TECHNOLOGY
FINANCE & ACCOUNTING
HEALTH INFORMATION MANAGEMENT
GOVERNMENT SOLUTIONS
ANNUAL REPORT 2013
Kforce is a professional staffing and solutions firm specializing in the areas of
technology, finance & accounting, and health information management for commercial
and government organizations. Headquartered in Tampa, Florida, Kforce has been
matching highly skilled talent and employers since 1962. Today, Kforce provides staffing
services and innovative solutions through more than 60 offices located throughout the
United States and one in the Philippines. With a commitment to “Great People = Great
Results,” Kforce is dedicated to being the Firm most respected by those we serve. For
more information, please visit www.kforce.com.
TECHNOLOGY
Our Technology staffing specialists have the experience and delivery capability to supply staffing
resources in the areas of functional and business management, systems applications development,
enterprise data management and infrastructure. From application programmers and network
operators, to systems analysts and CIOs, Kforce has an extensive database of qualified candidates
to handle all of an organization’s technical resource needs.
FINANCE & ACCOUNTING
Our Finance & Accounting staffing specialists provide highly qualified professionals in the functional
areas of general accounting, audit services, SEC reporting, periodic financial close and tax preparation
support. From CFOs and controllers with Big 4 experience to entry level transactional accounting
positions, Kforce has the knowledge and dedication to deliver results for those we serve.
HEALTH INFORMATION MANAGEMENT
For more than 17 years, Kforce Healthcare has offered customized business solutions for Health
Information Management services including all aspects of the coding department, revenue cycle
and more. We work with healthcare providers across the U.S., many of which are among the nation’s
top Honor Roll Hospitals.
GOVERNMENT SOLUTIONS
Kforce Government Solutions (KGS), a wholly-owned subsidiary of Kforce, is a government contracting
services and solutions provider that has offered a comprehensive portfolio of solutions to a wide
range of Federal and Defense agencies since 1970. Headquartered in Fairfax, VA with offices in San
Antonio, TX and Tampa, FL, KGS offers a full range of solutions in the areas of Healthcare Informatics,
Financial Management and Accounting, Enterprise Technology, Engineering and Intelligence.
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS). PLEASE SEE THE “SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS” CONTAINED IN THE INTRODUCTORY PORTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2013 FOR ADDITIONAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS.
To our Fellow ShareholderS, ClienTS and employeeS:
We are very pleased with full-year results for 2013. Kforce
reported revenues for the year ended December 31, 2013
of $1.15 billion, as compared to $1.08 billion for 2012, an
increase of 6.4%. On a GAAP basis, Kforce reported net income of
$10.8 million, or $0.32 per share, for the year ended December 31,
2013 and a net loss of $13.7 million, or a loss of $0.38 per share
for the year ended December 31, 2012. Exclusive of the non-cash
goodwill impairment charge and realignment-related charges, net
income for the year ended December 31, 2013 was $28.2 million,
or $0.84 per share, compared with net income, exclusive of the
non-cash goodwill impairment charge, of $30.8 million, or $0.85
per share for 2012. The Firm was aggressive in response to market
fluctuations and was able to repurchase 1.8 million shares of stock
at a total cost of $27.3 million during the year, which represented
2.6% of the outstanding shares as of December 31, 2012.
Additionally, the Firm declared a quarterly dividend of $0.10 at its
February 2014 Board of Directors meeting after paying a $0.10 per
share dividend in December 2013 in an effort to return capital to
shareholders while continuing to focus on our priority of investing
in our growing business.
We would like to reflect on many of the changes that have taken
place, both in the industry and at Kforce over the past year.
Moderate GDP growth rates have resulted in a disproportionate
share of job growth coming in the temporary staffing sector. The
temp penetration rate reached 2.06% in December 2013, surpassing
the all time high of 2.03% reached at the height of the Y2K, ERP
and .com boom in 2000. The unemployment rate among college-
degreed workers as of January 2014 is 3.2%, about half of the overall
U.S. rate of unemployment, and is substantially lower in several of
the skill sets Kforce specializes in, particularly in technology. Our
revenue footprint and domestic platform are focused in some of the
areas of greatest demand in today’s knowledge-based economy. We
foresee continued benefits to our clients utilizing a more flexible
workforce during this tempered non-traditional economic recovery,
as they navigate through regulatory, tax and health care reform as
well as continued economic uncertainty. We believe our clients will
have an increasing desire to migrate towards a flexible workforce.
For the year 2013, approximately 10% of total job growth came
from temp staffing. These facts suggest that the Flex Supercycle
(where staffing is growing faster than historical GDP models would
suggest) is real, and that the growth of the sector is no longer simply
driven by accelerating GDP. Tech flex is performing particularly well
and we believe the temp penetration rate in Tech is significantly
greater than the “headline” BLS 2.06%, driven by secular shifts as
well as the ubiquitous nature of technology, largely project driven,
across our clients’ platforms. We believe that all of this bodes well
for the future of our Firm.
This past year has also been a year of significant change at Kforce.
We began 2013 with a reinvigorated executive team with a
mission to accelerate revenue growth through a greater emphasis
on an outward bound sales driven culture. Our executive team
visited virtually every market and met with hundreds of top
clients throughout the United States. We made investments in our
revenue generating population, a key component of our strategy in
2013, in order to accelerate revenue growth. This investment and
the ramping productivity of our associates drove year-over-year
revenue from (1.5)% in Q1 2013 to growth of 12.3% in Q4 2013,
which now exceeds year-over-year associate growth of 10.3%. We
expect to continue to invest further as the business environment
dictates and for revenue growth rates to exceed hiring rates, which
will drive improving operating margins. The Firm took significant
steps to realign our leadership and revenue enablers in the latter
part of 2013. This resulted in pre-tax restructuring charges of $11.9
million in the fourth quarter, with a goal of allocating a higher
percentage of roles closer to the customer and accelerating the
speed of turning decisions into action. We narrowed our focus,
simplified our processes and aligned resources to target the
industries and skill sets where we could have the greatest chance
of success. This realignment has allowed us to invest further
in revenue-generating activities and we believe has created a
roadmap to exceed prior peak operating margins of 7.4% as we
approach $1.6 billion in revenues.
looking at our business by service line in 2013:
• Technology (“Tech”) Flex is our largest business unit and
represents 64.2% of total net service revenues. Tech Flex revenues
increased 9.9% in 2013 over 2012. We look forward to continued
demand for our Tech Flex business with the goal of further taking
market share. We couldn’t be more excited and proud of our team
as in the fourth quarter of 2013, we saw year-over-year growth
of 18.3%. This growth acceleration was largely a result of actions
taken by the Firm over the past five quarters of listening to the
voice of our field leaders and clients, with a relentless drive for
Focus, Simplicity and Accountability in everything we do.
• Revenues for our Finance and Accounting (“FA”) business represent
21.0% of our total net service revenues. FA Flex increased 0.6%
in 2013 over 2012, and overall demand for our core FA business
remains strong. Taken as a whole, our FA unit continues to perform
well, and we believe opportunity exists to take additional market
share during 2014.
• Revenues of $77.7 million for our Health Information Management
(“HIM”) Flex business increased 1.6% in 2013 over 2012. Our
HIM Flex revenues were at record levels in the fourth quarter
and revenue trends continue to be promising as we move into
2014. Hospital spend continues to improve, particularly related
to project services and remote coding. We look forward to
opportunities that are evolving for both HIM and Tech Flex related
to the transition to electronic medical records and the impending
mandated adoption of ICD-10, set for October 1, 2014.
KFORCE INC. AND SUBSIDIARIES 1
32% of additions to associate staff in field offices came from
the NRC. We believe further development of this strategy could
positively impact turnover rates as the training received during
their tenure in the NRC improves their ability to ramp. We are
also working on a plan to create greater efficiency in serving our
West Coast clients by reallocating a portion of NRC resources to a
facility on the West Coast.
Looking forward to 2014, we believe there remains significant
opportunity for continued market share capture. This is against
a backdrop of Kforce having only a 3% market share in a growing
U.S. professional staffing market where the demand for the skilled
talent, particularly in technology, that we provide has remained
very much intact. We also believe that given the continued solid
demand for our services, it is prudent to continue to invest in the
Firm, particularly in field sales and delivery. Our belief is that we are
in a period of growth for both the Firm and the industry, and that
this investment will allow us to maintain our revenue growth rates
and over time exceed prior peak operating margins.
We appreciate your interest in and support for Kforce. Thanks to
each and every member of our field and corporate teams, and to our
consultants, clients and shareholders for allowing us the privilege
of serving you.
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
• Revenues for Kforce Government Solutions (“GS”) of $91.9 million
increased 0.6% in 2013 as compared to 2012. Government
contractors continue to see the negative impacts from the
challenging federal procurement environment, fiscal concerns
and funding cuts, which could impact GS in the future. During
the fourth quarter of 2013, we performed a strategic review of
our Government segment which has resulted in a renewed focus
on the prime solutions aspects of the business. The refinement
of our KGS business will impact the near-term forecast but we
believe will ultimately yield a higher quality revenue stream. Also,
as part of the realignment, we welcomed Pat Moneymaker back
to Kforce as Chairman and CEO of Kforce Government Solutions
in January 2014. As a result of the strategic review, we took a
non-cash goodwill impairment charge in the fourth quarter of
2013 of $14.5 million.
• Permanent placement (“Search”) revenues of $48.9 million
increased 2.5% in 2013 over 2012. While Search remains an
important part of our business, we continue to focus on increasing
our market share for Flex revenues.
In the aggregate, the Firm provides consultants to approximately
3,000 clients at any time. We have a diversified revenue stream,
with no one client constituting more than 3% of total revenues. Our
revenue generator headcount increased 10.3% in 2013 over 2012.
We continue to see contributions from all tenure populations and
experience better than average historic retention levels for the
Firm. A key driver in further accelerating growth is to continue to
refine our territory management and allocation of resources to
efficiently meet customer needs with the right mix and volume of
associates. We have a large portfolio of excellent clients, and deeper
penetration into existing opportunities will be a key to our success.
Associate mix remains highly weighted in the tenure range of less
than 15 months, so overall productivity levels have significant room
to improve.
As part of the changes that took place in 2013, we have fully
integrated our Premier Customer group into our Field Leadership
team enhancing our alignment to serve and delight our premier
clients. This change streamlines decision making driving greater
consistency and focus around sales activity, while more effectively
positioning us to partner with these customers to quickly adjust
to the pace of change taking place within these large consumers
of the services we provide. As we move through 2014, we intend
to further redefine our value proposition and evolve our approach
around customer intimacy. From a delivery standpoint, we have
narrowed the focus of our National Recruiting Center (“NRC”)
to target skill sets and industries in which this national delivery
model can be applied most efficiently. The NRC also continues to
serve as a training ground for developing new talent that may be
deployed for Field office assignments. During 2013, approximately
2 KFORCE INC. AND SUBSIDIARIES
SeleCTed FinanCial daTa
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with
Kforce’s Consolidated Financial Statements and the related notes thereto incorporated into this Annual Report, hereinafter collectively
referred to as “Consolidated Financial Statements.”
Years Ended December 31,
(In thousands, except per share amounts)
Net service revenues
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Depreciation and amortization
Other expense, net
Income (loss) from continuing operations,
before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Income from discontinued operations,
net of income taxes
Net income (loss)
Earnings (loss) per share–basic,
continuing operations
Earnings (loss) per share–diluted,
continuing operations
Earnings (loss) per share–basic
Earnings (loss) per share–diluted
Weighted average shares outstanding–basic
Weighted average shares outstanding–diluted
Cash dividend declared per share
As of December 31,
(In thousands)
Working capital
Total assets
Total outstanding borrowings–Credit Facility
Total long-term liabilities
Stockholders’ equity
2013(1)(2)
2012(3)(4)
2011
2010
2009
$1,151,887
369,612
323,933
14,510
9,846
1,225
20,098
9,311
10,787
$1,082,479
347,933
322,436
69,158
10,789
1,116
(55,566)
(19,854)
(35,712)
$1,004,747
317,747
274,072
—
12,505
1,256
29,914
10,858
19,056
$886,657
283,846
251,156
—
12,589
1,236
18,865
6,869
11,996
$802,108
257,230
238,365
—
11,673
1,085
6,107
2,684
3,423
—
10,787
$
22,009
$ (13,703)
8,100
$ 27,156
8,638
$ 20,634
9,450
$ 12,873
$0.32
$(1.00)
$0.50
$0.32
$0.32
$0.32
33,511
33,643
$0.10
$(1.00)
$(0.38)
$(0.38)
35,791
35,791
$ 1.00
$0.49
$0.72
$0.70
37,835
38,831
$ —
$0.30
$0.30
$0.52
$0.51
39,480
40,503
$ —
$0.09
$0.09
$0.33
$0.33
38,485
39,330
$ —
2013(1)(2)
2012(3)(4)
2011
2010
2009
$ 112,913
$ 347,768
$
62,642
$ 100,562
$ 157,233
$ 72,685
$ 325,149
$ 21,000
$ 56,429
$ 169,846
$ 103,075
$ 409,672
$ 49,526
$ 93,393
$ 233,115
$ 64,878
$391,044
$ 10,825
$ 36,904
$253,817
$ 57,924
$339,825
$ 3,000
$ 33,887
$226,725
(1) Kforce recognized a goodwill impairment charge of $14.5 million related to the GS reporting unit during 2013. The tax benefit associated with this impairment charge was $5.2
million, resulting in an after-tax impairment charge of $9.3 million.
(2) During the three months ended December 31, 2013, Kforce commenced a plan to streamline its leadership and support-related structure to better align a higher percentage
of personnel in roles that are closest to the customer through an organizational realignment. As a result of the organizational realignment, Kforce incurred severance and
termination-related expenses of $7.1 million during 2013 which were recorded within selling, general and administrative expense. Additionally, in connection with the
realignment and succession planning, the Compensation Committee approved discretionary bonuses of $3.6 million paid to a broad group of senior management during the
fourth quarter of 2013.
(3) Kforce recognized a goodwill impairment charge of $69.2 million related to the GS reporting unit during 2012. The tax benefit associated with this impairment charge was $24.7
million, resulting in an after-tax impairment charge of $44.5 million.
(4) In connection with the disposition of Kforce Clinical Research, Inc. (“KCR”), as described below, the Board exercised its discretion, as permitted within the Kforce Inc. 2006 Stock
Incentive Plan, to accelerate the vesting, for tax planning purposes, of substantially all of the outstanding and unvested restricted stock and alternative long-term incentive
(“ALTI”) awards on March 31, 2012, which resulted in the acceleration of $31.3 million of compensation expense and payroll taxes recorded during the three months ended
March 31, 2012.
During the three months ended March 31, 2012, Kforce disposed of KCR for a purchase price of $50.0 million plus a $7.3 million post-
closing working capital adjustment. As a result, the results of operations of KCR have been presented as discontinued operations for each
year presented above. See Note 2 – “Discontinued Operations” to the Consolidated Financial Statements for more detail.
KFORCE INC. AND SUBSIDIARIES 3
SToCk priCe perFormanCe
The following graph is a comparison of the cumulative total returns for Kforce common stock as compared with the cumulative total return for the
2013 Industry Peer Group and the NASDAQ Stock Market (U.S.) Index. Kforce’s cumulative return was computed by dividing the difference between
the price of Kforce common stock at the end of each year and the beginning of the measurement period (December 31, 2008 to December 31,
2013) by the price of Kforce common stock at the beginning of the measurement period. Cumulative total return for Kforce, the 2013 Industry Peer
Group and the NASDAQ include dividends in the calculation of total return and are based upon an assumed $100 investment on December 31, 2008,
with all returns weighted based on market capitalization at the end of each discrete measurement period. The comparisons in the graph below are
based on historical data and are not intended to forecast the possible future performance of Kforce common stock. For purposes of the stock price
performance graph below, Kforce has been excluded from the 2013 Industry Peer Group.
s
r
a
l
l
o
D
300
275
250
225
200
175
150
125
100
75
2008
2009
2010
2011
2012
2013
End of Year
Kforce Inc.
NASDAQ Stock Market (Composite)
2013 Industry Peer Group
Investment of $100 on December 31, 2008
Kforce Inc.
NASDAQ Stock Market (Composite)
2013 Industry Peer Group
2008
100.0
100.0
100.0
2009
162.9
143.9
141.0
2010
210.8
168.2
163.2
2011
160.6
165.2
125.4
2012
201.7
191.5
149.9
2013
287.8
264.8
234.8
2013 industry peer Group:
CDI Corporation
CIBER, Inc.
Computer Task Group Inc.
Manpower Inc.
On Assignment, Inc.
Resources Connection, Inc.
Robert Half International Inc.
TrueBlue Inc.
The industry peer group is one of the building blocks of the executive compensation program as it provides the Committee with fact-based data and insight
into external compensation practices. The industry peer group provides information about pay levels, pay practices and performance comparisons. The
primary criterion for peer group selection includes peer company customers, revenue footprint (revenues derived from different industries as a percentage
of total revenues), geographical presence, talent, capital, size (total revenues, market capitalization and domestic presence), complexity of operating model
and annual revenues. Additionally, Kforce includes companies with which we compete for executive level talent. FY 2013 revenues and market capitalization
for Kforce was $1.15 billion and $690.1 million, respectively, which compares to the median FY 2013 revenues and market capitalization of the 2013 Industry
Peer Group of $982.6 million and $809.3 million, respectively.
There was no change in the Industry Peer Group between 2012 and 2013.
4 KFORCE INC. AND SUBSIDIARIES
markeT For reGiSTranT’S Common equiTy, relaTed SToCkholder maTTerS and
iSSuer purChaSeS oF equiTy SeCuriTieS
market information
Our common stock trades on the NASDAQ Global Select Market under the symbol “KFRC.” The following table sets forth, for the periods
indicated, the high and low intra-day sales price of our common stock, as reported on the NASDAQ Global Select Market. These prices represent
inter-dealer quotations without retail markups, markdowns or commissions, and may not represent actual transactions.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
2013
High
Low
2012
High
Low
$16.65
$13.36
$15.02
$12.01
$16.43
$12.23
$15.40
$12.14
$17.99
$14.69
$14.43
$10.34
$21.37
$16.83
$14.92
$10.66
From January 1, 2014 through February 24, 2014, the high and low intra-day sales price of our common stock was $21.71 and $17.30,
respectively. On February 24, 2014, the last reported sale price of our common stock on the NASDAQ Global Select Market was $20.76
per share.
holders of Common Stock
As of February 24, 2014, there were approximately 182 holders of record.
dividends
A cash dividend on common stock of $0.10 per share was declared on December 4, 2013 and paid on December 30, 2013 to shareholders
of record as of the close of business on December 16, 2013. A special cash dividend on common stock of $1.00 per share was declared on
December 7, 2012 and paid on December 27, 2012 to shareholders of record as of the close of business on December 17, 2012.
We currently expect to continue to declare and pay quarterly dividends of an amount similar to our December 2013 dividend of $0.10
per share. However, the declaration and payment of future dividends are discretionary and will be subject to determination by our Board of
Directors each quarter following its review of our financial performance. There can be no assurances that dividends will be paid in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in its operations, Kforce is exposed to certain market risks, primarily changes in interest rates.
As of December 31, 2013, we had $62.6 million outstanding under our Credit Facility. Our weighted average effective interest rate on our
Credit Facility was 1.57% at December 31, 2013. A hypothetical 10% increase in interest rates in effect at December 31, 2013 would have an
increase to Kforce’s annual interest expense of less than $0.1 million.
We do not believe that we have a material exposure to fluctuations in foreign currencies because our international operations represented
approximately 2% of net service revenues for the year ended December 31, 2013, and because our international operations’ functional
currency is the U.S. Dollar. However, Kforce will continue to assess the impact which currency fluctuations could have on our operations
going forward.
KFORCE INC. AND SUBSIDIARIES 5
BuSineSS overview
Company overview
HIM
We are a provider of professional and technical specialty staffing services
and solutions and operate through our corporate headquarters in Tampa,
Florida, 62 field offices located throughout the United States and one office
in Manila, Philippines. Kforce was incorporated in 1994 but its predecessor
companies, Romac & Associates, Inc. and Source Services Corporation have
been providing staffing services since 1962. Kforce completed its Initial
Public Offering in August 1995.
We provide our clients staffing services and solutions through four
operating segments: Technology (“Tech”), Finance and Accounting (“FA”),
Health Information Management (“HIM”) and Government Solutions
(“GS”). Our Tech segment includes the results of Kforce Global Solutions,
Inc. (“Global”), a wholly-owned subsidiary, which has an office in the
Philippines. HIM and GS segments are organized and managed by specialty
because of the unique operating characteristics of each business.
The following charts depict the percentage of our total revenues for each
of our segments for the years ended December 31, 2013, 2012 and 2011:
2013
2012
2011
7.1%
HIM
64.2%
Tech
8.5%
GS
22.0%
FA
6.8%
HIM
62.4%
Tech
9.2%
GS
21.9%
FA
62.1%
Tech
8.0%
GS
21.0%
FA
6.8%
HIM
Tech
Our Tech segment provides both temporary staffing and permanent
placement services to our clients, focusing primarily on areas of
information technology such as systems/applications programmers and
developers, senior-level project managers, systems analysts, enterprise
data management and e-business and networking technicians. The
average bill rate for our Tech segment for 2013 was approximately
$65 per hour. Our Tech segment provides service to clients in a variety
of industries with a strong footprint in healthcare, financial services
and government integrators. A recent report published by Staffing
Industry Analysts (“SIA”) provides an expectation that temporary
technology staffing could experience growth of 7% in 2014. We believe
the continued high growth is due to the continuing use of temporary
staffing as a solution during uncertain economic cycles, the increasing
cost of employment driving the systemic use of temporary staffing,
particularly in project-based work such as technology, and an increasing
influence of technology in business driving up the overall demand
for Tech talent. SIA also acknowledges that notable skill shortages in
certain technology skill sets will continue, which we believe will result
in strong future growth in our Tech segment.
FA
Our FA segment provides both temporary staffing and permanent
placement services to our clients in areas such as general accounting,
business analysis, accounts payable, accounts receivable, financial analysis
and reporting, taxation, budget preparation and analysis, mortgage
and loan processing, cost analysis professional administrative, credit
and collections, audit services, and systems and controls analysis and
documentation. Our FA segment provides service to clients in a variety of
industries with a strong footprint in financial services organizations and
government integrators. The average bill rate for our FA segment for 2013
was approximately $32 per hour. A recent report published by SIA indicated
that the market for temporary finance/accounting work is expected to
expand 5% during 2014.
6 KFORCE INC. AND SUBSIDIARIES
Our HIM segment provides temporary staffing services to our clients,
which primarily consist of acute care facilities, hospitals, and physician
clinics. Our HIM professionals provide services in the middle stage of
the revenue cycle in areas such as health information management, to
include medical coding, charge capture and cancer/trauma registry. The
average bill rate for our HIM segment for 2013 was approximately $62
per hour. We believe there will be strong demand in health information
management through 2014 given requirements and deadlines for the
International Statistical Classification of Diseases and Related Health
Problems, 10th edition (“ICD-10”) conversion and electronic health
record implementation.
