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, 2018
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, 2018
("2018 10-K").
2. Leases
Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02
Leases
(Accounting Standards Codification Topic "ASC" 842)
,
which requires lessees to recognize most operating leases on the balance sheet as a right of use ("ROU") asset and lease liability. The Company adopted this standard using the optional transition method measuring and recognizing the ROU asset and lease liability from operating leases on the condensed consolidated balance sheet without comparative period information or disclosures. The adoption of the standard did not have an effect on the Company’s results of operations, stockholders' equity or cash flows.
The Company elected the package of practical expedients which specifies entities do not need to reassess expired or existing contracts as of the adoption date for the following items: (i) determination of whether a contract is or contains a lease, (ii) revising classification of leases and (iii) assessment of initial direct costs. For existing or expired contracts as of the adoption date, the determinations made for these items under the previous accounting standard (ASC 840) were retained at transition, as allowed by this package of practical expedients.
The Company has operating leases for corporate offices, branch offices and data centers. At the transition date, the operating lease ROU asset and operating lease liability were
$93.9 million
and
$99.4 million
, respectively. The difference between the operating lease ROU asset and operating lease liability is due to pre-existing deferred rent and prepaid rent balances that were reclassified as a component of the ROU asset at the transition date.
The Company's leases have remaining lease terms of
one month
to
eight years
. At the inception of a contract, the Company determines if the contract contains a lease. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date, based on the present value of the future minimum lease payments. Since most of the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate (“IBR”) in determining the present value of lease payments. In determining the IBR, the Company considers its credit rating and the current market interest rates. The IBR approximates the interest rate the Company would pay on collateralized debt with similar terms and payments as the lease agreements and in a similar economic environment where the leased assets are located. Leases with an initial term of 12 months or less ("short-term leases") are not recorded on the balance sheet. The Company does not have finance leases.
Lease expense is recognized on a straight-line basis over the lease term and is primarily included in selling, general and administrative expenses. Some lease agreements offer renewal options which are assessed against relevant economic factors to determine whether it is reasonably certain that these renewal options will be exercised. As a result of this assessment, for most leases, renewal options were excluded from the minimum lease payments when calculating the operating lease ROU assets and operating lease liabilities, as the Company does not consider the exercise of such options to be reasonably certain.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all underlying asset classes. Some leases require variable payments for common area maintenance, property taxes, parking, insurance and other variable costs. The variable portion of lease payments is not included in operating lease ROU assets or operating lease liabilities. Variable lease costs are expensed when incurred. Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining term of the lease.
Components of lease expense for the
three months ended
March 31, 2019
(in millions):
|
|
|
|
|
|
Operating lease expense
|
|
$
|
7.9
|
|
Short-term lease expense
|
|
0.4
|
|
Variable lease expense
|
|
1.1
|
|
Total lease expense
|
|
$
|
9.4
|
|
Total rent expense for the
three months ended
March 31, 2018
was
$6.9 million
. The Company leases
two
properties owned indirectly by certain board members and an executive of the Company. Rent expense for these two properties was
$0.3 million
for the
three months ended
March 31, 2019
and 2018.
Supplemental cash flow information related to leases for the
three months ended
March 31, 2019
(in millions):
|
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
$
|
7.9
|
|
Operating lease right of use assets obtained in exchange for new operating lease liabilities
|
|
$
|
4.4
|
|
Weighted-average remaining lease term of operating leases
|
|
4.3 years
|
|
Weighted-average discount rate of operating leases
|
|
4.6
|
%
|
Maturities of operating lease liabilities as of
March 31, 2019
(in millions):
|
|
|
|
|
|
Remainder of 2019
|
|
$
|
23.6
|
|
2020
|
|
26.1
|
|
2021
|
|
21.8
|
|
2022
|
|
16.4
|
|
2023
|
|
11.1
|
|
Thereafter
|
|
8.6
|
|
Total future minimum lease payments
|
|
107.6
|
|
Less imputed interest
|
|
(10.7
|
)
|
Total operating lease liabilities
|
|
$
|
96.9
|
|
As of
March 31, 2019
, we have additional operating leases that have not yet commenced with total future lease payments of approximately
$1.5 million
. These operating leases will commence in 2019 with lease terms of approximately
5 years
.
