(In thousands)

		Nine Months Ended September 30,
		2009				2008
Cash Flows from Operating Activities:
Net income		$	3,672			$	15,432
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			4,349				3,775
Amortization of intangible assets			4,571				7,068
Provision for doubtful accounts and billing adjustments			75				277
Deferred income tax (benefit) expense			(55	)			13
Stock-based compensation			3,721				4,742
Amortization of deferred loan costs			640				444
Change in fair value of interest rate swap			(1,345	)			(352	)
(Gain) loss on officers’ life insurance policies			(414	)			518
Gross excess tax benefits from stock-based compensation			—				(69	)
(Gain) loss on disposal of property and equipment			(254	)			101
Workers’ compensation and medical malpractice provision			3,563				4,148
Changes in operating assets and liabilities:
Accounts receivable			29,027				(9,710	)
Prepaid expenses			2,577				1,438
Prepaid income taxes			2,267				(2,592	)
Accounts payable			(183	)			296
Accrued payroll and contract professional pay			(6,746	)			5,137
Deferred compensation			352				(153	)
Workers’ compensation and medical malpractice loss reserves			(2,841	)			(3,332	)
Other			(2,407	)			(1,455	)
Net cash provided by operating activities			40,569				25,726
Cash Flows from Investing Activities:
Purchase of property and equipment			(3,730	)			(6,344	)
Net cash paid for acquisitions			(5,341	)			(9,013	)
Proceeds from insurance claim			512				—
Other			182				(367	)
Net cash used in investing activities			(8,377	)			(15,724	)
Cash Flows from Financing Activities:
Net proceeds from stock transactions			196				1,735
Gross excess tax benefits from stock-based compensation			—				69
Deferred loan costs			(1,065	)			—
Payments of other long-term liabilities			(122	)			(344	)
Principal payments of long-term debt			(43,000	)			—
Net cash (used in) provided by financing activities			(43,991	)			1,460
Effect of exchange rate changes on cash and cash equivalents			596				(489	)
Net (Decrease) Increase in Cash and Cash Equivalents			(11,203	)			10,973
Cash and Cash Equivalents at Beginning of Period			46,271				37,764
Cash and Cash Equivalents at End of Period		$	35,068			$	48,737

 (continued)

 

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		Nine Months Ended September 30,
		2009				2008
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes, net of refunds		$	985			$	14,540
Interest		$	7,033			$	6,974
Supplemental Disclosure of Non-Cash Transactions:
Acquisition of property and equipment through accounts payable		$	564			$	464

See notes to condensed consolidated financial statements.

 

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ON ASSIGNMENT, INC. AND SUBSIDIARIES

1. Financial Statement Presentation. The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This 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, 2008. Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year or any other period.  The Company has evaluated subsequent events through November 9, 2009 for appropriate accounting and disclosure, the date the financial statements were issued.

2. Accounting Standards Updates. In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162.”   SFAS 168 made the FASB Accounting Standards Codification (the Codification) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants.  The Company adopted the disclosure requirements of the Codification in the current quarter with no impact on the consolidated financial statements.  In the description of Accounting Standards Updates that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate.

In August 2009, an update was made to “Fair Value Measurements and Disclosures” on measuring liabilities at fair value. The guidance provides clarification that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using a valuation technique that uses the quoted price of an identical liability when traded as an asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as assets. If none of this information is available, an entity should use a valuation technique in accordance with existing fair valuation principles.   The Company is in the process of evaluating the impact of this guidance on the Company’s consolidated financial position or results of operations, which will be effective in the quarter ended December 31, 2009.

In May 2009, an update was made to “Subsequent Events” on accounting and disclosure.  The Company adopted this guidance in the quarter ended June 30, 2009 with no impact on the consolidated financial statements. See Note 1 for the disclosure required by this standard.

In April 2009, an update was made to “Fair Value Measurements and Disclosures” on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are not orderly.  The Company adopted this guidance in the quarter ended June 30, 2009 with no impact to the consolidated financial statements.

In April 2009, an update was made to “Business Combinations” to include additional requirements regarding accounting for assets acquired and liabilities assumed in a business combination. The Company implemented these requirements with no impact on the consolidated financial statements.

