KFORCE INC. EXECUTIVE SUMMARY The following is an executive summary of what Kforce believes are highlights as of and for the nine months endedSeptember 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 nine months endedSeptember 30, 2020 increased 3.2% to$1,043.7 million from$1,011.2 million in the comparable period in 2019. •Flex revenue for the nine months endedSeptember 30, 2020 increased 4.6% to$1,019.2 million from$974.0 million in the comparable period in 2019. Flex revenue decreased 0.8% and increased 26.3% for Tech and FA, respectively, on a year-over-year basis. During the second quarter, we secured contracts to support government-sponsored COVID-19 related initiatives (the "COVID-19 Business") that benefited FA Flex with$51.1 million and$86.2 million in revenue for the three and nine months endedSeptember 30, 2020 , respectively. •Flex revenue in Tech increased 1.7% in the three months endedSeptember 30, 2020 versus the three months endedJune 30, 2020 . •Direct Hire revenue for the nine months endedSeptember 30, 2020 decreased 34.3% to$24.4 million from$37.2 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 nine months endedSeptember 30, 2020 decreased 10 basis points to 26.6% from 26.7% in the comparable period in 2019. For the nine months endedSeptember 30, 2020 , Flex gross profit increased 30 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 nine months endedSeptember 30, 2020 decreased to 22.6% from 23.4% in the comparable period in 2019 due to leverage gained from our revenue growth and tight management of spend during the pandemic. •Income from continuing operations for the nine months endedSeptember 30, 2020 decreased 5.5% to$37.8 million , or$1.77 per share, from$40.0 million , or$1.65 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$42.0 million of capital to our shareholders with a quarterly dividend of$12.6 million ($0.60 per share) and open market common stock repurchases of$29.4 million during the nine months endedSeptember 30, 2020 . InMarch 2020 , the Board approved an increase in our stock repurchase authorization to an aggregate of$100.0 million and we have$84.5 million remaining under current authorizations. •Cash provided by operating activities was$93.9 million during the nine months endedSeptember 30, 2020 compared to$46.5 million for the nine months endedSeptember 30, 2019 . Our operating cash flows were positively impacted by certain tax payment deferrals, improved profitability, and solid management of our accounts receivable portfolio. •Cash and cash equivalents, net of long-term debt of$100 million , was$1.3 million as ofSeptember 30, 2020 . 18
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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 in Tampa, Florida
and through our various field offices located throughout the United States . As
of September 30, 2020 , Kforce employed approximately 2,000 associates and we had
approximately 13,700 consultants on assignment (of which approximately 5,000 of
these consultants were on assignment supporting the COVID-19 Business, which is
expected to be of relatively short-term duration). 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 and client portfolio are key contributors to our
performance during this pandemic and long-term financial stability.
During 2020, the U.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 during the nine months of 2020 based on data published
by the Bureau 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 1.75% and 7.9%, respectively, in
September 2020 , which will likely continue to fluctuate significantly in the
near-term as this economic and health crisis evolves. A report published by SIA
in September 2020 indicates that the technology temporary staffing industry and
finance and accounting temporary staffing industry are estimated to decline by
9% and 17%, respectively, for 2020.
Certain sectors of the U.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 the U.S. economy, although the composition of our
revenue by industry is, by intent, diversified. Our top three industries include
financial services, business services and telecommunications.
During the end of the first quarter and through the third quarter, the U.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
has 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, which have displayed resiliency during this pandemic, and having
a diversified client portfolio serving many industries with no undue
concentration in any single client or 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 the
U.S. economy during this crisis in areas such as customer service, loan
processing and administration. This new business contributed $51.1 million and
$86.2 million in FA Flex revenue for the three and nine months ended
September 30, 2020 . The COVID-19 Business is expected to continue into the
fourth quarter, although at lower levels than the third quarter, and these
contracts are likely shorter-term and non-recurring in nature. The business
climate related to this economic and health crisis, along with political
uncertainty, is extremely fluid, and there is significant uncertainty as to the
extent and length of the potential impacts.
