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ASGN > SEC Filings for ASGN > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for ON ASSIGNMENT INC


2-Aug-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The information in this discussion contains 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. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include statements regarding our anticipated financial and operating performance for future periods. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) actual demand for our services as impacted by the general economic environment; (2) our ability to attract, train and retain qualified staffing consultants; (3) our ability to remain competitive in obtaining and retaining temporary staffing clients;
(4) the availability of qualified contract professionals; (5) our ability to manage our growth efficiently and effectively; (6) continued performance of our enterprise-wide information systems; (7) our ability to manage our medical malpractice and other potential or actual litigation matters; and (8) other risks detailed from time to time in our reports filed with the Securities and Exchange Commission (the "SEC"), including in our Annual Report on Form 10-K, for the year ended December 31, 2012, as filed with the SEC on March 18, 2013, under the section "Risk Factors." Other factors also may contribute to the differences between our forward-looking statements and our actual results. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements in this document are based on information available to us as of the date we file this Quarterly Report on Form 10-Q, and we assume no obligation to update any forward-looking statement or the reasons why our actual results may differ.

OVERVIEW

On Assignment, Inc. is a leading global provider of in-demand, skilled professionals in the growing technology, healthcare, and life sciences sectors. We provide clients with short-term and long-term placement of contract, contract-to-hire, and direct hire professionals.

Our Technology service offering consists of two complementary segments uniquely positioned in the marketplace to offer our clients a broad spectrum of information technology, or IT, staffing solutions: Apex and Oxford. Our Apex segment provides mission-critical daily IT operation professionals for contract and contract-to-hire positions to Fortune 1000 and mid-market clients across the United States, and offers recruitment solutions for other select professional skills and workforce needs. Our Oxford segment proactively recruits and delivers high-end information technology, engineering, regulatory, and compliance professionals for consulting assignments and permanent placements across the United States, Canada, and Europe.

Our Healthcare service offering consists of two segments: Physician and Healthcare. Our Physician segment is a leading provider of physician staffing, known as locum tenens, and permanent physician search services. Our Physician segment provides short- and long-term locum tenens services and full-service physician search and consulting services, primarily in the United States, with some locum tenens placements in Australia and New Zealand. We work with physicians in a wide range of specialties, placing them in hospitals, community-based practices and federal, state and local facilities. Our Healthcare segment offers our healthcare clients locally-based and traveling contract professionals, from a number of healthcare, medical, financial and allied occupations. Our Healthcare segment contract professionals include local nurses, health information management professionals, dialysis technicians, surgical technicians, imaging technicians, x-ray technicians, medical technologists, medical assistants, pharmacists, pharmacy technicians, respiratory therapists, phlebotomists, coders, billers, claims processors and collections staff, and dental professionals (including dental assistants, hygienists and dentists and rehabilitation therapists).

Our Life Sciences service offering segment provides locally-based contract life science professionals to clients in the biotechnology, pharmaceutical, food and beverage, medical device, personal care, chemical, automotive, educational and environmental industries. Our contract professionals include chemists, clinical research associates, clinical lab assistants, engineers, biologists, biochemists, microbiologists, molecular biologists, food scientists, regulatory affairs specialists, lab assistants, biostatisticians, drug safety specialists, SAS programmers, medical writers, and other skilled scientific professionals.

Seasonality

Demand for our staffing services historically has been lower during the first and fourth quarters due to fewer business days resulting from client shutdowns, adverse weather conditions and a decline in the number of contract professionals willing to work during the holidays. Demand for our staffing services usually increases in the second and third quarters of the year. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.


