Kforce Inc. 2012 Form 10-K Summary
Business context and reporting period
Kforce provides professional and technical specialty staffing services through Technology, Finance and Accounting, Health Information Management, and Government Solutions segments. Services consist primarily of temporary staffing (“Flex”) and permanent placement (“Search”). The filing covers the fiscal year ended December 31, 2012, with selected fourth-quarter data.
Kforce operated through its Tampa headquarters, 62 U.S. field offices, and one Manila office. At year-end, it employed approximately 2,500 associates and had approximately 10,700 consultants on assignment. Kforce sold Kforce Clinical Research, Inc. (“KCR”) on March 31, 2012; KCR is presented as discontinued operations.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net service revenues | $1,082.5 million | $1,004.7 million | +7.7% |
| Gross profit | $347.9 million | $317.7 million | +9.5% |
| Gross margin | 32.1% | 31.6% | +50 basis points |
| SG&A | $322.4 million | $274.1 million | +17.6% |
| SG&A as a percentage of revenue | 29.8% | 27.3% | +250 basis points |
| Income from continuing operations | $(35.7) million | $19.1 million | Decline of $54.8 million |
| Net income | $(13.7) million | $27.2 million | Decline of $40.9 million |
| Adjusted EBITDA | $51.1 million | $55.5 million | $(4.4) million |
| Operating cash flow | $56.0 million | $31.2 million | +$24.7 million |
| Capital expenditures | $5.8 million | $6.5 million | $(0.6) million |
Flex revenue increased 7.7% to $1.035 billion, while Search revenue increased 9.6% to $47.7 million. Flex gross margin improved to 29.0% from 28.5%, primarily due to a wider bill-rate/pay-rate spread, partly offset by higher statutory payroll costs.
| Segment | 2012 revenue | Year-over-year change |
|---|---|---|
| Technology | $675.6 million | +8.3% |
| Finance and Accounting | $238.5 million | +8.6% |
| Health Information Management | $77.0 million | +12.1% |
| Government Solutions | $91.4 million | (1.1%) |
Fourth-quarter 2012 revenue was $269.8 million, compared with $259.3 million in the fourth quarter of 2011. Fourth-quarter income from continuing operations was $5.9 million, compared with $5.1 million in the prior-year quarter.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.4 million at December 31, 2012, compared with $0.9 million at December 31, 2011.
- Working capital was $72.7 million, down from $103.1 million; the current ratio was 1.7 versus 2.2.
- Credit Facility borrowings were $21.0 million, down from $49.5 million. Availability was $64.4 million at year-end, under a facility with up to $100 million of revolving capacity and a $15 million letter-of-credit sublimit.
- The Credit Facility expires September 20, 2016. The weighted-average effective interest rate was 1.50% at year-end.
- Kforce received $55.4 million of net proceeds from the KCR divestiture and used the proceeds in part to reduce borrowings.
- Kforce repurchased approximately 3.4 million shares for $44.4 million and paid a special cash dividend of $35.2 million, or $1.00 per share.
- Management stated that cash, operating cash flow, and available borrowings were expected to meet operating and capital requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth continued across Tech, FA, and HIM, while GS revenue declined because of delays in starting funded federal projects and uncertainty regarding federal spending.
- Continuing operations changed from $19.1 million of income in 2011 to a $35.7 million loss in 2012.
- Kforce recorded a $69.2 million pre-tax goodwill impairment charge for GS, producing an after-tax charge of approximately $44.5 million and reducing diluted continuing-operations EPS by $1.24.
- SG&A included $31.3 million of accelerated compensation expense and payroll taxes after the Board accelerated vesting of substantially all outstanding unvested restricted stock, PARS, and ALTI awards in connection with the KCR divestiture.
- Kforce’s 2012 net loss included $22.0 million of income from discontinued operations, including a $36.4 million pre-tax gain on the KCR sale.
- Trade receivables declined to $151.6 million from $174.8 million, primarily reflecting improved collections in the fourth quarter.
Guidance, outlook, risks, and unusual items
Management expected continued growth in Tech, FA, HIM, and Search in 2013. It expected Flex margins to remain flat to slightly expand as bill/pay-rate improvements offset rising statutory payroll costs. Kforce increased revenue-responsible headcount materially in the fourth quarter of 2012 and expected the investment to support accelerated revenue growth in the second half of 2013, recognizing that new associates generally require six to nine months to reach expected productivity.
Management identified demand related to technology skill shortages, healthcare information technology, electronic health records, and the ICD-10 conversion as growth opportunities. GS performance remained exposed to federal budget reductions, sequestration scheduled for March 1, 2013, contract start-up delays, funding uncertainty, and potential future goodwill impairment. At December 31, 2012, GS fair value exceeded carrying value by 18.0%, but management stated that further deterioration could result in a material impairment.
- Key operating risks include economic weakness, staffing demand volatility, customer payment defaults, pricing pressure, competition, employee retention, and rising payroll-related costs.
- Legal and regulatory risks include wage-and-hour claims, independent-contractor classification, employment practices, privacy and health-information security, immigration restrictions, and federal contracting compliance.
- Kforce’s Government Solutions business operated under an Administrative Agreement with the Department of the Interior expected to remain in effect through September 30, 2013; noncompliance could result in sanctions, suspension, or debarment.
- The company settled an EEOC matter for $1.7 million in 2012 and received approximately $1.0 million of insurance recovery. A $2.5 million California class-action settlement remained recorded, subject to resolution of an appeal; management considered further losses remote.
- Unfunded executive benefit obligations included approximately $10.7 million expected to be paid in 2013 under the Supplemental Executive Retirement Plan.
- Management reported effective disclosure controls and effective internal control over financial reporting; Deloitte & Touche issued unqualified audit opinions.
Most important facts for investors to verify
- Whether revenue growth and the increased revenue-responsible headcount translated into sustained growth after the six-to-nine-month ramp period.
- Whether GS revenue and cash flows recovered without additional goodwill impairment following federal budget reductions and sequestration.
- Whether Flex margins held at or above the 2012 level despite unemployment taxes, healthcare reform costs, and other payroll-related expenses.
- The sustainability of operating cash flow after the one-time KCR divestiture proceeds, share repurchases, and special dividend.
- Compliance with Credit Facility availability requirements and related fixed-charge coverage covenants.
- Potential cash requirements for executive retirement obligations, litigation, tax matters, employment agreements, and other contractual commitments.