UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet as of December 31, 2017 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 were derived from the audited consolidated financial statements of ASGN Incorporated ("ASGN" or the "Company”) and the audited consolidated financial statements of ECS, Federal LLC ("ECS") and give effect to ASGN's acquisition of ECS. The unaudited pro forma condensed combined balance sheet reflects the acquisition as if it occurred on December 31, 2017. The unaudited pro forma condensed combined statement of operations reflects the acquisition as if it occurred on January 1, 2017.
The pro forma results of operations are not necessarily indicative of what the results of operations would have been had the acquisition been completed as of the dates indicated, nor do they purport to project future operating results of ASGN. The unaudited pro forma condensed combined financial statements should be read together with (i) the accompanying notes, (ii) the audited consolidated financial statements of ECS included in this Current Report on Form 8-K/A (Exhibit 99.1) and (iii) the audited consolidated financial statements of ASGN filed with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
ASGN INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 2017
(in thousands)
|
| | | | | | | | | | | | | | | | |
| | | ASGN | | ECS | | Pro Forma Adjustments | | Pro Forma Combined |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 36,667 |
| | $ | 211 |
| | $ | 14,749 |
| (a) | $ | 51,627 |
|
| Accounts receivable, net | | 428,536 |
| | 99,841 |
| | — |
| | 528,377 |
|
| Prepaid expenses and income taxes | | 18,592 |
| | 9,512 |
| | — |
| | 28,104 |
|
| Workers’ compensation receivable | | 12,702 |
| | — |
| | — |
| | 12,702 |
|
| Other current assets | | 3,026 |
| | 889 |
| | 197 |
| (a) | 4,112 |
|
| Total current assets | | 499,523 |
| | 110,453 |
| | 14,946 |
| | 624,922 |
|
| Property and equipment, net | | 57,996 |
| | 33,818 |
| | — |
| | 91,814 |
|
| Goodwill | | 894,095 |
| | 113,940 |
| | (113,940 | ) | (b) | 1,431,217 |
|
| | | | | | | 537,122 |
| (c) | |
| Identifiable intangible assets, net | | 352,766 |
| | 38,939 |
| | (38,939 | ) | (b) | 547,616 |
|
| | | | | | | 194,850 |
| (c) | |
| Other non-current assets | | 5,749 |
| | 530 |
| | 786 |
| (a) | 7,065 |
|
| Total assets | | $ | 1,810,129 |
| | $ | 297,680 |
| | $ | 594,825 |
| | $ | 2,702,634 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
| | | | |
| Current liabilities: | | |
| | |
| | | | |
| Current portion of long-term debt | | $ | — |
| | $ | 17,361 |
| | $ | (17,361 | ) | (d) | $ | — |
|
| Accounts payable | | 6,870 |
| | 53,963 |
| | — |
| | 60,833 |
|
| Accrued payroll and contract professional pay | | 114,832 |
| | 22,778 |
| | — |
| | 137,610 |
|
| Workers’ compensation loss reserves | | 14,777 |
| | — |
| | — |
| | 14,777 |
|
| Income taxes payable | | 1,229 |
| | — |
| | — |
| | 1,229 |
|
| Deferred revenues | | — |
| | 15,908 |
| | — |
| | 15,908 |
|
| Other current liabilities | | 29,009 |
| | 3,365 |
| | — |
| | 32,374 |
|
| Total current liabilities | | 166,717 |
| | 113,375 |
| | (17,361 | ) | | 262,731 |
|
| Long-term debt | | 575,213 |
| | 121,805 |
| | (121,805 | ) | (d) | 1,381,904 |
|
| | | | | | | 822,000 |
| (a) |
|
|
| | | | | | | (15,309 | ) | (a) | |
| Deferred income tax liabilities | | 69,436 |
| | 83 |
| | (4,309 | ) | (e) | 65,210 |
|
| Other long-term liabilities | | 7,372 |
| | 5,676 |
| | — |
| | 13,048 |
|
| Total liabilities | | 818,738 |
| | 240,939 |
| | 663,216 |
| | 1,722,893 |
|
| Stockholders’ equity: | | |
| | |
| | | | |
| Preferred stock | | — |
| | — |
| | — |
| | — |
|
| Common stock | | 521 |
| | — |
| | — |
| | 521 |
|
| Paid-in capital | | 566,090 |
| | — |
| | — |
| | 566,090 |
|
| Retained earnings | | 428,419 |
| | — |
| | (11,650 | ) | (e) | 416,769 |
|
| Members' equity | | — |
| | 56,741 |
| | (56,741 | ) | (b) | — |
|
| Accumulated other comprehensive loss | | (3,639 | ) | | — |
| | — |
| | (3,639 | ) |
| Total stockholders’ equity | | 991,391 |
| | 56,741 |
| | (68,391 | ) | | 979,741 |
|
| Total liabilities and stockholders’ equity | | $ | 1,810,129 |
| | $ | 297,680 |
| | $ | 594,825 |
| | $ | 2,702,634 |
|
The accompanying notes are an integral part of the unaudited pro forma condensed combined balance sheet.
