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ASGN Inc - Quarter Report: 2018 March (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 March 31, 2018
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 000-20540
 
ASGN Incorporated
(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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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 May 4, 2018, the total number of outstanding shares of the Common Stock of ASGN Incorporated ("the Company") ($0.01 par value) was 52,304,176.

1



ASGN INCORPORATED AND SUBSIDIARIES

INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 



2



PART I - FINANCIAL INFORMATION


Item 1 — Condensed Consolidated Financial Statements (Unaudited)


ASGN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share amounts)
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
77,900

 
$
36,667

Accounts receivable, net
443,338

 
428,536

Prepaid expenses and income taxes
10,646

 
18,592

Workers' compensation receivable
15,338

 
12,702

Other current assets
5,049

 
3,026

Total current assets
552,271

 
499,523

Property and equipment, net
57,067

 
57,996

Goodwill
894,888

 
894,095

Identifiable intangible assets, net
345,370

 
352,766

Other non-current assets
8,563

 
5,749

Total assets
$
1,858,159

 
$
1,810,129

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,467

 
$
6,870

Accrued payroll and contract professional pay
120,356

 
114,832

Workers’ compensation loss reserves
17,479

 
14,777

Income taxes payable
777

 
1,229

Other current liabilities
29,669

 
29,009

Total current liabilities
182,748

 
166,717

Long-term debt
565,929

 
575,213

Deferred income tax liabilities
69,439

 
69,436

Other long-term liabilities
9,827

 
7,372

Total liabilities
827,943

 
818,738

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, 52,281,052
 and 52,151,538 issued and outstanding, respectively
523

 
521

Paid-in capital
574,346

 
566,090

Retained earnings
457,511

 
428,419

Accumulated other comprehensive loss
(2,164
)
 
(3,639
)
Total stockholders’ equity
1,030,216

 
991,391

Total liabilities and stockholders’ equity
$
1,858,159

 
$
1,810,129

 

See notes to condensed consolidated financial statements.

3




ASGN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Revenues
 
$
685,173

 
$
626,528

Costs of services
 
467,436

 
428,384

Gross profit
 
217,737

 
198,144

Selling, general and administrative expenses
 
164,444

 
146,072

Amortization of intangible assets
 
7,601

 
8,464

Operating income
 
45,692

 
43,608

Interest expense
 
(6,545
)
 
(8,501
)
Income before income taxes
 
39,147

 
35,107

Provision for income taxes
 
9,907

 
12,725

Income from continuing operations
 
29,240

 
22,382

Income (loss) from discontinued operations, net of income taxes
 
(148
)
 
9

Net income
 
$
29,092

 
$
22,391

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
0.56

 
$
0.43

Diluted
 
$
0.55

 
$
0.42

 
 
 
 
 
Number of shares and share equivalents used to calculate earnings per share:
 
 
 
 
Basic
 
52,178

 
52,658

Diluted
 
52,831

 
53,249

 
 
 
 
 
Reconciliation of net income to comprehensive income:
 
 
 
 
Net income
 
$
29,092

 
$
22,391

Foreign currency translation adjustment
 
1,475

 
702

Comprehensive income
 
$
30,567

 
$
23,093



 See notes to condensed consolidated financial statements.
 
 

 


4



ASGN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Three Months Ended
March 31,
 
2018

2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
29,092

 
$
22,391

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,413

 
14,475

Stock-based compensation
4,891

 
5,570

Provision for accounts receivable allowances
483

 
2,807

Workers’ compensation provision
813

 
645

Other
1,236

 
2,990

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(13,526
)
 
(10,154
)
Prepaid expenses and income taxes
8,218

 
(457
)
Accounts payable
5,825

 
712

Accrued payroll and contract professional pay
6,473

 
144

Income taxes payable
(448
)
 
11,226

Workers’ compensation loss reserves
(747
)
 
(493
)
Other
(1,990
)
 
(6,056
)
Net cash provided by operating activities
54,733

 
43,800

Cash Flows from Investing Activities:
 
