Kforce Inc. 2013 Q1 Form 10-Q Summary
Business context and reporting period
Kforce provides temporary and permanent professional staffing services through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. Operations are primarily in the United States, with international revenue representing approximately 2% of total revenue. This unaudited report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net service revenue | $265.6 million | $268.4 million | Down 1.0% |
| Gross profit | $83.3 million | $80.8 million | Up 3.1% |
| Gross margin | 31.4% | 30.1% | Up 130 basis points |
| SG&A expense | $75.7 million | $108.1 million | Down 30.0% |
| SG&A as a percentage of revenue | 28.5% | 40.3% | Down 1,180 basis points |
| Operating income (loss) | $5.2 million | $(30.2) million | Improved |
| Income from continuing operations | $3.1 million | $(17.7) million | Improved |
| Net income | $3.1 million | $4.1 million | Down 24.1% |
| Diluted earnings per share | $0.09 | $0.12 | Down $0.03 |
| Adjusted EBITDA | $7.9 million | $(1.7) million | Improved |
Flex revenue was $254.1 million, down 1.3%, while Search revenue was $11.6 million, up 4.9%. Flex gross margin increased to 28.3% from 27.1%, primarily because of a wider bill-to-pay rate spread and the absence of certain 2012 tax-audit accruals.
Segment performance
| Segment | Q1 2013 revenue | Year-over-year change | Q1 2013 gross profit |
|---|---|---|---|
| Technology | $167.6 million | Up 1.2% | $48.8 million |
| Finance and Accounting | $56.5 million | Down 6.2% | $21.3 million |
| Health Information Management | $18.6 million | Down 4.2% | $6.0 million |
| Government Solutions | $22.8 million | Down 0.7% | $7.3 million |
Cash flow, debt and liquidity
- Cash used in operating activities was $8.4 million, compared with $2.5 million provided in Q1 2012, principally reflecting seasonal working-capital requirements and a $13.2 million increase in trade receivables.
- Cash used in investing activities was $2.1 million, including $1.9 million of capital expenditures. The prior-year period included $48.3 million of proceeds from the sale of Kforce Clinical Research.
- Cash provided by financing activities was $10.0 million, including net borrowing activity and $8.4 million of share repurchases.
- Cash and cash equivalents were $0.9 million at March 31, 2013, versus $1.4 million at December 31, 2012.
- Working capital was $90.0 million and the current ratio was 1.9 at March 31, 2013.
- Credit facility borrowings were $39.5 million, with $47.0 million available at March 31, 2013. The facility expires September 20, 2016. At May 7, 2013, borrowings were $33.6 million and availability was $53.0 million.
- The weighted-average effective interest rate on the credit facility was 1.9%. Management stated that a hypothetical 10% increase in interest rates would not materially affect annual interest expense.
Material changes versus the prior comparable period
- Profitability from continuing operations improved sharply because Q1 2012 included $31.3 million of accelerated compensation expense and payroll taxes related to accelerated vesting of substantially all outstanding unvested equity awards.
- Q1 2012 also included a $21.8 million after-tax gain from the sale of Kforce Clinical Research, which caused reported net income and EPS to exceed Q1 2013 despite the improvement in continuing operations.
- Revenue declined modestly, driven primarily by the Finance and Accounting segment and lower staffing hours, while Technology revenue increased.
- Approximately 0.4 million shares were repurchased for $5.9 million during the quarter. The board increased the repurchase authorization by $50.0 million, leaving $83.9 million available at March 31, 2013.
Guidance, outlook, risks and unusual items
- Management expected continued Technology growth, stable-to-improving Health Information Management revenue, Government Solutions growth, and slight growth in Search revenue during 2013.
- Management expected Flex gross margins to expand slightly during the remainder of 2013 as bill-to-pay spreads improve, partly offset by higher statutory payroll costs. It also expected SG&A leverage as recently hired revenue-producing staff became more productive.
- Federal budget deficits and sequestration beginning March 1, 2013 could affect Government Solutions demand. Kforce continued monitoring the segment for goodwill impairment triggers; $33.5 million of goodwill was allocated to Government Solutions, and a future impairment could be material.
- Seasonality, billing-day fluctuations, employment-tax resets in the first quarter, economic conditions, staffing demand, receivable collections, and competition may affect results.
- A California employment-class-action settlement of approximately $2.5 million remained accrued. An appeal was dismissed in April 2013, and settlement was expected during Q2 2013.
- Executive employment agreements could require approximately $53.6 million of payments following qualifying terminations after a change in control, or approximately $15.2 million absent a change in control; no liability was recorded.
- Kforce had $2.7 million of letters of credit outstanding for workers’ compensation, insurance, and facility lease deposits.
- Management stated that existing cash, operating cash flow, and credit-facility availability should meet capital and working-capital requirements for at least the next 12 months, while noting that economic deterioration or lender constraints could reduce liquidity.
- No material changes were reported to the risk factors in the 2012 Form 10-K. Management concluded that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, particularly in Technology and Government Solutions, offsets continued weakness in Finance and Accounting and Health Information Management.
- Whether Flex gross-margin expansion and SG&A leverage persist after the unusually favorable comparison with Q1 2012.
- Operating cash-flow conversion and the effect of receivables growth on liquidity.
- Credit-facility availability, covenant compliance, borrowing levels, and the ability to fund repurchases without increasing leverage.
- Potential Government Solutions goodwill impairment related to sequestration and federal spending reductions.
- Settlement completion and any additional exposure from litigation, executive benefit obligations, or Kforce Clinical Research indemnification provisions.