Everforth Inc: Form 10-Q for the period ended Jun 30, 2023

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations, as well as management's beliefs and assumptions and involve a high degree of risk and uncertainty. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Statements that include the words "believes," "anticipates," "plans," "expects," "intends," and similar expressions that convey uncertainty of future events or outcomes are forward-looking statements. Our actual results could differ materially from those discussed or suggested in the forward-looking statements herein. Factors that could cause or contribute to such differences include those described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 10-K"). In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements in this document are based on information available to us as of the filing date of this Quarterly Report on Form 10-Q and we assume no obligation to update any forward-looking statements or the reasons why our actual results may differ.

OVERVIEW

ASGN provides information technology ("IT") services and professional solutions, including technology and creative digital marketing, across the commercial and government sectors. We operate through two segments, Commercial and Federal Government. The Commercial Segment, which is the largest segment, provides consulting, creative digital marketing and permanent placement services primarily to large enterprises and Fortune 1000 companies. Our Federal Government Segment provides mission-critical solutions to the Department of Defense, the intelligence community and federal civilian agencies. Virtually all of the Company's revenues are generated in the United States.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2023 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2022

Revenues

Revenues for the quarter were $1.1 billion, down 1.0 percent over the second quarter of last year. Revenues for the quarter included approximately $52.9 million from businesses acquired in the last 12 months. Excluding the contributions from these recent acquisitions, revenue declined 5.6 percent year-over-year. The table below shows our revenues by segment for the three months ended June 30, 2023 and 2022 (in millions).

Commercial Segment — Revenues from our Commercial Segment (71.7 percent of total revenues) were down 4.6 percent year-over-year. Assignment revenues were $530.2 million (65.4 percent of the segment's revenues), down 15.6 percent year-over-year. Consulting services revenues were $281.1 million (34.6 percent of the segment's revenues), up 26.5 percent year-over-year. Excluding the contribution of $27.7 million from GlideFast, consulting services revenues were up 14.1 percent.

From an industry perspective, Commercial revenues fall into five broad industry verticals: (i) Financial Services, (ii) Consumer and Industrial, (iii) Technology, Media and Telecom ("TMT"), (iv) Healthcare, and (v) Business and Government Services. Our Consumer and Industrial and Healthcare verticals saw single-digit revenue growth year-over-year. The TMT, Business and Government Services, and Financial Services verticals were down compared with the second quarter of 2022.

Within the Commercial Segment, IT services and solutions division, which accounted for 86.0 percent of the segment's revenues in the quarter, were down 1.3 percent year-over-year. The segment's more discretionary and cyclical divisions, creative digital marketing and permanent placement, accounted for 14.0 percent of the segment's revenues and were down 21.0 percent.

Federal Government Segment — Revenues from our Federal Government Segment (28.3 percent of revenues) were up 9.8 percent year-over-year. Excluding the contribution from Iron Vine of $25.2 million, revenues increased by 1.1 percent.

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment for the three months ended June 30, 2023 and 2022 (in millions).

Gross profit is comprised of revenues less costs of services, which consist primarily of compensation for our contract professionals, other direct costs and reimbursable out-of-pocket expenses. Consolidated gross profit was down 5.1 percent year-over-year on a revenue decline of 1.0 percent.

Gross margin was 28.9 percent, a compression of 120 basis points from the second quarter of 2022. Both segments reported compression in gross margin. The compression in gross margin of the Commercial Segment was primarily due to a lower contribution from our more discretionary and cyclical permanent placement and creative digital marketing revenues. The compression in gross margin of the Federal Government Segment was driven by certain higher margin fixed price programs in the previous year.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses consist primarily of compensation expense for our field operations and corporate staff, rent, information systems, marketing, telecommunications, public company expenses and other general and administrative expenses. SG&A expenses were $210.5 million (18.6 percent of revenues), compared with $220.4 million (19.3 percent of revenues) in the second quarter of 2022. This decrease reflected effective expense management and lower incentive compensation expense.

