ASGN Incorporated

the ASGN Incorporated Second Quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kimberly Eshlekin, Congressional Relations. You may begin.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's second quarter 2020 conference call. With me are Ted Hansen, President and Chief Executive Officer, Rand Blazer, President of APEC Systems, George Wilson, President of ECS, and Ed Pierce, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risk and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between the GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hansen, President and Chief Executive Officer.

Thank you, Kimberly, and thank you for joining ASGN's second quarter 2020 earnings call. ASGN's business demonstrated solid resiliency in the second quarter. Our scale, high-end IT service offerings, and large and diverse client base, including over 60% of the Fortune 500, as well as key federal defense and civilian government agencies, provided stability and positioned us well to serve our clients despite the challenges of COVID-19. For the quarter, revenues totaled $936.8 million, down 3.6% from the prior year. Our commercial business, which includes our Apex and Oxford segments, accounted for 74.4% or $697.1 million of consolidated revenues, while our government business, our ECS segment, accounted for 25.6% or $239.7 million of consolidated revenues. Adjusted EBITDA totaled $106.2 million for the second quarter and represented a solid margin of 11.3%. Although we did not provide formal guidance for the second quarter, our results came in well ahead of the midpoint of the illustrative scenarios we provided. Revenues were 4.1% higher and adjusted EBITDA margins 110 basis points higher. Looking at the cadence of revenue during the second quarter, April proved to be a challenging four weeks for the commercial market, while our government business remained strong and continued to perform above expectations. Declines in our commercial business continued through the first half of the quarter, flattened in the second half, and have remained stable through the first three weeks of the third quarter. Our government business remained resilient throughout Q2. Strength in the second quarter was driven largely by industry-leading performance of the ECS segment, which was up 25.8% over the prior year, and the strength of APEX Systems, which only declined 3.4% year-over-year. ECS and APEX Systems together comprise roughly 80% of our consolidated revenues. As I emphasized last quarter, ASGN continues to see the benefits of the strategic initiatives we have undertaken to evolve and strengthen our business model. We've become much more IT-centric, and in doing so, expanded and increased market share in our large account portfolio. Through the ECS segment, we also have significant exposure to the federal government marketplace, a sector that is typically more insulated from economic volatility than commercial industry verticals. Last but not least, we've continued to increase our high-end IT solutions capabilities. Each of these strategic developments has positioned ASGN not only for stability during the current downturn, but also for strength in the future recovery. In terms of bidding activity, our pipeline of new business remains solid. We are witnessing an accelerating trend toward digital transformation as our clients push forward strategic initiatives to deepen their customer experience and engagement, increase their businesses' agility, and decrease the time needed to get their products to market. Services related to project management, data analytics, web development, artificial intelligence, machine learning, cloud, and cybersecurity are increasingly in demand. our clients' IT challenges are also becoming much more complex. We are finding customers awarding more work to firms with multidisciplinary skill sets and broad ranges of IT expertise, but characteristics that differentiate ASGN from our competitors. Government contracting remains steady, with bids and process continuing to flow. Like the commercial end markets, IT modernization remains important for our government clients. the federal government is about five to seven years behind the commercial market in IT modernization, including cloud adoption, with only a portion of federal agencies having migrated to the cloud. The increased desire to transition to the cloud, along with the mission-critical, sensitive nature of the information held by the government, is creating a strong demand for SDN-sophisticated cybersecurity capabilities and managed services. Importantly, given the market conditions, our clients are as open as ever to remote work. ASGN is fortunate to have one of the largest, most skilled contingent labor forces available for teleworking today. We shifted our internal workforce to 100% remote in mid-March, and over 80% of our billable consultants also continued to work remotely with just a small portion of essential staff still onsite with required safety protocols. Along with our solid business pipeline and diverse client base, our flexible cost structure and robust free cash flow continue to provide stability to our business. Our free cash flow generation is our principal source of liquidity and underpins our strong borrowing capacity. In the second quarter, we generated $178.8 million in free cash flow, up 102.7% year-over-year. We also had $207.9 million in cash on the balance sheet as of June 30th. As of quarter end, we had no outstanding borrowings under our $250 million revolving credit facility and had full availability under that facility. Nevertheless, a moderate amount of debt has always been part of our balanced capital structure and supports our ability to make strategic acquisitions. Our acquisition pipeline is active and acquisitions remain an important part of our long-term growth strategy. With the cash we have on hand, what we expect to generate in the second half of the year, and our borrowing capacity, we have significant capital resources to deploy on M&A or stock repurchases, depending on what makes the most strategic sense for our business at the time. With that as background, let's talk about our segment performance for the second quarter. Apex, our largest segment, which includes Apex Systems and Creative Circle, services clients across multiple commercial and markets. For the second quarter of 2020, the segment generated revenue of $576.9 million, down 8.2% year-over-year. As I noted earlier, Apex Systems declined only 3.4% year-over-year. Creative Circle saw double-digit declines with the deepest decline amongst ad, event, and permanent placement services. Digital-related skill placements, however, held up during the quarter. Fortunately, both APEX Systems and Creative Circle revenues appeared to level mid-second quarter. In June, APEX Systems revenues started to improve, while Creative Circle revenues held steady without further weekly declines. Before speaking to industry trends for the quarter, a quick housekeeping note. Beginning in the second quarter, we are now classifying APEX Systems revenue into five industry verticals as compared to the