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Healthcare Staffing UpdateMay 29, 2007
As we have said previously, we have been
hearing that there is a significant variation
in the healthcare staffing revenue picture
experienced by companies in the
industry. The Q1'07 revenue results for the
public companies below show this quite
nicely. Although overall revenue within the
segment was up 8.7%, on a piece by piece
basis revenue results varied significantly
both within the industry and company.
Generally speaking, the public companies
saw an increase in revenue in travel nurse,
allied, locum and physician permanent
placements and a decrease in revenue for
per-diem staffing. We are presenting
revenue and other information below as
it shows how much variation in results is
experienced by the public companies.
Q1'
07 vs. Q1'06 11.3% 6.8%
(3.1%)
10.2%
In its 10-Q for the period ending March 31, 2007, Cross Country indicated that there was an increase in revenue in travel nurse and clinical staffing, and a decrease in revenue in per-diem staffing and retained search operations. It also indicated that average number of full-time equivalents (FTE's) on contract increased 5.6% and that bill rates increased approximately 5.4% during the past year. Cross Country derives 6.7% of its revenue from other human capital management services which experienced higher revenue for education and training and lower revenue for retained search.
12.6% 10.5%
5.0%
11.7%
In its 10-Q for the period ending March 31, 2007, AMN indicated that in its nursing and allied staffing segment, the average number of temporary healthcare professionals increased 6.5% and that there was a 5.1% increase in revenue per temporary. In its locum tenens staffing segment, the average number of days filled by temporary healthcare professional increased 6.2% and bill rates increased by 4.3%.
5.9% 40.8%
14.3%
19.7%
6.9%
As of the date of this letter, we could not find a 10-Q for On Assignment. However, in its 8-K filing for the period ending March 31, 2007, the president of On Assignment said that healthcare staffing revenue was negatively impacted by the loss of a major customer and "Our focus in the remainder of 2007 will be to continue to grow and expand our revenue base and improve our EBITDA. In order to achieve this, we will continue to work to increase bill rates, raise gross margins and contain costs."
(2.4%) (0.6%)
(45.8%)
(4.5%)
In its 10-Q for the period ending March 31, 2007, MSN indicates that there was a decrease in the hours worked by professionals due in part to their February 2006 restructuring initiative in branch-based per-diem staffing, a decrease in the hours worked by professionals in the travel nurse staffing division, both were partially offset by an increase in bill rates that were slightly higher than that of the Consumer Price Increase. It further stated that the per-diem marketplace is now showing modest growth.
Each company has a different gross
margin story. See below: Q1'07 Percentage
23.0% Cross Country experienced a 0.4% decrease in gross margin versus the same period in 2006. Higher housing and professional liability insurance expenses in the healthcare staffing business and a change in mix of business within the other human capital management services toward higher expense areas accounted for the decrease. This was partially offset by a widening in its bill-pay spread in the healthcare staffing business
23.3% 25.2%
63.2%
25.5%
AMN experienced a decrease in gross margin of 1.5% for the nursing and allied staffing segment; a decrease in gross margin of 1.2% for the locum tenens staffing segment; and an increase in gross margin of 3.1% in the physician permanent placement segment. Housing costs and health insurance claims negatively impacted nursing and allied gross margin. The mix of physician specialties negatively impacted locum tenens gross margin.
On Assignment has increased its healthcare staffing gross margin by 2.5% versus what it was a year ago. Travel Nurse gross margin has been increasing during the past year, but that was more like a 1% rate of increase. Most of the increase seems to have come from the medical, financial and allied portion of healthcare staffing. The company has been focused on raising gross margin across all segments of its business for some time and is currently benefiting from this effort.
MSN has increased its gross margin by 2.5% in the past year and attributes this to a more favorable pricing environment than in recent years. It stated that it has begun to see increases in bill rates over the past few months.
Sales General
& Administrative Expenses Percentage
Q1'07
Percentage
16.8% Cross Country improved its SG&A expenses by 0.8% of revenue versus Q1'06. It cited lower Sarbanes-Oxley costs, lower legal fees and lower corporate compensation; partially offset by an increase in consulting fees. It also cited improved operating leverage in its healthcare staffing business and a lower mix of other human capital management businesses with higher SG&A burden than its healthcare staffing business as reasons for the improvement.
