Item 1 — Condensed Consolidated Financial Statements (Unaudited)
ON ASSIGNMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
27,977
|
|
|
$
|
27,044
|
|
|
Accounts receivable, net of allowance of $9,504 and $8,093, respectively
|
432,718
|
|
|
386,858
|
|
|
Prepaid expenses and income taxes
|
7,644
|
|
|
6,331
|
|
|
Workers' compensation receivable
|
14,312
|
|
|
14,001
|
|
|
Other current assets
|
3,103
|
|
|
3,290
|
|
|
Total current assets
|
485,754
|
|
|
437,524
|
|
|
Property and equipment, net
|
58,231
|
|
|
56,942
|
|
|
Goodwill
|
893,776
|
|
|
873,513
|
|
|
Identifiable intangible assets, net
|
361,140
|
|
|
377,730
|
|
|
Other non-current assets
|
5,967
|
|
|
6,958
|
|
|
Total assets
|
$
|
1,804,868
|
|
|
$
|
1,752,667
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
6,164
|
|
|
$
|
6,266
|
|
|
Accrued payroll and contract professional pay
|
127,005
|
|
|
111,596
|
|
|
Workers’ compensation loss reserves
|
16,527
|
|
|
15,784
|
|
|
Income taxes payable
|
15,127
|
|
|
1,260
|
|
|
Other current liabilities
|
24,373
|
|
|
27,593
|
|
|
Total current liabilities
|
189,196
|
|
|
162,499
|
|
|
Long-term debt
|
609,997
|
|
|
640,355
|
|
|
Deferred income tax liabilities
|
74,860
|
|
|
74,282
|
|
|
Other long-term liabilities
|
5,837
|
|
|
6,592
|
|
|
Total liabilities
|
879,890
|
|
|
883,728
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued
|
—
|
|
|
—
|
|
|
Common stock, $0.01 par value, 75,000,000 shares authorized, 51,991,815
and 52,716,388 issued and outstanding, respectively
|
520
|
|
|
527
|
|
|
Paid-in capital
|
567,731
|
|
|
562,862
|
|
|
Retained earnings
|
361,122
|
|
|
315,573
|
|
|
Accumulated other comprehensive loss
|
(4,395
|
)
|
|
(10,023
|
)
|
|
Total stockholders’ equity
|
924,978
|
|
|
868,939
|
|
|
Total liabilities and stockholders’ equity
|
$
|
1,804,868
|
|
|
$
|
1,752,667
|
|
See notes to condensed consolidated financial statements.
ON ASSIGNMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues
|
$
|
667,048
|
|
|
$
|
629,401
|
|
|
$
|
1,946,889
|
|
|
$
|
1,819,529
|
|
|
Costs of services
|
448,733
|
|
|
422,281
|
|
|
1,317,493
|
|
|
1,222,541
|
|
|
Gross profit
|
218,315
|
|
|
207,120
|
|
|
629,396
|
|
|
596,988
|
|
|
Selling, general and administrative expenses
|
149,197
|
|
|
141,968
|
|
|
440,446
|
|
|
423,199
|
|
|
Amortization of intangible assets
|
8,248
|
|
|
9,742
|
|
|
25,011
|
|
|
29,918
|
|
|
Operating income
|
60,870
|
|
|
55,410
|
|
|
163,939
|
|
|
143,871
|
|
|
Interest expense
|
(7,099
|
)
|
|
(8,294
|
)
|
|
(21,667
|
)
|
|
(25,278
|
)
|
|
Income before income taxes
|
53,771
|
|
|
47,116
|
|
|
142,272
|
|
|
118,593
|
|
|
Provision for income taxes
|
18,892
|
|
|
17,341
|
|
|
51,775
|
|
|
45,457
|
|
|
Income from continuing operations
|
34,879
|
|
|
29,775
|
|
|
90,497
|
|
|
73,136
|
|
|
Income (loss) from discontinued operations, net of income taxes
|
(23
|
)
|
|
(7
|
)
|
|
(153
|
)
|
|
37
|
|
|
Net income
|
$
|
34,856
|
|
|
$
|
29,768
|
|
|
$
|
90,344
|
|
|
$
|
73,173
|
|
|
|
|
|
|
|
|
|
|
|
Per share income from continuing operations and net income:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.66
|
|
|
$
|
0.56
|
|
|
$
|
1.72
|
|
|
$
|
1.37
|
|
|
Diluted
|
$
|
0.66
|
|
|
$
|
0.55
|
|
|
$
|
1.70
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares and share equivalents used to calculate earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
52,500
|
|
|
53,275
|
|
|
52,660
|
|
|
53,281
|
|
|
Diluted
|
53,173
|
|
|
53,768
|
|
|
53,319
|
|
|
53,787
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income to comprehensive income:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
34,856
|
|
|
$
|
29,768
|
|
|
$
|
90,344
|
|
|
$
|
73,173
|
|
|
Foreign currency translation adjustment
|
1,783
|
|
|
420
|
|
|
5,628
|
|
|
680
|
|
|
Comprehensive income
|
$
|
36,639
|
|
|
$
|
30,188
|
|
|
$
|
95,972
|
|
|
$
|
73,853
|
|
See notes to condensed consolidated financial statements.