Despite certain adverse effects to our business due to the abrupt economic
disruption, we believe our strategic decisions to (i) focus our offerings in the
U.S. domestic technology and professional staffing and solutions market, (ii)
limit the concentration of Direct Hire revenue (less than 3% of total revenue),
(iii) focus on serving Fortune 1000 clients and (iv) maintain a strong balance
sheet has resulted in what we believe to be exceptional performance in 2020 and
provides 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, especially in this remote environment. 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. 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. We are also taking this opportunity to challenge each area of our
business given that we believe the working environment for Kforce and our
clients, candidates and consultants will be more flexible in the future.
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Operating Results - Three and Nine Months EndedSeptember 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Revenue by segment: Tech 71.2 % 78.7 % 75.0 % 78.4 % FA 28.8 21.3 25.0 21.6 Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Revenue by type: Flex 97.6 % 96.6 % 97.7 % 96.3 % Direct Hire 2.4 3.4 2.3 3.7 Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 28.4 % 29.8 % 28.3 % 29.4 % Selling, general and administrative expenses 20.8 % 23.0 % 22.6 % 23.4 % Depreciation and amortization 0.4 % 0.4 % 0.4 % 0.5 % Income from operations 7.3 % 6.4 % 5.4 % 5.5 % Income from continuing operations, before income taxes 7.1 % 6.2 % 5.0 % 5.3 % Income from continuing operations 5.1 % 4.6 % 3.6 % 4.0 % Income from discontinued operations, net of tax - % (0.3) % - % 7.6 % Net income 5.1 % 4.3 % 3.6 % 11.5 %
Revenue. The following table presents revenue by type for each segment and the percentage change from the prior period (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech
Flex revenue $ 256,118 (4.2) % $ 267,304 $ 770,635 (0.8) % $ 777,227
Direct Hire revenue 4,133 (12.0) % 4,695 12,150 (22.7) % 15,720
Total Tech revenue $ 260,251 (4.3) % $ 271,999 $ 782,785 (1.3) % $ 792,947
FA
Flex revenue $ 100,569 51.6 % $ 66,348 $ 248,578 26.3 % $ 196,760
Direct Hire revenue 4,604 (36.2) % 7,211 12,289 (42.7) % 21,450
Total FA revenue $ 105,173 43.0 % $ 73,559 $ 260,867 19.5 % $ 218,210
Total Flex revenue $ 356,687 6.9 % $ 333,652 $ 1,019,213 4.6 % $ 973,987
Total Direct Hire revenue 8,737 (26.6) % 11,906 24,439 (34.3) % 37,170
Total Revenue $ 365,424 5.7 % $ 345,558 $ 1,043,652 3.2 % $ 1,011,157
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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)
Q3 2020 Q2 2020 Q1 2020 Q4 2019 Q3 2019
Billing Days 64 64 64 62 64
Tech Flex (4.2) % (3.0) % 3.3 % 4.8 % 6.5 %
FA Flex 51.6 % 28.7 % (3.4) % (7.6) % (5.3) %
Total Flex 6.9 % 3.4 % 1.9 % 2.1 % 3.9 %
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 4.2% and 0.8% during the three and nine months
ended September 30, 2020 , respectively, as compared to the same periods in 2019.
The decline in the third quarter was primarily driven by assignment ends by
clients that were most significantly impacted late in the first quarter and
early in the second quarter by the economic and health crisis. In addition,
while new assignment starts during the third quarter were below levels
experienced in the comparable period in 2019, assignment ends continued to
stabilize. Additionally, lower billable hours in our Tech business were
partially offset by higher average bill rates, which increased 4.6% on a
year-over-year basis in the third quarter of 2020, due to the demand for
higher-skilled consultants. In September 2020 , SIA projected that temporary
technology staffing would experience a decline of 9% for 2020. Due to the level
of resiliency this business has displayed during this pandemic and our progress
in growing billable consultants since early June 2020 , we expect that revenues
for 2020 may be down only 1.5% to 2.0% for the full year. This would imply a
slight acceleration in the sequential billing day growth from the third quarter
in the fourth quarter of 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.
