Olsten Q2
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Olsten Q2
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(FOOL CONFERENCE CALL
SYNOPSIS)* By Debora Tidwell (MF Debit)
Olsten Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %> UNION CITY, Ca., August 9, 1996/FOOLWIRE/ --- Olsten Corporation reported Q2 1996 results yesterday morning. Revenues were up 16% to $800 million. System-wide sales increased 21% to $977 million. And net income was up 23% to $30 million. Earnings per share was at $0.38 for the quarter and that was up about 19%.
Q2 was a very busy and very productive quarter for Olsten. Clearly the most significant event during the quarter was the announcement and completion of the acquisition of Quantum Health Resources -- which was accounted for as a pooling of interests. As a result of Quantum's numbers and operating performance for the quarter and for the 6-month period in both the current year and last year are included with Olsten's.
They also completed the acquisition of Systems Partners Inc in Q2 in June. This is a California-based Information Technology Services company with 5 offices with a run rate of about $30 million. Also, on the acquisition front, they announced the proposed acquisition of Co-Counsel, which is a publicly held legal staffing company that provides attorneys and paralegals from offices in 5 cities with annualized revenues of about $15-17 million. The shareholders of Co-Counsel are meeting tomorrow to vote on the acquisition.
In May they were able to successfully convert substantially all of their $125 million in convertible bonds into equity. As a result of that, the Quantum transaction, good operating performance, and other things, their shareholders' equity is now just over $750 million. They are pleased to announce that they have negotiated a $400 million revolving credit facility through a consortium of 11 banks. This transaction is scheduled to close tomorrow and will run for 5 years. So, from a financing point of view, having done their straight debt in Q1 and having converted their outstanding convertible debt, and with this bank line, they should be in pretty good shape to expand and grow the business.
From an operating point of view, in Q2 they made very good progress. In their staffing service business, system-wide sales were very strong (up 26%) and revenues were even stronger (up 33%), with about half of this increase on the acquisitions they have made in the last few quarters. Half of the increase was internal growth and half was from acquisitions. They signed a number of significant multi-year staffing contracts during Q2 that included Chase, Warner Lambert, Paine Webber, United Healthcare, Smith Barney, and Corning.
The information technology business continued to grow both internally at a run rate of about 30% and through acquisitions. In this area as well, they signed a number of large and important contracts and deals in Q2. Some of them were mega-deals where they were just one of several preferred vendors to provide services. This is very important to that segment. The IT area continues to be a very hot area, not only for Olsten but for the entire industry. They look forward to expanding it and will continue to make acquisitions as well. They anticipate that the run rate for this business in Q4 could reach about $200 million.
European and Latin American operations, which now account for about 18% of the staffing service business, had very good operating results with the exception of Germany which had a rough economy in the first half. From what they hear, read, and expect the second half of the year should be much better in Germany so they are looking forward to a nice pickup there.
The healthcare side of their business was also very active in Q2. Their healthcare system-wide sales were up 16% during the quarter, primarily due to the growth of their hospital management business and Quantum. They continue to see excellent growth during the quarter in their managed care business. However, this growth was offset pretty much evenly by the softness in their Medicare business. As a result, revenues in the healthcare segment were essentially flat. What they are seeing is a transformation in the marketplace that they have been discussing over the past 24 months where they are seeing Medicare patients either moving into the managed care arena or being serviced by a hospital-based home health agency. Their strategy in dealing with this change in the marketplace is two-fold. They are continuing to build their infrastructure for network management so that they can take a greater share of the managed care business (where a lot of these patients are moving). Presently they have two network management sites operational -- one in Hartford and one in Phoenix -- and they expect facilities to be operational in Q3 and Q4 in Tampa and Houston. By the end of the year, they will have four network management sites fully operational. They also are continuing to expand the management of their hospital based home health agencies, which is another area where they are losing Medicare patients. Right now they manage 185 agencies and they anticipate that system-wide sales in this business should be about $500 million for the year. And this is a business that they entered not quite two years ago. So they have made substantial progress here. On this $500 million in system-wide sales, Olsten receives fees on a per visit basis which are included in their revenues.
Their Cigna contract is a good example of their network management capabilities as they continue to enroll the Cigna Health Plans -- all 68 of them. They are not quite there yet. They expect that they will be servicing all of them in Q4. In Q2 they moved at a pretty active pace and it really started to pick up in June. But in Q3, substantially all of the plans will be enrolled with maybe one or two going into October. But by Q4 they should have all of Cigna's lives under their enrollment.
Clearly the Quantum acquisition was very strategic for them in that they have now become the largest provider of infusion therapy. And, that will allow them to provide more services to the managed care community and to those other patients. It also gives them a national pharmacy network as well as relationships with pharmaceutical companies that wish to find new channels for their new drug therapies. They will be taking after-tax charges of up to $45 million in Q3 to cover merger, integration, and related costs resulting from the Quantum acquisition and from certain allowances related to Olsten's home healthcare business.
They are in a changing healthcare environment and what they have seen of late are different interpretations of costs reimbursed under the Medicare program. They believe it is prudent at this time to provide for allowances for potential denial of costs that were previously reimbursed in prior periods. Prior to 1996, they have audits going on, which is ordinary and usual. This will not be an ongoing allowance. They are a Medicare provider and are an efficient provider of services. Their Medicare reimbursements on an annual basis are roughly $400 million. They are audited every year by Medicare. The auditing process is an ongoing one and what they are seeing is that costs that had been ordinarily reimbursable and accepted are now being talked about and questioned.
The allowances are a conservative approach -- there is no smoking gun or major problem -- they think it just makes good business sense given the size of their Medicare reimbursements. The company was asked to comment on the revised cost limits for home health agencies. They responded that they have looked at the new limits and are crunching those numbers now. They don't believe there is any significant impact one way or the other because most of their agencies are at or below the limits. And they are looking at those that are at or close to it. They don't think it has much impact, but the analysis should be done next week. Those limits won't go into effect until January 1997 because that is when their fiscal year begins. So, even if a couple of locations that may be impacted by the new limits, they have five months to react to it and deal with it to offset any potential impact. But they don't think it is significant at all, if any.
Their balance sheet is stronger than ever. Their equity is just over $750 million. Working capital is over $600 million. Long-term debt is at $332 million. And they will be signing a new credit arrangement today for $400 million. All in all they think they are in strong financial shape. Both of their businesses continued to make good progress. Olsten is becoming a global leader on the staffing side -- expanding in Europe and Latin America. On the healthcare side of the business, they have a core strength in nursing but also now have hospital management, infusion therapy, and network management services. They are strengthening the network management area and this area should be strategically very important to them as they take on more managed care contracts.
All in all they are in good shape. They think the strategies they have put in motion over the last two years are serving them well and they are looking forward to a good second half. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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