ON ASSIGNMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net income
|
$
|
90,344
|
|
|
$
|
73,173
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
43,493
|
|
|
46,171
|
|
|
Stock-based compensation
|
17,943
|
|
|
19,803
|
|
|
Provision for doubtful accounts and billing adjustments
|
9,216
|
|
|
8,678
|
|
|
Fair value adjustment for contingent consideration
|
—
|
|
|
613
|
|
|
Workers’ compensation provision
|
2,383
|
|
|
1,939
|
|
|
Other
|
5,967
|
|
|
4,065
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
(51,936
|
)
|
|
(47,385
|
)
|
|
Prepaid expenses and income taxes
|
(958
|
)
|
|
6,840
|
|
|
Accounts payable
|
(135
|
)
|
|
(3,525
|
)
|
|
Accrued payroll and contract professional pay
|
14,291
|
|
|
25,352
|
|
|
Income taxes payable
|
13,426
|
|
|
15,070
|
|
|
Workers’ compensation loss reserves
|
(1,952
|
)
|
|
(1,913
|
)
|
|
Payments of accrued earn-outs
|
—
|
|
|
(4,780
|
)
|
|
Other
|
(3,895
|
)
|
|
(1,194
|
)
|
|
Net cash provided by operating activities
(1)
|
138,187
|
|
|
142,907
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
Cash paid for property and equipment
|
(18,038
|
)
|
|
(20,551
|
)
|
|
Cash received from sale of discontinued operations, net
|
—
|
|
|
6,000
|
|
|
Cash paid for acquisitions, net
|
(25,828
|
)
|
|
—
|
|
|
Other
|
—
|
|
|
(787
|
)
|
|
Net cash used in investing activities
|
(43,866
|
)
|
|
(15,338
|
)
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Principal payments of long-term debt
|
(69,500
|
)
|
|
(106,000
|
)
|
|
Proceeds from long-term debt
|
37,000
|
|
|
7,000
|
|
|
Debt issuance or amendment costs
|
(3,273
|
)
|
|
(889
|
)
|
|
Proceeds from option exercises and employee stock purchase plan
|
7,690
|
|
|
9,458
|
|
|
Payment of employment taxes related to release of restricted stock awards
|
(7,785
|
)
|
|
(5,968
|
)
|
|
Repurchase of common stock
|
(58,949
|
)
|
|
(21,470
|
)
|
|
Payments of accrued earn-outs
|
—
|
|
|
(16,814
|
)
|
|
Net cash used in financing activities
(1)
|
(94,817
|
)
|
|
(134,683
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
1,429
|
|
|
217
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
933
|
|
|
(6,897
|
)
|
|
Cash and Cash Equivalents at Beginning of Year
|
27,044
|
|
|
23,869
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
27,977
|
|
|
$
|
16,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
Cash paid for:
|
|
|
|
|
Income taxes
|
$
|
37,716
|
|
|
$
|
23,974
|
|
|
Interest
|
$
|
18,980
|
|
|
$
|
20,798
|
|
|
Supplemental Disclosure of Non-Cash Transactions
|
|
|
|
|
Unpaid portion of additions to property and equipment
|
$
|
2,063
|
|
|
$
|
1,415
|
|
|
Unsettled repurchases of common stock
|
$
|
1,074
|
|
|
$
|
1,100
|
|
__________
(1) Effective January 1, 2017, the Company adopted ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718)
. The Company elected to present retrospectively its gross excess tax benefits as cash flows from operating activities in the condensed consolidated statements of cash flows for all periods presented, which increased cash flows from operating activities and decreased cash flows from financing activities by
$2.6 million
for the nine months ended September 30, 2016.
See notes to condensed consolidated financial statements.
ON ASSIGNMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The
December 31, 2016
condensed consolidated balance sheet was derived from audited financial statements. The financial statements include adjustments consisting of normal recurring items, which, in the opinion of management, are necessary for a fair presentation of the financial position of On Assignment, Inc. and its subsidiaries (the "Company") and its results of operations for the interim dates and periods set forth herein. The results for any of the interim periods are not necessarily indicative of the results to be expected for the full year or any other period. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
2. Accounting Standards Update
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which outlines a comprehensive new revenue recognition model designed to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional quantitative and qualitative disclosures. The Company plans to adopt the new standard beginning January 1, 2018 and expects to use the modified retrospective approach. The allowance for fallouts (permanent placement candidates that do not remain with the client through the contingency period, which is typically 90 days or less) is currently included in accounts receivable allowances. Under the new standard these are considered contract liabilities and upon adoption of the standard they will be presented as liabilities on the Company’s consolidated balance sheet. Based on the Company’s analysis to date, the adoption of this standard is not expected to have a material impact on its consolidated financial statements and disclosures.
In May 2017, the FASB issued ASU No, 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU will be applied prospectively to awards modified on or after the adoption date. The Company is required to adopt the new standard on January 1, 2018, and early adoption is permitted. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
3. Acquisitions
On
August 8, 2017
, the Company acquired all of the outstanding shares of
StratAcuity Staffing Partners, Inc.
("Stratacuity")
headquartered in New Hampshire
for
$25.9 million
. Stratacuity
was purchased to expand the Company's specialized clinical/scientific staffing solutions for biotechnology and pharmaceutical organizations
. Goodwill related to this acquisition totaled
$17.5 million
and is deductible for income tax purposes. Identifiable intangible assets related to this acquisition totaled
$7.6 million
. The results of operations for this acquisition have been combined with those of the Company from the acquisition date and are included in the Apex Life Sciences business within the Apex Segment.
Assets and liabilities of the acquired entity were recorded at their estimated fair values as of the acquisition date. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired has been allocated to goodwill. The fair value assigned to identifiable intangible assets was determined primarily by using a discounted cash flow method (a non-recurring fair value measurement based on Level 3 inputs). The Company's allocation of the purchase price remains incomplete and any purchase price allocation adjustments will be recognized in the period the adjustments are determined.
4. Goodwill and Identifiable Intangible Assets
The changes in the carrying amount of goodwill for
nine months ended
September 30, 2017
and the year ended
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apex Segment
|
|
Oxford Segment
|
|
Total
|
|
Balance as of December 31, 2015
|
$
|
644,617
|
|
|
$
|
230,289
|
|
|
$
|
874,906
|
|
|
Translation adjustment
|
—
|
|
|
(1,393
|
)
|
|
(1,393
|
)
|
|
Balance as of December 31, 2016
|
644,617
|
|
|
228,896
|
|
|
873,513
|
|
|
Stratacuity acquisition
|
17,493
|
|
|
—
|
|
|
17,493
|
|
|
Translation adjustment
|
—
|
|
|
2,770
|
|
|
2,770
|
|
|
Balance as of September 30, 2017
|
$
|
662,110
|
|
|
$
|
231,666
|
|
|
$
|
893,776
|
|
Acquired intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Estimated Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
2 - 10 years
|
|
$
|
202,474
|
|
|
$
|
114,065
|
|
|
$
|
88,409
|
|
|
$
|
196,204
|
|
|
$
|
98,804
|
|
|
$
|
97,400
|
|
|
Contractor relationships
|
2 - 5 years
|
|
71,103
|
|
|
57,174
|
|
|
13,929
|
|
|
69,721
|
|
|
50,528
|
|
|
19,193
|
|
|
Non-compete agreements
|
2 - 7 years
|
|
11,845
|
|
|
6,145
|
|
|
5,700
|
|
|
10,861
|
|
|
4,922
|
|
|
5,939
|
|
|
In-use software
|
6 years
|
|
18,900
|
|
|
12,029
|
|
|
6,871
|
|
|
18,900
|
|
|
9,666
|
|
|
9,234
|
|
|
Favorable contracts
|
5 years
|
|
900
|
|
|
618
|
|
|
282
|
|
|
900
|
|
|
453
|
|
|
447
|
|
|
|
|
|
305,222
|
|
|
190,031
|
|
|
115,191
|
|
|
296,586
|
|
|
164,373
|
|
|
132,213
|
|
|
Not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
245,949
|
|
|
—
|
|
|
245,949
|
|
|
245,517
|
|
|
—
|
|
|
245,517
|
|
|
Total
|
|
|
$
|
551,171
|
|
|
$
|
190,031
|
|
|
$
|
361,140
|
|
|
$
|
542,103
|
|
|
$
|
164,373
|
|
|
$
|
377,730
|
|
Estimated future amortization expense is as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of 2017
|
$
|
8,483
|
|
|
2018
|
30,470
|
|
|
2019
|
23,400
|
|
|
2020
|
15,687
|
|
|
2021
|
12,806
|
|
|
Thereafter
|
24,345
|
|
|
|
$
|
115,191
|
|
5. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
$200 million revolving credit facility
|
$
|
29,500
|
|
|
$
|
—
|
|
|
Term B loan facility
|
594,000
|
|
|
656,000
|
|
|
|
623,500
|
|
|
656,000
|
|
|
Unamortized deferred loan costs
|
(13,503
|
)
|
|
(15,645
|
)
|
|
|
$
|
609,997
|
|
|
$
|
640,355
|
|
In 2015, the Company entered into a
$975.0 million
credit facility consisting of (i) an
$825.0 million
seven-year term B loan facility and (ii) a
$150.0 million
revolving credit facility.