In April 2009, an update was made to “Financial Instruments” to include additional requirements regarding interim disclosures about the fair value of financial instruments which were previously only disclosed on an annual basis. The Company adopted these requirements in the quarter ended June 30, 2009. See Note 5 for the additional disclosures required by this standard.

On January 1, 2009, the Company implemented the deferred provisions under “Fair Value Measurements and Disclosures” related to non-financial assets and liabilities.  See Note 5 for the additional disclosures required by this standard.

On January 1, 2009, the Company adopted the guidance in “Derivative Instruments and Hedging Activities.”  See Note 4 for the additional disclosures required by this standard.

Other Accounting Standards Updates which are not effective until after September 30, 2009, are not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

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3. Long-Term Debt. Long-term debt at September 30, 2009 and December 31, 2008, consisted of the following (in thousands):

		September 30, 2009				December 31, 2008
Senior Secured Debt:
$20 million revolving credit facility, due January 2012		$	—			$	—
$145 million term loan facility, due January 2013			82,913				125,913
Total		$	82,913			$	125,913

On March 27, 2009, the Company entered into an amendment to its senior credit facility that modified certain financial covenants.  Under the terms of the amended facility, the maximum total leverage ratio (total debt to adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, as defined by the credit agreement for the preceding 12 months) is as follows:

January 1, 2009 – December 31, 2009	3.25 to 1.00
January 1, 2010 – September 30, 2010	3.00 to 1.00
October 1, 2010 – December 31, 2011	2.75 to 1.00
January 1, 2012 and thereafter	2.50 to 1.00

The minimum interest coverage ratio (EBITDA to interest expense, as defined by the credit agreement for the preceding 12 months) is 4.00 to 1.00 until maturity.  The amendment also modified the definition of the LIBOR rate to include a 3.0 percent floor and increased the spread on revolving and term loans by 150 basis points to 3.75 percent. In connection with the amendment, the Company paid down the principal balance on the term loan by $15.0 million.  The credit facility is secured by all of the assets of the Company.  As of September 30, 2009, the Company was in compliance with all covenants under its agreement with the credit facility and expects to remain in compliance for the next 12 months.

The Company paid $10.0 million in the second quarter and $18.0 million in the third quarter against the principal balance of the term loan.  At the end of every year, the Company may need to make payments related to excess cash flow as defined by the debt agreement.  The principal payments made to date on the term loan were sufficient to cover required payments under the credit facility, as well as all minimum quarterly payments until maturity on January 31, 2013.

4. Derivative Instruments.  The Company utilizes derivative financial instruments to manage interest rate risk. The Company does not use derivative financial instruments for trading or speculative purposes, nor does it use leveraged financial instruments.

On May 2, 2007, the Company entered into a transaction with a financial institution to fix the underlying interest rate on $73.0 million of its outstanding bank loan for a period of two years beginning June 30, 2007. This transaction, commonly known as an interest rate swap, essentially fixed the Company’s base borrowing rate at 4.9425 percent as opposed to a floating rate, which reset at selected periods. The current base rate on the loan balance in excess of $73.0 million was 3.75 percent plus LIBOR (subject to a 3.00 percent LIBOR floor).  On June 30, 2009, the swap expired in accordance with the terms of the agreement.  The Company recorded a gain of $1.3 million for the nine months ended September 30, 2009, and a gain of $0.5 million and $0.4 million for the three and nine months ended September 30, 2008, respectively for the change in fair value of the interest rate swap.  The gain on the swap is included in interest expense in the consolidated statements of operations and comprehensive income.

The interest rate swap was not designated as a hedging instrument for accounting purposes.  The fair value of the interest rate swap was the estimated amount the Company would have received to terminate the swap agreement at the reporting date, taking into account current interest rates and the creditworthiness of the Company and the swap counterparty depending on whether the swap was in an asset or liability position, referred to as a credit valuation adjustment.  The interest rate swap expired on June 30, 2009, thus there was no related fair value measurement as of September 30, 2009. The Company’s fair value measurement as of December 31, 2008 using significant other observable inputs (Level 2) for the interest rate swap was $1.3 million, and was included in the condensed consolidated balance sheets in other current liabilities. The interest rate swap was a pay-fixed, receive-variable interest rate swap based on a LIBOR swap rate. The LIBOR swap rate was observable at commonly quoted intervals for the full term of the swap and, therefore, was considered a Level 2 item.  Credit risk related to the swap was considered minimal and was managed by requiring high credit standards for the counterparty and periodic settlements of the underlying transactions.

