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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
———————
FORM 10-Q
———————
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2022
Or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From _________ to _________
———————
CROSS COUNTRY HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
——————— | | | | | | | | |
Delaware | 0-33169 | 13-4066229 |
(State or other jurisdiction of Incorporation or organization) | Commission file number | (I.R.S. Employer Identification Number) |
6551 Park of Commerce Boulevard, N.W.
Boca Raton, Florida 33487
(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)
———————
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, par value $0.0001 per share | CCRN | The Nasdaq Stock Market |
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 38,231,338 shares of common stock, par value $0.0001 per share, as of July 21, 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, and 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 potential 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, demand for the healthcare services we provide, both nationally and in the regions in which we operate, 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 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
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 279 | | | $ | 1,036 | |
Accounts receivable, net of allowances of $11,896 in 2022 and $6,881 in 2021 | 701,926 | | | 493,910 | |
Prepaid expenses | 6,774 | | | 7,648 | |
Insurance recovery receivable | 5,750 | | | 5,041 | |
Other current assets | 3,594 | | | 638 | |
Total current assets | 718,323 | | | 508,273 | |
Property and equipment, net of accumulated depreciation of $19,240 in 2022 and $17,729 in 2021 | 18,241 | | | 15,833 | |
Operating lease right-of-use assets | 5,058 | | | 7,488 | |
Goodwill | 113,360 | | | 119,490 | |
Trade names, indefinite-lived | 5,900 | | | 5,900 | |
Other intangible assets, net | 42,863 | | | 42,344 | |
Non-current deferred tax assets | 8,096 | | | 11,525 | |
Other non-current assets | 27,120 | | | 21,956 | |
Total assets | $ | 938,961 | | | $ | 732,809 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 189,805 | | | $ | 109,753 | |
Accrued compensation and benefits | 65,409 | | | 65,580 | |
Current portion of debt | — | | | 4,176 | |
Operating lease liabilities - current | 4,145 | | | 4,090 | |
Income tax payable | 30 | | | 7,307 | |
Current portion of earnout liability | 7,500 | | | 7,500 | |
Other current liabilities | 1,769 | | | 1,364 | |
Total current liabilities | 268,658 | | | 199,770 | |
Long-term debt, less current portion | 205,376 | | | 176,366 | |
Operating lease liabilities - non-current | 7,017 | | | 10,853 | |
Non-current deferred tax liabilities | 222 | | | 190 | |
Long-term accrued claims | 26,869 | | | 25,314 | |
Non-current earnout liability | 7,500 | | | 9,000 | |
Other long-term liabilities | 12,508 | | | 13,788 | |
Total liabilities | 528,150 | | | 435,281 | |
| | | |
Commitments and contingencies | | | |
| | | |
Stockholders' equity: | | | |
Common stock | 4 | | | 4 | |
Additional paid-in capital | 320,000 | | | 321,552 | |
Accumulated other comprehensive loss | (1,335) | | | (1,293) | |
Retained earnings (accumulated deficit) | 92,142 | | | (22,735) | |
| | | |
| | | |
Total stockholders' equity | 410,811 | | | 297,528 | |
Total liabilities and stockholders' equity | $ | 938,961 | | | $ | 732,809 | |
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 | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Revenue from services | $ | 753,561 | | | $ | 331,827 | | | $ | 1,542,293 | | | $ | 661,068 | |
Operating expenses: | | | | | | | |
Direct operating expenses | 583,156 | | | 259,237 | | | 1,197,094 | | | 517,013 | |
Selling, general and administrative expenses | 86,009 | | | 50,344 | | | 162,822 | | | 96,671 | |
Bad debt expense | 3,192 | | | 466 | | | 5,561 | | | 970 | |
Depreciation and amortization | 3,481 | | | 2,199 | | | 6,200 | | | 4,452 | |
Acquisition and integration-related costs | — | | | 924 | | | 40 | | | 924 | |
