On assignment dip eased by purchase of nursing unit. (Corporate Focus).

CAN On Assignment Inc. recapture its past glory?

Through the first quarter of 2001, the Calabasas-based provider of temporary workers to science and health care markets posted 34 consecutive quarters of revenue and earnings growth.

But the streak, dating back to a 1992 initial public offering, succumbed to pressures from a slowing economy and growing competition from general staffing providers.

Last August, the company brought in a new chief executive, Joe Peterson, to replace the retiring H. Tom Buelter, who led the company since 1989. Peterson recruited a new senior management team, shifted the sales structure and made an acquisition that moved On Assignment into the fast-growing market for of short-term traveling nurses.

Results haven't yet materialized. For the second quarter ended June 30, net income was $3.9 million (15 cents a diluted share), compared with $4.5 million (19 cents) for the like year-earlier period. Revenues rose to $67.6 million from $49.7 million, but they included the nursing unit, Health Personnel Options Corp.

Excluding the acquisition, revenues fell by about 20 percent, analysts said. On Assignment also lowered its earnings outlook for full 2002, citing the cost of efforts to shore up its existing businesses, lab support and health care financial staffing.

Wall Street has turned tentative on this previously bankable growth story, concerned that the new competition and internal changes will place pressure on On Assignment's profit margins. In the past year, its stock has fallen by 48 percent, to a recent price of $10.30 a share.

"On Assignment is transitioning to its next chapter," Peterson said. "These types of transitions are frequently hard for the market to read accurately because they tend not to be operational guys."

About half the stock's decline came on the heels of lowered earnings guidance issued on July 16. The company lowered its full 2002 earnings guidance to between 50 and 60 cents a share from 70 to 75 cents, said Adam Waldo, a Lehman Bros. analyst. He rates On Assignment an "equal weight," or neutral.

One reason for the sharp drop was the timing of the revised outlook. Only a month earlier, on May 16, the company reaffirmed its previous guidance at an analysts' day event, so investors were surprised by the rollback, and drove the stock down.

"I was very disappointed that the outcome was a sense that we were in any way not being forthcoming," Peterson said. At the analysts' day, the new management team was still evaluating how to address the business challenges, he said.

"Some of the restructuring options were more dramatic than others were and more expensive," Peterson said. Several weeks later, the company chose an option that required some significant investment."

While the markets remain undecided about whether On Assignment can resume its previous performance, company insiders are demonstrating confidence. After the stock fell in July, several top executives, including Peterson, Chief Financial Officer Ronald Rudolph, bought shares on the open market. So did about 50 lower-level employees, Peterson said.

Addressing the core

On Assignment's biggest near-term challenge is how to get revenues back on track in its lab support and health care staffing businesses.

Traditionally, the company used one account manager to handle both sales and recruiting to fill a temporary position. That worked well when demand far exceeded supply of workers, because the sales job was minimized. But in the tightened economy, customers are centralizing temporary hiring in human resources, shifting decision-making and negotiating functions away from, say, a lab supervisor. The bargaining has become tougher, a shift that some of On Assignment's staff wasn't equipped to handle.

On Assignment has separated its sales and recruiting functions, to align them with larger competitors such as Kelly Services Inc., Adecco SA and Robert Half International Inc., which have developed specialized units to compete with companies like On Assignment.

The cost of retraining is cutting into profits, as is lost business as On Assignment resists cutting prices to compete with its larger competitors. "They're losing market share to preserve (profit) margins but you can only do that so long," said Waldo.

Meantime, the traveling nurse unit is performing well. Its revenues, which accounted for 41 percent of the overall business, are expected to grow by 65 percent this year.

The nursing market, which suffers from perennial labor shortages, is "one of the few sectors of staffing that has continued to grow through the recession," said Marta Nichols, a Banc of America Securities analyst.

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Stock Prices


Aug. 29, 2001  $19.65
Aug. 29, 2002  $10.26

Note: Table made from line graph
On Assignment Inc.

YEAR (Dec. 31)                 2001    2000

Revenue (millions)           $194.6  $195.1
Total Expenses (millions)     170.1   166.9
Operating Income (millions)    24.5    28.2
Net Income (millions)            17    19.2
Earnings Per Share            $0.74   $0.83

SUMMARY

Business: Health care and science

Headquarters: Calabasas

CEO: Joe Peterson

Market Cap: $274 million

Dividend Yield: N/A *

* Total Liabilities: $32.7 million

P/E Ratio: 16.9

* Long-Term Debt: $1.2 million

* On Assignment does not pay dividends