Kforce Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
Kforce provides professional staffing and solutions through Technology, Finance and Accounting, and Government Solutions segments. The unaudited report covers the three months ended March 31, 2018, compared with the same period in 2017. At quarter-end, Kforce had approximately 2,600 associates and 11,500 consultants on assignment across 58 U.S. field offices.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $346.3 million | $334.0 million | +3.7% |
| Gross profit | $100.2 million | $97.1 million | +3.1% |
| Gross margin | 28.9% | 29.1% | -20 basis points |
| Income from operations | $13.6 million | $10.4 million | +30.6% |
| Operating margin | 3.9% | 3.1% | +80 basis points |
| Net income | $9.2 million | $5.9 million | +55.5% |
| Diluted EPS | $0.37 | $0.23 | +60.9% |
| Adjusted EBITDA | $17.9 million | $14.6 million | +23.1% |
| Cash flow from operations | $10.3 million | $(10.5) million | Improved by $20.8 million |
| Free cash flow | $8.8 million | $(12.8) million | Improved by $21.6 million |
Flex revenue increased 4.2% to $332.8 million, while Direct Hire revenue declined 1.0% to $11.4 million and product revenue declined 34.0% to $2.1 million. Flex gross margin increased 10 basis points to 26.3%. Total gross margin declined because of lower Government Solutions Flex margins and a lower mix of Direct Hire revenue.
- Technology: Revenue increased 6.5% to $236.5 million; Flex revenue increased 6.7%.
- Finance and Accounting: Revenue decreased 7.3% to $80.9 million; Flex revenue decreased 7.9%.
- Government Solutions: Revenue increased 17.0% to $28.9 million; Flex revenue increased 24.5%, principally from two new prime contract wins in 2017.
SG&A declined slightly to $84.6 million and decreased to 24.4% of revenue from 25.4%. Management attributed the improvement to lower revenue-generating headcount, prior realignment activities, and improved associate productivity. The effective tax rate declined to 25.1% from 36.0%, benefiting from the Tax Cuts and Jobs Act.
Cash and cash equivalents were $0.3 million at March 31, 2018, compared with $0.4 million at December 31, 2017. Working capital was $169.0 million, up from $161.7 million. Trade receivables were $237.8 million. Capital expenditures were $1.5 million.
Credit facility borrowings were $123.2 million, up from $116.5 million at year-end, with $173.6 million of availability, subject to covenants. The facility matures May 25, 2022, and includes a $300.0 million borrowing capacity that may be increased by up to $150.0 million subject to conditions. Kforce was in compliance with its covenants and was not restricted from dividends or repurchases at quarter-end. The company also maintained a $65.0 million interest-rate swap for the first three years of its term.
Material changes versus the prior comparable period
- Revenue growth was led by Technology and Government Solutions, while Finance and Accounting revenue contracted following the conclusion of several large projects.
- Technology Flex growth accelerated to 6.7% from 5.4% in the fourth quarter of 2017.
- Total Flex hours billed declined 5.9%; Technology hours declined 2.1% and Finance and Accounting hours declined 11.0%. Higher bill rates and mix supported Technology revenue despite lower hours.
- SG&A leverage improved by 100 basis points, producing stronger operating and net margins.
- Operating cash flow and free cash flow turned positive, aided by collection timing and receipt of a $6.8 million income-tax receivable.
- Kforce repurchased approximately 318 thousand shares for $8.7 million on the open market, in addition to shares repurchased for tax withholding. Approximately $29.8 million remained available under the repurchase authorization.
- The company declared and paid a quarterly dividend of $0.12 per share, or approximately $3.0 million.
Accounting, outlook, risks and unusual items
Kforce adopted ASC Topic 606 effective January 1, 2018, using the modified retrospective method. The adoption reduced opening retained earnings by approximately $0.2 million net of tax. Management stated that the new standard did not materially affect the first-quarter financial statements compared with the prior revenue-recognition standard.
- Management expected Technology Flex revenue to increase sequentially and year over year in the second quarter, with further growth acceleration.
- Finance and Accounting Flex revenue was expected to stabilize sequentially in the second quarter, while year-over-year declines were expected to remain similar to first-quarter levels.
- Government Solutions Flex revenue was expected to remain stable sequentially, with year-over-year growth approximating first-quarter levels.
- Direct Hire revenue was expected to increase seasonally in the second quarter, with year-over-year trends directionally similar to the first quarter.
- Management expected the Tax Cuts and Jobs Act to generate approximately $10 million of additional operating cash flow during 2018.
- Management believed cash flow from operations, existing cash, and available credit would satisfy operating and capital requirements for at least the next 12 months.
Key risks include staffing demand and economic conditions, competition for consultants, pricing pressure, customer concentration and collections, execution and funding of government contracts, interest-rate exposure, covenant compliance, litigation, workers’ compensation and health-insurance liabilities, and potential changes in accounting standards. Government Solutions Flex margin declined because of compression between bill and pay rates on several larger contracts. Ordinary-course litigation was not expected to be material, although adverse outcomes could affect results.
Important facts for investors to verify
- Whether Technology growth and Government Solutions contract wins offset continued weakness in Finance and Accounting.
- Whether Flex hours, consultant supply, bill rates, and gross-margin trends support management’s second-quarter outlook.
- Credit-facility leverage, covenant headroom, interest costs, and the effect of rising rates despite the swap hedge.
- The sustainability of positive operating cash flow, including receivable collections and tax-related cash benefits.
- The continuing level of share repurchases and dividends relative to debt reduction and available liquidity.
- Potential effects of the new revenue standard, future lease accounting adoption, litigation, contingencies, and government-contract funding.