Acquisition Expected to be Accretive to 2018 Adjusted EPS
On Assignment Announces Preliminary Fourth Quarter of 2017 Financial Results
On Assignment to Change Name to ASGN Incorporated
CALABASAS, Calif.--(BUSINESS WIRE)--On Assignment, Inc. (NYSE: ASGN), one of the foremost providers of IT
and professional services in the technology, creative/digital,
engineering and life sciences sectors, announced today that it has
signed a definitive agreement to acquire ECS Federal, LLC (ECS) from Roy
Kapani, the company’s majority owner and founder, and Lindsay Goldberg,
a private investment firm, for $775 million in cash. The transaction is
subject to various regulatory approvals and customary closing conditions
and is expected to close on April 2, 2018.
ECS, one of the largest privately-held government services contractors,
delivers cyber security, cloud, DevOps, IT modernization and advanced
science and engineering solutions to government enterprises. Combined,
On Assignment and ECS will be one of the largest and fastest growing IT
and professional services firms in North America.
For the year ended December 31, 2017, ECS estimates its revenues and
Adjusted EBITDA (a non-GAAP measure) on a pro forma basis will be
approximately $586.4 million and $67.6 million, respectively. Estimated
pro forma results assume a business acquired by ECS in April 2017
occurred at the beginning of the year. For 2018, ECS expects high
single-digit year-over-year revenue growth.
For the year ended December 31, 2017, On Assignment estimates its
revenues and net income will be approximately $2.6 billion and $157.7
million, respectively and its Adjusted EBITDA (a non-GAAP measure) will
be approximately $311.4 million. On a pro forma basis, which assumes the
acquisition of ECS occurred at the beginning of 2017 (a non-GAAP
measure), On Assignment’s revenues and Adjusted EBITDA are estimated to
be approximately $3.2 billion and $379 million, respectively.
Additionally, the acquisition is accretive to On Assignment’s 2017
Adjusted Net Income (a non-GAAP measure).
Commenting on the acquisition, Peter Dameris, CEO of On Assignment,
said: “ECS’ government services solutions will complement and elevate
our offerings and strengthen our position as a premium IT and
professional services provider. Our addressable end market is now $279
billion by virtue of our entering the $129 billion Government Services
space. ECS’ long-term contracts, which average 5 years in length, and
robust backlog ($1.6 billion) provide strong revenue visibility and
mitigate volatility from permanent placement revenue and a more
challenging economic environment.”
Dameris concluded: “All companies struggle with identifying and
attracting highly qualified technical personnel in today’s economy. Our
combined 24,000+ billable consultants, of which 2,900 maintain security
clearances, and our recruiting prowess will strengthen ECS’ fulfillment
capabilities, credentials and qualifications as it competes for future
awards.”
ECS has well established positions on critical IT systems of national
importance which provide unmatched customer access and unique visibility
into future technology transformation initiatives. For example, ECS’
domain expertise in cyber security for the defense industry will be
immensely valuable to On Assignment’s customers given the increased
frequency and complexity of cyber-attacks for customers everywhere.
ECS will become a division of On Assignment and continue to operate
under the ECS brand name. The CEO of ECS, George Wilson, and the current
leadership team will continue to execute the strategy and oversee the
day-to-day operations of the business. “This acquisition immediately
introduces a company with the scale, contracts, capabilities, personnel,
past performance and ability to compete for the largest opportunities in
the Federal market. The entire team is energized about the
possibilities.” said George Wilson.
On Assignment intends to change its name to ASGN Incorporated to better
reflect its evolving position as a leading provider of human capital in
IT and Professional Services Solutions effective April 2, 2018.
Commenting on the name change, Peter Dameris said: “On Assignment
commenced operations as a life sciences staffing firm in 1985 and has
since evolved its offerings to include technology, creative/digital,
engineering and scientific solutions. As our company has grown over the
last 33 years, we believe it is the right time to change our name to
better reflect our path forward.” Dameris concluded: “Our success is the
direct result of the hard work of our many dedicated employees and
billable professionals and I would like to thank the entire organization
for its continued commitment to excellence.”
Transaction Details
Under terms of the definitive purchase agreement, On Assignment will
acquire all of ECS’ equity for $775 million to be paid at closing.
