Kforce Inc. 2020 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary Flex and permanent Direct Hire staffing services through its Technology and Finance and Accounting segments. The unaudited results cover the three months ended March 31, 2020, and are compared with the three months ended March 31, 2019. The company had more than 2,200 associates, over 10,000 consultants on assignment, and 50 U.S. field offices at quarter-end.
Kforce completed the sale of its Government Solutions segment in 2019. Prior-year results therefore include a material discontinued-operations benefit that is not present in 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $335.2 million | $326.7 million | Up 2.6% |
| Gross profit | $94.5 million | $93.2 million | Up 1.4% |
| Gross margin | 28.2% | 28.5% | Down 30 bps |
| Income from operations | $13.9 million | $11.7 million | Up 18.8% |
| Income from continuing operations | $9.1 million | $8.0 million | Up 14.2% |
| Diluted EPS from continuing operations | $0.42 | $0.32 | Up $0.10 |
| Net income | $9.1 million | $26.9 million | Down 66.1% |
| Adjusted EBITDA | $18.2 million | $15.9 million | Up 14.5% |
| Cash flow from operations | $3.0 million | $11.8 million | Down $8.8 million |
| Free cash flow | $1.0 million | $10.3 million | Down $9.3 million |
Flex revenue increased 3.5% to $326.1 million, while Direct Hire revenue declined 22.6% to $9.1 million. Technology revenue increased 4.4% to $266.8 million; Finance and Accounting revenue decreased 3.8% to $68.4 million. Flex revenue represented 97.3% of total revenue.
Flex gross margin improved to 26.2% from 25.8%, primarily because of a more favorable payroll tax environment and improved Technology spreads. Total gross margin declined because of the lower mix of higher-margin Direct Hire revenue. SG&A declined to 23.6% of revenue from 24.4%.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $31.8 million at March 31, 2020, compared with $19.8 million at December 31, 2019.
- Trade receivables increased to $235.6 million from $217.9 million. The company increased its credit-loss provision in response to COVID-19-related collection risk.
- Debt outstanding under the credit facility increased to $100.0 million from $65.0 million after a $35.0 million draw in March. Approximately $197.9 million remained available, subject to covenants.
- The credit facility matures May 25, 2022. Kforce reported compliance with its covenants at March 31, 2020 but warned that a severe pandemic-related deterioration could cause a covenant default.
- The company entered into a new interest-rate swap with a fixed rate of 0.61% and a $35.0 million initial notional amount. Total swap liabilities were $1.7 million at quarter-end.
- Kforce paid $4.3 million in quarterly dividends, or $0.20 per share, and repurchased approximately 0.7 million shares for approximately $20.3 million. The remaining repurchase authorization was $93.6 million.
- Working capital excluding cash was approximately $150.0 million. Management stated that available cash, operating cash flow, and borrowing capacity should be adequate for at least the next 12 months, subject to economic conditions and lender availability.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed on a billing-day basis to 1.0% overall and 1.9% for Flex. Technology Flex revenue grew 3.3% on a billing-day basis, while Finance and Accounting Flex revenue declined 3.4%.
- Flex hours billed declined 0.7% overall: Technology increased 2.2% and Finance and Accounting decreased 6.2%.
- Direct Hire placements decreased 20.8%, and average placement fees decreased 2.3%.
- Operating profitability improved despite lower total gross margin, reflecting lower SG&A, reduced discretionary spending, lower expected performance-based compensation, and the absence of approximately $2.0 million of prior-year expenses related to the Government Solutions divestiture.
- Operating cash flow weakened because clients delayed payments during the final weeks of March and because the 2019 comparison included cash generated by the divested Government Solutions segment.
- Net income fell sharply because Q1 2019 included $18.9 million of after-tax income from discontinued operations, including an $18.5 million deferred-tax benefit related to the Government Solutions sale.
- The allowance for credit losses increased to $3.9 million at March 31, 2020, including a $2.2 million current-period provision and a $0.3 million adoption adjustment at January 1, 2020.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal full-year financial guidance. It expected near-term declines in revenue and profitability because of the COVID-19 economic and health crisis and stated that forecasting was unusually difficult.
- April Technology Flex revenue was approximately 1% below the prior year. April Finance and Accounting Flex revenue was approximately 20% below the prior year before the benefit of large-scale COVID-19-related government initiatives.
- COVID-19-related Finance and Accounting Flex work was expected to contribute approximately $20 million to $30 million of second-quarter revenue, although the work was expected to be temporary.
- April Direct Hire revenue was approximately 55% below the prior year, and management expected a significant second-quarter decline in placements.
- Client actions included reducing or eliminating assignments, lowering bill rates, extending payment terms, and furloughing consultants. Management also reported declines in job orders, new assignment demand, and Direct Hire placements.
- The company temporarily suspended new hires, eliminated discretionary spending, and selectively reduced other expenses.
- COVID-19 could adversely affect client demand, billable hours, pricing spreads, collections, staffing availability, receivables, goodwill, the WorkLLama equity investment, liquidity, and compliance with credit-facility covenants.
- Kforce held a 50% equity-method investment in WorkLLama and recorded a $0.6 million loss in Q1 2020. It had a maximum potential future contribution obligation of $22.5 million, of which $9.0 million had been contributed in 2019; no contingent contribution was recorded at March 31, 2020.
- Employment agreements could require approximately $39.7 million of payments if, following a change in control, all covered executives were terminated under specified circumstances, or $16.8 million absent a change in control.
- The company adopted the current expected credit-loss standard and optional LIBOR transition guidance on January 1, 2020.
- Management stated that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether COVID-19-driven declines in Technology, Finance and Accounting, and Direct Hire demand persisted beyond the April trends disclosed in the filing.
- Whether temporary COVID-19-related contracts generated the expected $20 million to $30 million of second-quarter Finance and Accounting revenue and at what margin.
- Receivables collections, credit-loss provisions, and the effect of extended client payment terms on operating cash flow.
- Debt covenant headroom, borrowing availability, interest expense, and the continued effectiveness and valuation of the interest-rate swaps.
- The sustainability of the $0.20 quarterly dividend and share-repurchase program given reduced cash generation and increased debt.
- Potential impairment of the WorkLLama investment or goodwill, and any additional contingent funding obligations.
- The effect of the Government Solutions divestiture when comparing future net income and cash flow with 2019 periods.