The purpose of the following Management's Discussion and Analysis (MD&A) is to
help facilitate the understanding of significant factors influencing the
quarterly operating results, financial condition, and cash flows of the Company.
Additionally, MD&A also conveys our current expectations of the potential impact
of known trends, events, or uncertainties that may impact future results. MD&A
is provided as a supplement to, and should be read in conjunction with, our
Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K)
(including Part I, Item 1A. "Risk Factors"), our financial statements and the
accompanying notes to our financial statements, as well as the Risk Factors
contained herein.
Business Overview
We provide total talent management services, including strategic workforce
solutions, contingent staffing, permanent placement, and consultative services
for healthcare customers across the continuum of care, by recruiting and placing
highly qualified healthcare professionals in virtually every specialty and area
of expertise. In addition to clinical roles such as school nurses, speech
language, and behavioral therapists, we place non-clinical professionals such as
teachers, substitute teachers, and other education specialties at educational
facilities across the nation. Our diverse customer base includes both public and
private acute care and non-acute care hospitals, outpatient clinics, ambulatory
care facilities, single- and multi-specialty physician practices, rehabilitation
facilities, Program of All-Inclusive Care for the Elderly (PACE) programs,
urgent care centers, local and national healthcare systems, managed care
providers, public and charter schools, correctional facilities, government
facilities, pharmacies, and many other healthcare providers. Through our
national staffing teams, we offer our workforce solutions and place clinicians
on travel and per diem assignments, local short-term contracts, and permanent
positions. In addition, we continually evaluate opportunities to acquire
companies that would complement or enhance our business, like Selected and
Workforce Solutions Group, Inc. (WSG).
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Our workforce solutions include managed service programs (MSPs), recruitment
process outsourcing (RPO), project management, and other outsourcing and
consultative services as described in Item 1. "Business" in our 2021 Form 10-K.
By utilizing the solutions we offer, customers are able to better plan their
personnel needs, optimize their talent acquisition and management processes,
strategically flex and balance their workforce, have access to quality
healthcare personnel, and provide continuity of care for improved patient
outcomes. We have a history of investing in diversity, equality, and inclusion
as a key component of the organization's overall corporate social responsibility
program, which we believe is closely aligned with our core values to create a
better future for our people, communities, and our stockholders.
The operating results of our business segments are regularly reviewed by the
chief operating decision maker.
? Nurse and Allied Staffing - Nurse and Allied Staffing represented
approximately 96% of our total revenue in the third quarter of 2022. The Nurse
and Allied Staffing segment provides workforce solutions and traditional
staffing, including temporary and permanent placement of travel nurses and
allied professionals, as well as per diem and contract nurses and allied
personnel. We also provide clinical and non-clinical professionals on short-term
and long-term assignments to clients such as local and national healthcare
plans, managed care providers, public and charter schools, correctional
facilities, skilled nursing facilities, and other non-acute settings. In
addition, Nurse and Allied Staffing provides retained search services for
healthcare professionals, as well as contingent search and recruitment process
outsourcing services. We provide flexible workforce solutions to our healthcare
customers through diversified offerings designed to meet their unique needs,
including: MSP, RPO, and consulting services.
? Physician Staffing - Physician Staffing represented approximately 4% of our
total revenue in the third quarter of 2022. Physician Staffing provides
physicians in many specialties, as well as certified registered nurse
anesthetists, nurse practitioners, and physician assistants as independent
contractors on temporary assignments throughout the United States.
Summary of Operations
For the quarter ended September 30, 2022, revenue from services increased 70%
year-over-year to $636.1 million, due to continued growth in both our Nurse and
Allied Staffing and Physician Staffing segments. The year-over-year revenue
increase was primarily driven by an increase in professionals on assignment and
volume growth. In the third quarter of 2022, revenue decreased 16% sequentially,
primarily due to average bill rates declining in the low double digits and a
decrease in billable hours, as anticipated. Net income attributable to common
stockholders in the third quarter of 2022 was $34.8 million, as compared to
$23.4 million for the same period in the prior year.
For the remainder of 2022, average travel bill rates are anticipated to
experience a high single-digit sequential decline. Looking to 2023, we
anticipate continued organic growth, driving further market share gains despite
potential headwinds from changing bill rates or demand from certain specialties.