In connection with the transaction, On Assignment has obtained a $1.6
billion financing commitment from Wells Fargo. The committed financing
consists of a $200 million revolving credit facility (undrawn at close)
and a $1.4 billion term B loan. We may complete a portion of the
financing through an amendment to our existing facilities and expect to
issue a new 7 year term B loan to fund the acquisition and to pay
related transaction costs. Upon closing, funded debt is expected to
total approximately 3.7 to 1 estimated pro forma Adjusted EBITDA for the
year ended December 31, 2017.
For income tax reporting purposes, the acquisition will be treated as an
asset purchase, resulting in tax basis in the intangibles assets
acquired. This “step-up” in tax basis is expected to result in an annual
cash income tax savings of approximately $12 million over the next 15
years from the amortization of these assets for income tax purposes.
Preliminary Financial Results for Fourth Quarter of 2017
In connection with the announcement of the transaction, On Assignment is
providing preliminary financial results for the fourth quarter of 2017.
These results are subject to completion of the Company’s financial and
accounting procedures and the annual independent audit. On Assignment
anticipates reporting its complete financial results for the fourth
quarter and year ended December 31, 2017 on February 14, 2018.
The preliminary fourth quarter results compared with
previously-announced estimates are as follows (in millions, except per
share amounts):
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Preliminary
Results
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Previously- Announced Estimates
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Revenues
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$
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679.0
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$658.0 to $668.0
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Net Income
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$
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67.3
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2
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$61.4 to $66.2
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Adjusted Net Income (non-GAAP measure)1
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$
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76.0
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2,3
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$69.4 to $74.1
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Income per diluted share:
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Net Income
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$
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1.28
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2
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$1.17 to $1.26
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Adjusted Net Income (non-GAAP measure)1
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$
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1.44
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2
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$1.32 to $1.41
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Number of shares and share equivalents used to calculated diluted
earnings per share
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52.8
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52.5
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Adjusted EBITDA (non-GAAP measure)
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$
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82.9
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4
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$77.5 to $80.5
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Non-cash tax benefit related to recently enacted Tax Cuts and Jobs
Act
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$
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31.4
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$30.5 to $33.5
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____________
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1
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Does not include Cash Tax Savings on Indefinite-lived Intangible
Assets. These savings total $6.8 million, or $0.13 per diluted
share, and represent the economic value of the tax deduction that
we receive from the amortization of goodwill and trademarks.
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2
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Includes excess tax benefits related to stock-based compensation of
$2.5 million (the tax effect of the difference between book and tax
expense for stock-based compensation), which were not included in
our previously-announced estimates.
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3
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Adjusted Net Income is calculated as follows: Net income plus (i)
$8.4 million amortization of intangible assets, (ii) $0.9 million
acquisition, integration and strategic planning expenses and (iii)
$0.1 million loss from discontinued operations; less (i) $0.4
million income taxes on amortization not deductible for income tax
purposes and (ii) $0.3 million tax effect on acquisition,
integration and strategic planning expenses.
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4
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Adjusted EBITDA is calculated as follows: Net income plus (i) $8.4
million amortization of intangible assets, (ii) $6.7 million
depreciation, (iii) $6.1 million stock-based compensation, (iv) $6.0
million interest expense, (v) $0.9 million acquisition, integration
and strategic planning expenses and (vi) $0.1 million loss from
discontinued operations; less $12.6 million income tax benefit.
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For the full year 2017, the Company estimates its net income and
Adjusted EBITDA will be approximately $157.7 million and $311.4 million,
respectively, and its cash flows from operating activities and free cash
flow (non-GAAP measure) will be approximately $196.4 million and $172.2
million, respectively. At December 31, 2017, long-term debt was
approximately $575.2 million and the leverage ratio (a non-GAAP measure)
was 1.89 to 1.
Legal and Financial Advisors
On Assignment, Inc. retained Sullivan & Cromwell LLP as legal counsel on
the transaction, Latham & Watkins LLP as legal counsel on the secured
financing commitment, Wells Fargo Securities, LLC as lead financial
advisor, American Discovery Capital, LLC as financial advisor, Wolf Den
Associates, LLC for strategic industry advisory services and Perkins
Coie, LLP for support with government contracts. ECS retained Cravath,
Swaine and Moore LLP and Venable LLP as legal counsel and Robert W.