3. Acquisitions
Assets and liabilities of all acquired companies are recorded at their estimated fair values at the dates of acquisition. The fair value assigned to identifiable intangible assets was primarily determined using a discounted cash flow method (a non-recurring fair value measurement based on Level 3 inputs). Goodwill represents the acquired assembled workforce, potential new customers and future cash flows after the acquisition.
DHA Acquisition
On
January 25, 2019
, the Company acquired all of the outstanding shares of
DHA Group, Inc.
("DHA"),
headquartered in Washington, D.C.
, for
$48.8 million
, which included
$2.8 million
for excess working capital. DHA is a provider of IT services mainly to the FBI as well as other federal customers. The purchase accounting for the acquisition of DHA remains incomplete and any measurement period adjustments will be recognized prospectively over a period not to exceed 12 months from the date of acquisition. The results of operations for this acquisition have been combined with those of the Company from the acquisition date and are included within the ECS Segment (see Note
10. Segment Reporting
).
ECS Acquisition
On
April 2, 2018
, the Company acquired all of the outstanding equity interests of
ECS Federal, LLC
("ECS") for
$775.0 million
. ECS, which is
headquartered in Fairfax, Virginia
, is a leading provider of government IT services and solutions.
The ECS acquisition allows the Company to compete in the Federal IT and professional services sector.
The purchase accounting for this acquisition was finalized as of December 31, 2018. Goodwill related to this acquisition totaled
$528.2 million
, of which
$514.2 million
is deductible for income tax purposes. Identifiable intangible assets related to this acquisition totaled
$195.0 million
. The weighted-average amortization period for identifiable intangible assets, excluding trademark, is
11 years
. The results of operations for this acquisition have been combined with those of the Company from the acquisition date and are included within the ECS Segment.
The summary below (in millions, except for per share data) presents pro forma unaudited condensed consolidated results of operations for the three months ended March 31, 2018 as if the acquisition of ECS by the Company and the acquisition of a business by ECS in April 2017, both occurred on January 1, 2017. The pro forma unaudited condensed consolidated results give effect to, among other things: (i) amortization of intangible assets, (ii) stock-based compensation expense and the related dilution for restricted stock units granted to ECS employees, (iii) interest expense on acquisition-related debt and (iv) the exclusion of nonrecurring expenses incurred by ECS prior to its acquisition by the Company for ECS’ acquisition-related activities and costs incurred in the sale of ECS to the Company. The pro forma results do not include pre-acquisition results of DHA due to its size. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the date indicated, nor are they necessarily indicative of future operating results.