Our FA segment experienced an increase in Flex revenue of 51.6% and 26.3% during
the three and nine months ended September 30, 2020 , respectively, as compared to
the same periods in 2019, primarily driven by the COVID-19 Business, which
contributed approximately $51.1 million and $86.2 million in revenue during the
three and nine months ended September 30, 2020 , respectively. This positively
impacted FA Flex revenue growth rates by 77.0% and 43.8% for the three and nine
months ended September 30, 2020 , respectively. Although these contracts
positively impacted FA Flex during the third quarter and are still expected to
benefit fourth quarter revenues, levels are expected to be lower than the third
quarter. In September 2020 , SIA projected that finance and accounting temporary
staffing would decline 17% in 2020. As we look to the fourth quarter, FA Flex
revenues are expected to decline as compared to the third quarter due to the
reduced expectations of COVID-19 Business and partially offset by an
acceleration in the sequential billing day growth in our remaining FA Flex
business in the fourth quarter of 2020 versus third quarter levels.
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 political uncertainty, and any
forward-looking information could fluctuate materially.
The following table presents the key drivers for the change in Flex revenue by
segment over the prior period (in thousands):
Three Months Ended Nine Months Ended
September 30, 2020 vs. September 30, September 30, 2020 vs. September 30,
2019 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Volume - hours billed $ (20,611) $ 48,497 $ (35,827) $ 68,123
Bill rate 11,196 (14,142) 32,449 (16,042)
Billable expenses (1,771) (134) (3,214) (263)
Total change in Flex revenue $ (11,186) $ 34,221 $ (6,592) $ 51,818
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The following table presents total Flex hours billed by segment and percentage change over the prior period (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 3,207 (7.8) % 3,478 9,759 (4.6) % 10,234
FA 3,118 73.3 % 1,799 7,229 34.7 % 5,366
Total Flex hours billed 6,325 19.9 % 5,277 16,988 8.9 % 15,600
For the three and nine months ended September 30, 2020 , FA Flex hours billed
included 1,778 and 2,995 thousand hours, respectively, 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 26.6% and 34.3% during the three and nine months
ended September 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 fourth quarter, we expect
Direct Hire revenue could approximate third 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 Nine Months Ended
September 30, 2020 vs. September 30,
September 30, 2020 vs. September 30, 2019 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Volume - number of placements $ (710) $ (2,650) $ (3,980) $ (9,281)
Placement fee 148 43 410 120
Total change in Direct Hire
revenue $ (562) $ (2,607) $ (3,570) $ (9,161) The following table presents the total number of placements by segment and percentage change over the prior period:
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 206 (15.2) % 243 636 (25.3) % 851
FA 316 (36.8) % 500 871 (43.3) % 1,536
Total number of placements 522 (29.7) % 743 1,507 (36.9) % 2,387
The following table presents the average placement fee by segment and percentage change over the prior period:
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech $ 20,045 3.7 % $ 19,328 $ 19,114 3.5 % $ 18,469
FA 14,557 1.0 % 14,420 $ 14,104 1.0 % $ 13,967
Total average placement fee $ 16,722 4.4 % $ 16,024 $ 16,217 4.1 % $ 15,572
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.
