Kforce Inc. 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kforce provides professional staffing and solutions through its Technology, Finance and Accounting, and Government Solutions segments. The company operates primarily in the United States, with international operations representing less than 2% of revenue. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net service revenue | $322.2 million | $312.6 million | +3.1% |
| Gross profit | $97.2 million | $94.7 million | +2.6% |
| Gross margin | 30.2% | 30.3% | -10 basis points |
| Income from operations | $9.3 million | $10.0 million | -7.0% |
| Net income | $3.7 million | $5.8 million | -36.9% |
| Diluted EPS | $0.14 | $0.20 | Declined |
| Cash flow from operations | $3.1 million | $11.4 million | Declined |
| Free cash flow | $1.8 million | $10.0 million | Declined |
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $0.9 million at March 31, 2016, down from $1.5 million at December 31, 2015.
- Trade receivables increased to $210.4 million from $198.9 million, contributing to lower operating cash flow.
- Working capital was $136.5 million, compared with $126.8 million at year-end 2015.
- Credit facility borrowings increased to $103.5 million from $80.5 million, primarily funding common-stock repurchases. The facility has $170.0 million of revolving capacity plus a $50.0 million accordion option and expires December 23, 2019.
- Availability under the credit facility was $42.0 million at March 31, 2016. As of April 29, 2016, borrowings were $108.6 million and availability was $44.9 million.
- Management stated that existing cash, operating cash flow, and credit-facility availability should satisfy operating, capital-expenditure, and working-capital needs for at least the next 12 months, subject to economic and market conditions.
Material Changes Versus the Prior Comparable Period
- Flexible staffing revenue increased 3.0% to $309.6 million, while direct-hire revenue increased 4.0% to $12.6 million.
- Technology revenue increased 1.4% to $216.6 million, Finance and Accounting revenue increased 12.9% to $82.5 million, and Government Solutions revenue declined 10.7% to $23.1 million.
- Flex gross margin declined to 27.3% from 27.5%, primarily because of higher benefit costs and lower bill-rate-to-pay-rate spreads in Government Solutions. Technology and Finance and Accounting spreads improved.
- SG&A expense increased to $85.6 million from $82.4 million and rose to 26.6% of revenue from 26.3%. The increase reflected additional revenue-generating personnel and $1.7 million of severance costs.
- The effective tax rate increased to 58.2% from 39.3%, primarily because of approximately $1.7 million of one-time non-cash tax adjustments. Excluding these adjustments, management reported an effective rate of 39.3%.
- Management reported adjusted net income of $6.4 million, or $0.24 per diluted share, compared with reported net income of $3.7 million, or $0.14 per share. These are non-GAAP measures and include adjustments for severance and related tax effects.
- Kforce repurchased approximately 1.1 million shares in open-market transactions for approximately $19.8 million. Total share repurchases, including shares withheld for taxes, were $22.1 million. The remaining authorization was $33.2 million at March 31, 2016.
- The quarterly dividend increased to $0.12 per share from $0.11 per share, with $3.1 million paid in cash.
Outlook, Commentary, Risks and Unusual Items
- No formal company revenue or earnings guidance is provided in the filing. Management expects Technology growth to decelerate slightly in the second quarter, Finance and Accounting to continue growing at a slower pace, and Government Solutions revenue to increase slightly year over year.
- Management expects the Department of Veterans Affairs T4 Next Generation contract vehicle, with an overall program ceiling of approximately $22 billion over 10 years, could support significant Government Solutions growth beginning in the fourth quarter of 2016. The filing does not quantify Kforce’s expected revenue from this contract.
- Management remained optimistic about temporary staffing demand but cited uncertainty related to the political environment, tax changes, geopolitical risks, health-care reform, economic volatility, client spending, and the supply and retention of qualified personnel.
- Technology growth was affected by lower spending from several large clients following organizational changes. Management expects the impact to be temporary but cannot assure a recovery.
- Quarterly results are affected by billing days, seasonality, and first-quarter employment-tax resets, which can increase direct service costs and reduce gross profit.
- Legal proceedings and claims arise in the ordinary course of business. Accrued matters were not considered material, but adverse litigation outcomes or insufficient insurance coverage could materially affect results.
- Executive employment agreements could require approximately $49.0 million of payments following a change in control, or approximately $21.5 million absent a change in control, if specified termination conditions were met. No liability was recorded.
- Kforce had not early adopted new accounting standards covering share-based payments, leases, deferred taxes, and revenue recognition. Management did not expect the revenue standard to materially affect the financial statements but expected additional disclosures.
- Management concluded that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether Technology and Finance and Accounting growth offsets continued weakness or margin pressure in Government Solutions.
- Whether accounts-receivable growth converts into operating cash flow and whether free cash flow improves from the Q1 level.
- The sustainability of share repurchases and dividends given the increased credit-facility borrowings and limited cash balance.
- Actual availability and covenant compliance under the asset-based credit facility, including the effect of receivable eligibility and borrowing-base changes.
- Whether the VA T4 Next Generation contract produces material Kforce revenue beginning in late 2016.
- The recurrence of severance costs and one-time tax adjustments, and the comparability of reported results with management’s non-GAAP adjusted measures.
- Changes in staffing demand, client concentration, consultant availability, bill-rate-to-pay-rate spreads, benefit costs, and litigation or self-insurance exposures.