Company Quick10K Filing
Quick10K
ASGN
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$65.86 53 $3,460
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-13 Earnings, Exhibits
8-K 2019-01-28 Earnings, Other Events
8-K 2019-01-28 Earnings, Other Events
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-18 Shareholder Vote
8-K 2018-05-03 Officers, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-04-02 Enter Agreement, M&A, Off-BS Arrangement, Amend Bylaw, Other Events, Exhibits
8-K 2018-03-15 Amend Bylaw, Other Events, Exhibits
8-K 2018-02-14 Earnings, Exhibits
8-K 2018-02-05 Regulation FD, Exhibits
8-K 2018-01-31 Enter Agreement, Earnings, Regulation FD, Exhibits
8-K 2018-01-05 Other Events, Exhibits
RHI Half Robert
ICFI ICF International
KELYA Kelly Services
HCKT Hackett Group
CCRN Cross Country Healthcare
SRT Startek
III Information Services Group
VISI Volt Information Sciences
DLHC DLH Holdings
CIFS China Internet Nationwide Financial Services
ASGN 2018-09-30
Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements (Unaudited)
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Notes
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 asgn20180930exhibit311.htm
EX-31.2 asgn20180930exhibit312.htm
EX-32.1 asgn20180930exhibit321.htm
EX-32.2 asgn20180930exhibit322.htm

ASGN Earnings 2018-09-30

ASGN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 asgn2018093010-q.htm 10-Q Document

  
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 September 30, 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 every Interactive Data File required to be submitted 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 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 October 31, 2018, the total number of outstanding shares of the Common Stock of ASGN Incorporated (the "Company") ($0.01 par value) was 52,477,027.

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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,888

 
$
36,667

Accounts receivable, net
572,864

 
428,536

Prepaid expenses and income taxes
13,606

 
18,592

Workers' compensation receivable
14,890

 
12,702

Other current assets
4,351

 
3,026

Total current assets
646,599

 
499,523

Property and equipment, net
81,672

 
57,996

Identifiable intangible assets, net
502,557

 
352,766

Goodwill
1,420,636

 
894,095

Other non-current assets
13,126

 
5,749

Total assets
$
2,664,590

 
$
1,810,129

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
28,921

 
$
6,870

Accrued payroll and contract professional pay
195,698

 
114,832

Workers’ compensation loss reserves
17,137

 
14,777

Income taxes payable
8,180

 
1,229

Other current liabilities
41,481

 
29,009

Total current liabilities
291,417

 
166,717

Long-term debt
1,154,154

 
575,213

Deferred income tax liabilities
71,712

 
69,436

Other long-term liabilities
17,483

 
7,372

Total liabilities
1,534,766

 
818,738

Commitments and contingencies (Note 7)


 


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, 52,456,886
 and 52,151,538 issued and outstanding
524

 
521

Paid-in capital
594,123

 
566,090

Retained earnings
540,244

 
428,419

Accumulated other comprehensive loss
(5,067
)
 
(3,639
)
Total stockholders’ equity
1,129,824

 
991,391

Total liabilities and stockholders’ equity
$
2,664,590

 
$
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
 
Nine Months Ended
September 30,
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
906,449

 
$
667,048

 
$
2,470,131

 
$
1,946,889

Costs of services
636,277

 
448,733

 
1,718,376

 
1,317,493

Gross profit
270,172

 
218,315

 
751,755

 
629,396

Selling, general and administrative expenses
177,335

 
149,197

 
521,395

 
440,446

Amortization of intangible assets
18,540

 
8,248

 
44,689

 
25,011

Operating income
74,297

 
60,870

 
185,671

 
163,939

Interest expense
(14,606
)
 
(7,099
)
 
(41,724
)
 
(21,667
)
Income before income taxes
59,691

 
53,771

 
143,947

 
142,272

Provision for income taxes
10,474

 
18,892

 
31,889

 
51,775

Income from continuing operations
49,217

 
34,879

 
112,058

 
90,497

Loss from discontinued operations, net of income taxes
(45
)
 
(23
)
 
(233
)
 
(153
)
Net income
$
49,172

 
$
34,856

 
$
111,825

 
$
90,344

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.66

 
$
2.14

 
$
1.72

Diluted
$
0.93

 
$
0.66

 
$
2.11

 
$
1.70

 
 
 
 
 
 
 
 
Number of shares and share equivalents used to calculate earnings per share:
 
 
 
 
 
 
 
Basic
52,362

 
52,500

 
52,282

 
52,660

Diluted
53,034

 
53,173

 
52,990

 
53,319

 
 
 
 
 
 
 
 
Reconciliation of net income to comprehensive income:
 
 
 
 
 
 
 
Net income
$
49,172

 
$
34,856

 
$
111,825

 
$
90,344

Foreign currency translation adjustment
(268
)
 
1,783

 
(1,428
)
 
5,628

Comprehensive income
$
48,904

 
$
36,639

 
$
110,397

 
$
95,972



 See notes to condensed consolidated financial statements.
 
