Kforce Inc. 2014 Form 10-K Summary
Business context and reporting period
Kforce provides professional and technical staffing services through Technology, Finance and Accounting, and Government Solutions segments. The filing covers the fiscal year ended December 31, 2014; the source is an annual report rather than a standalone fourth-quarter filing. Kforce operated 62 U.S. field offices and one Manila office, employed approximately 2,600 associates, and had more than 11,000 consultants on assignment at year-end.
- Technology represented 69.2% of continuing revenue, Finance and Accounting 22.7%, and Government Solutions 8.1%.
- Flexible staffing represented 96.2% of revenue; Search represented 3.8%.
- Approximately 98% of revenue was generated in the United States, and no customer represented more than 5% of annual revenue.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net service revenue | $1.217 billion | $1.074 billion | 13.4% increase |
| Gross profit | $374.6 million | $344.4 million | 8.8% increase |
| Gross margin | 30.8% | 32.1% | 130 basis-point decline |
| SG&A expense | $315.3 million | $307.9 million | 2.4% increase |
| SG&A as a percentage of revenue | 25.9% | 28.7% | 280 basis-point improvement |
| Income from continuing operations | $29.4 million | $5.3 million | Increase of $24.1 million |
| Net income | $90.9 million | $10.8 million | Increase of $80.1 million |
| Diluted EPS from continuing operations | $0.93 | $0.16 | Increase |
| Diluted EPS | $2.87 | $0.32 | Increase |
| Adjusted EBITDA | $62.2 million | $39.1 million | 58.3% increase |
Flex revenue increased 14.2% to $1.171 billion, while Search revenue declined 3.6% to $46.7 million. Flex gross margin fell to 28.0% from 28.9%, primarily because growth was concentrated among larger, lower-margin clients and benefit costs increased. Segment revenue increased 13.9% in Technology, 14.2% in Finance and Accounting, and 6.6% in Government Solutions.
- Cash used in operating activities was $25.6 million, compared with $0.5 million of cash provided in 2013, mainly reflecting a $40.3 million increase in trade receivables and timing of collections.
- Investing activities generated $110.5 million, including $117.9 million of proceeds from the HIM divestiture; capital expenditures were $6.0 million.
- Financing activities used $84.6 million, including $101.8 million for share repurchases and $12.8 million for dividends.
- Year-end cash was $1.2 million, working capital was $130.2 million, and the current ratio was 2.4.
- Credit-facility borrowings were $93.3 million versus $62.6 million at year-end 2013. The facility had $39.6 million of availability and a $170 million borrowing capacity, with a $50 million accordion option.
- Total assets were $363.9 million and stockholders’ equity was $139.4 million at December 31, 2014.
Material changes versus the prior comparable period
- Kforce sold its Health Information Management business in August 2014 for $119.0 million plus a $96 thousand working-capital adjustment. The transaction produced a $94.3 million pretax gain, or $56.1 million after tax, and the business was classified as discontinued operations.
- Income from discontinued operations was $61.5 million in 2014 versus $5.5 million in 2013; therefore, reported net income and total EPS were substantially affected by the divestiture.
- Kforce repurchased approximately 4.8 million shares for about $101.6 million during 2014; approximately 4.9 million shares were repurchased under the authorized program at a total cost of about $102.9 million. The remaining authorization was $29.7 million at year-end.
- The quarterly dividend increased from $0.10 to $0.11 per share in December 2014. Total dividends declared were $0.41 per share for the year.
- The credit facility was amended in December 2014, increasing borrowing capacity by $35 million to $170 million and increasing the accordion option from $15 million to $50 million.
- No goodwill impairment was recorded in 2014. This compares with a $14.5 million pretax Government Solutions impairment charge in 2013.
- Kforce terminated its Supplemental Executive Retirement Health Plan and paid approximately $3.9 million to settle future obligations, recording a $0.7 million net settlement loss.
Guidance, outlook, risks and unusual items
Management expected Technology and Finance and Accounting to continue year-over-year growth in 2015, while Government Solutions was expected to remain approximately flat. Management expected Flex gross margins to remain stable relative to 2014 and planned continued selective hiring of revenue-generating associates. Industry forecasts cited by management projected 2015 growth of approximately 7% in temporary technology staffing and 5% in temporary finance and accounting staffing.
- Government Solutions faced contract re-competes in 2015, increased emphasis on lowest-bid awards, federal budget uncertainty, sequestration risk, and possible project delays.
- The Government Solutions goodwill balance had only a 7% estimated fair-value cushion over carrying value at December 31, 2014; deterioration in forecasts, discount rates, market multiples, or government demand could lead to future impairment.
- Key operating risks include economic cyclicality, pricing pressure, competition for qualified professionals, employee retention, accounts-receivable collection risk, payroll and benefit cost increases, and dependence on information systems.
- Additional risks include employment-law and independent-contractor claims, privacy and cybersecurity breaches, immigration restrictions affecting H-1B personnel, federal procurement compliance, government audits, and contract termination or debarment.
- The company reported ordinary-course litigation as not expected to be material. A False Claims Act and whistleblower lawsuit had its federal claims dismissed with prejudice in November 2014 and was pending on appeal.
- Executive employment agreements could require approximately $19.2 million of payments following a change in control or approximately $41.6 million absent a change in control if specified termination conditions occurred; no liability was recorded.
- The company stated that existing cash, operating cash flow, and available credit were expected to meet operating and capital requirements for at least the next 12 months, but noted dependence on lender availability and receivable-backed borrowing capacity.
Important facts for investors to verify
- Separate recurring operating performance from the $56.1 million after-tax gain on the HIM sale included in 2014 discontinued operations.
- Reconcile the reported cash-flow deficit with net income, particularly the effects of receivables, income-tax payments, and divestiture proceeds.
- Monitor credit-facility utilization, borrowing-base availability, covenant thresholds, interest rates, and the effect of share repurchases on leverage.
- Assess whether Technology and Finance and Accounting growth can offset lower Search revenue and the expected flat Government Solutions outlook.
- Track Flex gross-margin trends, consultant pay and benefit costs, client mix, and pricing spreads.
- Review Government Solutions contract re-competes and the narrow goodwill valuation cushion.
- Consider the concentration of reported 2014 earnings in discontinued operations and the sustainability of the dividend and repurchase program.