ANNUAL REPORT 2014
is a professional staffing and solutions firm specializing
in the areas of technology and finance & accounting, serving both 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 sixty offices located throughout the United
States, as well as two national recruiting centers. 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
FINANCE & ACCOUNTING
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:
• KGSoffers a full range of
solutions in the areas of
Healthcare Informatics, Financial
Management and Accounting,
Enterprise Technology,
Engineering and Intelligence.
As the 7th largest technology staff-
ing firm in the U.S., we engage more
than 14,000 consultants annually in
technology roles on a temporary,
consulting and direct-hire basis.
Our Technology professionals range
from project managers to developers
to data and network architects and
technicians:
• PROJECTMANAGEMENTAND
BUSINESSANALYSIS offers a full
suite of functional professionals
to support the full scope of your
initiative.
• APPLICATIONDEVELOPMENT
supports applications and
systems software creation and
maintenance.
• ENTERPRISEDATAMANAGEMENT
supports any operating
environment from unstructured
to mature Big Data.
•INFRASTRUCTURE specializes in
providing reliable infrastructure
support to build and maintain the
backbone of your organization.
the 4th
As
largest finance and
accounting staffing firm in the U.S., we
engage more than 15,000 highly skilled
in finance
professionals annually
and accounting roles on a temporary,
consulting and direct-hire basis.
Our Finance & Accounting professionals
range from strategic and operational
to
transactional and professional
administration:
• OPERATIONALANDTECHNICAL
professionals perform day-to-day
accounting and staff-level
analysis, which includes directing,
controlling and planning.
• TRANSACTIONAL functions
include Accounts Receivable,
Accounts Payable and Payroll.
• PROFESSIONALADMINISTRATION
tasks include Loan Servicing,
Benefits Administration, Customer
Service/Call Center, Data Entry,
Human Resources and Professional
Administrative Support.
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, 2014 for additional information
regarding forward-looking statements.
TO OUR FELLOW SHAREHOLDERS, CLIENTS AND EMPLOYEES:
We are very pleased with full-year results for 2014. Kforce
reported revenues from continuing operations for 2014
of $1.22 billion, as compared to $1.07 billion for 2013, an
increase of 13.4%. On a GAAP basis, Kforce reported net income
of $90.9 million, or $2.87 per share for the year ended December
31, 2014 and net income of $10.8 million, or $0.32 per share for the
year ended December 31, 2013. Income and earnings per share from
continuing operations for the year ended December 31, 2014 was
$29.4 million and $0.93 per share and $5.3 million and $0.16 per share
for the year ended December 31, 2013. Income and earnings per
share from continuing operations for the year ended December 31,
2014, exclusive of non-recurring charges, was $30.9 million and
$0.97 per share resulting in a year-over-year increase of 36.1% and
44.8%, respectively. Income and earnings per share from continuing
operations for the year ended December 31, 2013, exclusive of a non-
cash goodwill impairment charge and realignment-related charges,
was $22.7 million and $0.67 per share. During 2014, we returned $115
million of capital to shareholders in the form of $102 million in share
repurchases and $13 million of dividends. In the fourth quarter, we also
increased our quarterly dividend by 10%, two years after initiating the
dividend program, and amended our credit facility by increasing its
borrowing capacity to $170 million and extending its term by five years
to provide additional flexibility and support our growing business.
We would like to take a moment to reflect on what has transpired
over the past year, both at Kforce and in professional staffing. We
believe the industry is very healthy with specialty firms leading the
way. The technology space continued its strong growth trends in 2014
and is projected to grow at high levels for the next several years. The
finance and accounting market also was robust, which contributed to
our strong performance. Against an uneven economic recovery, the
secular shift continues as the need for flexibility and specialized skills,
the project nature of work, and the regulatory environment drive
customers to greater use of flexible resources.
We are proud of our team’s execution in what remains an uncertain,
non-traditional economic recovery. The employment environment
has recently been improving, particularly in the higher skilled niches.
U.S. job growth improved over the course of 2014 and temporary
positions continued to contribute a historically disproportionate share
of this expansion. The temporary penetration rate is at near record
levels and college educated unemployment is at 2.9%, about half the
overall unemployment rate. Expectations for technology demand
remain high, as mobility, big data, data security, project/program
management, and post recession IT rebuild continue to fuel needs for
talent in virtually all roles in commercial IT organizations.
2014 was a year when we began seeing the results of the strategic
decisions our executive team made over the past two years. We
simplified our business model to narrow our focus on our core
offerings and accelerated investment in revenue-generating
resources to build a model that, we believe, will drive sustained organic
double-digit revenue growth. We streamlined our processes,
simplified our organizational structure to a more client-centric
approach, and aligned resources to target the industries and skill
sets where we have the greatest opportunity to capture client share
and accelerate growth. We fostered stronger partnerships with our
Premier Partner clients and sought optimization and efficiencies in
our revenue enablement support. Our executive team continued to
visit many of our markets and met with hundreds of the Firm’s top
clients throughout the United States. A greater understanding of
client dynamics has translated into accelerated growth year-over-year,
laid the foundation for continued growth and, we believe, a clear path
to 7.5% operating margins at $1.6 billion in annualized revenues.
On August 4, 2014, we divested our Health Information Management
(HIM) business unit. Although HIM had been a successful part of
Kforce for some time, it became clear to us that significant additional
investment resources would be needed within that business unit
to equip our HIM team with the tools necessary for the continued
delivery of exceptional service to our clients. We believe we are now
better positioned to allocate resources toward investment in our core
business. The sale of HIM reinforced our commitment to simplify our
business model and intensify the focus on our core Technology and
Finance & Accounting businesses, both in the commercial space and
through Kforce Government Solutions.
The sale of HIM brought an aggregate purchase price of $119 million,
resulting in after tax cash proceeds of over $70 million. We used the
proceeds from this transaction to pay down outstanding borrowings
under our credit facility and to further enhance shareholder value,
including significant share repurchases made in the second half
of 2014. The repurchases, combined with operating efficiencies
identified in late 2014, have allowed us to fully recapture the
contribution of the HIM business to our earnings more quickly than
we had originally anticipated and, we believe, we remain on track to
meet our longer-term operating margin targets.
In the New Era, which we began in late 2012, we are narrowing our
focus, simplifying our business model and raising accountability. We
believe that our Kforce stakeholders are better served by focusing on
Technology and Finance & Accounting through our commercial and
government services. The market for Technology staffing is projected
to approach $28 billion in 2015 and the Finance & Accounting market
is projected to be $7 billion. We believe we can significantly improve
upon our approximately 3% market share in each of these markets and
better serve our current clients and consultants, leading to sustained
revenue outperformance and improved profitability.
Looking at our business by service line in 2014:
• Technology (“Tech”) Flex is our largest business unit and represents
68% of total net service revenues. Tech Flex revenues increased 14.3%
in 2014 over 2013, about double the Staffing Industry Association
(“SIA”) industry average. Our Tech Flex business focuses primarily
KFORCE INC. AND SUBSIDIARIES 1
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. We look forward to continued demand for
our Tech Flex business with the goal of increasing market share.
• Revenues for our Finance & Accounting (“FA”) Flex business represent
20% of our total net service revenues. FA Flex increased 16.9% in 2014
over 2013, about triple the SIA industry average, and overall demand
for our core FA Flex business remains strong. Our FA Flex business
focuses in areas such as general accounting, business analysis,
accounts payable, accounts receivable, financial analysis and
reporting, taxation, budgeting, mortgage and loan processing, cost
analysis, professional administration, credit and collections, audit
services, and systems and controls analysis and documentation.
We believe opportunity exists to take additional market share
during 2015.
• Revenues for Kforce Government Solutions (“GS”) of $98 million
increased 6.6% in 2014 as compared to 2013. Our GS segment
provides Tech and FA professionals to the Federal Government
as both a prime contractor and a subcontractor, as well as a
small product business that provides MATT (Multiple Amputee
and Trauma Trainer) mannequins to the federal government.
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.
• Direct hire (“Search”) revenues of $46.7 million decreased 3.6% in
2014 over 2013. We provide direct hire services to our clients in both
Tech and FA. We have made selective investments to meet client
demand and continued to add to our existing strong teams.
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 5% of total revenues.
Our talent resources are essential to the success of Kforce and we are
continuing to add to our teams across geographies in Tech and FA. 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 driver of our success. Associate mix
remains highly weighted in the tenure range of less than 24 months,
and we believe overall productivity levels have significant room to
improve if we can achieve success in lengthening associate tenure.