The facility was amended on August 5, 2016, resulting in a reduction of 25 basis points in the interest rate for the term B loan facility and the Company incurred
$0.9 million
in third-party fees, which were included in interest expense in 2016.
The facility was amended three separate times during the first nine months of 2017. The first amendment was on February 21, 2017, which resulted in (i) a reduction of 50 basis points in the interest rate for the term B loan facility, (ii) an increase in the borrowing capacity of the revolving credit facility from
$150.0 million
to
$200.0 million
and (iii) extension of the maturity date for the revolving credit facility to February 21, 2022. The second amendment was on August 22, 2017, which resulted in a reduction of 25 basis points in the interest rate for the term B loan facility. The third amendment was on September 22, 2017, which resulted in (i) a reduction of 25 to 50 basis points in the interest rate on the revolving credit facility, depending on leverage levels and (ii) a reduction of five basis points on the commitment fee for the undrawn portion. The Company incurred
$3.3 million
in third-party fees related to these amendments, of which
$2.7 million
was included in interest expense and the remainder was capitalized and will be amortized over the term of the revolving credit facility.
Borrowings under the term B loan bear interest at LIBOR, plus
2.00 percent
and borrowings under the revolving credit facility bear interest at LIBOR plus
1.25
to
2.25 percent
, or the bank’s base rate plus
0.25
to
1.25 percent
, depending on leverage levels. A commitment fee of
0.20
to
0.35 percent
is payable on the undrawn portion of the revolving credit facility.
Under terms of the credit facility, the Company is required to make minimum quarterly payments of
$2.1 million
and mandatory prepayments from excess cash flow and with the proceeds of asset sales, debt issuances and specified other events, subject to specified exceptions. Due to principal payments made through
September 30, 2017
, no additional minimum quarterly payments are required. The credit facility includes various restrictive covenants including the maximum ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") (
4.00
to 1.00 as of
September 30, 2017
, and steps down at regular intervals to
3.25
to 1.00 on March 31, 2019). The credit facility also contains certain customary limitations including, among other terms and conditions, the Company's ability to incur additional indebtedness, engage in mergers and acquisitions and declare dividends.
At
September 30, 2017
, the Company was in compliance with all of its debt covenants, its ratio of consolidated funded debt to consolidated EBITDA was
2.08
to 1.00 and had
$166.6 million
available borrowing capacity under its revolving credit facility.
6. Commitments and Contingencies
The Company h
as entered into various non-cancelable operating leases, primarily related to its facilities and certain office equipment used in the ordinary course of business. The Company leases
two
properties owned by related parties. Rent expense for these two properties was
$0.3 million
for the
three months ended September 30, 2017
and
2016
and
$1.0 million
for the
nine months ended September 30, 2017
and
2016
.
The Company carries retention policies for its workers’ compensation liability exposures. The workers' compensation loss reserves are based upon an actuarial study conducted by a third-party specialist. Changes in estimates, differences in estimates and actual payments for claims are recognized in the period that the estimates change or the payments are made. The workers' compensation loss reserves were approximately
$2.2 million
and
$1.8 million
at
September 30, 2017
and
December 31, 2016
, respectively, net of anticipated insurance and indemnification recoveries of
$14.3 million
and
$14.0 million
, at
September 30, 2017
and
December 31, 2016
, respectively.
Certain employees participate in the Company’s Amended and Restated Change in Control Severance Plan, or have separate agreements that provide for certain benefits in the event of termination at the Company's convenience or following a change in control, as defined by the plan or agreement. Generally, these benefits are based on the employee’s position with the Company and include severance, continuation of health insurance and a pro rata bonus.
Legal Proceedings
The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. Based on the facts currently available, the Company does not believe that the disposition of matters that are pending or asserted will have a material effect on its condensed consolidated financial statements.
7. Fair Value Measurements
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued payroll and contractor professional pay approximate their fair value based on their short-term nature. Long-term debt recorded in the Company’s condensed consolidated balance sheet at
September 30, 2017
was
$610.0 million
(net of
$13.5 million
of unamortized deferred loan costs, refer to "Note
5. Long-Term Debt
"). The carrying value of the revolving credit facility approximates its fair value. The fair value of the term B loan was determined using Level 1 inputs (quoted prices in active markets for identical liabilities) from the fair value hierarchy. The fair value of the term B loan was
$597.7 million
as of
September 30, 2017
.
Certain acquisitions included obligations to pay contingent consideration in cash if specific performance targets were met. There were no remaining contingent consideration obligations as of
September 30, 2017
and December 31, 2016.