GS
Our GS segment provides Tech and FA professionals to the Federal
Government as both a prime and a subcontractor. The GS contracts are
concentrated on customers that are less impacted by sequestration
threats, such as healthcare. GS offers integrated business solutions
to its customers in areas such as: information technology, healthcare
informatics, data and knowledge management, research and development,
financial management and accounting, among other areas. Substantially
all GS services are supplied to the Federal Government through field offices
located in the Washington, D.C. metropolitan area, San Antonio, Texas and
Austin, Texas. During the fourth quarter of 2013, Kforce management
made a strategic business decision with regard to the GS segment to
focus its service offerings and efforts on prime integrated business
solution services. As a result of this change in focus, management plans to
reallocate existing investments in the business and redirect the business
development team to concentrate on a more specific and, in our opinion,
a higher quality revenue stream. These plans will ultimately result in the
transition away from certain existing revenue streams, specific revenue-
generating contracts and opportunities in the business development life
cycle that do not fit within the revised strategic scope of service offerings,
including pure staff augmentation as well as product sales. The change
in strategy, coupled with the lengthy contract procurement cycle within
the government sector of approximately 18 months for solution-based
services, is expected to have a negative impact on near-term growth
prospects of the GS segment and, as a result, we believe GS will experience
a moderate reduction in revenues and profitability over the next few years.
Types of Staffing Services
Kforce’s staffing services consist of temporary staffing services (“Flex”)
and permanent placement services (“Search”). For the three years ended
December 31, 2013, 2012 and 2011, Search represented 4.2%, 4.4% and
4.3% of total Kforce revenue, respectively.
Flex
We provide our clients with qualified individuals (“consultants”) on a
temporary basis when it is determined that they have the appropriate
skills and experience and are “the right match” for our clients. We recruit
consultants from the job boards, from our associates’ networks, from
social media networks and from passive candidates we identify who are
currently employed and not actively seeking another position. Our success
is dependent upon our employees’ (“associates”) ability to: (1) understand
and acknowledge our clients’ needs; (2) determine and understand the
capabilities of the consultants being recruited; and (3) deliver and manage
the client-consultant relationship to the satisfaction of both our clients
and our consultants. We believe proper execution by our associates and our
consultants directly impacts the longevity of the assignments, increases
the likelihood of being able to generate repeat business with our clients
and fosters a better experience for our consultants, which has a direct
correlation to their redeployment.
Flex revenue is driven by the number of total hours billed and established
bill rates. Flex gross profit is determined by deducting consultant pay,
benefits and other related costs from Flex revenues. Flex associate
commissions, related taxes and other compensation and benefits as well
as field management compensation are included in Selling, General and
Administrative expenses (“SG&A”), along with administrative and corporate
compensation. The Flex business model involves attempting to maximize
the number of consultant hours and bill rates, while managing consultant
pay rates and benefit costs, as well as compensation and benefits for our
core associates. Flex revenue also includes solutions provided through
our GS segment. These revenues involve providing longer-term contract
services to the customer primarily on a time-and-materials basis but also
on a fixed-price and cost-plus basis.
Search
Our Search business is a significantly smaller, yet important, part of
our business that involves locating qualified individuals (“candidates”)
for permanent placement with our clients. We primarily perform these
searches on a contingency basis; thus, fees are only earned if the candidates
are ultimately hired by our clients. The typical structure for search fees is
based upon a percentage of the placed individual’s annual compensation
in their first year of employment, which is known at the time of placement.
We recruit permanent employees from the job boards, from our associates’
networks, social media networks and from passive candidates we identify
who are currently employed and not actively seeking another position.
Also, there are occasions where consultants are initially assigned to a
client on a Flex basis and later are converted to a permanent placement,
for which we may also receive a Search fee (referred to as “conversion
revenue”). We target clients and recruits for both Flex and Search services,
which contributes to our objective of providing integrated solutions for all
of our clients’ human capital needs.
Search revenues are driven by placements made and the resulting
fees billed and are recognized net of an allowance for “fallouts,” which
occur when placements do not complete the applicable contingency
period. Although the contingency period varies by contract, it is typically
90 days or less. This allowance for fallouts is estimated based upon
historical experience with Search placements that did not complete the
contingency period. There are no consultant payroll costs associated with
Search placements, thus, all Search revenues increase gross profit by the
full amount of the fee. Search associate commissions, compensation and
benefits are included in SG&A.
Business Strategy
The key elements of our business strategy include the following:
Enhanced Customer Focus. During 2013, Kforce streamlined the Firm’s
leadership and revenue enablers in an effort to align a higher percentage
of roles closer to the customer, supporting our significant focus to provide
more consistent and effective service to our clients and our consultants.
The new alignment has resulted in a more significant focus on our revenue-
generating activities and has resulted in more streamlined processes and
tools that should enable us to simplify and improve how we do business
with our clients and consultants.
We believe we have developed long-term relationships with our clients
by repeatedly providing solutions to their specialty staffing requirements.
We strive to differentiate ourselves by working closely with our clients to
understand their needs and maximize their return on human capital. In
addition, Kforce’s ability to offer flexible staffing solutions, coupled with
our permanent placement capability, offers the client a broad spectrum
of specialty staffing services. We believe this ability enables Kforce to
emphasize consultative rather than transactional client relationships, and
therefore facilitates further client penetration and the expansion of our
share of our clients’ staffing needs.
We believe our consultants are a significant component in delivering
value to our clients. We are focused on efficient and effective consultant
care processes, such as onboarding, frequent and ongoing communication
and programs to redeploy our consultants in a timely fashion. We strive to
increase the tenure and loyalty of our consultants and be their “Employer of
Choice,” thus enabling us to deliver the highest quality talent to our clients.
Invest in Headcount of Revenue Generators. Given the current and
expected future demand in the marketplace for the services provided by
Kforce and our most tenured associates’ performance continuing to remain
near peak levels, the Firm made significant investments starting in Q4
2012 and throughout 2013 in the hiring of associates that are responsible
for generating revenue. The increase in revenue generator headcount
from Q4 2012 to Q4 2013 was 10.3%. New associates typically take six
to nine months to begin performing at expected levels. Accordingly, we
expect that the investment in 2013 will result in more revenue growth
during 2014. Going forward, the Firm expects to continue to hire additional
revenue generators in those lines of business, geographies and industries
that we believe present the greatest opportunity.
Retain our Great People. A significant focus of Kforce is on the retention
of our tenured and top performing associates. We ended fiscal 2013 with
a highly tenured management team, field sales team and back office
employees, which we believe will continue to enhance our ability to
achieve future profitable growth.
Optimize Operating Margins. The optimization of operating margins
remains the ultimate goal for Kforce as we strive to deliver profitable
revenue growth. We believe our revenue-focused alignment and
streamlined infrastructure will allow us to meet the needs of our clients
and consultants in the most cost effective manner possible.
Narrow the Focus for Our GS Segment. The Firm has made a strategic
business decision with regard to the GS segment to focus its service
offerings and efforts on prime integrated business solution services.
The strategy going forward will include a renewed focus on the prime
solutions aspects of this business, and less emphasis on other aspects of
the portfolio, including pure staff augmentation as well as product sales.
Invest in Large Client Relationships. A focus of Kforce is cultivating
relationships with premier partners and strategic clients, both in terms
of annual revenues and geographic dispersion. In order to achieve
greater penetration within each of our largest accounts, we work to
foster an understanding of our client’s needs holistically while building
a consultative partnership rather than a transactional client relationship.
We are increasingly concentrated on bringing our core employees closer
to the customer, and with that in mind we have integrated our largest
accounts leadership team into our field leadership team, enhancing our
alignment to serve these clients. We believe that this strategy will allow
us to more effectively drive expansion in our share of our clients’ staffing
needs, as well as capturing additional overall market share.
Focus on Value-Add Services. Finding the right match for both our clients
and consultants is our ultimate priority. The placement of our highly skilled
consultants requires operational and technical skill to effectively recruit
and evaluate personnel, match them to client needs, and manage the
resulting relationships. We believe the proper placements of consultants
with the right clients will serve to balance the desire for optimal volume,
rate, effort and duration of assignment, while ultimately maximizing the
benefit for our clients, consultants and the Firm. We concentrate resources
among Tech, FA, HIM and GS to the areas of highest anticipated demand
to adapt to the ever-changing landscape within the staffing industry. We
believe our historical focus in these markets, combined with our staff’s
operating expertise, provides us with a competitive advantage.
Continue to Develop and Optimize our National Recruiting Center
(“NRC”). We believe our centralized NRC offers us a competitive advantage.
The NRC is particularly effective at increasing the quality and speed of
delivery services to our clients with demands for high volume staffing. The
KFORCE INC. AND SUBSIDIARIES 7
NRC identifies and interviews active candidates from nationally contracted
job boards, Kforce.com, as well as other sources, then forwards qualified
candidates to Kforce field offices to be matched to available positions.
The NRC has continued to evolve throughout 2013, and supports all of
our operating segments. There continues to be a significant demand
for its resources. We continue to focus on job order prioritization, which
places greater attention on orders that we believe present the greatest
opportunity and streamlining the NRC’s focus to more specific industries,
customer segments and skill sets to create leverage. A continued focus for
2014 will be to enhance the performance of the NRC in meeting demand,
and enhance our efforts to support future growth by building a pipeline
of qualified candidates as well as evolving its international talent solution
strategy. The Firm will continue to utilize the NRC as a training ground for
field sales as top performers in the NRC with a strong knowledge of the
delivery system will move into field sales roles. Additionally, during 2014
we are working on a plan to create greater efficiency in serving our West
Coast clients by reallocating a portion of the NRC resources to a facility on
the West Coast.
Leverage Infrastructure. A significant focus for Kforce is to more
effectively leverage the functionality built over the last several years with
its front-end and back office technology infrastructure. We believe our
back office system software provides a competitive advantage through the
enhancement of the efficiency and performance of our sales and delivery
functions. We will continue to selectively improve our front-end systems
and our back office systems, including our ERP and time collection and
billing systems, in areas that we believe will generate additional operating
leverage. During 2014, Kforce will be adopting and implementing an Agile
software development methodology (whereby requirements and solutions
evolve through cross-functional teams), and undergoing an organization
transformation in order to maximize the responsiveness and velocity by
which value is delivered through our technology investments.
Encourage Employee Achievement. We focus on promoting and
maintaining a quality-focused, energetic, results-oriented culture. Our field
associates and corporate personnel are given incentives (which include
competitions with significant prizes and internal recognition, in addition
to bonuses) to encourage achievement of Kforce’s corporate goals and
high levels of service. The Firm has continued to utilize AMP! (a.k.a. Actions
Maximizing Performance), a metrics-based system, in order to provide
associates with current and historical performance measures relative to
their Kforce peers. We believe this system fuels healthy competition and
assists associates in reaching their maximum performance levels.
industry overview
We serve Fortune 1000 companies, the Federal Government, state and
local governments, local and regional companies, and small to mid-sized
companies. Our 10 largest clients represented approximately 21% of
revenues and no single customer accounted for more than 3% of revenues
for the year ended December 31, 2013. The specialty staffing industry
is made up of thousands of companies, most of which are small local
firms providing limited service offerings to a relatively small local client
base. We believe Kforce is one of the 10 largest publicly-traded specialty
staffing firms in the United States. According to a recent report by SIA,
105 companies reported at least $100 million in U.S. staffing revenues in
2012 and these 105 companies represent an estimated 54.1% of the total
market. Competition in a particular market can come from many different
companies, both large and small. We believe, however, that our geographic
presence, diversified service offerings, NRC, focus on consistent service
and delivery and effective job order prioritization, all provide a competitive
advantage, particularly with clients that have operations in multiple
geographic markets. In addition, we believe that our diversified portfolio of
service offerings is primarily concentrated in areas with significant growth
opportunities in both the short and long term.
8 KFORCE INC. AND SUBSIDIARIES
Based upon previous economic cycles experienced by Kforce, we believe
that times of sustained economic recovery generally stimulate demand
for substantial additional U.S. workers and, conversely, an economic
slowdown results in a contraction in demand for additional U.S. workers.
From an economic standpoint, temporary employment figures and trends
are important indicators of staffing demand, which improved during
2013 at a greater rate than 2012 based on data published by the Bureau
of Labor Statistics (“BLS”). Total temporary employment increased 9.6%
and the penetration rate (the percentage of temporary staffing to total
employment) increased 8.4% from December 2012 to December 2013,
bringing the rate to 2.06% in December 2013, an all-time high. While
the macro-employment picture remains uncertain, it has continuously
improved, with the unemployment rate at 6.7% as of December 2013,
and non-farm payroll expanding an average of 182,000 jobs per month in
2013. Also, the college-level unemployment rate, which serves as a proxy
for professional employment and is more closely aligned with the Firm’s
business strategy, was at a low 3.3% in December 2013. Management
believes that uncertainty in the overall U.S. economic outlook related to
the political landscape, potential tax changes, geo-political risk and impact
of health care reform, will continue to fuel growth in temporary staffing as
employers may be reluctant to increase full-time hiring. Additionally, we
believe the increasing costs of employment may be driving a systematic
shift to an increased use of temporary staff as a percentage of the total
workforce, which is creating reduced cyclicality in the business. If the
penetration rate of temporary staffing continues to experience growth in
the coming years, we believe that our Flex revenues can grow significantly
even in a relatively modest growth macro-economic environment.
Management remains optimistic about the growth prospects of the
temporary staffing industry, the penetration rate, and in particular, our
revenue portfolio. Of course, no reliable predictions can be made about
the general economy, the staffing industry as a whole, or specialty staffing
in particular.
According to a recent staffing industry forecast published by SIA, the U.S.
temporary staffing industry generated estimated revenues of $82.0 billion
in 2010, $92.5 billion in 2011, and $99.0 billion in 2012; with projected
revenues of $103.9 billion in 2013 and $108.9 billion in 2014. Based on
projected revenues of $103.9 billion for the U.S. temporary staffing industry,
this would put the Firm’s market share at approximately 1%. Therefore,
our previously discussed business strategies are sharply focused around
expanding our share of the U.S. temporary staffing market and further
penetrating our existing clients’ staffing needs.
Over the last several years, our GS segment’s operations have been
adversely impacted by the (i) continued uncertainty of funding levels of
various Federal Government programs and agencies, (ii) uncertain macro-
economic and political environment, and (iii) unexpected significant
delays in the start-up of already executed and funded projects, which
we believe were due to acute shortages of acquisition and contracting
personnel within certain Federal Government agencies. During the third
quarter of 2013, the Federal Government did not pass a substantial
funding bill, which resulted in a 16-day government shutdown.
The shutdown ended on October 16, 2013 when the U.S. Congress
agreed to a deal that extended funding for government services until
January 15, 2014 and extended the debt ceiling through February 7, 2014. On
January 15, 2014, Congress passed a budget for fiscal year 2014. GS
management remains cautiously optimistic as it cannot predict the
outcome of past, current and future efforts to reduce federal spending
and whether these efforts will materially impact the future budgets of
federal agencies that are clients of our GS segment.
manaGemenT’S diSCuSSion and analySiS oF FinanCial
CondiTion and reSulTS oF operaTionS
This section is intended to help the reader understand Kforce,
our operations, and our present business environment. This MD&A
should be read in conjunction with our Consolidated Financial
Statements and the accompanying notes thereto contained in this
Annual Report as well as Business Overview for an overview of our
operations and business environment.
This overview summarizes the MD&A, which includes the
following sections:
• Executive Summary—an executive summary of our results of
operations for 2013.
• Critical Accounting Estimates—a discussion of the accounting
estimates that are most critical to fully understanding and
evaluating our reported financial results and that require
management’s most difficult, subjective or complex judgments.
• New Accounting Standards—a discussion of recently issued
accounting standards and their potential impact on our
Consolidated Financial Statements.
• Results of Operation—an analysis of Kforce’s consolidated
results of operations for the three years presented in its
Consolidated Financial Statements. In order to assist the reader
in understanding our business as a whole, certain metrics are
presented for each of our segments.
• Liquidity and Capital Resources—an analysis of cash flows, off-
balance sheet arrangements, stock repurchases and contractual
obligations and commitments and the impact of changes in
interest rates on our business.
On March 31, 2012, Kforce sold all of the issued and outstanding
stock of KCR. See Note 2 – “Discontinued Operations” to the Notes
to Consolidated Financial Statements, included in this annual
report. The results presented in the accompanying Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
years ended December 31, 2012 and 2011 include activity relating
to KCR as discontinued operations. Except as specifically noted,
our discussions below exclude any activity related to KCR, which is
addressed separately in the discussion of income from discontinued
operations, net of income taxes.
eXeCuTive Summary
The following is an executive summary of what Kforce believes
are important 2013 highlights, which should be considered in the
context of the additional discussions herein and in conjunction
with the Consolidated Financial Statements and notes thereto. We
believe such highlights are as follows:
• Net service revenues increased 6.4% to $1.15 billion in 2013
from $1.08 billion in 2012. Net service revenues increased 9.4%
for Tech, 1.7% for FA, 1.5% for HIM, and 0.6% for GS.
• Flex revenues increased 6.6% to $1.10 billion in 2013 from
$1.03 billion in 2012.
• Search revenues increased 2.5% to $48.9 million in 2013 from
$47.7 million in 2012.
• Quarterly sequential net service revenues grew for three
consecutive quarters, driving Q4 revenue growth to 12.3% year
over year.
• Flex gross profit margin increased 10 basis points to 29.1% in
2013 from 29.0% in 2012. Flex gross profit margin increased 30
basis points for Tech and 270 basis points for GS and decreased
20 basis points for FA and 320 basis points for HIM year over year.
• SG&A as a percentage of revenues for the year ended
December 31, 2013 was 28.1% compared to 29.8% in 2012. This
decrease was primarily a result of the acceleration of substantially
all long-term incentive awards (“LTIs”) on March 31, 2012, which
resulted in the acceleration of $31.3 million of compensation
expense and payroll taxes recorded in 2012. The reduction in
SG&A was partially offset by the investment in revenue generator
headcount in the fourth quarter of 2012 and throughout
2013 and the severance and termination-related charge and
Compensation Committee approved bonuses of $7.1 million and
$3.6 million, respectively, incurred during the fourth quarter of
2013 as a result of the Firm’s organizational realignment plan.
• Net income from continuing operations of $10.8 million for
2013 increased $46.5 million from a net loss from continuing
operations of $35.7 million in 2012. The results for 2013 include
an after-tax goodwill impairment charge of $9.3 million as
well as the previously mentioned organizational realignment
charges. The results for 2012 include an after-tax goodwill
impairment charge of $44.5 million as well as the previously
mentioned acceleration of LTIs during 2012.
• Earnings per share from continuing operations for 2013 was
$0.32 compared to a loss per share of $1.00 per share in 2012.
• During 2013, Kforce repurchased 1.8 million shares of common
stock on the open market at a total cost of approximately
$27.3 million.
• The Firm amended its Credit Facility in December 2013 to
increase borrowing capacity by $35.0 million to $135.0 million.
• The Firm initiated a quarterly dividend program and declared
and paid a cash dividend of $0.10 per share in the fourth
quarter of 2013 resulting in a payout in cash of $3.3 million.
• The total amount outstanding under the Credit Facility
increased $41.6 million to $62.6 million as of December 31,
2013 as compared to $21.0 million as of December 31, 2012.
CriTiCal aCCounTinG eSTimaTeS
Our Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States
(“GAAP”). In connection with the preparation of our 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, revenue, 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
Consolidated Financial Statements are prepared. On a regular
basis, management reviews the accounting policies, estimates,
assumptions and judgments to ensure that our Consolidated
Financial Statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot
be determined with certainty, actual results could differ from our
assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1—
“Summary of Significant Accounting Policies” to the Consolidated
Financial Statements, included in this Annual Report. Management
believes that the following accounting estimates are the most
critical to aid in fully understanding and evaluating our reported
financial results, and they require management’s most difficult,
subjective or complex judgments, resulting from the need to make
estimates about the effect of matters that are inherently uncertain.
KFORCE INC. AND SUBSIDIARIES 9
Description
Judgments and Uncertainties
Effect if Actual Results
Differ From Assumptions
ALLOWANCE FOR DOUBTFUL ACCOUNTS, FALLOUTS
AND OTHER ACCOUNTS RECEIVABLE RESERVES
See Note 1—“Summary of Significant
Accounting Policies” to the Notes to Consolidated
Financial Statements, included in this Annual
Report, for a complete discussion of our policies
related to determining our allowance for
doubtful accounts, fallouts and other accounts
receivable reserves.
GOODWILL IMPAIRMENT
We evaluate goodwill for impairment annually
or more frequently whenever events and
circumstances indicate that the carrying value of
the goodwill may not be recoverable. See Note 6—
“Goodwill and Other Intangible Assets” to the
Notes to Consolidated Financial Statements,
included in this Annual Report for a complete
discussion of the valuation methodologies
employed.
During the fourth quarter of 2013, Kforce
management made a strategic business
decision with regard to the GS segment, which
is ultimately expected to have a negative
impact on near-term growth prospects and
result in a moderate reduction in revenues and
profitability over the next few years. As a result
of the strategic decision, we believe there was
a triggering event during the fourth quarter.
In connection with our annual assessment of
goodwill impairment as of December 31, we
performed a step one and step two analysis,
which ultimately resulted in an impairment
charge of $14.5 million in our GS reporting unit.
The carrying value of goodwill as of December 31,
2013 by reporting unit was $17.0 million, $8.0
million, $4.9 million and $19.0 million for our
Tech, FA, HIM and GS reporting units, respectively.
Kforce performs an ongoing analysis of factors
including recent write-off and delinquency
trends, changes in economic conditions, a specific
analysis of material accounts receivable balances
that are past due, and concentration of accounts
receivable among clients, in establishing its
allowance for doubtful accounts.
Kforce estimates its allowance for Search
fallouts based on our historical experience with
the actual occurrence of fallouts.
Kforce estimates its reserve for future revenue
adjustments (e.g. bill rate adjustments, time card
adjustments, early pay discounts) based on our
historical experience.
We determine the fair value of our reporting
units using widely accepted valuation techniques,
including discounted cash flow, guideline
transaction method and guideline company
method. These types of analyses contain
uncertainties because they require management
to make significant assumptions and judgments
including: (i) an appropriate rate to discount the
expected future cash flows, (ii) the inherent risk
in achieving forecasted operating results, (iii)
long-term growth rates, (iv) expectations for
future economic cycles, (v) market comparable
companies and appropriate adjustments thereto
and (vi) market multiples.
It is our policy to conduct impairment testing
based on our current business strategy in light
of present industry and economic conditions, as
well as future expectations.
We have not made any material changes in
the accounting methodology used to establish
our allowance for doubtful accounts, fallouts
and other accounts receivable reserves. As of
December 31, 2013 and 2012, the allowance was
1.1% and 1.4% as a percentage of gross accounts
receivable, respectively.
We do not believe there is a reasonable
likelihood that there will be a material change
in the future estimates or assumptions we use
to calculate our allowance for doubtful accounts,
fallouts and other accounts receivable reserves.
However, if our estimates regarding estimated
accounts receivable losses are inaccurate, we
may be exposed to losses or gains that could be
material. A 10% difference in actual accounts
receivable losses reserved at December 31, 2013,
would have impacted our net income for 2013 by
approximately $0.1 million.
For our Tech and FA reporting units, Kforce
assessed the qualitative factors of each reporting
unit to determine if it was more likely than not
that the fair value of the reporting unit was less
than its carrying amount, including goodwill.
Based upon the qualitative assessments, it was
determined that it was not more likely than not
that the fair value of the reporting units were
less than the carrying values.