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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:
Three Months Ended September 30, Nine Months Ended September 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Tech 27.7 % (1.4) % 28.1 % 27.7 % - % 27.7 %
FA 30.3 % (15.6) % 35.9 % 30.3 % (14.9) % 35.6 %
Total gross profit percentage 28.4 % (4.7) % 29.8 % 28.3 % (3.7) % 29.4 %
The change in total gross profit percentage for the nine months endedSeptember 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 Flex 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: Three Months Ended September 30, Nine Months Ended September 30, Increase Increase 2020 (Decrease) 2019 2020 (Decrease) 2019 Tech 26.5 % (1.1) % 26.8 % 26.5 % 1.1 % 26.2 % FA 27.2 % (5.9) % 28.9 % 26.9 % (5.6) % 28.5 % Total Flex gross profit percentage 26.7 % (1.8) % 27.2 % 26.6 % (0.4) %
26.7 %
Overall, our Flex gross profit percentage decreased slightly for the three and nine months endedSeptember 30, 2020 as compared to 2019, although there were notable fluctuations within our segments. •Tech Flex gross profit margin decreased 30 basis points for the three months endedSeptember 30, 2020 as compared to the same period in 2019, which was impacted by a decline in the spread between consultant bill and pay rates, partially offset by the impact of a reduction in the amount of billable expenses. Tech Flex gross profit margin increased 30 basis points for the nine months endedSeptember 30, 2020 as compared to the same period in 2019, primarily due to the impact of a reduction in the amount of billable expenses. • FA Flex gross profit margin decreased 170 basis points and 160 basis points for the three and nine months endedSeptember 30, 2020 , respectively, as compared to the same periods in 2019, primarily due to compression in bill and pay spreads. The decrease was impacted by the COVID-19 Business, which contributed a lower gross profit margin than the rest of the FA portfolio. For the three and nine months endedSeptember 30, 2020 , the estimated Flex gross profit margin for the COVID-19 Business was 25.1%, and 24.9%, respectively, which is roughly 420 and 360 basis points, respectively, 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, but may begin to change if our clients increase their travel requirements. 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 and political uncertainty. 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. 23
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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 Nine Months Ended
September 30, 2020 vs. September 30, September 30, 2020 vs. September 30,
2019 2019
Tech FA Tech FA
Key Drivers - Increase (Decrease)
Revenue impact $ (3,003) $ 9,885 $ (1,729) $ 14,783
Profitability impact (911) (1,735) 2,474 (4,047)
Total change in Flex gross profit
$ 745
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 83.3% and 82.1% for the three and nine months endedSeptember 30, 2020 , respectively, as compared to 83.2% and 83.3% 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 EndedSeptember 30 , Compensation, commissions, payroll taxes and benefits costs$ 63,162 17.3 %$ 65,875 19.1 % Other (1) 12,690 3.5 % 13,348 3.9 % Total SG&A$ 75,852 20.8 %$ 79,223 23.0 % Nine Months EndedSeptember 30 , Compensation, commissions, payroll taxes and benefits costs$ 193,534 18.5 %$ 197,432 19.5 % Other (1) 42,080 4.1 % 39,621 3.9 % Total SG&A$ 235,614 22.6 %$ 237,053 23.4 % (1) Includes credit loss expense, lease expense, professional fees, travel, telephone, computer and certain other expenses. SG&A as a percentage of revenue decreased 220 and 80 basis points for the three and nine months endedSeptember 30, 2020 as compared to the same periods in 2019. The decrease is primarily related to leverage from our revenue growth, continued improvements in associate productivity, reductions in certain areas such as travel and office related expenses given the impact of the pandemic and overall tight management of spend. We are prioritizing the retention of our most productive people and will continue to monitor the business environment and our operating trends and manage our performer headcount accordingly. For the nine months endedSeptember 30, 2020 , SG&A was negatively impacted by 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, as well as approximately$1.9 million in operating lease and other expenses related to the streamlining of our field offices. During the nine months endedSeptember 30, 2019 , SG&A was adversely affected by approximately$2.0 million of expense due to actions taken as a result of the GS divestiture. The Firm continues to focus on improving the productivity of our associates and expects to continue exercising solid expense discipline, especially in light of the potential adverse impacts that could occur as a result of the macro-economic uncertainties related to the current economic and health crisis. Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Increase Increase 2020 (Decrease) 2019 2020 (Decrease) 2019 Fixed asset depreciation (includes finance leases)$ 957 (19.7) %$ 1,192 $ 3,265 (12.4) %$ 3,726 Capitalized software amortization 351 49.4 % 235 816 (8.6) % 893 Total Depreciation and amortization$ 1,308 (8.3) %$ 1,427 $ 4,081 (11.6) %$ 4,619 Other Expense, Net. Other expense, net for the three and nine months endedSeptember 30, 2020 was$0.9 million and$3.7 million , respectively. Other expense, net for the three and nine months endedSeptember 30, 2019 was$0.9 million and$2.2 million , respectively. Other expense, net includes 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. 24
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During the three and nine months endedSeptember 30, 2020 , Other expense, net also includes our proportionate share of the loss from WorkLLama, our equity method investment, of$0.1 million and$1.2 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 nine months endedSeptember 30, 2020 and 2019 was 27.8% and 24.8%, respectively. The increase was primarily driven by certain tax provision true-ups recorded during 2020. 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 nine months endedSeptember 30, 2019 , Free Cash Flows includes results from discontinued operations. The following table presents Free Cash Flow (in thousands): Nine Months Ended September 30, 2020 2019 Net cash provided by operating activities $ 93,871$ 46,510 Capital expenditures (5,296) (7,728) Free cash flow 88,575 38,782 Change in debt 35,000 (6,800) Repurchases of common stock (29,623) (91,947) Cash dividends (12,619) (12,726) Equity method investment (2,500) (7,500) Net proceeds from the sale of assets held for sale - 123,254 Other 2,609 (1,855) Change in cash and cash equivalents $
81,442
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.
