# Everforth Inc (EFOR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Everforth Inc's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/890564/000089056424000006/asgn-20231231.htm
Accession: 0000890564-24-000006
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/EFOR/
All MD&A years: /company/EFOR/mda/
Previous year: /company/EFOR/mda/fy2022/ (FY 2022)
Next year: /company/EFOR/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the other sections of this 2023 10-K, including the Special Note on Forward-Looking Statements and Part I, Item 1A. Risk Factors.

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 large enterprises and Fortune 1000 companies. The 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.

Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), which require us to make certain assumptions and related estimates affecting the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.

Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often because we must make estimates about matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe the accounting policies and estimates most critical in understanding the judgments involved in preparing our financial statements are goodwill and acquired intangible assets.

Recoverability of Goodwill and Acquired Intangible Assets — Goodwill is evaluated for impairment annually or more frequently if an event occurs or circumstances change, such as a material deterioration in performance that would indicate an impairment may exist. We perform an annual impairment assessment as of October 31st for each of our reporting units. When evaluating goodwill for impairment, we may first perform a qualitative assessment (“step zero” of the impairment test) to determine whether it is more likely than not that a reporting unit is impaired. If we decide not to perform a qualitative assessment, or if we determine that it is more likely than not the carrying amount of a

reporting unit exceeds its fair value, then we perform a quantitative assessment (“step one” of the impairment test), and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge would be recorded to reduce the carrying amount to its estimated fair value.

We performed a qualitative assessment for the October 31, 2023 annual impairment evaluation for all reporting units. By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior projections, and other relevant entity-specific events, we determined it was more likely than not that the fair value of each reporting unit exceeded its carrying amount.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2023 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2022

In this section, we discuss the results of our operations for the year ended December 31, 2023 compared with the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared with the year ended December 31, 2021, please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

Revenues

Revenues for the year were $4.5 billion, down 2.8 percent year-over-year. Revenues in 2023 included approximately $128.0 million from businesses acquired in the prior year through their acquisition date anniversaries. Excluding the contributions from acquisitions, revenues declined 5.6 percent year-over-year. The table below shows our revenues by segment (in millions).

[[GREPCENT_TABLE]]
[["","","","","","","% of Total"],["","","2023","","2022","","Change","","2023","","2022","","Change"],["Commercial:"],["Assignment","","$","2,078.9","","","$","2,476.1","","","(16.0)","%","","46.7","%","","54.1","%","","(7.4)","%"],["Consulting","","1,095.5","","","959.6","","","14.2","%","","24.6","%","","20.9","%","","3.7","%"],["","","3,174.4","","","3,435.7","","","(7.6)","%","","71.3","%","","75.0","%","","(3.7)","%"],["Federal Government","","1,276.2","","","1,145.4","","","11.4","%","","28.7","%","","25.0","%","","3.7","%"],["Consolidated","","$","4,450.6","","","$","4,581.1","","","(2.8)","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

From an industry perspective, the Company operates in six broad industry verticals. Commercial Segment revenues (71.3 percent of total revenues) were down 7.6 percent year-over-year and included $53.6 million of revenues from the GlideFast business through its acquisition date anniversary, which was at the beginning of July 2023. Commercial revenues fall into five broad industry verticals: (i) Financial Services, (ii) Consumer and Industrials, (iii) Healthcare, (iv) Technology, Media and Telecom, and (v) Business and Government Services. The Consumer and Industrials industry vertical had low single-digit growth, while the remaining four industry verticals declined year-over-year. Federal Government Segment revenues (28.7 percent of total revenues), the sixth industry vertical, were up 11.4 percent year-over-year and included $74.3 million from Iron Vine through its acquisition date anniversary, which was at the beginning of October 2023.

Total IT consulting services revenues were $2.4 billion (53.3 percent of total revenues), up 12.7 percent year-over-year. Federal Government Segment revenues, which are all consulting revenues, were $1.3 billion, up 11.4 percent year-over-year as stated above, and Commercial Segment consulting revenues were $1.1 billion, up 14.2 percent year-over-year. The growth in IT consulting services revenues was offset by a 16.0 percent year-over-year decline in assignment revenues which totaled $2.1 billion (46.7 percent of total revenues), reflecting continued softness in the more discretionary and cyclical portions of the Commercial Segment business.

