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.
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
|
|
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 h
as entered into various non-cancelable operating leases, primarily related to its facilities and certain office equipment used in the ordinary course of business. The Company leases
two
properties owned by related parties. Rent expense for these two properties was
$0.3 million
for the
three months ended 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.
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.
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, 20
17
|
|
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, 20
17
|
|
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
|
|
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.