UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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For the Quarterly Period Ended September 30, 2022
Or
For the Transition Period From _________ to _________
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(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of Incorporation or organization) | Commission file number | (I.R.S. Employer Identification Number) | ||||||
(Address of principal executive offices)(Zip Code)
(561 ) 998-2232
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had outstanding 37,295,465 shares of common stock, par value $0.0001 per share, as of October 20, 2022.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995, and are subject to the “safe harbor” created by those sections. Forward-looking statements consist of statements that are predictive in nature, depend upon or refer to future events. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “suggests”, “appears”, “seeks”, “will”, “could”, and variations of such words and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following: the overall macroeconomic environment, including increased inflation and interest rates, demand for the healthcare services we provide, both nationally and in the regions in which we operate, the ongoing impacts of the coronavirus pandemic (COVID or COVID-19) on our business, financial condition, and results of operations, our ability to attract and retain qualified nurses, physicians and other healthcare personnel, costs and availability of short-term housing for our travel healthcare professionals, the functioning of our information systems, the effect of cyber security risks and cyber incidents on our business, the effect of existing or future government regulation and federal and state legislative and enforcement initiatives on our business, our clients’ ability to pay us for our services, our ability to successfully implement our acquisition and development strategies, including our ability to successfully integrate acquired businesses and realize synergies from such acquisitions, the effect of liabilities and other claims asserted against us, the effect of competition in the markets we serve, our ability to successfully defend the Company, its subsidiaries, and its officers and directors on the merits of any lawsuit or determine its potential liability, if any, and other factors, including, without limitation, the risk factors set forth in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K), as filed and updated in our Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission (SEC).
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. Except as may be required by law, the Company undertakes no obligation to update or revise forward-looking statements.
All references to “the Company”, “we”, “us”, “our”, or “Cross Country” in this Quarterly Report on Form 10-Q mean Cross Country Healthcare, Inc. and its consolidated subsidiaries.
CROSS COUNTRY HEALTHCARE, INC.
INDEX
FORM 10-Q
September 30, 2022
| PAGE | ||||||||
Item 6. | ||||||||
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Prepaid expenses | |||||||||||
| Insurance recovery receivable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Trade names, indefinite-lived | |||||||||||
| Other intangible assets, net | |||||||||||
| Non-current deferred tax assets | |||||||||||
| Non-current insurance recovery receivable | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Accrued compensation and benefits | |||||||||||
| Current portion of debt | |||||||||||
| Operating lease liabilities - current | |||||||||||
| Income tax payable | |||||||||||
| Current portion of earnout liability | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Operating lease liabilities - non-current | |||||||||||
| Non-current deferred tax liabilities | |||||||||||
| Long-term accrued claims | |||||||||||
| Non-current earnout liability | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
| Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings (accumulated deficit) | ( | ||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements
1
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except per share data)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Direct operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Bad debt expense | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Acquisition and integration-related costs | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other expenses (income): | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss on early extinguishment of debt | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income attributable to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrealized foreign currency translation loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to common stockholders - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to common stockholders - Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
2
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended September 30, 2022 and 2021
(Unaudited, amounts in thousands)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss, net | Retained Earnings | Noncontrolling Interest in Subsidiary | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock repurchase and retirement | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss, net | (Accumulated Deficit) Retained Earnings | Noncontrolling Interest in Subsidiary | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Dissolution of noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling shareholder | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
3
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2022 and 2021
(Unaudited, amounts in thousands)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss, net | (Accumulated Deficit) Retained Earnings | Noncontrolling Interest in Subsidiary | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock repurchase and retirement | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss, net | (Accumulated Deficit) Retained Earnings | Noncontrolling Interest in Subsidiary | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Equity compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of taxes | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Acquisition of WSG | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Dissolution of noncontrolling interest | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling shareholder | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements
4
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Consolidated net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for allowances | |||||||||||
| Deferred income tax expense | |||||||||||
| Non-cash lease expense | |||||||||||
| Impairment charges | |||||||||||
| Loss on early extinguishment of debt | |||||||||||
| Equity compensation | |||||||||||
| Other non-cash costs | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Income taxes | ( | ||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from term loan | |||||||||||
| Principal payments on term loan | ( | ( | |||||||||
| Debt issuance costs | ( | ( | |||||||||
| Borrowings under Senior Secured Asset-Based revolving credit facility | |||||||||||
| Repayments on Senior Secured Asset-Based revolving credit facility | ( | ( | |||||||||
| Cash paid for shares withheld for taxes | ( | ( | |||||||||
| Principal payments on note payable | ( | ( | |||||||||
| Stock repurchase and retirement | ( | ||||||||||
| Payment of contingent consideration | ( | ||||||||||
| Other | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements
5
CROSS COUNTRY HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Nature of Business
The accompanying condensed consolidated financial statements include the accounts of Cross Country Healthcare, Inc. and its direct and indirect wholly-owned subsidiaries (collectively, the Company). In the opinion of management, all adjustments necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. All such adjustments consisted of all normal recurring items, including the elimination of all intercompany transactions and balances.
Cross Country Talent Acquisition Group, LLC was a joint venture controlled but not wholly-owned by the Company. Effective December 31, 2020, the sole professional staffing services agreement held by this joint venture was terminated and, as a result, the Company dissolved Cross Country Talent Acquisition Group, LLC in the third quarter of 2021.
The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the 2021 Form 10-K. The December 31, 2021 condensed consolidated balance sheet included herein was derived from the December 31, 2021 audited consolidated balance sheet included in the 2021 Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation. See the condensed consolidated balance sheets and statements of cash flows.
