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CROSS COUNTRY HEALTHCARE INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 1. Business, Item 1A. Risk
Factors, Forward-Looking Statements, and Item 15. Consolidated Financial
Statements and the accompanying notes and other data, all of which appear
elsewhere in this Annual Report on Form 10-K.
Management's Discussion and Analysis below generally discusses 2021 and 2020
items and year-to-year comparisons between 2021 and 2020. Discussions of 2019
items and year-to-year comparisons between 2020 and 2019 that are not included
in this Form 10-K can be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the
23
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Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020
filed with the SEC on February 25, 2021 and such information is incorporated
herein by reference.
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, 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 the first quarter of 2021, we modified our reportable segments to reflect the
following two business segments: Nurse and Allied Staffing and Physician
Staffing . Based on our revised management structure that better aligns with our
operations, we aggregated the previously-reported Search segment in Nurse and
Allied Staffing to reflect how the business is evaluated, and the operating
results are regularly reviewed by the chief operating decision maker. Prior
period data in this MD&A has been reclassified to conform to the new segment
reporting structure.
? Nurse and Allied Staffing - For the year ended December 31, 2021 , Nurse and
Allied Staffing represented approximately 96% of total revenue. 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 - For the year ended December 31, 2021 , Physician Staffing
represented approximately 4% of total revenue. Physician Staffing provides
physicians in many specialties, as well as CRNAs, NPs, and PAs as independent
contractors on temporary assignments throughout the U.S.
Summary of Operations
For the year endedDecember 31, 2021 , revenue from services increased 100% year-over-year to$1,676.7 million , due to continued solid execution and strong performance in our Nurse andAllied Staffing segment, and growth in ourPhysician Staffing segment. Given the incredibly tight labor market and extreme risk faced by healthcare professionals throughout the pandemic, direct operating expenses rose by 105% over the prior year. Average bill rates rose during the year as we continued to experience significant demand for our services across virtually every specialty, related to both COVID and non-COVID assignments, such as operating room, emergency, pediatrics, labor and delivery, and medical surgical. As a result, we significantly expanded the number of professionals on assignment over the prior year. Throughout the pandemic, we have acted with integrity, and worked collaboratively with clients on adjusting bill rates in response to rapidly changing market conditions. Ensuring our clients have a continuing supply of clinicians and professionals to meet their needs has remained our top priority, and as a result, we grew our investments in attracting candidates and added significant capacity by growing our workforce. As a result of the rising compensation costs for professionals on assignment, and our commitment to absorb as much of the increases as possible, our consolidated gross profit margin decreased 180 basis points year-over-year. Despite the decline in gross margin and significant investments in our workforce, the rising number of professionals on assignment improved our operating leverage, and as a result net income attributable to common stockholders for the year endedDecember 31, 2021 was$132.0 million , as compared to a net loss of$13.0 million in the prior year. Net income for 2021 was favorably impacted by the reversal of valuation allowances in connection with net operating losses, which is not expected to recur in the future. Going forward, the Company expects to see a significant increase in cash taxes and have an effective tax rate of approximately 30 percent. For the year endedDecember 31, 2021 , cash flow used in operating activities was$85.6 million , due to the investment in net working capital associated with the historic growth in our business. As ofDecember 31, 2021 , we had$1.0 million in cash and 24 --------------------------------------------------------------------------------
cash equivalents and
Availability under the asset-based credit facility (ABL) was
with
undrawn letters of credit outstanding, leaving
borrowing as of
financial statements.
In 2021, we refinanced the Company with a new subordinated$175.0 million term loan and completed two acquisitions. OnJune 8, 2021 , we entered into an asset purchase agreement withWorkforce Solutions Group, Inc. (WSG), which allows us to deliver critical support to some of the neediest populations by delivering professionals to the home. OnDecember 16, 2021 , we entered into an asset purchase agreement with Selected, a subscription-based SaaS model for schools to recruit permanent educators and special education professionals. As we progress throughout 2022, we anticipate that bill rates will likely decline as COVID hospitalizations decline. However, demand remains robust amidst a backdrop of tight supply for clinicians and professionals, which will likely continue throughout much of 2022. We anticipate continued volume growth throughout 2022, as we continue to invest in both added capacity and our technologies. Our proprietary tool, Marketplace, continues to evolve, with new features and functionality being deployed to improve the candidate experience across the entire engagement life cycle. In 2021, we spent more than$9.0 million on advancing our digital platforms and given the success of our projects, we anticipate expanding our spend on IT related projects, by more than doubling the level of investments in the coming year.