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
834.2
|
|
Income from continuing operations
|
|
$
|
34.6
|
|
Net income
|
|
$
|
34.5
|
|
|
|
|
Earnings per share:
|
|
|
Basic
|
|
$
|
0.66
|
|
Diluted
|
|
$
|
0.65
|
|
|
|
|
Number of shares and share equivalents used to calculate earnings per share:
|
|
|
Basic
|
|
52.2
|
|
Diluted
|
|
52.9
|
|
4. Goodwill and Identifiable Intangible Assets
The changes in the carrying amount of goodwill for the
three months ended
March 31, 2019
and the year ended
December 31, 2018
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apex Segment
|
|
Oxford Segment
|
|
ECS Segment
|
|
Total
|
Balance as of December 31, 2017
|
$
|
662.1
|
|
|
$
|
232.0
|
|
|
$
|
—
|
|
|
$
|
894.1
|
|
ECS acquisition
|
—
|
|
|
—
|
|
|
528.2
|
|
|
528.2
|
|
Translation adjustment
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
Balance as of December 31, 2018
|
662.1
|
|
|
230.8
|
|
|
528.2
|
|
|
1,421.1
|
|
DHA acquisition
|
—
|
|
|
—
|
|
|
24.8
|
|
|
24.8
|
|
Translation adjustment
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
Balance as of March 31, 2019
|
$
|
662.1
|
|
|
$
|
230.4
|
|
|
$
|
553.0
|
|
|
$
|
1,445.5
|
|
Acquired intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Estimated Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and contractual relationships
|
2 - 12.75 years
|
|
$
|
362.4
|
|
|
$
|
153.8
|
|
|
$
|
208.6
|
|
|
$
|
346.9
|
|
|
$
|
145.4
|
|
|
$
|
201.5
|
|
Contractor relationships
|
2 - 5 years
|
|
71.1
|
|
|
69.0
|
|
|
2.1
|
|
|
71.1
|
|
|
67.1
|
|
|
4.0
|
|
Backlog
|
1 - 2.75 years
|
|
25.0
|
|
|
19.2
|
|
|
5.8
|
|
|
23.1
|
|
|
17.7
|
|
|
5.4
|
|
Non-compete agreements
|
2 - 7 years
|
|
23.6
|
|
|
10.9
|
|
|
12.7
|
|
|
22.1
|
|
|
9.9
|
|
|
12.2
|
|
In-use software
|
6 years
|
|
18.9
|
|
|
16.8
|
|
|
2.1
|
|
|
18.9
|
|
|
16.0
|
|
|
2.9
|
|
Favorable contracts
|
5 years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
|
0.9
|
|
|
0.5
|
|
|
|
|
501.0
|
|
|
269.7
|
|
|
231.3
|
|
|
483.5
|
|
|
257.0
|
|
|
226.5
|
|
Not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
262.1
|
|
|
—
|
|
|
262.1
|
|
|
262.2
|
|
|
—
|
|
|
262.2
|
|
Total
|
|
|
$
|
763.1
|
|
|
$
|
269.7
|
|
|
$
|
493.4
|
|
|
$
|
745.7
|
|
|
$
|
257.0
|
|
|
$
|
488.7
|
|
Estimated future amortization expense is as follows (in millions):
|
|
|
|
|
Remainder of 2019
|
$
|
36.8
|
|
2020
|
38.1
|
|
2021
|
32.6
|
|
2022
|
24.9
|
|
2023
|
21.7
|
|
Thereafter
|
77.2
|
|
|
$
|
231.3
|
|
5. Long-Term Debt
Long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
$200 million revolving credit facility, due March 31, 2023
|
$
|
6.0
|
|
|
$
|
—
|
|
Term B loan facility, due June 5, 2022
|
337.0
|
|
|
337.0
|
|
Term B loan facility, due April 2, 2025
|
787.0
|
|
|
787.0
|
|
|
1,130.0
|
|
|
1,124.0
|
|
Unamortized deferred loan costs
|
(22.3
|
)
|
|
(23.6
|
)
|
|
$
|
1,107.7
|
|
|
$
|
1,100.4
|
|
Borrowings under the term B loans 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. At
March 31, 2019
, the weighted average interest rate was
4.5 percent
.
For the term B loan that matures on June 5, 2022, there are no required minimum payments until its maturity date. For the term B loan that matures on April 2, 2025, the Company is required to make minimum quarterly payments of
$2.1 million
; however, as a result of principal payments made through
March 31, 2019
, the first required minimum quarterly payment of
$2.1 million
is not due until
September 30, 2022
. The Company is also required to make mandatory prepayments on its term loans from excess cash flow and with the proceeds of asset sales, debt issuances and specified other events, subject to certain exceptions. The credit facility is secured by substantially all of our assets and has various restrictive covenants, including the maximum ratio of consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"). The maximum permitted ratio of consolidated secured debt to consolidated EBITDA was
4.75
to 1.00 as of
March 31, 2019
, and steps down at regular intervals to
3.75
to 1.00 as of
September 30, 2021
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, 2019
, the Company was in compliance with its debt covenants; its ratio of consolidated secured debt to consolidated EBITDA was
2.65
to 1.00, and it had
$190.1 million
of available borrowing capacity under its revolving credit facility.