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment (in millions).

[[GREPCENT_TABLE]]
[["","","Gross Profit","","","","Gross Margin"],["","","2023","","2022","","Change","","2023","","2022","","Change"],["Commercial","","$","1,017.6","","","$","1,126.2","","","(9.6)","%","","32.1","%","","32.8","%","","(0.7)","%"],["Federal Government","","262.4","","","243.4","","","7.8","%","","20.6","%","","21.3","%","","(0.7)","%"],["Consolidated","","$","1,280.0","","","$","1,369.6","","","(6.5)","%","","28.8","%","","29.9","%","","(1.1)","%"]]
[[/GREPCENT_TABLE]]

Gross profit is comprised of revenues less costs of services, which consist primarily of compensation for our billable professionals, other direct costs, and reimbursable out-of-pocket expenses.

Consolidated gross profit declined 6.5 percent on revenue decline of 2.8 percent. Gross margin was 28.8 percent, a compression of 110 basis points year-over-year. The compression mainly related to business mix: (i) within the Commercial Segment, a lower mix of certain high-

margin assignment revenues, namely, creative digital marketing and permanent placement revenues, which was partially offset by a higher mix of high-margin IT consulting revenues with a year-over-year expansion in margin, and (ii) a higher mix of revenues from the Federal Government Segment, which have a lower gross margin than commercial revenues.

Selling, General, and Administrative Expenses

Selling, general, and administrative ("SG&A") expenses were $844.2 million (19.0 percent of revenues), compared with $895.0 million (19.5 percent of revenues) in 2022. This improvement was primarily due to lower incentive compensation expense.

Amortization of Intangible Assets

Amortization of intangible assets was $71.7 million, up from $65.1 million in 2022. This increase reflects a full year of amortization from businesses acquired in 2022.

Interest Expense

Interest expense was $66.4 million up from $45.9 million in 2022, primarily as a result of higher interest rates on the senior secured credit facility, and also included $2.3 million of costs related to the August 2023 amendments to the senior secured credit facility. The weighted-average outstanding borrowings and cash-based interest rate were $1.1 billion and 5.9 percent (excluding costs related to the aforementioned amendments) in 2023, and $1.0 billion and 4.1 percent in 2022.

Provision for Income Taxes

The provision for income taxes was $78.4 million, down from $96.7 million in 2022 due to lower income before income taxes. The effective tax rate of 26.3 percent was slightly lower than the effective tax rate of 26.6 percent for 2022.

Income from Continuing Operations

Income from continuing operations was $219.3 million, down from $266.9 million in 2022.

Income from Discontinued Operations

Income from discontinued operations was $1.2 million in 2022.

Net Income

Net income was $219.3 million in 2023, down from $268.1 million in 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. 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.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(Dollars in millions)","","2023","","2022","","2021"],["Bookings","","$","1,351.9","","","$","1,192.2","","","$","810.3"],["Book-to-Bill Ratio","","1.2 to 1","","1.2 to 1","","1.3 to 1"]]
[[/GREPCENT_TABLE]]

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.

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(Dollars in millions)","","2023","","2022","","2021"],["New Contract Awards","","$","1,022.2","","","$","1,073.3","","","$","1,157.0"],["Book-to-Bill Ratio","","0.8 to 1","","0.9 to 1","","1.1 to 1"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31,"],["(Dollars in millions)","","2023","","2022","","2021"],["Funded Contract Backlog","","$","543.5","","","$","582.3","","","$","529.2"],["Negotiated Unfunded Contract Backlog","","2,466.0","","","2,681.2","","","2,472.0"],["Contract Backlog","","$","3,009.5","","","$","3,263.5","","","$","3,001.2"],["Contract Backlog Coverage Ratio","","2.4 to 1","","2.9 to 1","","2.6 to 1"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Our working capital, which is current assets less current liabilities, at December 31, 2023 was $579.2 million, and our cash and cash equivalents were $175.9 million. Our cash flows from operating activities have been our primary source of liquidity and have been sufficient to fund our working capital and capital expenditure needs. At December 31, 2023, we had full availability of our $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 $456.9 million in 2023, compared with $307.8 million in 2022. Net cash provided by operating activities before changes in operating assets and liabilities was $400.8 million, compared with $448.5 million in 2022. Changes in operating assets and liabilities resulted in net cash generation of $56.1 million, compared with net cash usage of $140.7 million in 2022. This year-over-year change primarily related to lower accounts receivable due to lower revenues as well as improvement in accounts receivable days sales outstanding ("DSO"), compared with 2022 which had increasing accounts receivable due to revenue growth as well as an increase in DSO.