We remain committed to continued investments in our people and technology,
including the ongoing rollout of our proprietary vendor-neutral offering,
Intellify.
On September 13, 2022, we entered into an agreement to acquire locums companies
Mint and Lotus, which closed on October 3, 2022.
For the three months ended September 30, 2022, cash flow provided by operating
activities was $140.6 million, with net borrowings of $9.2 million on our senior
secured asset-based credit facility (ABL), and an increase in working capital
stemming from an increase in accounts receivable partly offset by the timing of
disbursements. As of September 30, 2022, we had $30.3 million of cash and cash
equivalents, a portion of which was subsequently used to complete the
acquisition of Mint and Lotus as noted above. As of September 30, 2022, we had a
principal balance of $123.9 million outstanding on our term loan, and borrowing
base availability under the ABL was $300.0 million, with $9.2 million of
borrowings drawn under our ABL, and $17.5 million of undrawn letters of credit
outstanding, leaving $273.3 million of excess availability.
In the third quarter of 2022, our Board of Directors authorized the New
Repurchase Program, whereby we may repurchase up to $100.0 million of our shares
of common stock. Upon completion of the authorized number of shares available
for repurchase under the Prior Repurchase Program, we commenced repurchases
under the New Repurchase Program during the third quarter of 2022. During the
quarter, we repurchased, under both the Prior Repurchase Program and the New
Repurchase Program, a total of 1,014,815 shares of common stock for $24.3
million, at an average market price of $23.97 per share.
See Results of Operations, Segment Results, and Liquidity and Capital Resources
sections that follow for further information.
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Operating Metrics
We evaluate our financial condition by tracking operating metrics and financial
results specific to each of our segments. Key operating metrics include hours
worked, days filled, number of contract personnel on a full-time equivalent
(FTE) basis, revenue per FTE, and revenue per day filled. Other operating
metrics include number of open orders, candidate applications, contract
bookings, length of assignment, bill and pay rates, and renewal and fill rates,
number of active searches, and number of placements. These operating metrics are
representative of trends that assist management in evaluating business
performance. Due to the timing of our business process and other factors,
certain of these operating metrics may not necessarily correlate to the reported
U.S. GAAP results for the periods presented. Some of the segment financial
results analyzed include revenue, operating expenses, and contribution income.
In addition, we monitor cash flow, as well as operating and leverage ratios, to
help us assess our liquidity needs.
Business Segment Business Measurement
Nurse and Allied Staffing FTEs represent the average number of Nurse and
Allied Staffing contract personnel on a full-time
equivalent basis.
Average revenue per FTE per day is calculated by
dividing the Nurse and Allied Staffing revenue,
excluding permanent placement, per FTE by the number
of days worked in the respective periods.
Physician Staffing Days filled is calculated by dividing the total
hours invoiced during the period, including an
estimate for the impact of accrued revenue, by eight
hours.
Revenue per day filled is calculated by dividing
revenue as reported by days filled for the period
presented.
Results of Operations
The following table summarizes, for the periods indicated, selected condensed
consolidated statements of operations data expressed as a percentage of revenue.