6. Commitments and Contingencies
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
and
$2.4 million
, at
March 31, 2019
and
December 31, 2018
, net of anticipated insurance and indemnification recoveries of
$15.2 million
and
$15.0 million
, at
March 31, 2019
and
December 31, 2018
, respectively. We have undrawn stand-by letters of credit outstanding to secure obligations for workers’ compensation claims with various insurance carriers. These stand-by letters of credit at
March 31, 2019
and
December 31, 2018
were
$3.9 million
and
$4.4 million
, respectively.
The Company’s deferred compensation plan liability was
$10.2 million
and
$6.2 million
at
March 31, 2019
and
December 31, 2018
and was included in other long-term liabilities. The Company established a rabbi trust to fund the deferred compensation plan (see Note
11. Fair Value Measurements
).
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. Revenues
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.
The Company’s contracts have termination for convenience provisions and do not have substantive termination penalties; therefore, the contract duration for accounting purposes may be less than the stated terms. For accounting purposes, the Company's contracts with customers are considered to be of a short-term nature (one year or less). The Company does not disclose the value of remaining performance obligations for short-term contracts.
The Company has contract liabilities for payments received in advance of providing services under certain contracts. Contract liabilities for advance payments were
$3.8 million
and
$9.8 million
at
March 31, 2019
and
December 31, 2018
, respectively. Contract liabilities are included in other current liabilities on the condensed consolidated balance sheets. During the
three months ended March 31, 2019
, the Company recognized revenues of
$8.8 million
relating to amounts that were included in contract liabilities as of
December 31, 2018
.
The allowance for doubtful accounts was
$4.6 million
at
March 31, 2019
and
$4.8 million
at
December 31, 2018
.
8. 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.
9. Earnings per Share
The following is a reconciliation of the shares used to compute basic and diluted earnings per share (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Weighted average number of common shares outstanding used to compute basic earnings per share
|
|
52.6
|
|
|
52.2
|
|
Dilutive effect of stock-based awards
|
|
0.6
|
|
|
0.6
|
|
Number of shares used to compute diluted earnings per share
|
|
53.2
|
|
|
52.8
|
|
There were
0.3 million
share equivalents outstanding during the
three months ended
March 31, 2019
that were anti-dilutive when applying the treasury stock method and thus were excluded from the number of shares used to compute diluted earnings per share. The number of anti-dilutive share equivalents outstanding during the
three months ended
March 31, 2018
was insignificant.
10. Segment Reporting
ASGN provides IT and professional staffing services in the technology, digital, creative, engineering and life sciences fields across commercial and government sectors. ASGN operates through its Apex, Oxford and ECS segments. The Apex Segment provides technology, scientific, engineering, digital and creative resources and services to Fortune 1000 and mid-market clients across the United States and Canada. The businesses in this segment include Apex Systems and Creative Circle. The Oxford Segment provides hard-to-find technical, digital, engineering and life sciences resources in select skill and geographic markets, along with consulting services. The businesses in this segment include Oxford Global Resources, CyberCoders and Life Sciences Europe. The ECS Segment provides advanced solutions in cloud, cybersecurity, artificial intelligence, machine learning, application and IT modernization and science and engineering to customers across the U.S. public sector, defense, intelligence and commercial industries.