 

 


4



ASGN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended
September 30,
 
2018

2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
111,825

 
$
90,344

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
71,298

 
43,493

Stock-based compensation
22,380

 
17,943

Provision for accounts receivable allowances
2,133

 
9,216

Workers’ compensation provision
2,459

 
2,383

Other
13,046

 
5,967

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(47,819
)
 
(51,936
)
Prepaid expenses and income taxes
12,482

 
(958
)
Accounts payable
9,892

 
(135
)
Accrued payroll and contract professional pay
26,942

 
14,291

Income taxes payable
6,849

 
13,426

Workers’ compensation loss reserves
(2,287
)
 
(1,952
)
Other
(5,639
)
 
(3,895
)
Net cash provided by operating activities
223,561

 
138,187

Cash Flows from Investing Activities:
 
 
 
Cash paid for property and equipment
(22,093
)
 
(18,038
)
Cash paid for acquisitions, net of cash acquired
(760,253
)
 
(25,828
)
Other
(180
)
 

Net cash used in investing activities
(782,526
)
 
(43,866
)
Cash Flows from Financing Activities:
 
 
 
Principal payments of long-term debt
(231,000
)
 
(69,500
)
Proceeds from long-term debt
822,000

 
37,000

Debt issuance and amendment costs
(22,450
)
 
(3,273
)
Proceeds from option exercises and employee stock purchase plan
9,342

 
7,690

Payment of employment taxes related to release of restricted stock awards
(4,402
)
 
(7,785
)
Repurchase of common stock

 
(58,949
)
Other
(9,473
)
 

Net cash provided by (used in) financing activities
564,017

 
(94,817
)
Effect of exchange rate changes on cash and cash equivalents
(831)

 
1,429

Net Increase in Cash and Cash Equivalents
4,221

 
933

Cash and Cash Equivalents at Beginning of Year
36,667

 
27,044

Cash and Cash Equivalents at End of Period
$
40,888

 
$
27,977

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for:
 
 
 
Income taxes
$
10,184

 
$
37,716

Interest
$
37,828

 
$
18,980

Supplemental Disclosure of Non-Cash Transactions
 
 
 
Unpaid portion of additions to property and equipment
$
1,676

 
$
2,063

Unsettled repurchases of common stock
$

 
$
1,074


 
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).

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 the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. As allowed by subsequently issued guidance, the Company expects to adopt the new leases standard on January 1, 2019, instead of the beginning of the earliest period presented.

The Company expects to recognize right-of-use assets and lease liabilities on its balance sheet primarily for its real estate operating leases. The Company does not expect the standard will have a material impact on its results of operations or cash flows. The adoption of the standard will have no impact to the Company's debt covenants compliance under its current credit facility.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in this update may be applied either retrospectively or prospectively. The Company is in the process of evaluating the impact the standard will have on its consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. The amendments in this update provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The Company is in the process of evaluating the impact the standard will have on its consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet at interim reporting periods must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is presented. The Company plans to include this presentation of interim changes in stockholders' equity in its Quarterly Report on Form 10-Q for the quarter ending March 31, 2019.


6



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. The adoption of ASC 606 did not have a significant impact on the recognition of revenues; therefore, the Company did not have an opening retained earnings adjustment. Disaggregated revenue disclosures by segment are presented in Note 12. Segment Reporting.

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. For the Apex and Oxford segments, revenues from assignment contracts 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 (i) the most likely amount method prescribed by ASC 606, (ii) contract terms and (iii) estimates of revenue. Revenues are recognized net of variable consideration to the extent it is probable a significant reversal of revenues will not occur in subsequent periods.

Permanent placement revenues are recognized at the 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.

On April 2, 2018, the Company acquired ECS Federal, LLC ("ECS"), which delivers advanced solutions in cloud, cybersecurity, artificial intelligence, machine learning, software development, IT modernization and science and engineering and is primarily focused on federal government activities (see Note 4. Acquisitions). ECS customer contracts generally contain a single performance obligation involving a significant integration of various activities that are performed together to deliver a combined service or solution. Performance obligations may involve a series of recurring services, such as network operations and maintenance, operation and program support services, IT outsourcing services and other IT arrangements where the Company is standing ready to provide support, when-and-if needed. Performance obligations are satisfied over time because the customer simultaneously receives and consumes the benefits of the Company’s performance as services are provided.

ECS provides services under the following types of contracts:

Time and materials ("T&M") contracts provide for payments based on fixed hourly rates for each direct labor hour expended and reimbursements for allowable material costs and out-of-pocket expenses. To the extent actual direct labor and associated costs vary in relation to the agreed upon billing rates, the generated profit may vary.

Cost-plus-fixed-fee ("CPFF") contracts provide for reimbursement of direct contract costs and allowable and allocable indirect costs, plus a negotiated profit margin or fee. CPFF contracts are usually subject to lower risk and tend to have lower margins.

Firm-fixed-price ("FFP") contracts provide for a fixed price for specified services and solutions. If actual costs vary from planned costs on an FFP contract, the Company generates more or less than the planned amount of profit.

Revenues for T&M contracts are recognized over time, based on hours worked. Revenues for CPFF contracts, under which the Company bills the customer for actual costs incurred plus a negotiated fee, and FFP contracts are recognized over time, generally based on the amount invoiced as those amounts directly correspond with the value received by a customer. From time to time, the Company may have FFP contracts in which revenues are recognized using a cost-to-cost measurement method.