 
 
Cash paid for property and equipment
(6,198
)
 
(6,792
)
Other
(20
)
 
17

Net cash used in investing activities
(6,218
)
 
(6,775
)
Cash Flows from Financing Activities:
 
 
 
Principal payments of long-term debt
(10,000
)
 
(26,000
)
Proceeds from long-term debt

 
2,000

Debt issuance or amendment costs

 
(2,403
)
Proceeds from option exercises and employee stock purchase plan
4,388

 
4,106

Payment of employment taxes related to release of restricted stock awards
(2,055
)
 
(5,782
)
Repurchase of common stock

 
(12,136
)
Net cash used in financing activities
(7,667
)
 
(40,215
)
Effect of exchange rate changes on cash and cash equivalents
385

 
151

Net Increase (Decrease) in Cash and Cash Equivalents
41,233

 
(3,039
)
Cash and Cash Equivalents at Beginning of Year
36,667

 
27,044

Cash and Cash Equivalents at End of Period
$
77,900

 
$
24,005

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for:
 
 
 
Income taxes
$
1,145

 
$
936

Interest
$
5,329

 
$
7,492

Supplemental Disclosure of Non-Cash Transactions
 
 
 
Unpaid portion of additions to property and equipment
$
1,985

 
$
2,332


 
See notes to condensed consolidated financial statements.

5



ASGN INCORPORATED 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, 2017 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 ASGN Incorporated and its subsidiaries ("ASGN" or 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, 2017.

2. Accounting Standards Update

Recently Adopted Accounting Pronouncements

Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. This update outlined 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 required additional quantitative and qualitative disclosures, see "Note 3. Revenues."

Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), which, among other changes, provided new guidance on the presentation of unrealized gains and losses from equity securities. Under this standard, unrealized holding gains and losses for equity securities shall be included in earnings. The adoption of this standard did not have significant impact on the Company's consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. The Company is required to adopt this standard effective January 1, 2019. The Company commenced its assessment of the new standard in 2017, developed a project plan to guide the implementation, which it expects to complete in the fourth quarter of 2018, and is evaluating the impact the new standard will have on its consolidated financial statements.

3. Revenues

Adoption of ASC Topic 606, Revenue from Contracts with Customers ("ASC 606")

Effective January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, which allows companies to apply the new revenue standard to reporting periods beginning in the year the standard is first implemented, while prior periods continue to be reported in accordance with previous accounting guidance. Since the adoption of ASC 606 did not have a significant impact on the recognition of revenues, the Company did not have an opening retained earnings adjustment.

Revenue Recognition

Revenues are recognized as control of the promised service is transferred to customers, in an amount that reflects the consideration expected in exchange for the services. Revenues from contract assignments are recognized over time, based on hours worked by the Company’s contract professionals. The performance of the requested service over time is the single performance obligation for assignment revenues. Certain customers may receive discounts (e.g., volume discounts, rebates, prompt-pay discounts) and adjustments to the amounts billed. These discounts, rebates and adjustments are considered variable consideration. Volume discounts are the largest component of variable consideration and are estimated using the most likely amount method prescribed by ASC 606, contracts terms and estimates of revenue. Revenues are recognized net of variable consideration to the extent that it is probable that a significant reversal of revenues will not occur in subsequent periods. Payment terms vary and the time between invoicing and when payment is due is not significant. There are no financing components to the Company’s arrangements. There are no incremental costs to obtain contracts and costs to fulfill contracts are expensed as incurred.

The Company recognizes revenues on a gross basis as it acts as a principal in its transactions. The Company has direct contractual relationships with its customers, bears the risks and rewards of its arrangements, has the discretion to select the contract professionals and establish the price for the services to be provided. Additionally, the Company retains control over its contract professionals based on its contractual arrangements. The Company primarily provides services through its employees and to a lesser extent, through subcontractors; the related costs are included in costs of services. The Company includes billable expenses (out-of-pocket reimbursable expenses) in revenues and the associated expenses are included in costs of services.