Our historical results of operations are not necessarily indicative of future
operating results.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue from services 100.0 % 100.0 % 100.0 % 100.0 %
Direct operating expenses 77.4 77.6 77.6 78.0
Selling, general and administrative expenses 12.6 14.1 11.2 14.4
Bad debt expense 0.2 0.4 0.3 0.3
Depreciation and amortization 0.5 0.7 0.4 0.7
Acquisition and integration-related costs 0.1 - - 0.1
Restructuring costs 0.4 0.1 0.1 0.2
Impairment charges 0.6 - 0.2 0.2
Income from operations 8.2 7.1 10.2 6.1
Interest expense 0.5 0.6 0.5 0.4
Loss on early extinguishment of debt - - 0.1 -
Other income, net - (0.1) - (0.1)
Income before income taxes 7.7 6.6 9.6 5.8
Income tax expense 2.2 0.3 2.7 0.5
Net income attributable to common stockholders 5.5 % 6.3 % 6.9 % 5.3 %
26
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Comparison of Results for the Three Months Ended September 30, 2022 and the
Three Months Ended September 30, 2021
Three Months Ended September 30,
Increase Increase
(Decrease) (Decrease)
2022 2021 $ %
(Amounts in thousands)
Revenue from services $ 636,098 $ 374,905 $ 261,193 69.7 %
Direct operating expenses 492,553 291,111 201,442 69.2 %
Selling, general and administrative expenses 80,216 52,847 27,369 51.8 %
Bad debt expense 1,101 1,441 (340) (23.6) %
Depreciation and amortization 3,214 2,680 534 19.9 %
Acquisition and integration-related costs 490 61 429 703.3 %
Restructuring costs 2,493 318 2,175 684.0 %
Impairment charges 3,856 - 3,856 100.0 %
Income from operations 52,175 26,447 25,728 97.3 %
Interest expense 3,498 2,182 1,316 60.3 %
Other income, net (27) (375) 348 92.8 %
Income before income taxes 48,704 24,640 24,064 97.7 %
Income tax expense 13,911 1,207 12,704 NM
Net income attributable to common stockholders $ 34,793
$ 23,433 $ 11,360 48.5 %
NM - Not meaningful
Revenue from services
Revenue from services increased 69.7% to $636.1 million for the three months
ended September 30, 2022, as compared to $374.9 million for the three months
ended September 30, 2021, due to strong performance in both our Nurse and Allied
Staffing and Physician Staffing segments, primarily driven by an increase in the
number of professionals on assignment, as well as higher bill rates in Nurse and
Allied. See further discussion in Segment Results.
Direct operating expenses
Direct operating expenses are comprised primarily of field employee compensation
and independent contractor expenses, housing expenses, travel expenses, and
related insurance expenses. Direct operating expenses increased $201.4 million,
or 69.2%, to $492.6 million for the three months ended September 30, 2022, as
compared to $291.1 million for the three months ended September 30, 2021, as a
result of revenue increases. As a percentage of total revenue, direct operating
expenses slightly decreased to 77.4% compared to 77.6% in the prior year period.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 51.8% to $80.2 million
for the three months ended September 30, 2022, as compared to $52.8 million for
the three months ended September 30, 2021, primarily due to increases in
compensation and benefit expense, as well as marketing and consulting expense
and computer subscription fees. As a percentage of total revenue, selling,
general and administrative expenses decreased to 12.6% for the three months
ended September 30, 2022, as compared to 14.1% for the three months ended
September 30, 2021.
Depreciation and amortization expense
Depreciation and amortization expense for the three months ended September 30,
2022 was $3.2 million, as compared to $2.7 million for the three months ended
September 30, 2021. The increase was primarily due to the additional
amortization of other intangible assets from the WSG and Selected acquisitions.
See Note 7 - Goodwill, Trade Names, and Other Intangible Assets to our condensed
consolidated financial statements. As a percentage of revenue, depreciation and
amortization expense was 0.5% for the three months ended September 30, 2022 and
0.7% for the three months ended September 30, 2021.
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Acquisition and integration-related costs
Acquisition and integration-related costs for the three months ended September
30, 2022 included costs for legal and advisory fees for the Mint and Lotus
acquisition that closed on October 3, 2022. Acquisition and integration-related
costs for the three months ended September 30, 2021 included costs for legal and
advisory fees for the WSG acquisition that closed on June 8, 2021.
Restructuring costs
Restructuring costs for the three months ended September 30, 2022 and 2021 were
primarily comprised of ongoing lease costs related to the Company's strategic
reduction of its real estate footprint and totaled $2.5 million and $0.3
million, respectively. Restructuring costs for the three months ended September
30, 2022 also included employee termination costs.
Impairment charges
Non-cash impairment charges totaled $3.9 million for the three months ended
September 30, 2022 and related to real estate
restructuring activities and the write-off of a discontinued IT project. There
were no such charges for the three months ended September 30, 2021. See Note 7 -
Goodwill, Trade Names, and Other Intangible Assets and Note 9 - Leases to our
condensed consolidated financial statements.
Interest expense
Interest expense was $3.5 million for the three months ended September 30, 2022,
as compared to $2.2 million for the three months ended September 30, 2021, due
to higher average borrowings and a higher effective interest rate. The effective
interest rate on our borrowings was 8.2% and 7.5% for the three months ended
September 30, 2022 and 2021, respectively.