 

 

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Prior to the expiration of the interest rate swap on June 30, 2009, the Company entered into an interest rate cap contract effective July 1, 2009, in order to mitigate the interest rate risk as required by the amended credit agreement.  The interest rate cap contract is for a notional amount of $51.0 million with a one-month LIBOR cap of 3.0 percent for a term of one year.  As this agreement has not been designated as a hedging instrument, changes in the fair value of this agreement will increase or decrease interest expense.  The Company’s fair value measurement as of September 30, 2009 using significant other observable inputs (Level 2) for the interest rate cap was not significant. The LIBOR rate is observable at commonly quoted intervals for the full term of the interest rate cap contract and, therefore, is considered a Level 2 item.  Credit risk related to the contract is considered minimal and will be managed by requiring high credit standards for the counterparty and periodic settlements.

The following table reflects the fair values of the derivative instruments as of September 30, 2009 (in thousands):

 

	Asset Derivative					Liability Derivative
Derivative not Designated as Hedging Instruments	Balance Sheet Location		Fair Value			Balance Sheet Location	Fair Value
Interest rate cap	—		$	—		Other current liabilities	$	—

 

The following table reflects the effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2009 (in thousands):

Derivative not Designated as Hedging Instruments	Location of Gain Recognized in Income on Derivative		Amount of Gain Recognized in Income on Derivative
			Three Months Ended				Nine Months Ended
			September 30, 2009
Interest rate swap	Interest expense		$	—			$	1,345
Interest rate cap	Interest expense		$	—			$	—

5. Fair Value of Financial Instruments.  The recorded values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value based on their short-term nature.

The interest rate cap was the only financial instrument carried at fair value on a recurring basis at September 30, 2009. The interest rate swap expired on June 30, 2009 (see Note 4 for the fair value disclosures).

The following table presents the carrying amounts and the related estimated fair values of the Company’s financial instruments not recorded at fair value (in thousands):

		September 30, 2009								December 31, 2008
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In thousands)
Assets
Life Insurance Policies		$	2,050			$	2,050			$	1,610			$	1,610
Liabilities
Long-Term Debt		$	82,913			$	78,146			$	125,913			$	107,026

The Company maintains life insurance policies for use as a funding source for its deferred compensation arrangements. These life insurance policies are recorded at their cash surrender value as determined by the insurance broker. Amounts associated with these policies are recorded in other assets in the condensed consolidated balance sheets.  The fair value of the long-term debt is based on the yields of comparable companies with similar credit characteristics.

Certain assets and liabilities 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).  At September 30, 2009, no fair value adjustments were required for non-financial assets or liabilities.

 

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6. Goodwill and Identifiable Intangible Assets. The changes in the carrying amount of goodwill for the nine months ended September 30, 2009 are as follows (in thousands):

		Life Sciences				Healthcare				Physician				IT and Engineering				Total
Balance as of January 1, 2009		$	1,197			$	15,912			$	37,143			$	148,525			$	202,777
Purchase price adjustment – earn-out			―				―				20				―				20
Balance as of September 30, 2009		$	1,197			$	15,912			$	37,163			$	148,525			$	202,797

In December 2008, the Company accrued for earn-out payments related to the 2008 financial performance of Oxford Global Resources, Inc. (Oxford) and VISTA Staffing Solutions, Inc. (VISTA).  The VISTA earn-out payment of $5.3 million was paid in April 2009. Oxford’s earn-out payment of $4.8 million was paid in October 2009.  VISTA’s purchase price included a $4.1 million holdback for potential claims that are indemnifiable by the selling shareholders pursuant to the acquisition agreement. The Company released $3.1 million of the $4.1 million holdback for potential claims that are indemnifiable by the selling shareholders of VISTA as of September 30, 2009. The remaining $1.0 million has been held back pending the resolution of the Company’s claims for indemnification which is expected to be settled in the first quarter of 2010.