RESULTS OF OPERATIONS



CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2013
COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2012



Revenues by segment (in thousands):
                 Three Months Ended
                      June 30,                  Change
                 2013          2012          $           %
Apex          $  233,446    $  98,503    $ 134,943    137.0 %
Oxford           101,474       88,107       13,367     15.2 %
Life Sciences     41,877       40,509        1,368      3.4 %
Physician         26,466       25,039        1,427      5.7 %
Healthcare        14,660       13,705          955      7.0 %
              $  417,923    $ 265,863    $ 152,060     57.2 %

Revenues increased $152.1 million, or 57.2 percent, related to the acquisition of Apex in May 2012 and the year-over-year growth in revenues of all our segments. The operating results of Apex for the second quarter of 2012 are included in the Company's consolidated operating results from May 16, 2012, the date of the acquisition. Consequently, our consolidated revenues for the second quarter of 2012 only include Apex's results for the last six weeks of that quarter. On a pro forma basis, which assumes Apex was acquired at the beginning of 2011, our year-over-year growth rate was 15.4 percent on a consolidated basis and 19.8 percent for Apex. Oxford revenues increased $13.4 million, or 15.2 percent, comprised of a 10.1 percent increase in the average number of contract professionals on assignment and a 3.3 percent increase in the average bill rate. Our Technology segments (Apex and Oxford) comprised 80.1 percent of total revenues and on a pro forma basis grew 18.4 percent year-over-year.

Our non-Technology segments (Life Sciences, Physician and Healthcare) comprised 19.9 percent of our total revenues for the quarter and grew 4.7 percent year-over-year. Life Sciences segment revenues increased $1.4 million, or 3.4 percent, due to an increase of 4.6 percent in the average number of contract professionals on assignment, partly offset by a 2.7 percent decrease in the average billing rate. Physician segment revenues increased $1.4 million, or 5.7 percent, mainly due to a 5.0 percent increase in the average bill rate. Healthcare revenues were $14.7 million in the quarter, up $1.0 million, or 7.0 percent year over year. The increase was due to a 4.4 percent increase in the average number of contract professionals on assignment, slightly offset by a 0.8 percent decrease in the average bill rate.

Gross Profit and Gross Margin by segment (dollars in thousands):

                                      Three Months Ended
                                           June 30,
                            2013                               2012
               Gross Profit      Gross Margin     Gross Profit      Gross Margin
Apex          $       63,896          27.4 %     $       26,983          27.4 %
Oxford                34,506          34.0 %             31,646          35.9 %
Life Sciences         13,838          33.0 %             13,808          34.1 %
Physician              7,640          28.9 %              7,718          30.8 %
Healthcare             4,687          32.0 %              4,382          32.0 %
              $      124,567          29.8 %     $       84,537          31.8 %

The year-over-year increase in gross profit was primarily due to the inclusion of Apex for a full quarter and higher revenues. Gross margin compressed 200 basis points mainly due to the inclusion of Apex for a full quarter as it has a lower gross margin and lower mix of direct hire and conversion fee revenues than our other segments. On a pro forma basis, gross profit increased $13.0 million or 11.6 percent year-over-year and the gross margin was down approximately 100 basis points. The compression in gross margin on a pro forma basis was due to the shift in mix toward Apex as it grew faster than our higher-margin segments, lower mix of permanent placement and conversion fees, which dropped from 1.9 percent of revenues in 2012 to 1.5 percent in 2013 and higher growth of lower-margin services.

Apex segment accounted for 51.3 percent of gross profit and the gross margin was 27.4 percent.

Oxford segment gross profit increased $2.9 million, or 9.0 percent, as a result of the 15.2 percent increase in revenues, which was partially offset by a 192 basis points contraction in gross margin. The contraction in gross margin mainly related to a change in the overall


business mix for the segment. Oxford experienced a higher growth in lower margin services and a higher mix of reimbursable expenses, which are billed to customers with no mark-up, partially offset by a 0.8 percent increase in bill/pay spread.

Life Sciences segment gross profit increased 0.2 percent. The increase in gross profit was primarily due to a 3.4 percent increase in revenues, partially offset by a 105 basis point contraction in gross margin. The contraction in gross margin was primarily due to a decrease in European retained search fees, a shift in business mix and a 4.9 percent decrease in bill/pay spread.

