Kforce Inc. Form 10-Q Summary
Business context and reporting period
Kforce provides U.S.-focused technology and finance and accounting talent solutions through its Technology and Finance and Accounting (FA) segments. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021. At March 31, 2022, Kforce had approximately 2,000 associates and 10,500 consultants on assignment.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $417.0 million | $363.2 million | 14.8% reported; 13.0% per billing day |
| Gross profit | $123.9 million | $98.7 million | 25.5% |
| Gross margin | 29.7% | 27.2% | +250 basis points |
| Income from operations | $27.7 million | $19.5 million | 42.6% |
| Net income | $19.2 million | $13.3 million | 44.6% |
| Diluted EPS | $0.93 | $0.62 | 50.0% |
| Adjusted EBITDA | $33.3 million | $24.1 million | 38.3% |
| Operating cash flow | $38.7 million | $22.4 million | 72.8% |
| Free cash flow | $36.5 million | $21.1 million | 73.2% |
Technology revenue increased 28.7% to $359.9 million, while FA revenue decreased 31.8% to $57.1 million. Flex revenue increased 13.6% to $401.9 million, and Direct Hire revenue increased 61.0% to $15.1 million. Technology represented 86.3% of revenue versus 77.0% in the prior-year quarter.
SG&A increased to $95.0 million from $78.0 million and rose to 22.8% of revenue from 21.5%, primarily due to higher performance-based compensation and credit expense. The effective tax rate was approximately 27.1%, compared with 27.0%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $116.6 million at March 31, 2022, up from $97.0 million at December 31, 2021.
- Trade receivables were $278.1 million, compared with $265.3 million at year-end 2021.
- Borrowings under the credit facility were $100.0 million, unchanged from year-end. The facility has $98.6 million available, subject to covenants, and matures October 20, 2026.
- Cash net of outstanding borrowings was $16.6 million.
- Kforce reported compliance with its credit facility covenants and expects to maintain compliance.
- Cash used for share repurchases was $10.3 million and cash dividends were $6.1 million. The quarterly dividend increased to $0.30 per share from $0.23.
- The company believes cash, operating cash flow and available borrowings will satisfy operating and capital requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Technology Flex revenue increased 26.0% on a billing-day basis, driven by higher consultant volumes and bill rates. The average Technology bill rate increased 6.3% year over year to approximately $85 per hour.
- FA Flex revenue declined 37.6% on a billing-day basis, primarily because COVID-19-related business substantially declined. Excluding that decline, FA Flex revenue decreased slightly more than 10%.
- Flex gross margin increased to 27.1% from 25.2%, supported by improved spreads, lower payroll taxes and lower healthcare costs.
- Direct Hire placements increased 51.9% to 817, while the average placement fee increased 6.1% to $18,479.
- Operating cash flow improved primarily because of profitable revenue growth and better working-capital management.
- Kforce repurchased approximately 144,000 shares in the open market for $10.1 million during the quarter. Following a February authorization increase, approximately $98.8 million remained available under the repurchase program at March 31, 2022.
Guidance, outlook, risks and unusual items
- Assuming stable demand and macroeconomic conditions, management expected second-quarter Technology revenue growth in the mid-20% range year over year.
- Management expected FA revenue to decline in the mid-single digits sequentially in the second quarter.
- Management cited strong secular technology demand, critical client technology initiatives and limited qualified talent supply as favorable drivers, while noting inflationary wage pressure and staffing shortages.
- Seasonality, billing-day differences and first-quarter employment-tax resets can affect quarterly comparability and profitability.
- COVID-19, inflation, supply constraints, changes in client demand, competition and the availability of qualified consultants remain material business risks.
- Interest-rate swaps hedged the company’s variable-rate debt. Swap A, with a $25.0 million notional amount, matured April 29, 2022; Swap B increased from $75.0 million to $100.0 million on May 1, 2022.
- The terminated Supplemental Executive Retirement Plan had $20.0 million of benefits owed to two participants at March 31, 2022. Deferred payroll-tax payments of approximately $19.3 million under the CARES Act were expected to be repaid by December 31, 2022.
- Kforce contributed $0.5 million to its WorkLLama equity-method investment during the quarter. Its maximum contractual capital contribution obligation of $22.5 million had been fully funded by March 31, 2022, although additional voluntary contributions may occur.
- Several California wage-and-hour and FLSA matters remain pending. Certain matters were subject to preliminary settlements, while outcomes and potential losses for others were not reasonably estimable. Management did not expect the proceedings, individually or collectively, to have a material effect.
- No material changes were reported to previously disclosed risk factors, market-risk disclosures or internal control effectiveness.
Important facts for investors to verify
- Whether Technology growth and the expected mid-20% second-quarter growth rate persist amid tight labor supply and macroeconomic uncertainty.
- Whether the FA segment stabilizes after the decline in COVID-19-related revenue and its repositioning toward higher-skilled roles.
- The sustainability of gross-margin improvement after payroll-tax, healthcare-cost and business-mix benefits.
- Credit-facility covenant compliance, variable-rate exposure and the effect of the May 2022 swap transition on interest expense.
- Repurchase and dividend capacity relative to cash flow, debt and the $20.0 million SERP obligation.
- Potential settlement costs and developments in the pending California and FLSA litigation.
- The financial performance and future funding needs of the WorkLLama investment.