Everforth Inc: Form 10-Q for the period ended Jun 30, 2024

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, 2023 ("2023 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 solutions across the commercial and government sectors. ASGN operates 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 Fortune 1000 and large mid-market companies. The Federal Government Segment provides advanced IT 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, 2024 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2023

Revenues

Revenues for the quarter were $1.0 billion, down 8.5 percent year-over-year. The table below shows our revenues by segment for the three months ended June 30, 2024 and 2023 (in millions).

From an industry perspective, the Company operates in six broad industry verticals. Commercial Segment revenues (70.1 percent of total revenues) were down 10.6 percent year-over-year and are categorized in five verticals: (i) Financial Services, (ii) Consumer and Industrial, (iii) Technology, Media, and Telecom ("TMT"), (iv) Healthcare, and (v) Business Services. The TMT industry vertical had mid single-digit growth, while the remaining four industry verticals declined year-over-year. Federal Government Segment revenues (29.9 percent of total revenues), the sixth industry vertical, were down 3.3 percent year-over-year.

Total IT consulting revenues were $590.5 million (57.1 percent of total revenues), down 1.7 percent year-over-year. Commercial Segment consulting revenues were $281.5 million, essentially flat year-over-year. Federal Government Segment revenues, which are all consulting revenues, were $309.0 million, down 3.3 percent year-over-year as stated above. Assignment revenues, which totaled $444.2 million (42.9 percent of total revenues), were down 16.2 percent year-over-year, reflecting continued softness in the portions of the Commercial Segment business that are more sensitive to changes in macroeconomic cycles (i.e., more cyclical).

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment for the three months ended June 30, 2024 and 2023 (in millions).

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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 declined 7.7 percent year-over-year on a revenue decline of 8.5 percent. Gross margin for the second quarter of 2024 was 29.1 percent, an expansion of 20 basis points from the second quarter of 2023. Gross margin for the Commercial Segment was up 50 basis points, reflecting a higher mix of consulting revenues as well as margin expansion for both consulting and assignment revenues. Gross margin for the Federal Government Segment was up 10 basis points.

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 $205.6 million, down from $210.5 million in the second quarter of 2023. The decrease in SG&A expense reflected, among other things, lower compensation-related expenses.

Amortization of Intangible Assets

Amortization of intangible assets was $15.1 million, compared with $17.9 million in the second quarter of 2023. The decrease was due to the accelerated amortization method of certain acquired intangibles, which have high amortization rates at the beginning of their useful lives.

Interest Expense, Net

Interest expense, net, which consists primarily of cash-based interest expense, amortization and adjustments to deferred loan costs, and interest income, was $15.8 million for the second quarter of 2024 and 2023. The weighted-average outstanding borrowings and cash-based interest expense rate in the second quarter of 2024 and 2023 were $1.0 billion and 6.0 percent, and $1.0 billion and 5.8 percent, respectively.

Provision for Income Taxes

The provision for income taxes was $17.4 million, down from $22.0 million in the second quarter of 2023 due to lower income before income taxes. The effective tax rate was 26.9 percent, up from 26.8 percent in the second quarter of 2023.

Net Income

Net income was $47.2 million, down from $60.1 million in the second quarter of 2023.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2024 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2023

Revenues

Revenues for the first half of the year were $2.1 billion, down 7.8 percent over the first half of 2023. The table below shows our revenues by segment for the six months ended June 30, 2024 and 2023 (in millions).

Commercial Segment revenues (69.9 percent of total revenues) were down 11.3 percent year-over-year, and all five of the industry verticals were down. Federal Government Segment revenues (30.1 percent of total revenues), the sixth industry vertical, were up 1.7 percent year-over-year.