The Company recognizes revenues on a gross basis as it acts as a principal for all of its revenue 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. The Company includes billable expenses (allowable material costs and out-of-pocket reimbursable expenses) in revenues and the associated expenses are included in costs of 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.


7



Payment Terms

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.

Contract Liabilities for Advance Payments

The Company has contract liabilities for payments received in advance of providing services under certain contracts. Contract liabilities for advance payments were $0.6 million at January 1, 2018 and $6.8 million at September 30, 2018. The increase in contract liabilities was due to ECS, which had a provisional contract liabilities balance of $11.6 million as of the acquisition date. Acquisition date balances are subject to change during the measurement period (see Note 4. Acquisitions). Contract liabilities are included in other current liabilities on the condensed consolidated balance sheet. During the three and nine months ended September 30, 2018, the Company recognized revenues of $8.9 million and $11.5 million, respectively, relating to amounts that were previously included in contract liabilities.

Contract Costs

There are no incremental costs to obtain contracts. Contract fulfillment costs include, but are not limited to, direct labor for both employees and subcontractors, allowable materials such as third-party hardware and software that are integrated as part of the overall services and solutions provided to customers and out-of-pocket reimbursable expenses. Contract fulfillment costs are expensed as incurred, except for certain set-up costs for an ECS project, which were capitalized and are being amortized over the expected period of benefit.

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 accounts receivable allowance was $5.1 million at September 30, 2018 and $9.9 million at December 31, 2017. The allowance at December 31, 2017 included $3.1 million for estimated permanent placement fallouts and various billing adjustments. Beginning in 2018, with the adoption of ASC 606, the permanent placement fallouts are now included in other current liabilities in the accompanying condensed consolidated balance sheet and billing adjustments are a direct reduction of the gross accounts receivable balance.

4. Acquisitions

On April 2, 2018, the Company acquired all of the outstanding equity interests of ECS, headquartered in Fairfax, Virginia for $775.0 million, resulting in ECS becoming a wholly-owned subsidiary of the Company. Acquisition expenses were approximately $12.0 million and were expensed as incurred and included in SG&A expenses. ECS delivers advanced solutions in cloud, cybersecurity, artificial intelligence, machine learning, software development, IT modernization and science and engineering and is primarily focused on federal government activities. ECS was purchased to complement and elevate our offerings and strengthen the Company's position as a premier IT and professional services provider by entering the government services space. ECS is reported as a separate segment of the Company.

The results of operations of ECS have been included in the consolidated results of the Company from the date of acquisition. The condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2018 included ECS revenues of $164.0 million and $319.1 million, respectively and operating income of $4.3 million and $8.0 million, respectively.

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 is determined primarily by 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. Goodwill related to this acquisition totaled $527.4 million, of which $507.6 million is estimated to be deductible for income tax purposes.

The purchase accounting for the acquisition of ECS remains incomplete with respect to opening tangible assets, intangible assets, liabilities and taxes, as management continues to gather and evaluate information about circumstances that existed as of the acquisition date. Measurement period adjustments will be recognized prospectively within 12 months from the date of acquisition.


8



The following table summarizes the consideration paid and the provisional fair value of assets acquired and liabilities assumed (in thousands):
Cash
 
$
12,400

Accounts receivable
 
97,514

Prepaid expenses and other current assets
 
8,568

Property and equipment
 
28,977

Identifiable intangible assets
 
194,850

Goodwill
 
527,388

Other non-current assets
 
1,282

Total assets acquired
 
870,979

 
 
 
Current liabilities
 
93,900

Long-term liabilities
 
4,425

Total liabilities assumed
 
98,325

 
 
 
Total purchase price(1)
 
$
772,654

_________
(1) This amount represents the $775.0 million in purchase consideration as set forth in the purchase agreement, plus $12.4 million paid for cash acquired and $1.0 million paid for working capital delivered in excess of target working capital, less $15.7 million indebtedness assumed.

The following table summarizes the acquired identifiable intangible assets of ECS (in thousands):
 
Useful life
 
 
Contractual customer relationships
13 years
 
$
141,400

Backlog
1 year
 
26,100

Non-compete agreements
4 to 7 years
 
10,350

Favorable contracts
5 years
 
500

Trademarks
indefinite
 
16,500

Total identifiable intangible assets acquired
 
 
$
194,850


The weighted-average amortization period for identifiable intangible assets, excluding trademarks, is 10.5 years.


