Kforce Inc. 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
Kforce provides professional staffing and solutions through its Technology (Tech), Finance and Accounting (FA), and Government Solutions (GS) segments. Services include temporary staffing (Flex), permanent placement (Direct Hire), and GS product revenue. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. At June 30, 2018, Kforce employed nearly 2,400 associates and had approximately 11,000 consultants on assignment.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Revenue | $358.6 million | $340.3 million | $704.9 million | $674.3 million |
| Gross profit | $107.5 million | $103.9 million | $207.7 million | $201.1 million |
| Gross margin | 30.0% | 30.5% | 29.5% | 29.8% |
| Income from operations | $23.1 million | $19.4 million | $36.7 million | $29.8 million |
| Net income | $16.3 million | $11.1 million | $25.4 million | $17.0 million |
| Diluted EPS | $0.65 | $0.44 | $1.01 | $0.67 |
| Adjusted EBITDA | $27.4 million | $23.3 million | $45.3 million | $37.8 million |
Q2 revenue increased 5.4%, operating income increased 19.3%, and net income increased 46.0% year over year. For the six-month period, revenue increased 4.5%, operating income increased 23.2%, and net income increased 49.3%. The six-month effective tax rate declined to 25.4% from 37.4%, primarily due to the Tax Cuts and Jobs Act.
- Revenue mix: Six-month Flex revenue increased 4.9% to $674.9 million; Direct Hire revenue declined 5.6% to $23.9 million; and Product revenue increased 8.4% to $6.1 million.
- Segment performance: Six-month Tech revenue increased 8.0% to $486.3 million, FA revenue declined 8.5% to $160.7 million, and GS revenue increased 19.9% to $57.9 million.
- Margin drivers: Six-month Flex gross margin declined to 26.7% from 26.8%. Tech and FA Flex margins each improved 30 basis points, while GS Flex margin declined 370 basis points because of bill-rate/pay-rate spread compression and higher benefit costs.
- Operating expenses: Six-month SG&A declined to 23.7% of revenue from 24.8%, reflecting improved associate productivity, lower revenue-generating headcount, realignment savings, and expense discipline.
- Shareholder returns: Kforce declared and paid $0.24 per share of dividends during the first half and repurchased approximately $12.1 million of common stock, including approximately $8.7 million of open-market repurchases.
Cash Flow, Debt, and Liquidity
| Metric | Six Months 2018 | Six Months 2017 |
|---|---|---|
| Cash provided by operating activities | $38.3 million | $5.5 million |
| Capital expenditures | $3.1 million | $4.3 million |
| Free cash flow | $35.1 million | $1.2 million |
| Cash used in financing activities | $35.0 million | Cash provided of $0.9 million |
Cash and cash equivalents were $0.5 million at June 30, 2018, compared with $0.4 million at December 31, 2017. Working capital was $162.7 million, compared with $161.7 million at year-end. Trade receivables were $239.1 million.
The credit facility had $100.6 million outstanding and $196.2 million available at June 30, 2018, compared with $116.5 million outstanding and $180.3 million available at December 31, 2017. The facility has a $300.0 million maximum borrowing capacity, with potential incremental capacity of $150.0 million subject to conditions. It matures May 25, 2022. Kforce reported compliance with its covenants and was not restricted from distributions or repurchases at quarter-end. An interest-rate swap had a $1.4 million fair value and hedges a portion of variable-rate debt.
Material Changes, Outlook, and Risks
- Kforce adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by approximately $0.2 million, net of tax, and did not materially affect Q2 financial statements compared with prior revenue-recognition rules.
- Management expects Tech Flex revenue to increase sequentially and year over year in Q3 2018, with further acceleration in year-over-year growth. Tech Flex growth was 9.8% in Q2, compared with 6.7% in Q1.
- FA Flex revenue is expected to be stable or slightly higher sequentially in Q3, but lower year over year, with an improving rate of decline. Direct Hire revenue is expected to experience a seasonal Q3 decrease.
- GS Flex revenue is expected to continue growing in Q3, although at a slower year-over-year rate. A significant GS recompete won in the first half is expected to pressure GS margins.
- Management believes cash flows, cash on hand, and available credit will meet operating and capital requirements for at least the next 12 months. It also expects approximately $10.0 million of additional 2018 operating cash flow from the lower tax rate resulting from the TCJA.
- On July 27, 2018, after quarter-end, the Board approved a 50% increase in the quarterly dividend from $0.12 to $0.18 per share. Future dividends remain discretionary.
- Key risks include staffing demand and economic conditions, consultant availability, client concentration and demand changes, pressure on staffing spreads and GS contract margins, accounts receivable collection, interest-rate exposure, covenant restrictions, litigation, insurance sufficiency, and execution of the new lease and credit-loss accounting standards.
- Ordinary-course legal proceedings were not considered material by management, although adverse outcomes could materially affect financial results. Executive employment agreements could require approximately $33.0 million of payments following a change in control, or approximately $13.4 million absent a change in control, under specified termination circumstances.
Investor Verification Items
- Verify whether Tech growth and FA stabilization met management’s Q3 expectations.
- Monitor GS margin performance, particularly the impact of the recompete and bill-rate/pay-rate compression.
- Reconcile operating cash flow and free cash flow, including the $6.8 million tax refund and working-capital movements.
- Review credit-facility covenant compliance, leverage, interest costs, and remaining borrowing capacity.
- Assess the sustainability of the increased $0.18 quarterly dividend alongside repurchases and debt reduction.
- Evaluate the effect of lower tax rates, ASC Topic 606 adoption, and forthcoming lease and credit-loss accounting standards on comparability and future results.