Income tax expense
Income tax expense totaled $13.9 million for the three months ended
September 30, 2022, compared to $1.2 million for the three months ended
September 30, 2021. The increase in income tax expense was primarily driven by
federal and state taxes, as in the prior year there was a valuation allowance on
substantially all of our domestic deferred tax assets. See Note 14 - Income
Taxes to our condensed consolidated financial statements.
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Comparison of Results for the Nine Months Ended September 30, 2022 and the Nine
Months Ended September 30, 2021
Nine Months Ended September 30,
Increase Increase
(Decrease) (Decrease)
2022 2021 $ %
(Amounts in thousands)
Revenue from services $ 2,178,391 $ 1,035,973 $ 1,142,418 110.3 %
Direct operating expenses 1,689,647 808,124 881,523 109.1 %
Selling, general and administrative expenses 243,038 149,518 93,520 62.5 %
Bad debt expense 6,662 2,411 4,251 176.3 %
Depreciation and amortization 9,414 7,132 2,282 32.0 %
Acquisition and integration-related costs 530 985 (455) (46.2) %
Restructuring costs 1,859 2,391 (532) (22.3) %
Impairment charges 5,597 2,070 3,527 170.4 %
Income from operations 221,644 63,342 158,302 249.9 %
Interest expense 10,876 4,049 6,827 168.6 %
Loss on early extinguishment of debt 1,912 - 1,912 100.0 %
Other income, net (1,119) (616) (503) (81.7) %
Income before income taxes 209,975 59,909 150,066 250.5 %
Income tax expense 60,305 5,480 54,825 NM
Net income attributable to common shareholders $ 149,670 $
54,429 $ 95,241 175.0 %
NM - Not meaningful
Revenue from services
Revenue from services increased 110.3% to $2.2 billion for the nine months ended
September 30, 2022, as compared to $1.0 billion for the nine months ended
September 30, 2021, due to strong performance in both our Nurse and Allied
Staffing and Physician Staffing segments, primarily driven by an increase in the
number of professionals on assignment, as well as higher bill rates in Nurse and
Allied. See further discussion in Segment Results.
Direct operating expenses
Direct operating expenses increased $881.5 million, or 109.1%, to $1.7 billion
for the nine months ended September 30, 2022, as compared to $808.1 million for
the nine months ended September 30, 2021 as a result of revenue increases. As a
percentage of total revenue, direct operating expenses decreased to 77.6%
compared to 78.0% in the prior year period.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 62.5% to $243.0 million
for the nine months ended September 30, 2022, as compared to $149.5 million for
the nine months ended September 30, 2021, primarily due to increases in
compensation and benefits, as well as marketing and consulting expense and
computer subscription fees. As a percentage of total revenue, selling, general
and administrative expenses decreased to 11.2% for the nine months ended
September 30, 2022 as compared to 14.4% for the nine months ended September 30,
2021.
Depreciation and amortization expense
Depreciation and amortization expense for the nine months ended September 30,
2022 was $9.4 million as compared to $7.1 million for the nine months ended
September 30, 2021. The increase is primarily due to the additional amortization
of other intangible assets from the WSG and Selected acquisitions. See Note 7 -
Goodwill, Trade Names, and Other Intangible Assets to our condensed consolidated
financial statements. As a percentage of revenue, depreciation and amortization
expense was 0.4% for the nine months ended September 30, 2022 and 0.7% for the
nine months ended September 30, 2021.
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Acquisition and integration-related costs
Acquisition and integration-related costs for the nine months ended September
30, 2022 included costs for legal and advisory fees for the Mint and Lotus
acquisition that closed on October 3, 2022, and an immaterial amount for the
Selected acquisition that closed late in the fourth quarter of 2021. Acquisition
and integration-related costs for the nine months ended September 30, 2021
included costs for legal and advisory fees for the WSG acquisition that closed
on June 8, 2021.
Restructuring costs
Restructuring costs for the nine months ended September 30, 2022 and 2021 were
primarily comprised of employee termination costs and ongoing lease costs
related to the Company's strategic reduction of its real estate footprint and
totaled $1.9 million and $2.4 million, respectively.
