ASGN Incorporated

Hello, and welcome to the ASGN Incorporated second quarter 2021 earnings call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kimberly Esterkin, Managing Director at Addo Investor Relations. Please go ahead, Kimberly.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's second quarter 2021 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 risks 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 Hampson, President and Chief Executive Officer.

Thank you, Kimberly, and thank you for joining ASGN's second quarter 2021 earnings call. ASGN reported very strong results for the second quarter, and I'm pleased to report that all is progressing as planned from both a client demand and company execution standpoint. The market is strong, the demand for our services is growing, and ASGN is capturing our share of the market and more. Were it not for the incredible performance of all our employees, serving our clients, and contributing to key initiatives and acquisitions, we would not be able to post such strong results. As you recall, at the beginning of July, we announced that we will now be reporting two business segments, the commercial segment, which includes Apex Systems, Creative Circle, and CyberCoders, and the federal government segment, our ECS business. On today's call, I will speak to these two segments, which represent our continuing operations. Ed Pierce, our CFO, will discuss Oxford or discontinued operations in conjunction with the overall financial results and Q3 guidance later in today's call. Revenues for the second quarter for continuing operations totaled $974.9 million, up 17.2% year-over-year and above the high end of our revised guidance range set forth in our announcement regarding the divestiture of our Oxford business. Adjusted EBITDA of $119.3 million also came in above the top of our revised guidance range for the second quarter, improving 25.2% from the prior year period. The commercial segment accounted for $712.5 million, or 73.1% of our consolidated revenues, while the federal government segment accounted for $262.4 million, or 26.9% of our consolidated revenues. The growth of our consulting business continues to be a big driver of the commercial segment's stellar performance. Both realized consulting revenues and our pipeline of consulting business are firing on all cylinders. Our federal government business was also up 9.5% in the second quarter, performing in line with our expectations. In addition to strong revenue and EBITDA, our free cash flow generation remained solid and totaled $72.3 million for the second quarter. Our free cash flow generation supports investments in our organic growth M&A and share repurchases. We view our current stock price as attractive, and with the announcement of the Oxford sale behind us, we are back in the market buying stock. Following the announcement of the Oxford divestiture, we have deployed approximately $35 million to repurchase common shares, and have $215 million remaining under our $250 million share repurchase plan. Share repurchases do not preclude us from being active on the M&A front. Our ample cash on hand, along with our borrowing capacity, enable us to continue to make acquisitions. While we would consider taking on additional leverage if needed, we are well positioned with our current balance sheet to continue to be acquisitive without taking on additional debt. The divestiture of Oxford will also free up capital. Our acquisition strategy is succeeding. Since the beginning of 2019, we have acquired eight companies with an aggregate annual revenue run rate of approximately $375 million. As a result of the contribution from acquisitions and the high organic growth of our underlying business, we expect we will report record revenues for Q3 2021. This is particularly noteworthy considering historical results included revenues from the Oxford business, which is now presented as discontinued operation. It's not just the intrinsic value of these standalone businesses that contributes to their acquisition multiples. It's also the expected revenue synergies and higher margins we can achieve when combining their capabilities with that of our own. With that said, let's turn to more detail on our segment performance for the second quarter. beginning with our largest segment, Commercial, which services large enterprises and Fortune 500 companies across multiple industry verticals. For the second quarter of 2021, the Commercial segment generated revenue of $712.5 million, up 20.3% year-over-year and up 19.3% organically. Growth across our consulting business, CyberCoders, and Creative Circle contributed to this increase in revenue. The commercial segment grew not just year-over-year and sequentially, but also grew high single digits as compared to the second quarter of 2019. APEX Systems revenues improved 16.6% over the prior year period, while Creative Circle and CyberCoders grew 39.4% and 58.9% year-over-year, respectively. Each of these operating units reported their fourth straight quarter of sequential growth. From an industry perspective, all five commercial industry verticals experienced growth during the quarter, with all but government and business services industry accounts achieving double-digit growth on a year-over-year basis. Commercial and industrial accounts were up double digits, both year-over-year and sequentially, due to the continued strength of consumer staples, e-commerce, and utilities, as well as significant improvement in retail, energy, hospitality, and transportation. Our technology and telecommunications, or TMT vertical, was up double digits year over year. Within the vertical, technology accounts saw significant growth over Q2 2020, while telecommunications accounts were flat year over year. Government and business services was up mid-single digits, with aerospace and defense and government accounts