See Results of Operations, Segment Results, and Liquidity and Capital Resources
sections that follow for further information.
Operating Metrics
We evaluate our financial condition by tracking operating metrics and financial results specific to each of our segments. Key operating metrics include hours worked, days filled, number of contract personnel on a full-time equivalent (FTE) basis, revenue per FTE, and revenue per day filled. Other operating metrics include number of open orders, candidate applications, contract bookings, length of assignment, bill and pay rates, and renewal and fill rates, number of active searches, and number of placements. These operating metrics are representative of trends that assist management in evaluating business performance. Due to the timing of our business process and other factors, certain of these operating metrics may not necessarily correlate to the reportedU.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 andAllied Staffing FTEs represent the average number of Nurse andAllied Staffing contract personnel on a full-time equivalent basis. Average revenue per FTE per day is calculated by dividing the Nurse andAllied 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. 25
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Results of Operations
The following table summarizes, for the periods indicated, selected consolidated
statements of operations data expressed as a percentage of revenue. Our
historical results of operations are not necessarily indicative of future
operating results.
Year Ended
2021 2020 Revenue from services 100.0 % 100.0 % Direct operating expenses 77.6 75.8 Selling, general and administrative expenses 12.8 20.8 Bad debt expense 0.3 0.4 Depreciation and amortization 0.6 1.5 Acquisition and integration-related costs 0.1 - Restructuring costs 0.2 0.7 Impairment charges 0.1 1.9 Income (loss) from operations 8.3 (1.1) Interest expense 0.4 0.3 Other (income) expense, net (0.1) - Income (loss) before income taxes 8.0 (1.4) Income tax expense (benefit) 0.1 - Consolidated net income (loss) 7.9 (1.4)
Less: Net income attributable to noncontrolling interest in subsidiary
- 0.1
Net income (loss) attributable to common stockholders 7.9 % (1.5) %
26
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Comparison of Results for the Year Ended
Ended
Year Ended December 31,
Increase Increase
(Decrease) (Decrease)
2021 2020 $ %
(Amounts in thousands)
Revenue from services $ 1,676,652 $ 836,417 $ 840,235 100.5 %
Direct operating expenses 1,301,653 633,685 667,968 105.4 %
Selling, general and administrative expenses 215,292 173,809 41,483 23.9 %
Bad debt expense 4,783 3,035 1,748 57.6 %
Depreciation and amortization 9,852 12,671 (2,819) (22.2) %
Acquisition and integration-related costs 1,068 77 991 NM
Restructuring costs 2,630 6,052 (3,422) (56.5) %
Impairment charges 2,070 16,248 (14,178) (87.3) %
Income (loss) from operations 139,304 (9,160) 148,464 NM
Interest expense 6,866 2,890 3,976 137.6 %
Other (income) expense, net (770) 280 (1,050) (375.0) %
Income (loss) before income taxes 133,208 (12,330) 145,538 NM
Income tax expense (benefit) 1,206 (188) 1,394 NM
Consolidated net income (loss) 132,002 (12,142) 144,144 NM
Less: Net income attributable to noncontrolling
interest in subsidiary - 820 (820) (100.0) %
Net income (loss) attributable to common
stockholders $ 132,002 $ (12,962) $ 144,964 NM
NM - Not meaningful
Revenue from services
Revenue from services increased $840.2 million , or 100.5%, to $1,676.7 million
for the year ended December 31, 2021 , as compared to $836.4 million for the year
ended December 31, 2020 , due to strong performance in our Nurse and Allied