6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties
The Company’s future results of operations and liquidity could be materially adversely affected by macroeconomic factors contributing to delays in payments from clients and inflationary pressure, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its clients.
The Company is also subject to additional risks and uncertainties due to the ongoing COVID pandemic. The extent of the impact on the Company’s business is highly uncertain and difficult to predict.
Accounts Receivable, net
The timing of revenue recognition, billings, and collections results in billed and unbilled accounts receivable from customers, which are classified as accounts receivable on the condensed consolidated balance sheets and are presented net of allowances for doubtful accounts and sales allowances. Estimated revenue for the Company employees', subcontracted employees', and independent contractors’ time worked but not yet billed at September 30, 2022 and December 31, 2021 totaled $161.2 million and $140.0 million, respectively.
The Company generally does not require collateral and mitigates its credit risk by performing credit evaluations and monitoring at-risk accounts. The allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Accounts receivable are written off against the allowance for doubtful accounts when the Company determines amounts are no longer collectible. Judgment is required in the estimation of the allowance and the Company evaluates the collectability of its accounts receivable and contract assets based on a combination of factors. The Company bases its allowance for doubtful account estimates on its historical write-off experience, current conditions, an analysis of the aging of outstanding receivable and customer payment patterns, and specific reserves for customers in adverse condition adjusted for current expectations for the customers or industry. Based on the information currently available, the Company also considered current expectations of future economic conditions, including the impact of COVID, when estimating its allowance for doubtful accounts.
7
| 2022 | 2021 | ||||||||||
| (amounts in thousands) | |||||||||||
| Balance at January 1 | $ | $ | |||||||||
| Bad Debt Expense | |||||||||||
| Write-Offs, net of Recoveries | ( | ( | |||||||||
| Balance at March 31 | |||||||||||
| Bad Debt Expense | |||||||||||
| Write-Offs, net of Recoveries | ( | ( | |||||||||
| Balance at June 30 | $ | $ | |||||||||
| Bad Debt Expense | |||||||||||
| Write-Offs, net of Recoveries | ( | ( | |||||||||
| Balance at September 30 | $ | $ | |||||||||
Restructuring Costs
The Company considers restructuring activities to be programs whereby it fundamentally changes its operations, such as closing and consolidating facilities, reducing headcount, and realigning operations in response to changing market conditions. As a result, restructuring (benefits) costs on the condensed consolidated statements of operations primarily include employee termination costs and lease-related exit costs.
Reconciliation of the employee termination costs and lease-related exit costs (benefits) beginning and ending liability balance is presented below:
| Employee Termination | Lease-Related | ||||||||||
| (amounts in thousands) | |||||||||||
| Balance at January 1, 2022 | $ | $ | |||||||||
Charged to restructuring(a) | |||||||||||
| Payments and adjustments | ( | ( | |||||||||
| Balance at March 31, 2022 | |||||||||||
Charged to restructuring(a) | ( | ||||||||||
| Payments | ( | ||||||||||
| Balance at June 30, 2022 | $ | $ | |||||||||
Charged to restructuring(a) | |||||||||||
| Payments | ( | ( | |||||||||
| Balance at September 30, 2022 | $ | $ | |||||||||
________________
(a) Restructuring costs in the condensed consolidated statements of operations for the nine months ended September 30, 2022 include a benefit of $1.4 million in the second quarter of 2022 associated with the early termination of the lease for one of the Company's corporate offices which was previously restructured.
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3. REVENUE RECOGNITION
The Company's revenues from customer contracts are generated from temporary staffing services and other services. Revenue is disaggregated by segment in the following table. Sales and usage-based taxes are excluded from revenue.
| Three Months ended September 30, 2022 | |||||||||||||||||
| Nurse And Allied Staffing | Physician Staffing | Total Segments | |||||||||||||||
| (amounts in thousands) | |||||||||||||||||
| Temporary Staffing Services | $ | $ | $ | ||||||||||||||
| Other Services | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Three Months ended September 30, 2021 | |||||||||||||||||
| Nurse And Allied Staffing | Physician Staffing | Total Segments | |||||||||||||||
| (amounts in thousands) | |||||||||||||||||
| Temporary Staffing Services | $ | $ | $ | ||||||||||||||
| Other Services | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Nine Months ended September 30, 2022 | |||||||||||||||||
| Nurse And Allied Staffing | Physician Staffing | Total Segments | |||||||||||||||
| (amounts in thousands) | |||||||||||||||||
| Temporary Staffing Services | $ | $ | $ | ||||||||||||||
| Other Services | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Nine Months ended September 30, 2021 | |||||||||||||||||
| Nurse And Allied Staffing | Physician Staffing | Total Segments | |||||||||||||||
| (amounts in thousands) | |||||||||||||||||
| Temporary Staffing Services | $ | $ | $ | ||||||||||||||
| Other Services | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
4. ACQUISITIONS
Selected
On December 16, 2021, the Company purchased and acquired substantially all of the assets and assumed certain liabilities of Selected, Inc. (Selected) for a purchase price of $3.5 million in cash, subject to adjustment, and $1.5 million in shares (or 59,429 shares) of the Company's common stock. The transaction was treated as a purchase of assets for income tax purposes.
The sellers were eligible to receive up to an additional $1.5 million in earnout cash consideration, based on Selected's revenues for each of the twelve-month periods ending on the first and second anniversaries of the first day after the closing date. In the
9
second quarter of 2022, the Company determined that the contingent consideration earnout related to the Selected acquisition would not be achieved for 2022 and 2023 and, as a result, the entire liability was reversed. See Note 10 - Fair Value Measurements.
