Kforce Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Kforce provides professional and technical staffing and solutions through Technology, Finance and Accounting, and Government Solutions segments. Services are provided primarily through flexible staffing and, to a lesser extent, direct-hire placements. The unaudited report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Kforce employed nearly 2,600 associates and had more than 11,000 consultants on assignment at quarter-end.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net service revenues | $341.1 million | $336.5 million | $1,015.4 million | $993.7 million |
| Gross profit | $104.4 million | $105.4 million | $305.4 million | $308.9 million |
| Gross margin | 30.6% | 31.3% | 30.1% | 31.1% |
| Income from operations | $20.3 million | $15.5 million | $50.1 million | $43.5 million |
| Net income | $10.1 million | $9.0 million | $27.1 million | $23.5 million |
| Diluted EPS | $0.40 | $0.34 | $1.06 | $0.89 |
| Adjusted EBITDA | $24.2 million | $18.9 million | $62.1 million | $55.2 million |
Q3 revenue increased 1.4%, while nine-month revenue increased 2.2%. Nine-month Flex revenue increased 2.4% reported and 3.0% on a billing-day basis; Direct Hire revenue declined 4.1%. Nine-month SG&A declined to 24.5% of revenue from 26.0%, supporting higher operating income and net income despite lower gross profit.
Nine-month operating cash flow was $5.6 million, down from $29.7 million in 2016, primarily because of higher trade receivables and collection timing. Capital expenditures were $5.4 million, producing reported free cash flow of $0.2 million. Cash and cash equivalents were $0.7 million at September 30, 2017, compared with $1.5 million at December 31, 2016.
Trade receivables increased to $243.8 million from $206.4 million at year-end. Working capital was $171.1 million. The new credit facility had $126.1 million outstanding and $170.4 million available, subject to covenants, plus $3.5 million of letters of credit. Total long-term debt was $128.9 million. The facility matures May 25, 2022 and is secured by substantially all company assets.
Material changes versus the prior comparable period
- Technology Flex revenue increased 2.5% on a billing-day basis for the nine-month period; Finance and Accounting Flex increased 5.3%; Government Solutions was stable.
- Direct Hire placements declined 5.9% for the nine months, with Finance and Accounting placements down 7.9%.
- Nine-month Flex gross margin declined to 27.4% from 28.3%, primarily due to compression between bill rates and pay rates and higher benefit costs.
- SG&A benefited from the absence of approximately $6.0 million of 2016 severance costs, lower compensation costs, improved productivity, and a $3.3 million gain on the sale of Global’s assets.
- Interest and other expense increased to $3.9 million from $2.3 million for the nine months, reflecting higher borrowings and accelerated amortization of prior financing fees.
- The company entered into a new $300.0 million revolving credit facility and a forward-starting interest-rate swap with a $65.0 million initial notional amount, declining to $25.0 million in years four and five.
- Share repurchases were $4.2 million for the nine months, compared with $31.8 million in 2016. Dividends were $0.12 per share per quarter, or $9.1 million for the nine months.
Guidance, outlook, commentary, risks and unusual items
Management expected Technology Flex revenue to increase sequentially and year over year on a billing-day-adjusted basis in the fourth quarter, with growth accelerating. Finance and Accounting Flex revenue was expected to increase sequentially but could decline year over year on a billing-day basis. Government Solutions revenue was expected to increase sequentially and year over year.
Management remained optimistic about temporary staffing demand, citing a September 2017 temporary-staffing penetration rate of 2.08%, a 4.2% unemployment rate, and continued demand for technology skills. However, management noted uncertainty in the broader economy and staffing industry and did not provide a full-year numerical earnings or revenue forecast.
- Hurricanes Harvey and Irma adversely affected Q3 Flex margins and reduced diluted EPS by approximately $0.05, including a $1.0 million disaster-relief contribution.
- The sale of Global’s assets generated a $3.3 million gain in SG&A and $1.0 million of initial cash proceeds; Global historically generated approximately $2.5 million of Tech Flex revenue per quarter.
- Bill-rate and pay-rate spreads may remain under pressure from client pricing demands, talent shortages, and consultant wage inflation.
- Higher receivables and days sales outstanding reduced operating cash flow and increased reliance on credit-facility borrowings.
- The credit facility requires a fixed-charge coverage ratio of at least 1.25 to 1.00 and a total leverage ratio of no more than 3.25 to 1.00. The company reported compliance and no restriction on distributions or repurchases at quarter-end.
- A putative wage-and-hour class action received preliminary settlement approval on October 24, 2017; final approval was scheduled for February 15, 2018. Management did not expect a material adverse effect.
- Executive employment agreements could require approximately $39.8 million of payments following a change in control, or $15.6 million absent a change in control, if specified termination conditions occurred. Approximately $0.8 million was accrued.
- Management expects the pending lease standard to significantly increase reported assets and liabilities. Revenue-recognition adoption is expected to have no timing impact on at least 95% of revenue, while Government Solutions fixed-price contracts remain under review.
Most important facts for investors to verify
- Whether receivable growth and days sales outstanding normalize and operating cash flow improves.
- Whether Flex gross-margin pressure persists or pricing and productivity initiatives restore spreads.
- Fourth-quarter performance against management’s segment-level outlook, particularly Technology and Government Solutions.
- Compliance with credit-facility covenants as borrowings, interest rates, dividends, and repurchases change.
- Final resolution and financial impact of the wage-and-hour litigation.
- The recurring versus nonrecurring effects of the Global asset-sale gain, hurricane-related costs, and prior-year severance comparison.
- Future dividend and repurchase capacity given low cash balances, limited free cash flow, and increased debt.