ASGN Incorporated Reports Third Quarter 2018 Results

Business Wire 24-Oct-2018 4:15 PM

Financial results above previously-announced estimates

ASGN Incorporated (NYSE:ASGN), a leading provider of IT and professional services in the technology, creative/digital, engineering and life sciences fields across commercial and government sectors, today reported financial results for the quarter ended September 30, 2018.

Highlights

• Revenues were $906.4 million, up 35.9 percent (10.5 percent on a pro forma basis) over the third quarter of 2017. Pro forma assumes the acquisition of ECS occurred at the beginning of 2017.
• Net income was $49.2 million ($0.93 per diluted share), up from $34.9 million ($0.66 per diluted share) in the third quarter of 2017.
• Adjusted Net Income (a non-GAAP measure) was $68.7 million ($1.30 per diluted share), up from $44.1 million ($0.83 per diluted share) in the third quarter of 2017.
• Adjusted EBITDA (a non-GAAP measure) was $112.9 million (12.4 percent of revenues), up from $83.4 million (12.5 percent of revenues) in the third quarter of 2017.
• Cash flows from operating activities were $92.1 million, up from $54.6 million in the third quarter of 2017.
• Free cash flow (a non-GAAP measure) was $84.6 million, or 9.3 percent of revenues.
• During the quarter, paid down $88.0 million of debt and the leverage ratio (a non-GAAP measure) was 2.89 to 1 at September 30, 2018, down from 3.2 to 1 at June 30, 2018. Since the closing of the ECS acquisition on April 2, 2018 through September 30, 2018, repaid $221.0 million of debt.
• During the quarter, ECS secured $306.4 million in new awards, which are included in its $1.5 billion contract backlog as of September 30, 2018.
• Book-to-bill ratio (a non-GAAP measure) for ECS for the quarter was 1.7 to 1. Book-to-bill ratio was calculated as the sum of the change in total contract backlog during the quarter plus revenues for the quarter, divided by revenues for the quarter.

Management Commentary

"The U.S. economy continues to perform well and our commercial and governmental clients are aggressively investing in their businesses", commented Peter Dameris, CEO of ASGN. Against this strong economic back drop, along with a continued increase in the adoption of our "shared resource" delivery model, we were able to accelerate our growth rate and expect to continue to be able to deliver above-market growth in the quarters ahead. We believe that we are well positioned to continue to service our customers' IT needs as technology rapidly evolves and is adopted."

Third Quarter 2018 Financial Results

Revenues were $906.4 million, up 35.9 percent year-over-year on a reported basis and 10.5 percent on a pro forma basis, which assumes the acquisition of ECS occurred at the beginning of 2017. On a "Same Billable Days" and "Constant Currency Basis" (both non-GAAP measures), the pro forma year-over-year growth rate would have been approximately 40 basis points higher.

Assignment revenues for our Apex and Oxford segments totaled $705.6 million, up 11.2 percent year-over-year and permanent placement revenues were $36.8 million (4.1 percent of revenues) compared with $32.7 million (4.9 percent of revenues) in the third quarter of 2017. Revenues for the quarter included $164.0 million in revenues from ECS, which was acquired on April 2, 2018. ECS is reported as a separate operating segment.

Our largest segment, Apex, accounted for 65.1 percent of total revenues and grew 14.0 percent year-over-year. Our Oxford Segment accounted for 16.8 percent of total revenues and was up 2.1 percent year-over-year. Our ECS Segment accounted for 18.1 percent of total revenues and was up 7.1 percent year-over-year on a pro forma basis.

Gross profit was $270.1 million, up $51.8 million, or 23.8 percent year-over-year. Gross margin was 29.8 percent, compared with 32.7 percent in the third quarter of 2017 on a reported basis and 30.0 percent on a pro forma basis. The compression in reported gross margin was primarily due to the inclusion of ECS, which has lower margins than our other segments. On a pro forma basis, the gross margin compression is mainly related to changes in business mix.

Selling, general and administrative ("SG&A") expenses were $177.3 million (19.6 percent of revenues), compared with $149.2 million (22.4 percent of revenues) in the third quarter of 2017. SG&A expenses for the quarter included acquisition, integration and strategic planning expenses of $1.6 million, compared with $1.5 million in the third quarter of 2017.

Amortization of intangible assets was $18.5 million, up from $8.2 million in the third quarter of 2017. The increase is related to the intangible assets from the ECS acquisition.

Interest expense was $14.6 million compared with $7.1 million in the third quarter of 2017. Interest expense for the quarter was comprised of (i) $13.2 million of interest on the credit facility and (ii) $1.4 million of amortization of deferred loan costs. Interest expense was $6.0 million lower than the preceding quarter as a result of (i) a one-time expense of $5.8 million in the second quarter of 2018 related to the amendment of the credit facility effective April 2, 2018 and (ii) lower average outstanding borrowings, partially offset by a higher average interest rate.