9




The summary below (in thousands, except for per share data) presents pro forma unaudited consolidated results of operations for the three and nine months ended September 30, 2018 and 2017 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 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 unaudited consolidated results are not necessarily indicative of the operating results that would have occurred if the acquisition had been consummated as of the date indicated, nor are they necessarily indicative of future operating results.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Revenues
 
$
906,449

 
$
820,185

 
$
2,619,170

 
$
2,381,872

Income from continuing operations
 
$
49,216

 
$
30,246

 
$
122,937

 
$
66,357

Net income
 
$
49,172

 
$
30,222

 
$
122,704

 
$
66,204

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.94

 
$
0.58

 
$
2.35

 
$
1.26

Diluted
 
$
0.93

 
$
0.57

 
$
2.32

 
$
1.24

 
 
 
 
 
 
 
 
 
Number of shares and share equivalents used to calculate earnings per share:
 
 
 
 
 
 
 
 
Basic
 
52,367

 
52,500

 
52,298

 
52,660

Diluted
 
53,125

 
53,223

 
53,085

 
53,350


5. Goodwill and Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2018 and the year ended December 31, 2017 were as follows (in thousands):
 
Apex Segment
 
Oxford Segment
 
ECS 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

ECS acquisition

 

 
527,388

 
527,388

Translation adjustment

 
(847
)
 

 
(847
)
Balance as of September 30, 2018
$
662,084

 
$
231,164

 
$
527,388

 
$
1,420,636


 

10



Acquired intangible assets consisted of the following (in thousands):
 
 
 
September 30, 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 and contractual relationships
2 - 13 years
 
$
343,707

 
$
135,739

 
$
207,968

 
$
202,588

 
$
119,272

 
$
83,316

Contractor relationships
2 - 5 years
 
71,121

 
65,102

 
6,019

 
71,121

 
59,174

 
11,947

Backlog
1 year
 
26,100

 
17,400

 
8,700

 

 

 

Non-compete agreements
2 - 7 years
 
22,234

 
8,950

 
13,284

 
11,850

 
6,600

 
5,250

In-use software
6 years
 
18,900

 
15,178

 
3,722

 
18,900

 
12,816

 
6,084

Favorable contracts
5 years
 
1,400

 
804

 
596

 
900

 
673

 
227

 
 
 
483,462

 
243,173

 
240,289

 
305,359

 
198,535

 
106,824

Not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
 
262,268

 

 
262,268

 
245,942

 

 
245,942

Total
 
 
$
745,730

 
$
243,173

 
$
502,557

 
$
551,301

 
$
198,535

 
$
352,766



Estimated future amortization expense is as follows (in thousands): 
Remainder of 2018
$
18,545

2019
51,296

2020
40,287

2021
35,469

2022
24,437

Thereafter
70,255

 
$
240,289


6. Long-Term Debt

Long-term debt consisted of the following (in thousands):
 
September 30,
2018
 
December 31,
2017
$200 million revolving credit facility, due March 31, 2023
$

 
$

Term B loan facility, due June 5, 2022
392,000

 
588,000

Term B loan facility, due April 2, 2025
787,000

 

 
1,179,000

 
588,000

Unamortized deferred loan costs
(24,846
)
 
(12,787
)
 
$
1,154,154

 
$
575,213


On April 2, 2018, in connection with the acquisition of ECS, the Company amended its credit facility mainly to add an $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. The revolving credit facility was also amended to extend the maturity date to March 31, 2023. The Company incurred $22.5 million of debt issuance and amendment costs, of which $15.3 million are presented in the condensed consolidated balance sheet as a reduction of outstanding debt and are being amortized over the term of the credit facility, $6.2 million were expensed as incurred and were included in interest expense in the nine months ended September 30, 2018, and the remaining fees were presented in other current assets and other non-current assets and are being amortized over the term of the credit facility.

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.

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 September 30, 2018, 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 specified exceptions. The credit facility includes various restrictive covenants including the maximum ratio of consolidated secured debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"), which steps down at regular intervals from 4.75 to 1.00 as of September 30, 2018, 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 September 30, 2018, the Company was in compliance with its debt covenants, its ratio of consolidated secured debt to consolidated EBITDA was 2.89 to 1.00, and it had $195.6 million available borrowing capacity under its revolving credit facility.

7. 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 September 30, 2018 and 2017, and $1.0 million for the nine months ended September 30, 2018 and 2017.

As a result of the acquisition of ECS (see Note 4. Acquisitions), the Company assumed various operating lease commitments for which total future payments are approximately $27.6 million as of September 30, 2018, with the last payment scheduled to be in February 2027.
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 $2.2 million and $2.1 million, at September 30, 2018 and December 31, 2017, net of anticipated insurance and indemnification recoveries of $14.9 million and $12.7 million, at September 30, 2018 and December 31, 2017, 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 were $4.4 million at September 30, 2018 and December 31, 2017.

The Company’s deferred compensation plan liability was $6.5 million at September 30, 2018, and was included in other long-term liabilities. The Company established a rabbi trust to fund the deferred compensation plan (see Note 8. 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.

8. 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 September 30, 2018 was $1.2 billion, excluding the $24.8 million of unamortized deferred loan costs (see Note 6. Long-Term Debt). The fair value of the term B loans was $1.2 billion as of September 30, 2018 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 $6.4 million at September 30, 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 nine months ended September 30, 2018 and 2017, no fair value adjustments were required for non-financial assets or liabilities.

9. Stockholders' Equity 

There were 139,241 and 305,348 shares issued upon the vesting of restricted stock units, exercise of stock options and purchases of stock under the Employee Stock Purchase Plan for the three and nine months ended September 30, 2018, respectively.

The accumulated other comprehensive loss balance at September 30, 2018 and December 31, 2017, and other comprehensive income during the nine months ended September 30, 2018, consists of foreign currency translation adjustments.