Staffing segment, resulting from both an increase in volume and higher bill
rates. In general, the increase in bill rates related to the spike in COVID
needs late in the fourth quarter of 2020, which continued throughout 2021, as
well as a continued high level of demand for our services throughout the current
year due to the overall tight labor supply for clinicians and professionals. 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$668.0 million , or 105.4%, to$1,301.7 million for the year endedDecember 31, 2021 , as compared to$633.7 million for the year endedDecember 31, 2020 , as a result of revenue increases. As a percentage of total revenue, direct operating expenses increased to 77.6% compared to 75.8% in the prior year period, as compensation costs rose by a higher percentage than our bill rates. Selling, general and administrative expenses Selling, general and administrative expenses increased$41.5 million , or 23.9%, to$215.3 million for the year endedDecember 31, 2021 , as compared to$173.8 million for the year endedDecember 31, 2020 , primarily due to increases in compensation and benefits, as well as equity compensation expense, marketing, and consulting, partially offset by lower rent expense due to the closure of a significant number of offices in 2020 and a decrease in legal expenses. As a percentage of total revenue, selling, general and administrative expenses decreased to 12.8% for the year endedDecember 31, 2021 as compared to 20.8% for the year endedDecember 31, 2020 . 27 --------------------------------------------------------------------------------
Depreciation and amortization expense
Depreciation and amortization expense for the year endedDecember 31, 2021 decreased to$9.9 million as compared to$12.7 million for the year endedDecember 31, 2020 . The decline was driven by a combination of lower depreciation on certain assets given the closure of offices, as well as accelerated amortization of trade names associated with our rebranding initiatives in the prior year. See Note 5 -Goodwill ,Trade Names , and Other Intangible Assets to our consolidated financial statements. As a percentage of revenue, depreciation and amortization expense was 0.6% for the year endedDecember 31, 2021 and 1.5% for the year endedDecember 31, 2020 .
Acquisition and integration-related costs
Acquisition and integration-related costs for the year endedDecember 31, 2021 include costs for legal and advisory fees, as well as integration costs, for the WSG acquisition that closed late in the second quarter of 2021, and legal and professional fees for the Selected acquisition that closed late in the fourth quarter of 2021. Restructuring costs Restructuring costs for the years endedDecember 31, 2021 and 2020 were primarily comprised of employee termination costs and ongoing lease costs related to the Company's strategic reduction of its real estate footprint and totaled$2.6 million and$6.1 million , respectively. Restructuring costs for the year endedDecember 31, 2020 also included reorganization costs as part of our planned costs savings initiatives.
Impairment charges
Non-cash impairment charges totaled$2.1 million for the year endedDecember 31, 2021 and related to real estate restructuring activities and the write-off of a discontinued software development project. Non-cash impairment charges totaled$16.2 million for the year endedDecember 31, 2020 . These were comprised of$10.7 million of impairment related to our Search and Nurse and Allied businesses and$5.5 million related to real estate restructuring activities. See Note 5 -Goodwill ,Trade Names , and Other Intangible Assets and Note 10 - Leases to our consolidated financial statements.
