KFORCE INC. EXECUTIVE SUMMARY The following is an executive summary of what Kforce believes are highlights as of and for the six months endedJune 30, 2020 , which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto. •Revenue for the six months endedJune 30, 2020 increased 1.9% to$678.2 million from$665.6 million in the comparable period in 2019. •Flex revenue for the six months endedJune 30, 2020 increased 3.5% to$662.5 million from$640.3 million in the comparable period in 2019. Flex revenue increased 0.9% and 13.5% for Tech and FA, respectively. We secured two large contracts to support government-sponsored COVID-19 related initiatives (the "COVID-19 Business") that benefited FA Flex with$35.1 million in revenue for the three months endedJune 30, 2020 . •Direct Hire revenue for the six months endedJune 30, 2020 decreased 37.8% to$15.7 million from$25.3 million in the comparable period in 2019, primarily driven by a significant decline in the volume of placements due to the ongoing impact of the COVID-19 pandemic on the economic environment. •Flex gross profit margin for the six months endedJune 30, 2020 increased 20 basis points to 26.6% from 26.4% in the comparable period in 2019. For the six months endedJune 30, 2020 , Flex gross profit increased 70 basis points for Tech and decreased 160 basis points for FA. The COVID-19 Business negatively impacted FA Flex gross profit margin. •SG&A as a percentage of revenue for the six months endedJune 30, 2020 decreased to 23.6% from 23.7% in the comparable period in 2019. •Income from continuing operations for the six months endedJune 30, 2020 decreased 21.0% to$19.0 million , or$0.89 per share, from$24.1 million , or$0.97 per share, in the comparable period in 2019. •InMarch 2020 , Kforce entered into a forward-starting interest rate swap agreement with a fixed interest rate of 0.61% (which is added to the applicable margin under our credit facility), resulting in an increase in the notional amount of our interest rate swaps of$35.0 million , for a total of$100.0 million . We executed this swap in order to take advantage of historically low interest rates and reduce liquidity risk at the onset of the COVID-19 economic and health crisis. •The Firm returned$37.9 million of capital to our shareholders with a quarterly dividend of$8.5 million ($0.40 per share) and open market common stock repurchases of$29.4 million during the six months endedJune 30, 2020 . InMarch 2020 , the Board approved an increase in our stock repurchase authorization to an aggregate of$100.0 million . •Cash provided by operating activities was$39.0 million during the six months endedJune 30, 2020 compared to$22.3 million for the six months endedJune 30, 2019 . Our operating cash flows were positively impacted by certain tax payment deferrals. RESULTS OF OPERATIONS Business Overview Kforce provides professional staffing services and solutions to our clients on both a temporary ("Flex") and permanent ("Direct Hire") basis through our Tech and FA segments. We operate through our corporate headquarters inTampa, Florida with over 40 field offices located throughoutthe United States . As ofJune 30, 2020 , Kforce employed approximately 2,100 associates and we had approximately 11,800 consultants on assignment (of which approximately 3,000 of these consultants were on assignment supporting the COVID-19 Business). Kforce serves clients across many industries and geographies as well as organizations of all sizes, with a particular focus on Fortune 1000 and other large companies. We believe that our portfolio of service offerings is a key contributor to our long-term financial stability. During 2020, theU.S. and global macro-economic environments have been severely impacted by the COVID-19 economic and health crisis. From an economic standpoint, temporary employment figures and trends have historically been important indicators of staffing demand. These figures and trends have fluctuated significantly in the first half of 2020 based on data published by theBureau of Labor Statistics and Staffing Industry Analysts ("SIA") and substantial uncertainty still remains around the future trends and impact on staffing demand. The penetration rate (the percentage of temporary staffing to total employment) and unemployment rate were 1.6% and 11.1%, respectively, inJune 2020 , which will likely continue to fluctuate significantly in the near-term as this economic and health crisis evolves. A report published by SIA inJuly 2020 indicates that the technology temporary staffing industry and finance and accounting temporary staffing industry are estimated to decline by 10% and 17%, respectively, for 2020. Certain sectors of theU.S. economy have been more acutely impacted by the COVID-19 economic and health crisis, such as the hospitality, transportation, retail, entertainment, health services and manufacturing sectors, though very few sectors appear to be immune. Kforce generates revenue within each of the aforementioned sectors of theU.S. economy, although the composition of our revenue by industry is, by intent, diversified. Our top three industries served include financial services, business services and telecommunications. 