11



10. 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Weighted average number of common shares outstanding used to compute basic earnings per share
52,362

 
52,500

 
52,282

 
52,660

Dilutive effect of stock-based awards
672

 
673

 
708

 
659

Number of shares used to compute diluted earnings per share
53,034

 
53,173

 
52,990

 
53,319


The number of anti-dilutive share equivalents outstanding during the three and nine months ended September 30, 2018 and 2017 was insignificant.

11. 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.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the "TCJA"). The guidance also provided for a measurement period of up to one year from the date of enactment to complete the accounting for the U.S. tax law changes. In previous quarters, the Company made provisional estimates of the tax effect of the transitional tax liability on deemed foreign dividends, executive compensation and meals and entertainment. Based on guidelines issued by the IRS during the third quarter of 2018, the Company adjusted its provisional estimates and recorded a tax benefit of $2.9 million. The measurement period under SAB 118 remains open as there is still anticipated guidance clarifying certain aspects of the TCJA and any subsequent adjustments to these provisional amounts would be recorded in the fourth quarter of 2018.



12



12. Segment Reporting 

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. ASGN operates through its Apex, Oxford and ECS segments. The Apex Segment provides technical, scientific, digital and creative services and solutions 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 "hard to find" technical, digital, engineering and life sciences resources and consulting services in select skill and geographic markets. The businesses in this segment include Oxford, CyberCoders and Life Sciences Europe. The ECS Segment delivers advanced solutions in cloud, cybersecurity, artificial intelligence, machine learning, software development, IT modernization and science and engineering and is primarily focused on federal government activities. ECS was acquired on April 2, 2018 (see Note 4. Acquisitions).

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 thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Apex:
 
 
 
 
 
 
 
 
Revenues
 
$
589,717

 
$
517,492

 
$
1,695,728

 
$
1,502,462

Gross profit
 
177,831

 
155,783

 
506,146

 
445,925

Operating income
 
71,443

 
59,016

 
192,610

 
162,679

Amortization
 
6,546

 
7,194

 
19,638

 
21,983

Oxford:
 
 
 
 
 
 
 
 
Revenues
 
$
152,701

 
$
149,556

 
$
455,222

 
$
444,427

Gross profit
 
62,712

 
62,532

 
187,321

 
183,471

Operating income
 
15,156

 
16,088

 
39,794

 
39,525

Amortization
 
1,040

 
1,054

 
3,143

 
3,028

ECS:
 
 
 
 
 
 
 
 
Revenues
 
$
164,031

 
$

 
$
319,181

 
$

Gross profit
 
29,629

 

 
58,288

 

Operating income
 
4,314

 

 
8,012

 

Amortization
 
10,954

 

 
21,908

 

Corporate:
 
 
 
 
 
 
 
 
Operating loss(1)
 
$
(16,616
)
 
$
(14,234
)
 
$
(54,745
)
 
$
(38,265
)
Consolidated:
 
 
 
 
 
 
 
 
Revenues
 
$
906,449

 
$
667,048

 
$
2,470,131

 
$
1,946,889

Gross profit
 
270,172

 
218,315

 
751,755

 
629,396

Operating income
 
74,297

 
60,870

 
185,671

 
163,939

Amortization
 
18,540

 
8,248

 
44,689

 
25,011


_____________
(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.


13



The following table presents our revenues disaggregated by type (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Apex:
 
 
 
 
 
 
 
 
Assignment
 
$
575,309

 
$
506,376

 
$
1,653,835

 
$
1,468,976

Permanent placement
 
14,408

 
11,116

 
41,893

 
33,486

 
 
$
589,717

 
$
517,492

 
$
1,695,728

 
$
1,502,462

Oxford:
 
 
 
 
 
 
 
 
Assignment
 
$
130,365

 
$
127,963

 
$
386,068

 
$
379,892

Permanent placement
 
22,336

 
21,593

 
69,154

 
64,535

 
 
$
152,701

 
$
149,556

 
$
455,222

 
$
444,427

ECS:
 
 
 
 
 
 
 
 
Firm-fixed-price
 
$
48,272

 
$

 
$
93,034

 
$

Time and materials
 
42,102

 

 
91,097

 

Cost-plus-fixed-fee
 
73,657

 

 
135,050

 

 
 
$
164,031

 
$

 
$
319,181

 
$

Consolidated
 
$
906,449

 
$
667,048

 
$
2,470,131

 
$
1,946,889


The Company operates internationally, with operations mainly in the United States. The following table presents revenues by geographic location (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
%
 
2017
 
%
 
2018
 
%
 
2017
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
$
867,754

 
95.7
%
 
$
632,584

 
94.8
%
 
$
2,352,993

 
95.3
%
 
$
1,849,567

 
95.0
%
Foreign
 
38,695

 
4.3
%
 
34,464

 
5.2
%
 
117,138

 
4.7
%
 
97,322

 
5.0
%
 
 
$
906,449

 
100.0
%
 
$
667,048

 
100.0
%
 
$
2,470,131

 
100.0
%
 
$
1,946,889

 
100.0
%


14



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; (9) maintenance of our ECS Segment contract backlog; 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” and those updated Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. 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

ASGN Incorporated is a leading provider of IT and professional services in the technology, creative/digital, engineering and life sciences fields across commercial and government sectors. ASGN operates through its Apex, Oxford and ECS segments. The Apex Segment provides technical, scientific, digital and creative services and solutions 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 "hard to find" technical, digital, engineering and life sciences resources and consulting services in select skill and geographic markets. The businesses in this segment include Oxford, CyberCoders and Life Sciences Europe. The ECS Segment delivers advanced solutions in cloud, cybersecurity, artificial intelligence, machine learning, software development, IT modernization and science and engineering and is primarily focused on federal government activities. ECS was acquired on April 2, 2018 (see Note 4. Acquisitions) in the notes to the condensed consolidated financial statements in Part 1, Item 1.