Baird & Co., Houlihan Lokey, Inc. and SunTrust Robinson Humphrey as
financial advisors.
Conference Call
On Assignment will hold a conference call with analysts and stockholders
today at 8:30 a.m. EST. The dial-in number is (800) 288-8961, (612)
332-0342 for callers outside the United States) and the conference ID
number is 444143. Participants should dial in ten minutes before the
call. A replay of the conference call will be available beginning today
at 11:30 a.m. EST and ending at midnight EST on February 21, 2018. The
access number for the replay is (800) 475-6701, (320) 365-3844 for
callers outside the United States) and the conference ID number 444143.
This call is being broadcasted by CCBN and can be accessed via On
Assignment’s web site at www.onassignment.com.
We have also posted on our website a presentation regarding this
transaction.
About ECS
Founded in 2001 and headquartered in Fairfax, Virginia, ECS is a leading
national information technology solutions provider delivering cyber
security, cloud, DevOps, IT modernization and advanced science and
engineering solutions. ECS designs, implements and operationalizes
security capabilities for some of the most highly-targeted government
customers in the world. The company maintains partnerships with the
world’s leading cyber and cloud technology organizations, with immediate
reach-back capability and certified experience. ECS is strategically
positioned at the intersection of mission and technology – delivering
proven market differentiation and unparalleled growth at scale.
About On Assignment
On Assignment, Inc. (NYSE: ASGN) is one of the foremost providers of IT
and professional services in the technology, creative/digital,
engineering and life sciences sectors. Through an integrated suite of
professional staffing and IT solutions, On Assignment improves
productivity and utilization among leading corporate enterprises.
Due to our companies’ achievements, we are viewed as best in class
across multiple industries and have built an outstanding reputation of
excellence over the past 33 years.
Based in Calabasas, California, On Assignment operates a network of over
150 branch offices across the United States, Canada and Europe. For more
information, visit us at www.onassignment.com.
Reasons for Presentation of Non-GAAP Financial Measures
Statements in this release may 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
Generally Accepted Accounting Principles in the United States ("GAAP").
Such measures also are used to determine a portion of the compensation
for some of our executives and employees. We believe the non-GAAP
financial measures provide useful information to management, investors
and prospective investors by excluding certain charges and other amounts
that we believe are not indicative of our core operating results. These
non-GAAP measures are included to provide management, our investors and
prospective investors with an alternative method for assessing our
operating results in a manner that is focused on the performance of our
ongoing operations and to provide a more consistent basis for comparison
between quarters. 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. Our press release on October 25, 2017
includes 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 referenced in this release.
Non-GAAP net income (net income, less income (loss) from discontinued
operations, net of tax, plus, as applicable, refinancing costs,
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.
EBITDA (earnings before interest, taxes, depreciation and amortization
of intangible assets) and Adjusted EBITDA (EBITDA plus stock-based
compensation expense and, as applicable, write-off of loan costs,
acquisition, integration and strategic planning expenses, 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.
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.
Estimated pro forma results for On Assignment assume a business acquired
by ECS in April 2017 occurred at the beginning of the year, as such
these estimated pro forma results are non-GAAP measures.
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 the
Company's anticipated financial and operating performance in 2018, the
expected timing of the closing of the transaction and other statements
regarding the expected performance of On Assignment and of the combined
company. 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, the Company makes
no assurances or guarantees: i) that a potential transaction with ECS
Federal, LLC would occur; ii) what the final terms related to such a
potential transaction would be; iii) that the assumptions made in
determining the value of the transaction would be realized; or iv) that
the Company would be able to finance the potential transaction per the
terms set forth above. Further, the Company makes no assurances that
estimates of revenues, net income, Adjusted Net Income, Adjusted EBITDA,
free cash flow, leverage ratio and other financial metrics 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 staffing clients, the
availability of qualified temporary and permanent placement
professionals, management of our growth, continued performance of our
enterprise-wide information systems, 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, 2016, as filed with the SEC
on March 1, 2017. We specifically disclaim any intention or duty to
update any forward-looking statements contained in this release.
Contact:
On Assignment, Inc.
Media Inquiries:
Adam Bleibtreu
Chief Marketing Officer
(818) 878-7900
or
Investor Inquiries:
Ed Pierce
Chief Financial Officer
(818) 878-7900