Impairment charges
Non-cash impairment charges totaled $5.6 million for the nine months ended
September 30, 2022 and related to real estate restructuring activities and the
write-off of a discontinued IT project. Non-cash impairment charges totaled $2.1
million for the nine months ended September 30, 2021 and related to real estate
restructuring activities and the write-off of a discontinued software
development project. See Note 7 - Goodwill, Trade Names, and Other Intangible
Assets and Note 9 - Leases to our condensed consolidated financial statements.
Interest expense
Interest expense was $10.9 million for the nine months ended September 30, 2022
as compared to $4.0 million for the nine months ended September 30, 2021, due to
higher average borrowings and a higher effective interest rate. The effective
interest rate on our borrowings was 8.8% for the nine months ended September 30,
2022 compared to 5.1% for the nine months ended September 30, 2021.
Loss on early extinguishment of debt
Loss on early extinguishment of debt for the nine months ended September 30,
2022 consisted of a prepayment premium and the write-off of debt issuance costs
related to the optional prepayment on our term loan made in the second quarter
of 2022. There were no such expenses for the nine months ended September 30,
2021.
Other income, net
For the nine months ended September 30, 2022, other income, net included a $1.1
million gain on lease termination as a result of the early termination of one of
our corporate offices.
Income tax expense
Income tax expense totaled $60.3 million for the nine months ended September 30,
2022 compared to $5.5 million for the nine months ended September 30, 2021. The
increase in income tax expense was primarily driven by federal and state taxes
as in the prior year there was a valuation allowance on substantially all of our
domestic deferred tax assets. See Note 14 - Income Taxes to our condensed
consolidated financial statements.
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Segment Results
Information on operating segments and a reconciliation to income from operations
for the periods indicated are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(amounts in thousands)
Revenue from services:
Nurse and Allied Staffing $ 612,270 $ 356,139 $ 2,109,293 $ 985,335
Physician Staffing 23,828 18,766 69,098 50,638
$ 636,098 $ 374,905 $ 2,178,391 $ 1,035,973
Contribution income:
Nurse and Allied Staffing $ 77,838 $ 40,645 $ 285,506 $ 113,346
Physician Staffing 837 910 3,822 2,900
78,675 41,555 289,328 116,246
Corporate overhead 16,447 12,049 50,284 40,326
Depreciation and amortization 3,214 2,680 9,414 7,132
Acquisition and integration-related costs 490 61 530 985
Restructuring costs 2,493 318 1,859 2,391
Impairment charges 3,856 - 5,597 2,070
Income from operations $ 52,175 $ 26,447 $ 221,644 $ 63,342
See Note 12 - Segment Data to our condensed consolidated financial statements.
Certain statistical data for our business segments for the periods indicated are
as follows:
Three Months Ended
September 30, September 30, Percent
2022 2021 Change Change
Nurse and Allied Staffing statistical
data:
FTEs 12,524 9,003 3,521 39.1 %
Average Nurse and Allied Staffing revenue
per FTE per day $ 526 $ 425 $ 101 23.8 %
Physician Staffing statistical data:
Days filled 13,219 12,187 1,032 8.5 %
Revenue per day filled $ 1,803 $ 1,540 $ 263 17.1 %
Nine Months Ended
September 30, September 30, Percent
2022 2021 Change Change
Nurse and Allied Staffing statistical
data:
FTEs 13,157 7,732 5,425 70.2 %
Average Nurse and Allied Staffing revenue
per FTE per day $ 582 $ 462 $ 120 26.0 %
Physician Staffing statistical data:
Days filled 38,703 31,430 7,273 23.1 %
Revenue per day filled $ 1,785 $ 1,611 $ 174 10.8 %
See definition of Business Measurements under the Operating Metrics section of
our MD&A.
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Segment Comparison - Three Months Ended September 30, 2022 and Three Months
Ended September 30, 2021
Nurse and Allied Staffing
Revenue increased $256.2 million, or 71.9%, to $612.3 million for the three
months ended September 30, 2022, compared to $356.1 million for the three months
ended September 30, 2021, through strong performance driven by volume increases
and higher bill rates.
Contribution income increased $37.2 million, or 91.5%, to $77.8 million for the
three months ended September 30, 2022, compared to $40.6 million for the three
months ended September 30, 2021, driven by increased revenue and lower costs. As
a percentage of segment revenue, contribution income margin was 12.7% for the
three months ended September 30, 2022, compared to 11.4% for the three months
ended September 30, 2021.
