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On Assignment announces two acquisitions, sale of its Allied Healthcare unit & updated Q4 estimate

On Assignment today announced the following transactions: a definitive agreement to acquire CyberCoders Holdings, Inc., a leading national permanent placement recruiting firm the acquisition of Whitaker Medical, LLC, a leading physician staffing firm and the sale of its Allied Healthcare business unit to Cross Country Healthcare, Inc. (NASDAQ:CCRN), a company that specializes in healthcare staffing. The Company also updated its estimates for the fourth quarter of 2013.

Highlights:

Entered into a definitive agreement to acquire CyberCoders Holdings, Inc., a technology-enabled permanent placement recruiting firm, for $94 million in cash and an earn-out opportunity of $11 million.

Completed acquisition of Whitaker Medical, LLC, a physician staffing firm, for $17.1 million in cash and an earn-out opportunity of $5 million.

Completed sale of the Allied Healthcare unit for $28.7 million. Operating results of this unit will be treated as discontinued operations.

Updated Q4 estimates to reflect the two acquisitions, the sale of Allied Healthcare and recent operating developments.

“These transactions are all part of our publicly stated drive to strategically grow the Company and solidify our position as a top player in the markets we serve,” said Peter T. Dameris, On Assignment’s President and Chief Executive Officer. “We are constantly evaluating our business mix and service offerings to ensure that we thoroughly understand the ever-changing demand and service delivery trends in the professional staffing industry. By doing this, we can not only better meet the needs of our customers, but also create the best opportunities for our employees and put the Company in the strongest position possible for the long-term benefit of our stockholders.”

Acquisition of CyberCoders Holdings, Inc.

On November 25, 2013, the company entered into a definitive agreement to purchase CyberCoders Holdings, Inc. (“CyberCoders”), a leading technology-enabled national permanent placement recruiting firm, for $94 million in cash and up to an additional $11 million based on future operating performance. The acquisition is expected to close in early December. The purchase price will be funded out of cash on hand and borrowings under the Company’s revolving credit facility.

Estimated 2013 revenues for CyberCoders are $55 million with an EBITDA margin of approximately 25 percent. The inclusion of CyberCoders will increase the Company’s mix of permanent placement revenues to over 4.5 percent of consolidated revenues (currently at 1.7 percent) and result in an expansion of 175 to 200 basis points in consolidated gross margin and 50 basis points in Adjusted EBITDA margin (a non-GAAP term defined below). The Company believes CyberCoders’ growth rate in 2014 will be in the high teens.

CyberCoders is based in Irvine, California, with additional offices in Los Angeles, Boston and New York. Its dedicated team of over 200 recruiters utilizes innovative and proprietary technology to place middle and senior level professionals with IT, healthcare and life sciences skills in permanent positions.

CyberCoders will become a division of On Assignment and continue to operate under the CyberCoders brand name. Heidi Golledge, CyberCoders’ Founder and Chief Executive Officer, and Matt Miller, Chief Technology Officer, will continue to oversee the day-to-day operations of the business. Golledge will report to On Assignment’s Chief Operating Officer Michael McGowan.

“CyberCoders has an impressive track record of consistent revenue growth and high margins,” said Dameris. “The success of the company is a testament to its talented management team, its unique culture which motivates its dedicated and hardworking recruiters, and technology-based business model. All of which we will be able to leverage as we seek to expand our activities in the attractive permanent placement marketplace. We believe that On Assignment’s more than 600-person sales team will accelerate CyberCoders’ growth by sharing with them the permanent placement leads that come through our Apex, Oxford, Healthcare and Life Sciences divisions. These are leads that historically we have not pursued or aggressively worked on, and are not easily filled by our existing staff.

“Because we are putting together two complementary businesses, there is very little integration risk and therefore we expect CyberCoders’ transition to On Assignment to be a smooth one,” Dameris continued. “The acquisition will also allow us to better serve our customers since we will now be able to not only meet their staff augmentation needs, but also provide them with permanent placement services on a contingent basis. As a result, we believe that CyberCoders complements our current service offerings across all the On Assignment divisions quite well.”

Acquisition of Whitaker Medical, LLC

On December 2, 2013, the Company acquired Whitaker Medical, LLC (“Whitaker”), a physician staffing business based in Houston, Texas, for $17.1 million in cash at closing and up to an additional $5 million based on future operating performance. The purchase price was paid out of cash on hand.

Estimated 2013 revenues for Whitaker are approximately $27 million. Whitaker is expected to grow above the growth rate for the physician staffing industry and its margins are comparable to the Company’s legacy physician staffing business.

Whitaker provides experienced health practitioners across a wide variety of subspecialties to medical facilities across the country and has been in business for more than 20 years. Whitaker also has offices in Atlanta, Austin, and Huntsville, Alabama. Whitaker will become a part of the Company’s VISTA Staffing Solutions business, making VISTA the fourth largest physician staffing practice in the United States with combined pro forma 2013 revenues of over $130 million.

“We are also very fortunate to have Whitaker join the On Assignment family,” said Dameris. “Whitaker’s concentration on the primary care market and geographic locations in the south are highly complementary to VISTA’s existing physician staffing business. In addition to their focus on physician staffing, Whitaker possesses strong expertise in advanced practice, including physician assistants, nurse anesthetists and nurse practitioners, which we believe to be one of the fastest growing segments in healthcare staffing.”

