CROSS COUNTRY HEALTHCARE, INC.
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 2020
Form 10-K, our financial statements and the accompanying notes to our financial
statements.
Business Overview
We provide total talent management services, including strategic workforce
solutions, contingent staffing, permanent placement, and consultative services
for healthcare customers by recruiting and placing highly qualified healthcare
professionals in virtually every specialty and area of expertise. 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, urgent care
centers, 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 we can place
clinicians on travel and per diem assignments, local short-term contracts, and
permanent positions. Our workforce solutions include managed service programs
(MSPs), internal resource pool (IRP), recruitment process outsourcing (RPO), and
other
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outsourcing and consultative services as described in Item 1. Business in our
2020 Form 10-K. By utilizing our various solutions, customers can better plan
their personnel needs, talent acquisition and management processes,
strategically flex and balance their workforce, access quality healthcare
personnel, and provide continuity of care for improved patient outcomes. We have
a longstanding history of investing in our diversity, equality, and inclusion
strategic initiatives as a key component of the organization's overall corporate
social responsibility program which is closely aligned with its core values to
create a better future for our people, communities, the planet, and our
shareholders.
In the first quarter of 2021, we modified our reportable segments to reflect the
following two business segments: Nurse and Allied Staffing and Physician
Staffing . Based on our revised management structure that better aligns with our
operations, we aggregated the Search segment in Nurse and Allied Staffing to
reflect how the business is evaluated, and the operating results are regularly
reviewed by the chief operating decision maker. Prior period data in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" has been reclassified to conform to the new segment reporting
structure.
? Nurse and Allied Staffing - Nurse and Allied Staffing represented
approximately 95% of our total revenue in the first quarter of 2021. 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 long-term
assignments to clients such as 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, Optimal Workforce Solutions (OWS), IRP, and consulting services.
?
Summary of Operations
For the quarter endedMarch 31, 2021 , revenue from services increased 57% year-over-year to$329.2 million , due to solid execution and strong performance in our Nurse andAllied Staffing segment, resulting in a 61% increase in direct operating expenses. As a result of the rise in demand and a tight labor market, our average travel bill rates increased due to the increases in pay rates required to attract healthcare professionals. Throughout the pandemic, we have worked with our clients to adjust bill rates to reflect the changing compensation costs in order to provide the critical healthcare professionals they need. Net income attributable to common shareholders in the first quarter of 2021 was$19.4 million as compared to a net loss of$2.1 million in the prior year. For the three months endedMarch 31, 2021 , cash flow used in operating activities was$24.9 million , with net borrowings of$42.6 million on our senior-secured asset-based credit facility (ABL), primarily driven by an increase in working capital stemming from the strong sequential growth in the business. As ofMarch 31, 2021 , there was$13.5 million of cash and cash equivalents, and availability under the ABL of$150.0 million , with$96.0 million of borrowings drawn under our ABL, and$18.5 million of undrawn letters of credit outstanding, leaving$35.5 million available for borrowing. We expect COVID-19 will continue to impact our business throughout the second quarter, with average bill rates remaining higher than the prior year though declining sequentially for certain assignments, as well as lower demand for certain services such as locum tenens, education, and search.
See Results of Operations, Segment Results, and Liquidity and Capital Resources sections that follow for further information.
