Everforth Inc (EFOR) FY 2024 MD&A

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 2024 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 Fortune 1000 and large mid-market companies. The Federal Government Segment provides advanced IT solutions to the Department of Defense, the intelligence community, and key federal civilian agencies, namely the Department of Homeland Security. 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 Trademarks — Goodwill and trademarks are evaluated for impairment annually on October 31st, or more frequently if an event occurs or circumstances change, including but not limited to, a significant decrease in expected revenues or cash flows; an adverse change in the business environment, regulatory environment or legal factors; or a substantial sustained decline in the market capitalization of our stock. Goodwill is tested at the reporting unit level, which is generally an operating segment or one level below the operating segment level, where a business operates and for which discrete financial information is available and reviewed by segment management. The Company's only identifiable indefinite-lived intangible assets are its trademarks.

When evaluating goodwill and trademarks for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that there has been an impairment. A qualitative assessment takes into consideration (i) macroeconomic, industry and market conditions; (ii) cost factors; (iii) overall financial performance compared with prior projections, including changes in assumptions since the last quantitative assessment; (iv) future performance and projections; (v) the excess of fair value over carrying value as of the most recent quantitative assessment performed; and (vi) other relevant entity-specific events. The decision to perform a qualitative assessment in a given year is influenced by a number of factors including the significance of the excess of the estimated fair value over carrying amount at the last quantitative assessment date and the amount of time between quantitative fair value assessments. If the Company decides not to perform a qualitative assessment, or if it determines that it is more likely than not that the carrying amount of goodwill or trademarks exceeds their fair value, a quantitative assessment is performed to determine the estimated fair value of the reporting unit or trademark.

To estimate the fair value of a reporting unit, quantitative analysis would generally include a combination of a discounted cash flow (“DCF”) model and a market approach. Key inputs to the DCF model would include (i) future revenues, (ii) earnings before interest, taxes depreciation and amortization and (iii) the weighted average cost of capital discount rate. As a result of a quantitative assessment, if the carrying amount exceeds the estimated fair value, an impairment charge would be recorded to reduce the carrying amount of goodwill.

To estimate the fair value of a trademark, quantitative analysis would generally include, an income approach, specifically a relief-from-royalty method. As a result of a quantitative assessment, if the carrying amount exceeds the estimated fair value, an impairment charge would be recorded to reduce the carrying amount of the trademark.

For the 2024 impairment test of goodwill and trademarks, the Company performed a qualitative assessment and determined there were no indicators of impairment and it was more likely than not that the fair value of each of the reporting units, and the trademarks, exceeded their respective carrying amounts.

For the 2024 goodwill impairment test, the Company had three reporting units: Apex, Creative Circle and Federal Government. Following the impairment test, the Company aggregated the Apex and Creative Circle reporting units into a single reporting unit, now known as the Commercial reporting unit. Before and after this change it is more likely than not the fair value of the Company's reporting units exceeded their carrying value.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2024 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2023

In this section, we discuss the results of our operations for the year ended December 31, 2024 compared with the year ended December 31, 2023. For a discussion of the year ended December 31, 2023 compared with the year ended December 31, 2022, 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, 2023.

Revenues

Revenues for the year were $4.1 billion, down 7.9 percent year-over-year. The table below shows our revenues by segment (in millions).

From an industry perspective, the Company operates in six broad industry verticals. Commercial Segment revenues (70.0 percent of total revenues) were down 9.6 percent year-over-year and are categorized into five broad industry verticals: (i) Financial Services, (ii) Consumer and Industrials, (iii) Healthcare, (iv) Technology, Media and Telecom ("TMT"), and (v) Business and Government Services. The TMT industry vertical had low single-digit growth, while the remaining four industry verticals declined year-over-year. Federal Government Segment revenues (30.0 percent of total revenues), the sixth industry vertical, were down 3.5 percent year-over-year, reflecting lower third-party software licenses revenues compared with the prior year.