6




Permanent placement revenues are recognized at a point in time when employment candidates begin permanent employment. Finding a qualified candidate that the client hires as a permanent employee is a single performance obligation for the Company’s permanent placement contracts. Revenues recognized from permanent placement services are based upon a percentage of the candidates' base salary. The Company records a liability for permanent placement candidates that do not remain with the client through the contingency period, which is typically 90 days or less ("fallouts"). When a fallout occurs the Company will generally find a replacement candidate at no additional cost to the client. Prior to the adoption of ASC 606, the estimate for permanent placement fallouts was recorded as accounts receivable allowances and effective January 1, 2018 this estimate is considered a contract liability and was $1.5 million.

See "Note 11. Segment Reporting," for assignment revenues and permanent placement revenues by segment.

Accounts Receivable Allowances

The Company estimates its credit losses (the inability of customers to make required payments) based on (i) a combination of past experience and current trends, (ii) consideration of the current aging of receivables and (iii) a specific review for potential bad debts. The resulting bad debt expense is included in selling, general and administrative ("SG&A") expenses. The allowance was $4.9 million at March 31, 2018 and $9.9 million at December 31, 2017. The December 31, 2017 allowance included estimates of $3.1 million for fallouts and other revenue adjustments, which prior to the adoption of ASC 606 were presented in the balance sheet as accounts receivable allowances. The presentation of these items in the condensed consolidated statement of cash flows for the current period have been conformed to their presentation in the balance sheet.

4. Goodwill and Identifiable Intangible Assets

The changes in the carrying amount of goodwill for three months ended March 31, 2018 and the year ended December 31, 2017 were as follows (in thousands):
 
Apex Segment
 
Oxford Segment
 
Total
Balance as of December 31, 2016
$
644,617

 
$
228,896

 
$
873,513

Stratacuity acquisition
17,467

 

 
17,467

Translation adjustment

 
3,115

 
3,115

Balance as of December 31, 2017
662,084

 
232,011

 
894,095

Translation adjustment

 
793

 
793

Balance as of March 31, 2018
$
662,084

 
$
232,804

 
$
894,888

 
Acquired intangible assets consisted of the following (in thousands):

 
 
 
March 31, 2018
 
December 31, 2017
 
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
 
$
202,800

 
$
123,802

 
$
78,998

 
$
202,588

 
$
119,272

 
$
83,316

Contractor relationships
2 - 5 years
 
71,200

 
61,191

 
10,009

 
71,121

 
59,174

 
11,947

Non-compete agreements
2 - 7 years
 
11,908

 
7,013

 
4,895

 
11,850

 
6,600

 
5,250

In-use software
6 years
 
18,900

 
13,603

 
5,297

 
18,900

 
12,816

 
6,084

Favorable contracts
5 years
 
900

 
706

 
194

 
900

 
673

 
227

 
 
 
305,708

 
206,315

 
99,393

 
305,359

 
198,535

 
106,824

Not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
 
245,977

 

 
245,977

 
245,942

 

 
245,942

Total
 
 
$
551,685

 
$
206,315

 
$
345,370

 
$
551,301

 
$
198,535

 
$
352,766




7



Estimated future amortization expense is as follows (in thousands): 
Remainder of 2018
$
22,765

2019
23,311

2020
15,633

2021
12,785

2022
8,060

Thereafter
16,839

 
$
99,393


5. Long-Term Debt

Long-term debt consisted of the following (in thousands):
 
March 31,
2018
 
December 31,
2017
$200 million revolving credit facility, due February 21, 2022
$

 
$

Term B loan facility, due June 5, 2022
578,000

 
588,000

 
578,000

 
588,000

Unamortized deferred loan costs
(12,071
)
 
(12,787
)
 
$
565,929

 
$
575,213


In 2015, the Company entered into a credit facility consisting of: (i) an $825.0 million term B loan facility and (ii) a revolving credit facility. Borrowings under the term B loan bear interest at LIBOR, plus 2.00 percent. 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 March 31, 2018, 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"), which steps down at regular intervals from 3.75 to 1.00 as of March 31, 2018, to 3.25 to 1.00 as of March 31, 2019 and thereafter. 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 March 31, 2018, the Company was in compliance with its debt covenants, its ratio of consolidated funded debt to consolidated EBITDA was 1.80 to 1.00, and it had $195.7 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 March 31, 2018 and 2017.