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
GAAP results for the periods presented. Some of the segment financial results
analyzed include revenue, operating
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--------------------------------------------------------------------------------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
March 31,
2021 2020
Revenue from services 100.0 % 100.0 %
Direct operating expenses 78.3 76.4
Selling, general and administrative expenses 14.1 21.8
Bad debt expense 0.1 0.3
Depreciation and amortization 0.7 1.6
Restructuring costs 0.4 0.3
Income (loss) from operations 6.4 (0.4)
Interest expense 0.2 0.4
Income (loss) before income taxes 6.2 (0.8)
Income tax expense 0.3 -
Consolidated net income (loss) 5.9 (0.8)
Less: Net income attributable to noncontrolling interest in subsidiary
- 0.2
Net income (loss) attributable to common shareholders 5.9 % (1.0) %
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Comparison of Results for the Three Months Ended
Three Months Ended March 31,
Increase
(Decrease) Increase (Decrease)
2021 2020 $ %
(Amounts in thousands)
Revenue from services $ 329,241 $ 210,064 $ 119,177 56.7 %
Direct operating expenses 257,776 160,461 97,315 60.6 %
Selling, general and administrative expenses 46,327 45,881 446 1.0 %
Bad debt expense 504 539 (35) (6.5) %
Depreciation and amortization 2,253 3,296 (1,043) (31.6) %
Acquisition and integration-related costs - 77 (77) (100.0) %
Restructuring costs 1,238 564 674 119.5 %
Impairment charges 149 - 149 100.0 %
Income (loss) from operations 20,994 (754) 21,748 2,884.4 %
Interest expense 671 867 (196) (22.6) %
Other income, net (37) (31) (6) (19.4) %
Income (loss) before income taxes 20,360 (1,590) 21,950 1,380.5 %
Income tax expense 912 178 734 412.4 %
Consolidated net income (loss) 19,448 (1,768) 21,216 1,200.0
Less: Net income attributable to noncontrolling
interest in subsidiary - 321 (321) (100.0) %
Net income (loss) attributable to common
shareholders $ 19,448 $ (2,089) $ 21,537 1,031.0 %
Revenue from services
Revenue from services increased 56.7% to $329.2 million for the three months
ended March 31, 2021 , as compared to $210.1 million for the three months ended
March 31, 2020 , due to strong performance in our Nurse and Allied Staffing
segment, resulting from both an increase in volume and higher bill rates. In
general, the increase in bill rates related to the spike in COVID-19 needs late
in the fourth quarter of 2020. Rates are expected to decline sequentially in the
second quarter but remain above pre-COVID-19 rates. 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 $97.3 million ,
or 60.6%, to $257.8 million for the three months ended March 31, 2021 , as
compared to $160.5 million for the three months ended March 31, 2020 as a result
of revenue increases. As a percentage of total revenue, direct operating
expenses increased to 78.3% compared to 76.4% in the prior year period, as
compensation costs rose by a higher percentage than our bill rates. Throughout
the pandemic, our position has been that in the long term interest of our client
relationships, we will do all that we can to mitigate the rising costs for our
clients. We expect compensation costs to decline sequentially in the coming
quarters, though not necessarily at the same pace as bill rates.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 1.0% to$46.3 million for the three months endedMarch 31, 2021 , as compared to$45.9 million for the three months endedMarch 31, 2020 , primarily due to increases in equity compensation expense and healthcare costs, as well as additional compensation expense related to the short-term incentive plan, partially offset by lower rent expense due to the closure of a significant number of offices in 2020 and decreases in IT and consulting expenses. As a percentage of total revenue, selling, general and administrative expenses decreased to 14.1% for the three months endedMarch 31, 2021 as compared to 21.8% for the three months endedMarch 31, 2020 . 22
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Depreciation and amortization expense
Depreciation and amortization expense for the three months endedMarch 31, 2021 decreased to$2.3 million as compared to$3.3 million for the three months endedMarch 31, 2020 . Lower depreciation expense for the three months endedMarch 31, 2021 related to fully amortized assets that have not been replaced. Amortization expense for the three months endedMarch 31, 2020 included accelerated amortization of trade names associated with our rebranding initiatives. See Note 6 -Goodwill ,Trade Names , and Other Intangible Assets to our condensed consolidated financial statements. As a percentage of revenue, depreciation and amortization expense was 0.7% for the three months endedMarch 31, 2021 and 1.6% for the three months endedMarch 31, 2020 .