For our HIM and GS reporting units, however,
a quantitative step one impairment assessment
was performed as of December 31, 2013. For the
HIM reporting unit, the step one analysis resulted
in the fair value exceeding the carrying value of
invested capital by $19.3 million, or 156%. Due to
the reductions in the forecasted revenues for the
GS reporting unit, the step one analysis indicated
potential impairment as the carrying value of
invested capital exceeded the fair value.
As a result of the potential impairment
indication for the GS reporting unit, a step two
analysis was performed, resulting in a pre-tax
impairment charge of $14.5 million for the year
ended December 31, 2013.
A deterioration in the assumptions discussed
in Note 6—“Goodwill and Intangible Assets”
to the Notes to the Consolidated Financial
Statements included in this Annual Report, could
result in an additional impairment charge.
10 KFORCE INC. AND SUBSIDIARIES
Description
Judgments and Uncertainties
Effect if Actual Results
Differ From Assumptions
SELF-INSURED LIABILITIES
We are self-insured for certain losses related
to health insurance and workers’ compensation
claims. However, we obtain third-party insurance
coverage to limit our exposure to these claims.
When estimating our self-insured liabilities, we
consider a number of factors, including historical
claims experience, plan structure, internal claims
management activities, demographic factors
and severity factors. Periodically, management
reviews its assumptions to determine the
adequacy of our self-insured liabilities.
Our liabilities for health insurance and workers’
compensation claims as of December 31, 2013
were $3.0 million and $1.7 million, respectively.
STOCK-BASED COMPENSATION
We have stock-based compensation programs,
which include options, stock appreciation rights
(“SARs”) and unvested share awards and an
employee stock purchase plan. See Note 1—
“Summary of Significant Accounting Policies,”
Note 12—“Employee Benefit Plans,” and Note 14—
“Stock Incentive Plans” to the Notes to
Consolidated Financial Statements, included in
this Annual Report for a complete discussion of our
stock-based compensation programs.
We have not granted any stock options or
SARs over the last three years. We determine the
fair market value of our restricted stock based on
the closing stock price of Kforce’s common stock
on the date of grant. We utilize a Monte Carlo
model to determine the derived service period
for any restricted stock which contain a market
vesting condition.
DEFINED BENEFIT PENSION PLAN—U.S.
We have a defined benefit pension plan that
benefits certain named executive officers, the
Supplemental Executive Retirement Plan (“SERP”)
and a defined benefit postretirement health plan,
the Supplemental Executive Retirement Health
Plan (“SERHP”). See Note 12—“Employee Benefit
Plans” to the Notes to Consolidated Financial
Statements included in this Annual Report for a
complete discussion of the terms of these plans.
Neither the SERP or SERHP were funded as of
December 31, 2013 or 2012.
ACCOUNTING FOR INCOME TAXES
See Note 4—“Income Taxes” to the Notes to
Consolidated Financial Statements, included in
this Annual Report for a complete discussion of
the components of Kforce’s income tax expense as
well as the temporary differences that exist as of
December 31, 2013.
Our self-insured
liabilities contain
uncertainties because management is required
to make assumptions and to apply judgment
to estimate the ultimate total cost to settle
reported claims and claims incurred but not
reported as of the balance sheet date.
Restricted stock which contain a market
vesting condition require management to make
assumptions regarding the likelihood of achieving
market conditions during the vesting period,
which are inherently difficult to estimate but are
modeled using a Monte Carlo simulation model.
The stock compensation expense recorded is
impacted by our estimated forfeiture rates, which
are based on historical employee turnover.
We have not made any material changes in
the accounting methodologies used to establish
our self-insured liabilities during the past three
fiscal years.
We do not believe there is a reasonable
likelihood that there will be a material change in
the estimates or assumptions we use to calculate
our self-insured liabilities. However, if actual
results are not consistent with our estimates or
assumptions, we may be exposed to losses or
gains that could be material.
A 10% change in our self-insured liabilities
related to health insurance and workers’
compensation as of December 31, 2013 would
have impacted our net income for 2013 by
approximately $0.3 million.
We do not believe there is a reasonable
likelihood that there will be a material change
in the future estimates or assumptions we
use to determine stock-based compensation
expense. However, if actual results are not
consistent with our estimates or assumptions,
we may be exposed to changes in stock-based
compensation expense that could be material
or the stock-based compensation expense
reported in our financial statements may not be
representative of the actual economic cost of the
stock-based compensation.
A 10% change in unrecognized stock-based
compensation expense would have impacted
our net income by $0.5 million for 2013.
When estimating the obligation for our
pension and postretirement benefit plans,
management is required to make certain
assumptions and to apply judgment with respect
to determining an appropriate discount rate,
bonus percentage assumptions, expected health
care and premium cost trends, applicability of
health care regulations and expected future
compensation increases for the participants in
the plans, as they apply to our plans.
We do not believe there is a reasonable
likelihood that there will be a material change in
the estimates or assumptions we use to calculate
our obligation. However, if actual results are not
consistent with our estimates or assumptions,
we may be exposed to losses or gains that could
be material.
A 10% change in the discount rate used to
measure the net periodic pension cost for the
SERP and SERHP during 2013 would have had an
insignificant impact on our net income for 2013.
Our consolidated effective income tax rate is
influenced by tax planning opportunities available
to us in the various jurisdictions in which we
conduct business. Significant judgment is required
in determining our effective tax rate and in
evaluating our tax positions, including those that
may be uncertain.
Kforce is also required to exercise judgment
with respect to the realization of our net deferred
tax assets. Management evaluates all positive and
negative evidence and exercises judgment regarding
past and future events to determine if it is more likely
than not that all or some portion of the deferred tax
assets may not be realized. If appropriate, a valuation
allowance is recorded against deferred tax assets to
offset future tax benefits that may not be realized.
We do not believe that there is a reasonable
likelihood that there will be a material change in
our liability for uncertain income tax positions or
our effective income tax rate. However, if actual
results are not consistent with our estimates or
assumptions, we may be exposed to losses that
could be material. Kforce recorded a valuation
allowance of $0.1 million as of December 31, 2013
related primarily to state net operating losses.
A 0.50% change in our effective income
tax rate from continuing operations would
have impacted our net income for 2013 by
approximately $0.1 million.
KFORCE INC. AND SUBSIDIARIES 11
new aCCounTinG STandardS
In July 2013, the FASB issued authoritative guidance regarding
presentation of an unrecognized tax benefit when a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward
exists. This guidance is to be applied for annual reporting periods
beginning on or after December 15, 2013, and interim periods
within those annual periods. Kforce does not expect the adoption of
this guidance to have a material impact on its future consolidated
financial statements.
reSulTS oF operaTionS
Net service revenues for the years ended December 31, 2013,
2012 and 2011 were $1.15 billion, $1.08 billion and $1.00 billion,
respectively, which represents an increase of 6.4% from 2012 to
2013 and 7.7% from 2011 to 2012. The increase in 2013 from 2012
was primarily due to our Tech segment which had an increase in
net service revenues of 9.4% and represented 64.2% of our total
net service revenues in 2013. The increase in 2012 from 2011 was
primarily due to our Tech and FA segments, which had increases in
net service revenues of 8.3% and 8.6%, respectively, and represented
62.4% and 22.0%, respectively, of our net service revenues in 2012.
In addition, net service revenues for HIM increased 1.5% in 2013
from 2012 and 12.1% in 2012 from 2011. Our GS segment net
service revenues increased 0.6% in 2013 from 2012 and decreased
1.1% in 2012 from 2011. Search revenues increased 2.5% in 2013
compared to 2012 and 9.6% in 2012 compared to 2011.
Flex gross profit margins increased 10 basis points to 29.1% for
the year ended December 31, 2013 from 29.0% for the year ended
December 31, 2012. Flex gross profit margins increased from 28.5%
for the year ended December 31, 2011 to 29.0% for the year ended
December 31, 2012 due primarily to an increase in the spread
between our bill and pay rates. SG&A expenses as a percentage
of net service revenues were 28.1% and 29.8% for the years ended
December 31, 2013 and 2012, respectively. The decrease in SG&A
expenses as a percentage of net service revenues during the year
ended December 31, 2013 was primarily a result of the acceleration
of substantially all of the outstanding and unvested restricted
stock and ALTI awards on March 31, 2012, which resulted in the
acceleration of $31.3 million of compensation expense and payroll
taxes recorded during the three months ended March 31, 2012. The
decrease in 2013 was partially offset by the investment in revenue
generator headcount additions during the fourth quarter of 2012
and throughout 2013 and severance and termination-related
charges of $7.1 million incurred during the fourth quarter of 2013
as a result of the Firm’s organizational realignment plan.
Additionally, during the years ended December 31, 2013 and
2012, Kforce recorded a goodwill impairment charge in the amount
of $14.5 million and $69.2 million, respectively, in our GS reporting
unit. In 2013, the goodwill impairment charge was a result of
a business strategy decision made during the fourth quarter
regarding the GS reporting unit, to focus its service offerings and
efforts on prime integrated business solution services. As a result
of the change in focus, management plans to reallocate existing
investments in the business and redirect the business development
team to concentrate on a more specific and, in our opinion, a higher
quality revenue stream. These plans will ultimately result in the
transition away from certain existing revenue streams, specific
revenue-generating contracts and opportunities in the business
development life cycle that do not fit within the revised strategic
12 KFORCE INC. AND SUBSIDIARIES
scope of service offerings, including pure staff augmentation
as well as product sales. We expect that the change in strategy,
coupled with the lengthy contract procurement cycle within the
government sector of approximately 18 months for solution-
based contracts, will have a negative impact on near-term growth
prospects of the GS segment and that GS will experience a
moderate reduction in revenues and profitability over the next few
years. This reduction in the forecast was the primary driver for the
impairment charge during the fourth quarter of 2013. During 2012,
the goodwill impairment charge was the result of the adverse
effect of the unexpected significant delays in the start-up of
already executed and funded projects, uncertainty of funding levels
of various Federal Government programs and agencies and the
increasingly uncertain macro-economic and political environment.
From an economic standpoint, temporary employment figures
and trends are important indicators of staffing demand, which
improved during 2013 as compared to 2012 based on data
published by the BLS. Total temporary employment increased 9.6%
and the penetration rate (the percentage of temporary staffing
to total employment) increased 8.4% from December 2012 to
December 2013, bringing the rate to 2.06% in December 2013,
an all-time high. While the macro-employment picture remains
uncertain, it has continuously improved, with the unemployment
rate at 6.7% as of December 2013, and non-farm payroll expanding
an average of 182,000 jobs per month in 2013. Also, the college-
level unemployment rate, which serves as a proxy for professional
employment and is more closely aligned with the Firm’s business
strategy, was at 3.3% in December 2013. Kforce believes that
uncertainty in the overall U.S. economic outlook related to the
political landscape, potential tax changes, geo-political risk and
impact of health care reform, will continue to fuel growth in
temporary staffing as employers may be reluctant to increase full-
time hiring. If the penetration rate of temporary staffing continues
to experience growth in the coming years, we believe that our
Flex revenues can grow significantly even in a relatively modest
growth macro-economic environment. Kforce remains optimistic
about the growth prospects of the temporary staffing industry, the
penetration rate, and in particular, our revenue portfolio.
During 2013 and over the last few years, we have undertaken
several significant initiatives including: (i) executing a realignment
plan to streamline our leadership and revenue enablers in an
effort to better align a higher percentage of roles closer to the
customer; (ii) increasing our focus on consultant care processes and
communications to redeploy our consultants in a timely fashion; (iii)
increasing revenue generator headcount to capitalize on targeted
growth opportunities; (iv) further optimizing our NRC team in
support of our field operations; (v) upgrading our corporate systems
with a focus on business intelligence, compensation management,
job order prioritization and the development of mobile applications;
(vi) focusing on process improvement, centralization and technology
infrastructure and (vii) divesting KCR in March 2012 in an attempt
to enhance Kforce’s focus on our core service offerings. We believe
our realigned field operations and back office operations models
provide a competitive advantage for us and are keys to our future
growth and profitability. We also believe that our portfolio of service
offerings, which are primarily in the U.S., are also a key contributor
to our long-term financial stability.
Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our consolidated statements
of operations and comprehensive income (loss) for the years ended:
December 31,
Revenues by Segment:
Tech
FA
HIM
GS
Net service revenues
Revenues by Type:
Flex
Search
Net service revenues
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Depreciation and amortization
Income (loss) from continuing operations, before income taxes
Income (loss) from continuing operations
Net income (loss)
2013
2012
2011
64.2%
21.0
6.8
8.0
62.4%
22.0
7.1
8.5
62.1%
21.9
6.8
9.2
100.0%
100.0%
100.0%
95.8%
4.2
100.0%
32.1%
28.1%
1.3%
0.9%
1.7%
0.9%
0.9%
95.6%
4.4
100.0%
32.1%
29.8%
6.4%
1.0%
(5.1)%
(3.3)%
(1.3)%
95.7%
4.3
100.0%
31.6%
27.3%
—
1.2%
3.0%
1.9%
2.7%
The following table details net service revenues for Flex and Search revenues by segment and changes from the prior year.
(In thousands)
Tech
Flex
Search
Total Tech
FA
Flex
Search
Total FA
HIM
Flex
Search
Total HIM
GS
Flex
Search
Total GS
Total Flex
Total Search
Total Revenues
2013
increase
(decrease)
2012
Increase
(Decrease)
2011
$ 720,179
19,183
9.9%
(6.5)%
$ 739,362
9.4%
$ 655,062
20,525
$ 675,587
8.1%
15.5%
8.3%
$ 606,238
17,774
$ 624,012
$ 213,158
29,259
$ 242,417
0.6%
9.7%
1.7%
$ 211,797
26,679
$ 238,476
9.0%
5.8%
8.6%
$ 194,359
25,216
$ 219,575
$ 77,745
414
$ 78,159
1.6%
(12.8)%
1.5%
$ 76,517
475
$ 76,992
12.2%
(10.4)%
$ 68,181
530
12.1%
$ 68,711
$ 91,949
—
$ 91,949
$1,103,031
48,856
$1,151,887
0.6%
—
0.6%
6.6%
2.5%
6.4%
$ 91,424
—
$ 91,424
$1,034,800
47,679
$1,082,479
(1.1)%
—
(1.1)%
7.7%
9.6%
7.7%
$ 92,449
—
$ 92,449
$ 961,227
43,520
$1,004,747
KFORCE INC. AND SUBSIDIARIES 13
While quarterly comparisons are not fully discussed herein, certain quarterly revenue trends are referred to in discussing annual
comparisons. Our quarterly operating results are affected by the number of billing days in a quarter, which is provided in the table below.
The following 2013 quarterly information is presented for informational purposes only.
(In thousands, except Billing Days)
december 31
September 30
June 30
march 31
Three months ended
Billing Days
Flex Revenues
Tech
FA
HIM
GS
Total Flex
Search Revenues
Tech
FA
HIM
Total Search
Total Revenues
Tech
FA
HIM
GS
Total Revenues
62
64
64
63
$193,238
55,552
20,678
21,695
$291,163
$ 4,338
7,238
180
$ 11,756
$197,576
62,790
20,858
21,695
$302,919
$188,888
54,791
19,602
24,127
$287,408
$ 4,694
7,456
94
$ 12,244
$193,582
62,247
19,696
24,127
$299,652
$175,213
52,954
18,921
23,297
$270,385
$ 5,356
7,900
48
$ 13,304
$180,569
60,854
18,969
23,297
$283,689
$162,840
49,861
18,544
22,830
$254,075
$ 4,795
6,665
92
$ 11,552
$167,635
56,526
18,636
22,830
$265,627
Flex Revenues. The primary drivers of Flex revenues are the
number of consultant hours worked, the consultant bill rate per
hour and, to a limited extent, the amount of billable expenses
incurred by Kforce.
Flex revenues for our largest segment, Tech, increased 9.9%
during the year ended December 31, 2013 as compared to 2012
and increased 8.1% in 2012 from 2011. We believe the increase
in revenue is primarily a result of candidate skill sets that are in
demand, our great people and operating model, and our increase
in revenue generator headcount. According to an IT growth update
published by SIA during the fourth quarter of 2013, industries that
utilized IT staffing are estimated to grow at a higher rate than the
overall U.S. employment growth rate. SIA estimates the IT staffing
market will grow 7% in 2014, which we believe is due to the
continuing use of temporary staffing as a solution during uncertain
economic cycles, the increasing cost of employment driving the
systemic use of temporary staffing, particularly in project-based
work such as technology, and an increasing influence of technology
in business driving up the overall demand for Tech talent. SIA also
acknowledges that notable skill shortages in certain technology
skill sets will continue, which we believe will result in strong future
growth in our Tech segment. In an effort to take advantage of
this continued expected growth, revenue generator headcount
focused on Tech was significantly increased year-over-year. Kforce’s
operating model includes our NRC, which we believe has been
highly effective in increasing the quality and speed of delivery of
services to our clients. We continue to believe that our operating
model allows us to deliver our service offerings in a disciplined and
consistent manner across all geographies and business lines.
Our FA segment experienced an increase in Flex revenues of 0.6%
during the year ended December 31, 2013 as compared to 2012,
which was a deceleration from the increase of 9.0% during the year
ended December 31, 2012 as compared to 2011. According to an
update in September 2013 from SIA, the finance and accounting
growth estimate for 2013 was lowered to 2% as a result of
headwinds within the industry but the U.S. market for temporary
finance and accounting workers is expected to grow 5% in 2014 as
the overall economy gains momentum. Management believes the
benefit from the significant investment in the revenue generator
headcount for FA made in 2012 and 2013 will be realized in 2014
through the capture of the expected growth in the FA industry as a
result of improvements in associate productivity that typically come
with tenure.
HIM Flex revenues increased 1.6% during the year ended
December 31, 2013 compared to 2012 and increased 12.2% during
the year ended December 31, 2012 compared to 2011. The increase
in 2013 is partially attributable to the required implementation of
ICD-10 by October 1, 2014. The increase in revenues from ICD-10
was partially offset by a reduction in spending by customers as a
result of increased healthcare reimbursement regulations. We
expect ICD-10 to continue contributing to the growth of HIM service
revenues throughout 2014.
Our GS segment experienced an increase in net service revenues
of 0.6% during the year ended December 31, 2013 as compared to
2012 and decreased 1.1% during the year ended December 31, 2012
as compared to 2011. The slight growth in 2013 was primarily related
to the expansion of revenues with existing GS customers in addition
to the ramping of new government contract wins through the third
14 KFORCE INC. AND SUBSIDIARIES
quarter, partially offset by delays in certain government contracts
during the fourth quarter due to the government shutdown.
We expect 2014 revenues to decline over 2013 as a result of the
aforementioned strategic decision made by Kforce management
with regard to the GS reporting unit to focus its service offerings
and efforts on prime integrated business solution services.
The following table details total Flex hours for our Tech, FA and HIM segments and percentage changes over the prior period for the years
ended December 31:
(In thousands)
Tech
FA
HIM
Total hours
2013
10,929
6,550
1,168
18,647
increase
(decrease)
9.0%
3.1%
2.6%
6.5%
2012
10,023
6,352
1,138
17,513
Increase
(Decrease)
4.2%
10.8%
7.3%
6.7%
2011
9,615
5,731
1,061
16,407
As the GS segment primarily provides solutions-based services as compared to staffing services, Flex hours are not presented above.
The changes in billable expenses, which are included as a component of net services revenues, are primarily attributable to increases or
decreases in project-based work. Flex billable expenses for each of our segments were as follows for the years ended December 31:
(In thousands)
Tech
FA
HIM
GS
Total billable expenses
2013
$ 5,630
423
5,245
348
$11,646
increase
(decrease)
(22.0)%
(19.7)%
(17.8)%
(37.4)%
(20.7)%
2012
$ 7,222
527
6,381
556
$14,686
Increase
(Decrease)
58.0%
(17.8)%
7.2%
(34.7)%
22.2%
2011
$ 4,571
641
5,955
852
$12,019
Search Fees. The primary drivers of Search fees are the number
of placements and the average placement fee. Search fees also
include conversion revenues (conversions occur when consultants
initially assigned to a client on a temporary basis are later
converted to a permanent placement). Our GS segment does not
make permanent placements.
Search revenues increased 2.5% during the year ended December 31,
2013 as compared to 2012 and increased 9.6% during the year
ended December 31, 2012 as compared to 2011. We expect the
slight growth in Search to continue in 2014.
Total placements for each segment were as follows for the years ended December 31:
Tech
FA
HIM
Total placements
2013
1,222
2,449
23
3,694
increase
(decrease)
(7.2)%
19.8%
(42.5)%
8.6%
2012
1,317
2,044
40
3,401
The average fee per placement for each segment was as follows for the years ended December 31:
Tech
FA
HIM
Total average placement fee
2013
$15,695
11,946
17,990
$13,224
increase
(decrease)
0.8%
(8.5)%
49.6%
(5.7)%
2012
$15,577
13,051
12,029
$14,017
Increase
(Decrease)
8.7%
2.1%
(45.2)%
3.5%
Increase
(Decrease)
6.2%
3.5%
65.6%
5.8%
2011
1,212
2,001
73
3,286
2011
$14,665
12,605
7,264
$13,244
KFORCE INC. AND SUBSIDIARIES 15
Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily flexible personnel payroll wages,
payroll taxes, payroll-related insurance, and subcontractor costs) from net Flex service revenues. In addition, consistent with industry practices,
gross profit dollars from Search fees are equal to revenues, because there are generally no direct costs associated with such revenues.
The following table presents, for each segment, the gross profit percentage (gross profit as a percentage of revenues) for the year as well
as the increase or decrease over the preceding period, as follows:
Tech
FA
HIM
GS
Total gross profit percentage
2013
29.7%
38.6%
32.3%
34.1%
32.1%
increase
(decrease)
—
1.0%
(9.0)%
8.6%
—
2012
29.7%
38.2%
35.5%
31.4%
32.1%
Increase
(Decrease)
1.4%
2.1%
(0.3)%
2.3%
1.6%
2011
29.3%
37.4%
35.6%
30.7%
31.6%
Kforce also monitors the gross profit percentage as a percentage of Flex revenues, which is referred to as the Flex gross profit percentage.
This provides management with helpful insight into the other drivers of total gross profit percentage such as changes in volume evidenced
by changes in hours billed for Flex and changes in the spread between bill rate and pay rate for Flex.
The increase in Search gross profit from 2012 to 2013 was $1.2 million, composed of a $3.9 million increase in volume, offset by a $2.7
million decrease in rate. The increase in Search gross profit from 2011 to 2012 was $4.2 million, composed of a $1.6 million increase in volume
and a $2.6 million increase in rate.
The following table presents, for each segment, the Flex gross profit percentage for the years ended December 31:
Tech
FA
HIM
GS
Total Flex gross profit percentage
2013
27.8%
30.2%
31.9%
34.1%
29.1%
increase
(decrease)
1.1%
(0.7)%
(9.1)%
8.6%
0.3%
2012
27.5%
30.4%
35.1%
31.4%
29.0%
Increase
(Decrease)
1.1%
4.1%
0.0%
2.3%
1.8%
2011
27.2%
29.2%
35.1%
30.7%
28.5%
The increase in Flex gross profit from 2012 to 2013 was $20.5
million, composed of a $19.8 million increase in volume and a $0.7
million increase in rate. The increase in Flex gross profit from 2011
to 2012 was $26.0 million, composed of a $21.0 million increase in
volume and a $5.0 million increase in rate.