Restructuring (benefits) costs | (1,114) | | | 835 | | | (634) | | | 2,073 | |
Impairment charges | — | | | 1,921 | | | 1,741 | | | 2,070 | |
Total operating expenses | 674,724 | | | 315,926 | | | 1,372,824 | | | 624,173 | |
Income from operations | 78,837 | | | 15,901 | | | 169,469 | | | 36,895 | |
Other expenses (income): | | | | | | | |
Interest expense | 3,857 | | | 1,196 | | | 7,378 | | | 1,867 | |
Loss on early extinguishment of debt | 1,912 | | | — | | | 1,912 | | | — | |
Other income, net | (1,084) | | | (204) | | | (1,092) | | | (241) | |
Income before income taxes | 74,152 | | | 14,909 | | | 161,271 | | | 35,269 | |
Income tax expense | 21,258 | | | 3,361 | | | 46,394 | | | 4,273 | |
| | | | | | | |
| | | | | | | |
Net income attributable to common stockholders | $ | 52,894 | | | $ | 11,548 | | | $ | 114,877 | | | $ | 30,996 | |
| | | | | | | |
Other comprehensive income: | | | | | | | |
Unrealized foreign currency translation loss, net of tax | (31) | | | (24) | | | (42) | | | (30) | |
Comprehensive income | $ | 52,863 | | | $ | 11,524 | | | $ | 114,835 | | | $ | 30,966 | |
| | | | | | | |
Net income per share attributable to common stockholders - Basic | $ | 1.41 | | | $ | 0.32 | | | $ | 3.08 | | | $ | 0.85 | |
| | | | | | | |
Net income per share attributable to common stockholders - Diluted | $ | 1.40 | | | $ | 0.31 | | | $ | 3.03 | | | $ | 0.84 | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 37,471 | | | 36,625 | | | 37,251 | | | 36,404 | |
Diluted | 37,757 | | | 37,203 | | | 37,866 | | | 37,120 | |
See accompanying notes to the condensed consolidated financial statements
2
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended June 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 March 31, 2022 | 37,443 | | | $ | 4 | | | $ | 318,125 | | | $ | (1,304) | | | $ | 39,248 | | | $ | — | | | $ | 356,073 | |
Vesting of restricted stock | 80 | | | — | | | (239) | | | — | | | — | | | — | | | (239) | |
Equity compensation | — | | | — | | | 2,114 | | | — | | | — | | | — | | | 2,114 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (31) | | | — | | | — | | | (31) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 52,894 | | | — | | | 52,894 | |
Balances at June 30, 2022 | 37,523 | | | $ | 4 | | | $ | 320,000 | | | $ | (1,335) | | | $ | 92,142 | | | $ | — | | | $ | 410,811 | |
| | | | | | | | | | | | | |
| 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 March 31, 2021 | 36,495 | | | $ | 4 | | | $ | 309,711 | | | $ | (1,286) | | | $ | (135,289) | | | $ | 534 | | | $ | 173,674 | |
Vesting of restricted stock | 159 | | | — | | | (204) | | | — | | | — | | | — | | | (204) | |
Equity compensation | — | | | — | | | 2,137 | | | — | | | — | | | — | | | 2,137 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (24) | | | — | | | — | | | (24) | |
Acquisition of WSG | 308 | | | — | | | 5,000 | | | — | | | — | | | — | | | 5,000 | |
Net income | — | | | — | | | — | | | — | | | 11,548 | | | — | | | 11,548 | |
Balances at June 30, 2021 | 36,962 | | | $ | 4 | | | $ | 316,644 | | | $ | (1,310) | | | $ | (123,741) | | | $ | 534 | | | $ | 192,131 | |
See accompanying notes to the condensed consolidated financial statements
3
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 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 | 37,024 | | | $ | 4 | | | $ | 321,552 | | | $ | (1,293) | | | $ | (22,735) | | | $ | — | | | $ | 297,528 | |
Vesting of restricted stock | 499 | | | — | | | (5,267) | | | — | | | — | | | — | | | (5,267) | |
Equity compensation | — | | | — | | | 3,715 | | | — | | | — | | | — | | | 3,715 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (42) | | | — | | | — | | | (42) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 114,877 | | | — | | | 114,877 | |
Balances at June 30, 2022 | 37,523 | | | $ | 4 | | | $ | 320,000 | | | $ | (1,335) | | | $ | 92,142 | | | $ | — | | | $ | 410,811 | |
| | | | | | | | | | | | | |
| 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 | 36,177 | | | $ | 4 | | | $ | 310,388 | | | $ | (1,280) | | | $ | (154,737) | | | $ | 534 | | | $ | 154,909 | |
Vesting of restricted stock | 477 | | | — | | | (2,230) | | | — | | | — | | | — | | | (2,230) | |