Restructuring costs
Restructuring costs for the three months endedMarch 31, 2021 and 2020 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$1.2 million and$0.6 million , respectively. Restructuring costs for the three months endedMarch 31, 2020 also included reorganization costs as part of our planned cost savings initiatives.
Interest expense
Interest expense was$0.7 million for the three months endedMarch 31, 2021 as compared to$0.9 million for the three months endedMarch 31, 2020 , due to a lower effective rate. The effective interest rate on our borrowings was 2.9% for the three months endedMarch 31, 2021 compared to 4.4% for the three months endedMarch 31, 2020 .
Income tax expense
Income tax expense was$0.9 million for the three months endedMarch 31, 2021 as compared to$0.2 million for the three months endedMarch 31, 2020 . As a result of our valuation allowance on substantially all of our domestic deferred tax assets, income tax expense for the three months endedMarch 31, 2021 andMarch 31, 2020 was primarily impacted by international and state taxes. See Note 13 - Income Taxes to our condensed consolidated financial statements. 23 --------------------------------------------------------------------------------
Segment Results
Information on operating segments and a reconciliation to loss from operations for the periods indicated are as follows:
Three Months Ended
March 31,
2021 2020
(amounts in thousands)
Revenue from services:
Nurse and Allied Staffing $ 313,008 $ 191,883
Physician Staffing 16,233 18,181
$ 329,241 $ 210,064
Contribution income:
Nurse and Allied Staffing $ 37,417 $ 13,822
Physician Staffing 1,428 631
38,845 14,453
Corporate overhead 14,211 11,270
Depreciation and amortization 2,253 3,296
Acquisition and integration-related costs - 77
Restructuring costs 1,238 564
Impairment charges 149 -
Income (loss) from operations $ 20,994 $ (754)
_______________
In the first quarter of 2021, the Company modified its reportable segments and, as a result, now discloses the following two reportable segments - Nurse andAllied Staffing andPhysician Staffing . Revenue in the amount of$3.6 million and contribution loss in the amount of$0.3 million included in the previously-reported Search segment have been reclassified to Nurse andAllied Staffing for the three months endedMarch 31, 2020 . Certain statistical data for our business segments for the periods indicated are as follows: Three Months Ended March 31, March 31, Percent 2021 2020 Change Change Nurse andAllied Staffing statistical data: FTEs 6,614 7,145 (531) (7.4) % Average Nurse andAllied Staffing revenue per FTE per day$ 522 $ 290 232 80.0 %Physician Staffing statistical data: Days filled 9,469 10,199 (730) (7.2) % Revenue per day filled$ 1,714 $ 1,783 (69) (3.9) %
See definition of Business Measurement under the Operating Metrics section of our Management's Discussion and Analysis.
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Segment Comparison - Three Months Ended
Nurse andAllied Staffing Revenue increased$121.1 million , or 63.1%, to$313.0 million for the three months endedMarch 31, 2021 , compared to$191.9 million for the three months endedMarch 31, 2020 , driven by volume increases and higher bill rates, especially for travel assignments. Revenue for the three months endedMarch 31, 2020 was negatively impacted by COVID-19 due to suspended services resulting from school closures and, to a lesser extent, volume declines in local staffing. Contribution income increased$23.6 million , or 170.7%, to$37.4 million for the three months endedMarch 31, 2021 , compared to$13.8 million for the three months endedMarch 31, 2020 driven by increased revenue. As a percentage of segment revenue, contribution income margin was 12.0% for the three months endedMarch 31, 2021 , compared to 7.2% for the three months endedMarch 31, 2020 . The average number of FTEs on contract during the three months endedMarch 31, 2021 decreased 7.4% from the three months endedMarch 31, 2020 , due to declines in local staffing and education clients. The average revenue per FTE per day increased 80.0%, due to the increase in the average travel bill rates as a result of the increases in pay rates required to attract healthcare professionals.
