KFRC

Business Context and Reporting Period

Kforce Inc. is a national provider of professional and technical specialty staffing services, operating through a corporate headquarters in Tampa, Florida, and 67 field offices across 41 U.S. markets plus one in Manila, Philippines. The company operates four segments: Technology, Finance and Accounting (FA), Health and Life Sciences (HLS), and Government Solutions (GS). This Form 10-K covers the fiscal year ended December 31, 2007.

Key Financial Metrics

Revenue Mix: Flexible staffing ("Flex") accounted for 92.5% of revenues, while Search (permanent placement) accounted for 7.5%. The Government Solutions segment, formed by 2006 acquisitions, represented 6.0% of total revenue.

Material Changes vs. Prior Period

• Revenue Growth: Net service revenues increased 10.5% to $1.037 billion, marking the first time the company exceeded $1 billion in annual revenue.
• Profitability: Net income rose 24.1% to $40.4 million. Gross profit margin expanded by 120 basis points to 35.9%, driven by improved bill rates and a focus on the spread between bill and pay rates.
• Debt Reduction: Outstanding borrowings under the Credit Facility decreased 41.8% to $50.3 million, funded by operating cash flows and proceeds from stock option exercises.
• Segment Performance:
  • Technology: Revenue increased 13.7%.
  • Finance & Accounting: Revenue declined 6.6% due to the conclusion of high-volume, high-rate project-specific business and a decline in mortgage-related client needs.
  • Health & Life Sciences: Revenue increased 11.8%.
  • Government Solutions: Revenue increased 87.9% as the segment completed its first full year of operations following the 2006 acquisitions of Bradson and PCCI.

Guidance, Outlook, and Risks

Management Commentary: Management attributes success to operational restructuring, back-office system upgrades (implemented August 2007), and successful integration of acquisitions. The company expects continued growth in Tech, FA, and HLS sectors but notes that the economic environment remains uncertain heading into 2008.

Risks and Contingencies:

• Economic Sensitivity: The staffing industry is highly correlated with the economic cycle; a U.S. recession would likely have a significant adverse impact.
• Competition: Intense competition exists from large national firms and local operators. The increasing use of Vendor Management Systems (VMS) by clients compresses margins.
• Personnel Shortages: The company faces challenges recruiting qualified nurses and technical personnel. A shortage of nurses limits growth in the healthcare segment.
• Government Contracting Risks: The GS segment faces risks related to federal budget priorities, procurement regulations, and potential debarment if compliance issues arise.
• Offshore Outsourcing: Clients increasingly seek offshore solutions, which could negatively impact domestic staffing demand.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the Credit Facility's minimum availability and fixed charge coverage ratios, as a breach could accelerate debt.
• FA Segment Trends: Monitor the Finance and Accounting segment for signs of recovery or further decline given the loss of specific high-value clients in 2007.
• Goodwill Valuation: Review the $237.6 million goodwill balance, particularly regarding the Government Solutions segment, for potential impairment triggers if federal spending slows.
• Stock Repurchase Program: Note that $14.8 million remained available for repurchases as of year-end 2007, with an additional $50 million authorization approved in February 2008.
• Self-Insured Liabilities: Assess the adequacy of reserves for workers' compensation and health insurance, which are partially self-insured and subject to actuarial estimation risks.