The Company assigned the following values to other identifiable intangible assets: (i) an immaterial amount to trade names with a weighted average estimated useful life of 2 years; (ii) $1.7 million to software with a weighted average estimated useful life of 5 years; and (iii) $2.9 million to a database, consisting of education professionals, with a weighted average estimated useful life of 5 years, for a total of $4.6 million in definite life intangible assets with a weighted average estimated useful life of 5 years.
The remaining excess purchase price over the fair value of net assets acquired of $0.4 million was recorded as goodwill on the Company's condensed consolidated balance sheets. See Note 7 - Goodwill, Trade Names, and Other Intangible Assets.
The acquisition was not significant and has been accounted for using the acquisition method of accounting. Associated immaterial acquisition-related costs incurred have been included in acquisition and integration-related costs on the Company's condensed consolidated statements of operations for the nine months ended September 30, 2022.
Cross Country Workforce Solutions Group (CCWSG)
On June 8, 2021, the Company purchased and acquired substantially all of the assets and assumed certain liabilities of Workforce Solutions Group, Inc. (WSG) for a purchase price of $25.0 million in cash and $5.0 million in shares (or 307,730 shares) of the Company's common stock. The parties agreed to a final net working capital reduction of $1.1 million, which was received in the fourth quarter of 2021. The transaction was treated as a purchase of assets for income tax purposes.
The sellers are also eligible to receive an earnout based on the business' performance through three years after the acquisition date that could provide up to an additional $15.0 million in cash. In the third quarter of 2022, the Company determined that the contingent consideration earnout was achieved for the 2021 through 2022 period and, as a result, the Company made a $7.5 million earnout payment. The remaining earnout liability's carrying amount of $7.5 million is included in current portion of earnout liability on the condensed consolidated balance sheets. See Note 10 - Fair Value Measurements.
The following table summarizes the fair value of the assets acquired and liabilities assumed on June 8, 2021:
| (amounts in thousands) | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable | |||||
| Other current assets | |||||
| Property and equipment | |||||
| Right-of-use assets | |||||
| Goodwill | |||||
| Other intangible assets | |||||
| Total assets acquired | |||||
| Accounts payable and accrued expenses | |||||
| Accrued compensation and benefits | |||||
| Lease liability - current | |||||
| Lease liability - non-current | |||||
| Earnout liability | |||||
| Total liabilities assumed | |||||
| Net assets acquired | $ | ||||
The Company assigned a value to other identifiable intangible assets of $14.2 million in customer relationships with a weighted average estimated useful life of 11.5 years.
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5. COMPREHENSIVE INCOME
Total comprehensive income includes net income or loss and foreign currency translation adjustments, net of any related deferred taxes, and is included within the accompanying condensed consolidated statements of operations. Certain of the Company’s foreign subsidiaries use their respective local currency as their functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. Income statement items are translated at the average exchange rates for the period. The cumulative impact of currency fluctuations related to the balance sheet translation is included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets and was an unrealized loss of $1.4 million at September 30, 2022 and $1.3 million at December 31, 2021.
6. EARNINGS PER SHARE
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (amounts in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common stockholders - Basic and Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares - Basic | |||||||||||||||||||||||
| Effect of diluted shares: | |||||||||||||||||||||||
| Share-based awards | |||||||||||||||||||||||
| Weighted average common shares - Diluted | |||||||||||||||||||||||
| Net income per share attributable to common stockholders - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to common stockholders - Diluted | $ | $ | $ | $ | |||||||||||||||||||
The following table represents the share-based awards that could potentially dilute net income per share attributable to common stockholders in the future that were not included in the computation of diluted net income per share attributable to common stockholders because to do so would have been anti-dilutive for the periods presented.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
| Share-based awards | $ | $ | |||||||||||||||||||||
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7. GOODWILL, TRADE NAMES, AND OTHER INTANGIBLE ASSETS
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||||||||||||||
| Databases | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||||||||||||||
| Non-compete agreements | |||||||||||||||||||||||||||||||||||
| Trade names | |||||||||||||||||||||||||||||||||||
| Software | |||||||||||||||||||||||||||||||||||
| Other intangible assets, net | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Intangible assets not subject to amortization: | |||||||||||||||||||||||||||||||||||
| Trade names, indefinite-lived | $ | $ | |||||||||||||||||||||||||||||||||
As of September 30, 2022, estimated annual amortization expense was as follows:
| (amounts in thousands) | |||||
| Years Ending December 31: | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| $ | |||||
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The changes in the carrying amount of goodwill by reportable segment are as follows:
| Nurse And Allied Staffing | Physician Staffing | Total | |||||||||||||||
| (amounts in thousands) | |||||||||||||||||
| Balances as of December 31, 2021 | |||||||||||||||||
| Aggregate goodwill acquired | $ | $ | $ | ||||||||||||||
| Sale of business | ( | ( | |||||||||||||||
| Accumulated impairment loss | ( | ( | ( | ||||||||||||||
| Goodwill, net of impairment loss | |||||||||||||||||
| Changes to aggregate goodwill in 2022 | |||||||||||||||||
Goodwill acquisition adjustment - Selected (a) | ( | ( | |||||||||||||||
| Balances as of September 30, 2022 | |||||||||||||||||
| Aggregate goodwill acquired | |||||||||||||||||
| Sale of business | ( | ( | |||||||||||||||
| Accumulated impairment loss | ( | ( | ( | ||||||||||||||
| Goodwill, net of impairment loss | $ | $ | $ | ||||||||||||||
________________
(a) Represents an adjustment to the fair value of the identifiable net assets acquired, with a corresponding offset to goodwill, made during the measurement period related to the acquisition of Selected. See Note 4 - Acquisitions.