The increase in Flex gross profit percentage of 10 basis points in
2013 from 2012 was primarily driven by the improvement in the
spread between our bill rates and pay rates predominately within
our GS segment. This improvement was partially offset by a decrease
in the Flex gross profit in our HIM segment which was primarily
related to investments we are making to retain and train consultants
in preparation for future ICD-10 related opportunities. A continued
focus for Kforce is to optimize the spread between bill rates and pay
rates by providing our associates with tools, economic knowledge and
defined programs to drive improvement in the effectiveness of our
pricing strategy around the staffing services we provide. We believe
this strategy will serve to balance the desire for optimal volume, rate,
effort and duration of assignment, while ultimately maximizing the
benefit for our clients, our consultants and Kforce. We anticipate that
Flex gross profit margins will remain flat in 2014 as compared to 2013
as we balance improvement in the spread between our bill rates and
pay rates with capturing market demand.
Selling, General and Administrative (“SG&A”) Expenses. For the
years ended December 31, 2013, 2012 and 2011, total commissions,
compensation, payroll taxes, and benefit costs as a percentage
of SG&A represented 85.2%. 86.2%, and 87.4%, respectively.
Commissions and related payroll taxes and benefit costs are
variable costs driven primarily by revenues and gross profit levels,
and associate performance. Therefore, as gross profit levels change,
these expenses are also generally anticipated to change but remain
relatively consistent as a percentage of revenues.
16 KFORCE INC. AND SUBSIDIARIES
The following table presents these components of SG&A along with an “other” caption, which includes bad debt expense, lease expense,
professional fees, travel, telephone, computer and certain other expenses; as an absolute amount and as a percentage of total net service
revenues for the years ended December 31:
(In thousands)
Compensation, commissions,
payroll taxes and benefits costs
Other
Total SG&A
2013
% of
revenues
2012
% of
Revenues
2011
% of
Revenues
$275,881
48,052
$323,933
24.0%
4.1
28.1%
$277,851
44,585
$322,436
25.7%
4.1
29.8%
$239,457
34,615
$274,072
23.8%
3.5
27.3%
SG&A as a percentage of net service revenues decreased 170 basis
points in 2013 compared to 2012. This was primarily attributable to
the following:
• Decrease in compensation, commissions, payroll taxes
and benefits cost of 1.7% of net service revenues, which
was primarily related to the discretionary acceleration of
substantially all of the outstanding and unvested restricted
stock and ALTI awards on March 31, 2012. This resulted in
incremental compensation expense of $31.3 million, including
payroll taxes, that was recorded during the first quarter of 2012.
This decrease was partially offset by the impact of the revenue
generator headcount additions in 2012 and 2013, as well as
the Firm’s execution of a realignment plan during the fourth
quarter of 2013.
As mentioned above, the Firm executed an organizational
realignment plan, whereby we streamlined the Firm’s leadership
and revenue enablers to align a higher percentage of roles closer
to the customer. During the fourth quarter, the Firm incurred
severance and termination-related charges of $7.1 million as a
result of the plan. Additionally, in connection with the realignment
and succession planning, the Compensation Committee approved
a discretionary bonus of $3.6 million paid to a broad group of senior
management during the fourth quarter of 2013. The new alignment
has resulted in more significant focus on our revenue generating
activities and more streamlined processes and tools that enable
us to simplify and improve how we do business with our clients
and consultants. Additionally, we believe that this organizational
realignment could positively impact our operating margins in 2014.
SG&A as a percentage of net service revenues increased 250 basis
points in 2012 compared to 2011. This was primarily attributable to
the following:
• Increase in compensation and benefits cost of 2.0% of net
service revenues, which was primarily related to an increase in
stock-based compensation expense and related payroll taxes
for the acceleration of the vesting for substantially all of the
outstanding and unvested restricted stock and ALTI awards
on March 31, 2012. This resulted in compensation expense of
$31.3 million, including payroll taxes, being recorded during the
three months ended March 31, 2012.
• Decrease in commission expense of 0.2% of net service
revenues, which was primarily attributable to a decrease in
the estimated annual effective commission rate due to certain
changes made to our compensation plans. This decrease was
partially offset by the increase in the average revenue generator
headcount during 2012 as compared to 2011.
• Increase in bad debt expense of 0.3% of net service revenues,
which was primarily attributable to (i) an increased level of
write-offs in the first half of 2012 as compared to 2011 and (ii)
a reduction in the allowance for doubtful accounts during 2011
due to positive collection trends.
• Increase in professional fees of 0.2% of net service revenues
as compared to 2011 due to an additional investment in
compliance-related activities.
Goodwill Impairment. As discussed above, Kforce management
made a strategic business decision during the fourth quarter of 2013
with regard to the GS reporting unit to focus its service offerings and
efforts on prime integrated business solution services. As a result
of the change in focus, management plans to reallocate existing
investments in the business and redirect the business development
team to concentrate on a more specific and, in our opinion, a higher
quality revenue stream. These plans will ultimately result in the
transition away from certain existing revenue streams, specific
revenue-generating contracts and opportunities in the business
development life cycle that do not fit within the revised strategic
scope of service offerings, including pure staff augmentation as
well as product sales. This change in strategy, coupled with the
lengthy contract procurement cycle within the government sector
of approximately 18 months for solutions-based services, led us to
expect negative impacts on near-term growth prospects of the GS
segment and reductions in revenues and profitability over the next
few years.
We believe these circumstances resulted in a possible
impairment trigger during the fourth quarter, which was assessed
in conjunction with the Firm’s annual goodwill impairment analysis
as of December 31, 2013. The step one analysis for the GS reporting
unit resulted in the carrying value of invested capital exceeding the
fair value of the GS reporting unit, primarily due to the reduction
in the forecast. As a result, Kforce performed a step two goodwill
impairment test for its GS reporting unit which ultimately resulted
in Kforce recording an impairment charge of approximately $14.5
million, with a related tax benefit of approximately $5.2 million,
during the fourth quarter of 2013.
During 2012, Kforce took an impairment charge on the GS reporting
unit goodwill in the amount of $69.2 million, as previously discussed.
Goodwill allocated to the GS reporting unit was $19.0 million and
$33.5 million as of December 31, 2013 and 2012, respectively.
A deterioration in the assumptions discussed in Note 6—
“Goodwill and Intangible Assets” to the Notes to the Consolidated
Financial Statements included in this Annual Report, could result in
an additional impairment charge.
KFORCE INC. AND SUBSIDIARIES 17
Depreciation and Amortization. The following table presents depreciation and amortization expense by major category for the years ended
December 31, 2013, 2012 and 2011 as well as the increases (decreases) experienced during 2013 and 2012:
(In thousands)
Fixed asset depreciation
Capital lease asset depreciation
Capitalized software amortization
Intangible asset amortization
Total depreciation and amortization
2013
$4,325
1,538
3,236
747
$9,846
increase
(decrease)
16.7%
(7.5)
(28.3)
(17.6)
(8.7)%
2012
$ 3,706
1,662
4,514
907
$10,789
Increase
(Decrease)
(11.7)%
2.0
(18.3)
(21.3)
(13.7)%
2011
$ 4,197
1,629
5,527
1,152
$12,505
Fixed Asset Depreciation: The $0.6 million increase in 2013 is
primarily the result of the leasehold improvement additions made
during 2013. The $0.5 million decrease in 2012 is primarily the result
of certain assets becoming fully depreciated during early 2012.
Capitalized Software Amortization: The $1.3 million decrease
in 2013 is primarily the result of several significant capitalized
software balances becoming fully amortized during 2013. The
$1.0 million decrease in 2012 is related to software becoming fully
amortized during 2012.
Other Expense, Net. Other expense, net was $1.2 million in 2013,
$1.1 million in 2012, and $1.3 million in 2011, and consists primarily
of interest expense related to Kforce’s Credit Facility.
Income Tax Expense (Benefit). For the year ending December 31,
2013, income tax expense as a percentage of income before income
taxes (our “effective rate”) was 46.3%, which was impacted by the
partially non-deductible goodwill impairment charge and certain
other non-deductible expenses. For the year ending December 31,
2012, income tax benefit as a percentage of loss before income
taxes (our “effective rate”) was 35.7%. The income tax benefit for
2012 was primarily related to tax benefits associated with the
partially deductible goodwill impairment charge taken in 2012.
For the year ending December 31, 2011, income tax expense as a
percentage of income before income taxes was 36.3%.
Income from Discontinued Operations, Net of Income Taxes.
Discontinued operations for each of the years ended December
31, 2012 and 2011 includes the consolidated income and expenses
of KCR. During the three months ended March 31, 2012, Kforce
completed the sale of KCR resulting in a pre-tax gain, including
adjustments, of $36.4 million. Included in the determination of
the pre-tax gain is approximately $5.5 million of goodwill and
transaction expenses totaling approximately $2.2 million, which
primarily included commissions, legal fees and transaction bonuses.
Income tax expense as a percentage of income from discontinued
operations, before income taxes, for the year ended December 31,
2012 and 2011 were 44.6% and 39.5%, respectively. The increase in
the effective income tax rate of discontinued operations during the
year ended December 31, 2012 is primarily related to the partially
deductible nature of the goodwill impairment charge of $5.5 million.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure,
is defined by Kforce as net (loss) income before discontinued
operations, goodwill impairment (pre-tax) charges, interest,
income taxes, depreciation and amortization and amortization of
stock-based compensation expense. 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 evaluate its operations
including its ability to generate cash flows and, consequently,
management believes this 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.
Some of the items that are excluded also impacted certain
balance sheet assets, resulting in all or a portion of an asset being
written off without a corresponding recovery of cash we may have
previously spent with respect to the asset. In addition, although
we excluded amortization of stock-based compensation expense
(which we expect to continue to incur in the future) because it is
a non-cash expense, the associated stock issued may result in an
increase in our outstanding shares of stock, which may result in the
dilution of our stockholder ownership interest. We encourage you to
evaluate these items and the potential risks of excluding such items
when analyzing our financial position.
18 KFORCE INC. AND SUBSIDIARIES
The following table presents Adjusted EBITDA results and includes a reconciliation of Adjusted EBITDA to net income for the years ended
December 31:
(In thousands, except per share amounts)
2013
per Share
2012
Per Share
2011
Per Share
Net income (loss)
Income from discontinued operations,
net of income taxes
Income (loss) from continuing operations
Goodwill impairment, pre-tax
Depreciation and amortization
Amortization of restricted stock
Interest expense and other
Income tax (benefit) expense
Earnings per share adjustment (1)
Adjusted EBITDA
$10,787
$ 0.32
$(13,703)
$(0.38)
$27,156
$0.70
—
$10,787
14,510
9,846
2,570
1,290
(9,311)
—
$48,314
—
$ 0.32
0.43
0.29
0.08
0.04
(0.28)
—
$ 1.44
22,009
$(35,712)
69,158
10,789
25,688
994
(19,854)
—
$ 51,063
0.62
$(1.00)
1.93
0.30
0.72
0.03
(0.55)
(0.01)
$ 1.42
8,100
$19,056
—
12,505
11,819
1,272
10,858
—
$55,510
0.21
$0.49
—
0.32
0.30
0.04
0.28
—
$1.43
(1) This earnings per share adjustment is necessary to properly reconcile net loss per share on a GAAP basis to Adjusted EBITDA per share.
liquidiTy and CapiTal reSourCeS
To meet our capital and liquidity requirements, we primarily rely
on operating cash flow as well as borrowings under our existing
Credit Facility. At December 31, 2013, Kforce had $112.9 million in
working capital compared to $72.7 million in 2012. Kforce’s current
ratio (current assets divided by current liabilities) was 2.3 at the end
of 2013 and 1.7 at the end of 2012. The increase in working capital
was primarily due to increases in the accounts receivable and the
income tax receivable.
Please see the accompanying Consolidated Statements of Cash
Flows for each of the three years ended December 31, 2013, 2012
and 2011 in this Annual Report for a more detailed description
of our cash flows. Kforce is principally focused on achieving the
appropriate balance in the following areas of cash flow: (i) achieving
positive cash flow from operating activities; (ii) returning capital
to our shareholders through our dividend program; (iii) reducing
the outstanding balance of our Credit Facility; (iv) repurchasing
our common stock; (v) investing in our infrastructure to allow
sustainable growth via capital expenditures; and (vi) making
strategic acquisitions.
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, significant deterioration in the economic environment
or market conditions, among other things, could negatively impact
operating results, cash flow, liquidity and the ability of our lenders
to fund borrowings. There is no assurance that: (i) our lenders will be
able to fund our borrowings or (ii) if operations were to deteriorate
and additional financing were to become necessary, we would be
able to obtain financing in amounts sufficient to meet operating
requirements or at terms which are satisfactory and which would
allow us to remain competitive.
Actual results could also differ materially from those indicated
as a result of a number of factors, including the use of currently
available resources for possible acquisitions and possible additional
stock repurchases and dividends.
The following table presents a summary of our cash flows from
operating, investing and financing activities, as follows:
(In thousands)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net (decrease) increase in
cash and cash equivalents
Discontinued Operations
Years Ended December 31,
2013
2012
2011
$ 465 $ 55,978
52,405
(8,547)
(107,941)
7,576
$ 31,240
(10,090)
(21,266)
$ (506) $ 442
$ (116)
As was previously discussed, Kforce divested KCR on March 31,
2012. The accompanying consolidated statements of cash flows
have been presented on a combined basis (continuing operations
and discontinued operations). Cash flows provided by discontinued
operations for all prior periods were provided by operating activities
and were not material to the capital resources of Kforce. In addition,
the absence of cash flows from discontinued operations is not
expected to have a significant effect on the future liquidity, financial
position, or capital resources of Kforce.
operating activities
The significant variations in cash provided by operating activities
and net income in 2013 are principally related to adjustments to
net income for certain non-cash charges such as depreciation and
amortization expense and stock-based compensation as well as
the goodwill impairment charge. These adjustments are more fully
detailed in our Consolidated Statements of Cash Flows for the three
years ended December 31, 2013. When comparing cash flows from
operating activities for the years ended December 31, 2013, 2012 and
2011, the primary drivers of cash inflows and outflows are net trade
receivables and accounts payable. The decrease in cash provided
by operating activities in 2013 compared to 2012 is a result of the
increase in account receivable due to the timing of collections.
KFORCE INC. AND SUBSIDIARIES 19
investing activities
Capital expenditures have been made over the years on
Kforce’s infrastructure to support the growth in our business.
Capital expenditures during 2013, 2012 and 2011, which exclude
equipment acquired under capital leases, were $8.1 million, $5.8
million and $6.5 million, respectively.
Effective March 31, 2012, Kforce sold all of the issued and
outstanding stock of KCR for a purchase price of $50.0 million plus a
$7.3 million post-closing working capital adjustment. Proceeds from
the divestiture of KCR were $55.4 million, net of transaction costs,
during the year ended December 31, 2012.
We expect to continue to selectively invest in our infrastructure
in order to support the expected future growth in our business.
Kforce believes it has sufficient cash and availability under its Credit
Facility to make any expected necessary capital expenditures in the
foreseeable future. In addition, we continually review our portfolio
of businesses and their operations in comparison to our internal
strategic and performance objectives. As part of this review, we may
acquire other businesses and further invest in, fully divest and/or
sell parts of our current businesses
Financing activities
During 2013, Kforce repurchased common stock totaling
$29.8 million, which was comprised of approximately $27.3
million of open market common stock repurchases and common
stock repurchases attributable to shares withheld for statutory
minimum tax withholding requirements pertaining to the vesting
of restricted stock awards, and the settlement of approximately
$2.5 million of common stock repurchases from the fourth quarter
of 2012. During 2012, Kforce repurchased common stock totaling
$44.4 million, which included open market repurchases of common
stock of approximately $28.9 million and repurchases of common
stock attributable to shares withheld for statutory minimum tax
withholding requirements pertaining to the vesting of restricted
stock awards of approximately $15.5 million. In 2011, repurchases
of common stock were $59.6 million, which included open market
repurchases of common stock of approximately $58.1 million and
repurchases of common stock attributable to shares withheld
for statutory minimum tax withholding requirements pertaining
to the vesting of restricted stock awards of approximately
$1.5 million.
During the fourth quarter of 2013, Kforce declared and paid a
cash dividend of $3.3 million, or $0.10 per share. During the fourth
quarter of 2012, Kforce declared and paid a special cash dividend of
$35.2 million, or $1.00 per share. We currently expect to continue
to declare and pay quarterly dividends of an amount similar to
our December 2013 dividend of $0.10 per share. However, the
declaration and payment of future dividends are discretionary and
will be subject to determination by our Board of Directors each
quarter following its review of our financial performance.
Credit Facility
The maximum borrowings available to Kforce under the Credit
Facility are limited to: (a) a revolving credit facility of up to $135
million (the “Revolving Loan Amount”) and (b) a $15 million sub-
limit included in the Credit Facility for letters of credit. Kforce has a
remaining accordion option to increase the borrowing capacity an
additional $15 million.
Borrowing availability under the Credit Facility is limited to the
remainder of: (a) the lesser of (i) $135.0 million minus the four week
average aggregate weekly payroll of employees assigned to work
for customers, or (ii) 85% of the net amount of eligible accounts
receivable, plus 80% of the net amount of eligible unbilled accounts
receivable, plus 80% of the net amount of eligible employee
placement accounts, minus certain minimum availability reserves,
and in either case; minus (b) the aggregate outstanding amount
under the Credit Facility. Outstanding borrowings under the
Revolving Loan Amount bear interest at a rate of: (a) LIBOR plus
an applicable margin based on various factors; or (b) the higher
of: (i) the prime rate, (ii) the federal funds rate plus 0.50% or (iii)
LIBOR plus 1.25%. Fluctuations in the ratio of unbilled to billed
receivables could result in material changes to availability from
time to time. Letters of credit issued under the Credit Facility
require Kforce to pay a fronting fee equal to 0.125% of the amount
of each letter of credit issued, plus a per annum fee equal to the
applicable margin for LIBOR loans based on the total letters of
credit outstanding. To the extent that Kforce has unused availability
under the Credit Facility, an unused line fee is required to be paid
equal to the applicable margin times the amount by which the
maximum revolver amount exceeded the sum of the average daily
outstanding amount of the revolving loans and the average daily
undrawn face amount of outstanding letters of credit during the
immediately preceding month. Borrowings under the Credit Facility
are secured by substantially all of the assets of Kforce and its
subsidiaries, excluding the real estate located at Kforce’s corporate
headquarters in Tampa, Florida. Under the Credit Facility, Kforce is
subject to certain affirmative and negative covenants including (but
not limited to) the maintenance of a fixed charge coverage ratio
of at least 1.00 to 1.00 if the Firm’s availability under the Credit
Facility is less than the greater of 10% of the aggregate amount
of the commitment of all of the lenders under the Credit Facility
and $11.0 million. Kforce had availability under the Credit Facility
of $43.2 million as of December 31, 2013; therefore, the minimum
fixed charge coverage ratio was not applicable. Kforce believes that
it will be able to maintain the minimum availability requirement;
however, in the event that Kforce is unable to do so, Kforce could fail
the fixed charge coverage ratio covenant, which would constitute
an event of default. Kforce believes the likelihood of default is
remote. The Credit Facility expires September 20, 2016.
As of December 31, 2013 and 2012, $62.6 million and $21.0
million was outstanding under the Credit Facility, respectively.
During the three months ended December 31, 2013, maximum
outstanding borrowings under the Credit Facility were $62.6 million.
As of February 24, 2014, $67.5 million was outstanding and $40.0
million was available under the Credit Facility.
off-Balance Sheet arrangements
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2013, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $2.4 million and for facility lease deposits totaling
$0.3 million. Aside from certain obligations more fully described
in the Contractual Obligations and Commitments section below,
we do not have any additional off-balance sheet arrangements
that have had, or are expected to have, a material effect on our
Consolidated Financial Statements.
20 KFORCE INC. AND SUBSIDIARIES
Stock repurchases
During the year ended December 31, 2012, Kforce repurchased
approximately 3.4 million shares of common stock attributable
to open market repurchases and shares withheld for statutory
minimum tax withholding requirements pertaining to the vesting
of restricted stock awards at a total cost of approximately $44.4
million. As of December 31, 2012, $39.9 million remained available
for future repurchases. On February 1, 2013, our Board of Directors
approved an increase to the existing authorization for repurchases
of common stock by $50.0 million (exclusive of any previously
unused authorizations). As a result, $89.9 million remained available
for future repurchases as of February 1, 2013. During the year ended
December 31, 2013, Kforce repurchased approximately 1.8 million
shares of common stock at a total cost of approximately $27.3
million. As of December 31, 2013, $62.6 million remains available
for future repurchases.
Contractual obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2013:
(In thousands)
Operating lease obligations
Capital lease obligations
Credit Facility (a)
Interest payable – Credit Facility (b)
Purchase obligations
Liability for unrecognized tax positions (c)
Deferred compensation plan liability (d)
Other (e)
Supplemental executive retirement plan (f)
Supplement executive retirement health plan (f)
Foreign defined benefit pension plan (g)
Total
Total
$ 12,604
8,082
62,642
2,705
10,787
—
26,296
—
10,538
8,537
13,251
$155,442
Less than
1 year
$ 5,410
3,539
—
984
6,165
—
3,149
—
—
48
—
$19,295
Payments due by period
1-3 Years
3-5 Years
$ 6,003
4,484
62,642
1,721
4,622
—
2,126
—
—
109
404
$82,111
$1,172
59
—
—
—
—
914
—
—
146
—
$2,291
More than
5 years
$ 19
—
—
—
—
—
20,107
—
10,538
8,234
12,847
$51,745
(a) The Credit Facility expires in September 2016.
(b) Kforce’s weighted average interest rate as of December 31, 2013 was 1.57%, which was utilized to forecast the expected future interest rate payments. These payments are
inherently uncertain due to interest rate and outstanding borrowings fluctuations that will occur over the remaining term of the Credit Facility.
(c) Kforce’s liability for unrecognized tax positions as of December 31, 2013 was $0.4 million. This balance has been excluded from the table above due to the significant uncertainty
with respect to expected settlements.
(d) Kforce has a non-qualified deferred compensation plan pursuant to which eligible highly-compensated key employees may elect to defer part of their compensation to later years.
These amounts, which are classified as other accrued liabilities and other long-term liabilities, respectively, are payable based upon the elections of the plan participants (e.g.
retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years
if covered employees schedule a distribution, retire or terminate during that time.
(e) Kforce provides letters of credit to certain vendors in lieu of cash deposits. Kforce currently has letters of credit totaling $2.7 million outstanding as security for workers’
compensation and property insurance policies as well as facility lease deposits. Kforce maintains a sub-limit for letters of credit of $15 million under its Credit Facility.
(f) There is no funding requirement associated with the SERP or the SERHP. Kforce does not currently anticipate funding the SERP or SERHP during 2014. Kforce has included the
total undiscounted projected benefit payments, as determined at December 31, 2013, in the table above. See Note 12 – “Employee Benefit Plans” to the Consolidated Financial
Statements for more detail.
(g) Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2013 in the table above. There is no funding requirement associated with
this plan.
