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ASGN > SEC Filings for ASGN > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for ON ASSIGNMENT INC


5-Nov-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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, Apex and Oxford, that are uniquely positioned in the marketplace to offer our clients a broad spectrum of information technology ("IT") staffing solutions. 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 IT, engineering, regulatory, and compliance professionals for consulting assignments and permanent placements across the United States, Canada, and Europe.

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.

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.

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 SEPTEMBER 30, 2013
COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2012



Revenues by segment (in thousands):
                 Three Months Ended
                   September 30,                Change
                 2013          2012          $           %
Apex          $  246,369    $ 202,664    $ 43,705     21.6   %
Oxford           100,005       88,104      11,901     13.5   %
Life Sciences     44,124       40,646       3,478      8.6   %

Physician 26,223 27,479 (1,256 ) (4.6 ) % Healthcare 15,450 15,618 (168 ) (1.1 ) % $ 432,171 $ 374,511 $ 57,660 15.4 %

Revenues for the quarter were $432.2 million, up $57.7 million year-over-year, primarily the result of revenue growth of our IT segments (Apex and Oxford), which grew 19.1 percent year-over-year. Revenues from our IT segments account for approximately 80 percent of consolidated revenues and for the quarter accounted for 96 percent of the revenue growth in the quarter. Revenues from Apex increased $43.7 million, or 21.6 percent, comprised of an 11.4 percent increase in the average number of contract professionals on assignment and a 2.2 percent increase in the average bill rate. Oxford's revenues increased $11.9 million, or 13.5 percent, comprised of an 8.9 percent increase in the average number of contract professionals on assignment and a 2.1 percent increase in the average bill rate.

Our non-IT segments (Life Sciences, Physician and Healthcare) accounted for approximately 20 percent of our total revenues for the quarter and grew 2.5 percent year-over-year. Life Sciences revenues increased $3.5 million, or 8.6 percent, due to an increase of 9.6 percent in the average number of contract professionals on assignment, partially offset by a 4.3 percent decrease in the average bill rate. Physician's revenues decreased $1.3 million, or 4.6 percent, mainly due to a 2.4 percent decrease in the average number of contract professionals on assignment. Healthcare's revenues were $15.5 million in the quarter, down $0.2 million, or 1.1 percent year-over-year, due to a 0.8 percent decrease in the average number of contract professionals on assignment and a 1.4 percent decrease in the average bill rate.

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

                                      Three Months Ended
                                         September 30,
                            2013                               2012
               Gross Profit      Gross Margin     Gross Profit      Gross Margin
Apex          $       69,448          28.2 %     $       56,934          28.1 %
Oxford                34,660          34.7 %             31,250          35.5 %
Life Sciences         14,306          32.4 %             14,002          34.4 %
Physician              7,382          28.2 %              8,370          30.5 %
Healthcare             4,820          31.2 %              5,075          32.5 %
              $      130,616          30.2 %     $      115,631          30.9 %

Gross profit increased $15.0 million, or 13.0 percent, as a result of the increase in revenues. Gross margin for the quarter was 30.2 percent, down 65 basis points year-over-year. The compression in gross margin was primarily due to a lower mix of direct hire and conversion fee revenues (1.7 percent of revenues for the current quarter compared with 2.0 percent for the third quarter of 2012), a higher mix of revenues from Apex, which has a lower margin than our other segments and higher growth in lower-margin services. Apex accounted for 53.2 percent (49.2 percent in 2012) of consolidated gross profit in the current quarter and the gross margin was 28.2 percent compared with 28.1 percent in 2012.

Oxford's gross profit increased $3.4 million, or 10.9 percent, as a result of the year-over-year increase in revenues. Gross margin for the quarter was 34.7 percent, down 81 basis points year-over-year. The compression mainly related to a change in business mix as a result of higher growth in lower-margin services and a higher mix of reimbursable expenses, which are billed to customers with no mark-up.

Life Sciences' gross profit increased 2.2 percent, as a result of the 8.6 percent increase in revenues. Gross margin for the quarter was 32.4 percent, down 203 basis points year-over-year. The compression was primarily due to a decrease in European retained search fees, and a 5.8 percent decrease in bill/pay spread due to competitive pricing pressures.


Physician's gross profit decreased 11.8 percent due to a 4.6 percent decrease in revenues and a 231 basis points compression in gross margin. The compression in gross margin was due to a higher mix of lower-margin specialties, a lower mix of direct hire and conversion fee revenues, and a $0.2 million increase in our medical malpractice expense.

Healthcare's gross profit decreased $0.3 million, or 5.0 percent due to the 1.1 percent decrease in revenues and a 130 basis points compression in gross margin. The compression in gross margin was primarily due to a 5.3 percent decrease in bill/pay spread, which is the result of changes in the business mix.