Physician segment gross profit decreased 1.0 percent despite a 5.7 percent growth in revenues. Gross margin contracted by 195 basis points as a result of an increase in our medical malpractice expense and a higher mix of lower margin specialties and a decline in call and overtime billing.

Healthcare segment gross profit increased $0.3 million, or 7.0 percent as a result of a $1.0 million or 7.0 percent increase in revenues, while gross margin was flat.

Selling, General and Administrative Expenses

For the quarter ended June 30, 2013, selling, general and administrative (SG&A) expenses were $86.5 million (20.6 percent of revenues) up from $65.2 million (24.5 percent of revenues) for the same period in 2012. The increase in SG&A expenses was primarily due to the inclusion of Apex for a full quarter.

Amortization of Intangible Assets

Amortization of intangible assets for the quarter ended June 30, 2013 was $5.3 million compared with $3.9 million in the same period in 2012. The increase related to the inclusion of Apex for a full quarter.

Interest Expense and Interest Income

Interest expense, net for the quarter ended June 30, 2013 was $4.2 million, compared with $4.0 million in the same period in 2012.

Write-Off of Loan Costs

Write-off of loan costs was $15.0 million for the quarter ended June 30, 2013 related to the refinancing of our credit facility in May 2013, compared to $0.8 million write-off of loan costs for the same period in 2012. The refinancing in May 2013 was treated as an early extinguishment of debt resulting in a full write-off of the loan costs associated with the old facility.

Provision for Income Taxes

The provision for income taxes was $5.9 million for the quarter ended June 30, 2013, compared with $4.6 million for the same period in the prior year. The annual effective tax rate was 42.8 percent and 43.3 percent for the same period in 2012.
Discontinued operations

The Nurse Travel division was sold in February 2013 for $33.7 million in cash. Income (loss) from discontinued operations was $(0.5) million compared with $1.5 million in 2012.

CHANGES IN RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2013
COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2012



Revenues by segment (in thousands):

                 Six Months Ended
                     June 30,                  Change
                 2013         2012          $           %
Apex          $ 446,174    $  98,503    $ 347,671    353.0 %
Oxford          196,736      166,866       29,870     17.9 %
Life Sciences    82,350       81,860          490      0.6 %
Physician        52,768       49,128        3,640      7.4 %
Healthcare       29,088       26,266        2,822     10.7 %
   Total      $ 807,116    $ 422,623    $ 384,493     91.0 %


Revenues increased $384.5 million, or 91.0 percent, related to the acquisition of Apex in May 2012 and the year-over-year growth in revenues in all our segments. The operating results of Apex for the second quarter of 2012 are included in the Company's consolidated operating results from May 16, 2012. Consequently, our consolidated revenues for the six months ended June 30, 2012 only include Apex's results for the last six weeks of that period. On a pro forma basis, which assumes Apex was acquired at the beginning of 2011, our year-over-year growth rate was 14.5 percent on a consolidated basis and 17.2 percent for Apex.

Oxford segment revenues increased $29.9 million, or 17.9 percent, comprised of a 13.3 percent increase in the average number of contract professionals on assignment and a 3.7 percent increase in average bill rate. Our Technology segments comprised 79.7 percent of total revenues and on a pro forma basis grew 17.4 percent year-over-year.

Our non-Technology segments (Life Sciences, Physician and Healthcare) comprised 20.3 percent of our total revenues for the quarter and grew 4.4 percent year-over-year. Life Sciences segment revenues increased $0.5 million, or 0.6 percent, comprised of an 1.5 percent increase in the average number of contract professionals on assignment, offset by a 1.3 percent decrease in the average bill rate. Physician segment revenues increased $3.6 million, or 7.4 percent, comprised of a 4.1 percent increase in the average number of physicians placed and working, and 5.5 percent increase in average bill rate. Healthcare segment revenues increased $2.8 million, or 10.7 percent, to $29.1 million, comprised of a 6.9 percent increase in the average number of contract professionals on assignment, and a 1.3 percent increase in the average bill rate, and an increase in conversion and permanent placement revenue.

