On Assignment reports revenues up nearly 15%
Second Quarter Highlights
• Revenues were $468.6 million, up 14.9 percent year-over-year and 8.6 percent on a pro forma basis (pro forma assumes the acquisitions of Whitaker Medical, LLC and CyberCoders Holdings, Inc. in December 2013 occurred at the beginning of 2013).
• Adjusted income from continuing operations (a non-GAAP measure defined below) was $30.6 million ($0.56 per diluted share).
• Income from continuing operations was $20.7 million ($0.38 per diluted share). Income from continuing operations included $2.1 million ($1.3 million net of income taxes, or $0.02 per diluted share) in acquisition, integration and strategic planning expenses, which were not included in our previously announced estimates.
• Adjusted EBITDA (a non-GAAP measure defined below) was $54.4 million.
• Leverage ratio (total indebtedness to trailing twelve months Adjusted EBITDA) was 1.98 to 1 at June 30, 2014, down from 2.2 to 1 at December 31, 2013.
• Board of Directors authorized a $100 million share repurchase program.
Commenting on the results, Peter Dameris, President and Chief Executive Officer of On Assignment, Inc., said, “Overall our operating performance in the second quarter was solid as we grew faster than the market and we exceeded our earnings and Adjusted EBITDA estimates. Our gross and Adjusted EBITDA margins expanded year-over-year on a pro forma basis, as our mix of direct hire revenues increased and our contract margins expanded in each of our business segments.
While we are pleased with our overall performance for the quarter, our revenues were slightly below our estimates. These estimates had assumed higher growth in the number of contract professionals on billing at our Oxford IT division and that Oxford would hit an inflection point during the quarter where the number of contractors on billing would exceed the high-water mark of 1,875 set in the second quarter of 2013. While Oxford did hit this inflection point, it occurred much later in the quarter than expected. Revenue growth at Apex was also slightly lower than expected as a result of lower growth from large accounts, which we believe relates to the normal ebb and flow of these accounts.
Looking forward based on current operating trends, we expect above market revenue growth for the remainder of the year. We also expect that our earnings and Adjusted EBITDA for the full year will be within our previously announced estimates and that our revenues for the full year will be slightly below our previously announced estimates.”
Second Quarter 2014 Financial Results
Revenues for the quarter were $468.6 million, up 14.9 percent year-over-year (8.6 percent on a pro forma basis, which assumes the acquisitions of Whitaker Medical and CyberCoders, had occurred at the beginning of 2013). Our largest segment Apex, which accounts for approximately 64 percent of total revenues, grew 13.5 percent year-over-year and accounted for approximately 96 percent of the pro forma revenue growth in the quarter.
Gross profit was $152.7 million, up 25.9 percent year-over-year (10.7 percent on a pro forma basis). This improvement was primarily due to growth in revenues (which included the results of the businesses acquired in December 2013) and expansion in gross margin. Gross margin for the quarter was 32.6 percent, up from 29.7 percent in the second quarter of 2013 and up from 31.3 percent in the first quarter of 2014. The year-over-year expansion in gross margin was mainly attributable to a higher mix of permanent placement revenues (4.9 percent of revenues for the quarter compared with 1.5 percent in the second quarter of 2013) and higher contract margins. The higher mix of permanent placement revenues in the quarter was attributable to the inclusion of CyberCoders, which accounted for $16.0 million of the $22.7 million in permanent placement revenues.
Selling, general and administrative (“SG&A”) expenses were $107.9 million (23.0 percent of revenues), up from $84.3 million(20.7 percent of revenues) in the second quarter of 2013 ($96.6 million, or 22.4 percent of revenues all on a pro forma basis). SG&A expenses for the quarter included acquisition, integration and strategic planning expenses of $2.1 million, most of which related to accrued severance for management personnel terminated in connection with the Company’s realignment and consolidation initiatives. The increase in our reported SG&A expense margin was due to the inclusion of CyberCoders, which has higher gross and expense margins than our other business units.
Amortization of intangible assets was $6.2 million, compared with $5.3 million in the second quarter of 2013. The increase related to amortization from the businesses acquired in December 2013.
Interest expense for the quarter was $3.1 million compared with $4.1 million in the second quarter of 2013. Interest expense for the quarter was comprised of interest on the credit facility of $2.8 million and amortization of capitalized loan costs of $0.3 million. The leverage ratio (total indebtedness to trailing twelve months Adjusted EBITDA) at June 30, 2014 was 1.98 to 1, down from 2.2 to 1 at December 31, 2013.
The effective income tax rate for the quarter was 41.8 percent, a slight increase from the 41.6 percent for the full year 2013.
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization of intangible assets plus equity-based compensation expense, impairment charges, acquisition, integration and strategic planning expenses), was $54.4 million, up from $43.1 million for the second quarter of 2013. Adjusted income from continuing operations was $30.6 million ($0.56 per diluted share). Income from continuing operations (which includes acquisition, integration and strategic planning expenses of$2.1 million, or $1.3 million net of income taxes) was $20.7 million ($0.38 per diluted share) compared with $7.2 million ($0.13per diluted share) for the second quarter of 2013.
Net income, which is comprised of (i) income from continuing operations of $20.7 million and (ii) income from discontinued operations of $0.1 million, totaled $20.8 million ($0.38 per diluted share) compared with $7.3 million ($0.14 per diluted share) in the second quarter of 2013. Net income for 2013 included a $9.2 million after-tax charge related to the write-off of capitalized loan costs following the debt refinancing in May 2013.
Share Repurchase Program
On July 21, 2014, the Board of Directors of the Company approved a program authorizing the Company to repurchase up to $100 million of the Company’s common stock. The share repurchase program will be operated in accordance with the Securities and Exchange Commission’s safe harbor requirements, and the authorization is in effect beginning on August 4, 2014 and continues for two years thereafter.
Financial Estimates for Q3 2014
On Assignment is providing financial estimates for continuing operations for the third quarter of 2014. These estimates do not include acquisition, integration, or strategic planning expenses and assume no deterioration in the staffing markets that On Assignment serves.
• Revenues of $479.0 million to $483.0 million
• Gross margin of 32.4 percent to 32.6 percent
• SG&A expense (excludes amortization of intangible assets) of $108.0 to $109.0 million (includes $3.6 million in depreciation and $4.9 million in equity-based compensation expense)
• Amortization of intangible assets of $6.2 million
• Adjusted EBITDA of $55.5 million to $57.0 million
• Effective tax rate of 41.6 percent
• Adjusted income from continuing operations of $30.7 million to $31.6 million
• Adjusted income from continuing operations per diluted share of $0.55 to $0.57
• Income from continuing operations of $22.1 million to $23.0 million
• Income from continuing operations per diluted share of $0.40 to $0.41
• Diluted shares outstanding of 55.8 million
These estimates assume year-over-year revenue growth on a reported basis in excess of 10 percent for Apex, high teens for Oxford (low single digit on a pro forma basis), over 30 percent for Physician (low single digits on a pro forma basis) and mid-single digit growth for Life Sciences-Europe. Pro forma growth rates assume the acquisitions of CyberCoders (included in Oxford segment) and Whitaker Medical (included in Physician segment) occurred at the beginning of 2013. For the full year, we expect our earnings and Adjusted EBITDA to be within our previously announced estimates and expect revenues to be slightly (approximately 0.3 percent) below the low-end of our previously announced full year estimates.