Interest expense
Interest expense was$6.9 million for the year endedDecember 31, 2021 and$2.9 million for the year endedDecember 31, 2020 , due to higher average borrowings and a higher effective interest rate. The effective interest rate on our borrowings was 5.7% and 3.5% for the years endedDecember 31, 2021 and 2020, respectively. Income tax expense (benefit) Income tax expense totaled$1.2 million for the year endedDecember 31, 2021 , compared to income tax benefit of$0.2 million for the year endedDecember 31, 2020 . The effective tax rate was 1.0% and 1.5%, including the impact of discrete items, for the years endedDecember 31, 2021 and 2020, respectively. The effective tax rate in 2021 was impacted by the$37.5 million release of valuation allowance on deferred tax assets and federal, international, and state taxes. The effective tax rate in 2020 was impacted by the additional valuation allowance on deferred tax assets, impairment of indefinite-lived intangibles, and international and state taxes. For the year endedDecember 31, 2021 , we recorded a net valuation allowance release of$37.5 million (comprised of$18.4 million related to federal NOLs,$7.5 million related to state NOLs, and$11.6 million related to other net deferred tax assets) on the basis of management's reassessment of the amount of its deferred tax assets that are more likely than not to be realized. The valuation allowance on an immaterial amount of state NOLs was not released due to the respective expiration periods and specific state taxable income projections. See Note 14 - Income Taxes to our consolidated financial statements. 28
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Segment Results
Information on operating segments and a reconciliation to loss from operations
for the periods indicated are as follows:
Year Ended December 31,
2021 2020
(amounts in thousands)
Revenue from services:
Nurse and Allied Staffing$ 1,605,781 $
768,483
Physician Staffing 70,871 67,934
$ 1,676,652 $ 836,417
Contribution income:
Nurse and Allied Staffing $ 205,738 $ 74,169
Physician Staffing 4,328 3,619
210,066 77,788
Corporate overhead 55,142 51,900
Depreciation and amortization 9,852
12,671
Acquisition and integration-related costs 1,068 77
Restructuring costs 2,630 6,052
Impairment charges 2,070 16,248
Income (loss) from operations $ 139,304 $
(9,160)
In the first quarter of 2021, the Company modified its reportable segments and, as a result, now discloses the following two reportable segments - Nurse andAllied Staffing andPhysician Staffing . Revenue in the amount of$10.5 million and contribution loss in the amount of$1.1 million included in the previously-reported Search segment have been reclassified to Nurse andAllied Staffing for the year endedDecember 31, 2020 . See Note 18 - Segment Data. Certain statistical data for our business segments for the periods indicated are as follows: Year Ended December 31, Percent 2021 2020 Change Change Nurse andAllied Staffing statistical data: FTEs 8,679 6,037 2,642 43.8 % Average Nurse andAllied Staffing revenue per FTE per day$ 503 $ 343 $ 160 46.6 %Physician Staffing statistical data: Days filled 44,169 38,987 5,182 13.3 % Revenue per day filled$ 1,605 $ 1,742 $ (137) (7.9) %
See definition of Business Measurements under the Operating Metrics section of
our Management's Discussion and Analysis.
Segment Comparison - Year Ended
Nurse andAllied Staffing Revenue increased$837.3 million , or 109.0% to$1,605.8 million for the year endedDecember 31, 2021 , from$768.5 million for the year endedDecember 31, 2020 , driven by volume increases and higher bill rates, due to the continuing impacts from COVID as well as the overall tight labor supply for clinicians and professionals.
Contribution income for the year ended
million
revenue, contribution income margin increased to 12.8% for the year ended
29 -------------------------------------------------------------------------------- The average number of FTEs on contract during the year endedDecember 31, 2021 increased 43.8% from the year endedDecember 31, 2020 , primarily due to headcount growth in travel nurse and allied which grew by more than double over the prior year, as well as additional headcount resulting from the WSG acquisition. Average revenue per FTE per day increased approximately 46.6% in the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , due to the increase in the average travel bill rates as a result of the increases in pay rates required to attract healthcare professionals.Physician Staffing Revenue increased$3.0 million , or 4.3% to$70.9 million for the year endedDecember 31, 2021 , compared to$67.9 million for the year endedDecember 31, 2020 , primarily due to an increase in volume in several specialties. Contribution income for the year endedDecember 31, 2021 , increased$0.7 million or 19.6% to$4.3 million compared to$3.6 million in the year endedDecember 31, 2020 . As a percentage of segment revenue, contribution income was 6.1% for the year endedDecember 31, 2021 and 5.3% for the year endedDecember 31, 2020 , driven by higher revenue, partially offset by higher direct costs. Total days filled increased 13.3% to 44,169 in the year endedDecember 31, 2021 , compared to 38,987 in the year endedDecember 31, 2020 . Revenue per day filled was$1,605 for the year endedDecember 31, 2021 and$1,742 for the year endedDecember 31, 2020 due to a shift in the mix of business.