Equity compensation | — | | | — | | | 3,486 | | | — | | | — | | | — | | | 3,486 | |
Foreign currency translation adjustment, net of taxes | — | | | — | | | — | | | (30) | | | — | | | — | | | (30) | |
Acquisition of WSG | 308 | | | — | | | 5,000 | | | — | | | — | | | — | | | 5,000 | |
Net income | — | | | — | | | — | | | — | | | 30,996 | | | — | | | 30,996 | |
Balances at June 30, 2021 | 36,962 | | | $ | 4 | | | $ | 316,644 | | | $ | (1,310) | | | $ | (123,741) | | | $ | 534 | | | $ | 192,131 | |
See accompanying notes to the condensed consolidated financial statements
4
CROSS COUNTRY HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
| | | | | | | | | | | |
| Six Months Ended |
| June 30, |
| 2022 | | 2021 |
Cash flows from operating activities | | | |
Consolidated net income | $ | 114,877 | | | $ | 30,996 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | |
Depreciation and amortization | 6,200 | | | 4,452 | |
Provision for allowances | 7,213 | | | 1,927 | |
Deferred income tax expense | 3,476 | | | 2,923 | |
Non-cash lease expense | 1,005 | | | 1,284 | |
Impairment charges | 1,741 | | | 2,070 | |
Loss on early extinguishment of debt | 1,912 | | | — | |
Equity compensation | 3,715 | | | 3,486 | |
Other non-cash (benefits) costs | (301) | | | 772 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (215,230) | | | (76,274) | |
Prepaid expenses and other assets | (424) | | | (64) | |
Income taxes | (9,021) | | | 479 | |
Accounts payable and accrued expenses | 78,438 | | | 22,014 | |
Operating lease liabilities | (2,674) | | | (3,365) | |
Other | (1,824) | | | (122) | |
Net cash used in operating activities | (10,897) | | | (9,422) | |
| | | |
Cash flows from investing activities | | | |
Acquisitions, net of cash acquired | — | | | (24,470) | |
Purchases of property and equipment | (3,848) | | | (3,002) | |
Net cash used in investing activities | (3,848) | | | (27,472) | |
| | | |
Cash flows from financing activities | | | |
Proceeds from term loan | — | | | 100,000 | |
Principal payments on term loan | (50,438) | | | — | |
Debt issuance costs | (3,159) | | | (4,465) | |
Borrowings under Senior Secured Asset-Based revolving credit facility | 900,112 | | | 273,981 | |
Repayments on Senior Secured Asset-Based revolving credit facility | (824,312) | | | (311,400) | |
Cash paid for shares withheld for taxes | (5,267) | | | (2,230) | |
Principal payments on note payable | (2,426) | | | (2,426) | |
| | | |
Other | (523) | | | (22) | |
Net cash provided by financing activities | 13,987 | | | 53,438 | |
| | | |
Effect of exchange rate changes on cash | 1 | | | (17) | |
Change in cash and cash equivalents | (757) | | | 16,527 | |
Cash and cash equivalents at beginning of period | 1,036 | | | 1,600 | |
Cash and cash equivalents at end of period | $ | 279 | | | $ | 18,127 | |
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.
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 statements of cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Management has assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the global pandemic using information that is reasonably available to the Company at the time. Significant estimates and assumptions are used for, but not limited to: (i) the valuation of accounts receivable; (ii) goodwill, trade names, and other intangible assets; (iii) other long-lived assets; (iv) revenue recognition; (v) accruals for health, workers’ compensation, and professional liability claims; (vi) valuation of deferred tax assets; (vii) legal contingencies; and (viii) income taxes. Accrued insurance claims and reserves include estimated settlements from known claims and actuarial estimates for claims incurred but not reported. As additional information becomes available to the Company, its future assessment of these estimates, including management's expectations at the time regarding the duration, scope, and severity of the pandemic, as well as other factors, could materially and adversely impact the Company's consolidated financial statements in future reporting periods. Actual results could differ from those estimates.
