Kforce Inc. 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary and permanent professional staffing services through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. The filing covers the three and six months ended June 30, 2013; financial statements are unaudited and amounts are in thousands except per-share data.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Net service revenues | $283.7 million | $274.1 million | $549.3 million | $542.5 million |
| Gross profit | $92.8 million | $89.8 million | $176.2 million | $170.6 million |
| Gross margin | 32.7% | 32.7% | 32.1% | 31.4% |
| Income (loss) from operations | $11.9 million | $(49.8) million | $17.1 million | $(80.0) million |
| Net income (loss) | $6.9 million | $(33.2) million | $10.0 million | $(29.1) million |
| Diluted EPS | $0.21 | $(0.90) | $0.29 | $(0.82) |
| Adjusted EBITDA | $14.8 million | $18.3 million | $22.7 million | $16.6 million |
Six-month Flex revenue increased 1.2% to $524.5 million, while Search revenue increased 2.7% to $24.9 million. Flex gross margin rose to 28.9% from 28.2%, primarily reflecting improved bill-to-pay spreads and lower statutory payroll taxes. SG&A was 28.1% of revenue for the six-month period versus 33.1% in the prior year.
Segment trends for the six months were mixed: Technology revenue increased 3.2%, Government Solutions increased 3.6%, Finance and Accounting declined 3.1%, and Health Information Management declined 4.6%. Technology represented approximately 63% of total revenue.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow was $(1.2) million for the first six months of 2013, compared with $7.7 million in the prior-year period, principally reflecting working-capital investment, including higher trade receivables.
- Investing cash flow was $(4.5) million, including $4.2 million of capital expenditures. The prior-year period included $48.3 million of proceeds from the Kforce Clinical Research disposition.
- Financing cash flow was $5.4 million, including $23.2 million of share repurchases and net borrowings under the bank line.
- Cash and cash equivalents were $1.1 million at June 30, 2013, versus $1.4 million at December 31, 2012. Working capital was $94.6 million and the current ratio was 2.0.
- Credit Facility borrowings were $50.1 million at June 30, 2013, compared with $21.0 million at December 31, 2012. Availability was $36.3 million at June 30 and $43.5 million as of July 29, 2013, with $43.4 million outstanding on that date.
- The facility expires September 20, 2016, is secured by substantially all assets other than headquarters real estate, and bears variable interest. The weighted-average effective rate was 1.7% at June 30, 2013.
- Management stated that cash, operating cash flow, and available credit are expected to meet operating and capital requirements for at least the next 12 months, subject to economic and lender-availability risks.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.5% in the second quarter and 1.3% for the first six months.
- Profitability improved substantially because the prior-year period included a $65.3 million goodwill impairment charge and $31.3 million of accelerated equity-award compensation expense. No goodwill impairment was recorded in 2013.
- The prior-year six-month results also included $21.8 million of after-tax income from discontinued operations and a gain related to the March 2012 sale of Kforce Clinical Research. No comparable discontinued-operation income was recorded in 2013.
- Six-month adjusted EBITDA increased to $22.7 million from $16.6 million, although second-quarter adjusted EBITDA declined to $14.8 million from $18.3 million.
- Kforce repurchased approximately 1.4 million shares for $20.7 million during the six months. Approximately $69.1 million remained available under the repurchase authorization at June 30.
Outlook, Risks, Contingencies and Unusual Items
Management remained optimistic about temporary staffing demand, citing improving staffing penetration, technology skill shortages, and employer caution regarding full-time hiring. Management expected continued Technology and Government Solutions growth, stable-to-improving Health Information Management revenue, and potential Finance and Accounting improvement in the second half of 2013. Search revenue was expected to remain approximately flat for the rest of 2013, and Flex gross margins were expected to remain stable.
Key risks include macroeconomic weakness, political and tax uncertainty, health-care reform, federal spending reductions and sequestration affecting Government Solutions, client demand and billing-day seasonality, collections and accounts receivable exposure, variable interest rates, and the ability of lenders to fund available borrowings. A hypothetical 10% increase in interest rates would have increased annualized interest expense by approximately $0.1 million based on June 30 borrowings.
Kforce paid a previously recorded $2.5 million California class-action settlement during the quarter. A new California class action filed June 18, 2013 alleges unpaid interview time, inaccurate wage statements, improper debit-card use, unfair competition, and related penalties. The potential loss could not be estimated and no liability was recorded. Employment agreements could require approximately $41.7 million of payments following a change in control or approximately $11.8 million absent a change in control if all covered executives qualified for payment; no liability was recorded.
Important Facts for Investors to Verify
- Reconcile reported earnings improvement with the nonrecurring 2012 goodwill impairment, discontinued-operation gain, and accelerated equity compensation.
- Monitor operating cash conversion, receivables growth, and the increase in Credit Facility borrowings used partly to fund repurchases.
- Assess whether Technology and Government Solutions growth offsets continued weakness in Finance and Accounting and Health Information Management.
- Review Credit Facility availability, borrowing-base limitations, covenants, interest-rate exposure, and lender funding risk.
- Follow the new California wage-and-hour class action and any developments affecting potential liability.
- Evaluate the sustainability of Flex gross-margin improvement after the benefit from lower statutory payroll taxes.