As of September 30, 2009 and December 31, 2008, the Company had the following acquired intangible assets (in thousands):

			September 30, 2009												December 31, 2008
	Estimated Useful Life		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Intangible assets subject to amortization:
Customer relations	3 months - 7 years		$	17,615			$	16,648			$	967			$	17,615			$	14,387			$	3,228
Contractor relations	3 - 7 years			26,012				22,360				3,652				26,012				20,134				5,878
Non-compete agreements	2 - 3 years			390				352				38				390				268				122
In-use software	2 years			500				500				—				500				500				—
				44,517				39,860				4,657				44,517				35,289				9,228
Intangible assets not subject to amortization:
Trademarks				22,200				—				22,200				22,200				—				22,200
Goodwill				202,797				—				202,797				202,777				—				202,777
Total			$	269,514			$	39,860			$	229,654			$	269,494			$	35,289			$	234,205

Amortization expense for intangible assets with finite lives was $1.5 million and $2.4 million for the three months ended September 30, 2009 and 2008, respectively.  Amortization expense for intangible assets with finite lives was $4.6 million and $7.1 million for the nine months ended September 30, 2009 and 2008, respectively.  Estimated amortization for the remainder of 2009 is $1.5 million.  Estimated amortization for each of the four years ending December 31, 2013 is $1.7 million, $0.7 million, $0.4 million and $0.4 million, respectively.

Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. Goodwill and intangible assets with indefinite lives are reviewed for impairment on an annual basis as of December 31, and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Intangible assets with indefinite lives consist of trademarks.  In order to test the trademarks for impairment, we determine the fair value of the trademarks and compare to its carrying value. We determine the fair value of the trademarks using a projected discounted cash flow analysis based on the relief-from-royalty approach. The principal factors used in the discounted cash flow analysis requiring judgment are projected net sales, discount rate, royalty rate and terminal value assumption. The royalty rate used in the analysis is based on transactions that have occurred in the Company’s industry.  Intangible assets having finite lives are amortized over their useful lives and are reviewed to ensure that no conditions exist indicating the recorded amount is not recoverable from future undiscounted cash flows.

 

 

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Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit.  This first step is a screen for impairment.  The second step, if necessary, measures the amount of impairment, if any. The fair value was determined based upon discounted cash flows prepared for each reporting unit. Cash flows are developed for each reporting unit based on assumptions including revenue growth expectations, gross margins, operating expense projections, working capital, capital expense requirements and tax rates. The multi-year financial forecasts for each reporting unit used in the cash flow models considered several key business drivers such as new product lines, historical performance and industry and economic trends, among other considerations.

The principal factors used in the discounted cash flow analysis requiring judgment are the projected results of operations, discount rate, and terminal value assumptions. The discount rate is determined using the weighted average cost of capital (WACC).  The WACC takes into account the relative weights of each component of the Company’s consolidated capital structure (equity and debt) and represents the expected cost of new capital adjusted as appropriate to consider lower risk profiles associated with such things as longer term contracts and barriers to market entry.  It also considers our risk-free rate of return, equity market risk premium, beta and size premium adjustment. A single discount rate is utilized across each reporting unit since the Company does not believe that there would be significant differences by reporting unit.  Additionally, the selection of the discount rate accounts for any uncertainties in the forecasts.  The terminal value assumptions are applied subsequent to the tenth year of the discounted cash flow model.

For purposes of establishing inputs for the estimated fair value calculations described above, an annual revenue growth rate was applied based on the then current economic and market conditions and a terminal growth rate of 4.0 percent.  These growth factors were applied to each reporting unit for the purpose of projecting future cash flows.  The cash flows as of December 31, 2008 were discounted at a rate of approximately 12.0 percent.  No impairment of goodwill or intangible assets with indefinite lives was determined to exist as of December 31, 2008.