COVID
The Company prioritizes the mental health and well-being of its employees, especially in response to the COVID pandemic. While operating primarily through a remote workforce, the Company's offices remain open with stringent safety guidelines and procedures in place. Business travel, including visits to healthcare clients, continues to be somewhat limited at the request of the Company's clients who are continuing to cope with the pandemic twenty-four hours a day/seven days a week.
In the second quarter of 2022, average bill rates were down in the mid-single digits as expected, but volumes were stronger as the Company continued to experience high demand across a wide range of specialties spanning the healthcare continuum. Investments in people and technology, along with other improvements the Company has made during the pandemic, have allowed it to quickly respond to high demand levels that it is continuing to see across a wide range of specialties, including operating room, emergency room, pediatrics, labor and delivery, and medical and surgical services, not all of which are directly related to COVID needs.
Throughout the pandemic, the Company worked collaboratively with clients on adjusting bill rates in order to adapt to the rapidly changing market conditions. One of the Company's core values is to act ethically and responsibly, and it has been especially important during this pandemic to be transparent and build trust with its clients to re-enforce long-lasting relationships as both demand and bill rates increased to unprecedented levels.
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 June 30, 2022 and December 31, 2021 totaled $217.3 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.
The opening balance of the allowance for doubtful accounts is reconciled to the closing balance for expected credit losses as follows: | | | | | | | | | | | |
| |
| |
| 2022 | | 2021 |
| (amounts in thousands) |
Balance at January 1 | $ | 6,087 | | | $ | 3,416 | |
Bad Debt Expense | 2,369 | | | 504 | |
Write-Offs, net of Recoveries | (365) | | | (699) | |
Balance at March 31 | 8,091 | | | 3,221 | |
Bad Debt Expense | 3,192 | | | 466 | |
Write-Offs, net of Recoveries | (426) | | | (358) | |
Balance at June 30 | $ | 10,857 | | | $ | 3,329 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
In addition to the allowance for doubtful accounts, the Company maintains a sales allowance for billing-related adjustments which may arise in the ordinary course of business and adjustments to the reserve are recorded as contra-revenue. The balance of this allowance as of June 30, 2022 and December 31, 2021 was $1.0 million and $0.8 million, respectively.
The Company’s contract terms typically require payment between 30 to 60 days from the date of invoice and are considered past due based on the particular negotiated contract terms. The majority of the Company's customers are U.S. based healthcare systems with a significant percentage in acute-care facilities. No single customer accounted for more than 10% of the Company’s revenue for the three and six months ended June 30, 2022 and 2021, or the accounts receivable balance as of June 30, 2022 and December 31, 2021.
Restructuring (Benefits) 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 | $ | 160 | | | $ | 2,423 | |
Charged to restructuring | — | | | 389 | |
Payments and adjustments | (160) | | | (192) | |
Balance at March 31, 2022 | — | | | 2,620 | |
Charged to restructuring(a) | 200 | | | (1,379) | |
Payments | — | | | (202) | |
Balance at June 30, 2022 | $ | 200 | | | $ | 1,039 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
________________
(a) Restructuring (benefits) costs in the condensed consolidated statements of operations for the six months ended June 30, 2022 include a benefit of $1.4 million associated with the early termination of one of the Company's corporate offices which was previously restructured. Other costs were immaterial for the six months ended June 30, 2022.