Kforce has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
income Tax audits
Kforce is periodically subject to U.S. Internal Revenue Service (“IRS”) audits as well as state and other local income tax audits for various
tax years. During 2013, the IRS finished an examination of Kforce’s U.S. income tax return for 2009 with no material adjustments, and no
settlements. During 2013, the IRS commenced a Limited Issue Focused Exam of Kforce’s 2010 and 2011 U.S. income tax returns. No material
liabilities are expected to result from this ongoing examination. Although Kforce has not experienced any material liabilities in the past due
to income tax audits, Kforce can make no assurances that this will continue.
.
KFORCE INC. AND SUBSIDIARIES 21
manaGemenT reporT on inTernal ConTrol over FinanCial reporTinG
The management of Kforce is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) of the Exchange Act. Kforce’s internal control system was designed to provide reasonable assurance to Kforce’s management
and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of the CEO and the CFO, Kforce’s management assessed the effectiveness of Kforce’s
internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992). Based on our assessment
we believe that, as of December 31, 2013, Kforce’s internal control over financial reporting is effective based on those criteria.
Kforce’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our internal control over
financial reporting. This report follows.
22 KFORCE INC. AND SUBSIDIARIES
reporT oF independenT reGiSTered puBliC aCCounTinG Firm
To the Board of Directors and Stockholders of Kforce Inc.
Tampa, FL
We have audited the accompanying consolidated balance sheets of Kforce Inc. and subsidiaries (“Kforce”) as of December 31, 2013 and
2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2013. We also have audited Kforce’s internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Kforce’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on Kforce’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive
and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Kforce Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, Kforce maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,
based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Certified Public Accountants
Tampa, Florida
February 27, 2014
KFORCE INC. AND SUBSIDIARIES 23
ConSolidaTed STaTemenTS oF operaTionS
and ComprehenSive inCome (loSS)
(In thousands, except per share amounts)
Years Ended December 31,
Net service revenues
Direct costs of services
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Depreciation and amortization
Income (loss) from operations
Other (income) expense:
Interest expense
Other (income) expense
Income (loss) from continuing operations, before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Income from discontinued operations, net of income taxes
Net income (loss)
Other comprehensive income (loss):
Defined benefit pension and postretirement plans, net of tax
Comprehensive income (loss)
Earnings (loss) per share – basic:
From continuing operations
From discontinued operations
Earnings (loss) per share – basic
Earnings (loss) per share – diluted
From continuing operations
From discontinued operations
Earnings (loss) per share – diluted
2013
$1,151,887
782,275
369,612
323,933
14,510
9,846
21,323
2012
$1,082,479
734,546
347,933
322,436
69,158
10,789
(54,450)
2011
$1,004,747
687,000
317,747
274,072
—
12,505
31,170
1,302
(77)
20,098
9,311
10,787
—
10,787
1,009
107
(55,566)
(19,854)
(35,712)
22,009
(13,703)
1,196
60
29,914
10,858
19,056
8,100
27,156
3,030
1,337
(2,570)
$ 13,817
$ (12,366)
$ 24,586
$0.32
$ —
$0.32
$0.32
$ —
$0.32
$(1.00)
$ 0.62
$(0.38)
$(1.00)
$ 0.62
$(0.38)
$0.50
$0.22
$0.72
$0.49
$0.21
$0.70
Weighted average shares outstanding – basic
33,511
35,791
37,835
Weighted average shares outstanding – diluted
33,643
35,791
38,831
The accompanying notes are an integral part of these consolidated financial statements.
24 KFORCE INC. AND SUBSIDIARIES
ConSolidaTed BalanCe SheeTS
(In thousands)
December 31,
aSSeTS
Current Assets:
Cash and cash equivalents
Trade receivables, net of allowances of $2,028 and $2,153, respectively
Income tax refund receivable
Deferred tax assets, net
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Other assets, net
Deferred tax assets, net
Intangible assets, net
Goodwill
Total assets
liaBiliTieS and SToCkholderS’ equiTy
Current Liabilities:
Accounts payable and other accrued liabilities
Accrued payroll costs
Other current liabilities
Income taxes payable
Total current liabilities
Long-term debt—credit facility
Long-term debt—other
Other long-term liabilities
Total liabilities
Commitments and contingencies (see Note 16)
Stockholders’ Equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
Common stock, $0.01 par; 250,000 shares authorized, 69,480 and 68,531 issued, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost; 35,751 and 33,980 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2013
2012
$ 875
179,095
7,720
4,662
10,534
202,886
36,728
30,991
23,270
4,993
48,900
$ 347,768
$ 31,821
56,872
1,141
139
89,973
62,642
1,364
36,556
190,535
$ 1,381
151,570
1,750
9,494
7,364
171,559
34,883
28,038
21,523
5,736
63,410
$ 325,149
$ 36,205
50,063
11,564
1,042
98,874
21,000
1,144
34,285
155,303
—
695
404,600
317
47,612
(295,991)
157,233
$ 347,768
—
685
400,688
(2,713)
40,203
(269,017)
169,846
$ 325,149
KFORCE INC. AND SUBSIDIARIES 25
ConSolidaTed STaTemenTS oF SToCkholderS’ equiTy
(In thousands)
Years Ended December 31,
Common stock—shares:
Shares at beginning of period
Issuance of restricted stock, net of forfeitures
Exercise of stock options and stock appreciation rights
Shares at end of period
Common stock—par value:
Balance at beginning of period
Issuance of restricted stock, net of forfeitures 9
Exercise of stock options and stock appreciation rights
Balance at end of period
Additional paid-in capital:
Balance at beginning of period
Issuance of restricted stock, net of forfeitures
Exercise of stock options and stock appreciation rights
Income tax benefit from stock-based compensation
Stock-based compensation expense
Employee stock purchase plan
Balance at end of period
Accumulated other comprehensive income (loss):
Balance at beginning of period
Pension and postretirement plans, net of tax of $1,919, $854 and $1,532, respectively
Balance at end of period
Retained earnings:
Balance at beginning of period
Net income (loss)
Dividend ($0.10, $1.00 and $0.00 per share, respectively)
Balance at end of period
Treasury stock – shares:
Shares at beginning of period
Repurchases of common stock
Shares tendered in payment of the exercise price of stock options
Employee stock purchase plan
Shares at end of period
Treasury stock—cost:
Balance at beginning of period
Repurchases of common stock
Shares tendered in payment of the exercise price of stock options
Employee stock purchase plan
Balance at end of period
The accompanying notes are an integral part of these consolidated financial statements.
2013
2012
2011
68,531
882
67
69,480
$ 685
1
$ 695
$ 400,688
72
597
399
2,570
274
$ 404,600
$ (2,713)
3,030
$ 317
$ 40,203
10,787
(3,378)
$ 47,612
33,980
1,812
—
(41)
35,751
68,566
(105)
70
68,531
$ 686
(1)
—
$ 685
$ 372,212
36
736
1,201
26,243
260
$ 400,688
$ (4,050)
1,337
$ (2,713)
$ 89,135
(13,703)
(35,229)
$ 40,203
30,644
3,376
11
(51)
33,980
66,542
1,604
420
68,566
$ 665
16
5
$ 686
$ 355,869
(16)
2,854
1,216
11,976
313
$ 372,212
$ (1,480)
(2,570)
$ (4,050)
$ 61,979
27,156
—
$ 89,135
24,823
5,746
131
(56)
30,644
$(269,017)
(27,313)
—
339
$(295,991)
$(224,868)
(44,375)
(161)
387
$(269,017)
$(163,216)
(59,643)
(2,401)
392
$(224,868)
26 KFORCE INC. AND SUBSIDIARIES
ConSolidaTed STaTemenTS oF CaSh FlowS
(In thousands)
Years Ended December 31,
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Gain on sale of discontinued operations
Goodwill and intangible asset impairment
Deferred income tax (benefit) provision, net
Provision for (recovery of) bad debts on accounts receivable and
other accounts receivable reserves
Depreciation and amortization
Stock-based compensation
Pension and postretirement benefit plans expense
Amortization of deferred financing costs
Tax benefit attributable to stock-based compensation
Excess tax benefit attributable to stock-based compensation
Deferred compensation liability increase (decrease), net
(Gain) loss on cash surrender value of Company-owned life insurance
Other
(Increase) decrease in operating assets, net of acquisitions:
Trade receivables, net
Income tax refund receivable
Prepaid expenses and other current assets
Other assets, net
Increase (decrease) in operating liabilities, net of acquisitions:
Accounts payable and other current liabilities
Accrued payroll costs
Income taxes payable
Other long-term liabilities
Cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from disposition of business, net of cash
Proceeds from the sale of assets held within the Rabbi Trust
Purchase of assets held within the Rabbi Trust
Other
Cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from bank line of credit
Payments on bank line of credit
Payments of capital expenditure financing
Payments of deferred loan financing costs
Short-term vendor financing
Proceeds from exercise of stock options
Excess tax benefit attributable to stock-based compensation
Repurchases of common stock
Cash dividend
Cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
2013
2012
2011
$ 10,787
$ (13,703)
$ 27,156
—
14,510
1,166
546
9,846
2,570
3,237
90
399
(110)
3,994
(3,690)
257
(28,071)
(5,970)
(3,170)
(57)
(12,471)
7,422
(903)
83
465
(8,145)
—
3,278
(3,697)
17
(8,547)
591,688
(550,081)
(1,452)
—
(180)
598
110
(29,810)
(3,297)
7,576
(506)
1,381
(36,418)
69,158
(17,136)
1,860
10,862
25,740
4,505
92
1,201
(1,130)
2,111
(1,797)
55
4,298
(1,500)
(2,246)
244
10,913
(241)
807
(1,697)
55,978
(5,846)
55,446
4,259
(1,460)
6
52,405
241,973
(270,499)
(1,802)
—
253
575
1,130
(44,375)
(35,196)
(107,941)
442
939
—
—
653
(925)
12,694
11,976
4,369
139
1,216
(878)
(634)
1,733
251
(25,332)
5,425
(380)
75
(4,576)
1,395
(15)
(3,102)
31,240
(6,495)
—
—
(3,440)
(155)
(10,090)
488,468
(449,767)
(1,497)
(450)
287
458
878
(59,643)
—
(21,266)
(116)
1,055
Cash and cash equivalents at end of year
$ 875
$ 1,381
$ 939
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES 27
noTeS To ConSolidaTed FinanCial STaTemenTS
(In thousands, except per share data)
1. Summary of Significant accounting PolicieS
organization and nature of operations
Kforce Inc. and subsidiaries (collectively, “Kforce”) provide
professional staffing services and solutions to customers in the
following segments: Technology (“Tech”), Finance and Accounting
(“FA”), Health Information Management (“HIM”) and Government
Solutions (“GS”). Kforce provides flexible staffing services and
solutions on both a temporary and full-time basis. Kforce operates
through its corporate headquarters in Tampa, Florida and 62
field offices located throughout the United States (the “U.S.”).
Additionally, one of our subsidiaries, Kforce Global Solutions, Inc.
(“Global”), provides information technology outsourcing services
internationally through an office in Manila, Philippines. Our
international operations comprised approximately 2% of net service
revenues for each of the three years ended December 31, 2013 and
are included in our Tech segment.
Kforce serves clients from the Fortune 1000, the Federal
Government, state and local governments, local and regional
companies and small to mid-sized companies.
Basis of presentation
The consolidated financial statements of Kforce have been
prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) and the rules of
the Securities and Exchange Commission (“SEC”).
principles of Consolidation
The consolidated financial statements include the accounts of
Kforce Inc. and its wholly-owned subsidiaries. References in this
document to “Kforce,” “the Company,” “we,” “our” or “us” refer to
Kforce Inc. and its subsidiaries, except where the context indicates
otherwise. All intercompany transactions and balances have been
eliminated in consolidation.
use of estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The most important of these estimates
and assumptions relate to the following: accounting for goodwill
and identifiable intangible assets and any related impairment; stock-
based compensation; obligations for pension and postretirement
benefit plans; self-insured liabilities for workers’ compensation and
health insurance; allowance for doubtful accounts, fallouts and
other accounts receivable reserves and accounting for income taxes.
Although these and other estimates and assumptions are based on
the best available information, actual results could be materially
different from these estimates.
Cash and Cash equivalents
Kforce classifies all highly liquid investments with an original
initial maturity of three months or less as cash equivalents. Cash
and cash equivalents consist of cash on hand with banks, either in
commercial accounts, or overnight interest-bearing money market
accounts and at times may exceed federally insured limits. Cash and
cash equivalents are stated at cost, which approximates fair value
due to the short duration of their maturities.
accounts receivable reserves
Kforce establishes its reserves for expected credit losses, fallouts,
early payment discounts and revenue adjustments based on past
experience and estimates of potential future activity. Specific to our
allowance for doubtful accounts, which comprises a majority of our
accounts receivable reserves, Kforce performs an ongoing analysis
of factors including recent write-off and delinquency trends, a
specific analysis of significant receivable balances that are past
due, the concentration of accounts receivable among clients and
higher-risk sectors, and the current state of the U.S. economy. Trade
receivables are written off by Kforce after all reasonable collection
efforts have been exhausted.
Accounts receivable reserves as a percentage of gross accounts
receivable was 1.1% and 1.4% as of December 31, 2013 and
December 31, 2012, respectively.
revenue recognition
We earn revenues from two primary sources: Flexible billings
and Search fees. Flexible billings are recognized as the services are
provided by Kforce’s temporary employees, who are Kforce’s legal
employees while they are working on assignments. Kforce pays all
related costs of such employment, including workers’ compensation
insurance, state and federal unemployment taxes, social security
and certain fringe benefits. Search fees are recognized by Kforce
when employment candidates accept offers of permanent
employment and are scheduled to commence employment within
30 days. Kforce records revenues net of an estimated reserve for
“fallouts,” which is based on Kforce’s historical fallout experience.
Fallouts occur when a candidate does not remain employed with
the client through the contingency period, which is typically 90 days
or less.
Net service revenues represent services rendered to customers
less credits, discounts, rebates and allowances. Revenues include
reimbursements of travel and out-of-pocket expenses (“billable
expenses”) with equivalent amounts of expense recorded in direct
costs of services.
Our GS segment generates its revenues under contracts that
are, in general, greater in duration than our other segments and
which can often span several years, inclusive of renewal periods. In
addition, our GS segment generates substantially all of its revenues
under time-and-materials (which account for the majority of this
segment’s contracts), fixed-price and cost-plus arrangements. Our
GS segment does not generate any Search fees. Except as provided
below, Kforce considers amounts to be earned once evidence of an
arrangement has been obtained, services are delivered, fees are
fixed or determinable, and collectability is reasonably assured.
• Revenues for time-and-materials contracts, which accounts
for approximately 73% of this segment’s revenue, are recorded
based on contractually established billing rates at the time
services are provided.
28 KFORCE INC. AND SUBSIDIARIES
• Revenues on fixed-price contracts are recognized on the basis of
the estimated percentage-of-completion. Approximately 15%
of this segment’s revenues are recognized under this method.
Progress towards completion is typically measured based on
costs incurred as a proportion of estimated total costs or other
measures of progress when applicable. Profit in a given period
is reported at the expected profit margin to be achieved on the
overall contract.
• Revenue on cost-plus arrangements is recognized based on
allowable costs incurred plus an estimate of the applicable
fees earned. Approximately 12% of this segment’s revenues are
recognized under these arrangements.
direct Costs of Services
Direct costs of services are composed primarily of payroll wages,
payroll taxes, payroll-related insurance for Kforce’s flexible employees,
and subcontractor costs. Direct costs of permanent placement
services primarily consist of reimbursable expenses. Direct costs
of services exclude depreciation and amortization expense, which
is presented on a separate line in the accompanying consolidated
statements of operations and comprehensive income (loss).
income Taxes
Kforce accounts for income taxes using the asset and liability
approach to the recognition of deferred tax assets and liabilities for
the expected future tax consequences of differences between the
financial statement carrying amounts and the tax basis of assets
and liabilities. Unless it is “more likely than not” that a deferred tax
asset can be utilized to offset future taxes, a valuation allowance
is recorded against that asset. The tax benefits of deductions
attributable to employees’ disqualifying dispositions of shares
obtained from incentive stock options, exercises of non-qualified
stock options, and vesting of restricted stock are reflected as
increases in additional paid-in capital.
Kforce evaluates tax positions that have been taken or are
expected to be taken in its tax returns, and records a liability
for uncertain tax positions. Kforce uses a two-step approach to
recognize and measure uncertain tax positions. First, tax positions
are recognized if the weight of available evidence indicates that
it is more likely than not that the position will be sustained upon
examination, including resolution of related appeals or litigation
processes, if any. Second, tax positions are measured as the largest
amount of tax benefit that has a greater than 50% likelihood of being
realized upon settlement. Kforce recognizes interest and penalties
related to unrecognized tax benefits in the provision for income
taxes in the accompanying consolidated financial statements.
Fair value measurements
Kforce uses the framework established by the Financial
Accounting Standards Board (“FASB”) for measuring fair value and
disclosures about fair value measurements. Kforce uses fair value
measurements in areas that include, but are not limited to: the
impairment testing of goodwill and long-lived assets; share-based
compensation arrangements; valuing the investment in bond
mutual funds within the Kforce’s deferred compensation plan; our
debt and capital lease obligations. The carrying values of cash and
cash equivalents, accounts receivable, accounts payable, and other
current assets and liabilities approximate fair value because of the
short-term nature of these instruments. Using available market
information and appropriate valuation methodologies, Kforce has
determined the estimated fair value measurements; however,
considerable judgment is required in interpreting data to develop
the estimates of fair value.
Fixed assets
Fixed assets are carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The cost of leasehold
improvements is amortized using the straight-line method over
the shorter of the estimated useful lives of the assets or the terms
of the related leases, which generally range from three to five years.
Goodwill and other intangible assets
Goodwill
Kforce performs a goodwill impairment analysis, using the two-
step analysis method, on an annual basis and whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable unless it is determined, based upon a review
of the qualitative factors of a reporting unit, that it is more likely
than not that the fair value of a reporting unit exceeds its carrying
amount, including goodwill. Under the two-step analysis method,
the recoverability of goodwill is measured at the reporting unit level,
which Kforce has determined to be consistent with its operating
segments; by comparing the reporting unit’s carrying amount,
including goodwill, to the fair market value of the reporting unit.
Kforce determines the fair market value of its reporting units
based on a weighting of the present value of projected future
cash flows (the “income approach”) and the use of comparative
market approach under both the guideline company method and
guideline transaction method (collectively, the “market approach”).
Fair market value using the income approach is based on Kforce’s
estimated future cash flows on a discounted basis. The market
approach compares each of Kforce’s reporting units to other
comparable companies based on valuation multiples derived
from operational and transactional data to arrive at a fair value.
Factors requiring significant judgment include, among others, the
determination of comparable companies, assumptions related to
forecasted operating results, discount rates, long-term growth rates,
and market multiples. Changes in economic or operating conditions,
or changes in Kforce’s business strategies, that occur after the
annual impairment analysis and which impact these assumptions,
may result in a future goodwill impairment charge, which could be
material to Kforce’s consolidated financial statements.
Other Intangible Assets
Identifiable intangible assets arising from certain of Kforce’s
acquisitions include non-compete and employment agreements,
contractual relationships, customer contracts, and a trade name
and trademark. For definite-lived intangible assets, Kforce has
determined that the straight-line method is an appropriate
methodology to allocate the cost over the period of expected benefit,
which ranges from one to 15 years. The impairment evaluation
for indefinite-lived intangible assets, which for Kforce consist of a
trademark and trade name, is conducted on an annual basis or more
frequently if events or changes in circumstances indicate that an
asset may be impaired.
KFORCE INC. AND SUBSIDIARIES 29
impairment of long-lived assets
Kforce reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Recoverability of long-lived
assets is measured by a comparison of the carrying amount of the
asset group to the future undiscounted net cash flows expected
to be generated by those assets. If such assets are considered to
be impaired, the impairment charge recognized is the amount by
which the carrying amounts of the assets exceed the fair value of
the assets, as determined based on the present value of projected
future cash flows.
Capitalized Software
Kforce purchases, develops, and implements new computer
software to enhance the performance of our Company-wide
technology infrastructure. Direct internal costs, such as payroll
and payroll-related costs, and external costs incurred during the
development stage of each project, are capitalized and classified
as capitalized software. Kforce capitalized development-stage
implementation costs of $970, $1,718 and $2,876 during the years
ended December 31, 2013, 2012 and 2011, respectively. Capitalized
software development costs are classified as other assets, net in the
accompanying consolidated balance sheets and are being amortized
over the estimated useful lives of the software, which range from
one to five years, using the straight-line method.
Commissions
Our associates make placements and earn commissions as a
percentage of actual revenues (for Search revenue) or gross profit
(for Flex revenue) pursuant to a calendar-year-basis commission
plan. The amount of commissions paid as a percentage of revenues
or gross profit increases as volume increases. Kforce accrues
commissions for actual revenues or gross profit at a percentage
equal to the percent of total expected commissions payable to total
revenues or gross profit for the year, as applicable.
Stock-Based Compensation
Kforce accounts for stock-based compensation by measuring
the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the
award. The cost is recognized over the requisite service period, net
of estimated forfeitures. If the actual number of forfeitures differs
from those estimated, additional adjustments to compensation
expense may be required in future periods.
premiums paid to state-operated insurance funds and an estimate
for Kforce’s liability for Incurred but Not Reported (“IBNR”) claims
and for the ongoing development of existing claims.
Kforce estimates its workers’ compensation liability based
upon historical claims experience, actuarially determined loss
development factors, and qualitative considerations such as claims
management activities.
Taxes assessed by Governmental agencies—revenue producing
Transactions
Kforce collects sales tax for various taxing authorities and it is
our policy to record these amounts on a net basis; thus, sales tax
amounts are not included in net service revenues.
health insurance
Except for certain fully insured health insurance lines of coverage,
Kforce retains the risk of loss for each health insurance plan participant
up to $275 in claims annually. Additionally, for all claim amounts
exceeding $275, Kforce retains the risk of loss up to an aggregate
annual loss of those claims of $500. For its partially self-insured lines
of coverage, health insurance costs are accrued using estimates to
approximate the liability for reported claims and IBNR claims, which
are primarily based upon an evaluation of historical claims experience,
actuarially-determined completion factors and a qualitative review of
our health insurance exposure including the extent of outstanding
claims and expected changes in health insurance costs.
accounting for postretirement Benefits
Kforce recognizes the overfunded or underfunded status of
its defined benefit postretirement plans as an asset or liability in
its consolidated balance sheets and recognizes changes in that
funded status in the year in which the changes occur through other
comprehensive income (loss). Kforce also measures the funded
status of the defined benefit postretirement plans as of the date of
its fiscal year-end, with limited exceptions.