Sale of Allied Healthcare Unit

On Assignment also announced the sale of certain operating assets of its Allied Healthcare division (“Allied Unit”) to a subsidiary of Cross Country Healthcare, Inc. for $28.7 million in cash. The Company will retain the working capital of the Allied Unit, which is approximately $3.6 million. The Allied Unit accounted for approximately 2.5 percent of the Company’s consolidated revenues and Adjusted EBITDA for the nine months ended September 30, 2013. As a result of the sale, the operating results of the Allied Unit will be reported as discontinued operations. The Condensed Consolidated Statements of Operations and Comprehensive Income presented below have been retroactively restated to report the Allied Unit as discontinued operations. Excluded from the sale of the Allied Unit is the Company’s Health Information Management practice, which will become part of Oxford’s Healthcare IT group.

“As we evaluated the allied healthcare staffing market, it became clear to us that it would be difficult to get this business unit, which is a tremendous asset and performs important and high-quality work, to the scale they need to be at On Assignment,” Dameris said. “We felt that Cross Country, which has a larger share of this market and deeper penetration into acute care facilities, can grow this business and allow it to flourish and would therefore be a better home for its employees and the unit.”

Pro Forma Financial Estimates for Q4 2013

On Assignment is providing pro forma financial estimates from continuing operations for the fourth quarter of 2013. These pro forma financial estimates exclude the operating results of the Allied Unit (which will be treated as discontinued operations) and include the operating results of CyberCoders and Whitaker as if those acquisitions had occurred at the beginning of the fourth quarter. These estimates do not include any acquisition-related costs or strategic planning expenses. Estimated revenues and EBITDA of the Allied Unit for the fourth quarter are approximately $10.9 million and $0.9 million, respectively, which were included in the Company’s previously announced Q4 financial estimates. Estimated revenues and EBITDA of the two acquisitions on a pro forma basis for the fourth quarter are approximately $20.0 million and $4.0 million, respectively.

Previously-Announced

Pro Forma

(in millions, except per share amounts)

Q4 Financial Estimates

Q4 Financial Estimates

 

From

To

From

To

Revenues

$

429.0

 

$

433.0

 

$

433.0

 

$

436.0

Gross Margin

 

29.8

%

 

30.1

%

 

31.8

%

 

32.1

%

SG&A Expenses

$

90.0

 

$

91.0

 

$

96.0

 

$

97.0

Amortization of Intangible Assets

$

5.2

 

$

5.2

 

$

6.5

 

$

6.5

Adjusted EBITDA

$

44.0

 

$

46.0

 

$

48.0

 

$

50.0

Effective Tax Rate

 

41.5

%

 

41.5

%

 

41.5

%

 

41.5

%

Income from Continuing Operations

$

17.2

 

$

18.3

 

$

18.3

 

$

19.5

Income per Diluted Share

$

0.31

 

$

0.33

 

$

0.33

 

$

0.36

Adjusted Income per Diluted Share

$

0.46

 

$

0.48

 

$

0.50

 

$

0.52

Diluted shares outstanding

 

54.7

 

54.7

 

54.7

 

54.7

 

 

 

 

SG&A Expenses include:

 

 

 

 

Equity-based compensation expense

$

3.9

 

$

3.9

 

$

3.9

 

3.9

Depreciation

$

2.4

 

$

2.4

 

$

2.7

 

2.7

Updated Financial Estimates for Q4 2013

The financial estimates below reflect operating results from continuing operations for the fourth quarter. Accordingly, these financial estimates exclude the operating results of the Allied Unit (which will be reported as discontinued operations) and include the operating results of the two acquired businesses from the date of acquisition through the end of the quarter. These estimates do not include any acquisition-related costs or strategic planning expenses. Estimated revenues and EBITDA of the Allied Unit for the fourth quarter are approximately $10.9 million and $0.9 million, respectively, which were included in the previously announced Q4 financial estimates, but are not included in the revised estimates as those results will be reported as discontinued operations. The estimates below include revenues of $4.0 to $6.0 million from the acquisitions and estimated EBITDA of $0.7 million to $1.0 million from the acquisitions, which assume Whitaker’s operating results will be included for the full month of December and CyberCoders for the last 3.5 weeks of December.

The differences between the pro forma financial estimates in the table above and the revised financial estimates below relate to the extent the operating results of the two acquisitions are included in the respective financial estimates. The pro forma financial estimates above include the operating results of the acquisitions for the entire fourth quarter, whereas the revised financial estimates below include the operating results of the acquisitions from the date of acquisition through the end of the quarter (i.e., the month of December for Whitaker and the last 3.5 weeks of December for CyberCoders).

Revenues of $418 to $422 million

Gross margin of 30.5 to 30.7 percent

SG&A (excludes amortization of intangible assets) of $88.0 to $89.0 million (includes $2.5 million in depreciation and $3.9 million in equity-based compensation)

Amortization of intangible assets of $5.6 million

Adjusted EBITDA of $45.5 million to $46.5 million

Effective tax rate of 41.5 percent

Income from continuing operations of $17.0 to $18.2

Income from continuing operations of $0.31 to $0.33 per diluted share

Adjusted income from continuing operations of $0.46 to $0.48 per diluted share

Diluted shares outstanding of 54.7 million

The pro forma and revised financial estimates also reflect adjustments to the Company’s Q4 2013 financial estimates for its other operating units based on actual results through October and revised estimates for November and December. The current revenue estimate for these units is below our previously announced estimates with no appreciable change in Adjusted EBITDA or income from continuing operations. The downward revision in revenues mainly related to Oxford and was due a number of factors, including, (i) the effects of the loss of Oxford’s largest customer in Q3 (which accounted for $5.9 million in revenues in Q4 of 2012 and $2.6 million in Q3 of 2013), (ii) a higher than expected sequential drop in revenues from Oxford’s Healthcare IT Group as spending on a number of projects have been slowed or delayed until Q1 of 2014, (iii) slower than expected growth in new practices and disciplines and (iv) fewer than expected billing days based on recent client feedback on planned shutdowns over the Christmas and New Year’s holidays.

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