The Company determined that there had been a triggering event as of March 31, 2009 due to the fact that the market capitalization was below book value, and there was a significant decline in forecasted cash flows for 2009.   The Company revised the assumptions used to determine the fair value of each reporting unit as of March 31, 2009 from those assumptions used at December 31, 2008 to reflect estimated reductions in future expected cash flows for 2009 and 2010 and to increase forecasts for 2011 and later years based on our review of the historical revenue growth rates. The discount rate used was approximately 13.5 percent.  The interim analysis performed at March 31, 2009 did not indicate impairment.

The Company determined that there continued to be a triggering event as of June 30, 2009 due to the fact that our market capitalization continued to be below book value, and due to additional reductions in forecasted cash flows for 2009 based on actual results through June 30, 2009.  Step one of the impairment analysis was performed as of June 30, 2009.  The assumptions used to determine the fair value of each reporting unit as of June 30, 2009 were revised from the assumptions used at March 31, 2009 to reflect further reductions in future expected cash flows for 2009 and 2010, offset by future expected increases in cash flows from cost savings measures taken in 2009 and revised cash flow forecasts for later years to incorporate future cost savings resulting from initiatives which contemplate further synergies from system and operational improvements in infrastructure and field support. Given the current economic environment as of June 30, 2009, the Company evaluated historical revenue growth rates experienced during a recovery from a recession in establishing inputs.  Despite the significant decline in revenue in 2009 as a result of the economic downturn, large annual increases were forecasted over the next four to five years anticipating an economic recovery. Revenue was forecasted to stabilize in the second half of 2009.  Revenue growth rates in the years beginning in 2010 reflect a recovery from the recession, but were within the range of historical growth rates experienced during similar economic recoveries.   The discount rate used was approximately 16.0 percent as of June 30, 2009 due primarily to increases in the cost of debt, the small company risk premium based on current market capitalization and the risk-free interest rate in the second quarter.  The interim analysis performed at June 30, 2009 did not indicate impairment.

Given that our market capitalization as of June 30, 2009 was significantly below book value, the Company added a review of market-based data to perform the step one analysis.  The market data review included a comparable trading multiple analysis based on public company competitors in the staffing industry.  The Company also performed a selected transaction premiums paid analysis using 2009 transactions with characteristics similar to ours.   Both market analyses were performed on a consolidated basis to assess the reasonableness of the results of the discounted cash flow analysis.  The market analyses were performed on a consolidated basis because the Company did not believe that there were direct competitors with publicly available financial data that were comparable to each of our reporting units.

Based on these analyses, the fair value determination based on the discounted cash flow model was determined to be reasonable in comparison to the fair values derived from these other valuation methods.

During the quarter ended September 30, 2009, overall operating results for the reporting units, with the exception of the Nurse Travel reporting unit, were consistent with the forecasts.  Additionally, the Company’s stock price increased during the third quarter and the excess of book value over market capitalization declined significantly.  As a result, with the exception of the Nurse Travel reporting unit, none of our other reporting units had triggering events as of September 30, 2009.

 

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The Nurse Travel reporting unit’s revenues declined to an amount which was below our forecasted amount in the third quarter.  The Company now expects that they will stabilize in 2010, but that 2010 revenue will be less than revenue in 2009.  This further decline in the Nurse Travel revenues is a triggering event and as such, the Company performed the step one analysis for the Nurse Travel reporting unit as of September 30, 2009.  In connection with the step one analysis, the forecasts were updated given the current results to reflect lower revenues in 2009 and 2010.  Forecasted revenues for each of the five years beginning in 2011 are less than 2008 actual revenues.  Changes in the forecast were also made for lower selling, general and administrative costs as a result of cost savings initiatives achieved during the quarter ended September 30, 2009.  There were no other significant changes made in the updated third quarter forecasts as compared to the assumptions used in the second quarter’s forecast.  Based on this analysis, we concluded that there was no impairment at September 30, 2009. As of September 30, 2009, the Nurse Travel reporting unit represented 7.6 percent of our $203.0 million goodwill balance and the estimated fair value of the reporting unit as determined by the discounted cash flow analysis exceeded the carrying value by 22.4 percent.

