Kforce Inc. 10-Q Summary
Business Context and Reporting Period
Kforce provides domestic U.S. technology and finance and accounting talent solutions through its Technology and Finance and Accounting segments. The unaudited report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Kforce had approximately 2,100 associates and 10,100 consultants on assignment at quarter-end.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $437.6 million | $402.7 million | $1,291.1 million | $1,169.6 million |
| Gross profit | $126.7 million | $119.3 million | $381.6 million | $336.9 million |
| Gross margin | 29.0% | 29.6% | 29.6% | 28.8% |
| Income from operations | $31.3 million | $29.3 million | $92.9 million | $81.8 million |
| Net income | $22.3 million | $20.2 million | $68.4 million | $54.6 million |
| Diluted EPS | $1.09 | $0.96 | $3.31 | $2.57 |
| Adjusted EBITDA | $36.8 million | $33.8 million | $117.5 million | $93.7 million |
- Technology revenue increased 15.8% in Q3 and 22.4% in the first nine months. Finance and Accounting revenue declined 28.0% in Q3 and 35.5% year to date, primarily because COVID-19-related work declined and the business was repositioned toward higher-skilled roles.
- Flex revenue increased 8.7% in Q3 and 9.7% year to date. Direct Hire revenue increased 8.1% in Q3 and 32.4% year to date.
- Q3 operating margin was 7.2%, compared with 7.3% in the prior-year quarter; the nine-month operating margin was 7.2%, compared with 7.0%.
- Cash provided by operating activities was $78.1 million for the first nine months, compared with $59.9 million in 2021. Free cash flow was $73.4 million, compared with $54.9 million.
- Capital expenditures were $4.7 million. Investing cash outflows included a $4.5 million note receivable issued to WorkLLama and a $0.5 million joint-venture contribution.
- Cash and cash equivalents were $5.1 million at September 30, 2022, versus $97.0 million at December 31, 2021. Trade receivables were $281.1 million.
- The $100.0 million credit-facility balance was repaid in May 2022. No borrowings were outstanding at quarter-end, with approximately $198.7 million of availability, subject to covenants. The facility matures in October 2026.
- Financing cash outflows included $42.1 million of share repurchases and $18.2 million of dividends. The company returned approximately $60.8 million to shareholders during the first nine months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Technology, higher Technology consultant volumes and bill rates, and stronger Direct Hire activity.
- Finance and Accounting Flex hours billed declined 46.1% in Q3 and 54.2% for the first nine months, reflecting the planned reduction of COVID-19-related work and repositioning efforts.
- Nine-month gross margin improved 80 basis points, primarily from a higher Direct Hire mix, improved Flex margins and the runoff of lower-margin COVID-19 work. Q3 gross margin declined 60 basis points because of greater consultant paid-time-off utilization and slight Technology Flex spread compression.
- SG&A increased to 22.1% of nine-month revenue from 21.5%, driven by higher performance-based compensation, business investments and the absence of the prior-year gain on the sale of the corporate headquarters.
- The company paid $20.0 million in July 2022 to settle benefits under the terminated Supplemental Executive Retirement Plan.
- Other income for the first nine months included a $4.1 million gain from terminating an interest-rate swap. Kforce had no outstanding swaps at September 30, 2022.
Guidance, Outlook, Risks and Unusual Items
- Management expected fourth-quarter Technology revenue growth in the high single digits year over year and sequential growth. Finance and Accounting Flex revenue was expected to increase in the low single digits sequentially, partly due to Hurricane Ian recovery work.
- Management noted that third-quarter demand trends were below 2021 and first-half 2022 levels but remained above pre-pandemic levels. Inflation, rapidly rising interest rates and potential economic slowing were identified as risks to demand and liquidity.
- Management stated that existing cash, operating cash flow and available credit were expected to meet operating, working-capital and capital-expenditure needs for at least the next 12 months, while cautioning that economic deterioration, additional investments, repurchases or dividends could affect liquidity.
- WorkLLama generated a $2.7 million equity-method loss in the first nine months. Its carrying value was not impaired as of June 30, but estimated fair value exceeded carrying value by less than 10%, making the investment sensitive to forecast, discount-rate and market-multiple assumptions.
- Kforce had reached preliminary settlements in certain California wage-and-hour matters, subject to court approval. Other wage-and-hour and overtime proceedings remained unresolved; loss estimates were not clear for several matters.
- The company disclosed employment-agreement liabilities of approximately $38.2 million following a change in control, or $13.7 million without a change in control, if specified executives were terminated under qualifying circumstances.
- A new Tampa headquarters lease commenced for accounting purposes in October 2022, with approximately $10.9 million of aggregate future lease payments and payments beginning July 1, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Important Facts for Investors to Verify
- Confirm the sustainability of Technology growth and bill-rate gains amid moderating staffing demand and macroeconomic uncertainty.
- Monitor whether the Finance and Accounting repositioning offsets the continued decline in COVID-19-related revenue and consultant hours.
- Assess liquidity after the credit-facility repayment, substantial shareholder returns and the relatively low $5.1 million cash balance.
- Review WorkLLama’s operating performance and valuation sensitivity, including the risk of a future impairment charge.
- Track court approval and ultimate costs of the California wage-and-hour settlements and unresolved litigation.
- Reconcile reported GAAP results with non-GAAP Adjusted EBITDA and Free Cash Flow, including the effects of the swap gain, stock compensation and other excluded items.