Kforce(KFRC) - 2019 Q4 - Annual Report

Part I Item 1. Business Kforce Inc. provides professional staffing services via Technology and Finance & Accounting segments, focusing on temporary and permanent placements after its 2019 Government Solutions divestiture - Kforce provides professional staffing services through its Technology (Tech) and Finance and Accounting (FA) segments, offering both temporary (Flex) and permanent (Direct Hire) solutions[17] - In 2019, Kforce sold its Government Solutions (GS) segment, which is now reported as discontinued operations, to sharpen its focus on commercial staffing[19] 2019 Segment Performance Overview | Segment | 2019 Revenue | YoY Growth | Key Metrics | | :--- | :--- | :--- | :--- | | Tech | $1.1 billion | 6.8% | Average bill rate: ~$76/hour (+3.1% YoY) | | FA | $289.5 million | -7.7% | Average bill rate: ~$37/hour (+5.7% YoY) | - Flex revenue represents about 96% of total revenue, driven by the number of consultants, billable hours, and bill rates. Direct Hire revenue, though less than 4% of the total, contributes significantly to gross profit[23][25][26] - Key business strategies include investing in a new talent relationship management system (TRM), enhancing client partnerships, improving the consultant experience through referral technology, and expanding into managed services and solutions[31][32][35][37] Item 1A. Risk Factors Kforce faces significant risks including economic sensitivity, talent recruitment challenges, employment-related legal issues, cybersecurity threats, and complex government regulations - Demand for staffing services is highly dependent on general economic activity and employment conditions. An economic downturn could materially adversely affect business, financial condition, and operating results[46] - The company faces significant competition for qualified technical and professional individuals, and a constrained supply of consultants, especially in the Tech segment, could adversely affect the business[47] - Cybersecurity risks are a major concern, as the company collects and retains personal information. A breach could lead to operational disruption, litigation, regulatory penalties, and reputational damage[50][51] - The business is subject to extensive government regulation, including employment laws, licensing, and immigration restrictions. Changes in H-1B visa availability could restrain the ability to employ skilled professionals needed for the Tech segment[53][54][55] - The business is dependent on the proper functioning of its information systems for critical operations like matching resources to clients and billing. System failures, including those at third-party cloud providers, could have a material adverse effect[62] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - None[77] Item 2. Properties Kforce owns its 128,000 sq. ft. Tampa headquarters and leases 247,000 sq. ft. across 50 U.S. field offices as of December 31, 2019 - Owns corporate headquarters in Tampa, FL (128,000 sq. ft.)[78] - Leases approximately 247,000 sq. ft. for 50 field offices across the U.S. as of year-end 2019[78] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are currently deemed material to its financial position - The company is involved in ordinary course legal proceedings but does not believe any are currently material[79] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[80] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kforce common stock trades on NASDAQ (KFRC); the company repurchased 823,168 shares for approximately $31.4 million in Q4 2019 under a $150.0 million authorization - The company's common stock trades on NASDAQ under the symbol KFRC[82] Q4 2019 Stock Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2019 | 703,579 | $37.90 | | Nov 2019 | 835 | $40.18 | | Dec 2019 | 118,754 | $39.95 | | Total Q4 2019 | 823,168 | $38.20 | - As of December 31, 2019, approximately $44.3 million remained available for repurchase under the publicly announced program[83] Item 6. Selected Financial Data This section summarizes five-year financial data, showing 2019 revenue of $1.35 billion and net income of $54.6 million from continuing operations, reflecting the GS segment divestiture Selected Financial Data (Continuing Operations, in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | $1,347,387 | $1,303,937 | $1,253,646 | | Gross profit | $395,038 | $386,487 | $375,597 | | Income from continuing operations | $54,566 | $50,876 | $29,594 | | EPS – diluted, continuing operations | $2.29 | $2.02 | $1.16 | | Dividends declared per share | $0.72 | $0.60 | $0.48 | Selected Balance Sheet Data (As of Dec 31, in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total assets | $381,125 | $379,908 | | Total outstanding borrowings | $65,000 | $71,800 | | Stockholders' equity | $167,263 | $168,331 | - The sale of the GS segment was completed in 2019, and its results are presented as discontinued operations for all periods shown[89] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Kforce's 2019 revenue from continuing operations grew 3.3% to $1.35 billion, driven by Tech segment growth, while income increased 7.3% to $54.6 million, supported by strong liquidity and strategic initiatives Executive Summary Kforce's 2019 revenue increased 3.3% to $1.35 billion, with income from continuing operations up 7.3% to $54.6 million, while returning $134.4 million to shareholders 2019 Financial Highlights vs. 2018 | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $1.35B | $1.30B | +3.3% | | - Tech Revenue | - | - | +6.8% | | - FA Revenue | - | - | -7.7% | | Income from Continuing Ops | $54.6M | $50.9M | +7.3% | | Diluted EPS from Continuing Ops | $2.29 | $2.02 | +13.4% | | SG&A as % of Revenue | 23.3% | 23.6% | -30 bps | - The company returned $134.4 million to shareholders in 2019, consisting of $16.6 million in dividends and $117.8 million in share repurchases[94] - Total outstanding debt under the Credit Facility decreased by $6.8 million to $65.0 million at year-end 2019[94] Results of Operations Kforce's 2019 total revenue grew 3.3% to $1.35 billion, driven by Tech segment growth despite FA segment decline, while gross profit margin decreased to 29.3% and SG&A improved to 23.3% of revenue Revenue by Segment (in thousands) | Segment | 2019 Revenue | 2018 Revenue | % Change | | :--- | :--- | :--- | :--- | | Tech | $1,057,859 | $990,089 | 6.8% | | FA | $289,528 | $313,848 | -7.7% | | Total | $1,347,387 | $1,303,937 | 3.3% | - Tech Flex revenue growth of 6.8% in 2019 was more than double SIA's projected industry growth rate of 3%, driven by large clients[99] - FA Flex revenue declined 8.6% due to a strategic repositioning towards higher-skilled