Goodwill, Trade Names, and Other Intangible Assets Impairment
The Company tests reporting units’ goodwill and intangible assets with indefinite lives for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The Company performs quarterly qualitative assessments of significant events and circumstances such as reporting units’ historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors, including COVID, and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting units or intangible assets is less than their carrying value. If indicators of impairments are identified a quantitative impairment test is performed.
As of September 30, 2022 and 2021, the Company performed a qualitative assessment of each of its reporting units and determined it was not more likely than not that the fair value of its reporting units dropped below their carrying value. Although management believes that the Company's current estimates and assumptions utilized in its qualitative testing are reasonable and supportable, including its assumptions on the impact and timing related to COVID, there can be no assurance that the estimates and assumptions management used for purposes of its qualitative assessment as of September 30, 2022 will prove to be accurate predictions of future performance.
For its long-lived assets and definite-lived intangible assets, the Company reviews for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. As of September 30, 2022, the Company performed a qualitative assessment of its trade names and other intangible assets and, as a result, the Company wrote off a discontinued IT project and recorded a $1.9 million impairment charge. During the nine months ended September 30, 2021, the Company wrote off a discontinued software development project, resulting in an immaterial impairment charge.
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8. DEBT
The Company's long-term debt consists of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Principal | Debt Issuance Costs | Principal | Debt Issuance Costs | ||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
Term Loan, interest of | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Senior Secured Asset-Based Loan, interest of | ( | ( | |||||||||||||||||||||
Note Payable, interest of | |||||||||||||||||||||||
| Total debt | ( | ( | |||||||||||||||||||||
| Less current portion - Note Payable | — | — | |||||||||||||||||||||
| Less current portion - Term Loan | — | — | |||||||||||||||||||||
| Long-term debt | $ | $ | ( | $ | $ | ( | |||||||||||||||||
As of December 31, 2021, the current portion of the term loan and the note payable are included in current portion of debt on the condensed consolidated balance sheets. The final installment of the note payable, related to contingent consideration assumed as part of a prior period acquisition, was paid in the first quarter of 2022. The Company has elected to present the debt issuance costs associated with its revolving line-of-credit as an asset, which is included in other non-current assets on the condensed consolidated balance sheets. As a result, the long-term debt in the above table will not agree to long-term debt, net of current portion on the condensed consolidated balance sheets herein.
Late in the second quarter of 2022, the Company made an optional prepayment of $50.0 million on its term loan. The Company was 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. As of September 30, 2022, the aggregate schedule for maturities of debt are as follows:
| Term Loan | Senior Secured Asset-Based Loan | ||||||||||
| (amounts in thousands) | |||||||||||
| Through Years Ending December 31: | |||||||||||
| 2022 | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total | $ | $ | |||||||||
2021 Term Loan Credit Agreement
On June 8, 2021, the Company entered into a Term Loan Credit Agreement (Term Loan Agreement) with certain lenders identified therein (collectively, the Lenders) and Wilmington Trust, National Association as administrative agent and collateral agent, pursuant to which the Lenders extended to the Company 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), with the remainder used to pay down a portion of the asset-based credit facility. Fees paid in connection with the Term Loan Agreement have been included as debt issuance costs and as a reduction to the carrying amount of the term loan and are expected to be amortized to interest expense over the term of the Term Loan Agreement.
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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, the Company amended its 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. In conjunction with the Term Loan First Amendment, the Company entered into the Term Loan First Amendment to the Intercreditor Agreement, effective as of November 18, 2021, which sets forth the lien priority, relative rights, and other creditors’ rights issues in respect of the collateral lenders.
In addition to its scheduled payments, on June 23, 2022, the Company made an optional prepayment of $50.0 million to reduce interest costs, 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 three months ended June 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.
The term loan is secured by a second-priority security interest in the collateral as defined in the ABL Credit Agreement (Loan Agreement) (as described below), and Wells Fargo Bank, National Association as agent, as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, and Fifth Amendment to the Loan Agreement. The lien priority, relative rights, and other creditors’ rights issues in respect of the collateral lenders are set forth in the Intercreditor Agreement, by and among Wells Fargo Bank, National Association, as first lien agent, and Wilmington Trust, National Association, as second lien agent, as amended, restated, amended and restated, supplemented or otherwise modified from time to time in accordance with the terms thereof dated June 8, 2021 (Intercreditor Agreement).
2019 Loan Agreement
Effective October 25, 2019, the Company terminated its commitments under its prior senior credit facility entered into in August 2017 and entered into a Loan Agreement, by and among the Company and certain of its domestic subsidiaries, as borrowers or guarantors, Wells Fargo, PNC Bank N.A., as well as other Lenders (as defined therein) from time to time parties thereto. The Loan Agreement provides for a five-year revolving senior secured asset-based credit facility (ABL) in the aggregate principal amount of up to $120.0 million (as described below), including a sublimit for swing loans up to $15.0 million and a $35.0 million sublimit for standby letters of credit.
On June 30, 2020, the Company amended its 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, the Company amended its 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, the Company amended its 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, the Company amended its Loan Agreement (Fourth Amendment), whereby the permitted indebtedness (as defined in the Loan Agreement), was increased to $175.0 million.