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$55.1 million for the year endedDecember 31, 2021 , from$51.9 million for the year endedDecember 31, 2020 , primarily due to increases in compensation and benefits, as well as equity compensation expense, and consulting expense, partially offset by decreases in legal expenses. As a percentage of consolidated revenue, unallocated corporate overhead was 3.3% for the year endedDecember 31, 2021 , and 6.2% for the year endedDecember 31, 2020 .
Transactions with Related Parties
See Note 17 - Related Party Transactions to our consolidated financial
statements.
Liquidity and Capital Resources
AtDecember 31, 2021 , we reported$1.0 million in cash and cash equivalents,$174.3 million of term loan outstanding, at par, and$9.2 million of borrowings drawn under our ABL. Working capital increased by$218.8 million to$308.5 million as ofDecember 31, 2021 , compared to$89.7 million as ofDecember 31, 2020 , primarily due to strong sequential growth, partially offset by the timing of disbursements. As ofDecember 31, 2021 , our days' sales outstanding, net of amounts owed to subcontractors, was 58 days, flat year-over-year. As ofDecember 31, 2021 , we do not have any off-balance sheet arrangements. Our operating cash flow constitutes our primary source of liquidity and, historically, has been sufficient to fund our working capital, capital expenditures, internal business expansion, and debt service. This includes our commitments, both short-term and long-term, of interest expense on our debt, payments on our promissory note payable, and operating lease commitments, as well as any settlements on uncertain tax positions, and future principal payments on our term loan and our Loan Agreement. 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.
Cash Flow Comparisons
Year Ended
Net cash used in operating activities during the year endedDecember 31, 2021 was$85.6 million compared to net cash provided by operating activities of$27.2 million during the year endedDecember 31, 2020 . The use of cash is due primarily to the investment in net working capital associated with the historic growth in our business, with accounts receivable increasing$318.4 million since the start of the year. 30 -------------------------------------------------------------------------------- Net cash used in investing activities during the year endedDecember 31, 2021 was$34.0 million compared to$4.6 million in the year endedDecember 31, 2020 . Net cash used in both periods was for capital expenditures, primarily related to the project to replace our applicant tracking system and various other IT initiatives. The year endedDecember 31, 2021 also included expenditures related to the development of our on-demand staffing platform and the build-out of our corporate office, and$26.9 million related to the acquisitions of WSG and Selected. Net cash provided by financing activities during the year endedDecember 31, 2021 was$119.1 million , compared to net cash used in financing activities of$22.0 million during the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , we reported net borrowings of$175.0 million on our term loan, and used cash to repay borrowing on our ABL of$44.2 million ,$0.7 million principal payment on our term loan,$2.4 million on our note payable,$6.1 million of debt issuance costs,$2.2 million for income taxes on share-based compensation, and an immaterial amount for other financing activities. During the year endedDecember 31, 2020 , we used cash to repay borrowing on our ABL of$17.6 million ,$2.4 million to pay our note payable,$0.7 million for income taxes on share-based compensation, and$1.3 million for other financing activities. Debt 2021 Term Loan Agreement As more fully described in Note 8 - Debt to our consolidated financial statements, onJune 8, 2021 , we entered into a 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 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 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 onSeptember 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 ofDecember 31, 2021 . 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. OnNovember 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 onDecember 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. 2019 Loan Agreement EffectiveOctober 25, 2019 , our prior senior credit facility entered into inAugust 2017 was replaced by a$120.0 million Loan Agreement, which provides for a five-year senior secured revolving credit facility. OnJune 30, 2020 , we amended the Loan Agreement (First Amendment), which increased the current aggregate committed size of the ABL from$120.0 million to$130.0 million . All other terms, conditions, covenants, and pricing of the Loan Agreement remained the same. OnMarch 8, 2021 , we amended the Loan Agreement (Second Amendment), which increased the current aggregate committed size of the ABL from$130.0 million to$150.0 million , increased certain borrowing base sub-limits, and decreased both the cash dominion event and financial reporting triggers. OnJune 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 inU.S. dollars. OnNovember 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 .
