Kforce Inc. Form 10-K Summary
Business Context and Reporting Period
Kforce provides professional staffing services and solutions through temporary staffing (“Flex”) and permanent placement (“Direct Hire”) offerings in its Technology (“Tech”) and Finance and Accounting (“FA”) segments. This Form 10-K covers the fiscal year ended December 31, 2019, with quarterly data included for the three months ended December 31, 2019.
During 2019, Kforce completed the divestitures of its Government Solutions (“GS”) businesses. GS results and disposal gains are reported as discontinued operations; operating discussions generally exclude GS.
- Approximately 2,300 associates and 10,600 consultants on assignment at December 31, 2019.
- Tech represented 78.5% of revenue; FA represented 21.5%.
- Flex represented 96.5% of revenue and Direct Hire represented 3.5%.
- The ten largest clients generated approximately 23% of revenue; no single client exceeded 5%.
Financial Results and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1.347 billion | $1.304 billion | +3.3% |
| Gross profit | $395.0 million | $386.5 million | +2.2% |
| Gross margin | 29.3% | 29.6% | -30 bps |
| Income from continuing operations | $54.6 million | $50.9 million | +7.3% |
| Diluted EPS from continuing operations | $2.29 | $2.02 | +13.4% |
| Net income | $130.9 million | $58.0 million | +125.7% |
| Adjusted EBITDA | $90.7 million | $87.7 million | +3.4% |
| Cash flow from operations | $66.6 million | $87.7 million | -$21.1 million |
| Free cash flow | $56.3 million | $82.6 million | -$26.3 million |
Net income included $76.3 million of after-tax income from discontinued operations, primarily reflecting gains on the GS divestitures. Continuing-operations operating margin was 5.6%, compared with 5.6% in 2018. SG&A declined to 23.3% of revenue from 23.6%, despite approximately $2.0 million of GS-related severance and other costs.
- Tech: Revenue increased 6.8% to $1.058 billion; gross margin was 27.7%, down from 28.0%. Tech Flex revenue increased 6.8%, supported by higher bill rates and hours billed.
- FA: Revenue decreased 7.7% to $289.5 million; gross margin improved to 35.2% from 34.8%. FA Flex revenue declined 8.6%, primarily due to fewer new assignments.
- Flex: Revenue increased 3.3% to $1.300 billion, while Flex gross margin declined to 26.7% from 27.1% because of bill/pay spread compression and client mix.
- Direct Hire: Revenue increased 4.4% to $47.7 million, despite a 2.7% decline in total placements, as average fees per placement increased 7.3%.
Liquidity, Debt, Capital Allocation and Balance Sheet
- Cash and cash equivalents were $19.8 million at December 31, 2019, compared with $0.1 million in 2018.
- Working capital was $160.3 million, compared with $158.1 million in 2018.
- Credit facility borrowings declined to $65.0 million from $71.8 million; net debt was $45.2 million.
- The $300 million revolving credit facility matures May 25, 2022, with $231.6 million available at year-end, subject to covenants and letters of credit.
- The company returned $134.4 million to shareholders through $16.6 million of dividends and $117.8 million of open-market repurchases. It repurchased approximately 3.3 million shares during 2019.
- On January 31, 2020, the Board approved an 11% increase in the quarterly dividend, from $0.18 to $0.20 per share.
- Management expects existing cash, operating cash flow and available borrowing capacity to meet operating and capital requirements for at least the next 12 months, subject to economic conditions and possible acquisitions or additional repurchases.
The company contributed $9.0 million to a 50%-owned WorkLLama joint venture during 2019. The investment was $8.2 million at year-end, and maximum potential future capital contributions under the agreement were $22.5 million.
Material Changes, Outlook and Unusual Items
- The GS divestiture generated $122.5 million of net sale proceeds and a $79.3 million pretax gain, materially increasing reported net income and investing cash flow.
- Management expects continued Tech Flex growth in 2020, supported by technology spending, digital transformation and demand for highly skilled professionals.
- Management expects FA Flex revenue to be stable in 2020 while repositioning the business toward higher-skilled roles.
- Kforce does not expect stock repurchases at 2019 levels in 2020.
- A new talent relationship management system was developed during 2019 and was expected to be deployed in 2020.
- The interest-rate swap fixed rate was 1.81%; its $65 million notional amount was scheduled to decrease to $25 million in May 2020 and mature in April 2022.
- The company adopted the new lease accounting standard in 2019, recording approximately $17.6 million of right-of-use assets and $21.0 million of lease liabilities at adoption.
Risks, Contingencies and Other Matters
- Staffing demand is sensitive to economic cycles, employment levels, client project deferrals and pricing pressure.
- Talent shortages, particularly in technology, may constrain growth or increase compensation costs.
- Key risks include employment-related litigation, worker classification, wage-and-hour compliance, immigration restrictions, cybersecurity incidents, data privacy, client concentration and reliance on information systems.
- The credit facility includes fixed-charge coverage and leverage covenants. Noncompliance could accelerate repayment obligations or restrict dividends and repurchases.
- Pending legal matters include a putative Fair Credit Reporting Act class action and a California PAGA action. Management stated the FCRA matter was unlikely to be material, while the outcome and potential loss of the PAGA matter could not yet be estimated.
- Executive employment agreements could require approximately $39.4 million of payments following a change in control and qualifying terminations, or approximately $16.5 million absent a change in control.
- Audit and management reports concluded that the financial statements and internal control over financial reporting were effective as of December 31, 2019.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $76.3 million of discontinued-operations income and the GS disposal gains.
- Assess whether Tech growth can offset continued weakness or restructuring needs in FA.
- Monitor Flex bill/pay spread compression and the effect of large-client mix on gross margins.
- Verify the sustainability of dividends and repurchases relative to operating cash flow, debt balances and covenant requirements.
- Review the WorkLLama investment, its milestone-based future funding obligation and potential impairment risk.
- Track developments in the California PAGA matter and the preliminary FCRA settlement.
- Evaluate the effects of talent shortages, immigration policy, cybersecurity incidents and changing employment regulations.