AMN's SG&A expenses have improved only slightly since last year when they were 18.7% of revenue. All the improvement has come from physician permanent placement which decreased by 3.5% of revenue and was offset by slight increases in the other areas.
On Assignment is much more of a hybrid company than any of the other companies discussed in this letter. Most of its revenue, 50.6% comes from outside of healthcare and physician staffing. Furthermore, On Assignment does not report SG&A by segment. We do know that On Assignment has been working for some time to reduce its SG&A as a percent of revenue and has made significant improvements in the last two (2) years. With its goal of continuing to control costs, we believe that On Assignment probably has a much better cost structure in its healthcare and physician staffing areas than is reflected above especially since its gross margin in these areas are significantly below that of its other businesses as shown in the gross margin section above.
MSN's SG&A expenses were impacted by higher professional service fees and recruiting/promotional costs in the first quarter of 2007. SG&A expenses are up 1.8% of revenue on a year over year basis during Q1'07. Summary Commentary The above revenue change section indicates that the healthcare staffing market is growing. The results for Cross Country, AMN and On Assignment confirm this and in its 10-Q, MSN notes that the per-diem marketplace is now showing modest growth. Given the consistency surrounding the growth stories, you should be participating in the market growth that is taking place. If you are growing at a faster rate than the companies above, it probably means that you have a good recruiting engine; we know of some companies that are growing faster than the market. We think they are the exception and expect that eventually there will be a weeding out of weaker companies in the industry as there are many suppliers and too few bodies to fill open orders. Industry revenue will continue to be limited by supply acquisition and turnover rather than by demand. Earlier this month, we attended a Symposium on the International Recruitment of Healthcare Workers that was sponsored by the Hammond Law Group. Hammond indicated that there is a 70% to 80% chance of retrogression being lifted by early July. That is good news for all companies involved with bringing healthcare personnel in to the country from international locations. Of note in the gross margin section is that all the public companies had gross margin of 23% or more in the first quarter. This is not by accident as all the public companies are taking actions to increase their gross margin. Still, from an overall viewpoint, the gross margin percentage for the public companies noted above remains about 2% lower than it was prior to 2002-2003. Longer term, we expect that the gross margin percentage for public companies will rise by 1%-2%.
Generally speaking, the SG&A expenses of
the public
companies will need to shrink over time to
get back to
where they were prior to 2004 as they are
still out of
line with historical percentages by 1-2% of
revenue. As
we've said previously, healthcare staffing
companies
probably should have SG&A expenses in
the range of
15% to 17% of revenue for travel or
per-diem
companies and in the range of 18% to 20%
for
physician and allied staffing companies.
These
guidelines should allow for EBITDA in the
range of 6%
to 8% or more if gross margin is properly
managed.
Almost any buyer we know would have a
difficult time
considering a company to be a quality
service provider
unless it had 6% EBITDA and gross margin
percentages similar to that experienced by
the public
companies. If you would like to confidentially discuss how we could help you to take advantage of acquisition opportunities available at this time, we should talk! Please contact either of us at the numbers below and for more information about us please visit our website www.lyonsolutions.com. Sincerely,
Visit Our Website
About Lyons Solutions,
LLC
We were founded in
1984 as
Lyons &
Associates, Inc.
and today Lyons Solutions, LLC is a
premier merger
and acquisitions financial advisor to the
healthcare
staffing industry nationwide. Since 1989
we've
completed approximately 30 healthcare
staffing
industry transactions. We have built an
extensive
corporate and private equity buyer
database and
provide sound, practical advice to owners
of private
companies seeking to execute a business
sale,
merger, acquisition, recapitalization or
management
buyout transaction. Seller clients tend to
have
revenue ranging from $5 million to $100
million. We
work with our clients to jointly determine the
best
time for them to approach the market and
then
aggressively develop alternatives for our
clients to
consider. Our senior deal makers actively
participate
in the Healthcare Staffing Summit, the
American
Staffing Association (ASA), the New
Jersey Staffing
Alliance (NJSA), the New York Staffing
Association (NYSA) and the Florida
Staffing Association (FSA) and have
completed over 100
multi-million dollar transactions.
Lyons Solutions, LLC
Webmaster:
hsmith@lyonssolutions.com
Website:
http://www.lyonssolutions.com
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