Kforce Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Kforce provides domestic technology and finance and accounting talent solutions through its Technology and Finance and Accounting (FA) segments. The unaudited results cover the three months ended March 31, 2023, compared with the same period in 2022. As of March 31, 2023, Kforce employed approximately 2,000 associates and had approximately 9,500 consultants on assignment.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $406.0 million | $417.0 million | Down 2.6% |
| Gross profit | $114.0 million | $123.9 million | Down 8.0% |
| Gross margin | 28.1% | 29.7% | Down 160 bps |
| Income from operations | $23.4 million | $27.7 million | Down 15.6% |
| Operating margin | 5.8% | 6.7% | Down 90 bps |
| Net income | $16.2 million | $19.2 million | Down 15.5% |
| Diluted EPS | $0.82 | $0.93 | Down 11.8% |
| Adjusted EBITDA | $28.7 million | $33.3 million | Down 13.7% |
| Operating cash flow | $19.1 million | $38.7 million | Down 50.8% |
| Free cash flow | $17.2 million | $36.5 million | Down 52.9% |
Technology revenue increased 1.4% to $364.8 million, while FA revenue declined 27.9% to $41.2 million. Flex revenue declined 1.6% to $395.5 million, and Direct Hire revenue declined 30.7% to $10.5 million. The effective tax rate was 27.5%, compared with 27.1% in the prior-year quarter.
At March 31, 2023, cash and cash equivalents were $0.2 million, trade receivables were $266.5 million, total assets were $385.2 million, and stockholders’ equity was $185.7 million. Credit-facility debt was $22.3 million, down from $25.6 million at December 31, 2022. The facility had $176.5 million of borrowing availability, subject to covenants, and matures October 20, 2026. Kforce stated that it was in compliance with all financial covenants.
Material changes versus the prior comparable period
- Technology Flex revenue grew 2.2%, supported by a 4.7% increase in average bill rates, but was partly offset by lower consultant volume.
- FA Flex revenue declined 28.2%, primarily reflecting business repositioning toward higher-skilled roles and softer macroeconomic demand.
- Total Flex hours billed declined 9.3%; Technology hours declined 2.2% and FA hours declined 35.0%.
- Gross margin contracted because of lower Direct Hire revenue mix, tighter pricing, and changes in the Technology client portfolio.
- SG&A declined to $89.3 million from $95.0 million, and SG&A as a percentage of revenue improved to 22.0% from 22.8%, driven by lower performance-based compensation, reduced lease expense, lower professional fees, and discretionary cost controls.
- Operating cash flow declined primarily because of lower profitability, payment timing, and a reduction in deferred tax liabilities related to the joint-venture sale.
- Kforce sold its 50% interest in WorkLLama and settled the related note receivable for proceeds of approximately $5.1 million, net of transaction costs. The equity-method investment had been fully impaired as of December 31, 2022.
- Kforce repurchased approximately 178,000 shares for approximately $10.0 million and paid $7.0 million in quarterly dividends, or $0.36 per share, returning approximately $17.0 million to shareholders.
Guidance, outlook, risks, contingencies, and unusual items
Management expected Technology revenue in the second quarter to decline in the mid-single digits year over year and in the low single digits sequentially. Management expected the year-over-year decline in FA Flex revenue in the second quarter to be comparable to the first-quarter decline. The company cited client resource pruning, economic uncertainty, staffing demand changes, pricing pressure, consultant availability, competition, and interest-rate exposure as important risks.
Kforce believed existing cash, operating cash flow, and available credit capacity would be adequate for operating, working-capital, and capital-expenditure needs for at least the next 12 months and would support continued shareholder returns. Dividends remain subject to quarterly Board approval and financial performance.
The company recorded $0.1 million of nondeductible excise tax related to stock repurchases under the Inflation Reduction Act. There were no outstanding interest-rate swaps at March 31, 2023. Employment agreements could require approximately $40.4 million of payments if, following a change in control, all covered executives were terminated without cause or resigned for good reason, or approximately $17.4 million absent a change in control. Several California employment-related matters were settled and dismissed, and management did not expect the remaining proceedings to have a material effect.
Important facts for investors to verify
- Whether the expected second-quarter Technology and FA revenue trends occurred and whether demand stabilized thereafter.
- Whether Technology Flex margins recovered from the 25.9% segment level and whether pricing pressure persisted.
- Operating cash-flow conversion, receivables collections, and the effect of deferred-tax and working-capital timing.
- Credit-facility borrowings, covenant compliance, interest expense, and remaining borrowing availability.
- The sustainability of quarterly dividends and share repurchases relative to free cash flow.
- Financial effects of the WorkLLama divestiture and settlement, including any remaining note-receivable or investment exposure.
- Potential costs or developments from employment litigation, executive employment agreements, self-insured claims, and other contingencies.