17 -------------------------------------------------------------------------------- Table of Con tents During the end of the first quarter and through the second quarter, theU.S. economy increasingly suffered the adverse effects of the COVID-19 economic and health crisis. Accordingly, we have and will continue to work closely with our clients to assist them in navigating these turbulent times. In some cases, this resulted in the reduction or elimination of consultants on previous projects and assignments, reducing bill rates, granting extended payment terms, and/or temporary furloughs for consultants, among other impacts. We also experienced a decrease in our leading indicators, such as job orders for both Flex assignments and Direct Hire placements. However, we believe Kforce has been successful thus far in mitigating the adverse effects due to the concentration of our revenues in technology (roughly 75% in the second quarter of 2020) and having a diversified client portfolio serving many industries with no undue concentration in any single industry, among other factors. Our client relationships and capability to source and deliver resources at scale has significantly contributed to us securing the COVID-19 Business to assist theU.S. economy during this crisis in areas such as customer service, loan processing and administration. This new business contributed$35.1 million in FA Flex revenue during the second quarter and is expected to continue into the third quarter, although these contracts are likely shorter-term and non-recurring in nature. The business climate related to this economic and health crisis is extremely fluid, and there is significant uncertainty as to the extent and length of the potential impacts on our business, clients, consultants and candidates. Despite certain adverse effects to our business due to the abrupt economic disruption, we believe our strategic decisions to focus our offerings in theU.S. domestic technology and professional staffing and solutions market, limit the concentration of Direct Hire revenue (less than 3% of total revenue), and maintain a strong balance sheet provide us confidence moving forward. In addition, we believe our investments in recent years to implement new and upgrade existing technologies have increased our operating efficiencies and enabled us to be more responsive to our consultants and clients. Most of our technologies can be securely accessed remotely, which put us in a good position to seamlessly transition to operating our business remotely. We have conducted multiple employee satisfaction surveys during this pandemic and the results indicate that our associates have embraced the ingenuity required to work remotely and have been successful in establishing new routines, which may cause us to increasingly look to a more flexible working environment in the future. Given the positive feedback from our associates during this work remote environment, we are taking the time to implement appropriate health and safety measures in each of our offices including, but not limited to, personal protective equipment, social distancing standards and personal accountability measures. Our guiding principle is to ensure the safety and well-being of our employees, consultants and clients. Operating Results - Three and Six Months EndedJune 30, 2020 and 2019 The following table presents certain items in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as a percentage of revenue: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue by segment: Tech 74.6 % 78.3 % 77.0 % 78.3 % FA 25.4 21.7 23.0 21.7 Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Revenue by type: Flex 98.1 % 96.0 % 97.7 % 96.2 % Direct Hire 1.9 4.0 2.3 3.8 Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 28.4 % 29.8 % 28.3 % 29.2 % Selling, general and administrative expenses 23.5 % 23.0 % 23.6 % 23.7 % Depreciation and amortization 0.4 % 0.5 % 0.4 % 0.5 % Income from operations 4.5 % 6.3 % 4.3 % 5.0 % Income from continuing operations, before income taxes 4.1 % 6.2 % 3.9 % 4.8 % Income from continuing operations 2.9 % 4.7 % 2.8 % 3.6 % Income from discontinued operations, net of tax - % 17.3 % - % 11.7 % Net income 2.9 % 22.1 % 2.8 % 15.3 % 18
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Table of Con tents
Revenue. The following table presents revenue by type for each segment and the percentage change from the prior period (in thousands):
Three Months Ended June 30 , Six
Months Ended
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech
Flex revenue $ 251,948 (3.0) % $ 259,707 $ 514,517 0.9 % $ 509,923
Direct Hire revenue 3,802 (32.1) % 5,598 8,017 (27.3) % 11,025
Total Tech revenue$ 255,750 (3.6) %$ 265,305 $ 522,534 0.3 %$ 520,948 FA Flex revenue$ 84,469 28.7 %$ 65,647 $ 148,009 13.5 %$ 130,412 Direct Hire revenue 2,801 (64.6) % 7,909 7,685 (46.0) % 14,239 Total FA revenue$ 87,270 18.6 %$ 73,556 $ 155,694 7.6 %$ 144,651 Total Flex revenue$ 336,417 3.4 %$ 325,354 $ 662,526 3.5 %$ 640,335 Total Direct Hire revenue 6,603 (51.1) % 13,507 15,702 (37.8) % 25,264 Total Revenue$ 343,020 1.2 %$ 338,861 $ 678,228 1.9 %$ 665,599 Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year revenue growth rates, on a billing day basis, for the last five quarters: Year-Over-Year Revenue
Growth Rates
(Per Billing Day)
Q2 2020 Q1 2020 Q4 2019 Q3 2019 Q2 2019
Billing Days 64 64 62 64 64
Tech Flex (3.0) % 3.3 % 4.8 % 6.5 % 6.2 %
FA Flex 28.7 % (3.4) % (7.6) % (5.3) % (9.4) %
Total Flex 3.4 % 1.9 % 2.1 % 3.9 % 2.6 %
Flex Revenue. The key drivers of Flex revenue are the number of consultants on
assignment, billable hours, the bill rate per hour and, to a limited extent, the
amount of billable expenses incurred by Kforce.
