Kforce Inc. — Fiscal 2017 Form 10-K Summary
Business context and reporting period
Kforce provides U.S.-focused professional staffing and solutions through Technology (Tech), Finance and Accounting (FA), and Government Solutions (GS). Services are provided primarily on a temporary Flex basis, with a smaller Direct Hire business. The filing covers the fiscal year ended December 31, 2017; quarterly information is provided but the filing is an annual report, not a standalone fourth-quarter filing.
- Operations included headquarters in Tampa, Florida, 59 U.S. field offices, nearly 2,600 associates, and more than 12,000 consultants on assignment at year-end.
- Flex represented 96.5% of 2017 revenue. The 10 largest clients represented approximately 25% of revenue; no single client exceeded 6%.
- Kforce sold the assets of Kforce Global Solutions in September 2017, recording a $3.3 million gain in SG&A. The business historically contributed approximately 1% of revenue.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net service revenue | $1,357.9 million | $1,319.7 million | +2.9% |
| Gross profit | $408.1 million | $408.5 million | -0.1% |
| Gross margin | 30.0% | 31.0% | -100 bps |
| Income from operations | $68.6 million | $59.1 million | +16.2% |
| Operating margin | 5.1% | 4.5% | +60 bps |
| Net income | $33.3 million | $32.8 million | +1.6% |
| Diluted EPS | $1.30 | $1.25 | +4.0% |
| Operating cash flow | $29.3 million | $39.8 million | -26.3% |
| Free cash flow | $23.5 million | $27.4 million | -14.3% |
Adjusted EBITDA, a non-GAAP measure, was $85.2 million versus $74.5 million in 2016. SG&A declined to 24.4% of revenue from 25.8%, reflecting the absence of $6.0 million of 2016 severance costs, improved productivity, expense discipline, and the Global asset-sale gain; these benefits were partly offset by higher technology investment.
- Tech: Revenue increased 2.7% to $907.5 million; gross margin was 28.3% versus 29.0%.
- FA: Revenue increased 2.5% to $346.1 million; gross margin was 34.2% versus 35.7%.
- GS: Revenue increased 5.7% to $104.3 million; gross margin was 31.1% versus 32.6%. Government backlog increased to $59.3 million from $42.9 million.
- Flex: Revenue increased 3.2% to $1.31 billion, while Direct Hire revenue declined 5.4% to $47.7 million. Flex gross margin fell to 27.5% from 28.2%.
Liquidity, debt, capital allocation, and balance sheet
- Working capital was $161.7 million at December 31, 2017, up from $135.4 million.
- Cash and cash equivalents were $0.4 million, while trade receivables were $225.9 million.
- Debt outstanding under the credit facility was $116.5 million, compared with $111.5 million at year-end 2016. The new facility provides $300 million of capacity, with $180.3 million available at year-end, subject to covenants and letters of credit.
- The credit facility matures May 25, 2022 and includes a maximum total leverage ratio of 3.25 to 1.00 and a minimum fixed-charge coverage ratio of 1.25 to 1.00. Kforce was in compliance and was not restricted from distributions or repurchases at year-end.
- Kforce paid $12.1 million in dividends, or $0.48 per share, and repurchased approximately 526,000 shares for $12.2 million in open-market purchases during 2017. Approximately $38.5 million remained authorized for repurchases at year-end.
- Capital expenditures were $5.8 million, compared with $12.4 million in 2016.
Material changes versus the prior comparable period
- Revenue growth improved, particularly in Tech Flex during the second half of 2017; quarterly year-over-year revenue growth per billing day reached 5.1% in the fourth quarter.
- Gross margin declined because of compression between consultant bill and pay rates, higher health insurance costs, talent scarcity, and the effects of Hurricanes Harvey and Irma. Management stated that the hurricanes reduced 2017 EPS by approximately $0.04.
- Operating profitability improved as SG&A declined despite increased technology investment.
- Operating cash flow weakened because accounts receivable increased with revenue growth, collections timing shifted, and certain large clients extended payment terms.
- The effective tax rate increased to 48.1% from 41.4%, primarily because the Tax Cuts and Jobs Act required a $5.4 million revaluation charge for deferred tax assets. Excluding that revaluation, the 2017 effective tax rate would have been 39.7%.
- Weighted average diluted shares declined to 25.6 million from 26.3 million, primarily reflecting share repurchases.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected Tech and FA revenue to grow year over year in 2018. GS was expected to grow at a low-double-digit rate if it retained its largest contract, which was being recompeted in the first quarter of 2018.
- Management projected a 2018 effective tax rate of 25.5% to 27.5% and expected approximately $10 million of additional 2018 operating cash flow from the lower tax rate.
- Management cited continued demand for technology staffing, but also scarcity of qualified consultants, potential wage inflation, pricing pressure, and spread compression.
- Key risks include economic cyclicality, client concentration and termination rights, collection and receivable risk, cybersecurity and data privacy, employment and worker-classification claims, immigration restrictions affecting H-1B consultants, regulatory compliance, government budget reductions or shutdowns, contract recompetes, and loss of government contracting vehicles or clearances.
- Outstanding contractual obligations totaled approximately $225.4 million, including $116.5 million of credit-facility borrowings, $25.9 million of operating leases, $14.5 million of purchase commitments, and $31.4 million of deferred compensation obligations.
- The company reported ordinary-course legal proceedings that were not considered material. A wage-and-hour class action was approved for settlement in February 2018 without a material adverse effect.
- No goodwill impairment was recorded in 2017; management reported that estimated fair value significantly exceeded carrying value for each reporting unit. Future deterioration in operating assumptions could nevertheless result in impairment.
- Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2017.
Most important facts for investors to verify
- Whether Tech Flex growth continues while bill-pay spreads and segment gross margins remain under pressure.
- Whether accounts receivable growth and extended customer payment terms continue to constrain operating cash flow.
- Whether GS retains its largest recompeted contract and converts the reported $59.3 million backlog into revenue.
- Actual 2018 tax-rate benefits and operating cash-flow improvement following the Tax Cuts and Jobs Act.
- Compliance with credit-facility leverage and fixed-charge coverage covenants as debt, dividends, and repurchases continue.
- Exposure to consultant wage inflation, H-1B restrictions, employment litigation, cybersecurity incidents, and federal procurement or funding changes.
- The sustainability of the dividend and share-repurchase program given minimal year-end cash and reliance on operating cash flow and revolving borrowings.