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 and differences between estimates and the 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 $2.1 million at March 31, 2018 and December 31, 2017, net of anticipated insurance and indemnification recoveries of $15.3 million and $12.7 million, at March 31, 2018 and December 31, 2017, respectively. We have unused stand-by letters of credit outstanding to secure obligations for workers’ compensation claims with various insurance carriers. The unused stand-by letters of credit at March 31, 2018 and December 31, 2017 were $4.3 million and $4.4 million, respectively.

The Company’s deferred compensation plan liability was $3.3 million at March 31, 2018, and was included in other long-term liabilities. The Company established a rabbi trust to fund the deferred compensation plan, see "Note 7. Fair Value Measurements."
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.

8



Legal Proceedings

The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. 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 March 31, 2018 was $565.9 million (net of $12.1 million of unamortized deferred loan costs, refer to "Note 5. Long-Term Debt"). The fair value of the term B loan was determined using Level 1 inputs (quoted prices in active markets for identical assets and liabilities) from the fair value hierarchy. The fair value of the term B loan was $582.3 million as of March 31, 2018.

The Company had investments, primarily mutual funds, of $3.3 million at March 31, 2018, held in a rabbi trust restricted to fund the Company's deferred compensation plan. The fair value of these investments was determined using Level 1 inputs from the fair value hierarchy. These assets are included in other non-current assets.

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). For the three months ended March 31, 2018 or 2017, no fair value adjustments were required for non-financial assets or liabilities.

8. Stockholders' Equity 

There were 129,514 shares issued upon the vesting of restricted stock units, exercise of stock options and stock purchases under the Employee Stock Purchase Plan during the three months ended March 31, 2018.

The accumulated other comprehensive loss balance at March 31, 2018 and December 31, 2017, and other comprehensive income during the three months ended March 31, 2018, consists of foreign currency translation adjustments.

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
 
 
March 31,
 
 
2018
 
2017
Weighted average number of common shares outstanding used to compute basic earnings per share
 
52,178

 
52,658

Dilutive effect of stock-based awards
 
653

 
591

Number of shares used to compute diluted earnings per share
 
52,831

 
53,249


The number of anti-dilutive share equivalents outstanding during the three months ended March 31, 2018 and 2017 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.

The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017. The TCJA reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. At March 31, 2018 and December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the TCJA; however, the Company made a reasonable estimate of the effects related to the disallowance of executive compensation and meals and entertainment and will continue to evaluate and analyze the impact of the legislation.

At December 31, 2017, the Company made a reasonable estimate of the transition tax liability related to its foreign subsidiaries. As of March 31, 2018, we have not changed the provisional estimates recognized in 2017. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis differences inherent in the entities, as these amounts continue to be indefinitely reinvested in foreign operations.


9



11. Segment Reporting 

The Company provides services through two operating segments, the Apex Segment and the Oxford Segment, with each addressing different sectors of the professional staffing and IT services market with distinct go-to-market strategies attuned to those sectors. Businesses in the Apex
Segment predominately serve markets with a large and local talent pool, and provide a full range of skills through a network of local offices where clients most value quality of talent relationship, speed, reliability and price. Businesses in the Oxford Segment predominately serve markets
with higher-end, specialized skills through a combination of national recruiting centers and local offices where clients most value the unique skill of the candidate and speed of response. The Apex Segment provides a broad spectrum of technical, digital, creative and scientific professionals for contract, contract-to-hire and permanent placement positions to Fortune 1000 and mid-market clients across the United States and Canada. The businesses in this segment include Apex Systems, Apex Life Sciences and Creative Circle. The Oxford Segment provides specialized staffing and permanent placement services in select skill and geographic markets. The businesses in this segment include Oxford, 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 segments’ internal financial reporting 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
 