ASGN INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2017
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | | | | |
| | | ASGN | | ECS | | Pro Forma Adjustments | | | | Pro Forma Combined |
| Revenues | | $ | 2,625,924 |
| | $ | 540,200 |
| | $ | — |
| | | | $ | 3,166,124 |
|
| Costs of services | | 1,775,851 |
| | 442,378 |
| | — |
| | | | 2,218,229 |
|
| Gross profit | | 850,073 |
| | 97,822 |
| | — |
| | | | 947,895 |
|
| Selling, general and administrative expenses | | 591,893 |
| | 76,062 |
| | 5,576 |
| | (f) | | 673,531 |
|
| Amortization of intangible assets | | 33,444 |
| | 11,666 |
| | 28,659 |
| | (g) | | 73,769 |
|
| Operating income | | 224,736 |
| | 10,094 |
| | (34,235 | ) | | | | 200,595 |
|
| Interest expense, net | | (27,643 | ) | | (6,807 | ) | | (27,540 | ) | | (h) | | (61,990 | ) |
| Income before income taxes | | 197,093 |
| | 3,287 |
| | (61,775 | ) | | | | 138,605 |
|
| Provision for income taxes | | 39,219 |
| | 1,260 |
| | (23,049 | ) | | (i) | | 17,430 |
|
| Income from continuing operations | | $ | 157,874 |
| | $ | 2,027 |
| | $ | (38,726 | ) | | | | $ | 121,175 |
|
| | | | | | | | | | | |
Income from continuing operations per share:
| | | | | | | | | | |
| Basic | | $ | 3.01 |
| | | | | | | | $ | 2.31 |
|
| Diluted | | $ | 2.97 |
| | | | | | | | $ | 2.28 |
|
| | | | | | | | | | | |
| Number of shares and share equivalents used to calculate earnings per share: | | |
| | |
| | |
| | | |
|
|
| Basic | | 52,503 |
| | | | — |
| | | | 52,503 |
|
| Diluted | | 53,205 |
| | |
| | 40 |
| | (j) | | 53,245 |
|
The accompanying notes are an integral part of the unaudited pro forma condensed combined statement of operations.
ASGN INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSENDED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma condensed combined balance sheet as of December 31, 2017 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 were derived from the audited consolidated financial statements of ASGN and the audited consolidated financial statements of ECS. The unaudited pro forma condensed combined balance sheet was prepared as if ASGN's acquisition of ECS had occurred on December 31, 2017 and the unaudited pro forma condensed combined statement of operations was prepared as if the acquisition of ECS occurred on January 1, 2017. The unaudited pro forma condensed combined statement of operations does not include the operating results of InfoReliance, LLC, a company acquired by ECS on April 17, 2017, for the period prior to its acquisition by ECS.
The audited consolidated financial statements of ECS for the year ended December 31, 2017 are included in this Current Report on Form 8-K/A. The unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statement of operations should be read in conjunction with the audited financial statements.
The historical financial information derived from the audited financial statements is adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma adjustments that are (i) directly attributable to the acquisition, (ii) factually supportable and (iii) in the case of the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined results. Pro forma adjustments are described in Note 3.
ASGN is accounting for the acquisition of ECS under the acquisition method of accounting in accordance with the authoritative guidance on business combinations. ASGN's best estimates and assumptions were used in determining the fair value of the tangible and intangible assets acquired and liabilities assumed. Goodwill is measured as the excess of purchase consideration over the fair value of the net tangible assets and identifiable intangible assets acquired. These estimates are preliminary and are only for the purposes of preparing these unaudited pro forma condensed combined financial statements.
2. Acquisition of ECS
The Company acquired all of the outstanding equity interests of ECS for $775.0 million cash, resulting in ECS becoming a wholly-owned subsidiary of the Company. This transaction was structured as a debt-free, cash-free acquisition and consideration paid was net of cash acquired and customary net working capital adjustments. ECS delivers cyber security, cloud, DevOps, IT modernization and advanced science and engineering solutions to U.S. government enterprises. The Company incurred acquisition costs of approximately $9.8 million. The transaction will be accounted for as a business combination using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recorded at their fair market values as of the acquisition date.
On April 2, 2018, in connection with the acquisition of ECS, the Company amended its credit facility mainly to add a new $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. Proceeds from the $822.0 million term B tranche were used to acquire ECS and pay for acquisition-related expenses and costs of the amendment to the credit facility. The Company incurred $22.5 million of financing costs, of which $6.2 million were expensed as incurred and $16.3 million were deferred and will be amortized over the term of the credit facility.