We have fully integrated our Premier Partner customers into our
Field Leadership team enhancing our alignment to better 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. As we move through 2015,
2 KFORCE INC. AND SUBSIDIARIES
we intend to further redefine our value proposition and evolve our
approach around customer intimacy. We believe we are beginning to
gain traction in our Revenue Cycle practice within our FA business as
clients see us as a highly cost-effective alternative. In addition, our
Advisory & Solutions practice in Tech is gaining acceptance as clients
see value in acquiring top project talent through a staffing solution
versus the traditional consulting model. While Kforce has a 3% market
share in the domestic Tech and FA staffing market, the consulting
market in these areas is estimated to be many times the size of the
staffing market alone.
The “War for Talent” remains acute, particularly around highly skilled
Tech and FA resources. Accordingly, 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. 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 also opened a NRC in Phoenix, Arizona, which
we believe will have greater efficiency in serving the Western U.S.
Our execution in 2014 has set the stage for continued success in
2015 and beyond. We remain committed to expanding market share,
evolving our relationship with our Premier Partners, and continuing
on our path to achieving our operating margin objectives. We also
believe that given the continued strong demand for our services, it
is prudent to continue to invest in the Firm, particularly in sales and
delivery resources.
In August of 2015, Kforce will be celebrating its 20th anniversary as
a publicly traded Firm. Over that time, according to SIA, U.S. staffing
revenue grew from $52 billion to an estimated $132 billion, and
professional staffing grew as a percent of overall staffing from 31%
to 48%. As secular trends and economic indicators continue to move
favorably, we believe our footprint and recent strategic decisions
position us well for near-term and future success.
We are very optimistic about the prospects for Kforce and appreciate
your continued interest and support. 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
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
2014(1)
2013(2)(3)
2012(4)(5)
2011
2010
$1,217,331
374,581
315,338
—
9,894
1,392
47,957
18,559
29,398
$1,073,728
344,376
307,944
14,510
9,846
1,147
$1,005,487
320,586
305,940
69,158
10,789
1,057
10,929
5,635
5,294
(66,358)
(24,227)
(42,131)
$936,036
293,271
258,578
—
12,505
1,220
20,968
7,339
13,629
$828,895
263,999
239,400
—
12,611
811
11,177
3,447
7,730
61,517
90,915
$
5,493
$ 10,787
28,428
$ (13,703)
13,527
$ 27,156
12,904
$ 20,634
$0.94
$0.16
$(1.18)
$0.36
$0.20
$0.93
$2.89
$2.87
31,475
31,691
$0.41
$0.16
$0.32
$0.32
33,511
33,643
$0.10
$(1.18)
$(0.38)
$(0.38)
35,791
35,791
$ 1.00
$0.35
$0.72
$0.70
37,835
38,831
$ —
$0.19
$0.52
$0.51
39,480
40,503
$ —
2014
2013
2012
2011
2010
$ 130,226
$ 363,922
$
93,333
$ 130,351
$ 139,388
$ 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
(1) During the year ended December 31, 2014, Kforce terminated the Company’s Supplemental Executive Retirement Health Plan (“SERHP”) and settled all future benefit
obligations by making lump sum payments totaling approximately $3.9 million, which resulted in a net settlement loss of approximately $0.7 million. The termination
effectively removed Kforce’s related post-retirement benefit obligation.
(2) 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.
(3) 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.
(4) 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.
(5) 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 September 30, 2014, Kforce disposed of Kforce Healthcare, Inc. (“KHI”), a wholly-owned subsidiary of Kforce Inc.
and operator of the former Health Information Management (“HIM”) reporting segment, for a total cash purchase price of $119.0 million plus a
$96 thousand post-closing working capital adjustment. The results of operations for KHI have been presented as discontinued operations for all of
the years presented above. See Note 2 – “Discontinued Operations” in the Notes to Consolidated Financial Statements for more detail.
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. The results of operations of KCR have been presented as discontinued operations for the years 2012, 2011 and 2010
presented above. See Note 2 – “Discontinued Operations” in the Notes to 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
2014 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, 2009 to December 31,
2014) by the price of Kforce common stock at the beginning of the measurement period. Cumulative total returns for Kforce, the 2014 Industry Peer
Group and the NASDAQ include dividends in the calculation of total return and are based on an assumed $100 investment on December 31, 2009,
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 2014 Industry Peer Group.
s
r
a
l
l
o
D
250
225
200
175
150
125
100
75
2009
2010
2011
2012
2013
2014
End of Year
Kforce Inc.
NASDAQ Stock Market (Composite)
2014 Industry Peer Group
Investment of $100 on December 31, 2009
Kforce Inc.
NASDAQ Stock Market (Composite)
2014 Industry Peer Group
2009
100.0
100.0
100.0
2010
129.5
116.9
115.8
2011
98.7
114.8
89.0
2012
123.9
133.1
106.4
2013
177.7
184.1
169.0
2014
213.5
208.7
175.7
2014 Industry Peer Group:
CDI Corporation
CIBER, Inc.
TrueBlue Inc.
Manpower Inc.
On Assignment, Inc.
Robert Half International Inc.
Resources Connection, Inc.
Computer Task Group Inc.
The industry peer group is one of the building blocks of the executive compensation program because 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 criteria for peer group selection includes peer company customers, revenue footprint (i.e., revenues derived from different industries as a
percentage of total revenues), geographical presence, talent, capital, size (i.e., total revenues, market capitalization and domestic presence), complexity
of operating model and companies with which we compete for executive level talent. We focus on selecting public staffing companies that are active in
recruiting and placing similar skill sets at similar types of clients.
There was no change in the industry peer group between 2014 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 using the ticker 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,
2014
High
Low
2013
High
Low
$22.59
$17.30
$16.65
$13.36
$23.80
$19.97
$16.43
$12.23
$22.76
$17.20
$17.99
$14.69
$24.72
$18.65
$21.37
$16.83
From January 1, 2015 through February 24, 2015, the high and low intra-day sales price of our common stock was $24.99 and $22.34,
respectively. On February 24, 2015, the last reported sale price of our common stock on the NASDAQ Global Select Market was $24.11 per share.
Holders of Common Stock
As of February 24, 2015, there were approximately 175 holders of record.
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 forfeitable restricted stock, at the same rate as the cash dividend on common stock and based on the closing
stock price on the record date. Such additional shares have the same vesting terms and conditions as the outstanding and unvested restricted
stock. During 2014, the Board declared a quarterly dividend of $0.10 per share on each of February 7, 2014, April 25, 2014 and July 25,
2014. On December 3, 2014, the Board declared an increase to the cash dividend bringing the quarterly dividend to $0.11 per share of common
stock. No dividend payments were declared during the first nine months of 2013. A cash dividend on common stock of $0.10 per share was
declared on December 4, 2013.
Kforce currently expects to continue to declare and pay quarterly dividends of an amount similar to its December 2014 dividend of $0.11
per share. However, the amount 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 and legal ability to pay. 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, 2014, we had $93.3 million outstanding under our Credit Facility. Our weighted average effective interest rate on our
Credit Facility was 1.7% at December 31, 2014. A hypothetical 10% increase in interest rates in effect at December 31, 2014 would have an
increase to Kforce’s annual interest expense of less than $0.2 million.
We do not believe that we have a material exposure to fluctuations in foreign currencies because our international operations represented
less than 2% of net service revenues for the year ended December 31, 2014, 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
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 three
operating segments: Technology (“Tech”), Finance and Accounting (“FA”)
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. The GS segment is organized and
managed by specialty because of the unique operating characteristics of
the business.
The following charts depict the percentage of our total revenues for
each of our segments for the years ended December 31, 2014, 2013 and
2012 (the charts for 2013 and 2012 have been reconfigured to exclude our
former Health Information Management (“HIM”) segment which we sold
in 2014):
2014
8.1%
GS
2013
8.5%
GS
2012
9.1%
GS
22.6%
FA
69.2%
Tech
23.7%
FA
68.9%
Tech
67.2%
Tech
22.7%
FA
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 2014 was approximately $68
per hour. Our Tech segment provides service to clients in a variety of
industries with a strong footprint in the healthcare, financial services
and government sectors. An IT growth update published by Staffing
Industry Analysts (“SIA”) during September 2014, states that temporary
technology staffing is projected to experience growth of 7% in 2015.