Flex revenue for Tech decreased 3.0% and increased 0.9% during the three and six
months ended June 30, 2020 , respectively, as compared to the same periods in
2019. The decline in the second quarter was primarily driven by selective
accelerated assignment ends by clients that were most significantly impacted
early in the quarter by this economic and health crisis. While new assignment
starts during the second quarter were well below levels experienced in the
comparable period in 2019, assignment ends slowed towards the end of the second
quarter and were also significantly below prior year levels. Additionally, lower
billable hours in our Tech business were partially offset by higher average bill
rates, which increased 6.2% on a year-over-year basis in the second quarter of
2020, due to the demand for higher-skilled consultants. In July 2020 , SIA
projected that temporary technology staffing would experience a decline of 10%
for 2020, a slight improvement from the expected 14% decline as of April 2020 .
We believe that the current crisis has only strengthened the secular drivers of
demand in technology as companies assess their digital transformation efforts
and capabilities to conduct business in what may be a more virtual operating
environment. As we look to the third quarter, Tech Flex revenue is down
approximately 2% on a year-over-year basis in July, and we expect third quarter
revenue may remain stable or slightly increase as compared to the second
quarter.
Our FA segment experienced an increase in Flex revenue of 28.7% and 13.5% during
the three and six months ended June 30, 2020 , respectively, as compared to the
same periods in 2019, primarily driven by the COVID-19 Business, which
contributed approximately $35.1 million in revenue during the second quarter.
This positively impacted FA Flex revenue growth rates by 53.5% and 26.9% for the
three and six months ended June 30, 2020 , respectively. Although these contracts
positively impacted FA Flex during the second quarter and are expected to
benefit third quarter revenues in a range of $45 million to $55 million , they
will likely be shorter-term and non-recurring in nature. In July 2020 , SIA
projected that finance and accounting temporary staffing would decline 17% in
2020, down from the 15% decline estimated in April 2020 . As we look to the third
quarter, FA Flex revenue, including the COVID-19 Business, could increase
approximately 17% as compared to the second quarter and nearly 50% as compared
to the third quarter of 2019.
Future forecasts and predictions about the demand for temporary staffing and
solutions are inherently uncertain due to the unknown impacts of the
macro-economic environment in which we are currently operating as a result of
the COVID-19 economic and health crisis, and any forward-looking information
could fluctuate materially.
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Table of Con tents
The following table presents the key drivers for the change in Flex revenue by
segment over the prior period (in thousands):
Three Months Ended Six Months Ended
June 30, 2020 vs. June
June 30, 2020 vs. June 30, 2019 30, 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Volume - hours billed $ (21,131) $ 23,905 $ (15,342) $ 19,856
Bill rate 14,709 (5,002) 21,379 (2,130)
Billable expenses (1,337) (81) (1,443) (129)
Total change in Flex revenue $ (7,759) $ 18,822 $ 4,594 $ 17,597 The following table presents total Flex hours billed by segment and percentage change over the prior period (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 3,141 (8.2) % 3,421 6,551 (3.0) % 6,756
FA 2,450 36.5 % 1,795 4,112 15.3 % 3,567
Total Flex hours billed 5,591 7.2 % 5,216 10,663 3.3 % 10,323
For the three and six months ended June 30, 2020 , FA Flex hours billed included
1,217 thousand hours from the COVID-19 Business.
Direct Hire Revenue. The key drivers of Direct Hire revenue are the number of
placements and the associated placement fee. Direct Hire revenue also includes
conversion revenue, which may occur when a consultant initially assigned to a
client on a temporary basis is later converted to a permanent placement for a
fee.
Direct Hire revenue decreased 51.1% and 37.8% during the three and six months
ended June 30, 2020 , respectively, as compared to the same periods in 2019,
primarily driven by a significant decline in the volume of placements due to the
uncertain economic environment. As we look to the third quarter, we expect
Direct Hire revenue could remain at or near second quarter levels.