Selling, General and Administrative Expenses

For the quarter ended September 30, 2013, selling, general and administrative (SG&A) expenses were $88.5 million (20.5 percent of revenues), up from $77.4 million (20.7 percent of revenues) for the same period in 2012. This increase is due to incentive compensation expense related to the incremental increase in gross profit and infrastructure investments to support the growth of the business. SG&A for the quarter included a $1.0 million benefit for the reduction of an earn-out obligation (a $1.0 million reduction in an earn-out obligation was also included in the third quarter of 2012) and charges totaling $0.7 million for certain non-recurring expenses. SG&A for the quarter also included $0.3 million in acquisition-related expenses and $0.2 million in strategic planning costs in 2013, compared with $0.8 million in acquisition-related expenses in 2012. No strategic planning costs were incurred in the same period of 2012.

Amortization of Intangible Assets

Amortization of intangible assets for the quarter was $5.2 million, compared with $6.7 million in the same period in 2012.

Interest Expense, Net

Interest expense (net of interest income) for the quarter was $3.3 million, compared with $6.0 million in the same period in 2012. The decrease in interest expense related to lower debt outstanding as we have paid down our borrowing over the last 12 months by $81.3 million, and lower interest rates under our new credit facility that went into place in May 2013.

Provision for Income Taxes

The provision for income taxes was $13.4 million for the quarter, compared with $10.9 million for the same period in 2012. The effective tax rate for the quarter was 39.9 percent and 42.5 percent for the same period in 2012. The improvement in the effective tax rate for the quarter benefited from the $1.0 million reduction in an earn-out obligation, which is not taxable, and higher growth in income before income taxes than the growth in permanent book-to-tax differences.

Discontinued operations

The Nurse Travel division was sold in February 2013 for $33.7 million in cash. Income (loss) from discontinued operations was $(0.1) million for the quarter, compared with $0.8 million in the same period in 2012.

CHANGES IN RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2012



Revenues by segment (in thousands):
                  Nine Months Ended
                    September 30,                Change
                  2013          2012          $           %
Apex          $   692,543    $ 301,167    $ 391,376    130.0 %
Oxford            296,741      254,970       41,771     16.4 %
Life Sciences     126,474      122,506        3,968      3.2 %
Physician          78,991       76,607        2,384      3.1 %
Healthcare         44,538       41,884        2,654      6.3 %
   Total      $ 1,239,287    $ 797,134    $ 442,153     55.5 %

Revenues for the nine months ended September 30, 2013 were $1,239.3 million, up $442.2 million or 55.5 percent, year-over-year, primarily as the result of 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 2012 are included in the Company's consolidated operating results from May 15, 2012, the date of the acquisition. Consequently, our consolidated revenues for the same period in 2012 only include Apex's results for the last four and a half months of that period. On a pro forma basis, which assumes Apex was acquired at the beginning of 2011, our pro forma consolidated year-over-year growth rate was 14.8 percent.


Revenues from our IT segments (Apex and Oxford) grew 77.9 percent year-over-year and 18.0 percent on a pro forma basis. Revenues from our IT segments accounted for approximately 80 percent of consolidated revenues and approximately 98 percent of the revenue growth for the nine months ended September 30, 2013 (94 percent on a pro forma basis). Oxford revenues increased $41.8 million, or 16.4 percent, comprised of an 11.8 percent increase in the average number of contract professionals on assignment and a 3.2 percent increase in average bill rate.

Our non-IT segments (Life Sciences, Physician and Healthcare) accounted for approximately 20 percent of our total revenues for the nine months ended September 30, 2013 and grew 3.7 percent year-over-year. Life Sciences' revenues increased $4.0 million, or 3.2 percent, comprised of a 4.2 percent increase in the average number of contract professionals on assignment, offset by a 2.3 percent decrease in the average bill rate. Physician's revenues increased $2.4 million, or 3.1 percent, comprised of a 1.9 percent increase in the average number of physicians placed and working, and a 3.8 percent increase in the average bill rate. Healthcare's revenues increased $2.7 million, or 6.3 percent, to $44.5 million, due to a 4.0 percent increase in the average number of contract professionals on assignment and an increase of $0.2 million, or 17.3 percent in conversion and permanent placement revenue.

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

                                       Nine Months Ended
                                         September 30,
                            2013                               2012
               Gross Profit      Gross Margin     Gross Profit      Gross Margin
Apex          $      188,963          27.3 %     $       83,917          27.9   %
Oxford               101,316          34.1 %             90,266          35.4   %
Life Sciences         41,528          32.8 %             41,649          34.0   %
Physician             22,505          28.5 %             23,587          30.8   %
Healthcare            14,145          31.8 %             13,498          32.2   %
Total         $      368,457          29.7 %     $      252,917          31.7   %

The year-over-year increase in gross profit was primarily due to the inclusion of Apex for the full nine months in 2013 and higher revenues. Gross margin compressed 200 basis points mainly due to the inclusion of Apex for the full nine months ended September 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 $39.2 million or 11.9 percent year-over-year due to the 14.8 percent growth in pro forma revenues. Gross margin on a pro forma basis compressed 80 basis points. This was due to higher growth of lower-margin services, a higher mix of revenues from Apex, whose gross margin is lower than our other segments and a lower mix of permanent placement and conversion fees (1.7 percent in 2013, down from 2.0 percent in 2012 on a pro forma basis).