flat over the second quarter of 2020. while business services accounts were up year over year. Financial services accounts were up double digits, with growth in regional banks, wealth management, and fintech accounts. Both top accounts and retail and branch accounts achieved double-digit growth rates for Q2. From an industry perspective, top account revenue at Apex Systems was up in all five industry verticals we target, while Creative Circle posted positive growth across their top accounts in Q2 2021. Gross margins for the commercial segment were 32% up 100 basis points from the prior year due to increased business in Creative Circle and CyberCoder units, along with the higher bill rates associated with our commercial consulting business. EBITDA margins were also up due to the growth in gross margins as mentioned above, Along with higher productivity in our workforce, importantly, EBITDA margins were up compared to Q2 2019, which is reflective of a more typical performance year. We also continued to grow our commercial consulting revenues during the quarter. Consulting revenues totaled $144.4 million for the second quarter, a significant increase of 69.3% year-over-year, of which 61.8% represents organic growth. Our pipeline of consulting business continues to grow at high double-digit rates and is trending positively in the third quarter. This growth in our consulting business resulted from a combination of factors, including broad-based industry demand, acquisitions of businesses that have bolstered our technical muscle and domain expertise, and the success of our Mexican Delivery Center. Since the onset of the global pandemic, client demand for nearshore capabilities has resulted in a doubling in size of our Mexican Delivery Center. The success of these nearshore capabilities is an excellent example of how we have been able to spread the strength of one of our acquisitions, in this case Innersys, across our entire commercial book of business. Speaking of acquisitions, at the end of the second quarter, We welcome the M4 Business Unit of AVAP, a modern enterprise solutions integrator, to the commercial segment, strengthening our consulting capabilities and offerings in the healthcare and consumer and industrial sectors. The M4 Business Unit's roughly 240 employees add to our growing portfolio of capabilities for our healthcare and manufacturing clients in the U.S. and in Europe, including new and enhanced advisory and managed service offerings. ASGN remains at the forefront of digital transformation, and we expect significant opportunities for the M4 team as legacy users of their enterprise solution, particularly in the healthcare space, upgrade to the cloud. As we strengthen our consulting capabilities, our revenues continue to accelerate. We see an increasing amount of work in digital innovation and modern enterprise solutions across cloud data and analytics and digital business transformation engagement, enabling us to implement many of the elements of our clients' individual digital roadmaps. Working Agile and DevOps, in particular, is a large component of our support as our clients tie together applications in their cloud environment and strengthen their customer support with real-time data updates. Our ability to build dashboards and software interfaces to propel the customer experience and internal management of the business operations have been key drivers of our revenues. We are very pleased with the recovery we have seen in our commercial business, which is representative of our commitment to service our accounts, build a diversified set of customers, and bring value to every piece of work assigned. Now let's turn to the federal government segment, which provides mission-critical solutions to the Department of Defense, intelligence agencies, and other civilian agencies. Revenues for the federal government segment totaled $262.4 million for the second quarter, up 9.5% year-over-year. Growth in the federal government segment was primarily due to the continued high demand for artificial intelligence and machine learning services and the impact of recent acquisitions, including both ISM and Skyris. The federal government segment's new business pipeline also remained strong, with approximately $304 million in new business awarded during the second quarter and a book-to-bill ratio of 1.2 to 1. Contract backlog totaled $2.7 billion at the end of the second quarter, or a healthy coverage ratio of 2.5 times the segment's trailing 12-month revenues. During the quarter, we were awarded a three-year award from the Army Resource Laboratory, to work in the development, fielding, and sustainment of artificial intelligence solutions for the Department of Defense. This award introduces several new mission areas and focuses on enhancing the DoD's development pipelines and data feeds. We were also awarded a contract from the DoD Combatant Command to support data and analytics activities in intelligence operations. Similar to the commercial segment, we remain inquisitive in the federal government space and will continue to be going forward. Just post the end of the second quarter, we announced the acquisition of Indersoft, a leading cybersecurity and digital transformation solutions provider for the federal government. Indersoft's team of 220 highly skilled consultants deepens ASGN's footprint with key customers, including the Air Force, Defense Information Systems Agency, Army Intelligence, and other defense agencies. The acquisition of Endersoft is another example of our long-term capital deployment strategy to acquire high-growth consulting businesses that position ASTN as an industry-leading provider of IT services and solutions. Before speaking further about our acquisition strategy, I will now turn the call over to Ed Pierce, our CFO, to discuss the second quarter financial results and our third quarter guidance. Ed?