Kforce Inc. 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 filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Kforce sold Kforce Clinical Research, Inc. (KCR) on March 31, 2012; KCR is reported as discontinued operations.
Financial results and key metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net service revenues | $274.1 million | $248.0 million | $542.5 million | $484.4 million |
| Gross profit | $89.8 million | $79.6 million | $170.6 million | $151.0 million |
| Gross margin | 32.7% | 32.1% | 31.4% | 31.2% |
| SG&A expense | $71.4 million | $68.4 million | $179.5 million | $132.0 million |
| Income from continuing operations | $(33.2) million | $4.8 million | $(50.9) million | $7.6 million |
| Net income | $(33.2) million | $6.8 million | $(29.1) million | $11.6 million |
| Basic EPS | $(0.90) | $0.17 | $(0.82) | $0.29 |
| Adjusted EBITDA | $18.3 million | $13.9 million | $16.6 million | $24.5 million |
Revenue increased 10.5% in the quarter and 12.0% year to date. Flex revenue increased 10.5% and 12.0%, respectively, while search revenue increased 10.4% and 11.3%. Flex gross margin was 29.3% in the quarter and 28.2% year to date, compared with 28.6% and 27.9% in the prior-year periods.
Quarterly SG&A was 26.1% of revenue versus 27.6% in the prior year. Year-to-date SG&A increased to 33.1% of revenue from 27.2%, primarily because of $31.3 million of accelerated stock-based compensation and payroll taxes related to accelerated vesting of equity awards following the KCR sale.
Segment performance and material changes
- Technology: Revenue increased 11.1% in the quarter and 13.3% year to date; it represented approximately 62% of total revenue.
- Finance and Accounting: Revenue increased 11.1% in the quarter and 11.5% year to date.
- Health Information Management: Revenue increased 19.1% in the quarter and 20.3% year to date. Management expected third-quarter revenue pressure as several large projects were scheduled to conclude.
- Government Solutions: Revenue declined 1.8% in the quarter and 1.7% year to date. Delays in starting funded federal projects, uncertainty regarding federal budgets, and contracting personnel shortages caused a significant deterioration in the outlook.
Kforce recorded a $65.3 million estimated goodwill impairment charge for Government Solutions. The reporting unit’s estimated fair value was 61% of its carrying value, leaving $37.3 million of Government Solutions goodwill. The related tax benefit was $23.3 million. Management stated that the impairment estimate could be adjusted in a subsequent period.
Cash flow, liquidity, debt, and capital allocation
- Cash provided by operating activities was $7.7 million for the first six months of 2012, compared with $10.9 million in 2011.
- Investing activities provided $45.1 million, principally reflecting $48.3 million of net proceeds from the KCR disposition. Capital expenditures were $2.9 million.
- Financing activities used $52.9 million, including $38.5 million of net repayments under the bank line and $16.3 million of share repurchases.
- Cash and cash equivalents were $0.8 million at June 30, 2012, compared with $0.9 million at December 31, 2011.
- Working capital was $105.4 million and the current ratio was 2.1 at June 30, 2012.
- Credit-facility debt was $11.0 million, with approximately $75.0 million available at June 30, 2012. As of August 2, 2012, borrowings were zero and availability was $86.2 million.
- The credit facility matures September 20, 2016 and is secured by substantially all assets other than the Tampa headquarters real estate.
- Letters of credit outstanding totaled approximately $3.7 million. Kforce had $67.9 million remaining under its $150.0 million share-repurchase authorization.
Management believed available cash, operating cash flow, and credit-facility availability would meet operating and capital requirements for at least the next 12 months, while noting that economic deterioration or reduced lender capacity could adversely affect liquidity.
Discontinued operations, outlook, risks, and contingencies
- KCR was sold for a $50.0 million cash purchase price, subject to a working-capital adjustment. Kforce received an additional $7.3 million on July 2, 2012. The six-month results included a $36.6 million pretax gain and $21.8 million of after-tax discontinued-operation income.
- Kforce provided transition services to the purchaser for up to 18 months and could be responsible for specified indemnification claims. Management considered the exposure remote and recorded no indemnification liability.
- Management was cautiously optimistic about Technology, Finance and Accounting, and the broader temporary-staffing market, and expected Flex gross margins to expand during the remainder of 2012.
- Management expected Government Solutions revenue to be broadly flat for full-year 2012 compared with 2011 after repositioning the business, but identified federal spending and contract-administration uncertainty as significant risks.
- Recorded contingencies included approximately $1.6 million for state tax audits and $1.55 million for an anticipated EEOC settlement, partially offset by an expected insurance recovery of approximately $0.8 million. The tax audits were settled in July 2012 for approximately the accrued amount.
- Executive employment agreements could require approximately $12.9 million of payments absent a change in control, or approximately $61.7 million following qualifying terminations after a change in control; no liability was recorded.
- Disclosure controls were reported effective, and management reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the $65.3 million Government Solutions goodwill impairment estimate was subsequently finalized or adjusted.
- The sustainability of Government Solutions revenue, margins, contract starts, and federal-budget exposure.
- The effect of the KCR divestiture and transition-services arrangement on future revenue, cash flow, and reported comparisons.
- Whether year-to-date SG&A normalizes after the one-time accelerated equity-award expense.
- Trade-receivable collections and allowance adequacy, given $179.4 million of net receivables and $23.8 million of operating cash usage from receivables growth.
- Compliance with credit-facility availability and fixed-charge coverage requirements if operating results or borrowing availability deteriorate.