We believe the sustained 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 the overall
demand for talent in the temporary technology staffing sector. The
SIA report 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 administration, 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 the healthcare, financial services
and government sectors. The average bill rate for our FA segment for 2014
was approximately $32 per hour. In its September 2014 update, the SIA
report indicated that the market for temporary finance/accounting work
is expected to expand 5% during 2015.
GS
Our GS segment provides Tech and FA professionals to the Federal
Government as both a prime contractor and a subcontractor. The
GS contracts are concentrated on customers that we believe 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.
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, 2014, 2013, and 2012, Flex represented 96.2%, 95.5% and
95.3% of total Kforce revenue, respectively.
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
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, Kforce.com, 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
6 KFORCE INC. AND SUBSIDIARIES
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”).
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
Our primary goal is to sustain long-term financial growth and
outperform the industry while being a leading provider of domestic
professional and staffing services in our focus segments. We believe the
following strategies will help us achieve our goal.
Invest in Headcount of Revenue Generators. Given the current and
expected future demand in the marketplace for the services provided by
Kforce and the performance of our most tenured associates continuing to
remain near peak levels, the Firm made significant investments beginning
in the fourth quarter of 2012 in the hiring of associates that are responsible
for generating revenue. The increase in revenue generator headcount from
2013 to 2014 was 6.3% and from 2012 to 2013 was 10.3%. New associates
typically take six to twelve months to ramp up to a minimum acceptable
standard and continue to ramp for up to four years. Accordingly, we expect
that the investment in 2014 will result in more revenue growth during
2015 and beyond. 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.
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.
A continued 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.
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.
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. 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 concentrate resources among our segments and staffing services
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 associates’ operating expertise,
provides us with a competitive advantage.
Optimize Operating Margins. The optimization of operating margins
remains an important 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.
Retain our Great People. A significant focus of Kforce is on the retention
of our tenured and top performing associates. We ended fiscal 2014 with
an even more 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.
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.
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
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 2014, and supports all of
our operating segments. There continues to be a significant demand for
its resources. In 2014, we reallocated a portion of the NRC resources to
a facility in Phoenix, Arizona with a goal to create greater efficiency in
serving our clients in the western U.S.
KFORCE INC. AND SUBSIDIARIES 7
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 2015
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.
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. In 2014, Kforce adopted and implemented an Agile software
development methodology (whereby requirements and solutions evolve
through cross-functional teams), and underwent an organizational
transformation with a goal to maximize the responsiveness and timeliness
by which value is delivered through our technology investments.
Enhance Shareholder Value. Kforce is committed to enhancing
shareholder value. In 2014, the Firm executed a significant share
repurchase program, completed four quarterly dividends, and continued to
focus on reducing expenses. We increased the quarterly dividend amount
by 10% in December 2014. Kforce expects to continue these initiatives
through 2015.
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 25% of
revenues and no single customer accounted for more than 5% of revenues
for the year ended December 31, 2014. 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 report published by
the SIA in July 2014, 124 companies reported at least $100 million in
U.S. staffing revenues in 2013 and these 124 companies represented
an estimated 54.5% 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 service offerings are primarily concentrated in areas
with significant growth opportunities in both the short and long term.
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 2014
at a greater rate than 2013 based on data published by the Bureau of
Labor Statistics (“BLS”). Total temporary employment increased 7.8% and
the penetration rate increased 3.4% from December 2013 to December
2014, bringing the rate to 2.13% in December 2014, an all-time high. While
the macro-employment picture remains uncertain, it has continuously
improved, with the unemployment rate at 5.6% as of December 2014,
and non-farm payroll expanding an average of 246,000 jobs per month in
2014. Also, the college-level unemployment rate, which we believe serves
as a proxy for professional employment and is more closely aligned with
the Firm’s business strategy, was at 2.9% in December 2014. 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 systemic
shift to an increased use of temporary staff as a percentage of 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. Kforce
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 an industry forecast published by SIA in September 2014,
the U.S. temporary staffing industry generated estimated revenues of
$92.5 billion in 2011, $99.0 billion in 2012 and $103.3 billion in 2013;
with projected revenues of $108.8 billion in 2014 and $115.0 billion in
2015. Based on projected revenues of $108.8 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 (1) continued uncertainty of funding levels of
various Federal Government programs and agencies; (2) uncertain macro-
economic and political environment; and (3) 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. 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. Our GS segment will be facing a
number of re-competes in 2015 that could materially impact that
segment’s performance, especially given the recent emphasis by the
Federal Government on awarding contracts to the lowest bidder and a
de-emphasis of overall funding of services.
8 KFORCE INC. AND SUBSIDIARIES
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 2014.
• Critical Accounting Estimates—a discussion of the accounting
estimates that are most critical to aid in 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 Operations—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.
Effective August 3, 2014, Kforce divested its HIM segment
through a sale of all of the issued and outstanding stock of
KHI. The results presented in the accompanying Consolidated
Statements of Operations and Comprehensive Income (Loss)
for the years ended December 31, 2014, 2013 and 2012
include activity relating to HIM as discontinued operations.
On March 31, 2012, Kforce sold all of the issued and outstanding
stock of KCR. The results presented in the accompanying
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the year ended December 31, 2012 includes activity relating
to KCR as discontinued operations. See Note 2 – “Discontinued
Operations” in the Notes to Consolidated Financial Statements.
Except as specifically noted, our discussions below exclude any activity
related to HIM and KCR, which are 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 2014 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 13.4% to $1.22 billion in 2014 from
$1.07 billion in 2013. Net service revenues increased 13.9% for Tech,
14.2% for FA and 6.6% for GS.
• Flex revenues increased 14.2% to $1.17 billion in 2014 from $1.03
billion in 2013.
• Search revenues decreased 3.6% to $46.7 million in 2014 from $48.4
million in 2013.
• Quarterly sequential revenues grew for four consecutive quarters,
driving revenue growth in the fourth quarter of 2014 to 13.0% year
over year.
• Flex gross profit margin decreased 90 basis points to 28.0% in 2014
from 28.9% in 2013. Flex gross profit margin decreased 60 basis
points for Tech, 70 basis points for FA and 310 basis points for GS
year over year.
• Selling, general and administrative (“SG&A”) expenses as a
percentage of revenues for the year ended December 31, 2014 was
25.9% compared to 28.7% in 2013. This decrease was primarily due to
a reduction in compensation expense as a result of the organizational
realignment executed by the Firm during the fourth quarter of 2013,
as well as a decrease in the annual effective commission rate due to
certain changes made to our compensation plan.
• Income from continuing operations of $29.4 million in 2014 increased
$24.1 million compared with income from continuing operations of
$5.3 million in 2013. The results for 2013 include an after-tax goodwill
impairment charge of $9.3 million.
• Net income of $90.9 million for the year ended December 31, 2014
increased $80.1 million from net income of $10.8 million for the year
ended December 31, 2013.
• Diluted earnings per share from continuing operations for the
year ended December 31, 2014 increased to $0.93 from $0.16 per
share in 2013.
• During the three months ended September 30, 2014, Kforce Inc.
sold all of the issued and outstanding stock of KHI, operator of the
former HIM reporting segment, for a total cash purchase price of
$119.0 million, plus a post-closing working capital adjustment of $96
thousand. Proceeds from the sale of HIM were primarily used initially
to pay off the outstanding borrowings under the Credit Facility and
ultimately to repurchase shares of common stock.
• During 2014, Kforce repurchased 4.8 million shares of common stock
on the open market at a total cost of approximately $101.6 million.
• The Firm declared and paid cash dividends totaling $0.41 per share
during the year ended December 31, 2014 resulting in a payout in
cash of $12.8 million.
• The Firm amended its credit facility on December 23, 2014 to increase
the borrowing capacity by $35.0 million to $170.0 million, and to
increase the accordion option from $15.0 million to $50.0 million.
• The total amount outstanding under the credit facility increased
$30.7 million to $93.3 million as of December 31, 2014 as compared
to $62.6 million as of December 31, 2013, primarily due to funds used
to repurchase shares of our common stock.
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” in the Notes to
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” in 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.
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.
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”
in the Notes to Consolidated Financial
Statements, included in this Annual Report
for a complete discussion of the valuation
methodologies employed.
In connection with our annual assessment of
goodwill impairment as of December 31, 2014
we performed a step one analysis for each of our
reporting units, which ultimately resulted in no
impairment charge for Tech, FA or GS.
The carrying value of goodwill as of
December 31, 2014 by reporting unit was
approximately $17.0 million, $8.0 million and
$20.9 million for our Tech, FA and GS reporting
units, respectively.