March 31, 2018
 
Apex
 
Oxford
 
Corporate(1)
 
Total
Revenues
$
538,504

 
$
146,669

 
$

 
$
685,173

Gross profit
158,648

 
59,089

 

 
217,737

Operating income
56,264

 
9,826

 
(20,398
)
 
45,692

Amortization
6,546

 
1,055

 

 
7,601


 
Three Months Ended
 
March 31, 2017
 
Apex
 
Oxford
 
Corporate(1)
 
Total
Revenues
$
482,515

 
$
144,013

 
$

 
$
626,528

Gross profit
139,919

 
58,225

 

 
198,144

Operating income
46,893

 
8,663

 
(11,948
)
 
43,608

Amortization
7,527

 
937

 

 
8,464


(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. Corporate expenses for the three months ended March 31, 2018 included $9.8 million of one-time expenses related to the acquisition of ECS Federal, LLC, which closed on April 2, 2018, see "Note 12. Subsequent Events."

The following table presents our revenues disaggregated by type (in thousands):
 
Three Months Ended
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
Apex
 
Oxford
 
Total
 
Apex
 
Oxford
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Assignment
$
524,854

 
$
125,402

 
$
650,256

 
$
471,266

 
$
123,249

 
$
594,515

Permanent placement
13,650

 
21,267

 
34,917

 
11,249

 
20,764

 
32,013

 
$
538,504

 
$
146,669

 
$
685,173

 
$
482,515

 
$
144,013

 
$
626,528


10



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
 
 
March 31,
 
 
2018
 
%
 
2017
 
%
Revenues:
 
 
 
 
 
 
 
 
Domestic
 
$
647,267

 
94.5
%
 
$
596,301

 
95.2
%
Foreign
 
37,906

 
5.5
%
 
30,227

 
4.8
%
 
 
$
685,173

 
100.0
%
 
$
626,528

 
100.0
%

12. Subsequent Events

On April 2, 2018, the Company acquired all of the outstanding equity interests of ECS Federal, LLC (“ECS”), a Delaware limited liability company, for $775.0 million, resulting in ECS becoming a wholly-owned subsidiary of the Company. Prior to the acquisition, ECS was one of the largest privately-held government services contractors. ECS delivers cyber security, cloud, DevOps, IT modernization and advanced science and engineering solutions to government enterprises. Acquisition costs of approximately $9.8 million were expensed through March 31, 2018 and are included in SG&A expenses. The transaction will be accounted for as business combination under ASC 805 using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition date. Preliminary estimates indicate the fair value of the acquired goodwill and identifiable intangible assets are approximately $540 million and $185 million, respectively. The determination of the fair values of the liabilities assumed and assets acquired is incomplete due to the recent date of the acquisition. The preliminary estimates provided here are subject to adjustment during a one-year measurement period. The results of operations for this acquisition will be combined with those of the Company from the acquisition date forward and presented as a separate reporting segment.

On April 2, 2018, in connection with the acquisition of ECS, the Company amended its credit facility mainly to add a new $822.0 million tranche to the term B loan facility that matures on April 2, 2025. The amendment also provided for the ability to increase the loan facilities by an amount not to exceed the sum of (i) $300.0 million, (ii) the aggregate principal of voluntary prepayments of the term B loans and permanent reductions of the revolving commitments and (iii) additional amounts so long as the pro forma consolidated secured leverage ratio is no greater than 3.25 to 1.00. Proceeds from the $822.0 million term B tranche were used to acquire ECS and pay acquisition-related expenses and costs of the amendment to the credit facility.




