On Assignment (ASGN) to Acquire ECS Federal for $775M

On Assignment, Inc. (NYSE: ASGN), one of the foremost providers of IT and professional services in the technology, creative/digital, engineering and life sciences sectors, announced today that it has signed a definitive agreement to acquire ECS Federal, LLC (ECS) from Roy Kapani, the company’s majority owner and founder, and Lindsay Goldberg, a private investment firm, for $775 million in cash. The transaction is subject to various regulatory approvals and customary closing conditions and is expected to close on April 2, 2018.

ECS, one of the largest privately-held government services contractors, delivers cyber security, cloud, DevOps, IT modernization and advanced science and engineering solutions to government enterprises. Combined, On Assignment and ECS will be one of the largest and fastest growing IT and professional services firms in North America.

For the year ended December 31, 2017, ECS estimates its revenues and Adjusted EBITDA (a non-GAAP measure) on a pro forma basis will be approximately $586.4 million and $67.6 million, respectively. Estimated pro forma results assume a business acquired by ECS in April 2017 occurred at the beginning of the year. For 2018, ECS expects high single-digit year-over-year revenue growth.

For the year ended December 31, 2017, On Assignment estimates its revenues and net income will be approximately $2.6 billion and $157.7 million, respectively and its Adjusted EBITDA (a non-GAAP measure) will be approximately $311.4 million. On a pro forma basis, which assumes the acquisition of ECS occurred at the beginning of 2017 (a non-GAAP measure), On Assignment’s revenues and Adjusted EBITDA are estimated to be approximately $3.2 billion and $379 million, respectively. Additionally, the acquisition is accretive to On Assignment’s 2017 Adjusted Net Income (a non-GAAP measure).

Commenting on the acquisition, Peter Dameris, CEO of On Assignment, said: “ECS’ government services solutions will complement and elevate our offerings and strengthen our position as a premium IT and professional services provider. Our addressable end market is now $279 billion by virtue of our entering the $129 billion Government Services space. ECS’ long-term contracts, which average 5 years in length, and robust backlog ($1.6 billion) provide strong revenue visibility and mitigate volatility from permanent placement revenue and a more challenging economic environment.”

Dameris concluded: “All companies struggle with identifying and attracting highly qualified technical personnel in today’s economy. Our combined 24,000+ billable consultants, of which 2,900 maintain security clearances, and our recruiting prowess will strengthen ECS’ fulfillment capabilities, credentials and qualifications as it competes for future awards.”

ECS has well established positions on critical IT systems of national importance which provide unmatched customer access and unique visibility into future technology transformation initiatives. For example, ECS’ domain expertise in cyber security for the defense industry will be immensely valuable to On Assignment’s customers given the increased frequency and complexity of cyber-attacks for customers everywhere.

ECS will become a division of On Assignment and continue to operate under the ECS brand name. The CEO of ECS, George Wilson, and the current leadership team will continue to execute the strategy and oversee the day-to-day operations of the business. “This acquisition immediately introduces a company with the scale, contracts, capabilities, personnel, past performance and ability to compete for the largest opportunities in the Federal market. The entire team is energized about the possibilities.” said George Wilson.

On Assignment intends to change its name to ASGN Incorporated to better reflect its evolving position as a leading provider of human capital in IT and Professional Services Solutions effective April 2, 2018.

Commenting on the name change, Peter Dameris said: “On Assignment commenced operations as a life sciences staffing firm in 1985 and has since evolved its offerings to include technology, creative/digital, engineering and scientific solutions. As our company has grown over the last 33 years, we believe it is the right time to change our name to better reflect our path forward.” Dameris concluded: “Our success is the direct result of the hard work of our many dedicated employees and billable professionals and I would like to thank the entire organization for its continued commitment to excellence.”

Transaction Details

Under terms of the definitive purchase agreement, On Assignment will acquire all of ECS’ equity for $775 million to be paid at closing.

In connection with the transaction, On Assignment has obtained a $1.6 billion financing commitment from Wells Fargo. The committed financing consists of a $200 million revolving credit facility (undrawn at close) and a $1.4 billion term B loan. We may complete a portion of the financing through an amendment to our existing facilities and expect to issue a new 7 year term B loan to fund the acquisition and to pay related transaction costs. Upon closing, funded debt is expected to total approximately 3.7 to 1 estimated pro forma Adjusted EBITDA for the year ended December 31, 2017.

For income tax reporting purposes, the acquisition will be treated as an asset purchase, resulting in tax basis in the intangibles assets acquired. This “step-up” in tax basis is expected to result in an annual cash income tax savings of approximately $12 million over the next 15 years from the amortization of these assets for income tax purposes.

Preliminary Financial Results for Fourth Quarter of 2017

In connection with the announcement of the transaction, On Assignment is providing preliminary financial results for the fourth quarter of 2017. These results are subject to completion of the Company’s financial and accounting procedures and the annual independent audit. On Assignment anticipates reporting its complete financial results for the fourth quarter and year ended December 31, 2017 on February 14, 2018.

The preliminary fourth quarter results compared with previously-announced estimates are as follows (in millions, except per share amounts):

For the full year 2017, the Company estimates its net income and Adjusted EBITDA will be approximately $157.7 million and $311.4 million, respectively, and its cash flows from operating activities and free cash flow (non-GAAP measure) will be approximately $196.4 million and $172.2 million, respectively. At December 31, 2017, long-term debt was approximately $575.2 million and the leverage ratio (a non-GAAP measure) was 1.89 to 1.

Legal and Financial Advisors

On Assignment, Inc. retained Sullivan & Cromwell LLP as legal counsel on the transaction, Latham & Watkins LLP as legal counsel on the secured financing commitment, Wells Fargo Securities, LLC as lead financial advisor, American Discovery Capital, LLC as financial advisor, Wolf Den Associates, LLC for strategic industry advisory services and Perkins Coie, LLP for support with government contracts. ECS retained Cravath, Swaine and Moore LLP and Venable LLP as legal counsel and Robert W. Baird & Co., Houlihan Lokey, Inc. and SunTrust Robinson Humphrey as financial advisors.

Conference Call

On Assignment will hold a conference call with analysts and stockholders today at 8:30 a.m. EST. The dial-in number is (800) 288-8961, (612) 332-0342 for callers outside the United States) and the conference ID number is 444143. Participants should dial in ten minutes before the call. A replay of the conference call will be available beginning today at 11:30 a.m. EST and ending at midnight EST on February 21, 2018. The access number for the replay is (800) 475-6701, (320) 365-3844 for callers outside the United States) and the conference ID number 444143.

This call is being broadcasted by CCBN and can be accessed via On Assignment’s web site at www.onassignment.com. We have also posted on our website a presentation regarding this transaction.

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