On March 21, 2022, the Company amended its 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 , and increased certain borrowing base sub-limits. In addition, the agreement provides 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
15
borrowers, plus an applicable margin. The applicable margin will increase 10 basis points due to the credit spread associated with the transition to SOFR.
These amendments were treated as modifications of debt and, as a result, the associated fees and costs were included in debt issuance costs and will be amortized ratably over the remaining term of the Loan Agreement.
Availability of the ABL commitments is subject to a borrowing base of up to 85 % of secured eligible accounts receivable, subject to adjustment at certain quality levels, minus customary reserves and subject to customary adjustments. Revolving loans and letters of credit issued under the Loan Agreement reduce availability under the ABL on a dollar-for-dollar basis. Availability under the ABL will be used for general corporate purposes. At September 30, 2022, borrowing base availability under the ABL was $300.0 million and the Company had $9.2 million of borrowings drawn, as well as $17.5 million of letters of credit outstanding related to workers' compensation and professional liability policies, leaving $273.3 million of excess availability.
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 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 unused line fee is 0.375 % of the average daily unused portion of the revolving credit facility.
The Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum fixed charge coverage ratio. The Company was in compliance with this covenant as of September 30, 2022. Obligations under the ABL are secured by substantially all the assets of the borrowers and guarantors, subject to customary exceptions.
9. LEASES
The Company's lease population of its right-of-use assets and lease liabilities is substantially related to the rental of office space. The Company enters into lease agreements as a lessee that may include options to extend or terminate early. Some of these real estate leases require variable payments of property taxes, insurance, and common area maintenance, in addition to base rent. Certain of the leases have provisions for free rent months during the lease term and/or escalating rent payments and, particularly for the Company’s longer-term leases for its corporate offices, it has received incentives to enter into the leases, such as receiving up to a specified dollar amount to construct tenant improvements. These leases do not include residual value guarantees, covenants, or other restrictions.
Beginning in the second quarter of 2020, in connection with the continuing developments from COVID, the Company expedited restructuring plans and either reduced or fully vacated leased office space. The Company is in the process of seeking to sublet some of the space where possible. The decision and change in the use of space resulted in a right-of-use asset impairment charge of $2.8 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively. This loss was determined by comparing the fair value of the impacted right-of-use assets to the carrying value of the assets as of the impairment measurement date. The fair value of the right-of-use assets was based on the estimated sublease income for the space taking into consideration the time period it will take to obtain a subtenant, the applicable discount rate, and the sublease rate. For the nine months ended September 30, 2022 and 2021, the Company wrote off an immaterial amount of leasehold improvements and other property and equipment related to these locations. The measurement of the right-of-use asset impairments, using the assumptions described, is a Level 3 fair value measurement. See Note 10 - Fair Value Measurements for a description of Level 3 inputs.
The table below presents the lease-related assets and liabilities included on the condensed consolidated balance sheets:
| Classification on Condensed Consolidated Balance Sheets: | September 30, 2022 | December 31, 2021 | |||||||||
| (amounts in thousands) | |||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Operating lease liabilities - current | $ | $ | |||||||||
| Operating lease liabilities - non-current | $ | $ | |||||||||
16
| September 30, 2022 | December 31, 2021 | ||||||||||
| Weighted average remaining lease term | |||||||||||
| Weighted average discount rate | % | % | |||||||||
The table below reconciles the undiscounted cash flows for each of, and total of, the remaining years to the operating lease liabilities (which do not include short-term leases) recorded on the condensed consolidated balance sheets as of September 30, 2022:
| (amounts in thousands) | |||||
| Years Ending December 31: | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Total minimum lease payments | |||||
| Less: amount of lease payments representing interest | ( | ||||
| Present value of future minimum lease payments | |||||
| Less: operating lease liabilities - current | ( | ||||
| Operating lease liabilities - non-current | $ | ||||
Other Information
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (amounts in thousands) | |||||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | |||||||||
| Right-of-use assets acquired under operating lease | $ | $ | |||||||||
17
| Three Months Ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (amounts in thousands) | |||||||||||
| Amounts Included in Condensed Consolidated Statements of Operations: | |||||||||||
| Operating lease expense | $ | $ | |||||||||
| Short-term lease expense | $ | $ | |||||||||
| Variable and other lease costs | $ | $ | |||||||||
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (amounts in thousands) | |||||||||||
| Amounts Included in Condensed Consolidated Statements of Operations: | |||||||||||
| Operating lease expense | $ | $ | |||||||||
| Short-term lease expense | $ | $ | |||||||||
| Variable and other lease costs | $ | $ | |||||||||
Operating lease expense, short-term lease expense, and variable and other lease costs are included in selling, general and administrative expenses, direct operating expenses, and restructuring costs in the condensed consolidated statements of operations, depending on the nature of the leased asset. Operating lease expense is reported net of sublease income, which is not material. Variable and other lease costs for the nine months ended September 30, 2022 include a benefit associated with the early termination of a lease for one of the Company's corporate offices which was previously restructured.
As of September 30, 2022, the Company did not have any material operating leases which had not yet commenced. The Company has an immaterial amount of finance lease contracts related to other equipment rentals which are not included in the above disclosures.
10. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy was established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Items Measured at Fair Value on a Recurring Basis:
The Company’s financial assets/liabilities required to be measured on a recurring basis were its: (i) deferred compensation asset included in other non-current assets; and (ii) deferred compensation liability included in other long-term liabilities on its condensed consolidated balance sheets.
