Kforce Inc. 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary staffing (Flex) and permanent placement (Direct Hire) services through its Technology (Tech) and Finance and Accounting (FA) segments. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
As of March 31, 2019, Kforce employed nearly 2,400 associates and had more than 10,300 consultants on assignment. The Government Solutions (GS) segment was classified as discontinued operations and held for sale.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $326.7 million | $317.4 million | Up 2.9%; up 4.6% per billing day |
| Gross profit | $93.2 million | $92.5 million | Up 0.7% |
| Gross margin | 28.5% | 29.2% | Down 70 basis points |
| Income from operations | $11.7 million | $12.0 million | Down 2.3% |
| Income from continuing operations | $8.0 million | $8.0 million | Essentially flat |
| Net income | $26.9 million | $9.2 million | Up substantially, primarily from discontinued operations |
| Diluted EPS | $1.07 | $0.37 | Increase primarily from discontinued operations |
| Adjusted EBITDA from continuing operations | $15.9 million | $15.9 million | Essentially flat |
| Cash provided by operating activities | $11.8 million | $10.3 million | Increase of $1.5 million |
| Free cash flow | $10.3 million | $8.8 million | Increase of $1.5 million |
Tech revenue increased 8.1% to $255.6 million, while FA revenue decreased 12.2% to $71.1 million. Flex revenue increased 2.9% overall, with Tech Flex up 8.1% and FA Flex down 13.1%. Direct Hire revenue increased 3.2% to $11.8 million.
Flex gross margin declined to 25.8% from 26.5%, primarily because Tech pay rates increased faster than bill rates and customer revenue mix pressured spreads. SG&A declined to 24.4% of revenue from 24.8%, despite approximately $2.0 million of severance and other costs related to the GS divestiture. The continuing-operations effective tax rate was 26.1%, compared with 25.0%.
Balance Sheet, Debt, Liquidity, and Capital Allocation
- Cash and cash equivalents were $0.3 million at March 31, 2019, compared with $0.1 million at December 31, 2018.
- Trade receivables were $220.5 million, net of a $2.9 million allowance.
- Working capital was $141.3 million, compared with $140.6 million at year-end 2018.
- Credit facility borrowings were $82.5 million, up from $71.8 million at December 31, 2018. The facility has maximum borrowing capacity of $300 million, with potential additional capacity of up to $150 million subject to conditions.
- Total debt, including other long-term debt, was approximately $83.6 million.
- Kforce repurchased approximately $14.6 million of common stock and paid a $4.4 million quarterly dividend, or $0.18 per share. Approximately $147.5 million remained available under the repurchase authorization at March 31, 2019.
- Management stated that cash, operating cash flow, and available credit capacity should be adequate for operating and capital requirements for at least the next 12 months, subject to economic conditions and potential strategic uses of cash.
Material Changes and Unusual Items
- Kforce committed to divest its GS segment, consisting of Kforce Government Solutions (KGS) and TraumaFX, because management intends to focus on commercial technical and professional staffing services.
- On April 1, 2019, after the reporting period, Kforce completed the sale of KGS to ManTech International Corporation for $115.0 million in cash, subject to a post-closing working capital adjustment. Management expected a gain of approximately $72.0 million, net of transaction costs.
- Q1 2019 discontinued-operations income was $18.9 million, including an $18.5 million deferred tax benefit triggered by the KGS sale agreement. The expected sale gain, transaction costs of approximately $9.5 million, and reversal of the related deferred tax asset were expected to be recorded in Q2 2019.
- TraumaFX was not included in the KGS sale. Kforce was exploring strategic alternatives, including a possible sale, with no assurance of a particular outcome.
- Kforce adopted the new operating lease standard on January 1, 2019, recognizing approximately $17.6 million of right-of-use assets and $21.0 million of lease liabilities at adoption. It also early adopted guidance for cloud-computing implementation costs.
- The company returned more capital to shareholders than it generated in free cash flow during the quarter, resulting in a $10.7 million increase in credit facility borrowings.
Outlook, Management Commentary, and Risks
Management cited continued demand for technology services, supported by technology investment and a constrained candidate market. However, FA Flex activity remained below expectations, with hours billed down 19.3% year over year, despite a 7.4% increase in average FA Flex bill rates. Management continued to pursue an FA transformation initiative focused on higher-skill opportunities.
Management emphasized productivity improvements, lower headcount, expense discipline, pricing effectiveness, and improved operating leverage. No formal revenue or earnings guidance was provided in the filing.
- Key risks include changes in client demand, economic conditions, competition, consultant and candidate availability, pricing and pay-rate pressure, and the ability to collect receivables.
- Liquidity could be affected by economic deterioration, reduced lender funding capacity, acquisitions, strategic investments, dividends, or additional share repurchases.
- The credit facility includes a minimum fixed-charge coverage ratio of 1.25 to 1.00 and a maximum total leverage ratio of 3.25 to 1.00. Kforce reported that it was not restricted from dividends or repurchases at March 31, 2019.
- Ordinary-course litigation was not considered material, although management noted that adverse outcomes or insufficient insurance coverage could have a material effect.
- Executive employment agreements could result in approximately $32.8 million of obligations following a change in control, or approximately $14.3 million without a change in control, if specified termination conditions applied.
Important Facts for Investors to Verify
- Verify the final accounting for the April 1, 2019 KGS sale, including the actual gain, transaction costs, working capital adjustment, and tax effects.
- Monitor whether TraumaFX is sold, retained, or otherwise disposed of and the resulting financial impact.
- Assess the sustainability of Tech growth and whether FA Flex volume stabilizes or continues to decline.
- Track Flex gross-margin trends, particularly bill-rate and pay-rate spreads in the candidate-constrained technology market.
- Review post-sale debt levels and the use of KGS proceeds for debt reduction, dividends, repurchases, or strategic investments.
- Separate recurring continuing-operations performance from the unusually large discontinued-operations tax benefit included in Q1 net income.