Amortization of a net unrecognized gain or loss in accumulated
other comprehensive income (loss) is included as a component of
net periodic benefit cost and net periodic postretirement benefit
cost if, as of the beginning of the year, that net gain or loss
exceeds 10% of the greater of the projected benefit obligation or
accumulated postretirement benefit obligation. If amortization is
required, the minimum amortization shall be that excess divided
by the average remaining service period of active plan participants.
earnings per Share
workers’ Compensation
Kforce retains the economic burden for the first $250 per
occurrence in workers’ compensation claims except: (i) in states
that require participation in state-operated insurance funds and (ii)
for its GS segment which is fully insured for workers’ compensation
claims. Workers’ compensation includes ongoing health care and
indemnity coverage for claims and may be paid over numerous
years following the date of injury. Workers’ compensation expense
includes insurance premiums paid, claims administration fees
charged by Kforce’s workers’ compensation administrator,
Basic earnings (loss) per share is computed as earnings (loss) divided
by the weighted average number of common shares outstanding
during the period. Basic weighted average shares outstanding
excludes unvested shares of restricted stock. Diluted earnings (loss)
per common share is computed by dividing the earnings (loss)
attributable to common shareholders for the period by the weighted
average number of common shares outstanding during the period
plus the dilutive effect of stock options and other potentially dilutive
securities such as unvested shares of restricted stock using the
treasury stock method, except where the effect of including potential
30 KFORCE INC. AND SUBSIDIARIES
common shares would be anti-dilutive. Weighted average shares
outstanding for purposes of computing diluted earnings per common
share excludes contingently issuable unvested restricted stock unless
the performance condition has been achieved as of the end of the
applicable reporting period.
The following table sets forth the computation of basic and
diluted earnings (loss) per share for the three years ended
December 31, 2013:
Numerator:
Income (loss) from
continuing operations
Income from discontinued
operations, net of tax
2013
2012
2011
$10,787 $(35,712) $19,056
—
22,009
8,100
Net income (loss)
$10,787 $(13,703) $27,156
Denominator:
Weighted average shares
outstanding—basic
Common stock equivalents
Weighted average shares
outstanding—diluted
Earnings (loss) per share—basic:
From continuing operations
From discontinued operations
Earnings (loss) per share—basic
Earnings (loss) per share—diluted:
From continuing operations
From discontinued operations
Earnings (loss) per share—diluted
33,511
132
35,791
—
37,835
996
33,643
35,791
38,831
$0.32
—
$0.32
$0.32
—
$0.32
$(1.00)
0.62
$(0.38)
$(1.00)
0.62
$(0.38)
$0.50
0.22
$0.72
$0.49
0.21
$0.70
For the year ended December 31, 2011, the total weighted average
awards to purchase or receive 33 shares of common stock was not
included in the computation of diluted earnings per share, because
these would have had an anti-dilutive effect on earnings per share.
Given that Kforce had a loss from continuing operations for the year
ended December 31, 2012, the calculation of diluted loss per share
from continuing operations, earnings from discontinued operations,
and net loss is computed using basic weighted average common
shares outstanding. For the year ended December 31, 2013, there
were no shares of common stock excluded from the computation
of diluted earnings per share.
Treasury Stock
Kforce’s Board of Directors (“Board”) may authorize share
repurchases of Kforce’s common stock. Shares repurchased under
Board authorizations are held in treasury for general corporate
purposes, including issuances under various employee share-based
award plans. Treasury shares are accounted for under the cost
method and reported as a reduction of stockholders’ equity in the
accompanying consolidated financial statements.
Comprehensive income (loss)
Accumulated other comprehensive income (loss) represents the
net after-tax impact of unrecognized actuarial gains and losses
related to: (i) the supplemental executive retirement plan and
supplemental executive retirement health plan, both of which
cover a limited number of executives and (ii) a defined benefit
plan covering all eligible employees in our Philippine operations.
Because each of these plans is unfunded as of December 31, 2013,
the actuarial gains and losses arise as a result of the actuarial
experience of the plans as well as changes in actuarial assumptions
in measuring the associated obligation as of year-end, or an
interim date if any re-measurement is necessary. This information
is provided in our consolidated statements of operations and
comprehensive income (loss).
dividends
Kforce’s Board may, at its discretion, declare and pay dividends on
the outstanding shares of Kforce’s common stock out of retained
earnings, subject to statutory requirements. Dividends for any
outstanding and unvested restricted stock as of the record date
are awarded in the form of additional shares of restricted stock, at
the same rate as the cash dividend on common stock and based
on the closing stock price, and have the same vesting terms as the
outstanding and unvested restricted stock. The following summarizes
the cash dividends declared for the three years ended December 31:
Cash dividends declared per share
$0.10
2013
2012
$1.00
2011
—
Kforce currently expects to continue to declare and pay quarterly
dividends of an amount similar to its December 2013 dividend of
$0.10 per share. However, the declaration and payment of future
dividends are discretionary and will be subject to determination by
Kforce’s Board of Directors each quarter following its review of the
Firm’s financial performance.
new accounting Standards
In July 2013, the FASB issued authoritative guidance regarding
presentation of an unrecognized tax benefit when a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward exists. This
guidance is to be applied for annual reporting periods beginning on
or after December 15, 2013 and interim periods within those annual
periods. Kforce does not expect the adoption of this guidance to have a
material impact on its future consolidated financial statements.
2. DiScontinueD oPerationS
On March 17, 2012, Kforce entered into a Stock Purchase Agreement
(the “SPA”) to sell all of the issued and outstanding stock of Kforce
Clinical Research, Inc. (“KCR”) to inVentiv Health, Inc. (“Purchaser”).
On March 31, 2012 (“Closing Date”), the Firm closed the sale of KCR to
the Purchaser for a total cash purchase price of $57,335, after giving
effect to a $7,335 post-closing working capital adjustment.
KFORCE INC. AND SUBSIDIARIES 31
In connection with the closing of the sale, Kforce entered into a
Transition Services Agreement (“TSA”) with the Purchaser to provide
certain post-closing transitional services for a period not to exceed
18 months from the Closing Date. Services provided by Kforce under
the TSA ceased during the three months ended June 30, 2013. The
fees for a significant majority of these services were generally
equivalent to Kforce’s cost.
In accordance with the SPA, Kforce was obligated to indemnify
the Purchaser for certain losses, as defined, in excess of $375
although this deductible did not apply to certain losses. Kforce’s
obligations under the indemnification provisions of the SPA, with
the exception of certain items, ceased 18 months from the Closing
Date and were limited to an aggregate of $5,000 although this cap
did not apply to certain losses. While it cannot be certain, Kforce
believes any exposure under the indemnification provisions is
remote, particularly given that the 18 month time period for general
indemnification claims has now passed, and, as a result, Kforce has
not recorded a liability as of December 31, 2013.
The financial results of KCR have been presented as discontinued
operations in the accompanying consolidated statements of
operations and comprehensive income (loss). The following
summarizes the results from discontinued operations for the two
years ended December 31:
of $31,297, which included $784 of payroll taxes. This expense
was classified in selling, general and administrative expenses in
the accompanying consolidated statements of operations and
comprehensive income (loss).
3. fixeD aSSetS
Major classifications of fixed assets and related useful lives are
summarized as follows:
December 31,
Useful Life
2013
2012
Land
Building and improvements
Furniture and equipment
Computer equipment
Leasehold improvements
Capital leases
5-40 years
5-7 years
3-5 years
3-5 years
3-5 years
$ 5,892 $ 5,892
25,121
8,232
7,269
4,720
5,902
25,191
9,701
8,966
6,894
4,306
60,950
57,136
Less accumulated depreciation
and amortization
(24,222)
(22,253)
$ 36,728 $ 34,883
Net service revenues
Direct costs of services and
operating expenses
Gain on sale of discontinued
operations
Income from discontinued
operations, before income taxes
Income tax expense
Income from discontinued
operations, net of income taxes
2012
2011
$29,808
$106,172
Depreciation and amortization expense during the years ended
December 31, 2013, 2012 and 2011 was $5,863, $5,368 and
$5,826, respectively.
26,491
3,317
36,418
39,735
17,726
92,775
13,397
—
13,397
5,297
$22,009
$ 8,100
4. income taxeS
The provision for income taxes from continuing operations
consists of the following:
Years Ended December 31,
2013
2012
2011
Current:
Federal
State
Deferred
$7,119 $ (1,238)
(1,097)
(17,519)
1,026
1,166
$ 8,784
1,244
830
$9,311 $(19,854)
$10,858
The provision for income taxes from continuing operations
shown above varied from the statutory federal income tax rate for
those periods as follows:
Years Ended December 31,
2013
2012
2011
35.0%
Federal income tax rate
State income taxes,
4.2
net of Federal tax effect
Non-deductible goodwill impairment 2.4
Non-deductible meals
and entertainment
Other
35.0%
35.0%
4.7
(4.1)
3.3
—
2.9 (0.7)
0.8
1.8
1.0
(3.0)
Effective tax rate
46.3%
35.7%
36.3%
Additionally, in connection with the servicing of the TSA,
approximately $2,658 was due to the Purchaser from Kforce as of
December 31, 2012 and is classified within accounts payable and
other accrued liabilities in the consolidated balance sheet. This was
paid during 2013.
acceleration of equity awards
In connection with the disposition of KCR as described above, the
Board exercised its discretion, as permitted within the Kforce Inc.
2006 Stock Incentive Plan, to accelerate the vesting, for tax planning
purposes, of substantially all of the outstanding and unvested
restricted stock and alternative long-term incentive awards (“ALTI”)
effective March 31, 2012. Kforce recognized a tax benefit from
the acceleration of the vesting of restricted stock and ALTI. The
acceleration resulted in the recognition of previously unrecognized
compensation expense during the quarter ended March 31, 2012
32 KFORCE INC. AND SUBSIDIARIES
Deferred income tax assets and liabilities are composed of
the following:
December 31,
Deferred taxes, current:
Assets:
2013
2012
Accounts receivable reserves
Accrued liabilities
Deferred compensation obligation
Pension and postretirement benefit plans
Other
$ 779
2,902
1,111
19
75
$ 859
3,795
917
4,191
71
Deferred tax assets, current
4,886
9,833
Liabilities:
Prepaid expenses
Deferred tax asset, net—current
Deferred taxes, non-current:
Assets:
(224)
4,662
(339)
9,494
579
Accrued liabilities
6,896
Deferred compensation obligation
Stock-based compensation
773
Pension and postretirement benefit plans 4,916
11,750
Goodwill and intangible assets
106
Deferred revenue
1,531
Other
Deferred tax assets, non-current
26,551
Liabilities:
Fixed assets
Other
Deferred tax liabilities, non-current
Valuation allowance
(2,693)
(503)
(3,196)
(85)
258
6,622
356
5,563
10,142
54
2,140
25,135
(2,659)
(868)
(3,527)
(85)
Deferred tax asset, net—non-current
23,270
21,523
Net deferred tax asset
$27,932 $31,017
At December 31, 2013, Kforce had approximately $20,907 of state
tax net operating losses (“NOLs”) which will be carried forward to
be offset against future state taxable income. The state tax NOLs
expire in varying amounts through 2032.
In evaluating the realizability of Kforce’s deferred tax assets,
management assesses whether it is more likely than not that
some portion, or all, of the deferred tax assets, will be realized.
Management considers, among other things, the ability to generate
future taxable income (including reversals of deferred tax liabilities)
during the periods in which the related temporary differences will
become deductible.
Kforce is periodically subject to U.S. Internal Revenue Service
(“IRS”) audits as well as state and other local income tax audits for
various tax years. During 2013, the IRS finished an examination
of Kforce’s U.S. income tax return for 2009 with no material
adjustments and no settlements. During 2013, the IRS commenced
a Limited Issue Focused Exam of Kforce’s 2010 and 2011 U.S. income
tax returns. No material liabilities are expected to result from this
ongoing examination. Although Kforce has not experienced any
material liabilities in the past due to income tax audits, Kforce can
make no assurances that this will continue.
uncertain income Tax positions
An uncertain income tax position taken on the income tax return
must be recognized in the consolidated financial statements at the
largest amount that is more likely than not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50% likelihood
of being sustained.
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits for the years ended December 31, 2013,
2012 and 2011 is as follows:
Beginning balance
Additions for tax positions
of prior years
Additions for tax positions
of current year
Reductions for tax positions
of prior years—lapse of
applicable statutes
Settlements
Ending balance
2013
$133
2012
$ 72
2011
$191
269
25
36
25
10
38
(24)
—
— —
(82)
(85)
$403
$133
$ 72
The entire amount of these unrecognized tax benefits as of
December 31, 2013, if recognized, would not significantly impact
the effective tax rate. Kforce does not expect any significant changes
to its uncertain tax positions in the next 12 months.
Kforce and its subsidiaries file income tax returns in the U.S.
federal jurisdiction and various states. Global files income tax
returns in the Philippines. With a few exceptions, Kforce is no longer
subject to federal, state, local, or non-U.S. income tax examinations
by tax authorities for years before 2009.
5. other aSSetS
December 31,
Assets held in Rabbi Trust
Capitalized software, net of amortization
Deferred loan costs, net of amortization
Other non-current assets
2013
2012
$24,910 $20,801
6,729
345
163
5,472
288
321
$30,991 $28,038
KFORCE INC. AND SUBSIDIARIES 33
As of December 31, 2013, the assets held in Rabbi Trust were
$24,910, which was comprised of $24,041 related to the cash
surrender value of life insurance policies and $869 of money
market funds. As of December 31, 2012, the assets held in Rabbi
Trust were $20,801, which was comprised of $16,677 related to
the cash surrender value of life insurance policies and $4,124 of
bond mutual funds. The cash surrender value of Company-owned
life insurance policies relates to policies maintained by Kforce on
certain participants in its deferred compensation plan, which, in
conjunction with the money market funds, could be used to fund
the related obligations (Note 12).
Kforce capitalized software purchases as well as direct costs
associated with software developed for internal use of approximately
$2,244 and $2,429 during the years ended December 31,
2013 and 2012, respectively. Accumulated amortization of
capitalized software was $34,816 and $31,861 as of December 31,
2013 and 2012, respectively. Amortization expense of capitalized
software during the years ended December 31, 2013, 2012 and
2011 was $3,236, $4,587 and $5,716, respectively.
6. gooDwill anD other intangible aSSetS
Goodwill
The following table contains a disclosure of changes in the
carrying amount of goodwill in total and for each reporting unit for
the two years ended December 31, 2013:
Health
Technology
Finance and
Accounting
Clinical
Research Management
Information Government
Solutions
Balance as of December 31, 2011
Adjustment
Disposition of KCR (a)
Impairment of goodwill
Balance as of December 31, 2012
Impairment of goodwill
Balance as of december 31, 2013
$17,034
—
—
—
$ 17,034
—
$ 17,034
$8,006
—
—
—
$8,006
—
$8,006
$ 5,474
36
(5,510)
—
$ —
—
$ —
$4,923
(36)
—
—
$4,887
—
$4,887
(a) See Note 2—“Discontinued Operations” for additional discussion.
$102,641
—
—
(69,158)
$ 33,483
(14,510)
Total
$138,078
—
(5,510)
(69,158)
$ 63,410
(14,510)
$ 18,973
$ 48,900
Kforce performed its annual impairment assessment of the
carrying value of goodwill as of December 31, 2013 and 2012.
During the impairment test performed on December 31, 2012,
Kforce compared the carrying value of the GS reporting unit to its
estimated fair value and for the Tech, FA and HIM reporting units
performed a qualitative assessment to determine if it was more
likely than not that the fair value of the reporting units was less than
its carrying amount. Kforce concluded there were no indications of
impairment for its Tech, FA, HIM or GS reporting units during the
December 31, 2012 annual impairment tests.
As of March 31, June 30, and September 30, 2013, as part of our
customary quarterly procedures, we considered the qualitative and
quantitative factors associated with each of our reporting units
and determined that there was not an indication that the carrying
values of any of our reporting units were likely impaired. During
the fourth quarter of 2013, Kforce management made a strategic
business decision with regard to the GS segment to focus its service
offerings and efforts on prime integrated business solution services.
As a result of this change in focus, management plans to reallocate
existing investments in the business and redirect the business
development team to concentrate on a more specific and, in our
opinion, a higher quality revenue stream. These plans will ultimately
result in the transition away from certain existing revenue
streams, specific revenue-generating contracts and opportunities
in the business development life cycle that do not fit within the
revised strategic scope of service offerings, including pure staff
augmentation as well as product sales. The change in strategy,
coupled with the lengthy contract procurement cycle within the
government sector of approximately 18 months for solution-based
services, changed our expectations for the forecast, and is now is
expected to have a negative impact on near-term growth prospects
of the GS segment. We believe that these circumstances indicated
a possible impairment trigger during the fourth quarter, which was
assessed in conjunction with the annual impairment test.
During the annual impairment test performed as of December 31,
2013 for our Tech, FA and HIM reporting units, Kforce assessed the
qualitative factors of each reporting unit to determine if it was
more likely than not that the fair value of the reporting unit was
less than its carrying amount, including goodwill. Based upon the
qualitative assessments for our Tech and FA reporting units, it was
determined that it was not more likely than not that the fair value
of the reporting units were less than the carrying values. For our
HIM reporting unit, a quantitative, or step one, analysis was deemed
appropriate as a result of the deterioration in the operating results
as compared to previous forecasts.
For our GS and HIM reporting units, we compared the respective
carrying values to their estimated fair value based on a weighting of
both the income approach and the market approaches. Discounted
cash flows, which serve as the primary basis for the income approach,
were based on discrete financial forecasts which were developed
by management for planning purposes and were consistent with
those distributed within Kforce. Cash flows beyond the discrete
34 KFORCE INC. AND SUBSIDIARIES
forecast period of five years were estimated using a terminal value
calculation, which incorporated historical and forecasted financial
trends and also considered long-term earnings growth rates for
publicly-traded peer companies, as well as the risk-free rate of
return. For the GS reporting unit, the discrete financial forecast
includes certain adjustments of costs that Kforce believes a market
participant buyer, such as a large government contractor, would
incur to operate the GS reporting unit. A terminal value growth rate
of 3% was used for both the GS and the HIM reporting units. The
income approach valuation included the cash flow discount rate,
representing the GS and HIM reporting units’ weighted average cost
of capital of 17% and 17.5%, respectively. This weighted average
cost of capital includes a specific company risk premium of 2% for
both GS and HIM.
As previously mentioned, the market approaches consist of the (i)
guideline company method and (ii) guideline transaction method.
The guideline company method applies pricing multiples derived
from publicly-traded guideline companies that are comparable to
the respective reporting unit to determine its value. To calculate
fair values under the guideline company method, Kforce utilized
enterprise value/revenue multiples ranging from 0.4x to 0.5x
and 0.3x to 0.6x and enterprise value/EBITDA multiples ranging
from 4.4x to 6.9x and 5.4x to 13.5x for GS and HIM, respectively.
Additionally, the fair value under the guideline company method
included a control premium ranging of 40% and 10% for GS and
HIM, respectively, which was determined based on a review of
comparative market transactions.
The guideline transaction method applies pricing multiples
derived from recently completed acquisitions that we believe are
reasonably comparable to the reporting unit to determine fair value.
To calculate fair values under the guideline transaction method,
Kforce utilized enterprise value/revenue multiples ranging from
0.6x to 2.0x and 0.2x to 0.8x and enterprise value/EBITDA multiples
ranging from 5.8x and 18.7x and from 4.7x to 19.7x, respectively,
for the GS and HIM reporting units. Kforce used the enterprise value
to EBITDA ratio due to it being the predominant measure used in
the marketplace to value this type of business. Publicly available
information regarding the market capitalization of Kforce was also
considered in assessing the reasonableness of the cumulative fair
values of our reporting units.
Upon completion of the first step of the goodwill impairment
analysis as of December 31, 2013 for our HIM reporting unit, it was
determined the fair value exceeded its carrying value by 156%. For
the GS reporting unit, the results of the first step of the goodwill
impairment analysis as of December 31, 2013 indicated that the
fair value was 73% of its carrying value; therefore, impairment was
indicated. Because indicators of impairment existed, we commenced
the second step of the goodwill impairment analysis to determine
the implied fair value of goodwill for the reporting unit, which was
determined in the same manner utilized to estimate the amount of
goodwill recognized in a business combination. As part of the second
step of the impairment analysis performed as of December 31,
2013, we calculated the fair value of certain assets, including
trade names and customer relationships. The implied fair value of
goodwill was measured as the excess of the fair value of the GS
reporting unit over the amounts assigned to its assets and liabilities.
The goodwill impairment loss for the reporting unit was measured
by the amount the carrying value of goodwill exceeded the implied
fair value of the goodwill. Based on this assessment, we recorded an
impairment charge of $14,510 which is presented separately in the
consolidated statements of operations and comprehensive income
(loss). A tax benefit in the amount of $5,160 was recorded related
to the goodwill impairment charge.
During the three months ended June 30, 2012, due to certain
adverse effects of events and indications during that time period,
Kforce believed that a triggering event occurred within our GS
reporting unit during the quarter. As a result, Kforce performed an
interim goodwill impairment analysis for its GS reporting unit as
of June 30, 2012, which resulted in an indication of impairment
and Kforce recording an estimated impairment charge. Due to the
complexity of the second step of the impairment analysis, Kforce
completed the analysis during the fourth quarter of 2012. Based
on this assessment, we recorded an impairment charge of $69,158
which included a related tax benefit of $24,670 during the year
ended December 31, 2012. This impairment charge included an
incremental adjustment of $3,858 with a related tax benefit of
$1,405 resulting from the completion of the second step analysis
during the fourth quarter of 2012.
Total goodwill impairment for the years ending December 31,
2013, 2012 and 2011 was $14,510, $69,158 and $0, respectively.
The following table contains a disclosure of the gross amount and accumulated impairment losses of goodwill for Tech, FA and GS reporting
units for the two years ended December 31, 2013:
Goodwill Carrying Value by Reporting Unit as of:
december 31, 2013
December 31, 2012
January 1, 2012
Technology
Gross amount
Accumulated impairment losses
Carrying value
Finance and Accounting
Gross amount
Accumulated impairment losses
Carrying value
Government Solutions
Gross amount
Accumulated impairment losses
Carrying value
$ 156,391
$(139,357)
$ 17,034
$ 19,766
$ (11,760)
$ 8,006
$ 102,641
$ (83,668)
$ 18,973
$ 156,391
$(139,357)
$ 17,034
$ 19,766
$ (11,760)
$ 8,006
$ 102,641
$ (69,158)
$ 33,483
$ 156,391
$(139,357)
$ 17,034
$ 19,766
$ (11,760)
$ 8,006
$ 102,641
$ —
$ 102,641
KFORCE INC. AND SUBSIDIARIES 35
There has been no impairment charges recognized for the HIM
reporting unit. As a result, the carrying value of goodwill for each of
the two years ended December 31, 2013 and 2012 represents the
gross amount of goodwill attributable to the reporting unit.
Other Intangible Assets
The gross and net carrying values of intangible assets as of
December 31, 2013 and 2012, by major intangible asset class, are
as follows:
Definite-lived intangible assets
Customer relationships, customer contracts, and other
Gross amount
Accumulated amortization
Carrying value
Indefinite-lived intangible assets
Trade name and trademark
Gross amount
Accumulated impairment losses
Carrying value
Amortization expense on intangible assets for each of the three
years ended December 31, 2013, 2012 and 2011 was $747, $907
and $1,152, respectively. Amortization expense for 2014, 2015,
2016, 2017 and 2018 is expected to be $634, $634, $457, $209 and
$209, respectively.
There was no impairment expense related to indefinite-lived
intangible assets during the years ended December 31, 2013, 2012
or 2011.
7. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of
the following:
December 31,
Accounts payable
Accrued liabilities
2013
2012
$19,445
12,376
$22,653
13,552
$31,821
$36,205
Kforce utilizes a major procurement card provider to pay certain
of its corporate trade payables. The balance owed to this provider
for these transactions as of December 31, 2013 and 2012 was $695
and $875, respectively, and has been included in accounts payable
and other accrued liabilities in the accompanying consolidated
balance sheets. The cash flows associated with these transactions
have been presented as a financing activity in the accompanying
consolidated statement of cash flows.