Pro forma revenues and gross profit by segment are presented in the tables and discussion below to provide a more consistent basis for comparison among periods. Pro forma data were 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.


15



Results of Operations

CHANGES IN RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018
COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(Dollars in millions)
 
 
Reported
 
Pro Forma
 
Three Months Ended September 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
Revenues by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
$
575.2

 
$
506.4

 
13.6
%
 
$
575.2

 
$
506.4

 
13.6
%
 
Permanent placement
 
14.4

 
11.1

 
29.6
%
 
14.4

 
11.1

 
29.6
%
 
 
 
589.6

 
517.5

 
14.0
%
 
589.6

 
517.5

 
14.0
%
 
Oxford:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
130.4

 
128.0

 
1.9
%
 
130.4

 
128.0

 
1.9
%
 
Permanent placement
 
22.4

 
21.6

 
3.4
%
 
22.4

 
21.6

 
3.4
%
 
 
 
152.8

 
149.6

 
2.1
%
 
152.8

 
149.6

 
2.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ECS
 
164.0

 

 

 
164.0

 
153.1

 
7.1
%
 
 
 


 
 
 
 
 


 


 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
705.6

 
634.4

 
11.2
%
 
705.6

 
634.4

 
11.2
%
 
Permanent placement
 
36.8

 
32.7

 
12.3
%
 
36.8

 
32.7

 
12.3
%
 
ECS
 
164.0

 

 

 
164.0

 
153.1

 
7.1
%
 
 
 
$
906.4

 
$
667.1

 
35.9
%
 
$
906.4

 
$
820.2

 
10.5
%
 
Percentage of total revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex
 
65.1
%
 
77.6
%
 
 
 
65.1
%
 
63.1
%
 
 
 
Oxford
 
16.8
%
 
22.4
%
 
 
 
16.8
%
 
18.2
%
 
 
 
ECS
 
18.1
%
 
%
 
 
 
18.1
%
 
18.7
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
77.8
%
 
95.1
%
 
 
 
77.8
%
 
77.3
%
 
 
 
Permanent placement
 
4.1
%
 
4.9
%
 
 
 
4.1
%
 
4.0
%
 
 
 
ECS
 
18.1
%
 
%
 
 
 
18.1
%
 
18.7
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
95.7
%
 
94.8
%
 
 
 
95.7
%
 
95.8
%
 
 
 
Foreign
 
4.3
%
 
5.2
%
 
 
 
4.3
%
 
4.2
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 

Revenues on a reported basis increased $239.3 million, or 35.9 percent year-over-year, as a result of (i) the contribution of $164.0 million of revenues from ECS, which was acquired on April 2, 2018 and (ii) year-over-year growth of $75.3 million of revenues, or 11.3 percent, from our other operating divisions. On a pro forma basis, revenues were up $86.2 million, or 10.5 percent, year-over-year.

Revenues from the Apex Segment, which accounted for 65.1 percent of consolidated revenues for the third quarter of 2018, were $589.6 million, up 14.0 percent year-over-year. Assignment revenues, which accounted for 97.6 percent of the segment's revenues for the quarter, grew 13.6 percent year-over-year, primarily related to growth in hours billed and to a lesser extent growth, in average bill rates.

IT services, which accounted for 75.5 percent of the Apex Segment's total revenues, grew 15.1 percent year-over-year with all seven industry verticals reporting growth, four of which (financial services, healthcare, consumer industrial and technology) grew double-digits. Creative/digital services revenues, which accounted for 16.8 percent of the segment's revenues, grew 11.3 percent year-over-year mainly as a result of growth in our corporate business accounts. Our life sciences revenues, which accounted for 7.7 percent of the segment's revenues, were up 8.9 percent year-over-year, primarily related to the $6.0 million contribution from Stratacuity, which was acquired in August 2017.

Revenues from the Oxford Segment, which accounted for 16.8 percent of consolidated revenues for the third quarter of 2018, were $152.8 million, up 2.1 percent year-over-year. Growth in permanent placement revenues accounted for approximately 23.6 percent of the segment's year-over-year revenue growth, driven by an increase in recruiter headcount and productivity partially offset by a reduction in the average fee per placement. Assignment revenues were $130.4 million up 1.9 percent year-over-year. Growth in assignment revenues was primarily from an increase in hours billed mainly related to growth from European operations.