As of
Agreement were based on LIBOR plus 1.50% for the revolving portion of the
borrowing base and LIBOR plus 4.00% on the Supplemental Availability (as defined
in the Loan
31 -------------------------------------------------------------------------------- Agreement). The Base Rate (as defined by the Loan Agreement) margins would have been 0.50% and 3.00% for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on our excess availability under the revolving credit facility. In addition, the facility is subject to an unused fee, letter of credit fees, and an administrative fee. The Loan Agreement contains various restrictions and covenants, including a covenant to maintain a minimum fixed charge coverage ratio. We were in compliance with the fixed charge coverage ratio covenant as ofDecember 31, 2021 . Availability under the ABL is subject to a borrowing base, which was sufficient to access the full facility size of$150.0 million atDecember 31, 2021 , with$9.2 million of borrowings drawn as well as$18.2 million of letters of credit outstanding, leaving$122.6 million available for borrowing.
Note Payable
As ofDecember 31, 2021 , the third and final installment of the subordinated promissory note payable, made in connection with the Mediscan acquisition, in the amount of$2.5 million is included in current portion of debt on the consolidated balance sheets. This installment is to be paid, together with interest at a rate of 2% per annum, accruing fromApril 1, 2020 , onJanuary 31, 2022 . See Note 4 - Acquisitions to our consolidated financial statements.
See Note 8 - Debt to our consolidated financial statements.
Stockholders' Equity
See Note 15 - Stockholders' Equity to our consolidated financial statements.
Critical Accounting Policies and Estimates
We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to asset impairment, accruals for self-insurance, allowance for doubtful accounts and sales allowances, taxes and other contingencies, and litigation. We state our accounting policies in the notes to the audited consolidated financial statements for the year endedDecember 31, 2021 , contained herein. These estimates are based on information that is currently available to us and on various assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Our business acquisitions typically result in the recording of goodwill, trade names, and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. As more fully described in Note 2 - Summary of Significant Accounting Policies, we assess the impairment of goodwill of our reporting units and indefinite-lived intangible assets annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, and determining appropriate discount rates, growth rates, company control premium, and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. See Note 5 -Goodwill ,Trade Names , and Other Intangible Assets, where impairment testing in 2021, 2020, and 2019 is more fully described. Indefinite-lived intangible assets related to our trade names were not amortized but instead tested for impairment at least annually, or more frequently should an event or circumstances indicate that a reduction in fair value may have occurred. We 32 --------------------------------------------------------------------------------
perform testing of indefinite-lived intangible assets, other than goodwill, at
the asset group level using the relief from royalty method. If the carrying
value exceeds the fair value, an impairment loss is recorded for that excess.
There can be no assurance that the estimates and assumptions made for purposes of the annual impairment test will prove to be accurate predictions of the future. Although management believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results. In addition, we are required to test the recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for potential impairment, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.
Risk and Uncertainties
The calculation of fair value used in these impairment assessments included a number of estimates and assumptions that required significant judgments, including projections of future income and cash flows, long-term growth rates, the identification of appropriate market multiples, royalty rates, and the choice of an appropriate discount rate. See Note 5 -Goodwill ,Trade Names , and Other Intangible Assets. In addition, deterioration of demand for our services, deterioration of labor market conditions, reduction of our stock price for an extended period, or other factors as described in Item 1A. Risk Factors, may affect our determination of fair value of goodwill, trade names, or other intangible assets. This evaluation can also be triggered by various indicators of impairment which could cause the estimated discounted cash flows to be less than the carrying amount of net assets. If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations. Under the current credit agreements, an impairment charge will not have an impact on our liquidity. As ofDecember 31, 2021 , we had total goodwill, intangible assets not subject to amortization, and other intangible assets of$167.7 million or 22.9% of our total assets.