We determine the fair value of our reporting
units using widely accepted valuation
techniques, including the 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: (1) an appropriate
rate to discount the expected future cash flows;
(2) the inherent risk in achieving forecasted
operating results; (3) long-term growth rates;
(4) expectations for future economic cycles; (5)
market comparable companies and appropriate
adjustments thereto; and (6) 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, 2014 and 2013, these allowances
were 1.0% and 1.1% 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, 2014,
would have impacted our net income for 2014 by
approximately $0.1 million.
Kforce performed a step one impairment
assessment for each of our reporting units
(Tech, FA and GS) as of December 31, 2014. We
compared the carrying value of each reporting
unit to the respective estimated fair value as of
December 31, 2014 and determined that the fair
value exceeded carrying value by 263%, 342%
and 7%, respectively. As a result, no goodwill
impairment charges were recognized during the
year ended December 31, 2014.
During the years ended December 31, 2012
and 2013, we recorded an impairment charge
to the GS reporting unit goodwill balance. As
the current fair value of the GS reporting unit
exceeds the carrying value by 7%, the following is
a discussion regarding certain of the assumptions
utilized in the step one impairment analysis for
GS as of December 31, 2014. Consistent with the
2013 Step 2 analysis, a terminal value growth
rate of 3% and a weighted average cost of capital
of 17%, which includes a specific company risk
premium of 2%, was used. To calculate fair
value under the guideline company method,
we utilized enterprise value/revenue multiples
ranging from 0.3x to 0.7x and enterprise value/
EBITDA multiples ranging from 3.0x to 6.9x.
Additionally, the fair value under the guideline
company method included a control premium of
35.0%, which was determined based on a review
of comparative market transactions. To calculate
the fair value under the guideline transaction
method, we utilized enterprise value/revenue
multiples ranging from 0.3x to 2.3x and
enterprise value/EBITDA multiples ranging from
7.6x to 20.8x.
A deterioration in any of these assumptions
or the assumptions discussed in Note 6 –
“Goodwill and Intangible Assets” in the Notes to
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 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 (“IBNR”) as of the balance sheet date.
Our
liabilities for health
insurance
and workers’ compensation claims as of
December 31, 2014 were $3.4 million and $1.9
million, respectively.
STOCK-BASED COMPENSATION
We have stock-based compensation programs,
which include options, stock appreciation rights
(“SARs”) and restricted stock awards. See Note 1 –
“Summary of Significant Accounting Policies,”
Note 11 – “Employee Benefit Plans,” and Note 13 –
“Stock
in the Notes to
Consolidated Financial Statements, included in
this Annual Report for a complete discussion of
our stock-based compensation programs.
Incentive Plans”
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.
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”). See Note 11 – “Employee Benefit
Plans” in the Notes to Consolidated Financial
Statements included in this Annual Report for
a complete discussion of the terms of this plan.
The SERP was not funded as of December 31,
2014 or 2013.
ACCOUNTING FOR INCOME TAXES
See Note 4 – “Income Taxes” in 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, 2014.
The stock compensation expense recorded
is impacted by our estimated forfeiture rates,
which are based on historical forfeitures, as well
as historical employee turnover.
When estimating the obligation for our
pension benefit plan, management is required
to make certain assumptions and to apply
judgment with respect to determining an
appropriate discount rate, bonus percentage
assumptions and expected effect of future
compensation increases for the participants in
the plan.
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 have not made any material changes in
the accounting methodologies used to establish
our self-insured liabilities during 2014 and 2013.
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, 2014 would
have impacted our net income for 2014 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 $0.7 million for 2014.
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 during 2014 would have had an
insignificant impact on our net income for 2014.
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, 2014 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 2014 by approximately
$0.2 million.
KFORCE INC. AND SUBSIDIARIES 11
NEW ACCOUNTING STANDARDS
In August 2014, the FASB issued authoritative guidance regarding
disclosure of uncertainties about an entity’s ability to continue as
a going concern, which requires management to evaluate, at each
interim and annual reporting period, whether there are conditions
or events that raise substantial doubt about the entity’s ability
to continue as a going concern within one year after the date the
financial statements are issued, and provide related disclosures. This
guidance is to be applied for annual periods ending after December 15,
2016, and for annual and interim periods thereafter, and early
adoption is permitted. We do not anticipate a material impact to the
consolidated financial statements upon adoption.
In May 2014, the FASB issued authoritative guidance regarding
revenue from contracts with customers, which specifies that revenue
should be recognized when promised goods or services are transferred
to customers in an amount that reflects the consideration which
the company expects to be entitled in exchange for those goods or
services. This guidance is to be applied for annual reporting periods
beginning on or after December 15, 2016 and interim periods within
those annual periods and will require enhanced disclosures. Kforce
is currently evaluating the potential impact of the accounting and
disclosure requirements on the consolidated financial statements;
we do not currently anticipate a material impact to the consolidated
financial statements upon adoption.
In April 2014, the FASB issued authoritative guidance regarding
reporting discontinued operations and disclosures of disposals of
components of an entity, which specifies additional thresholds
for a disposal to qualify as a discontinued operation and requires
new disclosures of both discontinued operations and certain other
disposals that do not meet the definition of a discontinued operation.
The guidance is to be applied for annual reporting periods beginning
on or after December 15, 2014, and early adoption is permitted.
Kforce elected not to adopt this standard early.
RESULTS OF OPERATIONS
Net service revenues for the years ended December 31, 2014, 2013
and 2012 were approximately $1.22 billion, $1.07 billion and $1.01
billion, respectively, which represents an increase of 13.4% from 2013
to 2014 and 6.8% from 2012 to 2013. The increase in 2014 from 2013
was primarily due to our Tech segment (which represented 69.2%
of total net service revenues in 2014) and our FA segment (which
represented 22.7% of total net service revenues in 2014) which had
increases in net service revenues of 13.9% and 14.2%, respectively. The
increase in 2013 from 2012 was primarily due to our Tech segment
(which represented 68.9% of total net service revenues in 2013) which
had an increase in net service revenues of 9.4%. Our GS segment net
service revenues increased 6.6% in 2014 from 2013 and increased 0.6%
in 2013 from 2012. Search revenues decreased 3.6% in 2014 compared
to 2013 and increased 2.6% in 2013 compared to 2012.
Flex gross profit margins decreased 90 basis points to 28.0% for
the year ended December 31, 2014 as compared to 28.9% for the
year ended December 31, 2013. The decrease is due primarily to the
impact of a change in spread between our bill rates and pay rates
as a result of higher concentration of our revenue growth coming
from larger, lower-margin profile clients and an increase in benefit
costs. Flex gross profit margins increased from 28.5% for the year
ended December 31, 2012 to 28.9% for the year ended December 31,
2013. SG&A expenses as a percentage of net service revenues were
25.9% and 28.7% for the years ended December 31, 2014 and 2013,
respectively. The decrease in SG&A expenses as a percentage of net
service revenues during the year ended December 31, 2014 was
12 KFORCE INC. AND SUBSIDIARIES
primarily driven by a reduction in compensation expense as a result
of the organizational realignment executed by the Firm during the
fourth quarter of 2013 and partially offset by the increase in benefit
costs mentioned previously.
Additionally, during the years ended December 31, 2013 and
2012, Kforce recorded a goodwill impairment charge of $14.5
million and $69.2 million, respectively, in our GS reporting unit. In
2013, this impairment charge was a result of a business strategy
decision made during the fourth quarter of 2013, regarding the GS
reporting unit, to focus its service offerings and efforts on prime
integrated business solution services. 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 continued
to improve during 2014 as compared to 2013 based on data published
by the BLS and SIA. Total temporary employment increased 7.8%
and the penetration rate increased 3.4% from December 2013 to
December 2014, bringing the rate to 2.13% in December 2014, an all-
time high. While the macro-employment picture remains uncertain,
it has continuously improved, with the unemployment rate at 5.6%
as of December 2014, and non-farm payroll expanding an average of
246,000 jobs per month in 2014. Also, the college-level unemployment
rate, which we believe serves as a proxy for professional employment
and is more closely aligned with the Firm’s business strategy, was at
2.9% in December 2014. 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 systemic shift to
an increased use of temporary staff as a percentage of total workforce,
which is creating reduced cyclicality in the business. If the penetration
rate of temporary staffing continues to experience growth in the
coming months and 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.