The following table presents the key drivers for the change in Direct Hire
revenue by segment over the prior period (in thousands):
Three Months Ended Six Months Ended
June 30, 2020 vs. June
June 30, 2020 vs. June 30, 2019 30, 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Volume - number of placements $ (2,214) $ (5,282) $ (3,241) $ (6,609)
Placement fee 418 174 233 55
Total change in Direct Hire revenue
The following table presents the total number of placements by segment and percentage change over the prior period:
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 187 (39.3) % 308 430 (29.3) % 608
FA 188 (66.8) % 566 555 (46.4) % 1,036
Total number of placements 375 (57.1) % 874 985 (40.1) % 1,644
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Table of Con tents
The following table presents the average placement fee by segment and percentage
change over the prior period:
Three Months Ended June 30, Six Months Ended June 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech $ 20,387 12.4 % $ 18,144 $ 18,667 3.0 % $ 18,125
FA 14,927 6.6 % 13,998 $ 13,846 0.7 % $ 13,748
Total average placement fee $ 17,648 14.1 % $ 15,463 $ 15,949 3.8 % $ 15,367
Gross Profit. Gross profit is calculated by deducting direct costs (primarily
consultant compensation, payroll taxes, payroll-related insurance and certain
fringe benefits, as well as independent contractor costs) from total revenue.
There are no consultant payroll costs associated with Direct Hire placements,
thus all Direct Hire revenue increases gross profit by the full amount of the
placement fee.
The following table presents the gross profit percentage (gross profit as a
percentage of total revenue) by segment and percentage change over the prior
period:
Six Months Ended June
Three Months Ended June 30, 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 28.2 % 0.7 % 28.0 % 27.7 % 1.1 % 27.4 %
FA 28.8 % (21.1) % 36.5 % 30.3 % (14.4) % 35.4 %
Total gross profit percentage 28.4 % (4.7) % 29.8 % 28.3 % (3.1) % 29.2 %
The change in total gross profit percentage for the six months ended June 30,
2020 , as compared to the same period in 2019, is primarily driven by the
decrease in the mix of Direct Hire revenue as well as lower gross profit margins
on the COVID-19 Business.
Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue)
provides management with helpful insight into the other drivers of total gross
profit percentage driven by our Flex business such as changes in the spread
between the consultants' bill rate and pay rate, changes in payroll tax rates or
benefits costs, as well as the impact of billable expenses, which provide no
profit margin.
The following table presents the Flex gross profit percentage by segment and
percentage change over the prior period:
Six Months Ended June
Three Months Ended June 30, 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 27.1 % 2.7 % 26.4 % 26.6 % 2.7 % 25.9 %
FA 26.5 % (8.3) % 28.9 % 26.7 % (5.7) % 28.3 %
Total Flex gross profit percentage 27.0 % 0.4 % 26.9 % 26.6 % 0.8 % 26.4 %
Overall, our Flex gross profit percentage remained fairly flat for the three and
six months ended June 30, 2020 as compared to 2019, although there were notable
fluctuations within our segments.
•Tech Flex gross profit margin increased 70 basis points for the three and six
months ended June 30, 2020 as compared to the same periods in 2019, primarily
due to a reduction in the amount of billable expenses. The spread between
consultant bill and pay rates remained stable.
•FA Flex gross profit margin decreased 240 basis points and 160 basis points for
the three and six months ended June 30, 2020 , as compared to the same periods in
2019, primarily due to compression in bill and pay spreads. The decrease in the
second quarter was impacted by the COVID-19 Business, which contributed a lower
gross profit margin than the rest of the FA portfolio, as well as higher payroll
taxes due to the volume of new consultants onboarded to support this business.
For the three months ended June 30, 2020 , the estimated Flex gross profit margin
for the COVID-19 Business was 24.7%, which is roughly 300 basis points lower
than the remaining FA Flex business.
We expect that the positive margin impact of lower billable expenses will
continue in the near-term as our clients continue to limit travel for our
consultants. Additionally, our expectation is that the spread between consultant
bill and pay rates may be under some pressure in the near-term due to the
current economic and health crisis, but we have not yet experienced these
declines in Tech. Our FA Flex gross profit percentage is expected to be
adversely affected, on a year-over-year basis, due to the COVID-19 Business as
described above, for the duration of these contracts.