Health, workers' compensation, and professional liability expense
We maintain accruals for our health, workers' compensation, and professional liability claims that are partially self-insured and are classified as accrued compensation and benefits on our consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating our historical experience and trends related to health, workers' compensation, and professional liability claims and payments, based on actuarial models, as well as industry experience and trends. If such models indicate that our accruals are overstated or understated, we will adjust accruals as appropriate. Healthcare insurance accruals have fluctuated with increases or decreases in the average number of corporate employees and healthcare professionals on assignment as well as actual company experience and increases in national healthcare costs. As ofDecember 31, 2021 and 2020, we had$4.1 million and$3.9 million accrued, respectively, for incurred but not reported health insurance claims. Corporate and field employees are covered through a partially self-insured health plan. Workers' compensation insurance accruals can fluctuate over time due to the number of employees and inflation, as well as additional exposures arising from the current policy year. As ofDecember 31, 2021 , and 2020, we had$12.5 million and$12.4 million accrued for case reserves and for incurred but not reported workers' compensation claims, net of insurance receivables, respectively. The accrual for workers' compensation is based on an actuarial model which is prepared or reviewed by an independent actuary quarterly. As ofDecember 31, 2021 , and 2020, we had$4.9 million and$5.8 million accrued, respectively, for case reserves and for incurred but not reported professional liability claims, net of insurance receivables. The accrual for professional liability is based on actuarial models which are prepared by an independent actuary quarterly.
Revenue recognition
We recognize revenue from our services when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for the service. We have concluded that transfer of control of our staffing services, which represents the majority of our revenues, occurs over time as the services are provided.
The following is a description of the nature, amount, timing and uncertainty of
revenue and cash flows from which we generate revenue.
Temporary Staffing Revenue
Revenue from temporary staffing is recognized as control of the services is
transferred over time, and is based on hours worked by our field staff. We
recognize the majority of our revenue at the contractual amount we have the
right to invoice for services
33 -------------------------------------------------------------------------------- completed to date. Generally, billing to customers occurs weekly, bi-weekly, or monthly and is aligned with the payment of services to the temporary staff. Accounts receivable includes estimated revenue for employees' and independent contractors' time worked but not yet invoiced. AtDecember 31, 2021 andDecember 31, 2020 , our estimate of amounts that had been worked but had not been billed totaled$140.0 million and$48.3 million , respectively, and are included in accounts receivable in the consolidated balance sheets.
Other Services Revenue
We offer other optional services to our customers that are transferred over time including: MSPs providing agency services (as further described below in Gross Versus Net Policies), RPO, other outsourcing services, and retained search services, as well as separately billable travel and housing costs, which in total amount to less than 5% of our consolidated revenue for the years endedDecember 31, 2021 , 2020, and 2019. Generally, billing and payment terms for MSP agency services are consistent with temporary staffing as the customers are similar or the same. Revenue from these services is recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services. For our RPO, other outsourcing, and retained search services, revenue is generally recognized in the amount to which the entity has a right to invoice which corresponds directly with the value to the customer. We do not, in the ordinary course of business, offer warranties or refunds.
Gross Versus Net Policies
We record revenue on a gross basis as a principal or on a net basis as an agent
depending on the contracted arrangement, as follows:
•We have certain contracts with acute care facilities to provide comprehensive MSP solutions. Under these contract arrangements, we primarily use our nurses, along with third-party subcontractors, to fulfill customer orders. If a subcontractor is used, we invoice our customer for these services, but revenue is recorded at the time of billing, net of any related subcontractor liability. The resulting net revenue represents the administrative fee charged by us for our MSP services.
•Revenue from our
we are the principal in the arrangements.
Allowances
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in a provision for bad debt expense. We determine the adequacy of this allowance based on 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 conditions adjusted for current expectations for the customers or industry. Based on the information currently available, we also considered current expectations of future economic conditions, including the impact of COVID, when estimating our allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We write off specific accounts based on an ongoing review of collectability as well as our past experience with the customer. In addition, we maintain a sales allowance for rate and hour differences which may arise in the ordinary course of business and adjustments to the reserve are recorded as contra-revenue. As ofDecember 31, 2021 and 2020, our total allowances were$6.9 million and$4.0 million , respectively.