The current economic environment significantly impacted the results of the IT and Engineering reporting unit and as a result, the assumptions related to its forecasts require a higher degree of management estimate and judgment.  The forecasted results, particularly as it relates to revenue, are dependent on the Company’s assumptions about the timing and degree of recovery for this reporting unit.  This is also the case for the Nurse Travel reporting unit and the related assumptions described above.  The IT and Engineering reporting unit represented 73.2 percent of the $203.0 million goodwill balance and the percentage by which the estimated fair value of the reporting unit as determined by the discounted cash flow analysis exceeded its carrying value at June 30, 2009 was 2.8 percent.  The reporting unit’s historical revenue growth over the past ten years was reviewed noting that the assumptions used for the revenue growth rates in the discounted cash flow analysis lead to a result that was comparable or lower than what the reporting unit had achieved historically.  Second quarter forecasts projected IT and Engineering revenues to begin to stabilize in the second half of 2009 and to increase beginning in 2010.  Third quarter results have shown the stabilization anticipated.  Given that the Company’s forecasts assume recovery and revenue growth from the recession beginning in 2010, disclosed below are the five-year compounded annual revenue growth rates for periods after the 2009 decline that were used in the discounted cash flow analysis to show the level of expected revenue growth after the economic downturn.  A comparison has been provided below of these revenue growth rates reflected in the discounted cash flow analysis to the historical five-year compounded annual growth rates. This comparison demonstrates that the revenue growth rates reflected in the discounted cash flow analysis were reasonable based on the reporting unit’s historical financial performance. 

The IT and Engineering reporting unit was heavily impacted by the economic environment because this business is concentrated in highly specialized projects which decline significantly when companies are not investing in capital expenditures.  However, historically the reverse has occurred during a period of economic recovery since the work that the reporting unit performs is necessary to develop systems or product enhancements.   The ten-year compounded annual revenue growth rate between 2008 and 2018 for the reporting unit reflected in the June 30, 2009 analysis was 4.3 percent and its historical ten-year compounded annual revenue growth rate between 1998 and 2008 was 4.6 percent. Both of these periods include the impact of an economic decline and a subsequent recovery.  The reporting unit experienced an economic downturn between 2002 and 2003 and as a result, revenues declined by 38.7 percent.  When the economy recovered over the next several years through 2008, the five-year compounded annual revenue growth rate was 16.3 percent.  In the discounted cash flow analysis, a five-year compounded annual revenue growth rate has been used between 2009 and 2014 of 15.8 percent reflecting the expected stabilization of revenues in the second half of 2009 and the economic recovery at the beginning of 2010, which the Company believes is reasonable based on the historical growth rates recovering from an economic downturn.  As noted above, it was determined that there were no triggering events for impairment related to the IT and Engineering reporting unit as of September 30, 2009.

 

 

 

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Due to the many variables inherent in the estimation of a business’s fair value and the relative size of recorded goodwill, changes in assumptions may have a material effect on the results of our impairment analysis. Downward revisions of the Company’s forecasts, extended delays in the economic recovery, or a sustained decline of the stock price resulting in market capitalization significantly below book value could lead to an impairment of goodwill or intangible assets with indefinite lives in future periods.

7. Property and Equipment.  The Company has capitalized costs related to its various technology initiatives. The net book value of the property and equipment related to software development was $7.9 million and $7.6 million, as of September 30, 2009 and December 31, 2008, respectively, which includes work-in-progress of $4.8 million and $3.5 million, respectively. The Company has also capitalized website development costs of $0.2 million and $0.3 million as of September 30, 2009 and December 31, 2008, respectively, of which no costs were considered work-in-progress.

8. Stock Option Plan and Employee Stock Purchase Plan. In the first quarter of 2009, the Company granted a discrete set of stock-based awards to certain officers that differ from generally stated terms.