positions, which resulted in a 5.7% increase in average bill rates but lower volume[100] - Total gross profit percentage decreased by 30 basis points to 29.3% in 2019, primarily due to a 40 basis point decline in Flex gross profit margin caused by business mix shifts towards larger clients with slightly lower margin profiles[104][105] - SG&A as a percentage of revenue decreased 30 basis points to 23.3%, reflecting increased associate productivity and expense discipline, even with $2.0 million in severance costs from the GS divestiture[109] Discontinued Operations Kforce completed the sale of its GS segment in 2019, including KGS for $115.0 million (net gain $72.3 million) and TFX for $18.4 million (net gain $7.0 million), resulting in $76.3 million income from discontinued operations - On April 1, 2019, Kforce sold its KGS business to ManTech International for $115.0 million, realizing a net gain of $72.3 million[114] - On June 7, 2019, Kforce sold its TFX business for $18.4 million, realizing a net gain of $7.0 million[115] - Total income from discontinued operations for 2019 was $76.3 million, net of tax, which includes the gains from the sales of KGS and TFX[113] Liquidity and Capital Resources Kforce maintains strong liquidity with $66.6 million in operating cash flow and a $300 million credit facility, enabling $117.8 million in share repurchases and dividend increases in 2019 Summary of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Operating activities | $66,617 | $87,723 | | Investing activities | $103,185 | $(4,170) | | Financing activities | $(150,083) | $(83,820) | - Cash from operations decreased in 2019 primarily due to the timing of income tax payments and refunds, and lower cash contribution from the divested GS segment[127] - The company repurchased 3.3 million shares for $117.8 million in 2019, utilizing proceeds from the GS divestiture[94][133][134] - As of Dec 31, 2019, $65.0 million was outstanding on the credit facility, with $231.6 million available. The company also has an interest rate swap to hedge against rising rates[131][132] Critical Accounting Estimates Management's critical accounting estimates involve significant judgment for doubtful accounts, income taxes, equity method investment and goodwill impairment, self-insured liabilities, and pension plan assumptions - Key estimates requiring significant management judgment include: Allowance for Doubtful Accounts, Accounting for Income Taxes, Equity Method Investment valuation, Goodwill Impairment, Self-Insured Liabilities, and Defined Benefit Pension Plan assumptions[143] - Goodwill is tested for impairment annually or more frequently if indicators exist, using qualitative assessments or quantitative methods like discounted cash flow and market approaches[151][152] - The company is self-insured for certain health and workers' compensation claims, requiring estimates for reported claims and claims incurred but not reported (IBNR)[154] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Kforce's primary market risk is interest rate exposure on its $65.0 million variable-rate debt, mitigated by an interest rate swap, while monitoring the LIBOR transition - The company's main market risk is interest rate changes on its $65.0 million of outstanding debt as of year-end 2019[159][160] - Kforce uses an interest rate swap to hedge against rising interest rates. The swap fixes the rate on a notional amount of $65.0 million until May 2020, after which the notional amount decreases to $25.0 million through maturity in 2022[161] - The company is evaluating the impact of the expected discontinuation of LIBOR after 2021 and the transition to an alternative benchmark rate[162] Item 8. Financial Statements and Supplementary Data This section presents Kforce's audited consolidated financial statements for 2017-2019, with Deloitte & Touche LLP providing an unqualified opinion and identifying the equity method investment as a critical audit matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[165] - The auditor identified the accounting for the equity method investment in WorkLLama as a critical audit matter due to the significant judgment required by management in estimating future contingent contributions to determine the initial investment value[174][175] Consolidated Statement of Operations Highlights (in thousands) | Line Item | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | $1,347,387 | $1,303,937 | $1,253,646 | | Gross Profit | $395,038 | $386,487 | $375,597 | | Income from Continuing Operations | $54,566 | $50,876 | $29,594 | | Income from Discontinued Operations | $76,296 | $7,104 | $3,691 | | Net Income | $130,862 | $57,980 | $33,285 | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $245,235 | $248,462 | | Total Assets | $381,125 | $379,908 | | Total Current Liabilities | $84,964 | $90,358 | | Total Liabilities | $213,862 | $211,577 | | Total Stockholders' Equity | $167,263 | $168,331 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[312] Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2019, with no material changes in Q4 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[312] - Management assessed internal control over financial reporting as effective as of December 31, 2019, based on the COSO framework[318] - No material changes to internal controls over financial reporting were identified during the fourth quarter of 2019[313] Item 9B. Other Information The company reports no other information for this item - None[320] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2020 Annual Meeting of Shareholders[322] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2020 Annual Meeting of Shareholders[324] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and related matters is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2020 Annual Meeting of Shareholders[325] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2020 Annual Meeting of Shareholders[326] Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information is incorporated by reference to the definitive proxy statement for the 2020 Annual Meeting of Shareholders[327] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists documents filed with the Form 10-K, including consolidated financial statements, Schedule II, and an exhibit index of corporate agreements and certifications - This item includes the list of consolidated financial statements and Schedule II – Valuation and Qualifying Accounts and Reserves[329][331] - An exhibit index is provided, listing key corporate documents, agreements, and certifications filed with the report[330][335] Item 16. Form 10-K Summary This item is not applicable to the company - Not applicable[334]