The effective tax rate for the quarter was 17.5 percent, down from 25.5 percent in the second quarter of 2018. The sequential improvement in the rate was mainly attributable to: (i) changes in our provisional estimates for the transitional tax on deemed foreign dividends and the tax treatment of executive compensation based on recently issued IRS regulations, (ii) higher excess tax benefits from stock-based compensation and higher employment tax credits and (iii) a one-time benefit of approximately $1.8 million resulting from the acceleration into 2017 of the tax deduction for certain deferred loan costs. For the fourth quarter of 2018, we estimate the effective tax rate (before excess tax benefits on stock-based compensation) to be approximately 26.0 percent.

Net income was $49.2 million ($0.93 per diluted share), up from $34.9 million ($0.66 per diluted share) in the third quarter of 2017. Adjusted Net Income (a non-GAAP measure) was $68.7 million ($1.30 per diluted share), up from $44.1 million ($0.83 per diluted share) in the third quarter of 2017. Adjusted EBITDA (a non-GAAP measure) was $112.9 million (12.4 percent of revenues), up from $83.4 million (12.5 percent of revenues) in the third quarter of 2017. Reconciliations between GAAP and non-GAAP measures are included in this release.

Cash flows from operating activities were $92.1 million and free cash flow (a non-GAAP measure) was $84.6 million. At September 30, 2018, our leverage ratio (a non-GAAP measure) was 2.89 to 1, down from 3.2 to 1 at June 30, 2018.

Fourth Quarter 2018 Financial Estimates

ASGN is providing financial estimates for the fourth quarter of 2018. These estimates do not include any acquisition, integration or strategic planning expenses and assume no deterioration in the markets that ASGN serves. These estimates also assume no significant change in foreign exchange rates. Reconciliations of estimated net income to the estimated non-GAAP measures are included in this release.

• Revenues of $905.0 million to $915.0 million
• Gross margin of 29.5 percent to 30.0 percent
• SG&A expenses (excludes amortization of intangible assets) of $178.7 million to $181.2 million (includes $7.0 million in depreciation and $9.1 million in stock-based compensation expense)
• Amortization of intangible assets of $18.6 million
• Interest expense of $14.4 million
• Effective tax rate of 26.0 percent (before any excess tax benefits related to stock-based compensation)
• Net income of $40.9 million to $44.6 million
• Earnings per diluted share of $0.77 to $0.84
• Diluted shares outstanding of 53.3 million
• Adjusted EBITDA⁽¹⁾ (a non-GAAP measure) of $107.0 million to $112.0 million
• Adjusted Net Income (a non-GAAP measure) of $59.2 million to $62.9 million
• Adjusted Net Income per diluted share⁽²⁾ (a non-GAAP measure) of $1.11 to $1.18

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Our financial estimates above are based on our estimate of "Billable Days" which are Business Days (calendar days for the period less weekends and holidays) adjusted for other factors, such as the day of the week a holiday occurs, additional time taken off around holidays, year-end client furloughs and inclement weather. For the fourth quarter, we estimate Billable Days of 60.2 (for our Apex and Oxford segments), which is 0.2 more than the fourth quarter of 2017 and 2.2 fewer than the third quarter of 2018. Each Billable Day is approximately $11.8 million in revenues. On a pro forma basis, which assumes the acquisition of ECS occurred at the beginning of 2017, our revenue estimates imply year-over-year growth of 8.8 to 10.0 percent.

Conference Call

ASGN will hold a conference call today at 5:00 p.m. EDT to review its financial results for the third quarter. The dial-in number is 800-230-1059 (+1-612-234-9959 for callers outside the United States) and the conference ID number is 455205. Participants should dial in ten minutes before the call. The prepared remarks, supplemental materials, and the webcast for this call can be accessed at asgn.com.

A replay of the conference call will be available beginning Wednesday, October 24, 2018 at 7:00 p.m. EDT until midnight on Wednesday, November 7, 2018. The access number for the replay is 800-475-6701 (+1-320-365-3844 outside the United States) and the conference ID number is 455205.

About ASGN Incorporated

ASGN Incorporated (NYSE:ASGN) is a leading provider of IT and professional services in the technology, creative/digital, engineering and life sciences fields across commercial and government sectors. Operating through its Apex, Oxford and ECS segments, ASGN helps leading corporate enterprises and government organizations develop, implement and operate critical IT and business solutions through its integrated offering of professional staffing and IT solutions.

Our mission as an organization is to be the most trusted partner for companies seeking highly skilled human capital and integrated solutions to fulfill their strategic and operational needs. ASGN was founded in 1985 and is headquartered in Calabasas, California. For more information, visit us at asgn.com.

Reasons for Presentation of Non-GAAP Financial Measures

Statements in this release and the accompanying financial information include non-GAAP financial measures. Such information is provided as additional information, not as an alternative to our consolidated financial statements presented in accordance with accounting principles generally accepted in the United States ("GAAP"), and is intended to enhance an overall understanding of our current financial performance. These terms might not be calculated in the same manner as, and thus might not be comparable to, similarly titled measures reported by other companies. The financial statement tables that accompany this press release include a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. Below is a discussion of our non-GAAP financial measures.

Pro forma revenues and gross profit by segment are presented to provide a more consistent basis for comparison between quarters. Pro forma was prepared as if the acquisition of ECS occurred at the beginning of 2017. Although the pro forma segment data are considered non-GAAP measures, they were calculated in the same manner as the consolidated pro forma data, which are GAAP measures.

