[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements.) This section presents Kforce Inc.'s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income](index=3&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Kforce reported Q3 2023 revenue of $373.1 million and net income of $10.6 million, with similar declines for the nine-month period compared to 2022 Q3 and Nine Months Financial Performance (in thousands, except EPS) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $373,122 | $437,620 | $1,168,309 | $1,291,103 | | **Gross Profit** | $103,461 | $126,670 | $327,703 | $381,628 | | **Income from Operations** | $16,033 | $31,319 | $65,369 | $92,912 | | **Net Income** | $10,575 | $22,262 | $45,359 | $68,359 | | **Diluted EPS** | $0.54 | $1.09 | $2.31 | $3.31 | [Unaudited Condensed Consolidated Balance Sheets](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2023, Kforce's total assets decreased to $369.8 million from $392.0 million at year-end 2022, with corresponding reductions in liabilities and equity Balance Sheet Summary (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $257,911 | $277,760 | | **Total Assets** | $369,762 | $392,004 | | **Total Current Liabilities** | $119,272 | $131,433 | | **Total Liabilities** | $190,810 | $209,806 | | **Total Stockholders' Equity** | $178,952 | $182,198 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash provided by operating activities for the nine months ended September 30, 2023, was $69.1 million, with significant cash used in financing activities due to stock repurchases and dividends Nine-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | **Cash provided by operating activities** | $69,056 | $78,063 | | **Cash used in investing activities** | ($2,532) | ($9,656) | | **Cash used in financing activities** | ($66,523) | ($160,307) | | **Change in cash and cash equivalents** | $1 | ($91,900) | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes detail significant accounting policies, segment reporting, and key financial events, including the sale of WorkLLama interest and the impact of the stock repurchase excise tax - On February 23, 2023, Kforce sold its 50% noncontrolling interest in WorkLLama and settled an outstanding Note Receivable for total proceeds of **$6.0 million**[37](index=37&type=chunk) - The Inflation Reduction Act of 2022 imposed a new 1% excise tax on stock repurchases, resulting in a charge of **$0.4 million** for the nine months ended September 30, 2023[38](index=38&type=chunk) - On April 20, 2023, shareholders approved the 2023 Stock Incentive Plan, reserving approximately **3.2 million shares** for issuance. As of September 30, 2023, total unrecognized stock-based compensation expense was **$29.5 million**[53](index=53&type=chunk)[54](index=54&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management discusses the financial results for Q3 and the first nine months of 2023, highlighting revenue decreases, segment performance, and capital allocation strategies [Executive Summary](index=17&type=section&id=Executive%20Summary) For the nine months ended September 30, 2023, revenue decreased 9.5% to $1.17 billion, and net income fell 33.6% to $45.4 million, primarily due to macroeconomic conditions Nine-Month Performance Highlights (YTD Sep 30, 2023 vs 2022) | Metric | YTD 2023 | Change vs YTD 2022 | | :--- | :--- | :--- | | **Revenue** | $1.17 billion | -9.5% | | **Net Income** | $45.4 million | -33.6% | | **Diluted EPS** | $2.31 | -30.2% | | **Gross Profit Margin** | 28.0% | -160 bps | | **Flex Revenue** | $1.14 billion | -8.5% | | **Direct Hire Revenue** | $30.1 million | -35.3% | - The company returned **$62.9 million** to shareholders during the first nine months of 2023, consisting of **$42.0 million** in stock repurchases and **$20.9 million** in dividends[65](index=65&type=chunk) [Results of Operations](index=18&type=section&id=Results%20of%20Operations) Total revenue for Q3 2023 decreased 14.7% year-over-year, driven by declines in both Technology and FA segments, impacting gross profit margins and increasing SG&A expenses Revenue Change by Segment (Q3 2023 vs Q3 2022) | Segment | Q3 2023 Revenue (in thousands) | % Change YoY | | :--- | :--- | :--- | | **Technology** | $338,289 | -13.4% | | **FA** | $34,833 | -26.1% | | **Total** | $373,122 | -14.7% | - The company took actions in Q3 2023 to realign its organization and reduce costs, which are expected to lower annual operating costs by at least **$14.0 million**[69](index=69&type=chunk) - SG&A expenses for Q3 2023 included **$8.4 million** in costs related to organizational realignment activities and legal settlements, which increased SG&A as a percentage of revenue by **150 basis points** compared to Q3 2022[82](index=82&type=chunk) [Non-GAAP Financial Measures](index=22&type=section&id=Non-GAAP%20Financial%20Measures) The company reports Free Cash Flow of $63.0 million and Adjusted EBITDA of $89.6 million for the nine months ended September 30, 2023, both lower than the prior year Non-GAAP Financial Measures (in thousands) | Measure | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | **Free Cash Flow** | $62,980 | $73,407 | | **Adjusted EBITDA** | $89,584 | $117,536 | [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) Kforce maintains liquidity through operating cash flows and its credit facility, having returned $62.9 million to shareholders through repurchases and dividends in the first nine months of 2023 - As of September 30, 2023, Kforce had **$21.4 million** outstanding under its credit facility and borrowing availability of **$177.4 million**[92](index=92&type=chunk)[98](index=98&type=chunk) - In the first nine months of 2023, Kforce repurchased **722 thousand shares** for approximately **$42.0 million**. As of September 30, 2023, **$66.8 million** remained available under the stock repurchase program[101](index=101&type=chunk) - Quarterly dividends paid during the first nine months of 2023 totaled **$20.9 million** (**$1.08 per share**), a **20% increase** on a per-share basis from the prior year[96](index=96&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) There have been no material changes to the market risk disclosures previously reported in the company's 2022 Annual Report on Form 10-K - There have been no material changes to the disclosures about market risk from those included in the 2022 Annual Report on Form 10-K[107](index=107&type=chunk) [Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - Based on an evaluation as of September 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[108](index=108&type=chunk) - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[109](index=109&type=chunk) [PART II - OTHER INFORMATION](index=26&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity security sales, and other general information not included in the financial statements [Legal Proceedings](index=26&type=section&id=Item%201.%20Legal%20Proceedings.) The company is involved in various legal proceedings in the ordinary course of business, which are not expected to have a material effect on its financial position - The company is involved in legal proceedings from the ordinary course of business but does not currently expect them to have a material financial impact[113](index=113&type=chunk) [Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors.) There have been no material changes to the risk factors from those previously disclosed in the company's 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the 2022 Annual Report on Form 10-K[114](index=114&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) During Q3 2023, Kforce repurchased 306,001 shares for $60.20 per share, with $66.8 million remaining available under the repurchase program Q3 2023 Stock Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share ($) | Value Remaining in Plan ($) | | :--- | :--- | :--- | :--- | | **July 2023** | 4,806 | $63.45 | $84,852,288 | | **August 2023** | 82,250 | $61.86 | $79,851,735 | | **September 2023** | 218,945 | $59.51 | $66,822,516 | | **Total Q3** | 306,001 | $60.20 | $66,822,516 | - In February 2023, the Board of Directors increased the stock repurchase authorization to **$100.0 million**[116](index=116&type=chunk) [Other Information](index=26&type=section&id=Item%205.%20Other%20Information.) No officers or directors adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during Q3 2023 - No officers or directors adopted or terminated any Rule 10b5-1 trading plans during the three months ended September 30, 2023[119](index=119&type=chunk) [Exhibits](index=27&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes required CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act[120](index=120&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________________________________________________________________________________ FORM 10-Q ________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section provides Kforce Inc.'s unaudited condensed consolidated financial statements and management's discussion for Q1 2023 [Item 1. Financial Statements.](index=4&type=section&id=Item%201.%20Financial%20Statements.) Presents Kforce Inc.'s unaudited condensed consolidated financial statements for Q1 2023 and 2022, with accompanying notes [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income](index=4&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20AND%20COMPREHENSIVE%20INCOME) Presents Kforce Inc.'s unaudited condensed consolidated statements of operations and comprehensive income for Q1 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Revenue | $406.0M | $417.0M | | Direct costs | $292.0M | $293.1M | | Gross profit | $114.0M | $123.9M | | Selling, general and administrative expenses | $89.3M | $95.0M | | Income from operations | $23.4M | $27.7M | | Net income | $16.2M | $19.2M | | Earnings per share – diluted | $0.82 | $0.93 | [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) Presents Kforce Inc.'s unaudited condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022 | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Total assets | $385.2M | $392.0M | | Total liabilities | $199.4M | $209.8M | | Total stockholders' equity | $185.7M | $182.2M | [Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity](index=6&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENT%20OF%20CHANGES%20IN%20STOCKHOLDERS'%20EQUITY) Details changes in Kforce Inc.'s stockholders' equity for the three months ended March 31, 2023 | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Balance, December 31, 2022 | $182.2M | N/A | | Net income | $16.2M | N/A | | Stock-based compensation expense | $4.3M | N/A | | Dividends ($0.36 per share) | $(7.0M) | N/A | | Repurchases of common stock | $(10.2M) | N/A | | Balance, March 31, 2023 | $185.7M | N/A | - The company declared and paid quarterly dividends of **$0.36 per share** for the three months ended March 31, 2023, totaling **$7.0 million**[18](index=18&type=chunk) - Common stock repurchases