Kforce Inc. 2013 Q3 Form 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary and permanent professional staffing services through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. The company operates primarily in the United States, with international operations representing approximately 2% of revenue. This unaudited report covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net service revenues | $299.7 million | $270.2 million | $849.0 million | $812.6 million |
| Revenue growth | 10.9% | — | 4.5% | — |
| Gross profit | $97.3 million | $88.8 million | $273.5 million | $259.4 million |
| Gross margin | 32.5% | 32.9% | 32.2% | 31.9% |
| Income from operations | $15.5 million | $15.7 million | $32.6 million | $(64.3) million |
| Operating margin | 5.2% | 5.8% | 3.8% | (7.9)% |
| Net income (loss) | $9.0 million | $9.3 million | $19.0 million | $(19.8) million |
| Diluted EPS | $0.27 | $0.26 | $0.56 | $(0.55) |
| Adjusted EBITDA | $18.3 million | $18.4 million | $41.0 million | $35.0 million |
Flex revenue increased 11.5% in Q3 and 4.6% year to date; Search revenue declined 1.0% in Q3 but increased 1.4% year to date. Flex gross margin was 29.6% in Q3, unchanged year over year, and 29.1% year to date versus 28.7% in 2012. SG&A was $79.3 million in Q3 and $233.5 million year to date, representing 26.5% and 27.5% of revenue, respectively.
At September 30, 2013, cash and cash equivalents were $0.8 million, trade receivables were $181.9 million, total assets were $362.3 million, and stockholders’ equity was $164.2 million. Total debt was approximately $55.1 million, including $53.4 million outstanding under the credit facility. Working capital was $102.6 million and the current ratio was 2.0.
For the nine months, operating cash flow was $3.8 million, investing cash flow was $(6.8) million, and financing cash flow was $2.4 million. Capital expenditures were $6.0 million. Trade receivables increased cash usage by $31.3 million, primarily due to revenue growth and collection timing.
Material Changes Versus the Prior Comparable Period
- Year-to-date revenue increased 4.5%, led by Technology revenue growth of 6.7% and Government Solutions growth of 4.5%. Finance and Accounting and Health Information Management revenue declined slightly.
- Year-to-date net income improved by $38.8 million, from a $19.8 million loss to $19.0 million of income. The 2012 period included a $65.3 million goodwill impairment charge and a $31.3 million acceleration of equity-award compensation expense.
- Year-to-date operating income improved to $32.6 million from a $64.3 million operating loss, but Q3 operating income declined modestly despite higher revenue because SG&A increased to 26.5% of revenue from 26.0%.
- Debt under the credit facility increased from $21.0 million at December 31, 2012 to $53.4 million at September 30, 2013, primarily in connection with share repurchases.
- Kforce repurchased approximately 1.8 million shares during the first nine months at a cost of approximately $26.6 million; $63.3 million remained available under the authorization at September 30.
- Cash from operations declined from $27.8 million in the prior-year period to $3.8 million, principally because of the increase in receivables.
Guidance, Outlook, Risks and Unusual Items
- Management expected Technology revenue to continue growing, Health Information Management revenue to remain stable to improving, and Government Solutions revenue to remain flat for the remainder of 2013. Search revenue was expected to stabilize, and Flex gross margins were expected to remain generally stable.
- Management cited improving temporary-staffing penetration and demand for technology skills as growth opportunities, while noting uncertainty related to the U.S. economy, political conditions, tax changes, geopolitical risks, health-care reform, and federal spending.
- The 16-day federal government shutdown created uncertainty for Government Solutions. Management remained cautiously optimistic but could not predict the effect of federal budget reductions on customer agencies.
- In October 2013, Kforce began a plan to streamline leadership and support functions. The company expected a pre-tax charge of $6.0 million to $7.0 million in the fourth quarter of 2013.
- A California class-action lawsuit alleges unpaid compensation and related wage-and-hour violations involving employee interviews and other practices. The potential loss was not reasonably estimable, and no liability was recorded.
- Management believed existing cash, operating cash flow, and credit-facility availability would satisfy operating and capital requirements for at least the next 12 months. The credit facility had $33.0 million of availability at September 30, 2013 and expires September 20, 2016.
- The credit facility is secured by substantially all company assets and includes availability and fixed-charge coverage covenants. Failure to maintain required availability could result in a covenant breach.
- The 2012 Kforce Clinical Research divestiture is presented as discontinued operations. The 2012 year-to-date results included a $21.8 million after-tax gain from discontinued operations, limiting comparability.
Important Facts for Investors to Verify
- Assess whether revenue growth, particularly in Technology, can offset weaker or flat trends in Finance and Accounting, Health Information Management, and Government Solutions.
- Monitor receivable collections, operating cash conversion, and the effect of working-capital needs on liquidity.
- Review credit-facility availability, borrowing-base calculations, interest rates, and compliance with covenant requirements.
- Evaluate the impact and timing of the expected $6.0 million to $7.0 million restructuring charge in Q4 2013.
- Separate recurring operating performance from the 2012 goodwill impairment, equity-award acceleration, and discontinued-operations gain.
- Track developments in the California wage-and-hour litigation and any potential indemnification or employment-related obligations.