Kforce Inc. Form 10-Q Summary
Business context and reporting period
Kforce provides technology and finance and accounting talent solutions through its Technology and Finance and Accounting segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared primarily with the corresponding 2022 periods. At June 30, 2023, Kforce employed approximately 2,000 associates and had approximately 9,000 consultants on assignment.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $389.2 million | $436.5 million | $795.2 million | $853.5 million |
| Gross profit | $110.3 million | $131.1 million | $224.2 million | $255.0 million |
| Gross margin | 28.3% | 30.0% | 28.2% | 29.9% |
| Income from operations | $25.9 million | $33.8 million | $49.3 million | $61.6 million |
| Net income | $18.6 million | $26.9 million | $34.8 million | $46.1 million |
| Diluted EPS | $0.95 | $1.30 | $1.77 | $2.22 |
| Operating cash flow | Not separately provided | Not separately provided | $40.4 million | $70.8 million |
| Free cash flow | Not separately provided | Not separately provided | $35.5 million | $67.3 million |
- Six-month Technology revenue declined 3.7% to $716.9 million; Finance and Accounting revenue declined 28.1% to $78.3 million.
- Six-month Flex revenue declined 5.8% to $774.0 million, while Direct Hire revenue declined 33.6% to $21.2 million.
- Six-month Flex gross margin was 26.2%, down from 27.1%; management cited tighter pricing, higher healthcare costs and client-mix changes.
- SG&A declined to 21.7% of revenue from 22.4%, primarily because of lower performance-based compensation and lower professional fees.
- Adjusted EBITDA was $31.6 million in Q2 and $60.5 million for the six months, compared with $39.3 million and $72.6 million, respectively, in 2022.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $0.1 million at June 30, 2023, compared with $0.1 million at December 31, 2022. Trade receivables were $249.9 million.
- Debt outstanding under the credit facility was $24.6 million, down from $25.6 million at year-end 2022. Borrowing availability was $174.2 million, subject to covenants.
- The credit facility matures October 20, 2026. In June 2023, Kforce amended it to replace LIBOR-based benchmarks with SOFR-based rates. Kforce reported compliance with all financial covenants.
- Six-month financing cash outflows included $24.6 million of share repurchases and $13.9 million of dividends. Kforce returned approximately $38.0 million to shareholders.
- Approximately $84.9 million remained available under the $100.0 million repurchase authorization at June 30, 2023.
Material changes versus the prior comparable period
- Revenue decreased 10.8% in Q2 and 6.8% for the six months, reflecting weaker demand, fewer consultants and reduced hiring activity in the macroeconomic environment.
- Technology Flex revenue declined 7.8% in Q2 and 2.9% for the six months, despite average bill-rate increases of 3.5% and 4.7%, respectively.
- Finance and Accounting Flex revenue declined 27.3% in Q2 and 27.8% for the six months, partly due to repositioning toward higher-skilled roles.
- Flex hours billed declined 14.7% in Q2 and 12.0% for the six months.
- Net income and diluted EPS declined materially, partly because the 2022 period benefited from a $4.1 million gain on termination of an interest-rate swap and included a $0.14 EPS benefit from that termination.
- Kforce sold its 50% WorkLLama joint-venture interest in February 2023 and received approximately $5.1 million in net proceeds, including settlement of the related note receivable.
Guidance, outlook, risks and unusual items
- Management expects Technology Flex revenue to decline sequentially by mid-single digits in Q3 2023 and to decline by low double digits year over year because of more difficult comparisons.
- Management expects the year-over-year decline in Finance and Accounting Flex revenue to approximate Q2 levels.
- Technology Flex gross margins are expected to remain stable with Q2 levels; Finance and Accounting Flex margins were flat year over year.
- Management cited client restraint on new technology initiatives, selective resource reductions, pricing pressure, healthcare costs, business-mix changes and uncertainty in the broader economy.
- Kforce expects existing cash flows and available borrowings to meet operating, working-capital and capital-expenditure needs for at least the next 12 months, but a material economic deterioration could impair results, liquidity or access to borrowings.
- Executive employment agreements could require approximately $40.3 million of payments following a change in control and qualifying terminations, or approximately $17.4 million absent a change in control.
- Several employment-related legal matters were settled or dismissed in 2023. A California PAGA matter remains unresolved; the filing states that the outcome and potential loss cannot currently be estimated.
- The 1% nondeductible excise tax under the Inflation Reduction Act resulted in charges of approximately $0.1 million in Q2 and $0.2 million for the six months. Management does not expect a material impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Technology demand, consultant assignments and Flex hours stabilize or continue to decline in Q3 and beyond.
- Progress and financial effects of the Finance and Accounting repositioning strategy.
- Technology Flex pricing, healthcare costs and gross-margin trends.
- Operating cash conversion, receivables collections and the sustainability of dividends and share repurchases relative to free cash flow.
- Credit-facility SOFR terms, borrowing availability and continued covenant compliance.
- Potential exposure from the unresolved California PAGA litigation and executive change-in-control obligations.