The average number of FTEs on contract during the three months ended
September 30, 2022 increased 39.1% from the three months ended September 30,
2021, primarily due to headcount growth in travel nurse and allied. The average
revenue per FTE per day increased 23.8%, due to the increase in the average bill
rates.
Physician Staffing
Revenue increased $5.0 million, or 27.0%, to $23.8 million for the three months
ended September 30, 2022, compared to $18.8 million for the three months ended
September 30, 2021, primarily due to an increase in volume in both hospitalists
and certified registered nurse anesthetists.
Contribution income was $0.8 million for the three months ended September 30,
2022, compared to $0.9 million for the three months ended September 30, 2021. As
a percentage of segment revenue, contribution income was 3.5% for the three
months ended September 30, 2022, compared to 4.8% for the three months ended
September 30, 2021, driven by higher indirect costs.
Total days filled for the three months ended September 30, 2022 were 13,219, as
compared with 12,187 in the prior year. Revenue per day filled was $1,803 as
compared with $1,540 in the prior year.
Corporate Overhead
Corporate overhead includes unallocated executive leadership and other
centralized corporate functional support costs such as finance, IT, legal, human
resources, and marketing, as well as public company expenses and corporate-wide
projects. Corporate overhead increased to $16.4 million for the three months
ended September 30, 2022, from $12.0 million for the three months ended
September 30, 2021, primarily due to increases in compensation and benefit
expense, as well as legal and computer expense. As a percentage of consolidated
revenue, corporate overhead was 2.6% for the three months ended September 30,
2022 and 3.2% for the three months ended September 30, 2021.
Segment Comparison - Nine Months Ended September 30, 2022 and Nine Months Ended
September 30, 2021
Nurse and Allied Staffing
Revenue increased $1.1 billion, or 114.1%, to $2.1 billion for the nine months
ended September 30, 2022, compared to $1.0 billion for the nine months ended
September 30, 2021, through strong performance driven by volume increases and
higher bill rates.
Contribution income increased $172.2 million, or 151.9%, to $285.5 million for
the nine months ended September 30, 2022, compared to $113.3 million for the
nine months ended September 30, 2021, driven by increased revenue and lower
costs. As a percentage of segment revenue, contribution income margin was 13.5%
for the nine months ended September 30, 2022, compared to 11.5% for the nine
months ended September 30, 2021.
The average number of FTEs on contract during the nine months ended
September 30, 2022 increased 70.2% from the nine months ended September 30,
2021, primarily due to headcount growth in travel nurse and allied, as well as
additional headcount resulting from the WSG acquisition. The average revenue per
FTE per day increased 26.0%, due to the increase in the average bill rates.
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Physician Staffing
Revenue increased $18.5 million, or 36.5%, to $69.1 million for the nine months
ended September 30, 2022, compared to $50.6 million for the nine months ended
September 30, 2021, primarily due to an increase in volume in primary care
physicians, hospitalists, and certified registered nurse anesthetists.
Contribution income was $3.8 million for the nine months ended September 30,
2022, compared to $2.9 million for the nine months ended September 30, 2021. As
a percentage of segment revenue, contribution income was 5.5% for the nine
months ended September 30, 2022, compared to 5.7% for the nine months ended
September 30, 2021, driven by higher revenue, partially offset by higher direct
and indirect costs.
Total days filled for the nine months ended September 30, 2022 were 38,703, as
compared with 31,430 in the prior year. Revenue per day filled was $1,785 as
compared with $1,611 in the prior year.
Corporate Overhead
Corporate overhead increased to $50.3 million for the nine months ended
September 30, 2022, from $40.3 million for the nine months ended September 30,
2021, primarily due to increases in compensation and benefit expense, as well as
legal, consulting, and computer expense. As a percentage of consolidated
revenue, corporate overhead was 2.3% for the nine months ended September 30,
2022 and 3.9% for the nine months ended September 30, 2021.