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Table of Con tents
The following table presents the key drivers for the change in Flex gross profit
by segment over the prior period (in thousands):
Three Months Ended Six Months Ended
June 30, 2020 vs. June
June 30, 2020 vs. June 30, 2019 30, 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Revenue impact $ (2,049) $ 5,431 $ 1,189 $ 4,988
Profitability impact 1,865 (2,008) 3,470 (2,402)
Total change in Flex gross profit $ (184) $
3,423
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 81.9% and 81.6% for the three and six months endedJune 30, 2020 , respectively, as compared to 83.2% and 83.4% for the comparable periods in 2019, respectively. Commissions and other bonus incentives for our revenue-generating talent are variable costs driven primarily by revenue and gross profit levels. Therefore, as gross profit levels change, these expenses would also generally be anticipated to change, but remain relatively consistent as a percentage of revenue. The following table presents components of SG&A as a percentage of revenue (in thousands): 2020 % of Revenue 2019 % of Revenue Three Months EndedJune 30 , Compensation, commissions, payroll taxes and benefits costs$ 66,005 19.3 %$ 64,922 19.1 % Other (1) 14,541 4.2 % 13,095 3.9 % Total SG&A$ 80,546 23.5 %$ 78,017 23.0 % Six Months EndedJune 30 , Compensation, commissions, payroll taxes and benefits costs$ 130,372 19.2 %$ 131,557 19.8 % Other (1) 29,390 4.4 % 26,273 3.9 % Total SG&A$ 159,762 23.6 %$ 157,830 23.7 % (1) Includes credit loss expense, lease expense, professional fees, travel, telephone, computer and certain other expenses. For the three months endedJune 30, 2020 , SG&A as a percentage of revenue increased 50 basis points as compared to 2019. As experienced in other economic downturns, we are prioritizing the retention of our most productive people, which is creating a degree of SG&A deleverage despite the decline in revenue-generating talent we have experienced. The increase in Other SG&A was primarily driven by approximately$1.2 million in operating lease and other expenses related to certain office closures and certain additional costs from the new COVID-19 Business. These increases were partially offset by significantly reduced spending in areas such as travel and other office-related expenses due to the current economic and health crisis. For the six months endedJune 30, 2020 , SG&A as a percentage of revenue was fairly flat as compared to 2019, driven by a decrease in compensation costs offset by an increase in other costs. The decrease in compensation costs was driven by continued improvements in associate productivity. The increase in Other SG&A costs was driven by the items noted above as well as an increase in credit loss expense due to a higher estimated risk of default within our accounts receivable portfolio resulting from the current economic and health crisis. During the six months endedJune 30, 2019 , SG&A was adversely affected by approximately$2.0 million of expense due to actions taken as a result of the GS divestiture. The Firm continues to focus on improving the productivity of our associates and expects to continue exercising solid expense discipline, especially in light of the potential adverse impacts that could occur as a result of the macro-economic uncertainties related to the current economic and health crisis. Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category (in thousands): Three Months Ended June 30, Six Months Ended June 30, Increase Increase 2020 (Decrease) 2019 2020 (Decrease) 2019 Fixed asset depreciation (includes finance leases)$ 1,132 (6.6) %$ 1,212 $ 2,308 (8.9) % $
2,534
Capitalized software amortization 248 (24.8) % 330 465 (29.3) %
658
Total Depreciation and amortization$ 1,380 (10.5) %$ 1,542 $ 2,773 (13.1) % $
3,192
Other Expense, Net. Other expense, net for the three and six months endedJune 30, 2020 was$1.4 million and$2.8 million , respectively. Other expense, net for the three and six months endedJune 30, 2019 was$0.4 million and$1.3 million , respectively. Other expense, net consists primarily of interest expense related to outstanding borrowings under our credit facility, which is partially offset by the interest income on cash held in government money market funds. 22 -------------------------------------------------------------------------------- Table of Con tents During the three and six months endedJune 30, 2020 , Other expense, net also includes our proportionate share of the loss from WorkLLama, our equity method investment, of$0.5 million and$1.1 million , respectively. Although the impact of the COVID-19 economic and health crisis remains highly uncertain, it could have a material adverse impact on the fair value of our equity method investment in WorkLLama; if the fair value falls below the book value of the equity method investment, we would be required to evaluate whether an other-than-temporary impairment has occurred. Income Tax Expense. Income tax expense as a percentage of income from continuing operations, before income taxes (our "effective tax rate" from continuing operations) for the six months endedJune 30, 2020 and 2019 was 28.4% and 24.5%, respectively. The increase was primarily driven by certain tax provision true-ups recorded during the second quarter. Discontinued Operations, Net of Tax. During 2019, we sold the GS segment and reported it as discontinued operations in the consolidated statements of operations for all periods presented. Refer to Note B - "Discontinued Operations" to the Notes to the Unaudited Condensed Consolidated Financial Statements for a more detailed