11



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 integration of our enterprise-wide information systems; (7) our ability to manage our litigation matters; (8) the successful integration of our acquired subsidiaries; and the factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 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

We provide services through two operating segments, our Apex Segment and our Oxford Segment, with each addressing different sectors of the professional staffing and IT services market with distinct go-to-market strategies attuned to those sectors. Businesses in the Apex Segment predominately serve markets with a large and local talent pool, and provide a full range of skills through a network of local offices where clients most value quality of talent relationship, speed, reliability and price. Businesses in the Oxford Segment predominately serve markets with higher-end, specialized skills through a combination of national recruiting centers and local offices where clients most value the unique skill of the candidate and speed of response. The Apex Segment provides a broad spectrum of technical, digital, creative and scientific professionals for contract, contract-to-hire and permanent placement positions to Fortune 1000 and mid-market clients across the United States and Canada. The businesses in this segment include Apex Systems, Apex Life Sciences and Creative Circle. The Oxford Segment provides specialized staffing and permanent placement services in select skill and geographic markets. The businesses in this segment include Oxford, CyberCoders and Life Sciences Europe.

12



Results of Operations

CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2018
COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2017
(Dollars in millions)

 
 
Three Months Ended March 31,
Year-Over-Year
Growth Rates
 
 
 
2018
 
2017
 
 
Revenues by segment:
 
 
 
 
 
 
 
Apex:
 
 
 
 
 
 
 
Assignment
 
$
524.9

 
$
471.3

 
11.4
%
 
Permanent placement
 
13.6

 
11.2

 
21.3
%
 
 
 
538.5

 
482.5

 
11.6
%
 
Oxford:
 
 
 
 
 
 
 
Assignment
 
125.4

 
123.2

 
1.7
%
 
Permanent placement
 
21.3

 
20.8

 
2.4
%
 
 
 
146.7

 
144.0

 
1.8
%
 
Consolidated:
 
 
 
 
 
 
 
Assignment
 
650.3

 
594.5

 
9.4
%
 
Permanent placement
 
34.9

 
32.0

 
9.1
%
 
 
 
$
685.2

 
$
626.5

 
9.4
%
 
Percentage of total revenues:
 
 
 
 
 
 
 
Apex
 
78.6
%

77.0
%
 
 
 
Oxford
 
21.4
%

23.0
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
94.9
%

94.9
%
 
 
 
Permanent placement
 
5.1
%

5.1
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
94.5
%

95.2
%
 
 
 
Foreign
 
5.5
%

4.8
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 


Revenues increased $58.7 million, or 9.4 percent year-over-year. Assignment revenues were $650.3 million, up 9.4 percent year-over-year, and permanent placement revenues, comprised of direct hire and conversion fees, were $34.9 million, up 9.1 percent year-over-year. Permanent placement revenues accounted for 5.1 percent of total revenues for the three months ended March 31, 2018 and 2017.

Revenues from the Apex Segment, which accounted for 78.6 percent of consolidated revenues for the quarter, were $538.5 million, up 11.6 percent year-over-year. Assignment revenues were up 11.4 percent year-over-year mainly related to growth in IT services, which accounted for approximately 74.9 percent of the segment's revenues. Growth in IT services reflected continued growth across all its industry verticals with double-digit revenue growth in aerospace and defense, financial services, consumer industrial, telecommunications, and technology industry accounts and double-digit growth in both retail and top accounts, with retail accounts growing slightly faster than top accounts during the quarter. Creative/digital services revenues, which accounted for 17.4 percent of the segment’s revenues, were up 7.9 percent year-over-year and life sciences revenues, which included $5.3 million in revenues from Stratacuity, which was acquired in August 2017, were up 11.5 percent year-over-year.

Revenues from the Oxford Segment, which accounted for 21.4 percent of consolidated revenues, were $146.7 million, up 1.8 percent year-over-year. Assignment revenues were $125.4 million for the current quarter, up from $123.2 million in the first quarter of last year. Permanent placement revenues were $21.3 million (14.5 percent of the segment's revenues), up from $20.8 million (14.4 percent of the segment's revenues) in the first quarter of last year.