Liquidity and Capital Resources
At September 30, 2022, we reported $30.3 million in cash and cash equivalents,
$123.9 million of term loan outstanding, at par, and $9.2 million of borrowings
drawn under our ABL. Working capital increased by $74.7 million to $383.2
million as of September 30, 2022, compared to $308.5 million as of December 31,
2021, primarily due to an increase in accounts receivable, partially offset by
the timing of disbursements. As of September 30, 2022, our days' sales
outstanding, net of amounts owed to subcontractors, was 67 days, up 6 days
year-over-year and up 1 day sequentially, primarily due to the timing of revenue
recognized throughout the year. As of September 30, 2022, we do not have any
off-balance sheet arrangements.
Our operating cash flow constitutes our primary source of liquidity and,
historically, has been sufficient to fund our working capital, capital
expenditures, internal business expansion, and debt service. This includes our
commitments, both short-term and long-term, of interest expense on our debt and
operating lease commitments, and future principal payments on our term loan and
our ABL credit facility. We expect to meet our future needs from a combination
of cash on hand, operating cash flows, and funds available through the ABL. See
debt discussion which follows.
We have an effective "shelf" registration statement on Form S-3 on file with the
Securities and Exchange Commission (SEC) that enables us, in one or more
offerings, to sell up to an aggregate of 5,000,000 shares of common stock.
Although we do not have any current plans to use the shelf registration
statement, the proceeds from any offering could be used for working capital and
other general corporate purposes, or to fund acquisitions of businesses,
products, and technologies.
Net cash provided by operating activities was $129.7 million in the nine months
ended September 30, 2022, compared to $12.3 million used in operating activities
in the nine months ended September 30, 2021, primarily due to the strength of
collections of accounts receivable.
Net cash used in investing activities was $6.8 million in the nine months ended
September 30, 2022, compared to $29.4 million in the nine months ended
September 30, 2021. Net cash used in the nine months ended September 30, 2022
was for capital expenditures, primarily related to multiple IT projects. Net
cash used in the nine months ended September 30, 2021 included $24.5 million
related to the acquisition of WSG, as well as capital expenditures and the
build-out of our corporate office.
Net cash used in financing activities during the nine months ended September 30,
2022 was $93.7 million, compared to $40.9 million provided by financing
activities during the nine months ended September 30, 2021. During the nine
months ended September 30, 2022, we used cash to repay borrowings of $50.4
million on our term loan, $2.4 million on our note payable, $5.3 million for
income taxes on share-based compensation, $3.2 million in debt issuance costs,
$24.3 million for share repurchases, $7.5 million for contingent consideration,
and an immaterial amount for other financing activities. During the nine months
ended September 30, 2021, we reported net borrowings of $100.0 million on our
term loan, and used cash to repay borrowing on our ABL of $49.4 million, $0.3
million principal payment on our term loan, $2.4 million on our note payable,
$4.6 million of debt issuance costs, $2.2 million for income taxes on
share-based compensation, and an immaterial amount for other financing
activities.
33
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Debt
2021 Term Loan Credit Agreement
As more fully described in Note 8 - Debt to our condensed consolidated financial
statements, on June 8, 2021, we entered into a Term Loan Credit Agreement (Term
Loan Agreement), which provides for a six-year second lien subordinated term
loan in the amount of $100.0 million (term loan). The term loan has an interest
rate of one-month London Inter-Bank Offered Rate (LIBOR) plus 5.75% per annum,
subject to a 0.75% LIBOR floor. The term loan was used to pay the cash
consideration, as well as any costs, fees, and expenses in connection with the
WSG acquisition (see Note 4 - Acquisitions to our condensed consolidated
financial statements), with the remainder used to pay down a portion of the
asset-based credit facility.
The borrowings under the Term Loan Agreement generally bear interest at a
variable rate based on either LIBOR or Base Rate (as defined in the Term Loan
Agreement) and are subject to mandatory prepayments of principal payable in
quarterly installments, commencing on September 30, 2021, with each installment
being in the aggregate principal amount of $0.3 million (subject to adjustment
as a result of prepayments) provided that, to the extent not previously paid,
the aggregate unpaid principal balance would be due and payable on the maturity
date. The Term Loan Agreement contains various restrictions and covenants
applicable to the Company and its subsidiaries, including a covenant to maintain
a minimum net leverage ratio. The Company was in compliance with this covenant
as of September 30, 2022. Obligations under the Term Loan Agreement are secured
by substantially all the assets of the borrowers and guarantors under the Term
Loan Agreement, subject to customary exceptions.
