Kforce Inc. Form 10-Q Summary
Business Context and Reporting Period
Kforce provides temporary staffing and permanent placement services through its Technology (Tech) and Finance and Accounting (FA) segments. This unaudited filing covers the three months ended March 31, 2021, compared with the same period in 2020. The company had approximately 2,000 employees and 12,100 consultants on assignment at quarter-end.
Financial Performance and Position
- Revenue: $363.2 million, up 8.4% from $335.2 million. Tech revenue increased 4.8% to $279.6 million, while FA revenue increased 22.3% to $83.7 million.
- Revenue mix: Flex revenue was $353.8 million, up 8.5%; Direct Hire revenue was $9.4 million, up 3.1%. FA Flex revenue included approximately $24.0 million from government-sponsored COVID-19 initiatives.
- Gross profit: $98.7 million, up 4.4%. Gross margin declined to 27.2% from 28.2%; Flex gross margin declined to 25.2% from 26.2%.
- Operating income: $19.5 million, up from $13.9 million. Operating margin improved to 5.4% from 4.2%.
- Net income: $13.3 million, or $0.62 diluted earnings per share, compared with $9.1 million, or $0.42 per diluted share.
- Adjusted EBITDA: $24.1 million, compared with $18.2 million.
- Cash flow: Operating cash flow was $22.4 million, compared with $3.0 million. Free cash flow was $21.1 million, compared with $1.0 million.
- Liquidity: Cash and cash equivalents were $101.3 million at March 31, 2021. The company had $100.0 million outstanding under its credit facility and $198.5 million available, subject to covenants. Net cash after debt was approximately $1.3 million.
- Capital allocation: The company repurchased $16.3 million of common stock and paid $4.8 million in dividends, or $0.23 per share. Approximately $68.4 million remained available under the repurchase authorization.
- Balance sheet: Total assets were $493.4 million and stockholders’ equity was $176.7 million. Trade receivables were $244.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger staffing demand, particularly in FA Flex and Tech Flex. Total Flex revenue increased 10.2% on a billing-day basis.
- FA Flex revenue growth was substantially supported by the COVID-19 Business; excluding that business, FA Flex revenue would have declined 12.8% year over year.
- Gross margin contracted because of spread compression, higher healthcare and payroll tax costs, a lower Direct Hire mix, and the lower-margin COVID-19 Business.
- SG&A declined to $78.0 million from $79.2 million, and SG&A as a percentage of revenue improved to 21.5% from 23.6% due to revenue leverage, productivity gains, lower travel and office costs, and lower credit expense.
- Operating cash flow improved primarily because of higher profitability, stronger receivable collections, working-capital management, and the absence of pandemic-related client payment delays that affected the first quarter of 2020.
- The company invested $2.0 million in WorkLLama, its equity method investment, during the quarter. WorkLLama generated a $0.5 million loss recognized in other expense.
Guidance, Outlook, Risks, and Unusual Items
- Management expected second-quarter 2021 Tech Flex revenue growth in the mid-to-high teens on a year-over-year billing-day basis.
- Management expected FA revenue to remain relatively stable year over year in the second quarter, while COVID-19 Business revenue was expected to continue into that quarter.
- Direct Hire revenue was expected to approximate first-quarter levels.
- Management believed cash, operating cash flow, and available credit would be adequate for operating and capital requirements for at least the next 12 months.
- Kforce expected approximately $23.0 million of net cash proceeds from the planned sale and 18-month leaseback of its corporate headquarters. If completed, the transaction was expected to generate an approximately $2.0 million gain in the second quarter.
- The company’s Supplemental Executive Retirement Plan was terminated effective April 30, 2021. Kforce expected to recognize a net loss of approximately $2.0 million in the second quarter; approximately $20.0 million of participant benefits were already accrued.
- COVID-19, economic conditions, staffing demand, consultant availability, client credit quality, and potential virus variants remain significant uncertainties. Management stated that it did not expect a material long-term impact on strategic plans, operations, or liquidity, but future effects remain difficult to predict.
- The credit facility matures May 25, 2022. Kforce was in compliance with its covenants at March 31, 2021, although a material deterioration in operating results could create covenant or default risk.
- Interest-rate swaps had a fair-value liability of $0.5 million and hedge variable-rate debt. The swaps mature in 2022 and 2025, respectively.
- Pending legal matters include employment classification, overtime, discrimination, and wage-related claims. The company could not estimate potential losses for two matters; it considered the Pennsylvania overtime matter unlikely to have a material adverse effect following a preliminary settlement subject to court approval.
Important Facts for Investors to Verify
- Whether Tech Flex growth and the projected second-quarter acceleration persist after the pandemic-related comparison effects.
- The sustainability of FA revenue after the approximately $24.0 million quarterly contribution from the COVID-19 Business.
- Whether gross-margin pressure from spread compression, healthcare costs, payroll taxes, and lower-margin contracts reverses or continues.
- Completion, timing, proceeds, and accounting gain from the headquarters sale and leaseback.
- The second-quarter financial impact and timing of payments following termination of the SERP.
- Credit facility maturity, refinancing plans, covenant compliance, and the effect of interest rates on borrowing costs.
- Potential losses or insurance coverage associated with pending litigation and the $22.5 million maximum potential WorkLLama capital contribution obligation.
- The company’s continued ability to fund dividends and share repurchases while maintaining adequate liquidity.