Kforce Inc. 10-Q Summary — Second Quarter 2019
Business Context and Reporting Period
Kforce provides temporary (Flex) and permanent (Direct Hire) staffing services through its Technology (Tech) and Finance and Accounting (FA) segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
During the quarter, Kforce completed the divestiture of its Government Solutions segment, including Kforce Government Solutions and TraumaFX. Results of that segment are presented as discontinued operations. Kforce reported more than 2,300 associates and nearly 10,400 consultants on assignment at June 30, 2019.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Year-over-Year Change | Six Months Ended June 30, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $338.9 million | 2.8% | $665.6 million | 2.9% |
| Gross profit | $101.0 million | 0.8% | $194.2 million | 0.8% |
| Gross margin | 29.8% | Down 60 bps | 29.2% | Down 60 bps |
| Income from operations | $21.5 million | Down 0.7% | $33.2 million | Down 1.2% |
| Income from continuing operations | $16.1 million | 6.0% | $24.1 million | 4.0% |
| Net income | $74.9 million | 360.1% | $101.7 million | 299.7% |
| Diluted EPS | $3.06 | Up from $0.65 | $4.11 | Up from $1.01 |
| Adjusted EBITDA from continuing operations | $25.4 million | Down 0.3% | $41.3 million | Down 0.1% |
Net income and EPS were substantially increased by $77.7 million of after-tax income from discontinued operations, including gains on the sales of the Government Solutions businesses. Continuing-operations net margin was 4.7% for the quarter and 3.6% for the six-month period.
Revenue and Segment Trends
- Second-quarter Tech revenue increased 6.2% to $265.3 million; six-month Tech revenue increased 7.1% to $520.9 million.
- Second-quarter FA revenue decreased 7.8% to $73.6 million; six-month FA revenue decreased 10.0% to $144.7 million.
- Six-month Flex revenue increased 2.8% to $640.3 million, while Direct Hire revenue increased 5.6% to $25.3 million.
- Six-month Tech Flex revenue increased 7.1%, supported by higher assignment volume and bill rates. FA Flex revenue declined 11.3%, primarily because of lower assignment volume.
- Six-month Flex gross margin decreased to 26.4% from 27.1%. Management attributed the decline primarily to narrower bill-pay spreads, including a larger mix of lower-margin clients and pay rates rising faster than bill rates in Tech.
Cash Flow, Liquidity, Debt and Capital Allocation
| Item | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Cash provided by operating activities | $22.3 million | $38.3 million |
| Capital expenditures | $4.2 million | $3.1 million |
| Free cash flow | $18.1 million | $35.1 million |
| Cash provided by investing activities | $111.0 million | $(3.1) million |
| Cash used in financing activities | $(68.4) million | $(35.0) million |
| Cash and cash equivalents at period-end | $65.0 million | $0.5 million |
- Cash increased by $64.9 million during the first six months, principally because of $122.7 million of net proceeds from divestitures.
- Credit Facility borrowings were $65.0 million at June 30, 2019, down from $71.8 million at December 31, 2018. Management described the company as having no net debt because cash approximately equaled credit-facility borrowings.
- The Credit Facility has a maximum borrowing capacity of $300.0 million, with potential incremental capacity of up to $150.0 million, subject to conditions. The company was in compliance with applicable covenants and was not restricted from repurchases or distributions at quarter-end.
- Kforce repurchased approximately 1.5 million shares for $51.3 million during the six-month period and paid $8.7 million of dividends, or $0.36 per share. Approximately $110.7 million remained available under the repurchase authorization.
- Management expects to maintain approximately $65.0 million of Credit Facility borrowings until the interest-rate swap’s notional amount decreases in May 2020.
Material Changes, Outlook, Risks and Unusual Items
- Kforce sold KGS on April 1, 2019 for $115.0 million and recognized a $72.3 million after-transaction-cost gain. It sold TFX on June 7, 2019 for $18.4 million, subject to a working-capital adjustment, and recognized a $7.7 million gain after transaction costs.
- Discontinued operations contributed $58.8 million of after-tax income in the second quarter and $77.7 million for the six months. The divestiture-related tax effects and gains make reported net income and EPS not representative of ongoing operating performance.
- Six-month SG&A included approximately $2.0 million of severance and other costs related to the KGS divestiture. Despite these costs, SG&A declined to 23.7% of revenue from 24.1%.
- Kforce entered a 50% joint venture investment in WorkLLama, a SaaS platform focused on consultant engagement and referrals. The investment was $9.0 million at June 30, 2019, including $7.5 million contributed in cash and $1.5 million of probable contingent contributions. Maximum future contingent contributions could reach $15.0 million.
- Management cited positive staffing demand and a candidate-constrained market, particularly in technology. It also noted risks from economic deterioration, client-demand changes, competition, consultant availability, pricing and wage pressure, and collection of receivables.
- Management believes existing cash, operating cash flow and available borrowings will satisfy capital and working-capital requirements for at least the next 12 months, but future dividends, repurchases, acquisitions and strategic investments remain discretionary.
- Operating lease accounting was adopted January 1, 2019, resulting in recognition of right-of-use assets and lease liabilities. Operating lease liabilities totaled $16.9 million at June 30, 2019.
- The company disclosed ordinary-course litigation and claims that management does not expect to be material, while noting that adverse outcomes or insufficient insurance coverage could have a material effect.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing stated that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Separate ongoing Tech and FA operating performance from the substantial, nonrecurring gains and tax effects of the Government Solutions divestiture.
- Monitor FA Flex assignment volumes, Tech bill-pay spreads and overall Flex gross margin, which declined year over year.
- Reconcile operating cash flow and free cash flow with the large divestiture proceeds and the timing of receivable collections.
- Review Credit Facility covenants, the planned debt level, interest-rate swap exposure and the company’s ability to continue share repurchases and dividends.
- Assess the potential future cash contributions and performance of the WorkLLama joint venture.
- Consider staffing-market risks, including candidate shortages, wage inflation, client demand, economic conditions and competition.
- Review the unaudited interim statements together with Kforce’s 2018 Form 10-K and related footnotes, including contingencies, lease obligations, benefit plans and stock-based compensation.