Kforce Inc. — Form 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary and permanent professional staffing services through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. The filing covers the three and nine months ended September 30, 2012, and was filed November 5, 2012. The interim financial statements are unaudited.
Kforce sold Kforce Clinical Research, Inc. on March 31, 2012, and presents that business as discontinued operations.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net service revenues | $270.2 million, up 3.5% | $812.6 million, up 9.0% |
| Gross profit | $88.8 million | $259.4 million |
| Gross margin | 32.9%, versus 32.4% | 31.9%, versus 31.6% |
| Income from continuing operations | $9.3 million | $(41.6) million |
| Net income (loss) | $9.3 million | $(19.8) million |
| Diluted EPS | $0.26 | $(0.55) |
| Adjusted EBITDA | $18.4 million | $35.0 million |
Flex revenue increased 3.4% in the quarter and 9.0% year to date; Search revenue increased 6.6% and 9.7%, respectively. Nine-month Flex gross margin was 28.7%, compared with 28.4% in 2011. SG&A was $70.4 million in the quarter and $249.9 million year to date; nine-month SG&A rose to 30.8% of revenue from 27.3%.
Cash provided by operating activities was $27.8 million for the nine months, compared with $13.9 million in 2011. Investing activities provided $51.4 million, including $55.6 million of net proceeds from the KCR disposition. Financing activities used $74.8 million, including $25.4 million of share repurchases and net repayments under the credit facility.
At September 30, 2012, cash and cash equivalents were $5.4 million, working capital was $98.2 million, and the current ratio was 2.1. No borrowings were outstanding under the credit facility, and $85.9 million was available. Total liabilities were $136.0 million, including $1.2 million of long-term debt other than the credit facility.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Technology, Finance and Accounting, and Health Information Management. Government Solutions revenue declined 5.0% in the quarter and 2.8% year to date.
- Gross margins improved modestly, primarily from better bill-to-pay spreads and lower statutory payroll taxes in the quarter.
- Nine-month continuing operations results were materially reduced by a $65.3 million goodwill impairment charge related to Government Solutions, with a related tax benefit of approximately $23.3 million.
- Kforce accelerated vesting of substantially all outstanding unvested equity awards following the KCR sale, producing approximately $31.3 million of compensation expense and payroll taxes in the first quarter.
- The KCR sale generated a $36.5 million pretax gain and $21.8 million of after-tax discontinued-operation income for the nine-month period.
- Shares repurchased during the nine months totaled approximately 1.9 million at a cost of $25.4 million. Approximately $58.8 million remained available under the repurchase authorization at September 30.
Guidance, Outlook, Risks and Unusual Items
Management remained cautiously optimistic about temporary staffing demand and expected continued growth in Technology, Finance and Accounting, and Health Information Management. Management expected 2012 Flex gross margins to exceed 2011 levels and Government Solutions revenue to be approximately flat for 2012 compared with 2011.
Government Solutions was affected by federal contracting delays, uncertainty regarding agency funding, federal budget reductions, widening deficits, and potential sequestration. Its September 30 goodwill impairment test showed estimated fair value only 5.4% above carrying value; deterioration in discount rates, growth assumptions, or forecast performance could result in future impairment. The company expected to perform its annual impairment test as of December 31, 2012.
Kforce stated that existing cash, operating cash flow, and credit-facility availability should meet operating and capital requirements for at least the next 12 months, but warned that economic deterioration, reduced operating performance, or lender funding constraints could adversely affect liquidity.
Material contingencies included a $1.4 million accrued EEOC settlement liability, a $2.5 million accrued California class-action settlement subject to appeal, and potential executive employment-agreement obligations of approximately $60.3 million following a change in control or approximately $12.9 million absent a change in control. Management had not recorded liabilities for the employment agreements because no triggering events had occurred.
Important Facts to Verify
- Whether Government Solutions performance, federal spending, and sequestration risks lead to additional goodwill impairment at year-end.
- The sustainability of revenue growth as Technology growth decelerated during 2012 and Search revenue declined sequentially.
- The comparability of reported earnings, given the KCR divestiture, goodwill impairment, and accelerated equity-compensation expense.
- Actual credit-facility availability, covenant compliance, letters of credit, and borrowing needs as staffing payroll and receivables fluctuate.
- Collections and credit quality of trade receivables, which totaled $169.0 million net of allowances at September 30, 2012.
- Final resolution and cash cost of litigation, tax audits, KCR indemnification obligations, and executive employment commitments.