13



Gross Profit and Gross Margins
 
 
Three Months Ended March 31,
 
 
Year-Over-Year
Growth Rates
 
 
 
2018
 
2017
 
 
 
Gross profit:
 
 
 
 
 
 
 
 
Apex
 
$
158.6

 
$
139.9

 
 
13.4
%
 
Oxford
 
59.1

 
58.2

 
 
1.5
%
 
Consolidated
 
$
217.7

 
$
198.1

 
 
9.9
%
 
Gross margin:
 
 
 
 
 
 
 
 
Apex
 
29.5
%
 
29.0
%
 
 
 
 
Oxford
 
40.3
%
 
40.4
%
 
 
 
 
Consolidated
 
31.8
%
 
31.6
%
 
 
 
 


Gross profit for the current quarter was $217.7 million, up 9.9 percent year-over-year. Gross margin was 31.8 percent, an expansion of 20 basis points year-over-year. This expansion related to a reduction in state unemployment tax rates and a slightly higher mix of higher-margin revenues.

The Apex Segment accounted for 72.9 percent of consolidated gross profit for the current quarter. Its gross profit was $158.6 million, up 13.4 percent year-over-year. Gross margin for the segment was 29.5 percent, an expansion of 50 basis points year-over-year related to lower state unemployment tax rates and a higher mix of higher-margin business, partially driven by higher growth in its retail accounts relative to top accounts.

The Oxford Segment accounted for 27.1 percent of consolidated gross profit for the current quarter. Its gross profit was $59.1 million, up 1.5 percent year-over-year. Gross margin for the segment was 40.3 percent, a compression of 10 basis points year-over-year primarily due to business mix within the segment.

Selling, General and Administrative Expenses
 
Selling, general and administrative ("SG&A") expenses were $164.4 million (24.0 percent of revenues) for the current quarter, up from $146.1 million (23.3 percent of revenues) in the first quarter of last year. SG&A expenses for the current quarter included $9.8 million in acquisition, integration and strategic planning expenses related to the ECS acquisition, compared with $0.9 million in acquisition, integration and strategic planning expenses in the same period of last year. Excluding the acquisition, integration and strategic planning expenses from both periods, SG&A expenses were $154.6 million (22.6 percent of revenues) in the current quarter, compared with $145.2 million (23.2 percent of revenues) in the first quarter of last year.

Amortization of Intangible Assets

Amortization of intangible assets was $7.6 million for the current quarter, compared with $8.5 million in the first quarter 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 $6.5 million for the current quarter, compared with $8.5 million in the first quarter 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 in 2017. Interest expense for the current quarter was comprised of (i) interest on the credit facility of $5.3 million, (ii) amortization of deferred loan costs of $0.9 million and (iii) $0.3 million of costs related to the amendment to our credit facility for the acquisition of ECS. Interest expense in the first quarter of last year was comprised of (i) interest on the credit facility of $5.6 million, (ii) $2.0 million of costs related to the amendment to our credit facility in February 2017 and (iii) amortization of deferred loan costs of $0.9 million.

Provision for Income Taxes

The provision for income taxes was $9.9 million (an effective tax rate of 25.3 percent) for the current quarter, compared with $12.7 million in the same first quarter of last year (an effective tax rate of 36.2 percent). The year-over-year reduction in the effective tax rate reflected the lower U.S. federal corporate tax rate related to the recently enacted Tax Cuts and Jobs Act. During the three months ended March 31, 2018 and 2017 income tax expense was reduced by $0.5 million and $1.1 million, respectively, related to excess tax benefits on stock-based compensation.

Net Income

Net income was $29.1 million for the current quarter, up from $22.4 million in the first quarter of last year.


14



Liquidity and Capital Resources
 
Our working capital (current assets less current liabilities) at March 31, 2018 was $369.5 million and our cash and cash equivalents were $77.9 million, of which $19.9 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 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 $54.7 million for the current quarter, compared with $43.8 million in the first quarter of last year. Net cash provided by operating activities before changes in operating assets and liabilities, was $50.9 million for the current quarter, up from $48.9 million in the first quarter of last year. Changes in operating assets and liabilities (mainly changes in working capital) resulted in cash generation of $3.8 million for the current quarter, compared with a use of $5.1 million in cash in the first quarter of last year.

