Kforce Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Kforce provides temporary (Flex) and permanent (Direct Hire) staffing services through its Technology (Tech) and Finance and Accounting (FA) segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared primarily with the corresponding 2019 periods. Results were significantly affected by the COVID-19 economic and health crisis.
During 2020, Kforce focused on U.S. commercial technology and professional staffing after completing the 2019 sale of its Government Solutions segment. The 2019 sale is presented as discontinued operations.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $365.4 million | $345.6 million | $1,043.7 million | $1,011.2 million |
| Gross profit | $103.9 million | $102.8 million | $295.8 million | $297.0 million |
| Gross margin | 28.4% | 29.8% | 28.3% | 29.4% |
| Income from operations | $26.7 million | $22.2 million | $56.1 million | $55.3 million |
| Income from continuing operations | $18.8 million | $15.9 million | $37.8 million | $40.0 million |
| Net income | $18.8 million | $14.9 million | $37.8 million | $116.7 million |
| Diluted EPS | $0.89 | $0.64 | $1.77 | $4.81 |
| Adjusted EBITDA | $30.9 million | $26.0 million | $68.9 million | $67.3 million |
Q3 revenue increased 5.7%, while nine-month revenue increased 3.2%. Q3 operating margin improved to 7.3% from 6.4%; nine-month operating margin was 5.4% versus 5.5%. Nine-month continuing-operations margin declined to 3.6% from 4.0%.
- Q3 Flex revenue increased 6.9% to $356.7 million; nine-month Flex revenue increased 4.6% to $1,019.2 million.
- Q3 Direct Hire revenue declined 26.6% to $8.7 million; nine-month Direct Hire revenue declined 34.3% to $24.4 million.
- Q3 Tech revenue declined 4.3%, while FA revenue increased 43.0%. For nine months, Tech declined 1.3% and FA increased 19.5%.
- The COVID-19 Business generated approximately $51.1 million of FA Flex revenue in Q3 and $86.2 million in the first nine months.
Cash flow, liquidity, debt and capital allocation
- Operating cash flow was $93.9 million for the first nine months of 2020, compared with $46.5 million in 2019. Free cash flow was $88.6 million versus $38.8 million.
- Cash and cash equivalents were $101.3 million at September 30, 2020, compared with $19.8 million at December 31, 2019.
- Debt under the credit facility was $100.0 million, up from $65.0 million at year-end 2019. The facility matures May 25, 2022; $198.5 million remained available, subject to covenants.
- Net cash after long-term debt was approximately $1.3 million. Management stated that the company was in compliance with its credit-facility covenants.
- Kforce paid $12.6 million in dividends and repurchased approximately $29.4 million of common stock during the nine months. The quarterly dividend was $0.20 per share, or $0.60 per share for the period.
- Approximately $84.5 million remained available under the $100.0 million repurchase authorization at September 30, 2020; repurchases were paused during the second quarter and were subject to reassessment.
- Working capital excluding cash was approximately $110 million. Deferred employer Social Security taxes under the CARES Act contributed approximately $25.4 million to operating cash flow and are payable in 2021 and 2022.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by FA Flex demand associated with government-sponsored COVID-19 initiatives and increased billable hours.
- Tech Flex revenue declined as client assignment ends and lower hours billed more than offset higher bill rates. Tech average bill rates increased 4.6% year over year in Q3.
- Direct Hire placements fell 29.7% in Q3 and 36.9% for the nine months, reflecting reduced hiring activity during the pandemic.
- Gross margin declined because of lower Direct Hire mix and lower-margin COVID-19 Business contracts. FA Flex margin was 27.2% in Q3 and 26.9% for the nine months, versus 28.9% and 28.5%, respectively, in 2019.
- SG&A declined to 20.8% of revenue in Q3 and 22.6% for the nine months, from 23.0% and 23.4%, respectively, due to revenue leverage, lower travel and office costs, and expense discipline.
- Nine-month net income was substantially lower than 2019 because 2019 included $76.7 million of after-tax income from discontinued operations, principally the gain on the Government Solutions sale.
- Cash increased despite higher debt, supported by stronger operating cash flow, tax deferrals and lower share repurchases.
Guidance, outlook, risks and unusual items
- Management expected Tech revenue for full-year 2020 to decline approximately 1.5% to 2.0%, implying slight sequential improvement on a billing-day basis in Q4.
- The COVID-19 Business was expected to continue into Q4 at lower levels than Q3 and was characterized as shorter-term and potentially non-recurring. FA Flex revenue was expected to decline sequentially from Q3.
- Direct Hire revenue was expected to approximate Q3 levels in Q4.
- Management expected to maintain positive cash flow and the quarterly dividend, but noted that dividends remain discretionary and depend on future financial performance and Board approval.
- Principal risks include the uncertain duration and severity of COVID-19, reduced staffing demand, client credit risk, pressure on bill-pay spreads, loss of COVID-related contracts, political and macroeconomic uncertainty, and potential covenant or liquidity pressure if results deteriorate materially.
- The allowance for credit losses increased due to heightened client default risk; trade receivables were $230.0 million and the credit-loss allowance was $3.7 million at September 30, 2020.
- Kforce recorded $1.5 million of operating lease impairment expense during the nine months, a $1.2 million loss from its WorkLLama equity-method investment, and a $2.2 million liability for interest-rate swaps.
- Kforce had a maximum potential additional capital contribution obligation of $22.5 million for WorkLLama and had contributed $11.5 million through September 30, 2020.
- New legal matters included a California PAGA action and a Pennsylvania wage-and-hour collective/class action. The company stated that the outcomes and potential losses could not reasonably be estimated at this stage.
Most important facts for investors to verify
- Whether COVID-19 Business revenue declines in Q4 and whether replacement FA demand can offset the reduction.
- The sustainability of Tech Flex recovery, consultant assignment levels, bill rates and bill-pay spreads.
- Direct Hire placement volumes and the effect of continued low placement activity on margins.
- The effect of CARES Act payroll-tax deferrals on reported operating cash flow and future cash payments.
- Debt repayment capacity, credit-facility covenant compliance and the May 2022 maturity.
- Future credit losses, WorkLLama funding or impairment exposure, and the outcome of disclosed employment-related litigation.
- The durability of the quarterly dividend and the timing of any resumption of share repurchases.