Kforce Inc. 2015 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kforce provides professional staffing and solutions through its Technology, Finance and Accounting, and Government Solutions segments. The report covers the three and six months ended June 30, 2015, and was filed August 5, 2015. Results are presented primarily on a continuing-operations basis following the August 2014 divestiture of the Health Information Management business.
International operations represented less than 2% of net service revenues. Quarterly results are affected by billing days and seasonality, including employment-tax resets that typically affect the first quarter.
Financial Performance
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net service revenues | $337.4 million | $302.8 million | $650.0 million | $584.8 million |
| Gross profit | $106.0 million | $94.4 million | $200.8 million | $177.9 million |
| Income from operations | $20.4 million | $13.6 million | $30.4 million | $21.0 million |
| Income from continuing operations | $11.6 million | $8.0 million | $17.4 million | $12.3 million |
| Net income | $11.6 million | $10.7 million | $17.4 million | $17.0 million |
| Diluted EPS from continuing operations | $0.41 | $0.24 | $0.61 | $0.37 |
| Adjusted EBITDA | $24.0 million | $16.5 million | $37.7 million | $27.1 million |
Q2 revenue increased 11.4%, while six-month revenue increased 11.1%. Six-month revenue growth was led by Finance and Accounting, up 18.1%, Technology, up 9.4%, and Government Solutions, up 7.4%. Flex revenue increased 10.8% for the six-month period and Direct Hire revenue increased 19.0%.
Six-month gross margin was 30.9%, compared with 30.4% in the prior-year period. Flex gross margin increased to 28.0% from 27.7%, primarily because of lower benefit costs and a more favorable payroll-tax environment. SG&A declined to 25.5% of revenue from 26.0%, contributing to operating leverage. The effective tax rate was 40.0%, compared with 39.0%.
Q2 and six-month net income comparisons are affected by the absence of the divested HIM business. HIM contributed $2.8 million of after-tax income in Q2 2014 and $4.6 million in the first six months of 2014. Accordingly, continuing-operations earnings and EPS provide the more meaningful comparison.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Six-month operating cash flow was $26.0 million, compared with $12.1 million in the prior-year period, primarily reflecting revenue growth and collection timing.
- Capital expenditures were $3.6 million, compared with $3.1 million.
- Cash used in financing activities was $22.0 million, including $17.7 million of share repurchases and $6.2 million of dividends.
- Cash and cash equivalents were $1.7 million at June 30, 2015, versus $1.2 million at December 31, 2014.
- Working capital was $132.9 million and the current ratio was 2.3 at June 30, 2015.
- Credit-facility borrowings were $93.6 million, compared with $93.3 million at year-end 2014. The facility has a $170.0 million maximum borrowing capacity, subject to borrowing-base limitations, and expires December 23, 2019.
- Availability under the credit facility was $52.9 million at June 30, 2015. At July 31, 2015, borrowings were $86.9 million and availability was $66.7 million.
- Letters of credit outstanding totaled $3.6 million, comprising $3.1 million for insurance coverage and $0.5 million for facility lease deposits.
Material Changes Versus the Prior Comparable Period
- Revenue, gross profit, operating income, continuing-operations income, and diluted continuing-operations EPS all increased materially.
- Flex hours in Technology and Finance and Accounting increased 12.6% for the first six months, while total Direct Hire placements increased 9.6%.
- Technology represented 68.6% of six-month revenue, Finance and Accounting 23.7%, and Government Solutions 7.7%; Finance and Accounting increased its mix while Technology and Government Solutions declined modestly.
- Weighted-average diluted shares declined to 28.4 million from 32.9 million, principally reflecting share repurchases, which amplified EPS growth.
- Stock-based compensation increased to $2.9 million from $1.4 million for the first six months.
- Other expense increased to $1.4 million from $0.8 million, including a $0.5 million remeasurement of contingent consideration.
- Kforce repurchased approximately 687,000 shares in the first six months for approximately $15.6 million. On July 31, 2015, the board increased the repurchase authorization by $60.0 million.
Outlook, Commentary, Risks, and Unusual Items
Management remained optimistic about temporary staffing demand, citing positive employment trends, a 2.05% temporary-staffing penetration rate in June 2015, expected growth in Technology and Finance and Accounting staffing, and productivity gains from recently added revenue-generating personnel. Management expected Government Solutions revenue to remain fairly stable in the near term because of continued uncertainty in the government environment.
Kforce expects to continue quarterly dividends at an amount similar to the June 2015 dividend of $0.11 per share, although dividends remain discretionary and require board approval each quarter. Management stated that existing cash, operating cash flow, and credit-facility availability should satisfy expected requirements for at least the next 12 months.
- Key operating risks include economic weakness, changes in temporary-staffing demand, competition for qualified candidates, skill shortages, retention of revenue-generating personnel, customer concentration and collection risk, and government-market uncertainty.
- Credit-facility availability and borrowing-base changes could restrict dividends or share repurchases and could trigger covenant requirements if availability falls below specified thresholds.
- Interest-rate risk is limited but present: a hypothetical 10% increase in rates would increase annual interest expense by approximately $0.1 million. The weighted-average effective rate was 1.6% at June 30, 2015.
- Routine litigation was not expected to have a material effect, and the appeal in the disclosed False Claims Act-related matter was dismissed with prejudice on May 14, 2015.
- Kforce disclosed potential executive employment-agreement obligations of approximately $41.2 million following a change in control, or $19.2 million absent a change in control; no liability was recorded because triggering events had not occurred.
- The company had indemnification obligations related to the HIM sale, generally subject to an aggregate cap of $8.925 million, but considered material exposure remote and recorded no liability.
- Management identified no material changes to previously disclosed risk factors and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Confirm that revenue growth is sustained by consultant hours and placements rather than primarily by pricing or one-time items.
- Monitor Flex gross margins, benefit costs, payroll taxes, and the bill-rate/pay-rate spread.
- Track accounts receivable growth, collections, bad-debt provisions, and borrowing-base availability.
- Assess the effect of continued share repurchases and dividends on leverage, liquidity, and diluted share count.
- Separate continuing-operations performance from the prior-year contribution of the divested HIM business.
- Review contingent consideration, executive benefit obligations, HIM indemnification exposure, and other litigation contingencies.
- Verify the status of the expanded $60.0 million repurchase authorization and subsequent borrowing levels.