Revenues from the ECS Segment, which accounted for 18.1 percent of consolidated revenues for the third quarter of 2018, were $164.0 million, up 7.1 percent year-over-year on a pro forma basis. This growth was driven by revenues from recent federal contract awards largely in artificial intelligence and machine learning ("AI/ML") solutions. Federal spending is expected to continue to increase in the near term, particularly in the higher-end AI/ML, cybersecurity and cloud solutions areas in which ECS has extensive expertise.

Gross Profit and Gross Margins
 
 
Reported
 
Pro Forma
 
Three Months Ended September 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex
 
$
177.8

 
$
155.7

 
14.2
%
 
$
177.8

 
$
155.7

 
14.2
%
 
Oxford
 
62.7

 
62.6

 
0.3
%
 
62.7

 
62.6

 
0.3
%
 
ECS
 
29.6

 

 

 
29.6

 
27.9

 
6.1
%
 
Consolidated
 
$
270.1

 
$
218.3

 
23.8
%
 
$
270.1

 
$
246.2

 
9.7
%
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex
 
30.2
%
 
30.1
%
 
 
 
30.2
%
 
30.1
%
 
 
 
Oxford
 
41.1
%
 
41.8
%
 
 
 
41.1
%
 
41.8
%
 
 
 
ECS
 
18.1
%
 
%
 
 
 
18.1
%
 
18.2
%
 
 
 
Consolidated
 
29.8
%
 
32.7
%
 
 
 
29.8
%
 
30.0
%
 
 
 

Gross profit is comprised of revenues less costs of services, which consist primarily of compensation for our contract professionals, other direct costs and reimbursable out-of-pocket expenses. Gross profit for the third quarter of 2018 was $270.1 million, up 23.8 percent year-over-year on a reported basis, primarily as a result of the contribution from ECS. Gross margin was 29.8 percent, a compression of 290 basis points year-over-year on a reported basis, primarily due to the inclusion of ECS, which has lower margins than our other segments. On a pro forma basis, our gross margin compressed approximately 20 basis points year-over-year mainly related to a change in business mix.

The Apex Segment accounted for 65.8 percent of consolidated gross profit for the third quarter of 2018. Its gross profit was $177.8 million, up 14.2 percent year-over-year. Gross margin for the segment was 30.2 percent, an expansion of 10 basis points year-over-year, reflecting stable pricing in our end markets.

The Oxford Segment accounted for 23.2 percent of consolidated gross profit for the third quarter of 2018. Its gross profit was $62.7 million, up 0.3 percent year-over-year. Gross margin for the segment was 41.1 percent, compared with 41.8 percent in the same period of last year. The compression in gross margin reflected a higher mix of revenues from its European operations, which have lower gross margins, as well as other changes in business mix.

The ECS Segment accounted for 11.0 percent of consolidated gross profit for the third quarter of 2018. Its gross profit was $29.6 million, up 6.1 percent year-over-year on a pro forma basis. Gross margin for the segment was 18.1 percent, a compression of 10 basis points year-over-year on a pro forma basis, largely related to an increase in the mix of revenues from cost-plus-fixed-fee contracts, which generally have lower gross margins and an increase in costs of services derived from the purchase of materials, and the use of subcontractors.

Selling, General and Administrative Expenses
 
Selling, general and administrative ("SG&A") expenses consist primarily of compensation expense for our field operations and corporate staff, rent, information systems, marketing, telecommunications, public company expenses and other general and administrative expenses. 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 last year. The increase in SG&A expenses is primarily due to (i) an increase in compensation expenses commensurate with growth in the business, and (ii) the inclusion of ECS, which had $14.4 million of SG&A expenses in the quarter. SG&A expenses as a percentage of revenues decreased as ECS has a lower SG&A expenses to revenues ratio when compared with our other segments. SG&A expenses for the third quarter of 2018 included $1.6 million in acquisition, integration and strategic planning expenses. SG&A expenses in the third quarter of 2017 included $1.5 million in acquisition, integration and strategic planning expenses.

Amortization of Intangible Assets

Amortization of intangible assets for the third quarter of 2018 was $18.5 million, compared with $8.2 million in the same period of last year. The increase is related to the intangible assets from the ECS acquisition.
 
Interest Expense
 
Interest expense for the third quarter of 2018 was $14.6 million, compared with $7.1 million in the same period of last year. The increase in interest expense was due to interest on the $822.0 million term B loan facility used to fund the acquisition of ECS. Interest expense for the quarter was comprised of $13.2 million of interest on the credit facility and $1.4 million of amortization of deferred loan costs.


Provision for Income Taxes
 
The provision for income taxes was $10.5 million for the third quarter of 2018, which reflected the lower federal corporate tax rate related to the recently enacted TCJA, compared with $18.9 million in the same period of last year. 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) an adjustment to the provisional TCJA estimates based on recently issued IRS guidelines, which resulted in a total benefit of $2.9 million and (ii) higher excess tax benefits from stock-based compensation and higher employment tax credits.

Net Income

Net income was $49.2 million for the third quarter of 2018, up from $34.9 million in the same period of last year.