Over the last few years, we have undertaken several significant
initiatives including: (1) 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; (2) increasing our
focus on consultant care processes and communications to redeploy
our consultants in a timely fashion; (3) increasing revenue generator
headcount to capitalize on targeted growth opportunities; (4) further
optimizing our NRC team in support of our field operations; and (5)
divesting of our non-core businesses, HIM and KCR. We believe our
realigned field operations and revenue enabler 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 almost exclusively in the U.S., are also a key contributor to our
long-term financial stability. We believe the recent divestitures of HIM
and KCR provide us the opportunity to further dedicate our resources to
exclusively providing technology and finance & accounting talent in the
commercial and government markets through our staffing organization
and KGS, our government solutions provider.
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 (Loss) Income for the years ended:
December 31,
Revenues by Segment:
Tech
FA
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)
2014
2013
2012
69.2%
22.7
8.1
100.0%
96.2%
3.8
100.0%
30.8%
25.9%
—%
0.8%
3.9%
2.4%
7.5%
68.9%
22.6
8.5
100.0%
95.5%
4.5
100.0%
32.1%
28.7%
1.4%
0.9%
1.0%
0.5%
1.0%
67.2%
23.7
9.1
100.0%
95.3%
4.7
100.0%
31.9%
30.4%
6.9%
1.1%
(6.6)%
(4.2)%
(1.4)%
The following table details net service revenues for Flex and Search by segment and changes from the prior year (in thousands).
Tech
Flex
Search
Total Tech
FA
Flex
Search
Total FA
GS
Flex
Search
Total GS
Total Flex
Total Search
Total Net Service Revenues
2014
Increase
(Decrease)
2013
Increase
(Decrease)
2012
$ 823,311
19,158
14.3%
(0.1)%
$ 842,469
13.9%
$ 720,179
19,183
$ 739,362
9.9%
(6.5)%
9.4%
$ 655,062
20,525
$ 675,587
$ 249,274
27,537
$ 276,811
$ 98,051
—
$ 98,051
$1,170,636
46,695
$1,217,331
16.9%
(5.9)%
14.2%
6.6%
—
6.6%
14.2%
(3.6)%
13.4%
$ 213,158
29,259
$ 242,417
$ 91,949
—
$ 91,949
$1,025,286
48,442
$1,073,728
0.6%
9.7%
1.7%
0.6%
—
0.6%
7.0%
2.6%
6.8%
$ 211,797
26,679
$ 238,476
$ 91,424
—
$ 91,424
$ 958,283
47,204
$1,005,487
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 2014 quarterly information is presented for informational purposes only (in thousands, except Billing Days).
Billing Days
Flex Revenues
Tech
FA
GS
Total Flex
Search Revenues
Tech
FA
Total Search
Total Revenues
Tech
FA
GS
Total Revenues
Three Months Ended
December 31
September 30
June 30
March 31
62
64
64
63
$212,414
67,863
26,547
$306,824
$ 4,740
7,175
$ 11,915
$217,154
75,038
26,547
$318,739
$212,269
64,254
24,787
$301,310
$ 5,374
7,126
$ 12,500
$217,643
71,380
24,787
$313,810
$206,165
60,057
23,946
$290,168
$ 5,036
7,554
$ 12,590
$211,201
67,611
23,946
$302,758
$192,463
57,100
22,771
$272,334
$ 4,008
5,682
$ 9,690
$196,471
62,782
22,771
$282,024
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 14.3%
during the year ended December 31, 2014 as compared to 2013
and increased 9.9% in 2013 from 2012. 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 2014, 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 and an additional 7% in 2015, 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. The Firm believes it is well-positioned to take
advantage of this growth, as a result of the expected increase in
productivity, which normally comes with tenure, of the revenue
generator headcount added over the past few years. Additionally,
the Firm expects to continue to make selective investments in
revenue generator headcount into 2015. The Firm believes the
Tech segment will continue to grow year-over-year in 2015 due
to our ongoing investments in revenue generating resources.
Our FA segment experienced an increase in Flex revenues of
16.9% during the year ended December 31, 2014 as compared to
2013, which was a significant acceleration from the increase of
0.6% during the year ended December 31, 2013 as compared to
2012. In its September 2014 update, SIA provides an expectation
that finance and accounting growth will be 5% in 2014 and will be
augmented by an additional 5% in 2015. Management believes the
benefit from the significant investment in the revenue generator
headcount for FA made in the last few years was realized in 2014
through the capture of the expected growth in the FA industry
and is due to improvements in associate productivity that typically
come with tenure. The Firm believes the FA segment will continue
to recognize year-over-year growth in 2015.
Our GS segment experienced an increase in net service revenues
of 6.6% during the year ended December 31, 2014 as compared to
2013 and an increase of 0.6% during the year ended December 31,
2013 as compared to 2012. The increase primarily relates to
stronger-than-expected expansion of revenues with existing
customers. The Firm believes the GS segment will remain flat year-
over-year in 2015.
14 KFORCE INC. AND SUBSIDIARIES
The following table details total Flex hours for our Tech and FA segments and percentage changes over the prior period for the years ended
December 31 (in thousands):
Tech
FA
Total hours
2014
12,024
7,691
19,715
Increase
(Decrease)
10.0%
17.4%
12.8%
2013
10,929
6,550
17,479
Increase
(Decrease)
9.0%
3.1%
6.7%
2012
10,023
6,352
16,375
As the GS segment primarily provides solutions-based services as
compared to staffing services, Flex hours are not presented above.
The increase in Flex revenues for Tech for the year ended
December 31, 2014 compared to the year ended December 31, 2013
was $103.1 million, composed of a $71.6 million increase in volume,
a $31.0 million increase in bill rate and a $0.5 million increase from
the impact of billable expenses. The increase in Flex revenues for FA
for the year ended December 31, 2014 compared to the year ended
December 31, 2013 was $36.1 million, composed of a $37.0 million
increase in volume, a $0.8 million decrease in bill rate and a $0.1
million decrease from the impact of billable expenses. The increase
in Flex revenues for Tech for the year ended December 31, 2013
compared to the year ended December 31, 2012 was $65.1 million,
composed of a $58.5 million increase in volume, a $8.2 million
increase in bill rate and a $1.6 million decrease from the impact of
billable expenses. The increase in Flex revenues for FA for the year
ended December 31, 2013 compared to the year ended December 31,
2012 was $1.4 million, composed of a $6.6 million increase in volume,
a $5.1 million decrease in bill rate and a $0.1 million decrease from
the impact of billable expenses.
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
GS
Total billable expenses
2014
$6,093
309
391
$6,793
Increase
(Decrease)
8.2%
(27.0)%
12.4%
6.1%
2013
$5,630
423
348
$6,401
Increase
(Decrease)
(22.0)%
(19.7)%
(37.4)%
(22.9)%
2012
$7,222
527
556
$8,305
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 decreased 3.6% during the year ended
December 31, 2014 as compared to 2013. The decrease was
primarily driven by the reallocation of revenue-generating
resources to capture the current high demand for our Flex staffing
services. Search revenues increased 2.6% during the year ended
December 31, 2013 as compared to 2012.
Total placements for each segment were as follows for the years ended December 31:
Tech
FA
Total placements
2014
1,193
2,256
3,449
Increase
(Decrease)
(2.4)%
(7.9)%
(6.0)%
2013
1,222
2,449
3,671
Increase
(Decrease)
(7.2)%
19.8%
9.2%
2012
1,317
2,044
3,361
The average fee per placement for each segment was as follows for the years ended December 31:
Tech
FA
Total average placement fee
2014
$16,062
12,205
$13,539
Increase
(Decrease)
2.3%
2.2%
2.6%
2013
$15,695
11,946
$13,194
Increase
(Decrease)
0.8%
(8.5)%
(6.0)%
2012
$15,577
13,051
$14,041
The decrease in Search revenues from 2013 to 2014 was $1.7 million, composed of a $2.9 million decrease in volume, partially offset by
a $1.2 million increase in rate. The increase in Search revenues from 2012 to 2013 was $1.2 million, composed of a $4.3 million increase in
volume partially offset by a $3.1 million decrease in rate.
