Kforce Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
Kforce provides temporary and permanent professional staffing services through its Technology (Tech) and Finance and Accounting (FA) segments. The filing covers the fiscal year ended December 31, 2020, with quarterly information including the three months ended December 31, 2020. Operations were materially affected by the COVID-19 pandemic, while most associates worked remotely from March 2020.
- Tech represented 75.1% of 2020 revenue; FA represented 24.9%.
- Flex staffing represented 97.6% of revenue and Direct Hire represented 2.4%.
- The 10 largest clients represented approximately 28% of annual revenue.
- Kforce had approximately 2,000 associates and 11,900 consultants on assignment at year-end.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,397.7 million | $1,347.4 million | 3.7% increase |
| Gross profit | $396.2 million | $395.0 million | 0.3% increase |
| Gross margin | 28.3% | 29.3% | Down 100 bps |
| Operating income | $80.3 million | $74.8 million | 7.3% increase |
| Income from continuing operations | $56.0 million | $54.6 million | 2.7% increase |
| Diluted EPS from continuing operations | $2.62 | $2.29 | 14.4% increase |
| Net income | $56.0 million | $130.9 million | 2019 included discontinued-operation gains |
| Adjusted EBITDA | $97.1 million | $90.7 million | 7.1% increase |
| Cash flow from operations | $109.2 million | $66.6 million | 64.0% increase |
| Free cash flow | $102.7 million | $56.3 million | 82.4% increase |
Tech revenue declined 0.8% to $1.05 billion, while FA revenue increased 20.2% to $348.1 million. FA benefited from $114.7 million of revenue from government-sponsored COVID-19 initiatives. Excluding that business, FA revenue would have declined 19.4% year over year.
Direct Hire revenue decreased 29.6% to $33.6 million, and placements declined 32.6% to 2,044. Flex revenue increased 5.0% to $1.36 billion. Tech Flex gross margin was 26.4%, compared with 26.3% in 2019; FA Flex gross margin declined to 27.1% from 28.5%, primarily because of lower-margin COVID-19 work.
SG&A declined to 22.2% of revenue from 23.3%, reflecting revenue leverage, productivity improvements, lower travel and office costs, and expense discipline. The effective tax rate increased to 25.5% from 23.6%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $103.5 million versus $19.8 million at year-end 2019.
- Working capital was $230.7 million versus $160.3 million.
- Credit facility borrowings were $100.0 million versus $65.0 million; approximately $198.5 million remained available, subject to covenants.
- Net cash was approximately $3.5 million at year-end, compared with net debt of approximately $45.2 million in 2019.
- The $300.0 million revolving credit facility matures May 25, 2022 and is secured by substantially all company assets other than designated exclusions.
- Kforce paid $16.8 million in dividends, or $0.80 per share, and repurchased $29.4 million of common stock during 2020.
- On February 5, 2021, the Board approved a 15% dividend increase, from $0.20 to $0.23 per quarter.
- Approximately $38.6 million of employer payroll taxes were deferred under the CARES Act, with repayment scheduled equally in 2021 and 2022.
Material Changes Versus the Prior Comparable Period
- Revenue grew despite the pandemic, but growth was concentrated in FA COVID-19 contracts and higher Tech bill rates.
- Tech hours billed declined 4.1%, partially offset by a 4.3% increase in average Tech Flex bill rates.
- FA Flex hours billed increased 35.0%, primarily reflecting COVID-19-related activity.
- Gross margin declined because of lower Direct Hire mix and lower-margin FA COVID-19 work.
- Operating profitability improved as SG&A declined faster than revenue-related costs.
- Cash generation increased significantly, aided by payroll-tax deferrals and improved accounts receivable performance.
- Open-market repurchases were suspended in April 2020 to preserve liquidity, although $1.0 million shares were repurchased during the year before suspension.
- The Government Solutions segment was fully divested in 2019; therefore, 2020 included no discontinued-operations activity, while 2019 net income included $76.3 million from discontinued operations, largely divestiture gains.
Guidance, Outlook, Risks and Unusual Items
Management expects Tech Flex revenue to grow in 2021 as pandemic restrictions ease, economic momentum improves and demand for digital transformation remains strong. Management expects overall FA revenue to decline from 2020 levels because COVID-19 contract revenue is expected to decrease and the company is migrating FA toward higher-skilled analytical and decision-support roles. Management also expects Direct Hire revenue trends to improve in the first quarter of 2021.
Kforce expects relatively stable Tech Flex spreads in 2021. FA Flex margins may remain pressured in the first quarter because of the declining COVID-19 revenue mix. The company is investing in managed teams and solutions, a talent relationship management system, a more flexible work environment and streamlined real estate operations.
- COVID-19 could reduce client demand, billable hours, bill rates, collections and consultant assignments, and could affect credit-facility covenant compliance.
- Staffing demand is sensitive to economic conditions, employment levels, client concentration and competitive pricing pressure.
- Kforce faces risks related to recruiting and retaining skilled consultants, foreign-worker visa restrictions, worker classification, wage-and-hour compliance and employment-related litigation.
- Pending California PAGA matters, wage-and-hour cases and other employment claims have uncertain outcomes; management stated that losses cannot currently be reasonably estimated for several matters.
- The company reported a preliminary settlement in an FCRA class action, with a final fairness hearing scheduled for April 16, 2021.
- Cybersecurity, data privacy, information-system outages and third-party technology risks could disrupt operations or result in penalties and reputational damage.
- WorkLLama, a 50%-owned equity-method investment, had a $10.5 million carrying value and generated a $1.7 million loss in 2020. Management concluded that it was not impaired, but the investment was identified as a critical audit matter.
- Contractual obligations totaled approximately $205.2 million, including credit-facility obligations, leases, purchase commitments, deferred compensation and SERP obligations.
- Executive employment agreements could require approximately $45.0 million of payments following a change in control, or approximately $17.2 million absent a change in control, under specified termination circumstances.
Most Important Facts for Investors to Verify
- How quickly FA COVID-19 revenue declines and whether replacement demand offsets that contraction.
- Whether Tech consultant assignments, hours billed and bill rates continue to improve.
- The sustainability of the 2020 SG&A leverage and the effect of returning office, technology and payroll costs.
- Compliance with credit-facility covenants and the repayment schedule for the $100.0 million borrowing and deferred payroll taxes.
- Whether the $0.23 quarterly dividend remains supported by operating cash flow and future capital-allocation decisions.
- Potential exposure from pending wage-and-hour, PAGA, FCRA and other employment-related proceedings.
- The recoverability of the WorkLLama investment and the performance of the company’s managed-solutions and FA migration strategies.