discussion. Non-GAAP Financial Measures Free Cash Flow. "Free Cash Flow," a non-GAAP financial measure, is defined by Kforce as net cash provided by operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic opportunities including investing in our business, making acquisitions, repurchasing common stock or paying dividends. Free Cash Flow is limited, however, because it does not represent the residual cash flow available for discretionary expenditures. Therefore, we believe it is important to view Free Cash Flow as a complement to (but not a replacement of) our Unaudited Condensed Consolidated Statements of Cash Flows. For the six months endedJune 30, 2019 , Free Cash Flows includes results from discontinued operations. The following table presents Free Cash Flow (in thousands): Six Months Ended June 30, 2020 2019 Net cash provided by operating activities$ 38,966 $ 22,330 Capital expenditures (3,793) (4,184) Free cash flow 35,173 18,146 Change in debt 35,000 (6,800) Repurchases of common stock (29,593) (51,546) Cash dividends (8,455) (8,684) Equity method investment (2,500) (7,500) Net proceeds from the sale of assets held for sale - 122,696 Other 2,915 (1,377) Change in cash and cash equivalents$ 32,540
Adjusted EBITDA. "Adjusted EBITDA", a non-GAAP financial measure, is defined by
Kforce as net income before income from discontinued operations, net of tax,
depreciation and amortization, stock-based compensation expense, interest
expense, net, income tax expense and loss from equity method investment.
Adjusted EBITDA should not be considered a measure of financial performance
under GAAP. Items excluded from Adjusted EBITDA are significant components in
understanding and assessing our past and future financial performance, and this
presentation should not be construed as an inference by us that our future
results will be unaffected by those items excluded from Adjusted EBITDA.
Adjusted EBITDA is a key measure used by management to assess our operations
including our ability to generate cash flows and our ability to repay our debt
obligations and management believes it provides a good metric of our core
profitability in comparing our performance to our competitors, as well as our
performance over different time periods. Consequently, management believes it is
useful information to investors. The measure should not be considered in
isolation or as an alternative to net income, cash flows or other financial
statement information presented in the consolidated financial statements as
indicators of financial performance or liquidity. The measure is not determined
in accordance with GAAP and is thus susceptible to varying calculations. Also,
Adjusted EBITDA, as presented, may not be comparable to similarly titled
measures of other companies.
In addition, although we excluded amortization of stock-based compensation
expense because it is a non-cash expense, we expect to continue to incur
stock-based compensation in the future and the associated stock issued may
result in an increase in our outstanding shares of stock, which may result in
the dilution of our shareholder ownership interest. We suggest that you evaluate
these items and the potential risks of excluding such items when analyzing our
financial position.
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Table of Con tents
The following table presents a reconciliation of Adjusted EBITDA to net income
(in thousands):
2020 2019
Three Months Ended June 30 ,
Net income $ 9,885 $ 74,859
Income from discontinued operations, net of tax - 58,783
Income from continuing operations 9,885 16,076
Depreciation and amortization 1,380 1,542
Stock-based compensation expense 2,903 2,429
Interest expense, net 893 410
Income tax expense 4,123 4,988
Loss from equity method investment 539 -
Adjusted EBITDA $ 19,723 $ 25,445
Six Months Ended June 30 ,
Net income $ 18,991 $ 101,714
Income from discontinued operations, net of tax - 77,664
Income from continuing operations 18,991 24,050
Depreciation and amortization 2,773 3,192
Stock-based compensation expense 5,799 4,963
Interest expense, net 1,684 1,333
Income tax expense 7,551 7,804
Loss from equity method investment 1,134 -
Adjusted EBITDA $ 37,932 $ 41,342
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on our
operating cash flow as well as borrowings under our credit facility. At June 30,
2020 and December 31, 2019 , we had $52.4 million and $19.8 million in cash and
cash equivalents, respectively, which consisted primarily of government money
market funds, and $100.0 million and $65.0 million outstanding under our credit
facility, respectively. The amounts outstanding under our credit facility were
hedged by interest rate swaps, as discussed below.
We believe we were in a position of financial strength before the onset of the
economic and health crisis and expect to maintain this strength due to our
strong balance sheet, healthy operating cash flows, low capital requirements and
$300.0 million credit facility. Although we could experience declines in our
revenue and, accordingly, in our profitability over the near term, we believe
our working capital, excluding cash, of roughly $140.0 million as of June 30,
2020 , provides a reliable source of liquidity. Based on our continued future
liquidity assessments (using assumptions that we believe are sufficiently
conservative), we continue to believe we are in a position of financial strength
and we expect to continue to generate positive cash flows while investing in our
business and maintaining our quarterly cash dividend. As the crisis evolves, we
will continue to take any actions necessary to improve our liquidity and further
fortify our cash position.