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
GS
Total gross profit percentage
2014
28.9%
36.5%
31.0%
30.8%
Increase
(Decrease)
(2.7)%
(5.4)%
(9.1)%
(4.0)%
2013
29.7%
38.6%
34.1%
32.1%
Increase
(Decrease)
—
1.0%
8.6%
0.6%
2012
29.7%
38.2%
31.4%
31.9%
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 following table presents, for each segment, the Flex gross profit percentage for the years ended December 31:
Tech
FA
GS
Total Flex gross profit percentage
2014
27.2%
29.5%
31.0%
28.0%
Increase
(Decrease)
(2.2)%
(2.3)%
(9.1)%
(3.1)%
2013
27.8%
30.2%
34.1%
28.9%
Increase
(Decrease)
1.1%
(0.7)%
8.6%
1.4%
2012
27.5%
30.4%
31.4%
28.5%
The increase in Flex gross profit from 2013 to 2014 was $32.0
million, composed of a $42.0 million increase in volume, partially
offset by a $10.0 million decrease in rate. The increase in Flex gross
profit from 2012 to 2013 was $22.6 million, composed of a $19.1
million increase in volume and a $3.5 million increase in rate.
The decrease in Flex gross profit percentage of 90 basis points
in 2014 from 2013 was primarily driven by the impact of change
in spread between our bill rates and pay rates as a result of higher
concentration of our revenue growth coming from larger, lower-
margin profile clients, and an increase in benefit costs. In addition,
our Flex gross profit within our GS segment was negatively
impacted by a shift to higher mix of subcontractor labor, which was
driven by current contractual demands, and increased benefit costs.
A continued focus for Kforce is optimizing 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
stable in 2015 as compared to 2014 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, 2014, 2013 and 2012, total commissions,
compensation, payroll taxes, and benefit costs as a percentage
of SG&A represented 84.8%, 85.9%, and 87.1%, respectively.
Commissions and related payroll taxes and benefit costs are
variable costs driven primarily by revenue and gross profit levels,
and associate performance. Therefore, as gross profit levels change,
these expenses would also generally be anticipated to change but
remain relatively consistent as a percentage of revenues.
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):
2014
% of
Revenues
2013
% of
Revenues
2012
% of
Revenues
Compensation, commissions,
payroll taxes and benefits costs
Other
Total SG&A
$267,471
47,867
$315,338
22.0%
3.9%
25.9%
$264,636
43,308
$307,944
24.7%
4.0%
28.7%
$266,413
39,527
$305,940
26.5%
3.9%
30.4%
16 KFORCE INC. AND SUBSIDIARIES
SG&A as a percentage of net service revenues decreased 280 basis
points in 2014 compared to 2013. This was primarily attributable to
the following:
• Decrease in compensation, commissions, payroll taxes and
benefits cost of 2.7% of net service revenues, which was
primarily a result of a reduction in compensation expense as a
result of the organizational realignment executed by the Firm
during the fourth quarter of 2013, as well as a decrease in the
annual effective commission rate due to certain changes made
to our compensation plans.
• Decrease
in professional fees of 0.1% which was
primarily the result of a reduction in corporate activities.
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 1.8% 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
additional costs due to the Firm’s execution of a realignment
plan during the fourth quarter of 2013.
Goodwill Impairment. During the year ended December 31, 2014,
Kforce performed a step one goodwill impairment analysis for each
of its reporting units, which did not result in any 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 and as a result we recorded
an impairment charge on the GS reporting unit goodwill in the
amount of approximately $14.5 million, with a related tax benefit
of approximately $5.2 million during the year ended December 31,
2013. During 2012, due to certain adverse effects of events and
indications during that time period, we recorded an impairment
charge of $69.2 million which included a related tax benefit of $24.7
million during the year ended December 31, 2012.
Although the valuation of the business supported its carrying
value in 2014, a deterioration in the assumptions discussed in
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Estimates” and in Note 6 –
“Goodwill and Intangible Assets” in the Notes to Consolidated
Financial Statements included in this Annual Report, could result in
an additional impairment charge in the future.
Depreciation and Amortization. The following table presents depreciation and amortization expense by major category for the years ended
December 31, 2014, 2013 and 2012, as well as the increases (decreases) experienced during 2014 and 2013 (in thousands):
Fixed asset depreciation
Capital lease asset depreciation
Capitalized software amortization
Intangible asset amortization
Total depreciation and amortization
2014
$5,142
1,203
2,904
645
$9,894
Increase
(Decrease)
18.9%
(21.8)%
(10.3)%
(13.7)%
0.5%
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
Fixed Asset Depreciation: The $0.8 million increase in 2014 is
primarily the result of the leasehold improvement and furniture and
fixture additions made during 2014. The $0.6 million increase in 2013
is primarily the result of the leasehold improvement additions made
during 2013.
Capital Lease Asset Depreciation: The $0.3 million decrease in 2014 is
primarily the result of a reduction in computer hardware additions and
current year disposals during 2014. The $0.1 million decrease in 2013
is primarily the result of computer hardware disposals during 2013.
Capitalized Software Amortization: The $0.3 million decrease
in 2014 is primarily the result of software disposals during 2014.
The $1.3 million decrease in 2013 is primarily the result of several
significant capitalized software balances becoming fully amortized
during 2013.
Other Expense, Net. Other expense, net was $1.4 million in 2014,
$1.1 million in 2013, and $1.1 million in 2012, and consists primarily
of interest expense related to Kforce’s Credit Facility.
Income Tax Expense (Benefit). For the year ending December 31,
2014, income tax expense as a percentage of income from
continuing operations before income taxes (our “effective rate”)
was 38.7%. There were no individual items that had a material
impact on Kforce’s effective rate. For the year ending December 31,
2013, income tax expense as a percentage of income from
continuing operations before income taxes was 51.6%, which was
impacted by certain non-deductible meals and entertainment, 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 income from continuing
operations before income taxes was 36.5%. The income tax benefit
for 2012 was primarily related to tax benefits associated with the
partially deductible goodwill impairment charge taken in 2012.
KFORCE INC. AND SUBSIDIARIES 17
Income from Discontinued Operations, Net of Income Taxes.
Discontinued operations for the years ended December 31, 2014,
2013 and 2012 include the consolidated income and expenses for
HIM. During the three months ended September 30, 2014, Kforce
completed the sale of HIM resulting in a pre-tax gain of $94.3 million.
Included in the determination of the pre-tax gain is approximately
$4.9 million of goodwill for HIM and transaction expenses totaling
approximately $11.0 million, which primarily included legal fees,
stock-based compensation related to acceleration of restricted stock
due to change in control provisions, commissions and transaction
bonuses. Discontinued operations for the year ended December 31,
2012 also 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,
2014, 2013 and 2012 was 40.6%, 40.1% and 43.7%, respectively.
Adjusted EBITDA and Adjusted EBITDA Per Share. “Adjusted EBITDA
and Adjusted EBITDA Per Share,” a non-GAAP financial measure, is
defined as earnings (loss), in total and on a per share basis, before
discontinued operations, non-cash impairment charges, interest,
income taxes, depreciation and amortization and stock-based
compensation expense. Adjusted EBITDA and Adjusted EBITDA Per
Share should not be considered a measure of financial performance
under GAAP. Items excluded from Adjusted EBITDA and Adjusted
EBITDA Per Share 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 and Adjusted EBITDA Per Share. Adjusted EBITDA
and Adjusted EBITDA Per Share is a key measure used by
management to evaluate our operations, including our 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 and Adjusted EBITDA Per Share,
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.
The following table presents Adjusted EBITDA and Adjusted EBITDA Per Share results and includes a reconciliation of Adjusted EBITDA to net
income and Adjusted Earnings Per Share to Earnings Per Share for the years ended December 31 (in thousands, except per share amounts):
Years Ended December 31,
Net income (loss)
Income from discontinued operations,
net of income taxes
Income (loss) from continuing operations
Goodwill impairment, pre-tax
Depreciation and amortization
Stock-based compensation expense
Interest expense and other
Income tax expense (benefit)
Earnings per share adjustment (1)
Adjusted EBITDA
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
2014
Per Share
2013
Per Share
2012
Per Share
$90,915
$2.87
$10,787
$0.32
$(13,703)
$(0.38)
61,517
$29,398
—
9,894
2,969
1,396
18,559
—
$62,216
31,475
31,691
1.94
$0.93
—
0.31
0.09
0.04
0.59
—
$1.96
5,493
$ 5,294
14,510
9,846
2,555
1,212
5,635
—
$39,052
33,511
33,643
0.16
$0.16
0.43
0.29
0.07
0.04
0.17
—
$1.16
28,428
$(42,131)
69,158
10,789
25,688
934
(24,227)
—
$ 40,211
35,791
35,791
0.80
$(1.18)
1.93
0.30
0.72
0.03
(0.68)
(0.01)
$ 1.11
(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, 2014, Kforce had $130.2 million
in working capital compared to $112.9 million in 2013. Kforce’s
current ratio (current assets divided by current liabilities) was 2.4
at the end of 2014 and 2.3 at the end of 2013. The increase in
working capital was primarily due to increases in accounts receivable
partially offset by an increase in accounts payable and accrued
other liabilities. In addition, our recent sale of HIM resulted in
proceeds of $109.4 million, net of transaction costs for legal fees,
commissions and cash transaction bonuses and $71.1 million
net of the aforementioned transaction costs and taxes. These
additional funds were used initially to reduce outstanding
borrowings under our credit facility and ultimately to
repurchase shares of common stock.
