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ASGN Inc - Quarter Report: 2017 September (Form 10-Q)


  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 000-20540
 
ON ASSIGNMENT, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4023433
 
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
26745 Malibu Hills Road, Calabasas, CA
 
91301
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 

(818) 878-7900
(Registrant's telephone number, including area code)

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes o No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  xYes o No 
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 o Yes x No 
 
At November 2, 2017, the total number of outstanding shares of the Company’s Common Stock ($0.01 par value) was 52,014,913.

1


ON ASSIGNMENT, INC. AND SUBSIDIARIES

INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 



2


PART I - FINANCIAL INFORMATION


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.

3



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.
 
 

 


4


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.

5


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.


6


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.

7


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 has 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.


8


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.


9


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
%

 

10


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.




11


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.



12


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").


13



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.


14


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.

15



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

16


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.

17


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.

Item 3 - Quantitative and Qualitative Disclosures about Market Risks
 
With respect to our quantitative and qualitative disclosures about market risks, there have been no material changes to the information included in our 2016 10-K.

We are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with foreign currency fluctuations and interest rates.

Foreign Currency Fluctuations. Our exposure to fluctuations in foreign currency exchange rates relates primarily to our foreign subsidiaries. Exchange rates impact the U.S. dollar value of our reported earnings, investments in our foreign subsidiaries and intercompany transactions with our foreign subsidiaries. Fluctuations in currency exchange rates impact the U.S. dollar amount of our stockholders’ equity. The assets and liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at period end. The resulting translation adjustments are recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss). Based on the relative size and nature of our foreign operations, we do not believe that a 10 percent change in the value of foreign currencies relative to the U.S. dollar would have a material impact on our financial statements.

Interest Rate Risk. Our exposure to interest rate risk is associated with our debt instruments (refer to "Note 5. Long-Term Debt" in the condensed consolidated financial statements for a further description of our debt instruments). A hypothetical 100 basis point change in interest rates on variable rate debt would have resulted in interest expense fluctuating approximately $6.2 million based on $623.5 million of debt outstanding for any 12-month period. We have not entered into any market risk sensitive instruments for hedging or trading purposes.

Item 4 - Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. The term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. We have established disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 PART II – OTHER INFORMATION

Item 1 – Legal Proceedings
 
We are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. However, based on the facts currently available, we do not believe that the disposition of matters that are pending or asserted will have a material effect on our financial position, results of operations or cash flows.

Item 1A – Risk Factors
 
Information regarding risk factors affecting our business is discussed in our 2016 10-K.

Item 2 - Unregistered Sales of Securities and Use of Proceeds

On June 10, 2016, the Board of Directors approved a stock repurchase program, under which the Company may repurchase up to $150.0 million of its common stock over the following two years. On Assignment purchases of securities during the quarter ended September 30, 2017 are shown in the table below.

Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number
(or Approximate Dollar Value)
of Shares That May Yet be Purchased Under the Plans or Programs
July
20,000

 
$
48.99

20,000

 
$
95,788,000

August
649,618

 
$
46.98

649,618

 
65,272,000

September
330,000

 
$
49.67

330,000

 
48,882,000

Total
999,618

 
$
47.90

999,618

 
$
48,882,000



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Item 6 - Exhibits

INDEX TO EXHIBITS
Number
 
Footnote
 
Description
 
(1)
 
 
(2)
 
4.1
 
(3)
 
Specimen Common Stock Certificate
 
(4)
 
 
*

 
 
*
 
 
*
 
 
*
 
 
*
 
101.INS
 
*
 
XBRL Instance Document
101.SCH
 
*
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
*
Filed herewith.
(1)
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed with the SEC on June 25, 2014.
(2)
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed with the SEC on September 27, 2016.
(3)
Incorporated by reference from an exhibit to our Registration Statement on Form S-1 (File No. 33-50646) declared effective by the SEC on September 21, 1992.
(4)
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed with the SEC on August 28, 2017.

 

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 SIGNATURE
 
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ON ASSIGNMENT, INC.
 
 
 
Date: November 7, 2017
By:
/s/ Edward L. Pierce
 
 
Edward L. Pierce
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 


 


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