Total IT consulting services revenues were $1.2 billion (56.9 percent of total revenues), up 1.4 percent year-over-year. Federal Government Segment revenues, which are all consulting revenues, were $626.5 million, up 1.7 percent year-over-year as stated above. Commercial Segment consulting revenues were $558.5 million, up 1.0 percent year-over-year. Assignment revenues, which totaled $898.7 million (43.1 percent of total revenues), were down 17.6 percent year-over-year reflecting continued softness in the more cyclical portions of the Commercial Segment business.

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment for the six months ended June 30, 2024 and 2023 (in millions).

Consolidated gross profit declined 8.5 percent year-over-year on a revenue decline of 7.8 percent. Gross margin was 28.7 percent, a compression of 20 basis points from the first half of 2023. The compression mainly related to business mix, including a higher mix of revenues from the Federal Government Segment, which have a lower gross margin than Commercial Segment revenues.

Selling, General, and Administrative Expenses

SG&A expenses were $415.8 million, down from $434.6 million in the first six months of 2023. The decrease in SG&A expenses reflected, among other things, lower compensation-related expenses.

Amortization of Intangible Assets

Amortization of intangible assets was $30.2 million, compared with $36.0 million in the first six months of 2023. The decrease was due to the accelerated amortization method of certain acquired intangibles, which have high amortization rates at the beginning of their useful lives.

Interest Expense, Net

Interest expense, net was $33.4 million, up from $31.2 million in the first six months of 2023. The increase was primarily a result of higher interest rates on the senior secured credit facility and $1.5 million of costs related to the March 2024 amendment to the senior secured credit facility, which was partially offset by interest income in the current year. The weighted-average outstanding borrowings and cash-based interest expense rate for the first six months of 2024 and 2023 were $1.0 billion and 6.1 percent (excluding costs related to aforementioned amendment), and $1.0 billion and 5.8 percent, respectively.

Provision for Income Taxes

The provision for income taxes was $32.6 million, down from $41.3 million in the first six months of 2023 due to lower income before income taxes. The effective tax rate was 27.7 percent, up from 27.4 percent in the first six months of 2023.

Net Income

Net income was $85.3 million, down from $109.6 million in the first six months of 2023.

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. Measuring Bookings involves the use of estimates and judgments and there are no independent standards or requirements governing the calculation of Bookings. Information regarding Bookings is not comparable to, nor should it be substituted for, an analysis of reported revenues. 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”). Information regarding New Contract Awards is not comparable to, nor should it be substituted for, an analysis of reported revenues. 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, 2024 was $523.8 million, and our cash and cash equivalents were $132.2 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, 2024, we had full availability under the $500.0 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 $164.0 million for the first six months of 2024, compared with $193.0 million in the same period of 2023. Net cash provided by operating activities before changes in operating assets and liabilities was $162.6 million, compared with $186.2 million in the same period of 2023. Net cash provided by changes in operating assets and liabilities was $1.4 million for the first six months of 2024, compared with $6.8 million in the same period of 2023.

Net cash used in investing activities was $16.0 million and $23.5 million for the first six months of 2024 and 2023, respectively, and primarily related to capital expenditures.

Net cash used in financing activities was $190.7 million for the first six months of 2024 and included $187.7 million to repurchase the Company's common stock. Net cash used in financing activities in the first six months of the prior year was $146.0 million 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.

For details on the Company’s senior secured credit facility, comprised of a revolving credit facility and term loan B, 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 2024 compared with those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2023 10-K.

Commitments

There were no material changes to the significant commitments or contractual obligations that were disclosed in our 2023 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 2023 10-K. Our exposure to interest rate risk is associated with our debt instruments. See Note 3. Long-Term Debt in Item 8. Financial Statements and Supplementary Data for a further description of our debt instruments. A hypothetical 100 basis-point change in interest rates on variable-rate debt would have resulted in an interest expense fluctuation of approximately $5.0 million based on $496.3 million of debt outstanding for any 12-month period. We have not entered into any market risk sensitive instruments for trading purposes.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on this evaluation, our Principal 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 the time periods specified in the SEC's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures 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 accumulated and communicated to the Company's management, including its Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, 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, 2024 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.