amounted to **$10.2 million** for the three months ended March 31, 2023[18](index=18&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Presents Kforce Inc.'s unaudited condensed consolidated statements of cash flows for Q1 2023 and 2022 | Cash Flow Activity | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | Change (YoY) | | :-------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :----------- | | Net cash provided by operating activities | $19.1M | $38.7M | (50.8)% | | Cash provided by (used in) investing activities | $2.4M | $(2.7M) | N/A | | Cash used in financing activities | $(21.4M) | $(16.4M) | 30.9% | | Change in cash and cash equivalents | $0.1M | $19.6M | (99.7)% | | Cash and cash equivalents, end of period | $0.2M | $116.6M | (99.8)% | - Cash provided by operating activities significantly decreased by **50.8% year-over-year**, primarily due to lower profitability levels, the timing of payments, and a reduction in deferred tax liability given the sale of our joint venture[90](index=90&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=NOTES%20TO%20UNAUDITED%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Details significant accounting policies, segment information, and other financial disclosures for the interim period - The unaudited condensed consolidated financial statements have been prepared pursuant to SEC rules for interim financial reporting, condensing certain GAAP information[23](index=23&type=chunk) - Quarterly operating results are affected by the number of billing days, seasonality of clients' businesses, and increased holiday/vacation days, with higher costs typically in the first quarter due to employment tax resets[24](index=24&type=chunk) [Note A - Summary of Significant Accounting Policies](index=9&type=section&id=Note%20A%20-%20Summary%20of%20Significant%20Accounting%20Policies) Summarizes Kforce Inc.'s significant accounting policies, covering health insurance claims, joint venture sale, and excise tax on stock repurchases - Kforce retains the risk of loss per participant for health insurance claims up to **$600 thousand annually**, and an aggregate annual loss of **$280 thousand** for claims exceeding **$600 thousand**[27](index=27&type=chunk) - On February 23, 2023, Kforce sold its **50% noncontrolling interest** in WorkLLama to an unaffiliated third party for **$6.0 million** (net proceeds **$5.1 million**), settling the outstanding Note Receivable[31](index=31&type=chunk) - For the three months ended March 31, 2023, Kforce recorded **$0.1 million** in excise tax related to the U.S. Federal 1% nondeductible excise tax on stock repurchases under the Inflation Reduction Act of 2022[32](index=32&type=chunk) [Note B - Reportable Segments](index=10&type=section&id=Note%20B%20-%20Reportable%20Segments) Provides financial information for Kforce Inc.'s Technology and Finance and Accounting (FA) reportable segments - Kforce provides services through its Technology and Finance and Accounting ("FA") segments[34](index=34&type=chunk) | Segment | Revenue (Q1 2023, in millions) | Revenue (Q1 2022, in millions) | Gross Profit (Q1 2023, in millions) | Gross Profit (Q1 2022, in millions) | | :-------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Technology | $364.8M | $359.9M | $98.4M | $102.5M | | FA | $41.2M | $57.1M | $15.6M | $21.4M | | Total | $406.0M | $417.0M | $114.0M | $123.9M | [Note C - Disaggregation of Revenue](index=11&type=section&id=Note%20C%20-%20Disaggregation%20of%20Revenue) Details Kforce Inc.'s revenue disaggregation by service type (Flex and Direct Hire) across Technology and FA segments | Revenue Type | Technology (Q1 2023, in millions) | Technology (Q1 2022, in millions) | FA (Q1 2023, in millions) | FA (Q1 2022, in millions) | Total (Q1 2023, in millions) | Total (Q1 2022, in millions) | | :------------- | :----------------------------------- | :----------------------------------- | :------------------------- | :------------------------- | :---------------------------- | :---------------------------- | | Flex revenue | $359.5M | $351.7M | $36.0M | $50.2M | $395.5M | $401.9M | | Direct Hire revenue | $5.3M | $8.2M | $5.1M | $6.9M | $10.5M | $15.1M | | Total Revenue | $364.8M | $359.9M | $41.2M | $57.1M | $406.0M | $417.0M | [Note D - Allowance for Credit Losses](index=11&type=section&id=Note%20D%20-%20Allowance%20for%20Credit%20Losses) Explains the methodology and changes in Kforce Inc.'s allowance for credit losses on trade receivables - The allowance for credit losses on trade receivables is determined by estimating and recognizing lifetime expected losses[37](index=37&type=chunk) | Metric | Amount (in millions) | | :---------------------------------------------------------------- | :-------------------- | | Allowance for credit losses, January 1, 2023 | $1.0M | | Current period provision | $0.4M | | Write-offs charged against the allowance, net of recoveries of amounts previously written off | $(0.4M) | | Allowance for credit losses, March 31, 2023 | $0.9M | [Note E - Other Assets, Net](index=12&type=section&id=Note%20E%20-%20Other%20Assets,%20Net) Details the composition of Kforce Inc.'s other assets, net, including Rabbi Trust, right-of-use assets, and capitalized software | Asset Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Assets held in Rabbi Trust | $34.3M | $32.0M | | Right-of-use assets for operating leases, net | $16.5M | $17.1M | | Capitalized software, net | $14.8M | $16.1M | | Notes receivable, net | $0 | $4.8M | | Other non-current assets | $5.2M | $4.8M | | Total Other assets, net | $71.7M | $75.8M | - Notes receivable, net decreased from **$4.8 million** at December 31, 2022, to **$0** at March 31, 2023, due to the settlement of the Note Receivable from the sale of the joint venture[40](index=40&type=chunk)[41](index=41&type=chunk) [Note F - Current Liabilities](index=12&type=section&id=Note%20F%20-%20Current%20Liabilities) Presents Kforce Inc.'s current liabilities, including accounts payable, accrued payroll, and operating lease liabilities | Liability Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Accounts payable and other accrued liabilities | $69.6M | $72.8M | | Accrued payroll costs | $46.9M | $48.4M | | Current portion of operating lease liabilities | $3.8M | $4.6M | | Income taxes payable | $5.4M | $5.7M | | Total current liabilities | $125.8M | $131.4M | [Note G - Credit Facility](index=12&type=section&id=Note%20G%20-%20Credit%20Facility) Details Kforce Inc.'s credit facility, including borrowing capacity, outstanding amounts, and compliance with covenants - Kforce has a maximum borrowing capacity of **$200.0 million** under its Amended and Restated Credit Facility, which matures on October 20, 2026[43](index=43&type=chunk) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Outstanding under credit facility | $22.3M | $25.6M | - As of March 31, 2023, the company was in compliance with all financial covenants contained in the Amended and Restated Credit Facility[43](index=43&type=chunk) [Note H - Other Long-Term Liabilities](index=13&type=section&id=Note%20H%20-%20Other%20Long-Term%20Liabilities) Outlines Kforce Inc.'s other long-term liabilities, including deferred compensation and operating lease liabilities | Liability Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Deferred compensation plan | $36.8M | $36.4M | | Operating lease liabilities | $14.5M | $16.4M | | Other long-term liabilities | $33 thousand | $3 thousand | | Total Other long-term liabilities | $51.4M | $52.8M | [Note I - Stock-based Compensation](index=13&type=section&id=Note%20I%20-%20Stock-based%20Compensation) Describes Kforce Inc.'s stock-based compensation plans, including the 2023 Stock Incentive Plan and restricted stock activity - Kforce's shareholders approved the 2023 Stock Incentive Plan, reserving approximately **3.2 million shares** for various stock-based awards[46](index=46&type=chunk) | Restricted Stock Activity (Q1 2023, in thousands) | Number of Restricted Stock | Weighted-Average Grant Date Fair Value | | :------------------------------------------------ | :------------------------- | :------------------------------------- | | Outstanding at December 31, 2022 | 911 | $54.42 | | Granted | 6 | $54.92 | | Forfeited | (1) | $75.22 | | Vested | (8) | $25.71 | | Outstanding at March 31, 2023 | 908 | $54.64 | - Total unrecognized stock-based compensation expense related to restricted stock was **$41.2 million** as of March 31, 2023, to be recognized over a weighted-average remaining period of **4.1 years**[47](index=47&type=chunk) [Note J - Derivative Instrument and Hedging Activity](index=13&type=section&id=Note%20J%20-%20Derivative%20Instrument%20and%20Hedging%20Activity) Discusses Kforce Inc.'s past interest rate swap instruments used for hedging and their current status - Kforce previously maintained two interest rate swap instruments (Swap A and Swap B) designated as cash flow hedges to mitigate interest rate risk[49](index=49&type=chunk) - Swap A matured in April 2022 and Swap B was terminated in May 2022; as of March 31, 2023, the Firm did not have any outstanding derivative instruments[49](index=49&type=chunk) [Note K - Fair Value Measurements](index=14&type=section&id=Note%20K%20-%20Fair%20Value%20Measurements) Explains Kforce Inc.'s fair value measurements, including the inputs used for financial instruments - Interest rate swaps were previously measured at fair value using Level 2 inputs[51](index=51&type=chunk) - There were no transfers into or out of Level 1, 2, or 3 assets or liabilities during the three months ended March 31, 2023[52](index=52&type=chunk) [Note L - Commitments and Contingencies](index=14&type=section&id=Note%20L%20-%20Commitments%20and%20Contingencies) Outlines Kforce Inc.'s potential liabilities from executive employment agreements and the status of legal proceedings - Potential liability from executive employment agreements could be approximately **$40.4 million** following a change in control and termination without cause, or **$17.4 million** without a change in control[53](index=53&type=chunk) - Several legal proceedings, including PAGA and FLSA class actions, were settled and dismissed in March 2023 or February 2023, with no material adverse effect on the company's financial position or operations[56](index=56&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.](index=15&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management's discussion and analysis of Kforce's financial condition and results of operations for Q1 2023 [Executive Summary](index=16&type=section&id=EXECUTIVE%20SUMMARY) Provides a high-level overview of Kforce Inc.'s key financial performance metrics and operational highlights for Q1 2023 | Metric | Q1 2023 | Q1 2022 | Change (YoY) | | :-------------------------------- | :-------- | :-------- | :----------- | | Total Revenue | $406.0M | $417.0M | (2.6)% | | Technology Revenue | +1.4% | N/A | +1.4% | | FA Revenue | (27.9)% | N/A | (27.9)% | | Flex Revenue | $395.5M | $401.9M | (1.6)% | | Direct Hire Revenue | $10.5M | $15.1M | (30.7)% | | Gross Profit Margin | 28.1% | 29.7% | (160 bps) | | Net Income | $16.2M | $19.2M | (15.5)% | | Diluted EPS | $0.82 | $0.93 | (11.8)% | | Capital Returned to Shareholders | $17.0M | N/A | N/A | | Cash Provided by Operating Activities | $19.1M | $38.7M | (50.8)% | - The decline in gross profit margin was attributed to a decrease in Direct Hire revenue mix and a decline in our Flex gross profit margin[63](index=63&type=chunk) - SG&A expenses as a percentage of revenue decreased due to lower performance-based compensation, reduced lease expense from real estate portfolio streamlining, and lower professional fees[63](index=63&type=chunk) [Results of Operations](index=17&type=section&id=RESULTS%20OF%20OPERATIONS) Analyzes Kforce Inc.'s operating results, including revenue, gross profit, and expenses, for Q1 2023 and 2022 - Kforce is a leading domestic provider of technology and finance and accounting talent solutions, focusing on Fortune 500 and other large consumers of its services[64](index=64&type=chunk) - The national unemployment rate remained flat at **3.5%** at the end of March 2023[65](index=65&type=chunk) - Staffing Industry Analysts (SIA) estimates technology temporary staffing to grow **5% in 2023** and **7% in 2024**, and finance and accounting temporary staffing to grow **6% in 2023** and **5% in 2024**[65](index=65&type=chunk) [Business Overview](index=17&type=section&id=Business%20Overview) Provides an overview of Kforce Inc.'s workforce, including the number of associates and consultants on assignment - As of March 31, 2023, Kforce employed approximately **2,000 associates** and **9,500 consultants** on assignment[64](index=64&type=chunk) [Operating Results - Three Months Ended March 31, 2023 and 2022](index=17&type=section&id=Operating%20Results%20-%20Three%20Months%20Ended%20March%2031,%202023%20and%202022) Presents a comparative analysis of Kforce Inc.'s operating results as a percentage of revenue for Q1 2023 and 2022 | Metric (% of Revenue) | Q1 2023 | Q1 2022 | | :-------------------------------- | :------ | :------ | | Technology Revenue | 89.9% | 86.3% | | FA Revenue | 10.1% | 13.7% | | Flex Revenue | 97.4% | 96.4% | | Direct Hire Revenue | 2.6% | 3.6% | | Gross profit | 28.1% | 29.7% | | Selling, general and administrative expenses | 22.0% | 22.8% | | Income from operations | 5.8% | 6.7% | | Net income | 4.0% | 4.6% | [Revenue Analysis](index=18&type=section&id=Revenue) Analyzes Kforce Inc.'s revenue performance by segment and service type (Flex and Direct Hire) for Q1 2023 and 2022 | Segment/Type | Q1 2023 Revenue (in millions) | Q1 2022 Revenue (in millions) | YoY Change (%) | | :---------------- | :------------------------------- | :------------------------------- | :------------- | | Technology Flex | $359.5M | $351.7M | 2.2% | | Technology Direct Hire | $5.3M | $8.2M | (35.0)% | | Total Technology | $364.8M | $359.9M | 1.4% | | FA Flex | $36.0M | $50.2M | (28.2)% | | FA Direct Hire | $5.1M | $6.9M | (25.6)% | | Total FA | $41.2M | $57.1M | (27.9)% | | Total Flex | $395.5M | $401.9M | (1.6)% | | Total Direct Hire | $10.5M | $15.1M | (30.7)% | | Total Revenue | $406.0M | $417.0M | (2.6)% | | Flex Revenue Growth Rates (Per Billing Day) | Q1 2023 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :------------------------------------------ | :------ | :------ | :------ | :------ | :------ | | Billing Days | 64 | 61 | 64 | 64 | 64 | | Technology | 2.2% | 8.5% | 15.7% | 23.3% | 26.0% | | FA | (28.2)% | (28.8)% | (30.7)% | (49.0)% | (37.6)% | | Total Flex | (1.6)% | 3.1% | 8.7% | 7.2% | 11.8% | [Flex Revenue](index=18&type=section&id=Flex%20Revenue) Examines the drivers of Kforce Inc.'s Flex revenue changes, including volume, bill rates, and billable expenses, by segment - Technology Flex revenue increased **2.2% year-over-year**, driven by a **4.7% increase in average bill rates**, partially offset by a decrease in consultants on assignment[68](index=68&type=chunk) - FA Flex revenue decreased **28.2% year-over-year**, primarily due to business repositioning towards high-skilled roles and macroeconomic uncertainty, though average bill rates improved **10.4% year-over-year**[69](index=69&type=chunk) | Key Drivers - Change in Flex Revenue (Q1 2023 vs. Q1 2022, in millions) | Technology | FA | | :---------------------------------------------------------------------- | :--------- | :--------- | | Volume - hours billed | $(7.7M) | $(17.5M) | | Bill rate | $16.0M | $3.4M | | Billable expenses | $(0.5M) | $(9 thousand) | | Total change in Flex revenue | $7.8M | $(14.1M) | | Flex Hours Billed (in thousands) | Q1 2023 | Q1 2022 | YoY Change (%) | | :------------------------------- | :------ | :------ | :------------- | | Technology | 4,032 | 4,122 | (2.2)% | | FA | 748 | 1,150 | (35.0)% | | Total Flex hours billed | 4,780 | 5,272 | (9.3)% | [Direct Hire Revenue](index=19&type=section&id=Direct%20Hire%20Revenue) Discusses the decrease in Kforce Inc.'s Direct Hire revenue for Q1 2023 compared to the same period in 2022 - Direct Hire revenue decreased **30.7%** during the three months ended March 31, 2023, as compared to the same period in 2022, primarily driven by a decrease in placements[72](index=72&type=chunk) [Gross Profit Analysis](index=19&type=section&id=Gross%20Profit) Analyzes Kforce Inc.'s gross profit percentages by segment and overall, highlighting factors influencing changes | Gross Profit Percentage | Q1 2023 | Q1 2022 | YoY Change (%) | | :---------------------- | :------ | :------ | :------------- | | Technology | 27.0% | 28.5% | (5.3)% | | FA | 37.8% | 37.6% | 0.5% | | Total gross profit percentage | 28.1% | 29.7% | (5.4)% | - The total gross profit percentage for the three months ended March 31, 2023, decreased **160 basis points**, primarily due to a decline in Direct Hire revenue mix and a decline in our Flex gross profit margin[74](index=74&type=chunk) | Flex Gross Profit Percentage | Q1 2023 | Q1 2022 | YoY Change (%) | | :--------------------------- | :------ | :------ | :------------- | | Technology | 25.9% | 26.8% | (3.4)% | | FA | 28.9% | 29.0% | (0.3)% | | Total Flex gross profit percentage | 26.2% | 27.1% | (3.3)% | - Overall, our Flex gross profit percentage decreased **90 basis points**, primarily due to a tighter pricing environment and business mix changes within our client portfolio in our Technology business[76](index=76&type=chunk) [SG&A Expenses Analysis](index=20&type=section&id=SG%26A%20Expenses) Examines Kforce Inc.'s selling, general, and administrative (SG&A) expenses, including components and their percentage of revenue | SG&A Component | Q1 2023 (in millions) | % of Revenue (Q1 2023) | Q1 2022 (in millions) | % of Revenue (Q1 2022) | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Compensation, commissions, payroll taxes and benefits costs | $75.6M | 18.6% | $80.2M | 19.2% | | Other | $13.7M | 3.4% | $14.8M | 3.6% | | Total SG&A | $89.3M | 22.0% | $95.0M | 22.8% | - SG&A as a percentage of revenue decreased **80 basis points**, driven by lower performance-based compensation, cost efficiencies from reducing leased office space, and lower professional fees[79](index=79&type=chunk) - Due to the softening demand environment, the company is prioritizing continued investments in strategic initiatives and exercising tighter discretionary spend control[79](index=79&type=chunk) [Depreciation and Amortization Analysis](index=20&type=section&id=Depreciation%20and%20Amortization) Details Kforce Inc.'s depreciation and amortization expenses for fixed assets and capitalized software | Category | Q1 2023 (in millions) | Q1 2022 (in millions) | YoY Change (%) | | :-------------------------------- | :----------------------- | :----------------------- | :------------- | | Fixed asset depreciation | $0.6M | $0.7M | (6.4)% | | Capitalized software amortization | $0.6M | $0.4M | 44.2% | | Total Depreciation and amortization | $1.2M | $1.1M | 12.9% | [Other Expense, Net Analysis](index=20&type=section&id=Other%20Expense,%20Net) Reviews Kforce Inc.'s other expense, net, primarily consisting of interest expense and losses from equity method investment | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :-------------------------------- | :----------------------- | :----------------------- | | Other expense, net | $1.0M | $1.4M | | Loss from equity method investment | $0.8M | $0.8M | - Other expense, net primarily includes interest expense and losses related to the equity method investment, which was **$0.8 million** for both periods[80](index=80&type=chunk)[81](index=81&type=chunk) [Income Tax Expense Analysis](index=20&type=section&id=Income%20Tax%20Expense) Presents Kforce Inc.'s effective tax rate for the three months ended March 31, 2023 and 2022 | Metric | Q1 2023 | Q1 2022 | | :-------------------------------- | :------ | :------ | | Effective tax rate | 27.5% | 27.1% | [Non-GAAP Financial Measures](index=20&type=section&id=Non-GAAP%20Financial%20Measures) Defines and reconciles Kforce Inc.'s non-GAAP financial measures, including Free Cash Flow and Adjusted EBITDA - Non-GAAP financial measures like Free Cash Flow and Adjusted EBITDA are used by management to assess operations and provide additional insights for investors, complementing GAAP results[83](index=83&type=chunk)[86](index=86&type=chunk) [Free Cash Flow](index=20&type=section&id=Free%20Cash%20Flow) Defines and presents Kforce Inc.'s Free Cash Flow for Q1 2023 and 2022 - Free Cash Flow is defined as net cash provided by operating activities determined in accordance with GAAP, less capital expenditures[83](index=83&type=chunk) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :-------------------------------- | :----------------------- | :----------------------- | | Net cash provided by operating activities | $19.1M | $38.7M | | Capital expenditures | $(1.9M) | $(2.2M) | | Free cash flow | $17.2M | $36.5M | [Adjusted EBITDA](index=21&type=section&id=Adjusted%20EBITDA) Defines and presents Kforce Inc.'s Adjusted EBITDA for Q1 2023 and 2022 - Adjusted EBITDA is defined as net income before depreciation and amortization, stock-based compensation expense, interest expense, net, income tax expense, loss from equity method investment and certain other items[85](index=85&type=chunk) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :-------------------------------- | :----------------------- | :----------------------- | | Net income | $16.2M | $19.2M | | Depreciation and amortization | $1.2M | $1.1M | | Stock-based compensation expense | $4.3M | $4.4M | | Interest expense, net | $0.3M | $0.6M | | Income tax expense | $6.1M | $7.1M | | Loss from equity method investment | $0.8M | $0.8M | | Adjusted EBITDA | $28.7M | $33.3M | [Liquidity and Capital Resources](index=22&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Discusses Kforce Inc.'s liquidity and capital resources, including cash flows, credit facility, and stock repurchases - Kforce primarily relies