Net cash used in investing activities in 2023 was $40.5 million and primarily consisted of capital expenditures. In 2022, net cash used in investing activities was $510.0 million and included $484.6 million used to acquire two IT consulting businesses and $37.5 million in capital expenditures.

Net cash used in financing activities in 2023 was $310.9 million, and primarily consisted of $273.1 million to repurchase the Company's common stock, net repayments of borrowings under the revolving credit facility totaling $31.5 million, a required quarterly principal payment of $1.3 million on the term loan B, as well as the effects of the August 2023 amendments to the Company's senior secured credit facility which generated net proceeds of $8.0 million that were offset by related amendment costs. In 2022, net cash used in financing activities was $256.5 million and primarily consisted of $281.4 million of stock repurchases, as well as net 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 9. Long-Term Debt in Item 8. Financial Statements and Supplementary Data.

Commitments and Contingencies — The following table sets forth, on an aggregate basis, the amounts of specified contractual cash obligations required to be paid in the future periods shown (in millions): 

[[GREPCENT_TABLE]]
[["Contractual Obligations","","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years","","Total"],["Long-term debt obligations(1)","","$","69.8","","","$","138.4","","","$","669.6","","","$","533.4","","","$","1,411.2"],["Operating Leases(2)","","22.8","","","34.4","","","16.3","","","2.5","","","76.0"],["Purchase obligations(3)","","23.2","","","24.4","","","0.1","","","\u2014","","","47.7"],["","","$","115.8","","","$","197.2","","","$","686.0","","","$","535.9","","","$","1,534.9"]]
[[/GREPCENT_TABLE]]

_______

(1) Long-term debt obligations include principal payments and estimated interest and fees calculated based on the rates in effect at December 31, 2023.

(2) Represents the future minimum lease payments for non-cancelable operating leases.

(3) Purchase obligations are non-cancelable job board service agreements and software subscriptions, maintenance, and license agreements.

For additional information about these contractual cash obligations, see Notes 5. Leases, 9. Long-Term Debt and 10. Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data.

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We have retention policies for our workers’ compensation liability exposures. The workers' compensation loss reserves are based upon an actuarial report obtained from a third party and determined based on claims filed and claims incurred but not reported. We account for claims incurred but not yet reported based on estimates derived from historical claims experience and current trends of industry data. Changes in estimates, differences in estimates, and actual payments for claims are recognized in the period that the estimates changed or the payments were made. The workers' compensation loss reserves were $3.0 million and $2.6 million, net of anticipated insurance and indemnification recoveries of $10.5 million and $10.2 million, at December 31, 2023 and 2022, respectively. We have undrawn stand-by letters of credit outstanding to secure obligations for workers’ compensation claims and other obligations. The undrawn stand-by letters of credit were $3.9 million at December 31, 2023 and 2022.

We have a deferred compensation plan liability of $16.6 million and $13.6 million at December 31, 2023 and 2022, which was primarily included in other long-term liabilities. We established a rabbi trust to fund the deferred compensation plan (see Note 12. Stock-Based Compensation and Other Employee Benefit Plans in Item 8. Financial Statements and Supplementary Data).

Off-Balance Sheet Arrangements

As of December 31, 2023, we had no off-balance sheet arrangements.

Accounting Standards Updates

See Note 3. Accounting Standards Update in Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.