Gross Profit and Gross Margin by segment (dollars in thousands):

                                       Six Months Ended
                                           June 30,
                            2013                               2012
               Gross Profit      Gross Margin     Gross Profit      Gross Margin
Apex          $      119,515          26.8 %     $       26,983          27.4   %
Oxford                66,656          33.9 %             59,016          35.4   %
Life Sciences         27,222          33.1 %             27,647          33.8   %
Physician             15,123          28.7 %             15,217          31.0   %
Healthcare             9,325          32.1 %              8,423          32.1   %
Total         $      237,841          29.5 %     $      137,286          32.5   %

The year-over-year increase in gross profit was primarily due to the inclusion of Apex for the full six months and higher revenues. Gross margin compressed 300 basis points mainly due to the inclusion of Apex for a the full six months ended June 30, 2013 as it has a lower gross margin and lower mix of direct hire and conversion fee revenues than our other segments. On a pro forma basis, gross profit increased $24.2 million or 11.3 percent year-over-year and the gross margin was down approximately 80 basis points. The compression in gross margin on a pro forma basis was due to the shift and mix toward Apex as it grew faster than our higher-margin segments, lower mix of permanent placement and conversion fees, which dropped from 2.9 percent of revenues in 2012 to 1.7 percent in 2013 and higher growth of lower-margin services.

Apex segment gross margin was 26.8 percent. We do not expect significant fluctuations in Apex gross margin.

Oxford segment gross profit increased $7.6 million, or 12.9 percent, primarily due to a $29.9 million, or 17.9 percent increase in revenues, which was partially offset by a 149 basis point contraction in gross margin. The contraction in gross margin mainly related to a change in the overall business mix for the segment. Oxford experienced a higher growth in lower margin services and a higher mix of reimbursable expenses, which are billed to customers with no mark-up, partially offset by a 0.8 percent increase in bill/pay spread.

Life Sciences segment gross profit decreased $0.4 million, or 1.5 percent. The decrease in gross profit was due to a 71 basis point contraction in gross margin, partially offset by a $0.5 million, or 0.6 percent increase in revenues. The contraction in gross margin was primarily due to a decrease in European retained search fees and a shift in business mix and a 2.8 percent decrease in bill/pay spread.

Physician segment gross profit decreased $0.1 million, or 0.6 percent. The decrease in gross profit was due to a $3.6 million, or 7.4 percent increase in the segment revenues, offset by a 231 basis point contraction in gross margin. The contraction in gross margin was primarily due to an increase in our medical malpractice expense and a higher mix of lower margin specialties and a decline in call and overtime billing, slightly offset by 2.6 percent increase in bill/pay spread.

Healthcare segment gross profit increased $0.9 million, or 10.7 percent. The increase in gross profit was due to a $2.8 million or 10.7 percent increase in revenues, while gross margin was flat.

Selling, General and Administrative Expenses

For the six months ended June 30, 2013, SG&A expenses increased $62.7 million, or 58.1 percent, to $170.6 million from $107.9 million for the same period in 2012. The increase in SG&A expenses was primarily due to the inclusion of Apex for the full six months.


Interest Expense and Interest Income

Interest expense was $9.5 million for the six months ended June 30, 2013 compared with $4.7 million in the same period in 2012. This increase was due to a full six months of higher debt outstanding in 2013, compared with one and a half months in 2012, to finance the acquisition of Apex Systems in May 2012.

Write-Off of Loan Costs

Write-off of loan costs was $15.0 million for the six months ended June 30, 2013 related to the refinancing of our credit facility in May 2013, compared to $0.8 million write-off of loan costs for the same period in 2012. The refinancing in May 2013 was treated as an early extinguishment of debt resulting in a full write-off of the loan costs associated with the old facility.