on operating cash flows and borrowings under its credit facility to meet capital and liquidity requirements[88](index=88&type=chunk) - The company believes that existing cash and cash equivalents, operating cash flows, and available borrowings under its Credit Facility will be adequate to meet capital expenditure and working capital requirements for at least the next 12 months[93](index=93&type=chunk) [Cash Flows](index=22&type=section&id=Cash%20Flows) Analyzes Kforce Inc.'s cash flow activities from operations, investing, and financing for Q1 2023 and 2022 | Cash Flow Activity | Q1 2023 (in millions) | Q1 2022 (in millions) | YoY Change (%) | | :-------------------------------- | :----------------------- | :----------------------- | :------------- | | Cash provided by operating activities | $19.1M | $38.7M | (50.8)% | | Cash provided by investing activities | $2.4M | $(2.7M) | N/A | | Cash used in financing activities | $(21.4M) | $(16.4M) | 30.9% | - The year-over-year decrease in cash provided by operating activities was primarily driven by lower profitability levels, the timing of payments, and a reduction in our deferred tax liability given the sale of our joint venture[90](index=90&type=chunk) - Cash provided by investing activities in Q1 2023 was **$2.4 million**, primarily from the **$5.1 million** proceeds from the sale of a joint venture interest, partially offset by **$1.9 million** in capital expenditures[91](index=91&type=chunk) | Common Stock Repurchase Activity (in millions) | Q1 2023 | Q1 2022 | | :---------------------------------------------- | :-------- | :-------- | | Open market repurchases | $11.0M | $10.1M | | Repurchase of shares related to tax withholding requirements | $0.1M | $0.2M | | Total cash flow impact of common stock repurchases | $11.1M | $10.3M | - Quarterly dividends increased by **20% per share**, from **$0.30 in Q1 2022** to **$0.36 in Q1 2023**, totaling **$7.0 million**[92](index=92&type=chunk) [Credit Facility](index=22&type=section&id=Credit%20Facility) Provides an update on Kforce Inc.'s credit facility, including outstanding amounts and borrowing availability - As of March 31, 2023, **$22.3 million** was outstanding under the credit facility, with **$176.5 million** of borrowing availability[94](index=94&type=chunk) - The company expects to maintain compliance with its credit facility covenants[94](index=94&type=chunk) [Stock Repurchases](index=23&type=section&id=Stock%20Repurchases) Details Kforce Inc.'s stock repurchase program, including authorization increases and shares purchased during Q1 2023 - In February 2023, the Board approved an increase in the stock repurchase authorization, bringing the total authorization to **$100.0 million**[96](index=96&type=chunk) | Repurchase Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased (in millions) | | :-------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------- | | January 1, 2023 to January 31, 2023 | 138,318 | $55.67 | $33.6M | | February 1, 2023 to February 28, 2023 | 42,248 | $58.02 | $98.8M | | March 1, 2023 to March 31, 2023 | — | — | $98.8M | | Total | 180,566 | $56.22 | $98.8M | - During Q1 2023, Kforce repurchased approximately **178 thousand shares** of common stock for **$10.0 million**, with **$98.8 million** remaining available under the authorization[96](index=96&type=chunk) - A **1% nondeductible excise tax** on certain stock repurchases was recorded due to the IRA, but it is not expected to have a material impact on cash flows, results of operations, or financial position[97](index=97&type=chunk) [Contractual Obligations and Commitments](index=23&type=section&id=Contractual%20Obligations%20and%20Commitments) States that there have been no material changes to Kforce Inc.'s contractual obligations since the 2022 Annual Report - There have been no material changes to contractual obligations previously disclosed in the 2022 Annual Report on Form 10-K, other than those described elsewhere in this report[98](index=98&type=chunk) [Critical Accounting Estimates](index=23&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) Highlights Kforce Inc.'s critical accounting estimates and the inherent uncertainties in financial reporting - The preparation of financial statements requires management to make assumptions and estimates, particularly for allowance for credit losses, income taxes, self-insured health liabilities, and the impairment of goodwill and other long-lived assets[26](index=26&type=chunk)[99](index=99&type=chunk) - Actual results could differ materially from these estimates due to the inherent uncertainty of future events[99](index=99&type=chunk) [New Accounting Standards](index=23&type=section&id=NEW%20ACCOUNTING%20STANDARDS) Discusses Kforce Inc.'s adoption of new FASB guidance for reference rate reform and its expected impact - Kforce adopted FASB guidance for reference rate reform as of January 1, 2023, extending the final sunset date to December 31, 2024, with no material impact expected on consolidated financial statements[33](index=33&type=chunk)[100](index=100&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk.](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) No material changes to Kforce Inc.'s quantitative and qualitative disclosures about market risk since the 2022 Annual Report on Form 10-K - There have been no material changes to the information included in Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022[101](index=101&type=chunk) [Item 4. Controls and Procedures.](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures.) Details the evaluation of Kforce Inc.'s disclosure controls, internal control over financial reporting, inherent limitations, and CEO/CFO certifications [Evaluation of Disclosure Controls and Procedures](index=23&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Reports on the effectiveness of Kforce Inc.'s disclosure controls and procedures as of March 31, 2023 - The CEO and CFO concluded that the design and operation of the company's disclosure controls and procedures were effective as of March 31, 2023[102](index=102&type=chunk) [Changes in Internal Control over Financial Reporting](index=23&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) States that no material changes in Kforce Inc.'s internal control over financial reporting occurred during the last fiscal quarter - Management concluded that no material changes in internal control over financial reporting occurred during the last fiscal quarter[103](index=103&type=chunk) [Inherent Limitations of Internal Control Over Financial Reporting](index=23&type=section&id=Inherent%20Limitations%20of%20Internal%20Control%20Over%20Financial%20Reporting) Acknowledges the inherent limitations of internal control over financial reporting in preventing or detecting all material misstatements - Due to inherent limitations, internal control over financial reporting may not prevent or detect all material misstatements due to error or fraud on a timely basis[104](index=104&type=chunk) [CEO and CFO Certifications](index=24&type=section&id=CEO%20and%20CFO%20Certifications) Confirms the inclusion of CEO and CFO certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002 - Certifications by the CEO and CFO are included as Exhibits 31.1 and 31.2, as required by Section 302 of the Sarbanes-Oxley Act of 2002[105](index=105&type=chunk) [PART II - OTHER INFORMATION](index=24&type=section&id=PART%20II%20OTHER%20INFORMATION) This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings.](index=24&type=section&id=Item%201.%20Legal%20Proceedings.) Refers to Note L for legal proceedings, noting that while outcomes are uncertain, they are not expected to materially affect financial position - The company is involved in legal proceedings, claims, and administrative matters that arise in the ordinary course of business, which are not expected to have a material effect on its financial position[107](index=107&type=chunk) [Item 1A. Risk Factors.](index=24&type=section&id=Item%201A.%20Risk%20Factors.) No material changes in Kforce Inc.'s risk factors previously disclosed in the 2022 Annual Report on Form 10-K - There have been no material changes in the risk factors previously disclosed in our 2022 Annual Report on Form 10-K[108](index=108&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.](index=24&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) Details Kforce Inc.'s common stock repurchases during Q1 2023 under its publicly announced repurchase program | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased (in millions) | | :-------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------- | | January 1, 2023 to January 31, 2023 | 138,318 | $55.67 | $33.6M | | February 1, 2023 to February 28, 2023 | 42,248 | $58.02 | $98.8M | | March 1, 2023 to March 31, 2023 | — | — | $98.8M | | Total | 180,566 | $56.22 | $98.8M | - In February 2023, the Board approved an increase in the stock repurchase authorization, increasing the available authorization to **$100.0 million**[110](index=110&type=chunk) - All dollar amounts presented exclude the **1% nondeductible excise tax** imposed by the IRA on the net value of certain open market stock repurchases made after December 31, 2022[110](index=110&type=chunk) [Item 3. Defaults Upon Senior Securities.](index=24&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) States that there were no defaults upon senior securities - No defaults upon senior securities were reported[111](index=111&type=chunk) [Item 4. Mine Safety Disclosures.](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) States that there are no mine safety disclosures - No mine safety disclosures were reported[112](index=112&type=chunk) [Item 5. Other Information.](index=24&type=section&id=Item%205.%20Other%20Information.) States that there is no other information to disclose - No other information was reported[113](index=113&type=chunk) [Item 6. Exhibits.](index=25&type=section&id=Item%206.%20Exhibits.) Lists the exhibits filed as part of the Form 10-Q, including corporate documents, stock incentive plans, certifications, and XBRL data - The report includes various exhibits such as Amended and Restated Articles of Incorporation, Bylaws, the 2023 Stock Incentive Plan, and CEO/CFO certifications[114](index=114&type=chunk) - XBRL formatted financial statements and related notes are provided as Exhibit 101.1[114](index=114&type=chunk) [SIGNATURES](index=26&type=section&id=SIGNATURES) This section contains the required signatures for the Form 10-Q filing - The report is signed by David M. Kelly, Executive Vice President, Chief Financial Officer, and Jeffrey B. Hackman, Senior Vice President, Finance and Accounting, on May 9, 2023[118](index=118&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________________________________________________________________ FORM 10-K _____________________________________________________________________________ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ...

