Kforce Inc. 2015 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kforce provides professional staffing and solutions through its Technology, Finance and Accounting, and Government Solutions segments. The company operates primarily in the United States, with international operations contributing less than 2% of revenue. This unaudited quarterly report covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Results exclude the former Health Information Management segment, which Kforce sold in August 2014 and classified as discontinued operations.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net service revenues | $312.6 million | $282.0 million | 10.8% increase |
| Gross profit | $94.7 million | $83.5 million | 13.4% increase |
| Gross margin | 30.3% | 29.6% | 70 basis-point increase |
| Income from operations | $10.0 million | $7.4 million | 34.4% increase |
| Income from continuing operations | $5.8 million | $4.4 million | 31.8% increase |
| Net income | $5.8 million | $6.2 million | 7.4% decrease |
| Diluted EPS from continuing operations | $0.20 | $0.13 | Increase |
| Diluted EPS | $0.20 | $0.19 | Increase |
| Cash provided by operating activities | $11.4 million | $5.9 million | Increase |
| Adjusted EBITDA | $13.7 million | $10.6 million | 29.9% increase |
Flex revenue increased 10.4% to $300.5 million, while Direct Hire revenue increased 24.7% to $12.1 million. Flex gross margin increased to 27.5% from 27.1%, primarily because employment-tax resets had a lower impact than in the prior-year quarter. SG&A increased 11.7% to $82.4 million and rose to 26.3% of revenue from 26.1%.
The effective income tax rate was 39.3%, compared with 38.1% in the prior-year quarter. Kforce declared a quarterly cash dividend of $0.11 per share, compared with $0.10 per share in Q1 2014.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $1.9 million at March 31, 2015, compared with $1.2 million at December 31, 2014.
- Working capital was $130.8 million, and the current ratio was 2.4.
- Trade receivables were $203.5 million, net of a $2.3 million allowance.
- Credit-facility borrowings were $94.3 million, compared with $93.3 million at year-end. Other long-term debt was $0.5 million.
- The credit facility has a $170.0 million maximum borrowing capacity, subject to borrowing-base limitations, and expires December 23, 2019. Availability was $38.0 million at March 31, 2015 and $46.6 million as of April 27, 2015.
- Kforce states that existing cash, operating cash flow, and available borrowings should meet operating and capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Technology revenue increased 8.7%, Finance and Accounting revenue increased 16.4%, and Government Solutions revenue increased 13.7%.
- Flex hours in Technology and Finance and Accounting increased 10.5% in aggregate, while total Direct Hire placements increased 8.6%.
- Gross margin improved despite first-quarter employment-tax resets. SG&A as a percentage of revenue increased modestly because of higher professional fees.
- Continuing-operations earnings improved materially, but total net income declined because Q1 2014 included $1.9 million of after-tax income from discontinued operations.
- Weighted average diluted shares declined to 28.5 million from 33.2 million, reflecting substantial prior share repurchases and supporting higher EPS.
- Kforce repurchased approximately 275,000 shares on the open market for approximately $6.4 million and paid $3.1 million in cash dividends. Approximately $23.2 million remained authorized for future repurchases at quarter-end.
Outlook, Risks, Contingencies, and Unusual Items
Management remained optimistic about Technology and Finance and Accounting growth, citing demand for temporary staffing, expected productivity gains from prior investments in revenue-generating personnel, and continued selective hiring. Management expected Government Solutions revenue to remain fairly stable for the rest of 2015 and Direct Hire revenue to remain stable to moderately grow. Flex gross margins were expected to remain stable relative to 2014.
Key risks include economic and political uncertainty, government-market volatility, staffing demand, competition for qualified personnel, collection of receivables, bill-rate and pay-rate spreads, employment-tax resets, interest-rate changes, lender availability, and the ability to satisfy credit-facility covenants. A hypothetical 10% increase in interest rates would have increased annual interest expense by approximately $0.1 million based on quarter-end borrowings.
Kforce reported ordinary-course litigation and claims that management did not expect to be material. A previously disclosed qui tam and whistleblower matter had been resolved, with the appeal expected to be dismissed. The company had potential indemnification obligations related to the sale of Kforce Healthcare, with an aggregate cap generally of $8.9 million, but management considered material exposure remote and recorded no liability.
Executive employment agreements could require approximately $41.6 million of payments following a change in control, or approximately $19.2 million absent a change in control, if specified termination conditions occurred; no liability was recorded. Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to the risk factors in the 2014 Form 10-K.
Important Facts for Investors to Verify
- Reconcile continuing-operations growth with total net-income decline caused by the absence of discontinued-operation earnings.
- Monitor credit-facility availability, borrowing-base calculations, covenant thresholds, and the effect of interest rates on financing costs.
- Assess whether Technology and Finance and Accounting growth, staffing hours, placement volumes, and bill-rate spreads support management’s 2015 outlook.
- Evaluate the sustainability of the improved Flex gross margin after employment-tax resets and other seasonal effects.
- Review the impact of share repurchases, dividends, stock-based compensation, and the lower diluted share count on per-share results.
- Consider potential exposure from litigation, Healthcare-sale indemnifications, executive employment agreements, receivable allowances, and other self-insured or benefit obligations.