Amortization of Intangible Assets

Amortization of intangible assets was $17.9 million, up from $13.5 million in the second quarter of 2022. This increase reflects amortization expense related to businesses acquired in the second half of last year.

Interest Expense

Interest expense was $15.8 million, up from $10.1 million in the second quarter of 2022, primarily as a result of higher interest rates on the senior secured credit facility. Interest expense was comprised of $8.8 million of interest on the senior secured credit facility, $6.4 million of interest on the unsecured senior notes, and $0.6 million in amortization of deferred loan costs. The weighted-average outstanding borrowings and interest rate in the second quarter of 2023 and 2022 were $1.0 billion and 5.8 percent, and $1.0 billion and 3.7 percent, respectively.

Provision for Income Taxes

The provision for income taxes was $22.0 million, down from $27.4 million in the second quarter of 2022 due to lower income before income taxes. The effective tax rate was 26.8 percent, down from 27.4 percent in the second quarter of 2022.

Income from Continuing Operations

Income from continuing operations was $60.1 million, down from $72.6 million in the second quarter of 2022.

Loss from Discontinued Operations

Loss from discontinued operations was $0.1 million in the second quarter of 2022.

Net Income

Net income was $60.1 million, down from $72.5 million in the second quarter of 2022.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2023 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2022

Revenues

Revenues for the first half of the year were $2.3 billion, up 1.2 percent year-over-year. Revenues for the period included approximately $103.3 million from businesses acquired during the last 12 months. Excluding the contributions from acquisitions, revenues declined 3.4 percent year-over-year. The table below shows our revenues by segment for the six months ended June 30, 2023 and 2022 (in millions).

Commercial Segment — Revenues from our Commercial Segment (72.7 percent of total revenues) declined 2.4 percent over the first half of last year. Assignment revenues were $1.1 billion (66.4 percent of the segment's revenues), down 13.2 percent year-over-year. Consulting services revenues were $552.8 million (33.6 percent of the segment's revenues), up 29.5 percent year-over-year. Excluding the contribution of $53.6 million from GlideFast, consulting services revenues were up 16.9 percent.

Within the Commercial Segment, IT services and solutions division, which accounted for 85.7 percent of the segment's revenues in the first half of 2022, were up 0.9 percent over the same period last year driven by growth in consulting services and the contribution from GlideFast. The creative digital marketing and permanent placement divisions, which combined accounted for 14.3 percent of the segment's revenues, declined 18.2 percent.

Federal Government Segment — Revenues from our Federal Government Segment (27.3 percent of revenues) were up 12.2 percent year-over-year. Excluding the contribution from Iron Vine of $49.7 million, revenues increased by 3.2 percent.

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment for the six months ended June 30, 2023 and 2022 (in millions).

Consolidated gross profit declined 2.7 percent on revenue growth of 1.2 percent. Gross margin was 28.9 percent, a compression of 110 basis points over the first half of 2022. The compression mainly related to business mix, including a slightly higher mix of revenues from the Federal Government Segment, which have a lower gross margin than commercial revenues, and, within the Commercial Segment, a lower mix of creative digital marketing and permanent placement revenues, which have higher gross margins.

Selling, General and Administrative Expenses

SG&A expenses were $434.6 million (19.2 percent of revenues), compared with $432.5 million (19.4 percent of revenues) in the first six months of 2022. The decrease as a percent of revenues reflects effective expense management and lower incentive compensation expense.

Amortization of Intangible Assets

Amortization of intangible assets was $36.0 million, up from $27.4 million in the first six months of 2022. This increase reflects amortization expense related to businesses acquired in the second half of last year.

Interest Expense

Interest expense was $31.2 million and was comprised of $17.3 million of interest on the senior secured credit facility, $12.8 million of interest on the unsecured senior notes, and $1.1 million in amortization of deferred loan costs. The weighted-average outstanding borrowings were $1.0 billion in both periods and the weighted-average interest rate was 5.8 percent, up from 3.5 percent in the first six months of 2022.

Provision for Income Taxes

The provision for income taxes was $41.3 million, down from $51.1 million in the first six months of 2022 due to lower income before income taxes. The effective tax rate was 27.4 percent, up from 26.7 percent in the first six months of 2022.