Financial Data and Key Metrics Changes - In 2022, the company achieved revenues of approximately $1.71 billion, representing an increase of nearly 8% year-over-year, with GAAP earnings per share at $3.68 and adjusted earnings per share of $4.25, improving approximately 20% year-over-year [67][41][51] - Operating cash flows were $90.8 million for 2022, and when adjusted for certain cash outflows, would have been approximately $130 million [70][50] - The company returned in excess of $830 million in capital to shareholders since 2007, representing approximately 75% of the cash generated [70] Business Line Data and Key Metrics Changes - The Technology business grew revenues by 18% in 2022, with a year-over-year growth of nearly 8% in the fourth quarter [41][120] - Flex margins in the Technology business were 26.1% in the fourth quarter, increasing 10 basis points sequentially but declining 30 basis points year-over-year [49] - The average bill rate in Technology improved to approximately $90 per hour, with a 1.7% sequential growth [20] Market Data and Key Metrics Changes - The company noted broad-based demand across various industries, with no specific vertical experiencing acute reductions in demand as of early 2023 [122][120] - The competitive landscape remains stable among larger players, while smaller operators are under pressure due to economic conditions [11][12] Company Strategy and Development Direction - The company is focused on advancing its integrated sales strategy and transforming its back office to sustain long-term growth ambitions and achieve double-digit operating margins [118][132] - There is a commitment to continue investing in managed teams and project solutions, which are expected to bring higher margins [125][45] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of technology spending, noting that critical technology initiatives are still being pursued despite economic uncertainty [20][115] - The company has a strong balance sheet with virtually no debt and is well-positioned to navigate potential economic challenges [34][117] Other Important Information - The company has reduced its real estate footprint by approximately 40%, leading to lower overall costs [69] - A 20% increase in the dividend to $1.44 per share was approved, reflecting confidence in the business [51] Q&A Session All Questions and Answers Question: Changes in client behavior and demand - Management noted that while there has been a higher level of project scrutiny from clients, they continue to invest in critical technology projects, particularly in cloud and digital transformation [85][86] Question: Impact of AI on business opportunities - Management acknowledged the buzz around AI and its potential to create new business opportunities, though it is still early to assess the full impact [75][78] Question: Expectations for bill rates and margins - The company expects stability in bill rates and margins, with minor fluctuations anticipated in the current economic environment [74] Question: Labor market tightness - The IT labor market remains tight, with clients being selective in hiring, but no significant changes in candidate supply are expected [82][83] Question: Insights on managed teams and project solutions - The company indicated that managed teams and project solutions engagements are in demand and typically yield higher margins compared to traditional services [88][125]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Exact name of registrant as specified in its charter _______________________________________________________________ FORM 10-Q ________________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For ...

Kforce, Inc. (NYSE:KFRC) Q3 2022 Earnings Conference Call October 31, 2022 5:00 PM ET Company Participants Joseph Liberatore - CEO, President & Director Kye Mitchell - EVP & COO David Kelly - EVP, Chief Financial & Administrative Officer and Corporate Secretary Conference Call Participants Timothy Mulrooney - William Blair & Company Marc Riddick - Sidoti & Company Kartik Mehta - Northcoast Research Partners Tobey Sommer - Truist Securities Mark Marcon - Robert W. Baird & Co. Operator Ladies and gentlemen, t ...

[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This part presents Kforce Inc.'s unaudited condensed consolidated financial statements and related disclosures [ITEM 1. FINANCIAL STATEMENTS.](index=3&type=section&id=Item%201.%20Financial%20Statements.) This section presents Kforce Inc.'s unaudited condensed consolidated financial statements and detailed notes [UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME](index=3&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20AND%20COMPREHENSIVE%20INCOME) This section provides Kforce Inc.'s unaudited condensed consolidated statements of operations and comprehensive income **Three Months Ended June 30, 2022 vs. 2021 (in thousands):** | Metric | 2022 | 2021 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Revenue | $436,516 | $403,614 | $32,902 | 8.2% | | Gross profit | $131,072 | $118,931 | $12,141 | 10.2% | | Income from operations | $33,849 | $33,123 | $726 | 2.2% | | Net income | $26,916 | $21,188 | $5,728 | 27.0% | | Diluted EPS | $1.30 | $1.00 | $0.30 | 30.0% | **Six Months Ended June 30, 2022 vs. 2021 (in thousands):** | Metric | 2022 | 2021 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Revenue | $853,483 | $766,839 | $86,644 | 11.3% | | Gross profit | $254,958 | $217,613 | $37,345 | 17.2% | | Income from operations | $61,593 | $52,574 | $9,019 | 17.2% | | Net income | $46,097 | $34,449 | $11,648 | 33.8% | | Diluted EPS | $2.22 | $1.61 | $0.61 | 37.9% | [UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS](index=4&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents Kforce Inc.'s unaudited condensed consolidated balance sheets as of June 30, 2022, and December 31, 2021 **Balance Sheet Highlights (in thousands):** | Metric | June 30, 2022 | December 31, 2021 | Change | | :-------------------------------- | :------------ | :---------------- | :----- | | Cash and cash equivalents | $29,974 | $96,989 | $(67,015) | | Total current assets | $326,293 | $372,111 | $(45,818) | | Total assets | $442,052 | $503,401 | $(61,349) | | Total current liabilities | $189,516 | $160,431 | $29,085 | | Long-term debt – credit facility | $0 | $100,000 | $(100,000) | | Total liabilities | $231,519 | $314,995 | $(83,476) | | Total stockholders' equity | $210,533 | $188,406 | $22,127 | [UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY](index=5&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENT%20OF%20CHANGES%20IN%20STOCKHOLDERS'%20EQUITY) This section details changes in Kforce Inc.'s stockholders' equity for the six months ended June 30, 2022 - Total stockholders' equity **increased** from **$188,406 thousand** at December 31, 2021, to **$210,533 thousand** at June 30, 2022, driven by net income of **$46,097 thousand**, stock-based compensation expense, and employee stock purchase plan contributions, partially offset by dividends paid and common stock repurchases[20](index=20&type=chunk) **Key Changes in Stockholders' Equity (Six Months Ended June 30, 2022, in thousands):** | Item | Amount | | :------------------------------------ | :------- | | Balance, December 31, 2021 | $188,406 | | Net income | $46,097 | | Stock-based compensation expense | $8,847 | | Employee stock purchase plan | $537 | | Dividends paid | $(12,187) | | Repurchases of common stock | $(20,553) | | Balance, June 30, 2022 | $210,533 | [UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS](index=7&type=section&id=UNAUDITED%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This section outlines Kforce Inc.'s unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 **Cash Flow Summary (Six Months Ended June 30, in thousands):** | Activity | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Cash provided by operating activities | $70,760 | $36,574 | | Cash used in investing activities | $(5,958) | $16,323 | | Cash used in financing activities | $(131,817) | $(39,104) | | Change in cash and cash equivalents | $(67,015) | $13,793 | | Cash and cash equivalents, end of period | $29,974 | $117,279 | - Operating cash flow **significantly increased** in H1 2022 to **$70.8 million** from **$36.6 million** in H1 2021. Investing activities shifted from providing cash in 2021 (due to asset sales) to using cash in 2022. Financing activities saw a **substantial increase** in cash usage, primarily due to the repayment of **$100 million** on the credit facility[23](index=23&type=chunk) [Note A - Summary of Significant Accounting Policies](index=9&type=section&id=Note%20A%20-%20Summary%20of%20Significant%20Accounting%20Policies) This note summarizes Kforce Inc.'s significant accounting policies and the basis of financial statement preparation - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for interim financial reporting, condensing or omitting certain GAAP information. Management believes disclosures are adequate and reflect all necessary adjustments for fair presentation. Quarterly results are affected by billing days, client seasonality, and increased holiday/vacation days, with **higher costs** typically in Q1 due to employment tax resets[27](index=27&type=chunk)[28](index=28&type=chunk) - Kforce retains **significant risk** for health insurance claims, up to **$600,000** per participant annually, and an aggregate annual loss of **$200,000** for claims exceeding **$600,000**. Accruals for health insurance costs are based on historical claims, actuarial completion factors, and qualitative review[31](index=31&type=chunk) - No new accounting standards adopted during the twenty-six weeks ended June 26, 2022, had an impact on financial statements, and no unadopted standards are expected to have a **significant impact**[34](index=34&type=chunk)[35](index=35&type=chunk) [Note B - Reportable Segments](index=11&type=section&id=Note%20B%20-%20Reportable%20Segments) This note provides financial information for Kforce Inc.'s Technology and Finance and Accounting reportable segments **Segment Performance (Three Months Ended June 30, in thousands):** | Metric | Technology (2022) | Technology (2021) | FA (2022) | FA (2021) | | :---------------- | :------------------ | :------------------ | :-------- | :-------- | | Revenue | $384,595 | $310,728 | $51,921 | $92,886 | | Gross profit | $109,917 | $88,235 | $21,155 | $30,696 | **Segment Performance (Six Months Ended June 30, in thousands):** | Metric | Technology (2022) | Technology (2021) | FA (2022) | FA (2021) | | :---------------- | :------------------ | :------------------ | :-------- | :-------- | | Revenue | $744,500 | $590,288 | $108,983 | $176,551 | | Gross profit | $212,367 | $162,515 | $42,591 | $55,098 | - Kforce operates through Technology and Finance and Accounting (FA) segments. Technology revenue and gross profit saw **significant increases**, while FA experienced **declines**, primarily due to the planned reduction in COVID-19 related business and repositioning efforts[37](index=37&type=chunk) [Note C - Disaggregation of Revenue](index=12&type=section&id=Note%20C%20-%20Disaggregation%20of%20Revenue) This note disaggregates Kforce Inc.'s revenue by service type (Flex and Direct Hire) and reportable segment **Revenue Disaggregation by Type (Three Months Ended June 30, in thousands):** | Revenue Type | Technology (2022) | Technology (2021) | FA (2022) | FA (2021) | Total (2022) | Total (2021) | | :------------- | :------------------ | :------------------ | :-------- | :-------- | :----------- | :----------- | | Flex revenue | $375,507 | $304,645 | $44,193 | $86,717 | $419,700 | $391,362 | | Direct Hire revenue | $9,088 | $6,083 | $7,728 | $6,169 | $16,816 | $12,252 | **Revenue Disaggregation by Type (Six Months Ended June 30, in thousands):** | Revenue Type | Technology (2022) | Technology (2021) | FA (2022) | FA (2021) | Total (2022) | Total (2021) | | :------------- | :------------------ | :------------------ | :-------- | :-------- | :----------- | :----------- | | Flex revenue | $727,223 | $579,429 | $94,343 | $165,780 | $821,566 | $745,209 | | Direct Hire revenue | $17,277 | $10,859 | $14,640 | $10,771 | $31,917 | $21,630 | - Flex revenue remains the **dominant revenue type**, with Technology Flex revenue showing **strong growth** (**25.5%** YoY for six months), while FA Flex revenue **declined significantly** (**-43.1%** YoY for six months). Direct Hire revenue showed **robust growth** across both segments (**47.6%** YoY total for six months)[39](index=39&type=chunk) [Note D - Allowance for Credit Losses](index=12&type=section&id=Note%20D%20-%20Allowance%20for%20Credit%20Losses) This note details Kforce Inc.'s accounting policy and activity for the allowance for credit losses on trade receivables - The allowance for credit losses on trade receivables is determined by factors such as write-off and delinquency trends, specific analysis of past-due balances, client concentration, and the U.S. economy. Credit loss rates are applied by aging category, and quarterly credit reviews are performed for certain clients[40](index=40&type=chunk) **Allowance for Credit Losses Activity (Six Months Ended June 30, 2022, in thousands):** | Item | Amount | | :---------------------------------------------------------- | :----- | | Allowance for credit losses, January 1, 2022 | $1,729 | | Current period provision (credit) | $(172) | | Write-offs charged against the allowance, net of recoveries | $(201) | | Allowance for credit losses, June 30, 2022 | $1,356 | [Note E - Other Assets, Net](index=13&type=section&id=Note%20E%20-%20Other%20Assets,%20Net) This note provides a breakdown of Kforce Inc.'s other assets, net, including investments and capitalized software **Other Assets, Net (in thousands):** | Asset Type | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Assets held in Rabbi Trust | $31,874 | $41,607 | | Right-of-use assets for operating leases, net | $11,889 | $15,395 | | Capitalized software, net | $15,572 | $14,666 | | Equity method investment (WorkLLama) | $15,668 | $17,008 | | Other non-current assets | $6,686 | $2,015 | | Total Other assets, net | $82,687 | $92,629 | - The equity method investment in WorkLLama resulted in a loss of **$1.8 million** for the six months ended June 30, 2022, and Kforce contributed **$0.5 million** in capital during the same period. A promissory note receivable of **$2.0 million** was issued to WorkLLama[42](index=42&type=chunk) [Note F - Current Liabilities](index=13&type=section&id=Note%20F%20-%20Current%20Liabilities) This note details Kforce Inc.'s current liabilities, including accounts payable, accrued payroll, and other accrued liabilities **Current Liabilities (in thousands):** | Liability Type | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Accounts payable and other accrued liabilities | $94,616 | $81,408 | | Accrued payroll costs | $88,454 | $71,424 | | Total current liabilities | $189,516 | $160,431 | - Accrued payroll costs include approximately **$19.3 million** in payroll tax payments related to the CARES Act 2020, expected to be repaid by December 31, 2022. The Supplemental Executive Retirement Plan (SERP) was terminated in April 2021, with **$20.0 million** in benefits fully paid in July 2022[43](index=43&type=chunk)[44](index=44&type=chunk) [Note G - Credit Facility](index=13&type=section&id=Note%20G%20-%20Credit%20Facility) This note describes Kforce Inc.'s credit facility, including borrowing capacity and outstanding balances - Kforce has an Amended and Restated Credit Facility with a maximum borrowing capacity of **$200.0 million**, maturing on October 20, 2026. The outstanding balance of **$100.0 million** was repaid in May 2022, resulting in **$0** outstanding as of June 30, 2022[45](index=45&type=chunk)[47](index=47&type=chunk) [Note H - Other Long-Term Liabilities](index=14&type=section&id=Note%20H%20-%20Other%20Long-Term%20Liabilities) This note outlines Kforce Inc.'s other long-term liabilities, such as deferred compensation and operating lease liabilities **Other Long-Term Liabilities (in thousands):** | Liability Type | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Deferred compensation plan | $33,030 | $42,623 | | Operating lease liabilities | $8,959 | $11,919 | | Total | $42,003 | $54,564 | [Note I - Stock Incentive Plans](index=14&type=section&id=Note%20I%20-%20Stock%20Incentive%20Plans) This note describes Kforce Inc.'s stock incentive plans and related stock-based compensation expense - The 2021 Stock Incentive Plan, approved by shareholders, reserves approximately **3.9 million** shares for various stock-based awards and terminates on April 22, 2031. Restricted stock awards vest over one to ten years[49](index=49&type=chunk)[50](index=50&type=chunk) **Stock-Based Compensation Expense (in thousands):** | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three Months Ended June 30, | $4,410 | $3,532 | | Six Months Ended June 30, | $8,848 | $6,936 | - As of June 30, 2022, total unrecognized stock-based compensation expense related to restricted stock was **$42.0 million**, to be recognized over a weighted-average remaining period of **4.3 years**[51](index=51&type=chunk) [Note J - Derivative Instruments and Hedging Activity](index=14&type=section&id=Note%20J%20-%20Derivative%20Instruments%20and%20Hedging%20Activity) This note details Kforce Inc.'s use of derivative instruments and hedging activities to manage interest rate risk - Kforce terminated Swap B in May 2022, receiving a **$4.1 million** gain, which is included in other income. As of June 30, 2022, the Firm had no outstanding derivative instruments, having used interest rate swaps (Swap A and Swap B) to mitigate rising interest rate risks on variable rate debt[52](index=52&type=chunk)[53](index=53&type=chunk)[55](index=55&type=chunk) [Note K - Fair Value Measurements](index=15&type=section&id=Note%20K%20-%20Fair%20Value%20Measurements) This note provides information on Kforce Inc.'s fair value measurements, particularly for derivative instruments - Interest rate swaps were measured at fair value using Level 2 inputs. Swap A matured in April 2022, and Swap B was terminated in May 2022. There were no transfers into or out of Level 1, 2, or 3 assets or liabilities during the six months ended June 30, 2022[57](index=57&type=chunk)[58](index=58&type=chunk) [Note L - Commitments and Contingencies](index=15&type=section&id=Note%20L%20-%20Commitments%20and%20Contingencies) This note outlines Kforce Inc.'s various commitments and contingencies, including legal proceedings and equity investments - Kforce has employment agreements with executives that provide for post-employment benefits, with potential liabilities of approximately **$38.2 million** following a change in control or **$13.7 million** without a change in control[59](index=59&type=chunk) - The company is involved in several legal proceedings, primarily class action and PAGA lawsuits in California related to alleged labor code violations (e.g., meal/rest periods, wage statements, overtime). While some settlements have been reached, others are ongoing, and outcomes are uncertain, though Kforce does not currently expect a **material adverse effect** on its financial position[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk)[69](index=69&type=chunk) - Kforce holds a **50%** noncontrolling equity method investment in WorkLLama, a joint venture. Despite not achieving operational and financial milestones, Kforce contributed the full **$22.5 million** maximum potential capital as of June 30, 2022. An impairment test as of June 30, 2022, concluded the carrying value was **not impaired**, but **future impairment is possible** if financial projections are not met or valuation assumptions change[70](index=70&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section discusses Kforce's financial condition and operating results for the three and six months ended June 30, 2022 [EXECUTIVE SUMMARY](index=19&type=section&id=EXECUTIVE%20SUMMARY) This summary highlights Kforce's key financial performance and capital allocation for the six months ended June 30, 2022 **Key Financial Highlights (Six Months Ended June 30, 2022 vs. 2021, in millions):** | Metric | 2022 | 2021 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Total Revenue | $853.5 | $766.8 | $86.7 | 11.3% | | Technology Revenue | $744.5 | $590.3 | $154.2 | 26.1% | | FA Revenue | $109.0 | $176.5 | $(67.5) | -38.2% | | Flex Revenue | $821.6 | $745.2 | $76.4 | 10.2% | | Direct Hire Revenue | $31.9 | $21.6 | $10.3 | 47.7% | | Gross Profit Margin | 29.9% | 28.4% | 1.5 pp | - | | Income from operations | $61.6 | $52.6 | $9.0 | 17.1% | | Net income | $46.1 | $34.4 | $11.7 | 34.0% | | Diluted EPS | $2.22 | $1.61 | $0.61 | 37.9% | | Cash provided by operating activities | $70.8 | $36.6 | $34.2 | 93.4% | - Kforce returned **$32.3 million** to shareholders in H1 2022 through **$20.1 million** in open market repurchases and **$12.2 million** in quarterly dividends[78](index=78&type=chunk) [RESULTS OF OPERATIONS](index=20&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes Kforce's operating results, including revenue, gross profit, and expenses, for the reporting periods [Business Overview](index=20&type=section&id=Business%20Overview) This section provides an overview of Kforce's business, market position, and industry outlook for talent solutions - Kforce is a leading domestic provider of technology and finance and accounting talent solutions, with a focus on Fortune 1000 and large companies. Technology talent solutions represent nearly **88%** of overall revenues[79](index=79&type=chunk) - As of June 30, 2022, Kforce employed approximately **2,100** associates and had about **10,300** consultants on assignment. The U.S. staffing industry forecast by SIA in May 2022 estimates technology temporary staffing to grow **12%** in 2022 and **6%** in 2023, while finance and accounting temporary staffing is estimated to grow **8%** in 2022 and **5%** in 2023[79](index=79&type=chunk)[80](index=80&type=chunk) [Operating Results - Three and Six Months Ended June 30, 2022 and 2021](index=20&type=section&id=Operating%20Results%20-%20Three%20and%20Six%20Months%20Ended%20June%2030,%202022%20and%202021) This section compares Kforce's operating results for the three and six months ended June 30, 2022 and 2021 **Revenue Mix by Segment and Type (as % of Total Revenue):** | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :---------------- | :------ | :------ | :------ | :------ | | Technology Revenue | 88.1% | 77.0% | 87.2% | 77.0% | | FA Revenue | 11.9% | 23.0% | 12.8% | 23.0% | | Flex Revenue | 96.1% | 97.0% | 96.3% | 97.2% | | Direct Hire Revenue | 3.9% | 3.0% | 3.7% | 2.8% | | Gross profit | 30.0% | 29.5% | 29.9% | 28.4% | | SG&A expenses | 22.0% | 21.0% | 22.4% | 21.2% | | Net income | 6.2% | 5.2% | 5.4% | 4.5% | [Revenue](index=21&type=section&id=Revenue) This section analyzes Kforce's total revenue growth and segment-specific performance for the reporting periods **Total Revenue Growth by Segment (YoY % Change):** | Segment | Q2 