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 June 30, 2022 |
| Nurse And Allied Staffing | | Physician Staffing | | | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 712,090 | | | $ | 21,207 | | | | | $ | 733,297 | |
Other Services | 19,353 | | | 911 | | | | | 20,264 | |
Total | $ | 731,443 | | | $ | 22,118 | | | | | $ | 753,561 | |
| | | | | | | |
| Three Months ended June 30, 2021 |
| Nurse And Allied Staffing | | Physician Staffing | | | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 308,519 | | | $ | 15,072 | | | | | $ | 323,591 | |
Other Services | 7,669 | | | 567 | | | | | 8,236 | |
Total | $ | 316,188 | | | $ | 15,639 | | | | | $ | 331,827 | |
| | | | | | | |
| Six Months ended June 30, 2022 |
| Nurse And Allied Staffing | | Physician Staffing | | | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 1,461,537 | | | $ | 43,311 | | | | | $ | 1,504,848 | |
Other Services | 35,486 | | | 1,959 | | | | | 37,445 | |
Total | $ | 1,497,023 | | | $ | 45,270 | | | | | $ | 1,542,293 | |
| | | | | | | |
| Six Months ended June 30, 2021 |
| Nurse And Allied Staffing | | Physician Staffing | | | | Total Segments |
| (amounts in thousands) |
Temporary Staffing Services | $ | 614,494 | | | $ | 30,478 | | | | | $ | 644,972 | |
Other Services | 14,702 | | | 1,394 | | | | | 16,096 | |
Total | $ | 629,196 | | | $ | 31,872 | | | | | $ | 661,068 | |
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See Note 12 - Segment Data.
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
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 six months ended June 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. The current portion of the liability of $7.5 million is included in current portion of earnout liability and the non-current portion of $7.5 million is included in non-current 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 | $ | 957 | |
Accounts receivable | 11,991 | |
Other current assets | 59 | |
Property and equipment | 10 | |
Right-of-use assets | 1,078 | |
Goodwill | 22,066 | |
Other intangible assets | 14,200 | |
Total assets acquired | 50,361 | |
Accounts payable and accrued expenses | 3,562 | |
Accrued compensation and benefits | 1,387 | |
Lease liability - current | 316 | |
Lease liability - non-current | 762 | |
Earnout liability | 15,000 | |
Total liabilities assumed | 21,027 | |
Net assets acquired | $ | 29,334 | |
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.
The remaining excess purchase price over the fair value of net assets acquired of $22.1 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. The pro-forma impact on the Company's consolidated revenue from services and net income, including the pro forma effect of events that are directly attributable to the acquisition, was not significant.
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 June 30, 2022 and $1.3 million at December 31, 2021.
6. EARNINGS PER SHARE
The following table sets forth the components of the numerator and denominator for the computation of the basic and diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
June 30, | | June 30, |
2022 | | 2021 | | 2022 | | 2021 |
| (amounts in thousands, except per share data) |
Numerator: | | | | | | | |
Net income attributable to common stockholders - Basic and Diluted | $ | 52,894 | | | $ | 11,548 | | | $ | 114,877 | | | $ | 30,996 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares - Basic | 37,471 | | | 36,625 | | | 37,251 | | | 36,404 | |
Effect of diluted shares: | | | | | | | |
Share-based awards | 286 | | | 578 | | | 615 | | | 716 | |
Weighted average common shares - Diluted | 37,757 | | | 37,203 | | | 37,866 | | | 37,120 | |
| | | | | | | |
Net income per share attributable to common stockholders - Basic | $ | 1.41 | | | $ | 0.32 | | | $ | 3.08 | | | $ | 0.85 | |
| | | | | | | |
Net income per share attributable to common stockholders - Diluted | $ | 1.40 | | | $ | 0.31 | | | $ | 3.03 | | | $ | 0.84 | |
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 | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (amounts in thousands) |
Share-based awards | 220 | | 21 | | 110 | | 13 |
7. GOODWILL, TRADE NAMES, AND OTHER INTANGIBLE ASSETS
The Company had the following acquired intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 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 | $ | 33,430 | | | $ | 20,217 | | | $ | 13,213 | | | $ | 30,530 | | | $ | 18,375 | | | $ | 12,155 | |
Customer relationships | 47,738 | | | 19,626 | | | 28,112 | | | 47,738 | | | 17,581 | | | 30,157 | |
Non-compete agreements | 304 | | | 303 | | | 1 | | | 304 | | | 272 | | | 32 | |