Income from Continuing Operations

Income from continuing operations was $109.6 million, down from $140.2 million in the first six months of 2022.

Income from Discontinued Operations

Loss from discontinued operations was $0.9 million in the first six months of 2022.

Net Income

Net income of $109.6 million, down from $139.3 million in the first six months of 2022.

Commercial Segment - Consulting Metrics

Commercial consulting bookings are the value of new contracts entered into during a specified period, including adjustments for the effects of changes in contract scope and contract terminations ("Bookings"). The underlying contracts are terminable by the client on short notice with little or no termination penalties. The book-to-bill ratio for our commercial consulting revenues is the ratio of Bookings to commercial consulting revenues for a specified period. The average duration of commercial consulting projects is one year.

(Dollars in millions)

Federal Government Segment Metrics

Contract backlog for our Federal Government Segment represents the estimated amount of future revenues to be recognized under awarded contracts, including task orders and options, at a point in time ("Contract Backlog"). These estimates are subject to change and may be affected by the execution of new contracts, the extension or early termination of existing contracts, the non-renewal or completion of current contracts and adjustments to estimates for previously included contracts. The timing of the execution of new contracts and other changes are affected by the funding cycles of the government and can vary from quarter to quarter. New contract awards are the estimated amount of future revenues to be recognized under contracts awarded during a specified period, including adjustments to estimates for contracts awarded in previous periods (“New Contract Awards”). Due to variability, New Contract Awards are presented on a trailing-twelve-months (“TTM”) basis. The book-to-bill ratio for our Federal Government Segment is the ratio of New Contract Awards to revenues for a specified period. Contract backlog coverage ratio is calculated as total Contract Backlog divided by TTM revenues.

(Dollars in millions)

(Dollars in millions)

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Liquidity and Capital Resources

Our working capital, which is current assets less current liabilities, at June 30, 2023 was $555.7 million, and our cash and cash equivalents were $93.8 million. Our cash flows from operating activities have been our primary source of liquidity and have been sufficient to meet our working capital and capital expenditure needs. At June 30, 2023, we had full availability under the $460.0 million revolving credit facility. We believe that our cash and cash equivalents on hand, expected operating cash flows and availability under our revolving credit facility will be sufficient to fulfill our obligations, working capital requirements and capital expenditures for the next 12 months.

Net cash provided by operating activities was $193.0 million for the first six months of 2023, compared with $144.4 million in the same period of 2022. The year-over-year increase mainly relates to changes in accounts receivable and accounts receivable days sales outstanding.

Net cash used in investing activities was $23.5 million for the first six months of 2023 and included $22.9 million for capital expenditures. Net cash used in investing activities in the first six months of the prior year was $6.1 million and included $18.4 million for capital expenditures, partially offset by $9.8 million from the sale of a business.

Net cash used in financing activities was $146.0 million for the first six months of 2023 and included $106.4 million to repurchase the Company's common stock, as well as net repayments of borrowings under the revolving credit facility totaling $31.5 million. Net cash used in financing activities in the first six months of the prior year was $177.1 million and primarily consisted of $168.1 million for stock repurchases.

For details on the Company’s senior secured facility, comprised of a revolving credit facility and term B loan, and unsecured senior notes, see Note 3. Long-Term Debt in Part I Item 1.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements that significantly impact the Company.

Critical Accounting Policies

There were no significant changes to our critical accounting policies and estimates during the second quarter of 2023 compared with those disclosed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 10-K.

Commitments

There were no material changes to the significant commitments or contractual obligations that were disclosed in our 2022 10-K.

With respect to our quantitative and qualitative disclosures about interest rates risks, there have been no material changes to the information included in our 2022 10-K. A hypothetical 100 basis-point change in interest rates on variable-rate debt would have resulted in an interest expense fluctuation of approximately $4.9 million based on $490.8 million of debt outstanding for any 12-month period.

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 Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on this evaluation, our Chief Executive Officer and Principal Financial 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 Exchange Act 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 Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.