Apex's gross margin was 27.3 percent, compared with 27.9 percent in 2012 and 27.5 percent on a pro forma basis.

Oxford's gross profit increased $11.1 million, or 12.2 percent, primarily due to the increase in revenues. Gross margin was 34.1 percent, down 126 basis points year-over-year. The compression in gross margin mainly related to higher growth of lower-margin services and a higher mix of reimbursable expenses, which are billed to customers with no mark-up.

Life Sciences' gross profit was flat despite revenue growth of 3.2 percent. Gross margin was 32.8 percent, down 116 basis points year-over-year. The compression in gross margin was primarily due to a decrease in European retained search fees from 2.0 percent of revenues in 2012 to 1.8 percent in 2013, and a 3.8 percent decrease in bill/pay spread due to competitive pricing pressures.

Physician's gross profit decreased $1.1 million despite revenue growth of 3.1 percent. Gross margin was 28.5 percent, down 230 basis points. The compression in gross margin was due to (i) a higher mix of revenues from lower margin specialties, (ii) the decline in call and overtime billing, (iii) a lower mix of permanent placement and conversion fees (3.4 percent of Physician revenue in 2013, down from 4.0 percent for the same period in 2012), and (iv) an increase in our medical malpractice expense of $0.6 million.

Healthcare's gross profit increased $0.6 million, or 4.8 percent, primarily due to the increase in revenues. Gross margin was 31.8 percent, down 47 basis points year-over-year. The compression in gross margin was primarily due to a 2.1 percent decrease in bill/pay spread, which is the result of changes in the business mix.

Selling, General and Administrative Expenses

For the nine months ended September 30, 2013, SG&A expenses increased $73.8 million, or 39.8 percent, to $259.1 million from $185.3 million for the same period in 2012. The increase in SG&A expenses was due to the inclusion of Apex for the full nine months, and an increase in incentive compensation related to the incremental increase in gross profit, and infrastructure investments to support the growth of the business. SG&A included a $1.9 million benefit for the reduction of an earn-out obligation (a $1.4 million reduction in earn-out obligations was also included for the same period of 2012) and charges totaling $2.1 million for certain non-recurring expenses. SG&A for


the current period also included $0.7 million for acquisition-related expenses and $1.1 million in strategic planning costs in 2013, compared with $9.8 million in acquisition-related expenses in 2012. No strategic planning costs were incurred in the same period of 2012.

Interest Expense, Net

Interest expense (net of interest income) was $12.8 million for the nine months ended September 30, 2013 compared with $10.7 million in the same period in 2012. This increase was due to a full nine months of higher debt outstanding in 2013, compared with four and a half months in 2012, to fund the cash portion of the purchase consideration for the acquisition of Apex in May 2012.

Write-Off of Loan Costs

Write-off of loan costs was $15.0 million for the nine months ended September 30, 2013 related to the refinancing of our credit facility in May 2013, compared with $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 $27.1 million for the nine months ended September 30, 2013 compared with $19.1 million for the same period in 2012. The effective tax rate was 41.2 percent for the nine months ended September 30, 2013 and 42.6 percent for the same period in 2012.

Discontinued operations

The Nurse Travel division was sold in February 2013 for $33.7 million in cash, resulting in a gain of $14.4 million, net of tax. Income (loss) from discontinued operations was $(1.0) million for the nine months ended September 30, 2013 compared with $2.7 million for the same period in 2012.

Liquidity and Capital Resources

Our working capital as of September 30, 2013 was $193.3 million and our cash and cash equivalents were $45.1 million, of which $8.7 million was held in foreign countries. 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 debt service.

Net cash provided by operating activities was $73.9 million for the nine months ended September 30, 2013 compared with $14.6 million for the same period in 2012. This increase is primarily due to the increase in net operating income, the higher non-cash write-off of loan costs and a decrease in operating assets and liabilities.

Net cash provided by investing activities was $18.0 million for the nine months ended September 30, 2013 compared with $360.5 million used in investing activities for the same period in 2012. During the nine months ended September 30, 2013, we sold our Nurse Travel division for $33.7 million cash, while in the same period in 2012 we paid $347.7 million in cash for the acquisition of Apex Systems. Capital expenditures for information technology projects, leasehold improvements and various property and equipment purchases were $12.3 million. We estimate that capital expenditures for the full year 2013 will be approximately $17.3 million.

Net cash used in financing activities was $74.5 million for the nine months ended September 30, 2013, compared with $342.0 million cash provided by financing activities for the same period in 2012, of which $513.0 million were proceeds from term debt. In 2013, the net cash used in financing activities related to $452.3 million in payments on long-term debt, partially 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) was initially 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 September 30, 2013, the leverage ratio was 2.16 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 September 30, 2013, we had $122.5 million of borrowing available under our revolving credit facility.

We believe that our working capital as of September 30, 2013, availability under our revolving credit facility and expected operating cash flows will be sufficient to meet our future debt obligations, working capital requirements and capital expenditures 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 September 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 September 30, 2013, the Company has potential future earn-out obligations of approximately $3.2 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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