2022 | H1 2022 | | :-------- | :------ | :------ | | Technology | 23.8% | 26.1% | | FA | (44.1)% | (38.3)% | | Total Revenue | 8.2% | 11.3% | **Revenue Growth Rates (Per Billing Day, YoY):** | Segment | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | Q2 2021 | | :-------- | :------ | :------ | :------ | :------ | :------ | | Technology | 23.3% | 26.0% | 31.0% | 28.9% | 20.9% | | FA | (49.0)% | (37.6)% | (28.9)% | (41.3)% | 2.7% | | Total Flex | 7.2% | 11.8% | 16.6% | 9.1% | 16.3% | [Flex Revenue](index=21&type=section&id=Flex%20Revenue) This section details the performance and key drivers of Kforce's Flex revenue by segment - Technology Flex revenue **increased** **23.3%** (Q2) and **24.5%** (H1) YoY, driven by growth in consultants and **higher average bill rates** (up **8.1%** YoY in Q2). FA Flex revenue **decreased** **49.0%** (Q2) and **43.5%** (H1) YoY, primarily due to the anticipated decline in COVID-19 related business and repositioning efforts, despite average bill rates **improving** **33.1%** YoY in Q2[83](index=83&type=chunk)[84](index=84&type=chunk) **Key Drivers for Change in Flex Revenue (Six Months Ended June 30, 2022 vs. 2021, in thousands):** | Driver | Technology | FA | | :---------------- | :--------- | :------- | | Volume - hours billed | $97,888 | $(94,021) | | Bill rate | $48,620 | $22,572 | | Billable expenses | $1,286 | $12 | | Total change | $147,794 | $(71,437) | **Total Flex Hours Billed (Six Months Ended June 30, in thousands):** | Segment | 2022 | 2021 | % Change | | :-------- | :----- | :----- | :------- | | Technology | 8,414 | 7,194 | 17.0% | | FA | 2,088 | 4,825 | (56.7)% | | Total | 10,502 | 12,019 | (12.6)% | [Direct Hire Revenue](index=22&type=section&id=Direct%20Hire%20Revenue) This section analyzes the growth and key drivers of Kforce's Direct Hire revenue by segment - Direct Hire revenue **increased significantly** by **37.3%** (Q2) and **47.6%** (H1) YoY, driven by a **substantial increase** in both the number of placements and associated fees, reflecting an improved economic environment and increased competition for talent[87](index=87&type=chunk) **Key Drivers for Change in Direct Hire Revenue (Six Months Ended June 30, 2022 vs. 2021, in thousands):** | Driver | Technology | FA | | :------------------------ | :--------- | :------- | | Volume - number of placements | $4,343 | $2,593 | | Placement fee | $2,075 | $1,276 | | Total change | $6,418 | $3,869 | **Total Number of Placements (Six Months Ended June 30):** | Segment | 2022 | 2021 | % Change | | :-------- | :--- | :--- | :------- | | Technology | 757 | 541 | 39.9% | | FA | 860 | 693 | 24.1% | | Total | 1,617 | 1,234 | 31.0% | **Average Placement Fee (Six Months Ended June 30):** | Segment | 2022 | 2021 | % Change | | :-------- | :------- | :------- | :------- | | Technology | $22,826 | $20,084 | 13.7% | | FA | $17,033 | $15,548 | 9.6% | | Total | $19,746 | $17,537 | 12.6% | [Gross Profit](index=23&type=section&id=Gross%20Profit) This section discusses Kforce's gross profit and gross profit percentage, highlighting segment-specific trends **Gross Profit Percentage (YoY % Change):** | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------------ | :------ | :------ | :------ | :------ | | Technology | 28.6% | 28.4% | 28.5% | 27.5% | | FA | 40.7% | 33.0% | 39.1% | 31.2% | | Total gross profit percentage | 30.0% | 29.5% | 29.9% | 28.4% | - Total gross profit percentage **increased** by **50 basis points** (Q2) and **150 basis points** (H1) YoY, primarily due to an increased mix of higher-margin Direct Hire revenue[89](index=89&type=chunk) - FA Flex gross profit margins **increased significantly** (**210 bps** in Q2, **290 bps** in H1) due to the reduction of lower-margin COVID-19 related business and successful repositioning efforts, along with **lower healthcare and payroll costs**. Technology Flex margins remained **stable** or **slightly improved**[91](index=91&type=chunk) [SG&A Expenses](index=23&type=section&id=SG%26A%20Expenses) This section analyzes Kforce's selling, general, and administrative expenses and their impact on profitability **SG&A Expenses as % of Revenue:** | Component | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------------------------------ | :------ | :------ | :------ | :------ | | Compensation, commissions, payroll taxes and benefits costs | 18.9% | 18.3% | 19.1% | 18.4% | | Other SG&A | 3.2% | 2.7% | 3.4% | 2.9% | | Total SG&A | 22.0% | 21.0% | 22.4% | 21.2% | - SG&A as a percentage of revenue **increased** by **100 basis points** (Q2) and **120 basis points** (H1) YoY. This increase was attributed to a gain on the sale of corporate headquarters in Q2 2021 (which lowered the prior year's percentage), **higher performance-based compensation**, and other business investments[92](index=92&type=chunk) [Depreciation and Amortization](index=24&type=section&id=Depreciation%20and%20Amortization) This section details Kforce's depreciation and amortization expenses for fixed assets and capitalized software **Depreciation and Amortization Expense (Six Months Ended June 30, in thousands):** | Category | 2022 | 2021 | % Change | | :------------------------------------ | :----- | :----- | :------- | | Fixed asset depreciation | $1,305 | $1,554 | (16.0)% | | Capitalized software amortization | $864 | $840 | 2.9% | | Total Depreciation and amortization | $2,169 | $2,394 | (9.4)% | [Other (Income) Expense, Net](index=24&type=section&id=Other%20(Income)%20Expense,%20Net) This section explains the components of Kforce's other (income) expense, net, including gains from derivative terminations - Other (income) expense, net, shifted from an expense of **$3.1 million** (Q2 2021) to income of **$2.7 million** (Q2 2022), primarily due to a **$4.1 million** gain from the termination of Swap B in May 2022. This line item also includes interest expense, interest income, and Kforce's proportionate share of the loss from WorkLLama (**$1.8 million** for H1 2022)[93](index=93&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) [Income Tax Expense](index=24&type=section&id=Income%20Tax%20Expense) This section provides information on Kforce's income tax expense and effective tax rate for the reporting periods - The effective tax rate for the six months ended June 30, 2022, was **26.6%**, down from **28.5%** in the comparable period of 2021[96](index=96&type=chunk) [Non-GAAP Financial Measures](index=24&type=section&id=Non-GAAP%20Financial%20Measures) This section presents and reconciles Kforce's non-GAAP financial measures, including Free Cash Flow and Adjusted EBITDA [Free Cash Flow](index=24&type=section&id=Free%20Cash%20Flow) This section defines and reconciles Kforce's Free Cash Flow, a key non-GAAP liquidity measure - Free Cash Flow, a non-GAAP measure, is defined as net cash provided by operating activities less capital expenditures. It **increased significantly** to **$67.3 million** for the six months ended June 30, 2022, from **$33.7 million** in the prior year[97](index=97&type=chunk)[98](index=98&type=chunk) **Free Cash Flow (Six Months Ended June 30, in thousands):** | Metric | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Net cash provided by operating activities | $70,760 | $36,574 | | Capital expenditures | $(3,458) | $(2,919) | | Free cash flow | $67,302 | $33,655 | [Adjusted EBITDA](index=25&type=section&id=Adjusted%20EBITDA) This section defines and reconciles Kforce's Adjusted EBITDA, a key non-GAAP profitability measure - Adjusted EBITDA, a non-GAAP measure, is used by management to assess operations and core profitability. It **increased** to **$72.6 million** for the six months ended June 30, 2022, from **$59.9 million** in the prior year[98](index=98&type=chunk)[101](index=101&type=chunk) **Adjusted EBITDA Reconciliation (Six Months Ended June 30, in thousands):** | Metric | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Net income | $46,097 | $34,449 | | Depreciation and amortization | $2,169 | $2,394 | | Stock-based compensation expense | $8,848 | $6,935 | | Interest expense, net | $979 | $1,562 | | Gain from swap termination | $(4,059) | $0 | | Income tax expense | $16,735 | $13,728 | | Loss from equity method investment | $1,840 | $1,022 | | Adjusted EBITDA | $72,609 | $59,860 | [LIQUIDITY AND CAPITAL RESOURCES](index=27&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses Kforce's liquidity position, cash flows, credit facility, and capital allocation strategies [Cash Flows](index=27&type=section&id=Cash%20Flows) This section analyzes Kforce's cash flows from operating, investing, and financing activities - Cash and cash equivalents **decreased** to **$30.0 million** at June 30, 2022, from **$97.0 million** at December 31, 2021. The company repaid **$100.0 million** outstanding on its credit facility in May 2022[102](index=102&type=chunk)[103](index=103&type=chunk) - Cash provided by operating activities **increased** to **$70.8 million** in H1 2022 from **$36.6 million** in H1 2021, driven by profitable revenue growth, proceeds from Swap B termination, and working capital management. Cash used in financing activities **significantly increased** to **$131.8 million** in H1 2022, primarily due to credit facility repayment and increased dividend payments[106](index=106&type=chunk)[108](index=108&type=chunk) **Common Stock Repurchase Activity (Six Months Ended June 30, in thousands):** | Item | 2022 | 2021 | | :---------------------------------------------------------- | :----- | :----- | | Open market repurchases | $19,136 | $29,591 | | Repurchase of shares related to tax withholding requirements | $464 | $336 | | Total cash flow impact of common stock repurchases | $19,600 | $29,927 | - Quarterly dividends **increased** by **30%** YoY, totaling **$12.2 million** (**$0.60** per share) in H1 2022 compared to **$9.5 million** (**$0.46** per share) in H1 2021[108](index=108&type=chunk) [Credit Facility](index=28&type=section&id=Credit%20Facility) This section details Kforce's credit facility, including borrowing availability and compliance with covenants - Kforce has **$198.6 million** of borrowing availability under its Amended and Restated Credit Facility as of June 30, 2022, with no outstanding balance. The company is in compliance with all credit facility covenants[111](index=111&type=chunk) [Stock Repurchases](index=28&type=section&id=Stock%20Repurchases) This section outlines Kforce's common stock repurchase program and activity during the period - The Board approved an increase in stock repurchase authorization to **$100.0 million** in February 2022. During H1 2022, Kforce repurchased approximately **303,000** shares for **$20.1 million**, leaving **$88.8 million** available for further repurchases[113](index=113&type=chunk) [Contractual Obligations and Commitments](index=28&type=section&id=Contractual%20Obligations%20and%20Commitments) This section addresses Kforce's contractual obligations and commitments, noting no material changes - No **material changes** to contractual obligations were reported during the period, other than those described elsewhere in the report[114](index=114&type=chunk) [CRITICAL ACCOUNTING ESTIMATES](index=28&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES) This section discusses Kforce's critical accounting estimates, particularly regarding its equity method investment [Equity Method Investment](index=28&type=section&id=Equity%20Method%20Investment) This section details the accounting and impairment assessment for Kforce's equity method investment in WorkLLama - Kforce's **50%** noncontrolling