On Assignment reports Q3 results
On Assignment, a leading global provider of diversified professional staffing solutions, today reported results for the quarter ended September 30, 2013.
Third Quarter Highlights
• Revenues were $432.2 million, up 15.4 percent year-over-year and 3.4 percent sequentially.
• Gross margin was 30.2 percent, up from 29.8 percent in the preceding quarter.
• Income from continuing operations was $20.2 million ($0.37 per diluted share), up from $14.7 million ($0.28 per diluted share) in the third quarter of 2012.
• Adjusted income from continuing operations (a non-GAAP measure set forth in the table below) was $28.5 million ($0.52 per diluted share).
• Adjusted EBITDA (a non-GAAP measure defined below) was $48.8 million, up from $43.8 million in third quarter of 2012.
• Percentage of gross profit converted into Adjusted EBITDA was 37.4 percent, up from 35.5 percent in second quarter of 2013.
• Leverage ratio (total indebtedness to trailing twelve months Adjusted EBITDA) was 2.16 to 1, down from 2.88 to 1 at December 31, 2012.
Commenting on the results, Peter Dameris, president and CEO of On Assignment, said, “We reported a very strong quarter. Revenues, gross margin, EPS and Adjusted EBITDA were at or above the high-end of our estimates. We continued to improve our operating leverage as evidenced by the percentage of gross profit converted into Adjusted EBITDA. Our conversion of gross profit into Adjusted EBITDA for the quarter was 37.4 percent, up from 35.5 percent in the second quarter of 2013.”
“Our strong revenue growth for the quarter was mainly driven by our IT businesses, Apex Systems and Oxford, which account for approximately 80 percent of our operations. Revenues from our IT businesses grew 19.1 percent year-over-year and 3.4 percent sequentially. In that sector of the market, we are the second largest provider of staffing services and we continue to grow faster than the overall market reflecting the benefit of our scale and operating models. We also continue to believe we are benefiting from a shift in spending toward IT staffing and away from other IT services delivery models, such as consulting and offshoring, as CIOs continue to focus sharply on project flexibility and accountability and cost control.”
“Revenues of our non-IT businesses (Life Sciences, Physician & Healthcare), which combined account for approximately 20 percent of our operations, were up 2.5 percent year-over-year and 3.4 percent sequentially. The growth of these businesses, except for the Physician segment, was in line with our estimates. The Physician business was down 4.6 percent year-over-year and below our revenue estimate for the quarter by $1.5 million, due to a less than robust hospital admissions environment. Our Life Sciences and Healthcare segments continue to improve and both reported revenue growth of 5.4 percent sequentially.”
Revenues for the quarter were $432.2 million, up 15.4 percent year-over-year and 3.4 percent sequentially. Our Information Technology businesses (Apex Systems and Oxford), which grew 19.1 percent year-over-year and 3.4 percent sequentially, accounted for 96 percent of the revenue growth in the quarter. Our non-Information Technology segments (Life Sciences, Physician and Healthcare), were up 2.5 percent year-over-year and 3.4 percent sequentially.
Gross profit was $130.6 million, up 13.0 percent year-over-year and up 4.9 percent sequentially. This improvement was primarily due to growth in revenues. Gross margin for the quarter was 30.2 percent, down from 30.9 percent in the third quarter of 2012 and up from 29.8 percent in the second quarter of 2013. The year-over-year compression in gross margin was mainly attributable to a lower mix of permanent placement revenues (1.7 percent of revenues for the quarter compared with 2.0 percent in the third quarter of 2012), a higher mix for revenues from Apex Systems, which has a lower gross margin than the other operating segments, and higher growth of lower-margin services. The sequential expansion in gross margin was primarily due to an increase in the mix of permanent placement revenues which was 1.7 percent of revenues for the quarter, up from 1.5 percent in the second quarter of 2013.
Selling, general and administrative expenses (“SG&A”) were $88.5 million, up from $77.4 million in the third quarter of 2012. This increase due to incentive compensation related to the incremental increase in gross profit and infrastructure investments to support the growth of the business. SG&A for the quarter included a $1.0 million benefit for the reduction of an earn-out obligation (a $1.0 million reduction in an earn-out obligation was also included in the third quarter of 2012) and charges totaling $0.7 million for certain non-recurring expenses.
Amortization of intangible assets was $5.2 million, compared with $6.7 million in the third quarter of 2012.
Interest expense for the quarter was $3.3 million compared with $6.0 million in the third quarter of 2012. Interest expense for the quarter was comprised of interest on the credit facility of $3.0 million and amortization of capitalized loan costs of $0.3 million.
The effective income tax rate for the quarter was 39.9 percent compared with 42.5 percent for the third quarter of 2012. The improvement in the effective tax rate for the quarter benefited from the $1.0 million reduction in an earn-out obligation, which is not taxable and higher growth in income before income taxes than the growth in permanent book-to-tax differences.
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization of identifiable intangible assets plus equity-based compensation expense, impairment charges, acquisition-related costs and fees and expenses of the outside consulting firm assisting with our strategic planning initiatives), was $48.8 million, up from $43.8 million for the third quarter of 2012.
Income from continuing operations was $20.2 million ($0.37 per diluted share) compared with $14.7 million ($0.28 per diluted share) for the third quarter of 2012.
Net income, which is comprised of income from continuing operations and the income (loss) from discontinued operations, was $20.2 million ($0.37 per diluted share) compared with $15.5 million ($0.29 per diluted share) in the third quarter of 2012. Net income for the quarter included (i) acquisition-related costs and strategic planning expenses of $0.5 million ($0.3 million, or $0.01 per diluted share, after tax) and (iii) a $0.1 million loss from discontinued operations.
Financial Estimates for Q4 2013
On Assignment is providing below financial estimates from continuing operations for the fourth quarter of 2013. These estimates do not include acquisition-related costs and strategic planning expenses and assume no deterioration in the staffing markets that On Assignment serves.
• Revenues of $429 million to $433 million
• Gross Margin of 29.8 percent to 30.1 percent
• SG&A (excludes amortization of intangible assets) of $90.0 to $91.0 million (includes $2.4 million in depreciation and $3.9 million in equity-based compensation expense)
• Amortization of intangible assets of $5.2 million
• Adjusted EBITDA of $44 million to $46 million
• Effective tax rate of 41.5 percent
• Adjusted Income from Continuing Operations of $25.1 million to $26.3 million
• Adjusted Income from Continuing Operations per diluted share of $0.46 to $0.48
• Income from Continuing Operations of $17.1 million to $18.3 million
• Income from Continuing Operations per diluted share of $0.31 to $0.33
• Diluted shares outstanding of 54.7 million
These estimates reflect normal seasonality in the business. The estimates assume year-over-year revenue growth of approximately mid-to high teens for IT segments (Apex Systems and Oxford), mid-single digit for Life Sciences, low single digit decline for Physician Staffing and modest growth in Allied Healthcare. The above estimates assume billable days of 61.4 for the quarter, which are 2.3 fewer days than the preceding quarter. The fewer billable days in the fourth quarter results in a sequential decrease in revenues of approximately $15.6 million based on the average revenues per billable day in the third quarter of 2013.