The Chief Executive Officer (CEO) was granted the following: 1) restricted stock units (RSUs) valued at $0.5 million which vest over the three years following the date of grant based on continued service, 2) restricted stock awards valued at $0.5 million, which vest on December 31, 2009, contingent upon meeting certain performance objectives (based on EBITDA), and 3) RSUs valued at $0.5 million, which vest three years following the grant date, contingent upon the Company meeting certain stock price performance objectives relative to its peers over three years from the date of grant. Compensation expense related to the time-based award is $0.3 million and will be expensed over the three year vesting period. Compensation expense for the performance-based award is based on estimates of the probability that the targets will be met. Based on the current forecast for 2009, EBITDA targets applicable to the restricted stock awards are not expected to be met.  The maximum compensation expense related to the performance-based award that may be recognized is $0.5 million expensed over the vesting term. The grant date fair value of the stock-price performance based award was $0.1 million expensed over three years. All awards are subject to the CEO’s continued employment through applicable vesting dates.  All awards may vest on an accelerated basis in part or in full upon the occurrence of certain events.

Additionally, the Company granted RSUs to certain other executive officers, forty percent of which vest on the first anniversary of the date of grant, contingent upon the Company meeting certain performance objectives during this period and further subject to the respective officer’s continued employment through applicable vesting dates.  Compensation expense for the performance-based component of these awards is based on estimates of the probability that the targets will be met.  Based on the current forecast for 2009, applicable performance targets are not expected to be met.  The maximum compensation expense related to these awards that may be recognized is $0.3 million expensed over the vesting term.   The remaining sixty percent of the RSUs subject to these grants vest over three years based solely on the respective officer’s continued employment through the applicable vesting dates.  Compensation expense related to the time-based component of these awards is $0.7 million, which is being expensed over the vesting term beginning in 2009.

Compensation expense charged against income related to stock-based compensation was $1.5 million and $3.7 million for the three and nine months ended September 30, 2009, respectively, and $1.6 million and $4.7 million for the three and nine months ended September 30, 2008, respectively, and is included in the Consolidated Statements of Operations and Comprehensive Income in selling, general and administrative expenses.

On August 6, 2009, the Company granted 50,252 RSUs to non-employee directors, of which 25,128 shares vested immediately upon issuance and the remaining shares will vest on August 6, 2010.  Compensation expense related to these awards that will be recognized is $0.2 million.

In January 2009, the Company implemented a stock option exchange program that gave eligible employees the opportunity to exchange options with an exercise price greater than $8.00 per share that were granted on or after December 31, 2000, for a reduced number of restricted stock units at an exchange price with a fair value approximately equivalent to the fair value of the cancelled options.  Certain executive officers and the Board of Directors were not eligible to participate in the stock option exchange program.  As a result of this stock option exchange program, 603,700 stock options were cancelled and exchanged for 87,375 RSU awards, which will vest 50 percent on January 22, 2011, 25 percent on January 22, 2012 and 25 percent on January 22, 2013 subject to the employee’s continued employment through such vesting dates.  Incremental compensation cost related to the Option Exchange was not material to the Company’s financial statements.

All shares authorized and available for issuance under the Company’s Employee Stock Purchase Plan (ESPP) were allocated and purchased as of February 27, 2009 and, at this time, there is no authorization from the shareholders to replenish shares for the ESPP program going forward.  As a result, the Company has suspended the ESPP program.

9. Commitments and Contingencies.  The Company is partially self-insured for its workers’ compensation liability related to the Life Sciences, Healthcare and IT and Engineering segments, as well as its medical malpractice liability in the Physician segment. The Company accounts for claims incurred but not yet reported based on estimates derived from historical claims experience and current trends of industry data. Changes in estimates and differences in

 

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estimates and actual payments for claims are recognized in the period that the estimates changed or the payments were made. The self-insurance claim liability was approximately $10.5 million and $9.8 million at September 30, 2009 and December 31, 2008, respectively.  Additionally, the Company has letters of credit outstanding to secure obligations for workers’ compensation claims with various insurance carriers.  The letters of credit outstanding at September 30, 2009 and December 31, 2008 were $3.5 million.

As of September 30, 2009 and December 31, 2008, the Company has an income tax reserve in other long-term liabilities related to uncertain tax positions of $0.3 million.

The Company is involved in various legal proceedings, claims and litigation arising in the ordinary course of business. However, based on the facts currently available, we do not believe that the disposition of matters that are pending or asserted will have a material adverse effect on our financial position, results of operations or cash flows.