Trade names | 30 | | | 8 | | | 22 | | | — | | | — | | | — | |
Software | 1,700 | | | 185 | | | 1,515 | | | — | | | — | | | — | |
Other intangible assets, net | $ | 83,202 | | | $ | 40,339 | | | $ | 42,863 | | | $ | 78,572 | | | $ | 36,228 | | | $ | 42,344 | |
| | | | | | | | | | | |
Intangible assets not subject to amortization: |
Trade names, indefinite-lived | | | | | $ | 5,900 | | | | | | | $ | 5,900 | |
As of June 30, 2022, estimated annual amortization expense is as follows:
| | | | | |
| (amounts in thousands) |
Years Ending December 31: | |
2022 | $ | 4,040 | |
2023 | 8,051 | |
2024 | 7,399 | |
2025 | 6,840 | |
2026 | 5,632 | |
Thereafter | 10,901 | |
| $ | 42,863 | |
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 | $ | 396,446 | | | $ | 43,405 | | | $ | 439,851 | |
Sale of business | (9,889) | | | — | | | (9,889) | |
Accumulated impairment loss | (269,874) | | | (40,598) | | | (310,472) | |
Goodwill, net of impairment loss | 116,683 | | | 2,807 | | | 119,490 | |
| | | | | |
Changes to aggregate goodwill in 2022 | | | | | |
Goodwill acquisition adjustment - Selected (a) | (6,130) | | | — | | | (6,130) | |
| | | | | |
Balances as of June 30, 2022 | | | | | |
Aggregate goodwill acquired | 390,316 | | | 43,405 | | | 433,721 | |
Sale of business | (9,889) | | | — | | | (9,889) | |
Accumulated impairment loss | (269,874) | | | (40,598) | | | (310,472) | |
Goodwill, net of impairment loss | $ | 110,553 | | | $ | 2,807 | | | $ | 113,360 | |
________________
(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 June 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 June 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 June 30, 2022, the Company performed a qualitative assessment of its trade names and other intangible assets and determined it was not more likely than not that their carrying value may not be recoverable. During the six months ended June 30, 2021, the Company wrote off a discontinued software development project, resulting in an immaterial impairment charge.
8. DEBT
The Company's long-term debt consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Principal | | Debt Issuance Costs | | Principal | | Debt Issuance Costs |
| (amounts in thousands) |
Term Loan, interest of 7.39% and 6.50% at June 30, 2022 and December 31, 2021, respectively | $ | 123,875 | | | $ | (3,499) | | | $ | 174,312 | | | $ | (5,396) | |
Senior Secured Asset-Based Loan, interest of 3.12% and 1.60% at June 30, 2022 and December 31, 2021, respectively | 85,000 | | | (3,848) | | | 9,200 | | | (991) | |
Note Payable, interest of 2.00% per annum at December 31, 2021 | — | | | — | | | 2,426 | | | — | |
Total debt | 208,875 | | | (7,347) | | | 185,938 | | | (6,387) | |
Less current portion - Note Payable | — | | | — | | | 2,426 | | | — | |
Less current portion - Term Loan | — | | | — | | | 1,750 | | | — | |
Long-term debt | $ | 208,875 | | | $ | (7,347) | | | $ | 181,762 | | | $ | (6,387) | |
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 June 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 | 123,875 | | | 85,000 | | | | | |
Total | $ | 123,875 | | | $ | 85,000 | | | | | |
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 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.
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 June 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.
Aside from 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 (as described below). 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) 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
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 June 30, 2022, borrowing base availability under the ABL was $300.0 million and the Company had $85.0 million of borrowings drawn, as well as $17.5 million of letters of credit outstanding related to workers' compensation and professional liability policies, leaving $197.5 million of excess availability.
As of June 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 June 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 asset 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 Company did not record any lease-related impairment charges for the three months ended June 30, 2022. The decision and change in the use of space resulted in a right-of-use asset impairment charge of $1.5 million for the three months ended March 31, 2022 and $1.7 million for the three months ended June 30, 2021. 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 three months ended March 31, 2022 and June 30, 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: | |