8. ACCRUED PAYROLL COSTS
Accrued payroll costs consisted of the following:
December 31,
Payroll and benefits
Payroll taxes
Health insurance liabilities
Workers’ compensation liabilities
2013
2012
$43,059
9,111
2,993
1,709
$36,172
9,246
3,114
1,531
$56,872
$50,063
December 31, 2013
December 31, 2012
$ 27,940
$(25,187)
$ 2,753
$ 2,240
$ —
$ 2,240
$ 27,936
$(24,440)
$ 3,496
$ 2,240
$ —
$ 2,240
9. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
December 31,
Supplemental executive
retirement plan (Note 12)
Other
2013
2012
$ —
1,141
$10,682
882
$1,141
$11,564
10. CREDIT FACILITY
On September 20, 2011, Kforce entered into a Third Amended and
Restated Credit Agreement, with a syndicate led by Bank of America,
N.A. This was amended on March 30, 2012 in connection with
the divestiture of KCR and was amended on December 27, 2013
(as amended to date, the “Credit Facility”) through the execution
of a Second Amendment and Joinder resulting in the increase
in the borrowing capacity from $100 million to $135 million by
executing the accordion feature under the Credit Facility. Kforce
has a remaining accordion option of $15 million. The maximum
borrowings available to Kforce under the Credit Facility are limited
to: (a) a revolving credit facility of up to $135 million (the “Revolving
Loan Amount”) and (b) a $15 million sub-limit included in the Credit
Facility for letters of credit.
Borrowing availability under the Credit Facility is limited to the
remainder of (a) the lesser of (i) $135 million minus the four week
average aggregate weekly payroll of employees assigned to work
for customers, or (ii) 85% of the net amount of eligible accounts
receivable, plus 80% of the net amount of eligible unbilled accounts
receivable, plus 80% of the net amount of eligible employee
placement accounts, minus certain minimum availability reserves,
and in either case, minus (b) the aggregate outstanding amount
under the Credit Facility. Outstanding borrowings under the
Revolving Loan Amount bear interest at a rate of (a) LIBOR plus
an applicable margin based on various factors or (b) the higher
of: (i) the prime rate, (ii) the federal funds rate plus 0.50% or (iii)
LIBOR plus 1.25%. Letters of credit issued under the Credit Facility
require Kforce to pay a fronting fee equal to 0.125% of the amount
36 KFORCE INC. AND SUBSIDIARIES
of each letter of credit issued, plus a per annum fee equal to the
applicable margin for LIBOR loans based on the total letters of
credit outstanding. To the extent that Kforce has unused availability
under the Credit Facility, an unused line fee is required to be paid
equal to the applicable margin times the amount by which the
maximum revolver amount exceeded the sum of the average daily
outstanding amount of the revolving loans and the average daily
undrawn face amount of outstanding letters of credit during the
immediate preceding month. Borrowings under the Credit Facility
are secured by substantially all of the assets of Kforce and its
subsidiaries, excluding the real estate located at Kforce’s corporate
headquarters in Tampa, Florida. Under the Credit Facility, Kforce is
subject to certain affirmative and negative covenants including (but
not limited to) the maintenance of a fixed charge coverage ratio
of at least 1.00 to 1.00 if the Firm’s availability under the Credit
Facility is less than the greater of 10% of the aggregate amount
of the commitment of all of the lenders under the Credit Facility
and $11 million. Kforce had availability under the Credit Facility of
$43.2 million as of December 31, 2013; therefore, the minimum
fixed charge coverage ratio was not applicable. Kforce believes that
it will be able to maintain the minimum availability requirement;
however, in the event that Kforce is unable to do so, Kforce could fail
the fixed charge coverage ratio, which would constitute an event
of default. Kforce believes the likelihood of default is remote. The
Credit Facility expires September 20, 2016.
As of December 31, 2013 and 2012, $62,642 and $21,000 was
outstanding under the Credit Facility, respectively.
11. other long-term liabilitieS
Other long-term liabilities consisted of the following:
expense related to ALTIs was recorded during the years ended
December 31, 2013 or 2011.
401(k) Savings plans
Kforce has a qualified defined contribution 401(k) Retirement
Savings Plan (the “Kforce 401(k) Plan”) covering substantially all
Kforce Inc. employees. Assets of the Kforce 401(k) Plan are held in
trust for the sole benefit of employees and/or their beneficiaries.
On October 2, 2006, Kforce created the Kforce Government Practice
Plan, a qualified defined contribution 401(k) retirement savings plan
(the “Government 401(k) Plan”), which covers all eligible employees
of the GS segment. Assets of the Government 401(k) Plan are held
in trust for the sole benefit of employees and/or their beneficiaries.
Employer matching contributions are discretionary and are funded
annually as approved by the Board of Directors.
Kforce accrued matching contributions of $973 and $1,139 for
the above plans as of December 31, 2013 and 2012, respectively. The
Kforce 401(k) Plan and Government 401(k) Plan held a combined
317 and 363 shares of Kforce’s common stock as of December 31,
2013 and 2012, respectively.
employee Stock purchase plan
Kforce’s employee stock purchase plan allows all eligible
employees to purchase Kforce’s common stock at a 5% discount from
its market price at the end of a rolling three-month offering period.
Kforce issued 41, 51 and 56 shares of common stock at an average
purchase price of $14.88, $12.55 and $12.64 per share during the
years ended December 31, 2013, 2012 and 2011, respectively. All
shares purchased under the employee stock purchase plan were
settled using Kforce’s treasury stock.
December 31,
2013
2012
deferred Compensation plan
Deferred compensation plan (Note 12)
Supplemental executive
retirement plan (Note 12)
Supplemental executive
retirement health plan (Note 12)
Other
$22,247
$19,115
7,852
8,976
2,627
3,830
3,554
2,640
$36,556
$34,285
12. emPloyee benefit PlanS
alternative long-Term incentive
On January 3, 2012, Kforce granted to certain executive officers an
ALTI as the result of certain performance criteria established in 2011
being met, which was to be initially measured over three tranches
having periods of 12, 24, and 36 months, respectively. The terms
of the grants specified that the ultimate annual payouts would
be based on: (a) Kforce’s common stock price changes each year
relative to its peer group or (b) the achievement of other market
conditions contained in the terms of the award.
As discussed within Note 2—“Discontinued Operations,” the
Board approved the acceleration of all outstanding and unvested
long-term incentives, including the ALTI, effective March 31, 2012.
The accelerated ALTI of $9,805 was paid in April 2012. Kforce
recognized total compensation expense related to ALTI $9,805
during the year ended December 31, 2012. No compensation
Kforce has a Non-Qualified Deferred Compensation Plan
(the “Kforce NQDC Plan”) and a Kforce Non-Qualified Deferred
Compensation Government Practice Plan (the “GS NQDC Plan”),
pursuant to which eligible management and highly compensated
key employees, as defined by IRS regulations, may elect to defer
all or part of their compensation to later years. These amounts are
classified in accounts payable and other accrued liabilities if payable
within the next year or as other long-term liabilities if payable after
the next year, upon retirement or termination of employment. At
December 31, 2013 and 2012, amounts included in accounts payable
and other accrued liabilities related to the deferred compensation
plan totaled $3,149 and $1,699, respectively. Amounts included in
other long-term liabilities related to the deferred compensation plan
totaled $22,247 and $19,115 as of December 31, 2013 and 2012,
respectively. Kforce has insured the lives of certain participants
in the deferred compensation plan to assist in the funding of the
deferred compensation liability. Compensation expense of $578,
$648 and $1,358 was recognized for the plans for the years ended
December 31, 2013, 2012 and 2011, respectively.
Employee distributions are being funded through proceeds
from the sale of assets held within our Rabbi Trust. The fair value
of the assets within the Rabbi Trust, including the cash surrender
value of the Company-owned life insurance policies, money
market funds and bond mutual funds, was $24,910 and $20,801
as of December 31, 2013 and 2012, respectively, and is recorded
in Other assets, net in the accompanying consolidated balance
KFORCE INC. AND SUBSIDIARIES 37
sheet. For the years ended December 31, 2013 and 2012, there
was $15 in losses and $519 in gains, respectively, attributable to
the investments in trading securities, including both money market
funds and bond mutual funds, which is included in selling, general
and administrative expenses in the consolidated statements of
operations and comprehensive income (loss). The Firm held no
trading securities, and as such, recorded no gains or losses during
the year ended December 31, 2011.
Foreign pension plan
Kforce maintains a foreign defined benefit pension plan for
eligible employees of the Philippine branch of Global that is required
by Philippine labor laws. The plan defines retirement as those
employees who have attained the age of 60 and have completed at
least five years of credited service. Benefits payable under the plan
equate to one-half month’s salary for each year of credited service.
Benefits under the plan are paid out as a lump sum to eligible
employees at retirement.
The significant assumptions used by Kforce in the actuarial
valuation include the discount rate, the estimated rate of future
annual compensation increases and the estimated turnover rate.
As of December 31, 2013, 2012 and 2011, the discount rate used
to determine the actuarial present value of the projected benefit
obligation and pension expense was 5.0%, 6.0% and 7.40%,
respectively. The discount rate was determined based on long-
term Philippine government securities yields commensurate with
the expected payout of the benefit obligation. The estimated
rate of future annual compensation increases as of December 31,
2013, 2012 and 2011 was 3.0%, 3.0% and 5.0%, respectively, and
was based on historical compensation increases as well as future
expectations. The Company applies a turnover rate to the specific
age of each group of employees, which ranges from 20 to 64 years
of age. For the years ended December 31, 2013, 2012 and 2011, net
periodic benefit cost was $92, $128 and $189, respectively.
As of December 31, 2013 and 2012, the projected benefit obligation
associated with our foreign defined benefit pension plan was $1,434
and $1,187, respectively, which is classified in other long-term
liabilities in the accompanying consolidated balance sheets.
Supplemental executive retirement plan
Kforce maintains a Supplemental Executive Retirement Plan (the
“SERP”) for the benefit of certain Named Executive Officers (“NEOs”).
The primary goals of the SERP are to create an additional wealth
accumulation opportunity, restore lost qualified pension benefits
due to government limitations and retain our NEOs. The SERP is a
non-qualified benefit plan and does not include elective deferrals of
covered executive officers’ compensation.
Normal retirement age under the SERP is defined as age 65;
however, certain conditions allow for early retirement as early
as age 55 or upon a change in control. Vesting under the plan is
defined as 100% upon a participant’s attainment of age 55 and 10
years of service and 0% prior to a participant’s attainment of age 55
and 10 years of service. Full vesting also occurs if a participant with
five years or more of service is involuntarily terminated by Kforce
without cause or upon death, disability or a change in control. The
SERP is funded entirely by Kforce, and benefits are taxable to the
executive officer upon receipt and deductible by Kforce when paid.
Benefits payable under the SERP upon the occurrence of a qualifying
distribution event, as defined, are targeted at 45% of the covered
executive officers’ average salary and bonus, as defined, from the
three years in which the executive officer earned the highest salary
and bonus during the last 10 years of employment, which is subject
to adjustment for retirement prior to the normal retirement age and
the participant’s vesting percentage. The benefits under the SERP
are reduced for a participant that has not reached age 62 with 10
years of service or age 55 with 25 years of service with a percentage
reduction up to the normal retirement age.
Benefits under the SERP are normally paid based on the lump sum
present value but may be paid over the life of the covered executive
officer or 10-year annuity, as elected by the covered executive
officer upon commencement of participation in the SERP. None of
the benefits earned pursuant to the SERP are attributable to services
provided prior to the effective date of the plan. For purposes of the
measurement of the benefit obligation as of December 31, 2013,
Kforce has assumed that all participants will elect to take the lump
sum present value option based on historical trends.
Actuarial Assumptions
The following represents the actuarial assumptions used
to determine the actuarial present value of projected benefit
obligations at:
December 31,
Discount rate
Expected long-term rate of return
on plan assets
Rate of future compensation increase
2013
2012
3.75%
2.50%
—
4.00%
—
3.75%
The following represents the weighted average actuarial
assumptions used to determine net periodic benefit cost for the
years ended:
December 31,
2013
2012
2011
Discount rate
Expected long-term rate of return
on plan assets
—
Rate of future compensation increase 4.00%
2.50%
3.25%
4.00%
—
4.00%
—
4.00%
The discount rate was determined using the Moody’s Aa long-
term corporate bond yield as of the measurement date with a
maturity commensurate with the expected payout of the SERP
obligation. This rate is also compared against the Citigroup Pension
Discount Curve and Liability Index to ensure the rate used is
38 KFORCE INC. AND SUBSIDIARIES
reasonable and may be adjusted accordingly. This index is widely
used by companies throughout the United States and is considered
to be one of the preferred standards for establishing a discount rate.
Due to the SERP being unfunded as of December 31, 2013 and
2012, it is not necessary for Kforce to determine the expected
long-term rate of return on plan assets. Once funded, Kforce
will determine the expected long-term rate of return on plan
assets by determining the composition of the asset portfolio, the
historical long-term investment performance and the current
market conditions. The assumed rate of future compensation
increases is based on a combination of factors, including the
historical compensation increases for its NEOs and future target
compensation levels for its NEOs taking into account the NEOs’
assumed retirement date.
The periodic benefit cost is based on actuarial assumptions that
are reviewed on an annual basis; however, Kforce monitors these
assumptions on a periodic basis to ensure that they accurately reflect
current expectations of the cost of providing retirement benefits.
Net Periodic Benefit Cost
The following represents the components of net periodic benefit
cost for the years ended:
December 31,
Service cost
Interest cost
Amortization of actuarial loss
Settlement loss
Net periodic benefit cost
2013
$2,018
471
97
24
$2,610
2012
2011
$2,087
560
164
—
$3,248
482
76
—
$2,811
$3,806
Changes in Benefit Obligation
The following represents the changes in the benefit obligation
for the years ended:
December 31,
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial experience and changes
in actuarial assumptions
Curtailment
Benefits paid
2013
2012
$ 19,658
2,018
471
$17,230
2,087
560
(1,475)
(2,138)
(10,682)
(219)
—
—
Projected benefit obligation, ending
$ 7,852
$19,658
During the three months ended December 31, 2013, in connection
with the Firm’s organizational realignment, two participants in the
SERP were terminated, resulting in a curtailment of $2,138 to the
projected benefit obligation. Additionally, during the three months
ended December 31, 2013, Kforce made a lump sum payment to a
participant in the SERP of $10,682 as a result of the participant’s
separation from service on June 1, 2013, as previously announced.
The current portion of the present value of the projected
benefit obligation (as recorded in other current liabilities in the
accompanying consolidated balance sheets) was $0 and $10,682
as of December 31, 2013 and 2012, respectively. The long-term
portion of the present value of the projected benefit obligation as of
December 31, 2013 and 2012 was $7,852 and $8,976, respectively,
and is recorded in other long-term liabilities in the accompanying
consolidated balance sheets. During the year ended December 31,
2012, there were no payments made under the SERP.
Contributions
There is no requirement for Kforce to fund the SERP and, as a
result, no contributions have been made to the SERP through the
year ended December 31, 2013. Kforce does not currently anticipate
funding the SERP during the year ending December 31, 2014.
Estimated Future Benefit Payments
Benefit payments by the SERP, which reflect the anticipated future
service of participants, are expected to be paid (undiscounted)
as follows:
2014
2015
2016
2017
2018
2019-2023
Thereafter
Projected Annual
Benefit Payments
$ —
—
—
—
—
7,494
3,044
Supplemental executive retirement health plan
Kforce maintains a Supplemental Executive Retirement Health
Plan (“SERHP”) to provide postretirement health and welfare benefits
to certain executives. The vesting and eligibility requirements mirror
that of the SERP, and no advance funding is required by Kforce or the
participants. Consistent with the SERP, none of the benefits earned
are attributable to services provided prior to the effective date of
the plan.
Actuarial Assumptions
The following represents the actuarial assumptions used
to determine the present value of the postretirement benefit
obligation at:
December 31,
2013
2012
Discount rate
5.00%
Expected long-term rate of return on plan assets —
3.75%
—
KFORCE INC. AND SUBSIDIARIES 39
The following represents the actuarial assumptions used to
determine the net periodic postretirement benefit cost for the
years ended:
Changes in Postretirement Benefit Obligation
The following represents the changes in the postretirement
benefit obligation for the years ended:
December 31,
Discount rate
Expected long-term rate
of return on plan assets
2013
2012
3.75%
4.00%
2011
5.25%
—
—
—
The discount rate was determined using the Moody’s Aa long-term
corporate bond yield as of the measurement date with a maturity
commensurate with the expected payout of the SERP obligation.
This rate is compared against the Citigroup Pension Discount Curve
and Liability Index to ensure the rate used is reasonable.
Due to the SERHP being unfunded as of December 31, 2013
and 2012, it is not necessary for Kforce to determine the expected
long-term rate of return on plan assets. Once funded, Kforce will
determine the expected long-term rate of return on plan assets by
determining the composition of the asset portfolio, the historical
long-term investment performance and current market conditions.
The following represents the assumed health care cost trend
rates used to determine the postretirement benefit obligations for
the years ended:
December 31,
2013
2012
Health care cost trend rate
assumed for next year
Rate to which the cost trend rate
is assumed to decline to
(ultimate trend rate)
Year that the rate reaches the
ultimate trend rate
7.5%
7.50%
5.00%
5.00%
2018
2017
Assumed health care cost trend rates can have a significant effect on
the amounts reported for the SERHP. A one percent change in assumed
health care cost trend rates would have the following effects:
Effect of total of service and
interest cost
Effect on postretirement
benefit obligation
One Percentage Point
Increase
Decrease
$ 73
$459
$ (59)
$(374)
Net Periodic Postretirement Benefit Cost
The following represents the components of net periodic
postretirement benefit cost for the years ended:
December 31,
Service cost
Interest cost
Amortization of actuarial loss
Curtailment gain
2013
$ 649
134
86
(359)
2012
$ 919
150
272
—
Net periodic benefit (gain) cost
$ 510
$1,341
2011
$324
47
6
—
$377
December 31,
2013
2012
Accumulated postretirement
benefit obligation, beginning
Service cost
Interest cost
Actuarial experience and
changes in actuarial assumptions
Curtailment
Benefits paid
Accumulated postretirement benefit
obligation, ending
$3,574
649
134
$ 3,764
919
150
(834)
(785)
(64)
(1,259)
—
—
$2,674
$ 3,574
During the three months ended December 31, 2013, in connection
with the Firm’s organizational realignment, two participants in the
SERHP were terminated, resulting in a curtailment of $785 to the
projected benefit obligation and in the recognition of a curtailment
gain of $359 recorded in selling, general and administrative
expenses in the corresponding consolidated statement of
operations and comprehensive income (loss). The current portion
of the accumulated postretirement benefit obligation as recorded
in other current liabilities in the accompanying consolidated
balance sheets was $47 and $20 as of December 31, 2013 and
2012, respectively. The long-term portion of the accumulated
postretirement benefit obligation as of December 31, 2013 and
2012 is $2,627 and $3,554, respectively, and is recorded in other
long-term liabilities in the accompanying consolidated balance
sheets. During the year ended December 31, 2012, there were no
payments made under the SERHP.
Estimated Future Benefit Payments
Benefit payments by the SERHP, which reflect anticipated future
service of the participants, are expected to be paid (undiscounted)
as follows:
2014
2015
2016
2017
2018
2019-2023
Thereafter
Projected Annual
Benefit Payments
$ 48
52
57
70
76
743
7,491
Pretax amounts recognized in accumulated other comprehensive
income (loss) as of December 31, 2013 that have not yet been
recognized as components of net periodic benefit cost for all of
Kforce’s defined benefit pension and postretirement plans, including
the foreign defined benefit plan, consist entirely of actuarial gains
40 KFORCE INC. AND SUBSIDIARIES
and losses arising from the actuarial experience of the plans and
changes in actuarial assumptions, as follows:
Net pretax actuarial gain
$304
$234
Pensions Postretirement
The estimated portion of the net actuarial loss above that is
expected to be recognized as a component of net periodic benefit
cost in the year ending December 31, 2014 is shown below:
Recognized net actuarial loss (gain)
$11
$—
Pensions Postretirement
13. fair Value meaSurementS
Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability (i.e., an exit price) in an orderly
transaction between market participants at the measurement date.
It establishes a fair value hierarchy and a framework which requires
categorizing assets and liabilities into one of three levels based on
the assumptions (inputs) used in valuing the asset or liability. Level 1
provides the most reliable measure of fair value, while Level 3
generally requires significant management judgment. Level 1
inputs are unadjusted, quoted market prices in active markets for
identical assets or liabilities. Level 2 inputs are observable inputs
other than quoted prices included in Level 1, such as quoted prices
for similar assets or liabilities in active markets or quoted prices
for identical assets or liabilities in inactive markets. Level 3 inputs
include unobservable inputs that are supported by little, infrequent,
or no market activity and reflect management’s own assumptions
about inputs used in pricing the asset or liability. The Company uses
the following valuation techniques to measure fair value.
The underlying
investments within Kforce’s deferred
compensation plans have included money market funds and bond
mutual funds, which are held within the Rabbi Trust. The assets
previously in bond mutual funds as of December 31, 2012 are
now held in money market funds as of December 31, 2013. Assets
held within the money market funds and bond mutual funds are
measured on a recurring basis and are recorded at fair value based
on each fund’s quoted market value per share in an active market,
which is considered a Level 1 input.
Certain assets, in specific circumstances, are measured at fair
value on a non-recurring basis utilizing Level 3 inputs such as
goodwill, other intangible assets and other long-lived assets. For
these assets, measurement at fair value in periods subsequent to
their initial recognition would be applicable if one or more of these
assets were determined to be impaired.
There were no transfers into or out of Level 1, 2 or 3 assets during
the years ended December 31, 2013 and 2012. Transfers between
levels are deemed to have occurred if the lowest level of input were
to change.
Kforce’s measurements at fair value on a recurring and non-recurring basis as of December 31, 2013 and 2012 were as follows:
Assets/(Liabilities) Measured at Fair Value:
Asset/(Liability)
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
As of December 31, 2013:
Recurring basis:
Money market funds (1)
Credit Facility (2)
Non-recurring basis:
Goodwill (3)
As of December 31, 2012:
Recurring basis:
Bond mutual funds (1)
Credit Facility (2)
Non-recurring basis:
Goodwill (3)
$ 869
$(62,642)
$ 48,900
$ 4,124
$(21,000)
$ 63,410
$ 869
$ —
$ —
$4,124
$ —
$ —
$ —
$(62,642)
$ —
$ —
$ —
$48,900
$ —
$(21,000)
$ —
$ —
$ —
$63,410
(1) See Note 12—“Employee Benefit Plans” and Note 5—“Other Assets” for additional discussion.
(2) The carrying value of long-term debt approximates its estimated fair value as it re-prices at varying interest rates.
(3) This amount is representative of the aggregated goodwill balance. The portion measured at fair value as of December 31, 2013 and 2012 of $18,973 and $33,483, respectively, was
related to the GS segment. The remaining portion of the goodwill balance presented is at carrying value. See Note 6—“Goodwill and Other Intangible Assets” for additional discussion.