The following table summarizes the changes in the balance of contingent consideration for 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
Balance at beginning of period
|
$
|
(5,843
|
)
|
|
$
|
(20,981
|
)
|
|
Payments on contingent consideration
|
5,843
|
|
|
21,594
|
|
|
Fair value adjustment
|
—
|
|
|
(613
|
)
|
|
Balance at end of period
|
$
|
—
|
|
|
$
|
—
|
|
Certain assets and liabilities, such as goodwill and trademarks, are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). There were no fair value adjustments to non-financial assets or liabilities during the
nine months ended September 30, 2017
or
2016
.
8. Stockholders' Equity
There were
0.2 million
and
0.5 million
shares issued during the
three and nine months ended
September 30, 2017
, respectively, for vesting of restricted stock units, exercise of stock options and stock purchases under the Employee Stock Purchase Plan.
On June 10, 2016, the Board of Directors approved a stock repurchase program, whereby the Company may repurchase up to
$150.0 million
of its common stock over the following two years. During the
three and nine months ended
September 30, 2017
, the Company repurchased
1.0 million
and
1.2 million
shares of its common stock at a cost of
$47.9 million
and
$58.0 million
, respectively. All shares repurchased were retired, resulting in a reduction of
$10.8 million
and
$13.2 million
in paid-in capital and a reduction of
$37.1 million
and
$44.8 million
in retained earnings, during the
three and nine months ended
September 30, 2017
, respectively.
9. Earnings Per Share
The following is a reconciliation of the shares used to compute basic and diluted earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Weighted average number of common shares outstanding used to compute basic earnings per share
|
52,500
|
|
|
53,275
|
|
|
52,660
|
|
|
53,281
|
|
|
Dilutive effect of stock-based awards
|
673
|
|
|
493
|
|
|
659
|
|
|
506
|
|
|
Number of shares used to compute diluted earnings per share
|
53,173
|
|
|
53,768
|
|
|
53,319
|
|
|
53,787
|
|
The amount of anti-dilutive share equivalents outstanding during the
three and nine months ended
September 30, 2017
and 2016 was insignificant.
10. Income Taxes
For interim reporting periods, the Company’s provision for income taxes is calculated using its annualized estimated effective tax rate for the year. This rate is based on its estimated full-year income and the related income tax expense for each jurisdiction in which the Company operates. Changes in the geographical mix, permanent differences or the estimated level of annual pre-tax income can affect the effective tax rate. This rate is adjusted for the effects of discrete items occurring in the period.
On January 1, 2017 the Company adopted ASU No. 2016-09,
Stock Compensation (Topic 718)
which requires excess tax benefits and deficiencies related to stock-based compensation to be recognized as income tax benefits or expense, while in prior years these excess tax benefits and deficiencies were treated as adjustments to stockholders equity. During the
three and nine months ended
September 30, 2017
, there were net excess tax benefits of
$0.4 million
and
$2.0 million
, respectively, related to stock-based compensation, which are treated as discrete items.
11. Segment Reporting
On Assignment provides services through
two
operating segments with each addressing different sectors of the professional staffing market with distinct business models attuned to those sectors. The Apex Segment provides a broad spectrum of technical, scientific, digital and creative professionals for contract, contract-to-hire and permanent placement positions to Fortune 1000 and mid-market clients across the United States and Canada. Businesses in this segment include Apex Systems, Apex Life Sciences and Creative Circle. The Oxford Segment provides specialized staffing, permanent placement and consulting services in select skill and geographic markets. Businesses in this segment include Oxford Global Resources, CyberCoders and Life Sciences Europe.
The Company’s management evaluates the performance of each segment primarily based on revenues, gross profit and operating income. The information in the following tables is derived directly from the internal financial reports used for corporate management purposes. The Company's management does not evaluate, manage or measure performance of segments using asset information and such information is not readily available. Accordingly, assets by reportable segment are not disclosed.
The following tables present revenues, gross profit, operating income and amortization by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30, 2017
|
|
September 30
, 2016
|
|
|
Apex
|
|
Oxford
|
|
Corporate
(1)
|
|
Total
|
|
Apex
|
|
Oxford
|
|
Corporate
(1)
|
|
Total
|
|
Revenues
|
$
|
517,492
|
|
|
$
|
149,556
|
|
|
$
|
—
|
|
|
$
|
667,048
|
|
|
$
|
473,546
|
|
|
$
|
155,855
|
|
|
$
|
—
|
|
|
$
|
629,401
|
|
|
Gross profit
|
155,783
|
|
|
62,532
|
|
|
—
|
|
|
218,315
|
|
|
143,681
|
|
|
63,439
|
|
|
—
|
|
|
207,120
|
|
|
Operating income
|
59,016
|
|
|
16,088
|
|
|
(14,234
|
)
|
|
60,870
|
|
|
53,982
|
|
|
14,429
|
|
|
(13,001
|
)
|
|
55,410
|
|
|
Amortization
|
7,194
|
|
|
1,054
|
|
|
—
|
|
|
8,248
|
|
|
8,590
|
|
|
1,152
|
|
|
—
|
|
|
9,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2017
|
|
September 30
, 2016
|
|
|
Apex
|
|
Oxford
|
|
Corporate
(1)
|
|
Total
|
|
Apex
|
|
Oxford
|
|
Corporate
(1)
|
|
Total
|
|
Revenues
|
$
|
1,502,462
|
|
|
$
|
444,427
|
|
|
$
|
—
|
|
|
$
|
1,946,889
|
|
|
$
|
1,360,424
|
|
|
$
|
459,105
|
|
|
$
|
—
|
|
|
$
|
1,819,529
|
|
|
Gross profit
|
445,925
|
|
|
183,471
|
|
|
—
|
|
|
629,396
|
|
|
407,990
|
|
|
188,998
|
|
|
—
|
|
|
596,988
|
|
|
Operating income
|
162,679
|
|
|
39,525
|
|
|
(38,265
|
)
|
|
163,939
|
|
|
144,158
|
|
|
41,045
|
|
|
(41,332
|
)
|
|
143,871
|
|
|
Amortization
|
21,983
|
|
|
3,028
|
|
|
—
|
|
|
25,011
|
|
|
25,770
|
|
|
4,148
|
|
|
—
|
|
|
29,918
|
|
|
|
|
|
(1)
|
Corporate expenses primarily consist of consolidated stock-based compensation expense, compensation for corporate employees, acquisition, integration and strategic planning expenses, public company expenses and depreciation expense for corporate assets.