18
Deferred compensation—The Company utilizes Level 1 inputs to value its deferred compensation assets and liabilities. The Company’s deferred compensation assets and liabilities are measured using publicly available indices, as per the plan documents.
| September 30, 2022 | December 31, 2021 | ||||||||||
| (amounts in thousands) | |||||||||||
| Financial Assets: | |||||||||||
| (Level 1) | |||||||||||
| Deferred compensation asset | $ | $ | |||||||||
| Financial Liabilities: | |||||||||||
| (Level 1) | |||||||||||
| Deferred compensation liability | $ | $ | |||||||||
Items Measured at Fair Value on a Non-Recurring Basis:
The Company's non-financial assets, such as goodwill, trade names, other intangible assets, right-of-use assets, and property and equipment, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
The nine months ended September 30, 2022 and 2021 included impairment charges to right-of-use assets along with related property and equipment in connection with leases that were vacated. The nine months ended September 30, 2022 also included impairment charges primarily related to the write-off of a discontinued IT project in the third quarter of 2022. Accordingly, as of September 30, 2022 and 2021, these assets were recorded at fair value using Level 3 inputs. See Note 7 - Goodwill, Trade Names, and Other Intangible Assets and Note 9 - Leases for more information about these fair value measurements.
Other Fair Value Disclosures:
Financial instruments not measured or recorded at fair value in the condensed consolidated balance sheets consist of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses. The estimated fair value of accounts receivable and accounts payable and accrued expenses approximate their carrying amount due to the short-term nature of these instruments. Other financial instruments not measured or recorded at fair value include: (i) note payable, (ii) ABL, (iii) term loan, (iv) earnout liabilities related to the WSG acquisition, and (v) earnout liabilities related to the Selected acquisition, as discussed below.
(i) The Company paid the third and final installment on its note payable in the first quarter of 2022. Due to its relatively short-term nature, the carrying value of the note payable approximated its fair value. (ii) The carrying amount of the Company's ABL approximates fair value because the interest rates are variable and reflective of market rates. (iii) The estimated fair value of the Company's term loan was calculated applying an interest rate lattice model using Level 2 inputs from available market information. (iv) Potential earnout payments related to the WSG acquisition are contingent upon meeting certain performance requirements based on 2021 through 2023 performance. The Company performed an analysis using multiple forecasted scenarios to determine the fair value of the earnout liability. In the third quarter of 2022, the Company determined that the contingent consideration earnout related to the WSG acquisition was achieved for the 2021 through 2022 period and, as a result, the Company made a $7.5 million earnout payment. The remaining earnout liability's carrying amount approximates fair value and is included in current portion of earnout liability on the condensed consolidated balance sheets. See Note 4 - Acquisitions. (v) Potential earnout payments related to the Selected acquisition were contingent upon meeting certain performance requirements based on 2022 and 2023 revenues. The earnout liability's carrying amount approximates fair value and was included in current portion of earnout liability and non-current earnout liability on the condensed consolidated balance sheets. In the second quarter of 2022, the Company determined that the contingent consideration earnout related to the Selected acquisition would not be achieved for 2022 and 2023 and, as a result, the entire liability was reversed. See Note 4 - Acquisitions.
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| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| (Level 2) | |||||||||||||||||||||||
| Note Payable | $ | $ | $ | $ | |||||||||||||||||||
| Senior Secured Asset-Based Loan | $ | $ | $ | $ | |||||||||||||||||||
| Term Loan, net | $ | $ | $ | $ | |||||||||||||||||||
| Earnout Liability (WSG) | $ | $ | $ | $ | |||||||||||||||||||
| Earnout Liability (Selected) | $ | $ | $ | $ | |||||||||||||||||||
Concentration of Credit Risk:
See discussion of credit losses and allowance for doubtful accounts in Note 2 - Summary of Significant Accounting Policies. Overall, based on the large number of customers in differing geographic areas, primarily throughout the United States and its territories, the Company believes the concentration of credit risk is limited.
11. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On August 16, 2022, the Company's Board of Directors authorized a new stock repurchase program (the New Repurchase Program), whereby the Company may repurchase up to $100.0 million of its shares of common stock, subject to the terms of its current credit agreements. The shares may be repurchased from time-to-time in the open market or in privately negotiated transactions. The New Repurchase Program was effective immediately and may be discontinued at any time at the Board's discretion. In addition to the repurchase of $100.0 million of its shares of common stock under the New Repurchase Program, the Company was authorized to continue to repurchase any remaining shares available for repurchase under the Company's previous stock repurchase program, which was approved by the Board of Directors on February 28, 2008 (the Prior Repurchase Program). Upon completion of the authorized number of shares available for repurchase under the Prior Repurchase Program, the Company commenced repurchases under the New Repurchase Program during the third quarter of 2022. During the third quarter, the Company repurchased and retired, 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. During the three and nine months ended September 30, 2021, the Company did no
As of September 30, 2022, the Company had $87.2 million remaining for share repurchase under the New Repurchase Program, subject to certain conditions in the Company's Loan Agreement and Term Loan Agreement. At September 30, 2022, the Company had 36,508,529 unrestricted shares of common stock outstanding.
Share-Based Payments
On May 19, 2020, the Company's stockholders approved the Cross Country Healthcare, Inc. 2020 Omnibus Incentive Plan (2020 Plan), which replaced the 2017 Omnibus Incentive Plan (2017 Plan), and applies to awards granted after May 19, 2020. The remaining shares available for grant under the 2017 Plan were cancelled and no further awards will be granted under that plan. The 2020 Plan generally mirrors the terms of the 2017 Plan and includes the following provisions: (i) an aggregate share reserve of 3,000,000 shares; (2) annual dollar and share limits of awards granted to employees and consultants, as well as non-employee directors, based on type of award; (3) awards granted generally will be subject to a minimum one-year vesting schedule; and (4) awards may be granted under the 2020 Plan until March 24, 2030.