interest in WorkLLama is accounted for as an equity method investment. An impairment test was performed as of June 30, 2022, due to WorkLLama taking longer than expected to achieve financial expectations, but concluded the carrying value was **not impaired**. However, the fair value exceeded the carrying value by less than **ten percent**, indicating a **potential for future impairment** if projections are not met[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) [NEW ACCOUNTING STANDARDS](index=29&type=section&id=NEW%20ACCOUNTING%20STANDARDS) This section addresses the impact of new accounting standards on Kforce's financial statements - No new accounting standards adopted or issued are expected to have a **significant impact** on Kforce's financial statements[119](index=119&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This section confirms no material changes to Kforce's market risk disclosures since the prior annual report - No **material changes** to market risk disclosures since the 2021 Annual Report on Form 10-K[120](index=120&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES.](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures.) This section details the evaluation of Kforce's disclosure controls and internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=29&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms the effectiveness of Kforce's disclosure controls and procedures as of June 30, 2022 - As of June 30, 2022, Kforce's CEO and CFO concluded that the design and operation of the company's disclosure controls and procedures were **effective**[121](index=121&type=chunk) [Changes in Internal Control over Financial Reporting](index=29&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section states that no material changes occurred in Kforce's internal control over financial reporting - Management, with CEO and CFO participation, concluded that no **material changes** in internal control over financial reporting occurred during the last fiscal quarter[122](index=122&type=chunk) [Inherent Limitations of Internal Control Over Financial Reporting](index=29&type=section&id=Inherent%20Limitations%20of%20Internal%20Control%20Over%20Financial%20Reporting) This section acknowledges the inherent limitations of internal controls in preventing or detecting all misstatements - The report acknowledges that internal controls have inherent limitations, meaning material misstatements due to error or fraud may not always be prevented or detected on a timely basis[123](index=123&type=chunk) [CEO and CFO Certifications](index=30&type=section&id=CEO%20and%20CFO%20Certifications) This section confirms the inclusion of CEO and CFO certifications as required by the Sarbanes-Oxley Act - CEO and CFO certifications (Exhibits 31.1 and 31.2) are included as required by Section 302 of the Sarbanes-Oxley Act of 2002[125](index=125&type=chunk) [PART II - OTHER INFORMATION](index=30&type=section&id=PART%20II%20OTHER%20INFORMATION) This part presents other information required in the Form 10-Q, including legal proceedings and risk factors [ITEM 1. LEGAL PROCEEDINGS.](index=30&type=section&id=Item%201.%20Legal%20Proceedings.) This section refers to Note L for legal proceedings and states no material adverse effect is currently expected - Kforce is involved in various legal proceedings in the ordinary course of business, but currently does not expect them to have a **material effect** on its financial position[127](index=127&type=chunk) [ITEM 1A. RISK FACTORS.](index=30&type=section&id=Item%201A.%20Risk%20Factors.) This section confirms no material changes to Kforce's risk factors since the prior annual report - No **material changes** in risk factors since the 2021 Annual Report on Form 10-K[128](index=128&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.](index=30&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) This section details Kforce's common stock repurchase activity and authorization for the reporting period - The Board increased the stock repurchase authorization to **$100.0 million** in February 2022[129](index=129&type=chunk) **Common Stock Repurchases (Three Months Ended June 30, 2022):** | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining | | :-------------------------- | :--------------------- | :--------------------------- | :--------------------------------- | | April 1, 2022 to April 30, 2022 | — | $— | $98,787,598 | | May 1, 2022 to May 31, 2022 | 4,009 | $70.40 | $98,787,598 | | June 1, 2022 to June 30, 2022 | 158,783 | $62.98 | $88,786,772 | | Total | 162,792 | $63.17 | $88,786,772 | [ITEM 3. DEFAULTS UPON SENIOR SECURITIES.](index=30&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) This section states that no defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred[130](index=130&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES.](index=30&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) This section confirms that there are no mine safety disclosures to report for Kforce Inc - No mine safety disclosures to report[131](index=131&type=chunk) [ITEM 5. OTHER INFORMATION.](index=30&type=section&id=Item%205.%20Other%20Information.) This section states that there is no other information to report for Kforce Inc - No other information to report[132](index=132&type=chunk) [ITEM 6. EXHIBITS.](index=31&type=section&id=Item%206.%20Exhibits.) This section lists all exhibits filed with Kforce Inc.'s Form 10-Q, including certifications and financial data - Exhibits include Amended and Restated Articles of Incorporation, Amended & Restated Bylaws, CEO and CFO Certifications (Section 302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial statements[134](index=134&type=chunk) [SIGNATURES](index=32&type=section&id=SIGNATURES) This section contains the required signatures for Kforce Inc.'s Form 10-Q, certifying its submission [SIGNATURES](index=32&type=section&id=SIGNATURES) This section contains the required signatures for Kforce Inc.'s Form 10-Q, certifying its submission - The report was signed on August 3, 2022, by David M. Kelly, Executive Vice President, Chief Financial Officer, and Jeffrey B. Hackman, Senior Vice President, Finance and Accounting[139](index=139&type=chunk)

Financial Data and Key Metrics Changes - Second quarter revenues were $436.5 million, an increase of 8.2% year-over-year, with earnings per share at $1.30, reflecting a 30% year-over-year increase [22][28] - Gross margins increased by 50 basis points year-over-year to 30.0%, primarily due to a greater mix of direct hire revenues [23] - Operating margin was 7.8%, slightly improved over the prior year after normalizing for a prior gain [27] Business Line Data and Key Metrics Changes - Technology business grew approximately 7% sequentially and 24% year-over-year, with organic growth of almost 50% over the last two years [12][13] - FA business declined 44% year-over-year, with a 10.7% decline when excluding COVID-related revenues [19][20] - Average bill rates in Technology increased by 2.4% sequentially and over 8% year-over-year to approximately $87 per hour [15] Market Data and Key Metrics Changes - Demand in technology remains strong, with clients continuing to invest in digital transformation initiatives [6][16] - Financial services, as the largest vertical, is experiencing good growth, driven by investments in technology platforms [60][62] - The overall demand environment is still above pre-pandemic levels, with strong growth across most industries supported [14][17] Company Strategy and Development Direction - The company is focused on providing domestic technology talent solutions, which is seen as having the greatest prospects for sustained growth [11][32] - A hybrid office model called "office-occasional" has been implemented to provide flexibility and attract top talent [10][59] - The strategic decision to focus on technology has positioned the company as a top performer, with plans to continue investing in technology and people [5][31] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's positioning despite macroeconomic uncertainties, citing a debt-free balance sheet and improved profitability [5][32] - The company expects third quarter revenues in the Technology business to grow in the mid-teen range year-over-year [18] - Management noted that while wage inflation has moderated, it remains a factor, and the company is well-positioned to manage it [45][46] Other Important Information - The company generated significant operating cash flows of $32 million in the second quarter and prioritized returning capital to shareholders through dividends and stock repurchases [28][29] - The average length of assignments in the technology business has doubled over the last five years, indicating strong client retention [52][53] Q&A Session Summary Question: What types of activity saw a slowdown in the second quarter? - Management noted growth in all industries except for a slight dip in healthcare, which was client-specific, and overall demand remains strong [36][37] Question: How does the macro environment impact third quarter guidance? - Management indicated that while the demand environment is not at the heightened levels of the past year, it remains strong and above pre-pandemic levels [38][39] Question: What is the outlook on wage inflation? - Wage inflation has moderated compared to the previous year, but remains a factor, with stable margins expected [44][46] Question: How competitive is the talent market? - The technology talent market remains extremely competitive, with negative unemployment, but the company is confident in its recruitment capabilities [48][49] Question: What is the visibility on assignment duration? - Assignment duration continues to expand as clients retain talent for critical projects, with conversions of consultants to full-time roles up 37% year-over-year [52][54] Question: What is the company's stance on acquisitions? - The company has not made an acquisition in over a dozen years, focusing instead on organic growth in technology, with a high bar for any potential acquisitions [56][57] Question: How is the office-occasional model performing? - The office-occasional strategy has exceeded expectations, with positive feedback from employees and successful technology integration [59] Question: What is the outlook for the financial services segment? - Demand in financial services remains strong, driven by technology investments, with no expected changes in growth [60][62] Question: What is the expected trend for the repositioned FA business? - The FA business is expected to continue declining in the short term as resources are focused on technology, but this is seen as a strategic long-term decision [63][64]

Kforce Overview - Kforce's market capitalization is $1.5 billion [5] - Kforce generates 100% of its revenue domestically with approximately 2,000 associates across the U S [6] - Kforce serves approximately 70% of Fortune-ranked companies [7, 12] - Technology constitutes 86% of Kforce's focus today, compared to 50% in 2007 [8] Financial Performance - Q1 2022 TTM revenues grew 14.6% year-over-year to $1.63 billion [9, 13] - Q1 2022 revenues increased 13% year-over-year to $417 million [9, 13] - Technology revenues grew 26.7% year-over-year in Q1 2022 and 35% over Q1 2020 [9, 13] - Kforce returned $16.2 million in capital to shareholders in Q1 2022 [16] Future Expectations - Kforce anticipates Q2 2022 revenues between $436 million and $444 million [24] - Kforce expects full-year 2022 revenue of at least $1.7 billion [27]