eight verticals previously provided. These consolidated verticals offer a better indication of how we internally view our business. Life sciences is now categorized in the healthcare industry verticals. Telecom is included in the technology, media, and telecom, or TMT, vertical, and aerospace and defense is part of business and government services. Additional information on these verticals can be found in our earnings supplemental presentation for the second quarter, which has been posted on our investor website. Now back to vertical performance for the quarter. Two out of the five industry verticals for APEX Systems including financial services and business and government services, saw revenue growth during the quarter. The remaining three verticals, healthcare, consumer and industrials, and TMT, declined year over year, though each of these verticals did see some acceleration of business in June. In the consumer and industrial space, as anticipated, retail, energy, hospitality, and transportation, including airlines, were all down in the second quarter. Top accounts achieved low single-digit growth rates for Q2, while retail and branch accounts declined low double digits. Gross margins for the Apex segment were 29.6%, down slightly year-over-year, due primarily to the lower permanent placement mix in Creative Circle. Contract gross margins across the segment held steady. EBITDA margins for the APEX segment were flat from a year ago, while APEX systems EBITDA margins increased significantly year-over-year, highlighting the resiliency of its variable cost structure. Importantly, we also continue to grow our commercial consulting business. Consulting work for the APEX and Oxford segments combines a total of $96.4 million for the second quarter, up 2.8% year-over-year. Although the growth rate in consulting revenue for the quarter was single digits, bookings increased each month throughout the quarter, with June being the strongest month. Additionally, our pipeline of consulting work continued to increase for the quarter at double-digit rates year over year. We expect that our high-end consulting offering will remain an important source of value we provide our clients going forward. We are finding more consulting market share being garnered by firms that are positioned around new technologies, or next-gen processes for the cloud, fast applications, and data analytics in particular. So we continue to ensure that our consulting teams are well-versed in these offerings. Throughout the quarter, the APEX segment sought new clients and provided added solutions to existing clients. As I noted previously, digitization projects remain in high demand. For a Fortune 500 business services account, for example, We updated their e-commerce platform, improving user experience, and moving their online payment and invoicing features to the cloud. These types of services are part of our digital roadmap approach in which we support the streamlining and integration of our client systems. Our work for this project was very cost-effective as we used both onshore and nearshore resources by capitalizing on the capabilities of our Mexican Development Center. As I mentioned on our Q1 call, as a result of current market conditions, we are having more discussions with our clients about reshoring their capabilities. Our near-shore Mexican Development Center provides a great alternative to many of APEX and Oxford's U.S. clients when traditional outsourcing to offshore may not be feasible or comes with newfound challenges. Let's now turn to ECS. which provides mission-critical solutions to the federal government, including the Department of Defense, intelligence agencies, and other civilian agencies. ECS continued to achieve industry-leading growth for the second quarter of 2020 and reported revenues of $239.7 million, up 25.8% year-over-year, driven by the continued high demand from federal government customers for machine learning and artificial intelligence services, a higher volume of cloud services and solutions, new opportunities presented by our acquisitions in the government space, and the contribution from Blackstone Federal, which was acquired in the first quarter. Consistent with the first quarter, in Q2 2020, ECS did not see any material changes in revenue or backlog as a result of COVID-19, due in large part to the stability of the government sector. Business in the ECS segment progressed as usual, with the exception of an increased number of professionals teleworking. Less than 1% of ECS employees are working on-site. ECS's new business pipeline remains robust, with no slowdown in customer requests for proposals during the second quarter. Though we have seen some of the work we anticipated would be put up for re-compete, pushback, or simply extended. The segment was awarded $175.7 million in new business and achieved a book-to-bill of 0.7 to one for the second quarter. On a trailing 12-month basis, ECS's book-to-bill was a healthy 1.7 to one, or contract backlog coverage ratio of 2.9 times. Key contracts one and Q2 included a significant expansion of machine learning services under a new contract within the Department of Defense along with three contracts awarded by the Department of Homeland Security, one for specialized architecture and engineering services, another for high-end design, development, and cloud migration of business applications, and a third for data modeling, business architecture, and policy reengineering expertise. In addition to contracts won, in the second quarter, ECS was named first among the top 100 vertical market managed service providers for the second year in a row and recognized as part of an elite group of Amazon Web Services managed service providers for the sixth consecutive year. Turning to our last segment, Oxford. Oxford offers on-demand consulting talent for commercial IT, healthcare, life sciences, and engineering clients. as well as permanent placement talent through our CyberCoders division. The segment reported revenues of $120.2 million for the second quarter of 2020, down 21.5% year-over-year. This decline includes an over 40% reduction in permanent placement services, which on a consolidated basis now only comprise 2.2% of revenues. As we enter the third quarter of 2020, it is clear that the COVID-19 pandemic will continue to impact our economy. Nevertheless, based on the trends we are currently seeing, along with the staggered reopening of the U.S. economy, we believe that we now have enough visibility to reinstate quarterly guidance for the third quarter. Ed Pierce, our CFO, will speak to our expectations shortly. I remain confident in ASGN's long-term growth capabilities. We're in the right industry IT services at the right time. We have a large and diverse client base bolstered by the stability of government sector work and large commercial clients. Our contract deployment model combined with a flexible cost structure provides further stability to our business. With that said, I'd now like to turn the call over to Ed Pierce, our CFO, to discuss our second quarter performance and third quarter guidance in further detail. Ed?