18 KFORCE INC. AND SUBSIDIARIES
The accompanying Consolidated Statements of Cash
Flows for each of the three years ended December 31,
2014, 2013 and 2012 in this Anual Report provide a more
detailed description of our cash flows. Currently, Kforce is
principally focused on achieving the appropriate balance in the
following areas of cash flow: (1) achieving positive cash flow
from operating activities; (2) returning capital to our shareholders
through our dividend program; (3) repurchasing our common stock;
(4) maintaining an appropriate outstanding balance on our credit
facility; (5) investing in our infrastructure to allow sustainable growth
via capital expenditures; and (6) 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 and liquidity, as well as the
ability of our lenders to fund borrowings. There is no assurance
that: (1) our lenders will be able to fund our borrowings or (2) 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.
The following table presents a summary of our cash flows from
operating, investing and financing activities, as follows
(in thousands):
Years Ended December 31,
2014
2013
2012
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in
cash and cash equivalents
Discontinued Operations
$(25,582)
110,535
(84,590)
$ 465 $ 55,978
52,405
(8,547)
(107,941)
7,576
$ 363
$ (506) $ 442
As was previously discussed, Kforce divested of HIM on August 4,
2014 and 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 are principally related to adjustments to net income
for certain non-cash charges such as depreciation and amortization
expense, stock-based compensation and gain on sale of discontinued
operations, as well as the goodwill impairment charges in prior
years. These adjustments are more fully detailed in our Consolidated
Statements of Cash Flows for the three years ended December 31,
2014, 2013 and 2012, in this Annual Report. When comparing cash
flows from operating activities for the years ended December 31,
2014, 2013 and 2012, the primary drivers of cash inflows and outflows
are net trade receivables and accounts payable. The decrease in cash
used in operating activities in 2014 compared to 2013 is primarily
the result of the increase in account receivable due to the timing
of collections.
Investing Activities
Capital expenditures during 2014, 2013 and 2012, which exclude
equipment acquired under capital leases, were $6.0 million, $8.1
million and $5.8 million, respectively. Proceeds from the divestiture
of HIM were $117.9 million during the year ended December 31,
2014. 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 the year ended December 31, 2014, the Firm paid cash
for repurchases of common stock totaling $101.8 million, which
was composed of approximately $100.2 million of open market
common stock repurchases and $1.6 million of common stock
repurchases attributable to shares withheld for statutory minimum
tax withholding requirements pertaining to the vesting of
restricted stock awards. During 2013, Kforce repurchased common
stock totaling $29.8 million, which was composed of approximately
$29.0 million of open market common stock repurchases (including
the settlement of approximately $2.5 million of common stock
repurchases from the fourth quarter of 2012) and $0.8 million of
common stock repurchases attributable to shares withheld for
statutory minimum tax withholding requirements pertaining to the
vesting of restricted stock awards. 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.
KFORCE INC. AND SUBSIDIARIES 19
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. Our
ability to make distributions or repurchase equity securities could be
limited if the Firm’s availability is less than the greater of 12.5% of
the aggregate amount of the commitment of all lenders under the
Credit Facility and $20.6 million. Kforce had availability under the
Credit Facility of $39.6 million as of December 31, 2014; therefore,
the minimum fixed charge coverage ratio was not applicable and
our ability to make distributions or repurchase equity securities was
not restricted. Kforce believes that it will be able to maintain these
minimum availability requirements; 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, or could limit our
ability to make distributions or repurchase equity securities. Kforce
believes the likelihood of default is remote. The Credit Facility
expires December 23, 2019.
As of December 31, 2014 and 2013, $93.3 million and $62.6
million was outstanding under the Credit Facility, respectively.
During the three months ended December 31, 2014, maximum
outstanding borrowings under the Credit Facility were $93.3
million. As of February 24, 2015, $97.0 million was outstanding and
$39.7 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, 2014, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $2.7 million, and for facility lease deposits totaling
$0.5 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.
Stock Repurchases
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 of the Board-authorized common stock repurchase program
remained available for future repurchases. On September 10,
2014, our Board of Directors approved an increase to the existing
authorization for repurchases of common stock by $70.0 million
(exclusive of any previously unused authorizations). During the
year ended December 31, 2014, Kforce repurchased approximately
4.9 million shares of common stock at a total cost of approximately
$102.9 million under the Board authorized common stock
repurchase program. As of December 31, 2014, $29.7 million
remained available for future repurchases.
During the year ended December 31, 2014, Kforce declared
and paid dividends in cash of $12.8 million, or $0.41 per share.
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. Kforce currently expects to
continue to declare and pay quarterly dividends of an amount
similar to its December 2014 dividend of $0.11 per share. However,
the amount 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
and legal ability to pay.
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 through the execution
of a Consent and First Amendment, on December 27, 2013 through
the execution of a Second Amendment and Joinder, and further
amended on December 23, 2014 through the execution of a Third
Amendment (as amended to date, the “Credit Facility”) resulting
in a maximum borrowing capacity of $170.0 million, as well as
an accordion option of $50.0 million. The maximum borrowings
available to Kforce under the Credit Facility are limited to: (a) a
revolving Credit Facility of up to $170.0 million (the “Revolving Loan
Amount”) and (b) a $15.0 million sub-limit included in the Credit
Facility for letters of credit.
Available borrowings under the Credit Facility are limited to 85%
of the net amount of eligible accounts receivable, plus 85% of the
net amount of eligible unbilled accounts receivable, plus 80% of the
net amount of eligible employee placement accounts, minus certain
minimum availability reserve; provided, that the Firm may, subject
to certain conditions, elect to increase the available borrowing
limitation based on a percentage of the appraised fair market value
of the Firm’s corporate headquarters property and/or an additional
percentage of net eligible accounts receivable, net eligible unbilled
accounts receivable and net eligible employee placement accounts.
Borrowings under the Credit Facility are secured by substantially all
of the assets of the Firm, excluding the real estate located at the
Firm’s corporate headquarters in Tampa, Florida, unless the eligible
real estate conditions are met. 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: (1)
the prime rate, (2) the federal funds rate plus 0.50% or (3) 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 on a monthly basis equal to
(a) if the average daily aggregate revolver outstanding are less than
35% of the amount of the commitments, 0.35% or (b) if the average
daily aggregate revolver outstanding are greater than 35% of the
amount of the commitments, 0.25% times the amount by which the
maximum revolver amount exceeded the sum of the average daily
aggregate revolver outstanding, during the immediately preceding
month or shorter period if calculated for the first month hereafter
or on the termination date.
20 KFORCE INC. AND SUBSIDIARIES
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2014 (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)
Foreign defined benefit pension plan (g)
Total
Payments due by period
Total
$ 18,136
1,759
93,333
7,933
12,561
—
26,076
—
13,268
12,469
$185,535
Less than
1 year
$ 6,348
1,141
—
1,587
7,563
—
3,651
—
—
404
$20,694
1-3 Years
$ 9,099
612
—
3,173
4,987
—
1,883
—
—
15
$19,769
3-5 Years
$ 2,350
6
93,333
3,173
11
—
1,056
—
9,187
53
$109,169
More than
5 years
$ 339
—
—
—
—
—
19,486
—
4,081
11,997
$35,903
(a) The Credit Facility expires December 23, 2019.
(b) Kforce’s weighted average interest rate as of December 31, 2014 was 1.7%, 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, 2014 was $0.3 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 $3.2 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 $15.0 million under its Credit Facility.
(f) There is no funding requirement associated with the SERP. Kforce does not currently anticipate funding the SERP during 2015. Kforce has included the total undiscounted projected
benefit payments, as determined at December 31, 2014, in the table above. See Note 11 – “Employee Benefit Plans” in the Notes to Consolidated Financial Statements for more detail.