On November 18, 2021, we amended the Term Loan Agreement (Term Loan First
Amendment), which provided the Company an incremental term loan in an aggregate
amount equal to $75.0 million. Additionally, the Term Loan First Amendment
increased the aggregate amount of all increases (as defined in the Term Loan
Agreement) to be no greater than $115.0 million. The borrowings will be used
primarily to fund organic growth. Commencing on December 31, 2021, installments
of the mandatory prepayments will be in the aggregate principal amount of $0.4
million. All other terms, conditions, covenants, and pricing of the Term Loan
Agreement remain the same.
Aside from our scheduled payments, on June 23, 2022, we made an optional
prepayment of $50.0 million, and paid a prepayment premium of $0.5 million
pursuant to the Term Loan Agreement. As a result of the early prepayment, debt
issuance costs of $1.4 million were written off in the nine months ended
September 30, 2022. The prepayment premium and the write-off of debt issuance
costs are included as loss on early extinguishment of debt in the condensed
consolidated statements of operations. We were entitled to determine the
application of the prepayment, which was applied to all future amortization
payments, with the balance applied to the remaining balloon payment in 2027.
2019 Loan Agreement
Effective October 25, 2019, our prior senior credit facility entered into in
August 2017 was replaced by a $120.0 million Loan Agreement, which provides for
a five-year senior secured revolving credit facility. On June 30, 2020, we
amended the Loan Agreement (First Amendment), which increased the current
aggregate committed size of the ABL from $120.0 million to $130.0 million. All
other terms, conditions, covenants, and pricing of the Loan Agreement remained
the same. On March 8, 2021, we amended the Loan Agreement (Second Amendment),
which increased the current aggregate committed size of the ABL from
$130.0 million to $150.0 million, increased certain borrowing base sub-limits,
and decreased both the cash dominion event and financial reporting triggers. On
June 8, 2021, we amended the Loan Agreement (Third Amendment), which permits the
incurrence of indebtedness and grant of security as set forth in the Loan
Agreement and in accordance with the Intercreditor Agreement, and provides
mechanics relating to a transition away from LIBOR as a benchmark interest rate
to a replacement alternative benchmark rate or mechanism for loans made in U.S.
dollars. On November 18, 2021, we amended the Loan Agreement (Fourth Amendment),
whereby the permitted indebtedness (as defined in the Loan Agreement) was
increased to $175.0 million. On March 21, 2022, we amended the Loan Agreement
(Fifth Amendment), which increased the current aggregate committed size of the
ABL from $150.0 million to $300.0 million, extended the credit facility for an
additional five years, increased certain borrowing base sub-limits, and provided
the option for all or a portion of the borrowings to bear interest at a rate
based on the Secured Overnight Financing Rate (SOFR) or Base Rate, at the
election of the borrowers, plus an applicable margin.
As of September 30, 2022, the interest rate spreads and fees under the Loan
Agreement were based on SOFR plus 1.60% for the revolving portion of the
borrowing base. The Base Rate (as defined by the Loan Agreement) margin would
have been 0.50% for the revolving portion. The SOFR and Base Rate margins are
subject to monthly pricing adjustments, pursuant to a pricing
34
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matrix based on the Company's excess availability under the revolving credit
facility. In addition, the facility is subject to an unused line fee, letter of
credit fees, and an administrative fee. The Loan Agreement contains various
restrictions and covenants, including a covenant to maintain a minimum fixed
charge coverage ratio. We were in compliance with the fixed charge coverage
ratio covenant as of September 30, 2022. Borrowing base availability under the
ABL was $300.0 million at September 30, 2022, with $9.2 million of borrowings
drawn as well as $17.5 million of letters of credit outstanding, leaving
$273.3 million of excess availability.
See Note 8 - Debt to our condensed consolidated financial statements.
Stockholders' Equity
See Note 11 - Stockholders' Equity to our condensed consolidated financial
statements.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates remain consistent with those
reported in our 2021 Form 10-K.
Transactions with Related Parties
See Note 15 - Related Party Transactions to our condensed consolidated financial
statements.
Recent Accounting Pronouncements
See Note 16 - Recent Accounting Pronouncements to our condensed consolidated
financial statements.
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