|
The following table presents revenues by type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment
|
$
|
634,339
|
|
|
95.1
|
%
|
|
$
|
596,437
|
|
|
94.8
|
%
|
|
$
|
1,848,868
|
|
|
95.0
|
%
|
|
$
|
1,720,312
|
|
|
94.5
|
%
|
|
Permanent placement
|
32,709
|
|
|
4.9
|
%
|
|
32,964
|
|
|
5.2
|
%
|
|
98,021
|
|
|
5.0
|
%
|
|
99,217
|
|
|
5.5
|
%
|
|
|
$
|
667,048
|
|
|
100.0
|
%
|
|
$
|
629,401
|
|
|
100.0
|
%
|
|
$
|
1,946,889
|
|
|
100.0
|
%
|
|
$
|
1,819,529
|
|
|
100.0
|
%
|
The Company operates internationally, with operations mainly in the United States, Europe and Canada. The following table presents revenues by geographic location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
632,584
|
|
|
94.8
|
%
|
|
$
|
599,991
|
|
|
95.3
|
%
|
|
$
|
1,849,567
|
|
|
95.0
|
%
|
|
$
|
1,732,594
|
|
|
95.2
|
%
|
|
Foreign
|
34,464
|
|
|
5.2
|
%
|
|
29,410
|
|
|
4.7
|
%
|
|
97,322
|
|
|
5.0
|
%
|
|
86,935
|
|
|
4.8
|
%
|
|
|
$
|
667,048
|
|
|
100.0
|
%
|
|
$
|
629,401
|
|
|
100.0
|
%
|
|
$
|
1,946,889
|
|
|
100.0
|
%
|
|
$
|
1,819,529
|
|
|
100.0
|
%
|
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, as well as management's beliefs and assumptions and involve a high degree of risk and uncertainty. Any
statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Statements that include the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions that convey uncertainty of future events or outcomes are 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 or suggested in the forward-looking statements herein. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) actual demand for our services; (2) our ability to attract, train and retain qualified staffing consultants; (3) our ability to remain competitive in obtaining and retaining clients; (4) the availability of qualified contract professionals; (5) management of our growth; (6) continued performance and improvement of our enterprise-wide information systems; (7) our ability to manage our litigation matters; (8) the successful integration of our acquired subsidiaries; (9) the successful implementation of our five-year strategic plan; and the factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 10-K”) under the section titled “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 filing date of this Quarterly Report on Form 10-Q and we assume no obligation to update any forward-looking statements or the reasons why our actual results may differ.
OVERVIEW
On Assignment provides services through two operating segments with each addressing different sectors of the professional staffing market with distinct business models attuned to those sectors. The Apex Segment provides a broad spectrum of technical, scientific, digital and creative professionals for contract, contract-to-hire and permanent placement positions to Fortune 1000 and mid-market clients across the United States and Canada. Our businesses in this segment include Apex Systems, Apex Life Sciences and Creative Circle. The Oxford Segment provides specialized staffing, permanent placement and consulting services in select skill and geographic markets. Our businesses in this segment include Oxford Global Resources, CyberCoders and Life Sciences Europe.
Results of Operations
CHANGES IN RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2017
COMPARED WITH THE
THREE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Year-Over-Year
Growth Rates
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
|
|
Apex:
|
|
|
|
|
|
|
|
|
|
Assignment
|
|
$
|
506.4
|
|
|
$
|
462.0
|
|
|
|
9.6
|
%
|
|
|
Permanent placement
|
|
11.1
|
|
|
11.6
|
|
|
|
(3.4
|
)%
|
|
|
|
|
517.5
|
|
|
473.6
|
|
|
|
9.3
|
%
|
|
|
Oxford:
|
|
|
|
|
|
|
|
|
|
Assignment
|
|
128.0
|
|
|
134.4
|
|
|
|
(4.8
|
)%
|
|
|
Permanent placement
|
|
21.6
|
|
|
21.4
|
|
|
|
0.6
|
%
|
|
|
|
|
149.6
|
|
|
155.8
|
|
|
|
(4.0
|
)%
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
Assignment
|
|
634.4
|
|
|
596.4
|
|
|
|
6.4
|
%
|
|
|
Permanent placement
|
|
32.7
|
|
|
33.0
|
|
|
|
(0.8
|
)%
|
|
|
|
|
$
|
667.1
|
|
|
$
|
629.4
|
|
|
|
6.0
|
%
|
|
|
Percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
Apex
|
|
77.6
|
%
|
|
75.2
|
%
|
|
|
|
|
|
Oxford
|
|
22.4
|
%
|
|
24.8
|
%
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment
|
|
95.1
|
%
|
|
94.8
|
%
|
|
|
|
|
|
Permanent placement
|
|
4.9
|
%
|
|
5.2
|
%
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
94.8
|
%
|
|
95.3
|
%
|
|
|
|
|
|
Foreign
|
|
5.2
|
%
|
|
4.7
|
%
|
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
Revenues
increased
$37.7 million
, or
6.0 percent
year-over-year. Assignment revenues were
$634.4 million
for the
third quarter
of
2017
,
up
6.4 percent
year-over-year and permanent placement revenues, comprised of direct hire and conversion fees, were
$32.7 million
,
down
0.8 percent
year-over-year. Permanent placement revenues accounted for
4.9 percent
of total revenues,
down
from
5.2 percent
for the
third quarter
of last year.
The Apex Segment accounted for
77.6 percent
of consolidated revenues for the
third quarter
of
2017
,
up
from
75.2 percent
in the same period of last year. Its revenues were
$517.5 million
,
up
9.3 percent
year-over-year. Assignment revenues were up
9.6 percent
year-over-year mainly related to growth in IT services, which account for approximately
74.8 percent
of the segment's revenues. IT services revenues were up
10.9 percent
year-over-year, related to the continued trend of higher growth in top accounts and improved productivity from our sales consultants. Creative/digital services revenues were up
5.2 percent
year-over-year for the
third quarter
of
2017
, which was below the 10.9 percent year-over-year growth rate in the preceding quarter. The sequential decline in the growth rate reflected, among other things, lower demand from advertising agencies during the quarter. Life sciences revenues were up
3.8 percent
, primarily due to the inclusion of a
$3.0 million
revenue contribution from Stratacuity, which was acquired in August 2017 (refer to "Note
3. Acquisitions
").