The CARES Act includes provisions for, among other things, deferment of the
employer portion of social security tax payments, employee retention credits and
technical amendments related to depreciation, which allows for retroactive 100%
bonus depreciation on qualified improvement property. During the second quarter,
we benefited from the deferral of social security tax payments, as described
below, and expect to continue to benefit from the deferral of social security
tax payments for the remainder of 2020. We are in the process of assessing our
benefit from the retroactive bonus depreciation and employee retention credits
as well as other impacts of the CARES Act on our business.
Cash Flows
We are principally focused on achieving an appropriate balance of cash flow
across several areas of opportunity such as: generating positive cash flow from
operating activities; returning capital to our shareholders through our
quarterly dividends and common stock repurchase program; maintaining appropriate
leverage under our credit facility; investing in our infrastructure to allow
sustainable growth via capital expenditures; selectively pursuing acquisition
opportunities and maintaining sufficient liquidity for operations.
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In 2019, we sold the GS segment, which has been reflected as discontinued
operations. For the six months ended June 30, 2019 , our Unaudited Condensed
Consolidated Statements of Cash Flows are presented on a combined basis
(continuing operations and discontinued operations) and cash provided by
operating activities and cash provided by investing activities for discontinued
operations were $5.1 million and $118.9 million , respectively.
Cash provided by operating activities was $39.0 million during the six months
ended June 30, 2020 , as compared to $22.3 million during the six months ended
June 30, 2019 . Our largest source of operating cash flows is the collection of
trade receivables, and our largest use of operating cash flows is the payment of
our associate and consultant compensation. The increase was primarily driven by
the deferral of certain tax payments, including $12.3 million related to the
employer portion of social security taxes, which will be paid in 2021 and 2022
as prescribed by the CARES Act, as well as the deferral of our estimated
quarterly federal tax payment, which will be paid in the third quarter.
Additionally, we were able to negotiate extended payment terms for certain of
our vendors. These positive impacts were partially offset by granting certain
strategic clients a temporary extension in their payment terms. The COVID-19
Business negatively impacted our operating cash flows in the second quarter of
2020 as minimal cash was received due to the timing of the projects, while we
continued paying the consultants on assignment.
Cash used in investing activities was $2.7 million during the six months ended
June 30, 2020 , as compared to cash provided by investing activities of $111.0
million during the six months ended June 30, 2019 , which includes capital
expenditures. Cash flows from investing activities for the six months ended
June 30, 2020 includes the receipt of proceeds from the sale of assets held
within the Rabbi Trust as well as payments for capital invested in WorkLLama.
Cash flows from investing activities during the six months ended June 30, 2019
includes the net proceeds from the sale of assets held for sale as well as
capital invested in WorkLLama. We expect to continue selectively investing in
our infrastructure, primarily focusing on implementing new and upgrading
existing technologies that will provide the most benefit.
Cash used in financing activities was $3.7 million during the six months ended
June 30, 2020 , as compared to $68.4 million during the six months ended June 30,
2019 . This was primarily driven by the $35.0 million draw down on our credit
facility during the six months ended June 30, 2020 , partially offset by a
decrease in cash used for repurchases of common stock. During the second
quarter, we elected to pause our repurchase activity, and we will continue to
reassess our share repurchase plan as the economic and health crisis evolves.
The following table presents the cash flow impact of the common stock repurchase
activity (in thousands):
Six Months Ended June 30,
2020 2019
Open market repurchases $ 29,386 $ 50,707 Repurchase of shares related to tax withholding requirements for vesting of restricted stock
207 839
Total cash flow impact of common stock repurchases $ 29,593 $ 51,546 Cash paid in current period for settlement of prior year repurchases
$ - $ 556
During the six months ended June 30, 2020 and 2019, Kforce declared and paid
quarterly dividends of $8.5 million ($0.40 per share) and $8.7 million ($0.36
per share), respectively. The declaration, payment and amount of future
dividends are discretionary and will be subject to determination by our Board
each quarter following its review of, among other things, the Firm's current and
expected financial performance as well as the ability to pay dividends under
applicable law.
We believe that existing cash and cash equivalents, cash flow from operations
and available borrowings under our credit facility will be adequate to meet the
capital expenditure and working capital requirements of our operations for at
least the next 12 months. However, a material deterioration in the economic
environment or market conditions, among other things, could adversely affect
operating results and liquidity, as well as the ability of our lenders to fund
borrowings. Actual results could also differ materially from these indicated as
a result of a number of factors, including the use of currently available
resources for capital expenditures, investments, additional common stock
repurchases or dividends.