Total IT consulting services revenues were $2.4 billion (57.5 percent of total revenues), down 0.5 percent year-over-year. Federal Government Segment revenues, which are all consulting revenues, were $1.2 billion, down 3.5 percent year-over-year as stated above. Commercial Segment consulting revenues were $1.1 billion, up 3.0 percent year-over-year. Assignment revenues, which totaled $1.7 billion (42.5 percent of total revenues), were down 16.3 percent year-over-year, reflecting continued softness in the portions of the Commercial Segment Business that are more sensitive to changes in the macroeconomic cycles (i.e., more cyclical).

Gross Profit and Gross Margin

The table below shows gross profit and gross margin by segment (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 declined 7.5 percent on a revenue decline of 7.9 percent. Gross margin was 28.9 percent, an expansion of 10 basis points year-over-year, reflecting a higher mix of Commercial consulting revenues (which carry a higher gross margin than assignment revenues and Federal Government Segment revenues), as well as margin expansion in these revenues.

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 $821.2 million (20.0 percent of revenues), compared with $844.2 million (19.0 percent of revenues) in 2023. The decrease in SG&A expenses was primarily due to lower compensation-related expense.

Amortization of Intangible Assets

Amortization of intangible assets was $58.1 million, down from $71.7 million in 2023. This decrease was due to (i) the accelerated amortization method whereby most of our acquired intangibles have higher amortization rates at the beginning of their useful lives, and (ii) older intangibles reaching the end 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 $64.3 million, down from $66.4 million in 2023. The decrease was primarily the result of higher interest income and lower debt amendment fees (related to refinancing the senior secured credit facility in both periods), partially offset by higher interest expense on the senior secured credit facility. The weighted-average outstanding borrowings for 2024 and 2023 were $1.05 billion and the cash-based interest expense rate was 6.0 percent and 5.9 percent (excluding interest income and costs related to debt amendments), respectively.

Provision for Income Taxes

The provision for income taxes was $64.9 million, down from $78.4 million in 2023 due to lower income before income taxes. The effective tax rate of 27.0 percent was slightly higher than the effective tax rate of 26.3 percent in 2023.

Net Income

Net income was $175.2 million, down from $219.3 million in 2023.

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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 approximately one year.

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. There is no assurance our contract backlog will result in future revenues. 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.

Liquidity and Capital Resources

Our working capital, which is current assets less current liabilities, at December 31, 2024 was $550.6 million, and our cash and cash equivalents were $205.2 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 December 31, 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 $400.0 million in 2024, compared with $456.9 million in 2023. Net cash provided by operating activities before changes in operating assets and liabilities was $353.9 million, compared with $400.8 million in 2023. Net cash provided by changes in operating assets and liabilities was $46.1 million, compared with $56.1 million in 2023.

Net cash used in investing activities was $35.3 million and $40.5 million for 2024 and 2023, respectively, and primarily related to capital expenditures.

Net cash used in financing activities in 2024 was $333.2 million, and primarily consisted of $327.2 million to repurchase the Company's common stock and required principal payments of $5.0 million on the term loan B. 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

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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.

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 8. 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):

_______

(1) Long-term debt obligations include principal payments and estimated interest and fees calculated based on the rates in effect at December 31, 2024.

(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 4. Leases, 8. Long-Term Debt and 9. Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data.

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 are 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 $2.8 million and $3.0 million, net of anticipated insurance and indemnification recoveries of $10.5 million and $10.5 million, at December 31, 2024 and 2023, 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 $3.7 million at December 31, 2024 and 2023.

We have a deferred compensation plan liability of $17.8 million and $16.6 million at December 31, 2024 and 2023, which was primarily included in other long-term liabilities in the accompanying consolidated balance sheets. We established a rabbi trust to fund the deferred compensation plan, which is primarily comprised of mutual funds measured at fair value using the net asset value practical expedient, and approximates the deferred compensation plan liability balances (see Note 11. Stock-Based Compensation and Other Employee Benefit Plans in Item 8. Financial Statements and Supplementary Data).

Off-Balance Sheet Arrangements

As of December 31, 2024, 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.