The Oxford Segment's revenues were
$149.6 million
,
down
4.0 percent
year-over-year, mainly due to a large customer project that was substantially completed in 2016. Excluding revenues from this project, revenues for the segment were flat year-over-year. Permanent placement revenues for the
third quarter
of
2017
were
$21.6 million
, or
14.4 percent
of the segment's revenues, up from
$21.4 million
, or
13.8 percent
of the segment's revenues in the same period of last year. CyberCoders, which accounts for
95.8 percent
of the segment's permanent placement revenues, was up
2.3 percent
year-over-year.
Gross Profit and Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Year-Over-Year
Growth Rates
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Apex
|
|
$
|
155.7
|
|
|
$
|
143.7
|
|
|
|
8.4
|
%
|
|
|
Oxford
|
|
62.6
|
|
|
63.4
|
|
|
|
(1.4
|
)%
|
|
|
Consolidated
|
|
$
|
218.3
|
|
|
$
|
207.1
|
|
|
|
5.4
|
%
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
Apex
|
|
30.1
|
%
|
|
30.3
|
%
|
|
|
|
|
|
Oxford
|
|
41.8
|
%
|
|
40.7
|
%
|
|
|
|
|
|
Consolidated
|
|
32.7
|
%
|
|
32.9
|
%
|
|
|
|
|
Gross profit is comprised of revenues less costs of services, which consist primarily of compensation for our contract professionals and assignment-related expenses. Gross profit for the
third quarter
of
2017
was
$218.3 million
,
up
5.4 percent
year-over-year. Gross margin was
32.7 percent
, a
compression
of
20
basis points year-over-year primarily due to a lower mix of permanent placement revenues (
4.9 percent
of revenues for the current quarter,
down
from
5.2 percent
for the
third quarter
of 2016).
The Apex Segment accounted for
71.4 percent
of consolidated gross profit for the
third quarter
of
2017
. Its gross profit was
$155.7 million
,
up
8.4 percent
year-over-year. Gross margin for the segment was
30.1 percent
, a
compression
of
20
basis points year-over-year related to (i) the continued trend of higher growth in revenues from high volume, lower-margin accounts and (ii) a lower mix of permanent placement revenues.
The Oxford Segment accounted for
28.6 percent
of consolidated gross profit for the
third quarter
of
2017
. Its gross profit was
$62.6 million
,
down
1.4 percent
year-over-year. Gross margin for the segment was
41.8 percent
, an
expansion
of
110
basis points year-over-year primarily resulting from a higher mix of permanent placement revenues compared with the
third quarter
of 2016.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of compensation expense for our field operations and corporate staff, rent, information systems, marketing, telecommunications, public company expenses and other general and administrative expenses. SG&A expenses for the
third quarter
of
2017
were
$149.2 million
(
22.4 percent
of revenues), compared with
$142.0 million
(
22.6 percent
of revenues) in the same period of last year. The
20
basis points reduction in SG&A expenses as a percent of revenues primarily related to lower growth in compensation expense for staffing consultants relative to revenue growth.
SG&A expenses for the
third quarter
of
2017
included
$1.5 million
in acquisition, integration and strategic planning expenses. These expenses included
$1.0 million
of costs related to the integration and streamlining of our operating units and
$0.5 million
of costs related to the Stratacuity acquisition.
SG&A expenses in the
third quarter
of 2016 included
$0.7 million
in acquisition, integration and strategic planning expenses primarily related to the integration of certain operating units onto Oxford's front and back office systems.
Amortization of Intangible Assets
Amortization of intangible assets for the
third quarter
of
2017
was
$8.2 million
, compared with
$9.7 million
in the same period of last year. The decrease is due to the accelerated amortization method for certain acquired intangibles, which have higher amortization rates at the beginning of their useful life.
Interest Expense
Interest expense for the
third quarter
of
2017
was
$7.1 million
, compared with
$8.3 million
in the same period of last year. Interest expense for the current quarter was comprised of (i)
$5.4 million
of interest on the credit facility, (ii)
$0.9 million
of amortization of deferred loan costs and (iii)
$0.8 million
of third-party fees related to two amendments to our credit facility (refer to "Note
5. Long-Term Debt
"). The decrease in interest expense reflected a lower outstanding debt balance and lower interest rates as a result of the amendments to our credit facility. Interest expense for the
third quarter
of 2016 was comprised of (i) $6.5 million of interest on the credit facility, (ii) $0.9 million of amortization of deferred loan costs and (iii) $0.9 million third-party fees related to the August 5, 2016 amendment to our credit facility.
Provision for Income Taxes
The provision for income taxes was
$18.9 million
for the
third quarter
of
2017
, compared with
$17.3 million
in the same period of last year. The effective tax rate for the quarter was
35.1 percent
, a decrease from
38.2 percent
for the full year
2016
. This lower effective tax rate was primarily due to (i) approximately $0.8 million in hiring-related tax credits related to a new employment category added in 2016, for which the company recently developed a program to identify, measure and apply for the additional credits and (ii) a
$0.4 million
tax benefit related to stock-based compensation (refer to "Note
10. Income Taxes
").
Net Income
Net income was
$34.9 million
for the
third quarter
of
2017
,
up
from
$29.8 million
in the same period of last year.
Results of Operations
CHANGES IN RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2017
COMPARED WITH THE
NINE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Year-Over-Year
Growth Rates
|
|
|
|
|
2017
|
|
2016
|
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
|
Apex:
|
|
|
|
|
|
|
|
|
Assignment
|
|
$
|
1,469.0
|
|
|
$
|
1,325.5
|
|
|
10.8
|
%
|
|
|
Permanent placement
|
|
33.5
|
|
|
34.9
|
|
|
(4.1
|
)%
|
|
|
|
|
1,502.5
|
|
|
1,360.4
|
|
|
10.4
|
%
|
|
|
Oxford:
|
|
|
|
|
|
|
|
|
Assignment
|
|
379.9
|
|
|
394.8
|
|
|
(3.8
|
)%
|
|
|
Permanent placement
|
|
64.5
|
|
|
64.3
|
|
|
0.3
|
%
|
|
|
|
|
444.4
|
|
|
459.1
|
|
|
(3.2
|
)%
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
Assignment
|
|
1,848.9
|
|
|
1,720.3
|
|
|
7.5
|
%
|
|
|
Permanent placement
|
|
98.0
|
|
|
99.2
|
|
|
(1.2
|
)%
|
|
|
|
|
$
|
1,946.9
|
|
|
$
|
1,819.5
|
|
|
7.0
|
%
|
|
|
Percentage of total revenues:
|
|
|
|
|
|
|
|
|
Apex
|
|
77.2
|
%
|
|
74.8
|
%
|
|
|
|
|
Oxford
|
|
22.8
|
%
|
|
25.2
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment
|
|
95.0
|
%
|
|
94.5
|
%
|
|
|
|
|
Permanent placement
|
|
5.0
|
%
|
|
5.5
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
95.0
|
%
|
|
95.2
|
%
|
|
|
|
|
Foreign
|
|
5.0
|
%
|
|
4.8
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
Revenues
increased
$127.4 million
, or
7.0 percent
year-over-year. Assignment revenues were
$1.8 billion
,
up
7.5 percent
year-over-year, and permanent placement revenues, comprised of direct hire and conversion fees, were
$98.0 million
,
down
1.2 percent
year-over-year. Permanent placement revenues accounted for
5.0 percent
of total revenues,
down
from
5.5 percent
for the
nine months
ended September 30,
2016
.