Contingent liabilities
We are subject to various litigation, claims, investigations, and other
proceedings that arise in the ordinary course of our business. These matters
primarily relate to employee-related matters that include individual and
collective claims, professional liability, tax, and payroll practices. Our
healthcare facility clients may also become subject to claims, governmental
inquiries and investigations, and legal actions to which we may become a party
relating to services provided by our professionals. We record a liability when
available information indicates that a loss is probable and an amount or range
of loss can be reasonably estimated. Significant judgment is required to
determine both the probability of loss and the estimated amount. At least
quarterly, we review our accrual and/or disclosures to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel, or new information.
However, losses ultimately incurred could materially differ from amounts
accrued. See Note 13 - Contingencies.
34
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Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. During 2021, the Company utilized 100 percent of its federal NOL carryforward and a significant amount of state NOLs. As ofDecember 31, 2021 , we have deferred tax assets related to certain state and foreign NOL carryforwards of$72.4 million . But for those NOL carryforwards with an indefinite carryover, the carryforwards will expire as follows: state between 2022 and 2040, and foreign between 2022 and 2026. As ofDecember 31, 2021 and 2020, we had valuation allowances on our deferred tax assets of an immaterial amount and$37.5 million , respectively. For the year endedDecember 31, 2021 , we recorded a valuation allowance release of$37.5 million (comprised of$18.4 million related to federal NOLs,$7.5 million related to state NOLs, and$11.6 million related to other net deferred tax assets) on the basis of management's reassessment of the amount of its deferred tax assets that are more likely than not to be realized. The valuation allowance on an immaterial amount of state NOLs was not released due to the respective expiration periods and specific state taxable income projections. See Note 14 - Income Taxes to our consolidated financial statements. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As ofDecember 31, 2021 , in part because in the current year we achieved 12 quarters of cumulative pretax income including permanent items in theU.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that our net deferred tax assets are realizable. We therefore reduced the valuation allowance accordingly. In arriving at our conclusion to reduce the valuation allowance we considered several positive and negative factors. For the 12 quarters endedDecember 31, 2021 , the Company has$110.3 million in cumulative pretax income including permanent items. The Company also has a history of utilizing NOLs prior to expiration, most notably the full utilization of the federal net operating loss carryforward in 2021. The Company is also forecasting positive pretax book income which is expected to exceed the reversal of its future tax deductions, further proving future estimates of taxable income. The growth estimates are tied to the growing demand for healthcare solutions for our customers, including a growing agingU.S. population, and our customers' pressure to keep costs down by using our staffing solutions. With regard to negative evidence, the Company does not have any material taxable temporary differences to offset deductible temporary differences and does not have any taxable income available for carryback to offset NOLs. As such, the primary focus of our analysis emphasized the current and prior two-year cumulative pretax income analysis, the full utilization of the federal net operating loss carryforward, and projections of future taxable income. We are subject to income taxes in theU.S. and certain foreign jurisdictions. Significant judgment is required in determining our consolidated provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of our business there are many transactions and calculations where the ultimate tax determination is uncertain. An unrecognized tax benefit represents the difference between the recognition of benefits related to exposure items for income tax reporting purposes and financial reporting purposes. For the year endedDecember 31, 2021 , the majority of the unrecognized tax benefit is classified as a component of other long-term liabilities in the consolidated balance sheets, while$0.4 million is classified as an offset to certain state NOLs within the deferred tax asset. As ofDecember 31, 2021 , total unrecognized tax benefits recorded was$9.2 million . We reserve for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. We are regularly under audit by tax authorities. Although the outcome of tax audits is always uncertain, we believe that we have appropriate support for the positions taken on our tax returns and that our annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated
financial statements.
Seasonality
35
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See Item 1. Business. Inflation We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we seek to ensure that billing rates reflect increases in costs due to inflation. In addition, we attempt to minimize any residual impact on our operating results by controlling operating costs.
METROMILE, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HANGER, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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