Credit Facility
On May 25, 2017 , the Firm entered into a credit agreement with Wells Fargo Bank,
National Association , as administrative agent, Wells Fargo Securities, LLC , as
lead arranger and bookrunner, Bank of America, N.A ., as syndication agent,
Regions Bank and BMO Harris Bank, N.A ., as co-documentation agents, and the
lenders referred to therein (the "Credit Facility"). The maturity date of the
Credit Facility is May 25, 2022 . Borrowings under the Credit Facility are
secured by substantially all of the tangible and intangible assets of the Firm,
excluding the Firm's corporate headquarters and certain other designated
collateral. As of June 30, 2020 , $100.0 million was outstanding and $197.8
million was available on our credit facility, subject to certain covenants, and
as of December 31, 2019 , $65.0 million was outstanding. As of June 30, 2020 , we
are in compliance with our credit facility covenants as described in the 2019
Annual Report on Form 10-K and currently expect that we will be able to maintain
compliance with these covenants. However, we cannot predict the impact from the
COVID-19 pandemic, which could have a material adverse effect on our results of
operations that could result in an event of default.
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Kforce has two forward-starting interest rate swap agreements, which have been designated as cash flow hedges, to mitigate the risk of rising interest rates. Refer to Note K - "Derivative Instruments and Hedging Activity" in the Notes to Unaudited Condensed Consolidated Financial Statements, included in this report, for a complete discussion of our interest rate swaps. AtJune 30, 2020 andDecember 31, 2019 , the fair value of our interest rate swaps were a liability of$2.3 million and$0.2 million , respectively. Stock Repurchases InMarch 2020 , the Board approved an increase in our stock repurchase authorization to an aggregate total of$100.0 million . During the six months endedJune 30, 2020 , Kforce repurchased approximately 1.0 million shares of common stock on the open market at a total cost of approximately$29.4 million and$84.5 million remained available for further repurchases under the Board-authorized common stock repurchase program atJune 30, 2020 . During the second quarter, we elected to pause our repurchase activity, and we will continue to reassess our share repurchase plan as the economic and health crisis evolves. Off-Balance Sheet Arrangements There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to our off-balance sheet arrangements previously disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 Annual Report on Form 10-K. Contractual Obligations and Commitments Other than the changes described elsewhere in this Quarterly Report, there have been no material changes during the period covered by this report on Form 10-Q to our contractual obligations previously disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 Annual Report on Form 10-K. CRITICAL ACCOUNTING ESTIMATES Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our unaudited condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our unaudited condensed consolidated financial statements are presented fairly and in accordance with GAAP. Due to the COVID-19 economic and health crisis, there has been uncertainty and disruption in theU.S. and global macro-economic environments, which could impact the inputs and assumptions for our critical accounting estimates. We are not currently aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of any assets or liabilities. However, actual results could differ from our assumptions and estimates and such differences could be material. Refer to Note 1 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in our 2019 Annual Report on Form 10-K for a more detailed discussion of our significant accounting policies and critical accounting estimates.Goodwill and Equity Method Investment Impairment For our goodwill and equity method investment fair value estimates, the valuation methodologies employed are sensitive to critical estimates, which could be impacted by the COVID-19 economic and health crisis, including forecasted operating results and long-term growth rates, expectations for future economic cycles and market multiples. At this time, the impact of the crisis on our forecasts is uncertain and increases the subjectivity that will be involved in evaluating our goodwill and equity method investment for potential impairment going forward. Allowance for Credit Losses The allowance for credit losses on trade receivables is determined based on a number of factors such as recent and historical write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of trade receivables among clients and the current state of theU.S. economy. As part of our analysis, we apply credit loss rates to outstanding receivables by aging category. For certain clients, we perform a quarterly credit review, which considers the client's credit rating and financial position as well as our total credit loss exposure. Trade receivables are written off after all reasonable collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received. Due to the ongoing COVID-19 economic and health crisis, we analyzed receivables concentrated within specific industries considered to be most significantly impacted, reviewed specific clients with credit ratings that were in a higher risk category and applied higher credit loss rates in order to estimate our potential credit loss exposure. At this time, the impact of the crisis on these estimates is uncertain and increases the subjectivity of our allowance for credit losses. 26
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NEW ACCOUNTING STANDARDS Refer to Note A - "Summary of Significant Accounting Policies" in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report for a discussion of new accounting standards.
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