Kforce Inc. 10-Q Summary
Business context and reporting period
Kforce provides U.S.-focused temporary and permanent professional 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, 2021, compared with the corresponding 2020 periods. At June 30, 2021, Kforce had approximately 2,000 associates and 13,400 consultants on assignment.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $403.6 million | $343.0 million | $766.8 million | $678.2 million |
| Gross profit | $118.9 million | $97.4 million | $217.6 million | $191.9 million |
| Gross margin | 29.5% | 28.4% | 28.4% | 28.3% |
| Income from operations | $33.1 million | $15.4 million | $52.6 million | $29.4 million |
| Net income | $21.2 million | $9.9 million | $34.4 million | $19.0 million |
| Diluted EPS | $1.00 | $0.47 | $1.61 | $0.89 |
| Operating cash flow | Not separately provided | Not separately provided | $36.6 million | $39.0 million |
| Free cash flow | Not separately provided | Not separately provided | $33.7 million | $35.2 million |
- Q2 revenue increased 17.7%; six-month revenue increased 13.1%.
- Tech represented 77.0% of revenue and FA represented 23.0% in both six-month periods. Six-month Tech revenue increased 13.0% and FA revenue increased 13.4%.
- Six-month Flex revenue increased 12.5% to $745.2 million, while Direct Hire revenue increased 37.8% to $21.6 million.
- Six-month SG&A was $162.6 million, or 21.2% of revenue, versus 23.6% in the prior-year period. The improvement reflected operating leverage, productivity gains, lower selected expenses, reduced credit expense and a gain on the headquarters sale.
- Six-month effective tax rate was 28.5%, compared with 28.4% in 2020. Six-month adjusted EBITDA was $59.9 million versus $37.9 million.
- Cash and cash equivalents were $117.3 million at June 30, 2021, compared with $103.5 million at December 31, 2020. Trade receivables were $266.9 million.
- Total debt was $100.0 million, classified as current, with $198.5 million available under the credit facility. Net cash after outstanding borrowings was $17.3 million.
Material changes versus the prior comparable period
- Technology Flex revenue accelerated, increasing 20.9% on a billing-day basis in Q2; management identified higher consultant volumes as the primary driver.
- FA Flex revenue increased 12.0% for the six-month period, significantly supported by $58.8 million of revenue from government-sponsored COVID-19 initiatives.
- Tech Flex gross margin declined 40 basis points for the six-month period to 26.2%, primarily because of spread compression, higher health-care costs and higher payroll taxes. FA Flex margin was unchanged at 26.7%.
- Kforce sold its corporate headquarters, receiving $23.7 million of net proceeds and recognizing a $2.0 million gain. It entered into an 18-month leaseback arrangement.
- The company terminated its Supplemental Executive Retirement Plan on April 30, 2021, recognizing a $1.8 million expense. Remaining benefits owed to two participants totaled approximately $20.0 million and are expected to be paid after June 30, 2022.
- Kforce repurchased approximately $29.6 million of common stock during the first six months and paid $9.5 million in dividends. Approximately $54.9 million remained available under the repurchase authorization at June 30, 2021.
- The Board increased the quarterly dividend from $0.23 to $0.26 per share beginning with the third quarter, an approximately 13% increase.
Guidance, outlook, risks and unusual items
- Management expected Technology year-over-year growth to accelerate in Q3 2021 relative to Q2 levels.
- Management expected FA revenue to decline in Q3 as COVID-19-related projects ended in late Q2 and early Q3. Direct Hire revenue could also decline sequentially in Q3 in line with normal seasonality.
- Management stated that COVID-19-related business would continue into Q3 but at significantly lower levels than in Q2. COVID-19 variants, vaccination trends and economic conditions remain difficult to predict.
- Management believed cash, operating cash flow and available borrowing capacity would be adequate for at least the next 12 months. The credit facility matures May 25, 2022, and the company was in compliance with its covenants at June 30, 2021.
- Kforce uses interest-rate swaps to hedge variable-rate debt; the swaps had a $0.5 million liability at June 30, 2021.
- Kforce may be required to make additional WorkLLama joint-venture contributions, with maximum potential contributions of $22.5 million. It contributed $4.5 million during the first six months and recognized a $1.0 million equity-method loss.
- Outstanding legal matters include employment-classification and wage claims. One Pennsylvania matter reached a preliminary settlement, and a California FCRA matter was dismissed with prejudice. Management did not expect currently disclosed matters to have a material adverse effect, although certain outcomes cannot be estimated.
- The company reported no material changes to previously disclosed risk factors, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether Technology growth offsets the expected normalization of COVID-19-related FA revenue.
- Whether Tech Flex spread compression and higher benefit and payroll-tax costs continue to pressure margins.
- The refinancing or repayment plan for the $100.0 million credit facility maturing in May 2022.
- The timing and cash impact of the approximately $20.0 million SERP benefit payments.
- Future funding requirements and operating performance of WorkLLama.
- Execution of the hybrid-work and real-estate strategy following the headquarters sale and leaseback.
- The status and potential exposure of pending wage-and-hour, discrimination and other employment-related litigation.