16



Results of Operations

CHANGES IN RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(Dollars in millions)

 
 
Reported
 
Pro Forma
 
Nine Months Ended September 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
Revenues by segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
$
1,653.8

 
$
1,469.0

 
12.6
%
 
$
1,653.8

 
$
1,469.0

 
12.6
%
 
Permanent placement
 
41.9

 
33.5

 
25.1
%
 
41.9

 
33.5

 
25.1
%
 
 
 
1,695.7

 
1,502.5

 
12.9
%
 
1,695.7

 
1,502.5

 
12.9
%
 
Oxford:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
386.1

 
379.9

 
1.6
%
 
386.1

 
379.9

 
1.6
%
 
Permanent placement
 
69.2

 
64.5

 
7.2
%
 
69.2

 
64.5

 
7.2
%
 
 
 
455.3

 
444.4

 
2.4
%
 
455.3

 
444.4

 
2.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ECS
 
319.1

 

 

 
468.2

 
435.0

 
7.6
%
 
 
 


 


 
 
 


 


 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
2,039.9

 
1,848.9

 
10.3
%
 
2,039.9

 
1,848.9

 
10.3
%
 
Permanent placement
 
111.1

 
98.0

 
13.3
%
 
111.1

 
98.0

 
13.3
%
 
ECS
 
319.1

 

 

 
468.2

 
435.0

 
7.6
%
 
 
 
$
2,470.1

 
$
1,946.9

 
26.9
%
 
$
2,619.2

 
$
2,381.9

 
10.0
%
 
Percentage of total revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex
 
68.6
%
 
77.2
%
 
 
 
64.7
%
 
63.1
%
 
 
 
Oxford
 
18.4
%
 
22.8
%
 
 
 
17.4
%
 
18.7
%
 
 
 
ECS
 
13.0
%
 
%
 
 
 
17.9
%
 
18.2
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assignment
 
82.5
%
 
95.0
%
 
 
 
77.9
%
 
77.7
%
 
 
 
Permanent placement
 
4.5
%
 
5.0
%
 
 
 
4.2
%
 
4.1
%
 
 
 
ECS
 
13.0
%
 
%
 
 
 
17.9
%
 
18.2
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
95.3
%
 
95.0
%

 
 
95.5
%
 
95.9
%
 
 
 
Foreign
 
4.7
%
 
5.0
%

 
 
4.5
%
 
4.1
%
 
 
 
 
 
100.0
%
 
100.0
%
 
 
 
100.0
%
 
100.0
%
 
 
 


Revenues on a reported basis increased $523.2 million, or 26.9 percent year-over-year, as a result of (i) the contribution of $319.1 million of revenues from ECS, which was acquired on April 2, 2018 and (ii) year-over-year growth of $204.1 million of revenues, or 10.5 percent from our other operating divisions. On a pro forma basis, revenues were up $237.3 million, or 10.0 percent, year-over-year.

Revenues from the Apex Segment, which accounted for 68.6 percent of consolidated revenues for the nine months ended September 30, 2018, were $1.7 billion, up 12.9 percent year-over-year. Assignment revenues, which accounted for 97.5 percent of the segment's revenues for the nine months ended September 30, 2018, grew 12.6 percent year-over-year, primarily related to growth in hours billed and to a lesser extent growth, in average bill rates.

IT services, which accounted for approximately 75.2 percent of the Apex Segment's total revenues, grew 13.7 percent year-over-year with all seven industry verticals reporting growth, five of which (consumer industrial, aerospace and defense/government, financial services, healthcare and technology) grew double-digits. Creative/digital services revenues, which accounted for 17.1 percent of the segment's revenues, grew 9.9 percent year-over-year mainly as a result of growth in corporate business accounts. Our life sciences revenues, which accounted for 7.7 percent of the segment's revenues, were up 11.7 percent year-over-year, primarily related to the $17.2 million contribution from Stratacuity, which was acquired in August 2017.

Revenues from the Oxford Segment, which accounted for 18.4 percent of consolidated revenues for the nine months ended September 30, 2018, were $455.3 million, up 2.4 percent year-over-year. Growth in permanent placement revenues accounted for approximately 42.8 percent of the segment's year-over-year revenue growth, driven by an increase in recruiter headcount and productivity partially offset by a reduction in the average fee per placement. Assignment revenues were $386.1 million for the nine months ended September 30, 2018, up from $379.9 million in the same period of last year. Growth in assignment revenues was primarily from an increase in hours billed mainly related to growth from European operations.

Revenues from the ECS Segment, which accounted for 13.0 percent of consolidated revenues for the nine months ended September 30, 2018, were $319.1 million, on an as reported basis. On a pro forma basis, revenues were up 7.6 percent for the nine months ended September 30, 2018. This growth was largely driven by revenues from recent federal contract awards including services related to delivering next generation enterprise applications, DevOps and AI/ML solutions. Federal spending is expected to increase in the near term, particularly in the higher-end AI/ML, cybersecurity and cloud solutions areas in which ECS has extensive expertise.

Gross Profit and Gross Margins
 
 
Reported
 
Pro Forma
 
Nine Months Ended September 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Apex
 
$
506.1

 
$
445.9

 
13.5
%
 
$
506.1

 
$
445.9

 
13.5
%
 
Oxford
 
187.3

 
183.5

 
2.1
%
 
187.3

 
183.5

 
2.1
%
 
ECS
 
58.3

 

 

 
85.0

 
84.8

 
0.1
%