Provision for Income Taxes

The provision for income taxes was $13.7 million for the six months ended June 30, 2013 compared with $8.3 million for the same period in the prior year. The annual effective tax rate was 42.6 percent for the six months ended June 30, 2013 and 2012.

Discontinued operations

The Nurse Travel division was sold in February 2013 for $33.7 million in cash. The $14.4 million gain on sale of the Nurse Travel division reflects the transfer of net assets and the selling expenses. Income (loss) from discontinued operations was $(0.9) million compared with $1.8 million in 2012.

Liquidity and Capital Resources

Our working capital as of June 30, 2013 was $174.8 million and our cash and cash equivalents were $14.1 million, of which $7.1 million was held in foreign countries. Cash held in foreign countries is not available to fund domestic operations unless repatriated, which would require the accrual and payment of taxes. We do not intend to repatriate cash held in foreign countries. Our operating cash flows have been our primary source of liquidity and historically have been sufficient to fund our working capital and capital expenditure needs. Our working capital requirements consist primarily of the financing of accounts receivable, payroll expenses and the periodic payments of principal and interest on our loans.

Net cash provided by operating activities was $30.3 million for the six months ended June 30, 2013 compared with $8.9 million used in operating activities in the same period in 2012. This increase is primarily due to the increase in net operating income, partially offset by the increase in operating assets and liabilities. The primary driver of the changes in operating assets and liabilities was the increase in accounts receivable.

Net cash provided by investing activities was $22.7 million in the six months ended June 30, 2013 compared with $355.2 million used in investing activities in the same period in 2012. During the six months ended June 30, 2013, we sold our Nurse Travel division for $33.7 million cash, while in the same period in 2012, we paid $347.4 million in cash for the acquisition of Apex Systems. Capital expenditures for information technology projects, leasehold improvements and various property and equipment purchases were $7.3 million. We estimate that capital expenditures for the full year 2013 will be approximately $16.0 million.

Net cash used in financing activities was $66.3 million for the six months ended June 30, 2013, compared with $364.9 million cash provided by financing activities for the same period in 2012, of which $490.0 million were proceeds from term debt. In 2013, the net cash used in financing activities related to $440.8 million in payments on long-term debt, offset by $383.5 million proceeds from the new term loans.

Under terms of the credit facility, the Company will be required to make quarterly amortization payments of $2.5 million on the term A loan facility and $0.7 million on the term B loan facility. We are also required to make mandatory prepayments from excess cash flow and with the proceeds of asset sales, debt issuances and specified other events. Our leverage ratio (consolidated funded debt to consolidated EBITDA) is currently limited to no more than 4.25 to 1.00 and steps down to 3.25 to 1.00 as of June 30, 2015. As of June 30, 2013, the leverage ratio was 2.30 to 1.00. Additionally, the agreement, which is secured by substantially all of our assets, provides for certain limitations on our ability to, among other things, incur additional debt, offer loans, and declare dividends. As of June 30, 2013, we had $122.5 million of borrowing available under our credit facility.

We believe that our working capital as of June 30, 2013, our credit facility and expected operating cash flows will be sufficient to fund future requirements of our debt obligations, accounts payable and related payroll expenses as well as capital expenditure initiatives for the next twelve months.

Recent Accounting Pronouncements

None.


Critical Accounting Policies

There have been no significant changes to our critical accounting policies and estimates during the quarter ended June 30, 2013 compared with those disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 18, 2013.

Commitments

In connection with certain acquisitions, we are subject to earn-out obligations. If the acquired businesses meet predetermined targets, we are obligated to make additional cash payments in accordance with the terms of such earn-out obligations. As of June 30, 2013, the Company has potential future earn-out obligations of approximately $5.6 million through 2013.

Other than those described above, we have not entered into any significant commitments or contractual obligations that have not been previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 18, 2013.

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