EBITDA (earnings before interest, taxes, depreciation and amortization of intangible assets) and Adjusted EBITDA (EBITDA plus stock-based compensation expense and, as applicable, acquisition, integration and strategic planning expenses, write-off of loan costs and impairment charges) are used to determine a portion of the compensation for some of our executives and employees. Stock-based compensation expense is added to arrive at Adjusted EBITDA because it is a non-cash expense. Write-off of loan costs, acquisition, integration and strategic planning expenses and impairment charges are added, as applicable, to arrive at Adjusted EBITDA as they are not indicative of the performance of our core business on an ongoing basis.

Non-GAAP net income (net income, less income (loss) from discontinued operations, net of tax, plus, as applicable, write-off of loan costs, credit facility amendment expenses, acquisition, integration and strategic planning expenses, accretion of fair value discount on contingent consideration, impairment charges, and the tax effect of these items) provides a method for assessing our operating results in a manner that is focused on the performance of our core business on an ongoing basis. Adjusted Net Income (Non-GAAP net income plus amortization of intangible assets, less income taxes on amortization for financial reporting purposes not deductible for income tax purposes) provides a method for assessing our operating results in a manner that is focused on the performance of our core business on an ongoing basis, adjusted for some of the cash flows associated with amortization of intangible assets to more fully present the performance of our acquisitions.

Constant currency information removes the effect of year-over-year changes in foreign currency exchange rates. Constant currency information is calculated using the foreign currency exchange rates from the same period in the prior year.

Billable Days are Business Days (calendar days for the period less weekends and holidays) adjusted for other factors, such as the day of the week a holiday occurs, additional time taken off around holidays, year-end client furloughs and inclement weather. In order to remove the fluctuations caused by comparable periods having different billable days, revenues on a Same Billable Days basis are calculated by taking the current period average revenue per billable day, multiplied by the number of billable days from the same period in the prior year.

The term Same Billable Days and Constant Currency basis means that the impact of year-over-year changes in foreign currency exchange rates has been removed from the Same Billable Days basis calculation.

Free cash flow is defined as net cash provided by (used in) operating activities, less capital expenditures. Management believes this provides useful information to investors about the amount of cash generated by the business that can be used for strategic opportunities. Our leverage ratio provides information about our compliance with loan covenants and is calculated in accordance with our credit agreement, as filed with the Securities and Exchange Commission ("SEC"), by dividing our total indebtedness by trailing 12 months Adjusted EBITDA.

Reasons for Presentation of Operating Metrics and Supplemental Information

Operating metrics are intended to enhance the overall understanding of our business and our current financial performance. These operating metrics might not be calculated in the same manner as, and thus might not be comparable to, similarly titled metrics reported by other companies. Contract backlog for our ECS segment represents the estimated amount of future revenues to be recognized under negotiated contracts and task orders. Book-to-bill ratio for our ECS segment is calculated as the sum of the change in total backlog during the quarter plus revenues for the quarter, divided by revenues for the quarter. The operating metrics for the Apex and Oxford segments presented on this release are calculated as follows: average number of staffing consultants are full time equivalent staffing consultant headcount in the quarter; average number of contract professionals and average number of customers are the number of contract professionals employed each week and the number of customers served each week, averaged for the quarter, respectively (average is weighted by total number of hours billed per week); top 10 customers as a percentage of revenue are the 10 largest clients defined by the revenue generated in the quarter, divided by total revenues in the quarter; gross profit per staffing consultant is gross profit for the quarter divided by the average number of staffing consultants; average bill rate is total assignment revenue client billings in the quarter divided by total hours billed in the quarter.

Safe Harbor

Certain statements made in this news release are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a high degree of risk and uncertainty. Forward-looking statements include statements regarding our anticipated financial and operating performance.

All statements in this release, other than those setting forth strictly historical information, are forward-looking statements. Forward-looking statements are not guarantees of future performance, and actual results might differ materially. In particular, we make no assurances that the estimates of revenues, gross margin, SG&A, amortization, effective tax rate, net income, diluted shares outstanding, contract backlog, book-to-bill ratio, Adjusted EBITDA, Adjusted Net Income, and related per share amounts (as applicable) set forth above will be achieved. Factors that could cause or contribute to such differences include actual demand for our services, our ability to attract, train and retain qualified staffing consultants, our ability to remain competitive in obtaining and retaining clients, the availability of qualified contract professionals, management of our growth, continued performance and improvement of our enterprise-wide information systems, our ability to manage our litigation matters, the successful integration of our acquired subsidiaries, and other risks detailed from time to time in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 1, 2018 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, as filed with the SEC on May 10, 2018 and August 9, 2018, respectively. We specifically disclaim any intention or duty to update any forward-looking statements contained in this news release.

(1) Investing and financing activities in 2018 included the ECS acquisition and related financing.

(1) Average number of contract professionals placed on assignment each week that are considered our employees; this number does not include employees of our subcontractors.

Information for the periods prior to the ECS acquisition date of April 2, 2018 is presented on a pro forma basis.

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