Net cash used in investing activities was $6.2 million for the current quarter, compared with $6.8 million in the first quarter of last year. Net cash used in investing activities was primarily comprised of cash used to purchase property and equipment.

Net cash used in financing activities was $7.7 million for the current quarter, compared with $40.2 million in the first quarter of last year. Net cash used in financing activities for the current quarter consisted primarily of $10.0 million in principal payments of long-term debt. Net cash used in financing activities in the first quarter of last year consisted primarily of $26.0 million in principal payments of long-term debt and $12.1 million used for repurchases of our common stock.

At March 31, 2018, borrowings under our credit facility totaled $578.0 million (refer to "Note 5. Long-Term Debt"), down from $588.0 at December 31, 2017. Under the 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 March 31, 2018, 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 3.75 to 1.00 as of March 31, 2018, 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 March 31, 2018, the Company was in compliance with all of its debt covenants, its ratio of consolidated funded debt to consolidated EBITDA was 1.80 to 1.00 and the Company had $195.7 million available borrowing capacity under its revolving credit facility.

On April 2, 2018, in conjunction with the acquisition of ECS (see below), the Company amended its credit facility to, among other things, add a new $822.0 million term B loan tranche that matures on April 2, 2025. The amended credit facility also provided the ability to increase the loan facilities by an amount not to exceed the sum of (i) $300.0 million, (ii) the aggregate principal of voluntary prepayments of the term B loans and permanent reductions of the revolving commitments and (iii) additional amounts so long as the pro forma consolidated secured leverage ratio is no greater than 3.25 to 1.00.

Proceeds from the $822.0 million term B loan were used to purchase ECS and to fund the acquisition-related expenses and the costs of amending the credit facility. Upon completion of the amendment, outstanding borrowings under the credit facility totaled $1.4 billion, comprised of (i) $1.4 billion under the two term B loans (including $822.0 million under the new term B loan) and (ii) no borrowings under the $200.0 million revolving credit facility. See "Note 12. Subsequent Events."

Acquisition of ECS Federal, LLC

On April 2, 2018, the Company acquired all of the outstanding equity interests of ECS Federal, LLC (“ECS”), a Delaware limited liability company, for $775.0 million, resulting in ECS becoming a wholly-owned subsidiary of the Company. Prior to the acquisition, ECS was one of the largest privately-held government services contractors. ECS delivers cyber security, cloud, DevOps, IT modernization and advanced science and engineering solutions to government enterprises. See "Note 12. Subsequent Events."

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
 
The Company's accounting policies were revised in connection with the implementation of ASC 606. Refer to "Note 2. Accounting Standards Update" in Part I, Item 1, of this Quarterly Report on Form 10-Q. There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2018 compared with those disclosed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2017 10-K.


15



Commitments

We have not made any material changes to the significant commitments or contractual obligations that were disclosed in our 2017 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 2017 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 $5.8 million based on $578.0 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 March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

16



 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 2017 10-K.

Item 2 - Unregistered Sales of Securities and Use of Proceeds

None.

Item 3 - Defaults Upon Senior Notes

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None.


17



Item 6 - Exhibits

INDEX TO EXHIBITS
Number
 
Footnote
 
Description
 
(1)
 
 
(2)
 
 
(3)
 
4.1
 
(4)
 
Specimen Common Stock Certificate
 
*†
 
 
*
 
 
*
 
 
*
 
 
*
 
 
*
 
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.
Portions of this exhibit have been omitted pursuant to a confidential treatment request submitted separately to the SEC pursuant to Rule 246-2 under the Exchange Act.
(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 March 16, 2018.
(3)
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed with the SEC on April 2, 2018.
(4)
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.
 
 

 

18




 
 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.
 
 
ASGN Incorporated
 
 
 
Date: May 9, 2018
By:
/s/ Edward L. Pierce
 
 
Edward L. Pierce
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 


 


19