20
The following table summarizes restricted stock awards and performance stock awards activity issued under the 2017 Plan and the 2020 Plan (Plans) for the nine months ended September 30, 2022:
| Restricted Stock Awards | Performance Stock Awards | ||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Target Shares | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Unvested restricted stock awards, January 1, 2022 | $ | $ | |||||||||||||||||||||
| Granted | $ | $ | |||||||||||||||||||||
| Vested | ( | $ | ( | $ | |||||||||||||||||||
| Forfeited | ( | $ | ( | $ | |||||||||||||||||||
| Unvested restricted stock awards, September 30, 2022 | $ | $ | |||||||||||||||||||||
Restricted stock awards granted under the Company’s Plans entitle the holder to receive, at the end of a vesting period, a specified number of shares of the Company’s common stock. Share-based compensation expense is measured by the market value of the Company’s stock on the date of grant.
Awards granted to non-employee directors under the 2017 Plan, prior to the adoption of the 2020 Plan, vest in three equal installments on the first, second, and third anniversaries of the grant date, while restricted shares granted under the 2020 Plan on and subsequent to June 2020 will vest on the first anniversary of such grant date, or earlier subject to retirement eligibility. In addition, effective in the three months ended June 30, 2020, the Company implemented modified guidelines that provide for accelerated vesting of restricted stock grants on the last date of service when a retirement-eligible director retires.
Pursuant to the Plans, the number of target shares that are issued for performance-based stock awards are determined based on the level of attainment of the targets. During the first quarter of 2022, the Company's Compensation Committee of the Board of Directors approved a 120 % level of attainment for the 2019 performance-based share awards, resulting in the issuance of 170,278 performance shares that vested on March 31, 2022.
During the three and nine months ended September 30, 2022, $1.5 million and $5.2 million, respectively, was included in selling, general and administrative expenses related to share-based payments. During the nine months ended September 30, 2022, a net of 499,700 shares of common stock were issued upon the vesting of restricted and performance stock. No shares vested during the three months ended September 30, 2022.
During the three and nine months ended September 30, 2021, $1.8 million and $5.3 million, respectively, was included in selling, general and administrative expenses related to share-based payments, and a net of 2,576 and 479,206 shares, respectively, of common stock were issued upon the vesting of restricted stock.
12. SEGMENT DATA
The Company’s segments offer services to its customers as described below:
● Nurse and Allied Staffing – Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added total talent solutions including: temporary and permanent placement of travel and local nurse and allied professionals, managed services programs (MSP) services, education healthcare services, in-home care services, and outsourcing services. In addition, Nurse and Allied Staffing provides retained search services for healthcare professionals, as well as contingent search and recruitment process outsourcing services. Its clients include: public and private acute-care and non-acute care hospitals, government facilities, local and national healthcare plans, managed care providers, public schools and charter schools, outpatient clinics, ambulatory care facilities, physician practice groups, and many other healthcare providers throughout the United States.
● Physician Staffing – 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 at various healthcare facilities, such as acute and non-acute care facilities, medical group practices, government facilities, and managed care organizations.
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The Company evaluates performance of each segment primarily based on revenue and contribution income. The Company defines contribution income as income (loss) from operations before depreciation and amortization, acquisition and integration-related costs, restructuring (benefits) costs, legal settlement charges, impairment charges, and corporate overhead. The Company does not evaluate, manage, or measure performance of segments using asset information; accordingly, total asset information by segment is not prepared or disclosed. The information in the following table is derived from the segments’ internal financial information as used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
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 | $ | $ | $ | $ | |||||||||||||||||||
| Physician Staffing | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Contribution income: | |||||||||||||||||||||||
| Nurse and Allied Staffing | $ | $ | $ | $ | |||||||||||||||||||
| Physician Staffing | |||||||||||||||||||||||
Corporate overhead (a) | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Acquisition and integration-related costs | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Impairment charges | |||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | |||||||||||||||||||
_______________
(a) 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 (initiatives).
13. CONTINGENCIES
Legal Proceedings
From time to time, the Company is involved in various litigation, claims, investigations, and other proceedings that arise in the ordinary course of its business. These matters primarily relate to employee-related matters that include individual and collective claims, professional liability, tax, and payroll practices. The Company establishes reserves when available information indicates that a loss is probable and an amount or range of loss can be reasonably estimated. These assessments are performed at least quarterly and are based on the information available to management at the time and involve significant management judgment to determine the probability and estimated amount of potential losses, if any. Based on the available information considered in its reviews, the Company adjusts its loss contingency accruals and its disclosures as may be required. Actual outcomes or losses may differ materially from those estimated by the Company's current assessments, including available insurance recoveries, which would impact the Company's profitability. Adverse developments in existing litigation claims or legal proceedings involving the Company or new claims could require management to establish or increase litigation reserves or enter into unfavorable settlements or satisfy judgments for monetary damages for amounts in excess of current reserves, which could adversely affect the Company's financial results. The Company believes the outcome of any outstanding loss contingencies as of September 30, 2022 will not have a material adverse effect on its business, financial condition, results of operations, or cash flows.