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 following tables present revenues, gross profit, operating income and amortization by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Apex:
|
|
|
|
|
Revenues
|
|
$
|
606.1
|
|
|
$
|
538.5
|
|
Gross profit
|
|
175.4
|
|
|
158.6
|
|
Operating income
|
|
61.0
|
|
|
56.3
|
|
Amortization
|
|
6.0
|
|
|
6.5
|
|
Oxford:
|
|
|
|
|
Revenues
|
|
$
|
149.6
|
|
|
$
|
146.7
|
|
Gross profit
|
|
58.9
|
|
|
59.1
|
|
Operating income
|
|
11.7
|
|
|
9.8
|
|
Amortization
|
|
1.0
|
|
|
1.1
|
|
ECS:
|
|
|
|
|
Revenues
|
|
$
|
168.0
|
|
|
$
|
—
|
|
Gross profit
|
|
29.6
|
|
|
—
|
|
Operating income
|
|
6.9
|
|
|
—
|
|
Amortization
|
|
6.8
|
|
|
—
|
|
Corporate:
|
|
|
|
|
Operating loss
(1)
|
|
$
|
(16.9
|
)
|
|
$
|
(20.4
|
)
|
Consolidated:
|
|
|
|
|
Revenues
|
|
$
|
923.7
|
|
|
$
|
685.2
|
|
Gross profit
|
|
263.9
|
|
|
217.7
|
|
Operating income
|
|
62.7
|
|
|
45.7
|
|
Amortization
|
|
13.8
|
|
|
7.6
|
|
_____________
|
|
(1)
|
Corporate expenses primarily consist of consolidated stock-based compensation expense, compensation for corporate employees, acquisition, integration and strategic planning expenses, public company expenses and depreciation expense for corporate assets.
|
The following table presents our revenues disaggregated by type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
2018
|
Apex:
|
|
|
|
|
Assignment
|
|
$
|
592.2
|
|
|
$
|
524.9
|
|
Permanent placement
|
|
13.9
|
|
|
13.6
|
|
|
|
$
|
606.1
|
|
|
$
|
538.5
|
|
Oxford:
|
|
|
|
|
Assignment
|
|
$
|
129.4
|
|
|
$
|
125.4
|
|
Permanent placement
|
|
20.2
|
|
|
21.3
|
|
|
|
$
|
149.6
|
|
|
$
|
146.7
|
|
ECS:
|
|
|
|
|
Firm-fixed-price
|
|
$
|
43.3
|
|
|
$
|
—
|
|
Time and materials
|
|
61.4
|
|
|
—
|
|
Cost-plus-fixed-fee
|
|
63.3
|
|
|
—
|
|
|
|
$
|
168.0
|
|
|
$
|
—
|
|
Consolidated
|
|
$
|
923.7
|
|
|
$
|
685.2
|
|
The Company operates internationally, with operations mainly in the United States. The following table presents revenues by geographic location (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
%
|
|
2018
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
881.1
|
|
|
95.4
|
%
|
|
$
|
647.3
|
|
|
94.5
|
%
|
Foreign
|
|
42.6
|
|
|
4.6
|
%
|
|
37.9
|
|
|
5.5
|
%
|
|
|
$
|
923.7
|
|
|
100.0
|
%
|
|
$
|
685.2
|
|
|
100.0
|
%
|
The following table presents the ECS segment revenues by customer type (in millions):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019
|
Department of Defense and Intelligence Agencies
|
|
$
|
96.0
|
|
Federal Civilian
|
|
60.2
|
|
Commercial and Other
|
|
11.8
|
|
|
|
$
|
168.0
|
|
11. Fair Value Measurements
The carrying amounts 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. The carrying value of the revolving credit facility approximates its fair value. The fair value of the term B loans was
$1.1 billion
as of
March 31, 2019
, excluding the
$22.3 million
of unamortized deferred loan costs (see Note
5. Long-Term Debt
) and was determined using Level 1 inputs (quoted prices in active markets for identical assets and liabilities) from the fair value hierarchy.
The Company had investments, primarily mutual funds, of
$10.1 million
and
$6.2 million
at
March 31, 2019
and
December 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, 2019
and
2018
, no fair value adjustments were required for non-financial assets or liabilities.