The Apex Segment accounted for
77.2 percent
of consolidated revenues for the
nine months ended September 30, 2017
,
up
from
74.8 percent
in the same period of last year. Its revenues were
$1.5 billion
,
up
10.4 percent
year-over-year. Assignment revenues were up
10.8 percent
year-over-year mainly related to growth in IT services, which account for approximately
74.6 percent
of the segment's revenues. IT services were up
11.7 percent
year-over-year, related to the continued trend of higher growth in top accounts. Creative/digital services revenues were up
9.8 percent
year-over-year for the
nine months ended September 30, 2017
, which was below the growth rate for the same period in 2016. This decline in growth rate reflected, among other things, lower demand from advertising agencies. Life sciences revenues were flat year-over-year after the inclusion of a
$3.0 million
revenue contribution from Stratacuity, which was acquired in August 2017 (refer to "Note
3. Acquisitions
").
Oxford Segment's revenues were
$444.4 million
,
down
3.2 percent
year-over-year, mainly due to a large customer project that was substantially completed in 2016. Permanent placement revenues were
$64.5 million
, or
14.5 percent
of the segment's revenues, compared with
$64.3 million
, or
14.0 percent
of the segment's revenues for the
nine months
ended September 30,
2016
. CyberCoders, which accounts for
96.1 percent
of the segment's permanent placement revenues, was up
1.3 percent
year-over-year.
Gross Profit and Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year-Over-Year
Growth Rates
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Apex
|
|
$
|
445.9
|
|
|
$
|
408.0
|
|
|
|
9.3
|
%
|
|
|
Oxford
|
|
183.5
|
|
|
189.0
|
|
|
|
(2.9
|
)%
|
|
|
Consolidated
|
|
$
|
629.4
|
|
|
$
|
597.0
|
|
|
|
5.4
|
%
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
Apex
|
|
29.7
|
%
|
|
30.0
|
%
|
|
|
|
|
|
Oxford
|
|
41.3
|
%
|
|
41.2
|
%
|
|
|
|
|
|
Consolidated
|
|
32.3
|
%
|
|
32.8
|
%
|
|
|
|
|
Gross profit for the
nine months ended September 30, 2017
was
$629.4 million
,
up
5.4 percent
year-over-year. Gross margin was
32.3 percent
, a
compression
of
50
basis points year-over-year primarily due to higher growth from the Apex Segment, which has lower gross margins than the Oxford Segment.
The Apex Segment accounted for
70.8 percent
of consolidated gross profit for the
nine months ended September 30, 2017
. Its gross profit was
$445.9 million
,
up
9.3 percent
year-over-year. Gross margin for the segment was
29.7 percent
, a
compression
of
30
basis points year-over-year related to (i) the continued trend of higher growth in revenues from high volume, lower-margin accounts and (ii) a lower mix of permanent placement revenues.
The Oxford Segment accounted for
29.2 percent
of consolidated gross profit for the
nine months ended September 30, 2017
. Its gross profit was
$183.5 million
,
down
2.9 percent
year-over-year. Gross margin for the segment was
41.3 percent
, an
expansion
of
10
basis points year-over-year, primarily related to a higher mix of permanent placement revenues, partially offset by the completion of a large, high-margin project.
Selling, General and Administrative Expenses
SG&A expenses were
$440.4 million
(
22.6 percent
of revenues) for the
nine months ended September 30, 2017
, compared with
$423.2 million
(
23.3 percent
of revenues) in the same period of last year. The
70
basis points reduction in SG&A expenses as a percent of revenues primarily related to (i) lower growth in compensation expense for staffing consultants relative to revenue growth, and (ii) lower acquisition, integration and strategic planning expenses and stock-based compensation expense.
SG&A expenses for the
nine months ended September 30, 2017
included
$3.1 million
in acquisition and integration expenses. These expenses included (i)
$2.1 million
of costs related to the integration and streamlining of our operating units, (ii)
$0.5 million
of costs related to the Stratacuity acquisition and (iii)
$0.5 million
related to a strategic study performed by an outside consulting firm to evaluate our current IT staff augmentation and project based service offerings.
SG&A expenses in the same period of last year included
$4.5 million
in acquisition, integration and strategic planning expenses which primarily related to the integration of certain operating units onto Oxford's front and back office systems.
Amortization of Intangible Assets
Amortization of intangible assets for the
nine months ended September 30, 2017
was
$25.0 million
, compared with
$29.9 million
in the same period of last year. The decrease is due to the accelerated amortization method for certain acquired intangibles, which have higher amortization rates at the beginning of their useful life.
Interest Expense
Interest expense was
$21.7 million
for the
nine months ended September 30, 2017
, compared with
$25.3 million
in the same period of last year. The decrease in interest expense reflected a lower outstanding debt balance and lower interest rates as a result of the amendments to our credit facility. Interest expense for the
nine months ended September 30, 2017
was comprised of (i)
$16.3 million
of interest on the credit facility, (ii)
$2.7 million
of amortization of deferred loan costs and (iii)
$2.7 million
of third-party fees related to the amendments to our credit facility. Interest expense in the same period of last year was comprised of (i) interest on the credit facility of $20.7 million, (ii) amortization of deferred loan costs of $2.8 million, (iii) accretion of discount of $0.9 million on the contingent consideration liability related to acquisitions and (iv) $0.9 million third-party fees related to the August 5, 2016 amendment to our credit facility.