The following table summarizes the consideration paid and estimated fair value of assets acquired and liabilities assumed, on a pro forma basis as if the acquisition occurred on December 31, 2017 (in thousands):
|
| | | |
| Cash | $ | 211 |
|
| Accounts receivable | 99,841 |
|
| Prepaid expenses and other current assets | 10,401 |
|
| Property and equipment | 33,818 |
|
| Identifiable intangible assets | 194,850 |
|
| Goodwill | 537,122 |
|
| Other | 530 |
|
| Total assets acquired | $ | 876,773 |
|
| | |
| Current liabilities | $ | 96,014 |
|
| Long-term liabilities | 5,759 |
|
| Total liabilities assumed | 101,773 |
|
| Total purchase price | $ | 775,000 |
|
The estimated fair values of the acquired identifiable intangible assets were determined primarily using a discounted cash flow method and goodwill reflected the excess purchase price over the net assets acquired. The estimated fair values of the acquired intangible assets are provisional and are subject to change during the measurement period, which is not to exceed one year from the acquisition date.
The following table summarizes the estimated identifiable intangible assets (in thousands):
|
| | | | | |
| | Useful life | | Estimated Values |
| Contractual customer relationships | 13 years | | $ | 141,400 |
|
| Backlog | 1 year | | 26,100 |
|
| Non-compete agreements | 4 to 7 years | | 10,350 |
|
| Favorable contracts | 1 year | | 500 |
|
| Trademarks | indefinite | | 16,500 |
|
| Total identifiable intangible assets acquired | | | $ | 194,850 |
|
| | | | |
On a pro forma basis, assuming the acquisition occurred on January 1, 2017, the estimated annual amortization of identifiable intangible assets over the first five years after the acquisition date is (in thousands):
|
| | | | |
| Year | | Amount |
| 1 | | $ | 40,325 |
|
| 2 | | 27,050 |
|
| 3 | | 24,103 |
|
| 4 | | 21,070 |
|
| 5 | | 14,911 |
|
3. Pro Forma Adjustments
Explanations of pro forma adjustments are as follows (in thousands):
Pro forma adjustments to unaudited condensed combined balance sheet:
(a) To reflect the following financing and cash transactions:
|
| | | |
| Proceeds: | |
| Borrowings from new term B loan | $ | 822,000 |
|
| | |
| Uses: | |
| Purchase price | $ | (775,000 | ) |
| | |
| ASGN financing costs: | |
| Deferred loan costs related to revolving credit line, current asset | (197 | ) |
| Deferred loan costs related to revolving credit line, non-current asset | (786 | ) |
| Deferred loan costs related to term B loan | (15,309 | ) |
| Loan amendment costs (expensed as incurred) | (6,159 | ) |
| Total financing costs | $ | (22,451 | ) |
| | |
| Payment of ASGN acquisition expenses | $ | (9,800 | ) |
| | |
| Total uses: | $ | (807,251 | ) |
| | |
| Net pro forma cash adjustment | $ | 14,749 |
|
| ____ | |
(1) Effect on retained earnings is $4.5 million, net of tax, and decreases deferred income tax liabilities by $1.7 million. |
(2) Effect on retained earnings is $7.2 million, net of tax, and decreases deferred income tax liabilities by $2.6 million. |
(b) To eliminate ECS' historical goodwill, identifiable intangibles assets and member's equity.
(c) To reflect the estimated fair value of the acquired intangible assets (see Note 2).
(d) To reflect the elimination of ECS' long-term debt. This is a debt-free acquisition and the sellers paid off ECS' long-term debt with the proceeds of the sale as of the acquisition closing date.
(e) To reflect the effect on retained earnings and deferred income tax liabilities of acquisition and loan amendment expenses.
Pro forma adjustments to unaudited condensed combined statement of operations:
(f) To reflect the stock-based compensation expense related to restricted stock units granted to ECS employees.
(g) To reflect the following amortization of intangible assets activity:
|
| | | |
| Elimination of ECS' historical amortization of identifiable intangible assets | $ | (11,666 | ) |
| Amortization expense related to newly acquired identifiable intangible assets | 40,325 |
|
| Net pro forma amortization of identifiable intangible assets adjustment | $ | 28,659 |
|
(h) To reflect the following interest expense activity:
|
| | | |
| Elimination of ECS' historical interest expense | $ | (6,807 | ) |
| ASGN's interest expense under new term loan | 34,347 |
|
| Net pro forma interest expense adjustment | $ | 27,540 |
|
ASGN interest expense under the new term loan is calculated using the acquisition date interest rate of 3.88 percent
on the $822.0 million new term loan, plus amortization of deferred loan costs.
A one-eighth percent variance in the floating rate would result in approximately $1.0 million change in annual interest expense.
(i) To reflect the estimated tax effect of the pro forma adjustments, as well as increasing ECS' income tax provision from an LLC to a C-Corporation tax rate.
(j) To reflect the dilutive effect of the acquisition date restricted stock units granted to ECS employees, which are not yet vested.
