Kforce Inc. FY2011 Form 10-K Summary
Business context and reporting period
Kforce is a U.S.-focused provider of professional and technical staffing services and solutions, operating through Technology, Finance and Accounting, Clinical Research, Health Information Management, and Government Solutions segments. The report covers the fiscal year ended December 31, 2011, with comparative results for 2010 and 2009. Kforce had approximately 2,200 internal associates and 11,100 consultants on assignment at year-end.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net service revenues | $1,110.9 million | $990.8 million | +12.1% |
| Gross profit | $346.3 million | $312.4 million | +10.9% |
| Gross margin | 31.2% | 31.5% | Down 30 basis points |
| SG&A | $289.0 million | $265.2 million | +9.0% |
| SG&A as a percentage of revenue | 26.0% | 26.8% | Down 80 basis points |
| Income from operations | $44.6 million | $34.6 million | +28.9% |
| Net income | $27.2 million | $20.6 million | +31.6% |
| Diluted EPS | $0.70 | $0.51 | +37.3% |
| Adjusted EBITDA | $69.3 million | $53.2 million | +30.3% |
| Cash flow from operations | $31.2 million | $28.6 million | +9.3% |
Flex revenue increased 12.1% to $1,066.4 million, while Search revenue increased 13.1% to $44.5 million. Flex gross profit margin declined to 28.3% from 28.7%, primarily due to higher statutory payroll and unemployment taxes, partly offset by improved bill-to-pay spreads. The effective income tax rate was 37.3%, compared with 38.1% in 2010.
Cash used in investing activities was $10.1 million, including $6.5 million of capital expenditures. Financing activities used $21.3 million, primarily reflecting $58.1 million of open-market share repurchases. Cash and cash equivalents were $0.9 million at year-end. Working capital increased to $103.1 million from $64.9 million, and the current ratio improved to 2.2 from 1.6.
Credit Facility borrowings were $49.5 million at December 31, 2011, compared with $10.8 million at December 31, 2010. The facility provides up to $100 million of revolving borrowing capacity, subject to borrowing-base limitations, and expires in September 2016. Reported availability was $35.9 million at year-end. The weighted-average effective interest rate was 1.80%.
Material changes versus the prior comparable period
- Technology revenue grew 15.9% to $624.0 million and represented 56.2% of total revenue.
- Finance and Accounting revenue grew 17.3% to $219.6 million.
- Health Information Management revenue grew 19.0% to $68.7 million, with Flex gross margin improving 170 basis points.
- Clinical Research revenue increased only 1.9% to $106.2 million and represented 9.5% of total revenue.
- Government Solutions revenue declined 10.4% to $92.4 million; gross margin declined to 30.7% from 32.2%.
- Total Flex hours increased 14.3% to 17.5 million, and total permanent placements increased 9.9% to 3,327.
- Kforce repurchased approximately 5.7 million shares for approximately $58.1 million in open-market purchases, contributing to higher borrowings and lower stockholders’ equity.
- Goodwill remained $138.1 million. No goodwill impairment was recorded, but the Government Solutions reporting unit’s estimated fair value exceeded carrying value by only 9%.
- The company separated Clinical Research and Health Information Management into distinct reportable segments in 2011 because of differing economic characteristics.
Guidance, outlook, risks and unusual items
- Management expected continued 2012 growth in Technology, Finance and Accounting, and Health Information Management, and anticipated a slight increase in Flex gross margin.
- Management expected Government Solutions revenue growth in 2012 from repositioning toward commercial opportunities, while acknowledging continued federal budget, procurement, in-sourcing and funding risks.
- A major Clinical Research customer, representing 50.5% of KCR revenue and 4.8% of total Kforce revenue, stated that it intended to migrate substantially all KCR services to other vendors, potentially by December 2012. Kforce was evaluating strategic alternatives, including a sale, joint ventures, acquisitions, or continued operation.
- The Department of Health and Human Services delayed the ICD-10 implementation date for an unspecified period. Management did not expect the delay to have a material adverse effect on Health Information Management.
- Kforce recorded a $2.5 million settlement accrual for a California class action involving alleged account-manager misclassification. An EEOC age-discrimination matter remained unresolved, with no loss accrued because the outcome could not be reasonably estimated.
- Kforce operated under a Department of the Interior Administrative Agreement relating to Government Solutions, scheduled to continue through December 29, 2012. Discussions were underway regarding a possible extension following a self-reported federal billing issue.
- Key risks include employment-law and independent-contractor claims, payroll-tax and health-care cost increases, federal contracting and budget uncertainty, customer concentration in KCR, information-security failures, immigration restrictions affecting technical staffing, litigation, and potential goodwill impairment.
- Management stated that existing cash, operating cash flow, and available credit were expected to satisfy operating and capital requirements for at least the next 12 months, subject to economic conditions and lender availability.
Most important facts for investors to verify
- Whether the KCR customer migration occurs as expected and the resulting effect on KCR revenue, margins, goodwill, and strategic plans.
- Whether Government Solutions recovers from the 2011 revenue decline and whether federal budget and procurement constraints persist.
- Credit Facility availability, borrowing levels, covenant compliance, interest costs, and the effect of further share repurchases on leverage.
- Flex gross margin trends, particularly the impact of unemployment taxes, health-care costs, pricing, and consultant pay rates.
- The sensitivity of the $102.6 million Government Solutions goodwill balance to changes in forecasts, discount rates, and long-term growth assumptions.
- Developments in the EEOC proceeding, federal administrative agreement, government billing matter, and other employment-related litigation.
- Cash conversion and working-capital requirements, given the staffing model’s significant payroll obligations and receivables balance.