Kforce Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Kforce provides temporary “Flex” and permanent “Direct Hire” staffing services through its Technology (Tech) and Finance and Accounting (FA) segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the prior-year periods. Operations were significantly affected by the COVID-19 economic and health crisis.
- Approximately 2,100 associates and 11,800 consultants were employed or on assignment at June 30, 2020.
- Approximately 3,000 consultants supported COVID-19-related business.
- The Government Solutions segment was sold in 2019 and is reported as discontinued operations in prior periods.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|
| Revenue | $343.0 million | $338.9 million | $678.2 million | $665.6 million |
| Gross profit | $97.4 million | $101.0 million | $191.9 million | $194.2 million |
| Gross margin | 28.4% | 29.8% | 28.3% | 29.2% |
| Income from operations | $15.4 million | $21.5 million | $29.4 million | $33.2 million |
| Income from continuing operations | $9.9 million | $16.1 million | $19.0 million | $24.1 million |
| Diluted EPS from continuing operations | $0.47 | $0.66 | $0.89 | $0.97 |
| Adjusted EBITDA | $19.7 million | $25.4 million | $37.9 million | $41.3 million |
| Cash flow from operations | Not separately provided | Not separately provided | $39.0 million | $22.3 million |
| Free cash flow | Not separately provided | Not separately provided | $35.2 million | $18.1 million |
- Q2 revenue increased 1.2%; six-month revenue increased 1.9%.
- Flex revenue increased 3.4% in Q2 and 3.5% for the six-month period. Direct Hire revenue declined 51.1% in Q2 and 37.8% for the six-month period.
- Tech represented 74.6% of Q2 revenue and FA represented 25.4%. Flex represented 98.1% of Q2 revenue.
- Six-month SG&A was $159.8 million, or 23.6% of revenue, compared with 23.7% in the prior-year period.
- The six-month effective tax rate from continuing operations was 28.4%, compared with 24.5% in 2019.
Balance sheet, debt and liquidity
| Metric | June 30, 2020 | December 31, 2019 |
|---|
| Cash and cash equivalents | $52.4 million | $19.8 million |
| Trade receivables, net | $242.4 million | $217.9 million |
| Total assets | $438.8 million | $381.1 million |
| Credit facility borrowings | $100.0 million | $65.0 million |
| Total liabilities | $286.4 million | $213.9 million |
| Stockholders’ equity | $152.5 million | $167.3 million |
- The $300 million credit facility matures May 25, 2022; $197.8 million was available at June 30, 2020, subject to covenants.
- Management stated that the company was in compliance with its credit facility covenants and expected to maintain compliance, but warned that a material COVID-19-related deterioration could cause an event of default.
- Interest rate swaps hedged the outstanding borrowings. The swaps had a combined fair-value liability of $2.3 million at June 30, 2020.
- Cash flow benefited from $12.3 million of deferred employer Social Security tax payments under the CARES Act, with payment expected in 2021 and 2022.
- Kforce paid $8.5 million in dividends and repurchased $29.4 million of common stock during the first six months. Share repurchases were paused during the second quarter; $84.5 million remained authorized at June 30.
Material changes versus the prior comparable period
- FA Flex revenue increased 28.7% in Q2, primarily because two COVID-19-related government-sponsored contracts contributed $35.1 million of revenue. These contracts generated lower margins and included approximately 1.2 million billed hours.
- Tech Flex revenue declined 3.0% in Q2 as clients ended certain assignments and new starts fell, partially offset by higher average bill rates.
- Direct Hire placements declined 57.1% in Q2 and 40.1% for the six-month period, reflecting hiring freezes and economic uncertainty.
- Total gross margin declined to 28.4% in Q2 and 28.3% for the six-month period. FA Flex margin was pressured by lower bill/pay spreads, COVID-19 contract economics and higher payroll taxes.
- Credit-loss provision increased as management applied higher loss rates to receivables exposed to COVID-19-affected industries and clients. The allowance for credit losses was $4.1 million at June 30, 2020.
- Q2 SG&A included approximately $0.9 million of impairment expense related to leased office right-of-use assets and approximately $1.2 million of office-closure and other COVID-19-related costs.
- Prior-year net income included $58.8 million of after-tax income from discontinued operations in Q2 and $77.7 million for the six-month period, including the gain on the 2019 Government Solutions sale. Accordingly, reported net income comparisons are not representative of continuing operations.
Guidance, outlook, risks and unusual items
- Management expected COVID-19-related contracts to contribute approximately $45 million to $55 million of FA Flex revenue in Q3 2020, but characterized them as shorter-term and likely non-recurring.
- Management expected Q3 Tech Flex revenue to remain stable or increase slightly from Q2; July Tech Flex revenue was approximately 2% below the prior-year period.
- Management expected Direct Hire revenue to remain at or near Q2 levels in Q3.
- Management believed cash, operating cash flow and available borrowings would be adequate for at least the next 12 months and expected to maintain the quarterly dividend, subject to Board approval.
- Key risks include prolonged COVID-19 effects, reduced client demand, lower bill rates, assignment cancellations, delayed collections, consultant availability, covenant compliance and possible impairment of goodwill or the WorkLLama equity-method investment.
- Kforce had a maximum potential additional capital contribution obligation of $22.5 million to WorkLLama and had contributed $2.5 million during the first six months of 2020.
- A putative class-action Fair Credit Reporting Act matter had reached preliminary settlement approval verbally; the company did not expect it to have a material adverse effect, although final court entry was pending.
- Management concluded that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 contracts continued, expired or materially changed after Q3 2020 and their actual revenue and margin contribution.
- Trends in Tech Flex demand, FA Flex demand, Direct Hire placements and consultant assignment levels.
- Receivable collections, credit-loss provisions and the effect of extended customer payment terms.
- Compliance with credit facility covenants, available borrowing capacity and the timing of the $35 million debt increase.
- The sustainability of the quarterly dividend and resumption or suspension of share repurchases.
- Potential impairment of WorkLLama or other assets, including leased-office right-of-use assets.
- Final resolution and financial impact of the FCRA litigation settlement and any additional WorkLLama funding obligations.