Provision for Income Taxes
The provision for income taxes for the
nine months ended September 30, 2017
was
$51.8 million
, compared with
$45.5 million
in the same period of last year. The effective tax rate for the
nine months ended September 30, 2017
was
36.4 percent
, a decrease from the
38.2 percent
for the full year 2016. This lower effective tax rate was primarily due to (i) a
$2.0 million
tax benefit related to stock-based compensation (refer to "Note
10. Income Taxes
") and (ii) approximately $0.8 million in hiring-related tax credits related to a new employment category added in 2016, for which the company recently developed a program to identify, measure and apply for the additional credits.
Net Income
Net income for the
nine months ended September 30, 2017
was
$90.3 million
,
up
from
$73.2 million
in the same period of last year.
Liquidity and Capital Resources
Our working capital (current assets less current liabilities) at
September 30, 2017
was
$296.6 million
and our cash and cash equivalents were
$28.0 million
, of which
$17.5 million
was held in foreign countries and not available to fund domestic operations unless repatriated. We do not intend to repatriate cash held in foreign countries. Our cash flows from operating activities and borrowings under our credit facility have been our primary source of liquidity and have been sufficient to fund our working capital and capital expenditure needs. Our working capital requirements are primarily driven by the overall growth in our business and debt service requirements. We believe that our expected operating cash flows and availability under our revolving credit facility will be sufficient to meet our obligations, working capital requirements and capital expenditures for the next 12 months.
Net cash provided by operating activities was
$138.2 million
for the
nine months ended September 30, 2017
, compared with
$142.9 million
in the same period of last year. Net cash provided by operating activities before changes in operating assets and liabilities, was
$169.3 million
for the
nine months ended September 30, 2017
, up from
$154.4 million
in the same period of last year. Changes in operating assets and liabilities (mainly changes in working capital) resulted in use of cash of
$31.2 million
for the
nine months ended September 30, 2017
, compared with
$11.5 million
in the same period of last year. The differences in year-over-year changes in working capital primarily related to the timing of period end compensation payments and income tax prepayments, as well as higher growth in accounts receivable balances due to growth in the business. Upon the adoption of ASU 2016-09, excess tax benefits related to stock-based compensation are included in cash flows from operating activities and this presentation is applied retrospectively for all periods presented, which resulted in an increase in cash flows from operating activities and a decrease in cash flows from financing activities of
$2.6 million
for the nine months ended September 30, 2016. For the
nine months ended September 30, 2017
the excess tax benefits related to stock-based compensation were
$2.0 million
and are included in net income.
Net cash used in investing activities was
$43.9 million
for the
nine months ended September 30, 2017
, compared with
$15.3 million
in the same period of last year. Net cash used in investing activities for the
nine months ended September 30, 2017
was primarily comprised of
$25.8 million
used for the purchase of Stratacuity (refer to "Note
3. Acquisitions
") and
$18.0 million
used to purchase property and equipment. Net cash used in investing activities in the same period of last year was primarily comprised of
$20.6 million
used to purchase property and equipment and the receipt of
$6.0 million
related to the release of cash held in escrow from the sale of the Physician Segment.
Net cash used in financing activities was
$94.8 million
for the
nine months ended September 30, 2017
, compared with
$134.7 million
in the same period of last year. Net cash used in financing activities for the
nine months ended September 30, 2017
consisted primarily of
$58.9 million
used for repurchases of our common stock (inclusive of $2.0 million cash settlement of stock repurchases from 2016) and
$32.5 million
net cash used to pay down long-term debt. Net cash used in financing activities in the same period of last year consisted primarily of
$106.0 million
in principal payments of long-term debt,
$21.5 million
used for repurchases of our common stock, and
$16.8 million
in payment of contingent consideration (total payment of $21.6 million, of which $16.8 million was cash used in financing activities and $4.8 million was cash used in operating activities).
In 2015, the Company entered into a $975.0 million credit facility consisting of (i) an $825.0 million seven-year term B loan facility and (ii) a $150.0 million revolving credit facility. The facility was amended on August 5, 2016, resulting in a 25 basis points reduction in the interest rate for the term B loan facility. Related to the August 5, 2016 amendment, the Company incurred $0.9 million in third-party fees which were included in interest expense in 2016.
During the first nine months of 2017, we amended the credit facility three separate times, which resulted in: (i) a 75 basis points reduction in the interest rate on the term B loan, (ii) a 25 to 50 basis points, depending on leverage levels, reduction in the interest rate on the revolving credit facility, (iii) a five basis point reduction in the commitment fee on the undrawn portion of the revolving credit facility, (iv) an increase in the borrowing capacity of the revolving credit facility to
$200.0 million
and (v) an extension of the maturity date on the revolving credit facility to February 2022. The costs of these amendments totaled
$3.3 million
, of which
$2.7 million
was included in interest expense and the remainder was capitalized and will be amortized over the term of the revolving credit facility.
The outstanding balance on the facility at
September 30, 2017
was
$623.5 million
(refer to "Note
5. Long-Term Debt
"). Under terms of the credit facility, we are required to make minimum quarterly payments of
$2.1 million
and mandatory prepayments from excess cash flow and with the proceeds of asset sales, debt issuances and specified other events, subject to specified exceptions. Due to principal payments made through September 30, 2017, no additional minimum quarterly payments are required. The credit facility is secured by substantially all of our assets and includes various restrictive covenants including the maximum ratio of consolidated funded debt to consolidated EBITDA, which steps down at
regular intervals from
4.00
to 1.00 as of
September 30, 2017
, to
3.25
to 1.00 as of March 31, 2019 and thereafter. The credit facility also contains customary limitations including, among other terms and conditions, the Company's ability to incur additional indebtedness, engage in mergers and acquisitions and declare dividends.
At
September 30, 2017
, the Company was in compliance with all of its debt covenants, its ratio of consolidated funded debt to consolidated EBITDA was
2.08
to 1.00 and the Company had
$166.6 million
available borrowing capacity under its revolving credit facility.
On June 10, 2016, the Board of Directors approved a stock repurchase program whereby the Company may repurchase up to $150.0 million of its common stock over the following two years. During the
nine months ended September 30, 2017
we purchased
1.2 million
shares for
$58.0 million
(
$47.24
average price per share). The remaining authorized amount under this program is
$48.9 million
.
Recent Accounting Pronouncements
Refer to “Note
2. Accounting Standards Update
” in the notes to the condensed consolidated financial statements in Part I, Item 1.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates during the
nine months ended
September 30, 2017
compared with those disclosed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our
2016
10-K.
Commitments
We have not made any material changes to the significant commitments or contractual obligations that were disclosed in our
2016
10-K, nor have we entered into any new ones.