Kforce Inc. 2013 Form 10-K Summary
Business context and reporting period
Kforce provides professional and technical specialty staffing and solutions through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. The filing covers the fiscal year ended December 31, 2013; fourth-quarter data is presented separately. Kforce operated 62 U.S. field offices and one Manila office, employed approximately 2,600 associates, and had approximately 11,900 consultants on assignment at year-end.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net service revenue | $1,151.9 million | $1,082.5 million | +6.4% |
| Gross profit | $369.6 million | $347.9 million | +6.2% |
| Gross margin | 32.1% | 32.1% | Flat |
| SG&A | $323.9 million | $322.4 million | +0.5% |
| SG&A as a percentage of revenue | 28.1% | 29.8% | Down 170 bps |
| Operating income | $21.3 million | $(54.5) million | Improved |
| Income from continuing operations | $10.8 million | $(35.7) million | Improved |
| Net income | $10.8 million | $(13.7) million | Improved |
| Diluted EPS from continuing operations | $0.32 | $(1.00) | Improved |
| Adjusted EBITDA | $48.3 million | $51.1 million | Down 5.4% |
| Cash flow from operations | $0.5 million | $56.0 million | Down materially |
Flex revenue increased 6.6% to $1.103 billion, while Search revenue increased 2.5% to $48.9 million. Flex gross margin increased modestly to 29.1% from 29.0%. Segment revenue growth was strongest in Technology, up 9.4%; Finance and Accounting increased 1.7%, Health Information Management increased 1.5%, and Government Solutions increased 0.6%.
At December 31, 2013, working capital was $112.9 million and the current ratio was 2.3. Cash and cash equivalents were $0.9 million. Credit Facility borrowings were $62.6 million versus $21.0 million at December 31, 2012. The amended facility increased revolving capacity to $135 million, with $43.2 million of availability at year-end. The facility expires in September 2016 and is secured by substantially all operating assets, excluding the Tampa headquarters real estate.
Capital expenditures were $8.1 million. Kforce repurchased approximately 1.8 million shares for $27.3 million during 2013 and paid a quarterly dividend of $0.10 per share, or approximately $3.3 million, in the fourth quarter. Management expected to continue quarterly dividends at a similar level, subject to Board approval.
Material changes versus the prior comparable period
- Fourth-quarter revenue was $302.9 million, up 12.3% year over year, but fourth-quarter continuing operations reported a loss of $8.2 million, or $(0.25) per diluted share.
- 2013 results benefited from the absence of the $31.3 million accelerated equity-award expense recorded in 2012 and the lower $14.5 million goodwill impairment charge compared with $69.2 million in 2012.
- Technology increased its share of revenue to 64.2% from 62.4%, while Finance and Accounting, Health Information Management, and Government Solutions declined as percentages of total revenue.
- Operating cash flow fell to $0.5 million, primarily because of increased trade receivables and the timing of collections.
- Total debt increased by approximately $41.6 million, reflecting greater use of the revolving credit facility.
- Kforce increased revenue-generator headcount 10.3% from the fourth quarter of 2012 to the fourth quarter of 2013. Management stated that new hires generally require six to nine months to reach expected productivity.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide formal consolidated revenue or earnings guidance. It expected continued demand in Technology, Finance and Accounting, and Health Information Management, citing projected 2014 temporary-staffing market growth of approximately 7% in Technology and 5% in Finance and Accounting, as well as ICD-10 implementation demand in Health Information Management. Management expected Flex gross margins to remain approximately flat in 2014.
Kforce changed the Government Solutions strategy in the fourth quarter to emphasize prime integrated business solutions and reduce emphasis on pure staff augmentation and product sales. Because solution-based government contracts can require approximately 18 months to procure, management expected Government Solutions revenue and profitability to decline moderately over the next several years. This strategy change triggered a $14.5 million pre-tax goodwill impairment charge and reduced the Government Solutions goodwill carrying value to $19.0 million.
The fourth-quarter organizational realignment generated $7.1 million of severance and termination-related expenses, including $1.1 million of accelerated stock compensation, and $3.6 million of discretionary bonuses for senior management. Approximately $1.4 million of severance remained accrued at year-end and was expected to be paid in the first quarter of 2014.
Key risks include economic and staffing-market cyclicality, pricing pressure, dependence on qualified personnel, collection risk on trade receivables, payroll and health-care cost inflation, immigration and H-1B restrictions, cybersecurity and data privacy exposure, government funding and procurement delays, federal contracting compliance, goodwill impairment, and covenant or borrowing-capacity limitations. The filing also disclosed a California wage-and-hour lawsuit and a qui tam complaint involving Kforce Government Solutions; no amounts were accrued because outcomes could not be reasonably estimated. Management stated that the independent auditor issued unqualified opinions and that internal control over financial reporting was effective.
Facts investors should verify
- Whether the Government Solutions restructuring produces the projected revenue and profitability decline and whether additional goodwill impairment is required.
- Whether operating cash flow recovers from the near break-even 2013 level as receivable collections normalize.
- Credit Facility availability, borrowing levels, covenant compliance, interest rates, and refinancing needs through the September 2016 maturity.
- Whether Technology growth and the 2013 investment in revenue-generating headcount translate into sustained 2014 operating leverage.
- The effect of health-care reform, payroll-cost inflation, pricing pressure, and consultant availability on Flex margins.
- The status and potential financial exposure of the California litigation, qui tam complaint, tax examination, and executive employment obligations.
- The filing contains an apparent inconsistency in one credit-facility note that cites $64.6 million outstanding, while the balance sheet, MD&A, and selected financial data report $62.6 million; the underlying filing should be checked.