Revenue decreased
Contribution income was
Total days filled for the three months ended
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$14.2 million for the three months endedMarch 31, 2021 , from$11.3 million for the three months endedMarch 31, 2020 . As a percentage of consolidated revenue, corporate overhead was 4.3% for the three months endedMarch 31, 2021 and 5.4% for the three months endedMarch 31, 2020 .
Transactions with Related Parties
See Note 14 - Related Party Transactions to our condensed consolidated financial statements.
Liquidity and Capital Resources
AtMarch 31, 2021 , we reported$13.5 million in cash and cash equivalents and$96.0 million of borrowings drawn under our ABL. Working capital increased by$58.4 million to$148.1 million as ofMarch 31, 2021 , compared to$89.7 million as ofDecember 31, 2020 , primarily due to strong sequential growth, partially offset by the timing of disbursements. As ofMarch 31, 2021 , our days' sales outstanding, net of amounts owed to subcontractors, was 56 days, flat year-over-year and down 2 days sequentially. As ofMarch 31, 2021 , 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 ABL credit facility, payments on our promissory note payable, and operating lease commitments, as well as any settlements on uncertain tax positions, and future principal payments on 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. 25 -------------------------------------------------------------------------------- Net cash used in operating activities was$24.9 million in the three months endedMarch 31, 2021 , compared to net cash provided by operating activities of$17.2 million in the three months endedMarch 31, 2020 , primarily due to strong sequential growth in the business and related investments in working capital. Net cash used in investing activities was$1.2 million in the three months endedMarch 31, 2021 , compared to$1.0 million in the three months endedMarch 31, 2020 . Net cash used in both periods was for capital expenditures. During the three months endedMarch 31, 2021 , the expenditures related to the project to replace our applicant tracking system, the development of our on-demand staffing platform, and the build-out of our corporate office. During the three months endedMarch 31, 2020 , the expenditures primarily related to the project to replace our applicant tracking system. Net cash provided by financing activities during the three months endedMarch 31, 2021 was$38.0 million , compared to net cash used in financing activities of$4.6 million during the three months endedMarch 31, 2020 . During the three months endedMarch 31,2021 , we reported net borrowings of$42.6 million on our ABL, and used cash to pay$2.4 million on our note payable,$2.0 million for income taxes on share-based compensation, and$0.2 million for other financing activities. During the three months endedMarch 31, 2020 , we used cash to repay$3.3 million on the ABL,$0.6 million for income taxes on share-based compensation,$0.6 million for noncontrolling shareholder payments, and$0.1 million of contingent consideration.
Debt
2019 ABL Credit Agreement
As more fully described in Note 7 - Debt to our consolidated financial statements, effectiveOctober 25, 2019 , our prior senior credit facility entered into inAugust 2017 was replaced by a$120.0 million ABL Credit Agreement (Loan Agreement), which provides for a five-year senior secured revolving credit facility. OnJune 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 remain the same. OnMarch 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. As ofMarch 31, 2021 , the interest rate spreads and fees under the Loan Agreement were based on LIBOR plus 2.00% for the revolving portion of the borrowing base and LIBOR plus 4.00% on the Supplemental Availability. The Base Rate (as defined by the Loan Agreement) margins would have been 1.00% and 3.00%, respectively, for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on our excess availability under the revolving credit facility. In addition, the facility is subject to an unused 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 ofMarch 31, 2021 . Availability under the ABL is subject to a borrowing base, which was sufficient to access the full facility size of$150.0 million atMarch 31, 2021 , with$96.0 million of borrowings drawn as well as$18.5 million of letters of credit outstanding, leaving$35.5 million available for borrowing.
See Note 7 - Debt to our consolidated financial statements.
Stockholders' Equity
See Note 10 - 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 2020 Form 10-K, other than the adoption of ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes as discussed in Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements.
Recent Accounting Pronouncements
See Note 15 - Recent Accounting Pronouncements to our condensed consolidated financial statements.
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