10. Earnings per Share. Basic earnings per share are computed based upon the weighted average number of common shares outstanding, and diluted earnings per share are computed based upon the weighted average number of common shares outstanding and dilutive common share equivalents (consisting of incentive stock options, non-qualified stock options, restricted stock awards and units and employee stock purchase plan shares) outstanding during the periods using the treasury stock method.

The following is a reconciliation of the shares used to compute basic and diluted earnings per share (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Weighted average number of common shares outstanding used to compute basic earnings per share			36,068				35,546				35,978				35,413
Dilutive effect of stock-based awards			510				525				438				382
Number of shares used to compute diluted earnings per share			36,578				36,071				36,416				35,795

The following table outlines the weighted average share equivalents outstanding during each period that were excluded from the computation of diluted earnings per share because the exercise price for these options was greater than the average market price of the Company’s shares of common stock during the respective periods. Also excluded from the computation of diluted earnings per share were other share equivalents that became anti-dilutive when applying the treasury stock method (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Anti-dilutive common share equivalents outstanding			2,442				2,500				3,023				2,566

11. Income Taxes. For the interim reporting periods, the Company prepares an estimate of the 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 estimated level of annual pretax income can impact our actual effective rate.

As of September 30, 2009 and December 31, 2008, the recorded liability of the Company’s uncertain tax positions was $0.5 million, which included penalties and interest, of which $0.3 million was carried in other long-term liabilities and $0.2 million was carried as a reduction to non-current deferred tax assets. If the Company’s positions are sustained by the taxing authority in favor of the Company, the entire $0.5 million would reduce the Company’s effective tax rate.  The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. Open tax years related to federal, state and foreign jurisdictions remain subject to examination.

12. Segment Reporting. The Company has four reportable segments: Life Sciences, Healthcare, Physician and IT and Engineering. The Company’s management evaluates the performance of each segment primarily based on revenues, gross profit and operating income. The information in the following table is derived directly from the segments’ internal financial reporting used for corporate management purposes.

 

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The following table presents revenues, gross profit and operating income (loss) by reportable segment (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues:
Life Sciences		$	22,590			$	33,948			$	70,715			$	98,653
Healthcare			21,019				47,999				75,782				138,368
Physician			22,594				23,612				67,658				66,005
IT and Engineering			31,850				56,388				102,534				167,416
Total Revenues		$	98,053			$	161,947			$	316,689			$	470,442
Gross Profit:
Life Sciences		$	7,599			$	11,609			$	22,945			$	32,926
Healthcare			6,279				12,265				21,202				35,121
Physician			7,536				7,455				21,662				19,967
IT and Engineering			11,359				21,480				37,345				62,887
Total Gross Profit		$	32,773			$	52,809			$	103,154			$	150,901
Operating Income (Loss):
Life Sciences		$	1,860			$	3,533			$	4,641			$	9,593
Healthcare			(445	)			2,790				(1,865	)			5,299
Physician			2,398				1,870				6,208				3,999
IT and Engineering			509				5,426				2,605				14,297
Total Operating Income		$	4,322			$	13,619			$	11,589			$	33,188

The Company operates internationally, with operations mainly in the United States, Europe, Canada, Australia and New Zealand. The following table presents revenues by geographic location (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Revenues:
Domestic		$	92,039			$	152,301			$	300,184			$	444,409
Foreign			6,014				9,646				16,505				26,033
Total Revenues		$	98,053			$	161,947			$	316,689			$	470,442

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.  The term “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods.  We have established disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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The information set forth above under Note 9, Commitments and Contingencies, contained in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this report is incorporated herein by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ON ASSIGNMENT, INC.
Date: November 9, 2009	By:	/s/ Peter T. Dameris
		Peter T. Dameris
		Chief Executive Officer and President (Principal Executive Officer)
Date: November 9, 2009	By:	/s/ James L. Brill
		James L. Brill
		Senior Vice President of Finance and Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

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Exhibit 31.1

CERTIFICATION PURSUANT TO RULES 13a-14(a) 

UNDER THE SECURITIES EXCHANGE ACT OF 1934 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter T. Dameris, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of On Assignment, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2009
/s/ Peter T. Dameris
Peter T. Dameris
Chief Executive Officer and President