KFORCE INC. AND SUBSIDIARIES 41
14. Stock incentiVe PlanS
On April 5, 2013, the shareholders approved the 2013 Stock
Incentive Plan, which was previously adopted by the Board of
Directors on March 1, 2013, subject to shareholder approval. The
aggregate number of shares of common stock that are subject to
awards under the 2013 Stock Incentive Plan, subject to adjustment
upon a change in capitalization, is 4,000. On June 20, 2006, the
shareholders approved the 2006 Stock Incentive Plan and, as
amended, the aggregate number of shares of common stock that
are subject to awards is 7,850.
The 2013 Stock Incentive Plan and 2006 Stock Incentive Plan allow
for the issuance of stock options, stock appreciation rights (“SARs”)
and restricted stock, subject to share availability. Vesting of equity
Stock options
instruments is determined on a grant-by-grant basis. Options expire
at the end of 10 years from the date of grant, and Kforce issues new
shares upon exercise of options.
The 2013 Stock Incentive Plan terminates on April 5, 2023 and
the 2006 Stock Incentive Plan terminates on April 28, 2016. The
Incentive Stock Option Plan expired in 2005.
Total compensation expense recognized related to all equity
awards during the years ended December 31, 2013, 2012 and 2011
was $2,570, $26,243 and $11,976, respectively. The related tax
benefit for the three years ended December 31, 2013 was $1,018,
$10,241 and $4,696, respectively.
The following table presents the activity under each of the stock incentive plans discussed above for the three years ended December 31, 2013:
Outstanding as of December 31, 2010
Exercised
Forfeited/Cancelled
Outstanding as of December 31, 2011
Exercised
Forfeited/Cancelled
Outstanding as of December 31, 2012
Exercised
Forfeited/Cancelled
outstanding and exercisable as of december 31, 2013
Incentive
Stock Option
Plan
587
(349)
(12)
226
(65)
(7)
154
(57)
—
97
Stock
Incentive
Plan
98
—
—
98
(5)
—
93
(10)
—
83
Total
Intrinsic
Value of
Options
Exercised
$2,931
$ 238
$ 573
Weighted
Average
Exercise
Price Per
Share
$ 9.47
$ 8.20
$10.75
$10.79
$10.48
$11.00
$10.87
$ 8.98
$ —
$11.57
Total
685
(349)
(12)
324
(70)
(7)
247
(67)
—
180
The following table summarizes information about employee and director stock options under all of the plans mentioned above as of
December 31, 2013:
Range of Exercise Prices
$0.00—$ 8.95
$8.96—$14.45
Outstanding and Exercisable
Number of
Awards
(#)
—
181
181
Weighted
Average
Remaining
Contractual
Term (Yrs)
—
2.17
2.17
Weighted
Average
Exercise
Price ($)
$ —
$11.57
$11.57
Total
Intrinsic
Value
$ —
1,605
$1,605
No compensation expense was recorded during the years ended December 31, 2013, 2012 or 2011 as a result of the grant date fair value
having been fully amortized as of December 31, 2009. As of December 31, 2013, there was no unrecognized compensation cost related to
non-vested options.
42 KFORCE INC. AND SUBSIDIARIES
Stock appreciation rights
Although no such requirement exists, SARs have historically been granted (if any) on the first trading day of each year to certain Kforce
executives based on the extent by which annual long-term incentive performance goals, which are established by Kforce’s Compensation
Committee during the first 90 days of the year of performance, are certified by the Compensation Committee as having been met. SARs
generally cliff vest three years from the date of issuance; however, vesting is accelerated if Kforce’s stock price exceeds the stock price at
the date of grant by 30% for a period of 10 trading days, or if the Compensation Committee determines that the criteria for acceleration are
satisfied. There were no SARs granted during the three years ended December 31, 2013.
There was no SARs activity during the year ended December 31, 2013 or 2012. Therefore, the following table presents only the activity for
the year ended December 31, 2011:
Outstanding as of December 31, 2010
Exercised
outstanding as of december 31, 2011
Number of SARs
169
(169)
—
Weighted Average
Exercise Price
Per SAR
$10.32
$10.32
$ —
Total Intrinsic
Value of SARs
Exercised
$1,278
No compensation expense was recognized during the three years ended December 31, 2013 due to the grant date fair value being fully
amortized as of December 31, 2008. As of December 31, 2013, there was no unrecognized compensation cost related to SARs.
restricted Stock
Restricted stock grants made to Kforce’s executives and
management are generally based on the extent by which annual
long-term incentive performance goals, which are established
by Kforce’s Compensation Committee during the first quarter
of the year of performance, have been met, as certified by the
Compensation Committee. Restricted stock granted by Kforce
contains time-based vesting terms ranging from two to ten years
and, for certain awards, includes a performance-acceleration
feature upon which vesting would accelerate if Kforce’s closing
stock price exceeded the stock price at the date of grant by a pre-
established percentage (which historically ranged from 40—50%)
for a period of 10 trading days, or if the Compensation Committee
determined that the criteria for acceleration was satisfied. Kforce
refers to restricted stock containing only a time-based vesting
term as restricted stock whereas restricted stock containing both a
time-based vesting term and a performance-acceleration feature is
referred to by the Company as performance-accelerated restricted
stock. During the three months ended December 31, 2013, Kforce
granted restricted stock and performance-accelerated restricted
stock both having a time-based vesting period of ten years with 20%
of the grant vesting annually in years six through ten.
Restricted stock contain voting rights and are included in the
number of shares of common stock issued and outstanding.
Restricted stock granted contain the right to dividends in the form
of additional shares of restricted stock at the same rate as the
cash dividend on common stock and containing the same vesting
provisions as the underlying award. The following table presents the
activity for the three years ended December 31, 2013:
Outstanding as of December 31, 2010
Granted (a)
Vested
Forfeited
Outstanding as of December 31, 2011
Granted
Vested
Forfeited (a)
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
outstanding as of december 31, 2013
Number of Restricted Stock
Weighted Average
Grant Date
Fair Value
Total Intrinsic
Value of Restricted
Stock Vested
1,898
1,604
(168)
—
3,334
288
(3,191)
(393)
38
904
(109)
(22)
811
$12.34
$16.31
$11.41
$ —
$14.30
$12.67
$14.15
$16.37
$12.11
$16.72
$14.15
$15.43
$16.89
$ 2,592
$47,407
$ 2,092
(a) Included in the restricted stock granted during the year ended December 31, 2011 are 689 shares of performance-based restricted stock which were subject to forfeiture based
upon the level of attainment of performance conditions pre-established by the Compensation Committee. In February 2012, the Compensation Committee certified 2011
performance measures, which resulted in the forfeiture of approximately 393 of these shares of restricted stock which was consistent with estimated forfeitures during 2011
that was used for compensation expense recognition purposes.
KFORCE INC. AND SUBSIDIARIES 43
The fair market value of restricted stock is determined based
on the closing stock price of Kforce’s common stock at the date of
grant, and is amortized on a straight-line basis over the requisite
service period. For the performance-accelerated restricted stock,
the requisite service period is the derived service period, which is
determined using a Monte Carlo model.
In connection with the Firm’s organizational realignment,
Kforce terminated two of its NEOs during the three months ended
December 31, 2013. In connection with their termination, Kforce
accelerated the vesting of their restricted stock and, as a result,
accelerated all of the related unrecognized compensation expense
associated with these awards of $1,078 during the three months
ended December 31, 2013.
As discussed within Note 2—“Discontinued Operations,” the
Board approved the vesting acceleration of substantially all of
the outstanding and unvested long-term incentives, including
the restricted stock, effective March 31, 2012. As a result of the
acceleration, Kforce accelerated all of the previously unrecognized
compensation expense associated with these awards of $22,158
during the three months ended March 31, 2012.
Kforce recognized total compensation expense related to
restricted stock of $2,570, $26,243 and $11,976 during the years
ended December 31, 2013, 2012 and 2011, respectively. As of
December 31, 2013, total unrecognized compensation expense
related to restricted stock was $7,525, which will be recognized over
a weighted average remaining period of 4.1 years.
15. organizational realignment
During October 2013, the Firm commenced a plan to streamline
its leadership and support-related structure to better align a higher
percentage of personnel in roles that are closest to the customer
through an organizational realignment. The new organizational
design is intended to provide improved accountability and deliver
better results for our clients, consultants and core personnel. As a
result of the organizational realignment, Kforce incurred severance
and termination-related expenses of $7,097 during the three
months ended December 31, 2013, which is recorded within selling,
general and administrative expenses in the consolidated statement
of operations and comprehensive income (loss). The severance
and termination-related expenses included the acceleration of
previously unrecorded stock compensation expense of $1,078.
Additionally, in connection with the realignment and succession
planning, the Compensation Committee approved discretionary
bonuses of $3,606 paid to a broad group of senior management
during the fourth quarter of 2013. As of December 31, 2013, Kforce
accrued approximately $1,416 of severance and termination-
related expenses, which is expected to be paid during the first
quarter of 2014 and is recorded in accounts payable and other
accrued liabilities on the Consolidated Balance Sheet. There were no
realignment charges incurred during the years ended December 31,
2012 or 2011.
16. commitmentS anD contingencieS
lease Commitments
Kforce leases space and operating assets under operating and
capital leases expiring at various dates, with some leases cancelable
upon 30 to 90 days notice and with some leases containing
escalation in rent clauses. The leases require Kforce to pay taxes,
insurance and maintenance costs, in addition to rental payments.
Future minimum lease payments, inclusive of accelerated lease payments, under non-cancelable capital and operating leases are
summarized as follows:
Capital leases
Present value of payments
Interest
Capital lease payments
Operating leases
Facilities
Furniture and equipment
Total operating leases
Total leases
2014
2015
2016
2017
2018
Thereafter
Total
$1,256
2,283
$3,539
$5,373
37
$5,410
$8,949
$1,000
2,212
$3,212
$3,635
18
$3,653
$6,865
$ 313
959
$1,272
$2,342
8
$2,350
$3,622
$ 51
8
$ 59
$748
—
$748
$807
$ —
—
$ —
$424
—
$424
$424
$ —
—
$ —
$19
—
$19
$19
$ 2,620
5,462
$ 8,082
$12,541
63
$12,604
$20,686
44 KFORCE INC. AND SUBSIDIARIES
The present value of the minimum lease payments for capital
lease obligations has been classified in other current liabilities and
long-term debt—other, according to their respective maturities.
Rental expense under operating leases was $5,265, $5,225 and
$6,027 for the years ended December 31, 2013, 2012 and 2011,
respectively.
purchase Commitments
Kforce has entered into various commitments including,
among others, a compensation software hosting and licensing
arrangement, and a commitment for data center fees for certain of
our information technology applications. As of December 31, 2013,
these commitments amounted to approximately $10,787 and are
expected to be paid as follows: $6,165 in 2014; $3,762 in 2015; $860
in 2016; and $0 in 2017 and 2018.
letters of Credit
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2013, Kforce had letters of credit
outstanding for workers’ compensation and other insurance coverage
totaling $2,360, and for facility lease deposits totaling $305.
litigation
On June 18, 2013, Kforce, along with other staffing firms, was
named as a defendant in a class action lawsuit filed in the Orange
County Superior Court of the State of California. The plaintiff alleges
that a class of current and former Kforce employees working in
California was denied compensation for the time they spent
interviewing with current and potential clients of Kforce, over a
period covering four years prior to the filing of the complaint. The
plaintiff seeks recovery in an unspecified amount for this alleged
unpaid compensation, the alleged failure of Kforce to provide them
with accurate wage statements, the alleged improper use of debit
cards as an employee payment mechanism in certain circumstances,
alleged unfair competition, and statutory penalties, attorney’s fees
and other damages. On August 30, 2013, Kforce moved the matter
to the U.S. District Court of the Central District of California, Case No.
8:13cv1356. On January 30, 2014, the U.S. District Court of Central
District of California substantially granted summary judgment in
favor of Kforce with the exception of the plaintiff’s claim for waiting
time penalties, which is an individual claim and not part of the class
action. The case has been remanded to Orange County Superior
Court. Absent a successful appeal of the class action allegations by
the plaintiff, this case does not present a reasonable possibility of a
material loss. At this stage of the litigation for the individual claim, it
is not reasonable to estimate the outcome or a range of loss, should
a loss occur. Accordingly, no amounts have been provided for in
Kforce’s Consolidated Financial Statements.
On February 19, 2014, the United States District Court for the
Middle District of Florida unsealed a qui tam complaint that had
been filed by a terminated former employee in June of last year.
The complaint was filed against Kforce and Kforce Government
Solutions Inc. (“KGS”). It alleges False Claims Act and federal and
state whistleblower statute violations and certain accounting
irregularities, as well as employment law and defamation claims. The
United States government has not intervened in this action at this
time. While the qui tam action was first disclosed to Kforce and KGS
on February 19, 2014, counsel for the former employee previously
informed Kforce and KGS of substantially similar allegations in a
postemployment demand letter. After the allegations were raised,
the matter was referred to the Audit Committee of Kforce’s Board
of Directors for an investigation. The Audit Committee retained
experienced, independent counsel for investigation. With the help
of forensic accountants, the investigators concluded that the False
Claims Act and accounting irregularity allegations raised in the
demand letter were unsupported by material, credible evidence.
Due to, among other things, this independent investigation, Kforce
and KGS believe the allegations in the complaint are factually
inaccurate and without merit. Kforce and KGS intend to vigorously
defend the litigation. At this stage of the litigation, it is not
reasonable to estimate the outcome or a range of loss, should a loss
occur. Accordingly, no amounts have been provided for in Kforce’s
Consolidated Financial Statements.
In the ordinary course of its business, Kforce is from time to time
threatened with litigation or named as a defendant in various
lawsuits and administrative proceedings. While management does
not expect any of these other matters to have a material adverse
effect on the Company’s results of operations, financial position or
cash flows, litigation is subject to certain inherent uncertainties.
Kforce maintains liability insurance in such amounts and with such
coverage and deductibles as management believes is reasonable.
The principal liability risks that Kforce insures against are workers’
compensation, personal injury, bodily injury, property damage,
directors’ and officers’ liability, errors and omissions, employment
practices liability and fidelity losses. There can be no assurance that
Kforce’s liability insurance will cover all events or that the limits of
coverage will be sufficient to fully cover all liabilities.
Kforce is not aware of any litigation that would reasonably be
expected to have a material effect on its results of operations, its
cash flows or its financial condition.
Tax audits
During 2013, the IRS finished an examination of Kforce’s U.S.
income tax return for 2009 with no material adjustments, and no
settlements. During 2013, the IRS commenced a Limited Issue Focused
Exam of Kforce’s 2010 and 2011 U.S. income tax returns. No material
liabilities are expected to result from this ongoing examination.
During 2012, Kforce was audited by state taxing authorities for
sales, income and gross receipts taxes, which in some cases covered
multiple years. In 2012, the tax audits were settled for $1,624 in cash.
KFORCE INC. AND SUBSIDIARIES 45
employment agreements
Kforce has entered into employment agreements with certain
executives that provide for minimum compensation, salary and
continuation of certain benefits for a six-month to a three-year
period under certain circumstances. Certain of the agreements
also provide for a severance payment of one to three times annual
salary and one half to three times average annual bonus if such
an agreement is terminated without good cause by the employer
or for good reason by the employee. These agreements contain
certain post-employment restrictive covenants. Kforce’s liability
at December 31, 2013 was approximately $39,804 if all of the
employees under contract were terminated without good cause by
the employer or the employees resigned for good reason following
a change in control and $12,686 if all of the employees under
contract were terminated by Kforce without good cause or the
employees resigned for good reason in the absence of a change
of control.
Kforce has not recorded any liability related to the employment
agreements as no events have occurred that would require payment
under the agreements.
17. rePortable SegmentS
Kforce’s reportable segments are as follows: (i) Tech, (ii) FA, (iii)
HIM and (iv) GS. This determination was supported by, among
others: the existence of segment presidents responsible for the
operations of each segment and who also report directly to our
chief operating decision maker, the nature of the segment’s
operations and information presented to the Board of Directors.
The Firm’s realignment plan, as described more fully in Note 15
—“Organizational Realignment,” did not cause any changes to the
composition of our reportable segments.
Historically, and through our year ended December 31, 2013,
Kforce has generated only sales and gross profit information on a
segment basis. Substantially all operations and long-lived assets
are located in the United States. We do not report total assets
separately by segment as our operations are largely combined.
The following table has been updated to reflect the disposition
of KCR. As described in Note 2—“Discontinued Operations,”
all revenues and gross profit associated with the discontinued
operation have been recorded within income from discontinued
operations, net of tax, in the consolidated statement of operations
and comprehensive income (loss).
The following table provides information concerning the operations of our segments for the years ended December 31, 2013, 2012 and 2011:
Technology
Health
Finance and
Information
Accounting Management
Government
Solutions
Total
$720,179
19,183
$739,362
$219,360
$213,158
29,259
$242,417
$ 93,663
$655,062
20,525
$675,587
$200,738
$211,797
26,679
$238,476
$ 91,124
$606,238
17,774
$624,012
$182,862
$194,359
25,216
$219,575
$ 82,028
$77,745
414
$78,159
$25,236
$76,517
475
$76,992
$27,347
$68,181
530
$68,711
$24,476
$91,949
—
$91,949
$31,353
$1,103,031
48,856
$1,151,887
$ 369,612
$91,424
—
$91,424
$28,724
$1,034,800
47,679
$1,082,479
$ 347,933
$92,449
—
$92,449
$28,381
$ 961,227
43,520
$1,004,747
$ 317,747
2013
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
2012
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
2011
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
46 KFORCE INC. AND SUBSIDIARIES
18. Quarterly financial Data (unauDiteD)
The quarterly financial data presented below has been adjusted, where applicable, to reflect the discontinued operations of KCR, which is
more fully described in Note 2—“Discontinued Operations.”
March 31,
June 30,
Sept. 30,
Dec. 31,
Three Months Ended
2013
Net service revenues
Gross profit
Income from continuing operations, net of income taxes
Income from discontinued operations, net of income taxes
Net income (loss)
Earnings (loss) per share—basic
Earnings (loss) per share—diluted
$265,627
83,336
3,094
—
3,094
$0.09
$0.09
2012
Net service revenues
Gross profit
(Loss) income from continuing operations, net of income taxes
Income (loss) from discontinued operations, net of income taxes
Net income (loss)
Earnings (loss) per share—basic
Earnings (loss) per share—diluted
$268,350
80,825
(17,727)
21,803
4,076
$0.12
$0.12
$283,689
92,847
6,948
—
6,948
$0.21
$0.21
$274,129
89,766
(33,182)
15
(33,167)
$(0.90)
$(0.90)
$299,652
97,312
8,979
—
8,979
$0.27
$0.27
$270,161
88,762
9,275
(7)
9,268
$0.26
$0.26
$302,919
96,117
(8,234)
—
(8,234)
$(0.25)
$(0.25)
$269,839
88,580
5,922
198
6,120
$0.17
$0.17
During the fourth quarter of 2013, the Firm executed an organizational realignment plan and incurred severance and termination-related
expenses of $7,097 and a Compensation Committee approved discretionary bonuses related to the realignment of $3,606. Additionally,
during the fourth quarter of 2013, Kforce recorded a goodwill impairment charge of $14,510.
During the first quarter of 2012, in connection with the disposition of KCR, the Board exercised its discretion, as permitted under the Kforce
Inc. 2006 Stock Incentive Plan, to accelerate the vesting, for tax planning purposes, of substantially all of the outstanding and unvested
restricted stock and ALTI effective March 31, 2012. The acceleration resulted in the recognition of previously unrecognized compensation
expense of $31,297, which includes $784 of payroll taxes. This expense has been classified in selling, general and administrative expenses in
the accompanying consolidated statements of operations and comprehensive income (loss).
Additionally, during the second quarter of 2012, Kforce recorded an estimated goodwill impairment charge of $65,300. Kforce completed
the step 2 impairment analysis and recorded an additional goodwill impairment charge of $3,858 during the fourth quarter of 2012.
KFORCE INC. AND SUBSIDIARIES 47
19. SuPPlemental caSh flow information
Supplemental cash flow information is as follows for the year ended December 31:
Cash paid during the period for:
Income taxes, net
Interest, net
Non-Cash Transaction Information:
Tax benefit from disqualifying dispositions of stock options and restricted stock
Shares tendered in payment of exercise price of stock options and SARs
Common Stock transactions:
Employee stock purchase plan
Equipment acquired under capital leases
2013
2012
$14,789
$ 800
$ 15
$ —
$ 613
$ 1,929
$14,456
$ 554
$ 36
$ 161
$ 647
$ 672
2011
$8,747
$ 838
$ 145
$2,401
$ 705
$1,166
48 KFORCE INC. AND SUBSIDIARIES
CORPORATE INFORMATION
BOARD OF DIRECTORS
David L. Dunkel
Chairman and
Chief Executive Officer,
Kforce Inc.
John N. Allred
President, A.R.G., Inc.
W.R. Carey, Jr.
Chief Executive Officer,
Corporate Resource Development, Inc.
Richard M. Cocchiaro
Vice Chairman and Vice President,
Kforce Inc.
Mark F. Furlong
President and
Chief Executive Officer,
BMO Harris Bank N.A.
Elaine D. Rosen
Nonexecutive Chair of the Board,
Assurant, Inc.
Chair of the Board,
The Kresge Foundation
Ralph E. Struzziero
Consultant
Howard W. Sutter
Vice Chairman and Vice President,
Kforce Inc.
A. Gordon Tunstall
President and
Chief Executive Officer,
Tunstall Consulting
EXECUTIVE AND
SENIOR OFFICERS
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
David M. Kelly
Chief Financial Officer
and Secretary
Kye L. Mitchell
Chief Operations Officer, East
Jeffrey T. Neal
Chief Operations Officer, West
Patrick D. Moneymaker
Chairman and CEO of
Kforce Government Solutions Inc.
Peter M. Alonso
Chief Talent Officer
Michael R. Blackman
Chief Corporate Development Officer
Andrew G. Thomas
Chief Field Services Officer
David J. Bair
Executive Director, Technology
Graig D. Paglieri
Chief Delivery Officer
CORPORATE COUNSEL
Holland & Knight LLP
Tampa, Florida
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Tampa, Florida
TRANSFER AGENT
Computershare Trust Company, N.A.
PO Box 43078
Providence, RI 02940-3078
www.computershare.com
Shareholder Inquiries:
1 (877) 282-1168
FORM 10-K AVAILABLE
A copy of the Kforce Inc.’s Annual
Report on Form 10-K (excluding exhibits
thereto) is available to any investor
without charge upon written request to:
Michael R. Blackman
Chief Corporate Development Officer
Kforce Inc.
1001 East Palm Avenue
Tampa, Florida 33605
Or contact us at www.kforce.com
or call Investor Relations:
1 (813) 552-2927.
ANNUAL MEETING
The annual meeting of shareholders will
be held on April 10, 2014 at 8:00 a.m.
at Kforce Inc. headquarters in
Tampa, Florida.
WEBSITE INFORMATION
For a comprehensive profile of
Kforce Inc., visit the Firm’s website at:
www.kforce.com.
KFORCE—64 TOTAL OFFICES TO SERVE YOU.
To find the location nearest you, visit our Website at www.kforce.com
or call 1 (800) 395-5575.
Corporate Headquarters: 1001 East Palm Avenue, Tampa, Florida 33605
1 (813) 552-5000
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