Kforce Inc. 2016 Form 10-K Summary
Business context and reporting period
Kforce provides professional and technical staffing and solutions through Technology (Tech), Finance and Accounting (FA), and Government Solutions (GS). Services are primarily temporary “Flex” staffing, supplemented by permanent “Direct Hire” placements. The filing covers the fiscal year ended December 31, 2016, with quarterly information including the three months ended December 31, 2016.
Kforce operated through its Tampa headquarters, 61 U.S. field offices, and an office in Manila. Approximately 96% of revenue came from Flex services, and approximately 99% came from U.S. operations. The 10 largest clients represented approximately 25% of revenue; no single client exceeded 6%.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net service revenue | $1,319.7 million | $1,319.2 million | Flat |
| Gross profit | $408.5 million | $414.1 million | Down 1.4% |
| Gross margin | 31.0% | 31.4% | Down 40 bps |
| SG&A | $341.2 million | $330.4 million | Up 3.3% |
| SG&A as a percentage of revenue | 25.9% | 25.0% | Up 90 bps |
| Income from operations | $58.6 million | $73.9 million | Down 20.7% |
| Income from continuing operations | $32.8 million | $42.8 million | Down 23.5% |
| Diluted EPS from continuing operations | $1.25 | $1.52 | Down 17.8% |
| Adjusted EBITDA | $74.1 million | $89.3 million | Down 17.1% |
| Operating cash flow | $39.4 million | $70.2 million | Down 43.8% |
| Free cash flow | $27.0 million | $61.9 million | Down 56.3% |
Fourth-quarter 2016 revenue was $326.0 million, gross profit was $99.6 million, and net income was $9.2 million, compared with fourth-quarter 2015 revenue of $327.7 million, gross profit of $103.5 million, and net income of $11.9 million.
Revenue and segment performance
- Tech: Revenue declined 1.4% to $883.5 million. Flex revenue declined 1.2%, reflecting lower spending by several large clients after organizational changes. Management reported renewed year-over-year Tech Flex growth on a billing-day basis in the fourth quarter.
- FA: Revenue increased 3.6% to $337.6 million. Flex revenue increased 4.4%, supported by growth in broader and centralized finance and accounting projects.
- GS: Revenue increased 1.3% to $98.6 million. The segment included a product-based trauma-training business representing approximately 16% of GS revenue.
- Flex: Revenue increased 0.3% to $1,269.3 million. Total Flex gross margin fell to 28.2% from 28.5%.
- Direct Hire: Revenue declined 6.8% to $50.4 million. Placements declined 4.6% to 3,722, while the average placement fee declined 2.3% to $13,543.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but profitability declined because gross profit fell $5.6 million and SG&A increased $10.8 million.
- Flex margin declined 30 basis points, primarily due to higher benefit costs, lower margins on certain GS recompete wins, and Tech pricing and spread compression at larger clients.
- 2016 included approximately $6.0 million of severance costs related to organizational realignment and $2.2 million of sales transformation costs. Management estimated after-tax impacts of approximately $3.5 million and $1.2 million, respectively.
- Operating cash flow declined to $39.4 million from $70.2 million. Management attributed the reduction to lower earnings, severance and transformation spending, technology and talent investments, and the transition of certain back-office processes from Manila to Tampa, which affected collections timing.
- Capital expenditures increased to $12.4 million from $8.3 million, reflecting continued investment in infrastructure and technology.
- Shares outstanding were reduced through approximately 2.3 million open-market repurchases costing $44.0 million. Total repurchases, including tax-withholding-related transactions, were $46.0 million.
- Quarterly dividends increased to $0.12 per share, producing $0.48 per share for the year versus $0.45 in 2015.
Debt, liquidity, guidance, and risks
- Borrowings under the secured revolving credit facility increased to $111.5 million at December 31, 2016, from $80.5 million. The facility has maximum borrowing capacity of $170.0 million, plus a $50.0 million accordion option, and expires December 23, 2019.
- Availability under the credit facility was $41.4 million at year-end. As of February 22, 2017, borrowings were $117.2 million and availability was $35.7 million. The fixed-charge coverage covenant was not applicable at year-end, and repurchases and distributions were not restricted.
- Working capital was $140.2 million, cash and cash equivalents were $1.5 million, total assets were $365.4 million, total liabilities were $243.7 million, and stockholders’ equity was $121.7 million.
- Management stated that existing cash, operating cash flow, and available borrowings should be adequate for operating, capital expenditure, and working-capital needs for at least the next 12 months, subject to economic and market conditions.
- Management expected Tech Flex, FA, and GS revenue to grow year over year in 2017. GS growth was expected to benefit partly from opportunities under the T4 Next Generation contract awarded in March 2016. The filing does not provide quantified 2017 revenue or earnings guidance.
- Principal risks include economic cyclicality, client concentration and pricing pressure, difficulty recruiting and retaining skilled consultants, wage-and-hour and worker-classification claims, immigration restrictions affecting foreign-national staffing, cybersecurity and data privacy incidents, government-contracting compliance, federal budget reductions, accounts-receivable collection risk, interest-rate and covenant risk, and potential goodwill impairment.
- Kforce disclosed a putative wage-and-hour class action involving alleged unpaid pre- and post-shift work by telephone-dedicated workers. The company could not estimate a loss range but believed the matter was unlikely to have a material adverse effect based on information then available.
- Goodwill totaled $46.0 million at year-end. No goodwill or other intangible-asset impairment was recorded in 2016; however, the company noted that deterioration in valuation assumptions could result in a future material charge.
Important facts for investors to verify
- Whether the reported fourth-quarter Tech Flex reacceleration continued in 2017 and offset weakness in Direct Hire revenue.
- Whether Flex gross-margin pressure from benefit costs, volume rebates, pricing, and client concentration persists.
- Operating cash-flow conversion and collections following the Manila-to-Tampa back-office transition.
- Credit-facility availability, borrowing levels, interest rates, and compliance with covenants that could restrict dividends or repurchases.
- The outcome and potential exposure from the wage-and-hour class action and other employment-related claims.
- Execution and return on investment from the sales transformation, technology upgrades, and revenue-generating talent investments.
- Future federal budget, procurement, contract-renewal, and T4 Next Generation developments affecting GS.