The following table presents a reconciliation of Adjusted EBITDA to net income
(in thousands):
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2020 2019
Three Months Ended September 30 ,
Net income $ 18,763 $ 14,940
Income from discontinued operations, net of tax - (967)
Income from continuing operations 18,763 15,907
Depreciation and amortization 1,308 1,427
Stock-based compensation expense 2,908 2,419
Interest expense, net 849 504
Income tax expense 7,017 5,374
Loss from equity method investment 103 359
Adjusted EBITDA $ 30,948 $ 25,990
Nine Months Ended September 30 ,
Net income $ 37,754 $ 116,654
Income from discontinued operations, net of tax - 76,697
Income from continuing operations 37,754 39,957
Depreciation and amortization 4,081 4,619
Stock-based compensation expense 8,707 7,382
Interest expense, net 2,533 1,837
Income tax expense 14,568 13,178
Loss from equity method investment 1,237 359
Adjusted EBITDA $ 68,880 $ 67,332
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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. AtSeptember 30, 2020 andDecember 31, 2019 , we had$101.3 million and$19.8 million in cash and cash equivalents, respectively, which consisted primarily of government money market funds. AtSeptember 30, 2020 andDecember 31, 2019 , we had$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$110.0 million as ofSeptember 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. 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 also benefited from certain employee retention credits during the third quarter. We are in the process of assessing our benefit from the retroactive bonus depreciation and potential further 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. In 2019, we sold the GS segment, which has been reflected as discontinued operations. For the nine months endedSeptember 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$118.5 million , respectively. Cash provided by operating activities was$93.9 million during the nine months endedSeptember 30, 2020 , as compared to$46.5 million during the nine months endedSeptember 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$25.4 million related to the employer portion of social security taxes, which will be paid in 2021 and 2022 as prescribed by the CARES Act, continued positive performance of our accounts receivable portfolio and profitable revenue growth. Cash used in investing activities was$4.2 million during the nine months endedSeptember 30, 2020 , as compared to cash provided by investing activities of$108.0 million during the nine months endedSeptember 30, 2019 , which includes capital expenditures. Cash flows from investing activities for the nine months endedSeptember 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 nine months endedSeptember 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$8.2 million during the nine months endedSeptember 30, 2020 , as compared to$113.3 million during the nine months endedSeptember 30, 2019 . This was primarily driven by the$35.0 million draw down on our credit facility during the nine months endedSeptember 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): Nine Months EndedSeptember 30, 2020 2019 Open market repurchases $
29,386
237 1,139
Total cash flow impact of common stock repurchases $
29,623
Cash paid in current period for settlement of prior year repurchases $ -$ 556 27
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During the nine months endedSeptember 30, 2020 and 2019, Kforce declared and paid quarterly dividends of$12.6 million ($0.60 per share) and$12.7 million ($0.54 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 OnMay 25, 2017 , the Firm entered into a credit agreement withWells 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 andBMO Harris Bank, N.A ., as co-documentation agents, and the lenders referred to therein (the "Credit Facility"). The maturity date of the Credit Facility isMay 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 ofSeptember 30, 2020 ,$100.0 million was outstanding and$198.5 million was available on our credit facility, subject to certain covenants, and as ofDecember 31, 2019 ,$65.0 million was outstanding. As ofSeptember 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. 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. AtSeptember 30, 2020 andDecember 31, 2019 , the fair value of our interest rate swaps were a liability of$2.2 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 nine months endedSeptember 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 atSeptember 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. 28
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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. 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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