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14. INCOME TAXES
For the three and nine months ended September 30, 2022, the Company calculated its effective tax rate estimating its annual effective tax rate, as opposed to the three and nine months ended September 30, 2021 whereby the Company calculated its effective tax rate based on year-to-date results. The Company’s effective tax rate for the three and nine months ended September 30, 2022 was 28.6 % and 28.7 %, respectively, including the impact of discrete items, and 28.6 % and 29.3 %, respectively, excluding discrete items. The Company's effective tax rate for the three and nine months ended September 30, 2021 was 4.9 % and 9.1 %, respectively, including the impact of discrete items, and 4.9 % and 5.9 %, respectively, excluding discrete items. The effective tax rate for the three and nine months ended September 30, 2022 was primarily impacted by federal and state taxes. As a result of the Company's valuation allowance on substantially all of its domestic deferred tax assets, the effective tax rate for the three and nine months ended September 30, 2021 was primarily impacted by international taxes and state taxes, while the effective tax rate for the nine months ended September 30, 2021 was also impacted by additional valuation allowance required as a result of the WSG acquisition.
During the fourth quarter of 2021, the Company concluded that it was more likely than not that a benefit from a substantial portion of its United States federal and state deferred tax assets would be realized and released the majority of its valuation allowance. As of December 31, 2021, the Company had an immaterial amount of valuation allowance on its deferred tax assets related to state net operating losses not expected to be realized before expiration. There was no valuation allowance related to state net operating losses as of September 30, 2022.
On August 16, 2022, President Biden signed the Inflation Reduction Act (the IRA) into law in the U.S. Among other changes, the IRA introduced an excise tax on certain stock repurchases by certain covered corporations for taxable years beginning after December 31, 2022. Based on its current estimates and pending future guidance to be issued by the Internal Revenue Service, the Company does not believe these provisions will have a material impact on its consolidated financial statements.
The tax years 2012 through 2021 remain open to examination by certain taxing jurisdictions to which the Company is subject to tax.
15. RELATED PARTY TRANSACTIONS
The Company has entered into an arrangement for digital marketing services provided by a firm that is related to Mr. Clark, the Company's non-executive Chairman of the Board of Directors since April 1, 2022, and the Company's Co-Founder & Chief Executive Officer through March 31, 2022. Mr. Clark is a minority shareholder in the firm's parent company and is a member of the parent company's Board of Directors. Management believes the terms of the arrangement are equivalent to those prevailing in an arm's-length transaction and have been approved by the Company through its related party process. The digital marketing firm manages a limited number of digital publishers covering various Company brands for a monthly management fee. During the three and nine months ended September 30, 2022 and 2021, the Company incurred an immaterial amount in expenses. The Company had immaterial payable balances at September 30, 2022 and December 31, 2021.
The Company provides services to entities which are affiliated with certain members of the Company’s Board of Directors. Management believes the services were conducted on terms equivalent to those prevailing in an arm's-length transaction. Revenue related to these transactions was $0.7 million and $1.5 million for the three and nine months ended September 30, 2022, respectively, and an immaterial
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16. RECENT ACCOUNTING PRONOUNCEMENTS
17. SUBSEQUENT EVENTS
Acquisition
On October 3, 2022, the Company completed the acquisition of substantially all of the assets and certain liabilities of Mint Medical Physician Staffing, LP (Mint) and Lotus Medical Staffing LLC (Lotus). Mint and Lotus place healthcare professionals in locum tenens positions throughout the country. The purchase price of the acquisition was paid for with a proportional combination of cash and shares of the Company's common stock. The acquisition was not significant to the Company's condensed consolidated financial statements.
Debt Prepayment
On October 26, 2022, the Company made an optional prepayment on its term loan, resulting in a prepayment premium and the write-off of debt issuance costs. The prepayment was applied to the remaining balloon payment in 2027.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 | % | |||||||||||||||
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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 (Decrease) | Increase (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 (Decrease) | Increase (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.
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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
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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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to variable interest rate risk associated with our Term Loan Agreement entered into on June 8, 2021 and our Loan Agreement entered into on October 25, 2019. These agreements charge interest at a rate based on either SOFR, LIBOR, or Base Rate (as defined in the agreements) plus an applicable margin.
A 1% change in interest rates would have resulted in interest expense fluctuating approximately $1.2 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively. See Note 8 - Debt to our condensed consolidated financial statements.
Refer to our 2021 Form 10-K Item 1A. Risk Factors under "The interest rates under our Term Loan Agreement and our ABL Credit Agreement may be impacted by the phase-out of LIBOR" for discussion of the interest rate risk related to the continued phase-out of LIBOR.
Other Risks
There have been no material changes to our other exposures as disclosed in our 2021 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, communicated to management, including the Chief Executive Officer and the Chief Financial Officer, and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports required under the Exchange Act of 1934, as amended, is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, in order to allow timely decisions regarding any required disclosure.
There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID pandemic.
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PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to certain legal proceedings is included in Part I, Item 1, Note 13 - Contingencies - Legal Proceedings of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There are no material changes to our Risk Factors as previously disclosed in our 2021 Form 10-K.
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ITEM 6. EXHIBITS
| No. | Description | |||||||
| *31.1 | ||||||||
| *31.2 | ||||||||
| **32.1 | ||||||||
| **32.2 | ||||||||
| *101.INS | XBRL Instance Document | |||||||
| *101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| *101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| *101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| *101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| *101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| # | Represents a management contract or compensatory plan or arrangement | |||||||
| * | Filed herewith | |||||||
| ** | Furnished herewith | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CROSS COUNTRY HEALTHCARE, INC. | ||||||||
Date: November 3, 2022 | By: | /s/ William J. Burns | ||||||
| William J. Burns Executive Vice President & Chief Financial Officer (Principal Accounting and Financial Officer) | ||||||||
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