Kforce Inc. 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
Kforce provides temporary and permanent professional staffing and solutions through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. The filing covers the unaudited three and six months ended June 30, 2014, compared with the corresponding 2013 periods. International operations represented approximately 2% of revenue.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net service revenues | $327.4 million, up 15.4% | $632.7 million, up 15.2% |
| Gross profit | $103.2 million; 31.5% margin | $194.3 million; 30.7% margin |
| Income from operations | $18.2 million; approximately 5.5% margin | $28.7 million; approximately 4.5% margin |
| Net income | $10.7 million; 3.3% margin | $17.0 million; 2.7% margin |
| Diluted EPS | $0.33 | $0.51 |
| Adjusted EBITDA | $21.1 million | $34.8 million |
- Six-month Flex revenue increased 16.4% to $610.4 million, while Search revenue declined 10.1% to $22.4 million.
- Six-month Flex gross margin declined to 28.2% from 28.9%, primarily because growth was concentrated among larger, lower-margin clients. Second-quarter Flex margin was 28.8% versus 29.4% in the prior-year quarter.
- SG&A declined to 25.4% of six-month revenue from 28.1%, reflecting lower compensation expense after the fourth-quarter 2013 organizational realignment.
- Operating cash flow was $12.1 million for the first six months, compared with cash used of $1.2 million in the prior-year period. Capital expenditures were $3.1 million.
- Cash and cash equivalents were $1.3 million at June 30, 2014. Working capital was $127.2 million and the current ratio was 2.3.
- Credit-facility debt was $81.7 million, compared with $62.6 million at December 31, 2013. Availability was $37.6 million at June 30, 2014. The facility matures September 20, 2016.
- Kforce repurchased approximately 1.0 million shares for $22.0 million and paid $6.5 million in cash dividends during the first six months. The quarterly dividend was $0.10 per share.
Material changes versus the prior comparable period
- Revenue growth was led by Technology, up 17.1% for the first six months, Finance and Accounting, up 11.1%, and Health Information Management, up 27.5%. Government Solutions increased 1.3%.
- Net income increased 68.8% for the first six months, from $10.0 million to $17.0 million, while diluted EPS increased from $0.29 to $0.51. The improvement reflected revenue growth and operating expense leverage.
- Gross profit margin declined from 32.1% to 30.7% for the first six months, despite higher gross profit dollars.
- Search placements declined 3.8% for the first six months and average placement fees declined 6.4%, contributing to lower Search revenue.
- Debt increased primarily in connection with share repurchases. Stockholders’ equity declined to $148.3 million from $157.2 million at year-end 2013.
Outlook, unusual items, risks, and contingencies
- Management expected Technology and Finance and Accounting to continue growing through the remainder of 2014. Government Solutions revenue was expected to remain stable, while Search revenue was expected to remain slightly below 2013 levels.
- Management expected Flex gross margins to remain stable for the remainder of 2014 and believed existing cash, operating cash flow, and available credit would meet requirements for at least the next 12 months.
- On August 4, 2014, Kforce agreed to sell Kforce Healthcare, Inc., which operated the HIM segment, for $119.0 million in cash, subject to a working-capital adjustment. The HIM business was expected to be reported as discontinued operations beginning in the third quarter of 2014. After the sale, the company reported no outstanding credit-facility balance and $119.5 million of availability as of August 5, 2014.
- The company cited risks from economic deterioration, staffing demand, client concentration and pricing pressure, government-sector uncertainty, receivables collection, interest rates, insurance and employment-related liabilities, litigation, and the availability of credit.
- A qui tam complaint against Kforce and Kforce Government Solutions alleged False Claims Act, whistleblower, accounting, employment, and defamation violations. The government had not intervened as of the filing date, and Kforce had moved to dismiss.
- The previously disclosed Gunawan employment class action was substantially resolved in Kforce’s favor; the company expected the remaining appeal to be dismissed without a material effect.
- Kforce disclosed approximately $31.4 million of potential executive employment-agreement payments following a change in control, or $12.6 million absent a change in control, although no liability was recorded.
- The company stated that there were no material changes to previously disclosed risk factors and that disclosure controls were effective as of June 30, 2014.
Important facts for investors to verify
- Completion, proceeds, working-capital adjustment, tax effects, and final accounting for the $119.0 million HIM divestiture.
- Post-divestiture revenue, margins, cash flow, debt repayment, and credit availability, including the treatment of HIM as discontinued operations.
- Whether Flex margin pressure from lower-margin clients and Government Solutions subcontractor costs improves or persists.
- Search revenue and placement trends after management’s expectation of slightly lower 2014 Search revenue.
- Developments in the qui tam litigation and any potential financial exposure.
- Future share repurchases and dividends relative to debt reduction and liquidity needs.