(g) Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2014 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 IRS audits, as well as state and other local income tax audits for various tax years. During 2014, the
IRS finished an examination of Kforce’s U.S. income tax return for 2010 and 2011 with no material adjustments. 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, 2014. 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 (2013). Based on our assessment
we believe that, as of December 31, 2014, 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, 2014 and
2013, and the related Consolidated Statements of Operations and Comprehensive Income (Loss), Changes in Stockholders’ Equity, and Cash
Flows for each of the three years in the period ended December 31, 2014. We also have audited Kforce’s internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) 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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2014, 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, 2014, based
on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Certified Public Accountants
Tampa, Florida
February 27, 2015
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 expense (income):
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 (loss) income:
Defined benefit pension and post-retirement 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
2014
$1,217,331
842,750
374,581
315,338
—
9,894
49,349
2013
$1,073,728
729,352
344,376
307,944
14,510
9,846
12,076
1,411
(19)
47,957
18,559
29,398
61,517
90,915
1,225
(78)
10,929
5,635
5,294
5,493
10,787
2012
$1,005,487
684,901
320,586
305,940
69,158
10,789
(65,301)
954
103
(66,358)
(24,227)
(42,131)
28,428
(13,703)
(688)
1,337
$ 90,227 $ 13,817 $ (12,366)
3,030
$0.94
$1.95
$2.89
$0.93
$1.94
$2.87
$0.16
$0.16
$0.32
$0.16
$0.16
$0.32
$(1.18)
$ 0.80
$(0.38)
$(1.18)
$ 0.80
$(0.38)
Weighted average shares outstanding – basic
31,475
33,511
35,791
Weighted average shares outstanding – diluted
31,691
33,643
35,791
Cash dividends declared per share
$0.41
$0.10
$ 1.00
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 $2,040 and $2,028, 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 15)
Stockholders’ Equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
Common stock, $0.01 par; 250,000 shares authorized, 70,029 and 69,480 issued, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Treasury stock, at cost; 40,616 and 35,751 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2014
2013
$ 1,238
204,710
3,311
4,980
10,170
224,409
35,330
30,349
22,855
5,011
45,968
$ 363,922
$ 38,104
52,208
986
2,885
94,183
93,333
562
36,456
224,534
$ 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
—
700
412,642
(371)
125,378
(398,961)
139,388
$ 363,922
—
695
404,600
317
47,612
(295,991)
157,233
$ 347,768
KFORCE INC. AND SUBSIDIARIES 25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Years Ended December 31,
Common stock—shares:
Shares at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures
Exercise of stock options
Shares at end of period
Common stock—par value:
Balance at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures 4
Exercise of stock options
Balance at end of period
Additional paid-in capital:
Balance at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures
Exercise of stock options
Income tax benefit from stock-based compensation
Stock-based compensation expense
Employee stock purchase plan
Balance at end of period
Accumulated other comprehensive (loss) income:
Balance at beginning of period
Pension and post-retirement plans, net of tax of $394, $1,919 and $854, respectively
Balance at end of period
Retained earnings:
Balance at beginning of period
Net income (loss)
Dividends, net of forfeitures ($0.41, $0.10 and $1.00 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.
2014
2013
2012
69,480
444
105
70,029
$ 695
1
$ 700
$ 404,600
369
1,213
595
5,475
390
$ 412,642
$ 317
(688)
$ (371)
$ 47,612
90,915
(13,149)
$ 125,378
35,751
4,896
4
(35)
40,616
68,531
882
67
69,480
$ 685
9
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
$(295,991)
(103,195)
(84)
309
$(398,961)
$(269,017)
(27,313)
—
339
$(295,991)
$(224,868)
(44,375)
(161)
387
$(269,017)
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 (used in) provided by operating activities:
Gain on sale of discontinued operations
Goodwill impairment
Deferred income tax provision (benefit), net
Provision for bad debts on accounts receivable
Depreciation and amortization
Stock-based compensation
Pension and post-retirement 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, net
Gain on cash surrender value of Company-owned life insurance
Gain from Company-owned life insurance proceeds
Other
(Increase) decrease in operating assets:
Trade receivables, net
Income tax refund receivable
Prepaid expenses and other current assets
Other assets, net
Increase (decrease) in operating liabilities:
Accounts payable and other current liabilities
Accrued payroll costs
Income taxes payable
Other long-term liabilities
Cash (used in) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisition, net of cash received
Proceeds from disposition of business
Proceeds from the disposition of assets held within the Rabbi Trust
Purchase of assets held within the Rabbi Trust
Proceeds from Company-owned life insurance
Other
Cash provided by (used in) 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 loan financing costs
Short-term vendor financing
Proceeds from exercise of stock options, net of shares tendered in payment of exercise
Excess tax benefit attributable to stock-based compensation
Repurchases of common stock
Cash dividend
Cash (used in) provided by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
2014
2013
2012
$ 90,915
$ 10,787 $ (13,703)
(64,600)
—
491
825
10,058
3,028
1,424
105
595
—
1,482
(1,036)
(849)
(152)
(40,339)
4,409
530
(27)
5,653
(248)
(35,529)
(2,317)
(25,582)
(6,011)
(2,611)
117,887
2,668
(2,436)
1,037
1
110,535
684,427
(653,701)
(1,280)
(460)
(160)
1,131
—
(101,771)
(12,776)
(84,590)
363
875
—
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
Cash and cash equivalents at end of year
$ 1,238
$ 875
$ 1,381
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
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”), 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.
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 less than 2% of net service
revenues for each of the three years ended December 31, 2014 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 have been prepared in
conformity with accounting principles generally accepted in the
United States of America (“GAAP”) and the rules of the SEC.
Certain prior year amounts have been reclassified to conform with
the current year presentation for amounts related to discontinued
operations (see Note 2 – “Discontinued Operations” for further
information on the discontinued operations).
Principles of Consolidation
The consolidated financial statements include the accounts of
Kforce Inc. and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
References in this document to “Kforce,” “the Company,” “we,” “the
Firm,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except
where the context indicates otherwise.
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: allowance
for doubtful accounts, fallouts and other accounts receivable
reserves; accounting for goodwill and identifiable intangible assets
and any related impairment; self-insured liabilities for workers’
compensation and health insurance; stock-based compensation;
obligations for pension plans 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.
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 1.0% and 1.1% as of December 31, 2014 and
December 31, 2013, respectively.
Revenue Recognition
Kforce considers amounts to be earned once evidence of an
arrangement has been obtained, delivery has occurred, fees are
fixed or determinable, and collectability is reasonably assured.
We earn revenues from two primary sources: Flexible billings and
Search fees.
Flexible billings are recognized as the services are provided
by Kforce’s Flexible Consultants. Net service revenues represent
services rendered to customers less credits, discounts, rebates
and revenue-related reserves. Revenues include reimbursements
of travel and out-of-pocket expenses (“billable expenses”) with
equivalent amounts of expense recorded in direct costs of services.
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.
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. Our
GS segment does not generate any Search fees. Our GS segment
generates revenues under the following contract arrangements.
• Revenues for time-and-materials contracts, which accounts
for approximately 69% 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 20%
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 11% of this segment’s revenues are
recognized under these arrangements.
Direct Costs of Services
Direct costs of services are composed of all related costs of
employment for its Flexible Consultants, including payroll wages,
payroll taxes, payroll-related insurance and certain fringe benefits,
as well as subcontractor costs. 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 income tax
expense (benefit) in the accompanying Consolidated Statement of
Operations and Comprehensive Income (Loss).
Fair Value Measurements
Kforce uses fair value measurements in areas that include,
but are not limited to: the impairment testing of goodwill and
intangible and long-lived assets; stock-based compensation
arrangements; valuing the investment in money market funds
within Kforce’s deferred compensation plan; and our contingent
liability. 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 approaches 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 assumptions related to discount rates, forecasted operating
results, long-term growth rates, the determination of comparable
companies, 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, technology,
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 fifteen years. The
impairment evaluation for indefinite-lived intangible assets, which
for Kforce consists 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 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 $0.4 million, $1.0 million and $1.7 million during the years
ended December 31, 2014, 2013 and 2012, 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 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 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.
Workers’ Compensation
Kforce retains the economic burden for the first $250 thousand
per occurrence in workers’ compensation claims except: (1) in states
that require participation in state-operated insurance funds and (2)
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,
premiums paid to state-operated insurance funds and an estimate
for Kforce’s liability for 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 thousand in claims annually. Additionally, for all claim
amounts exceeding $275 thousand, Kforce retains the risk of loss
up to an aggregate annual loss of those claims of $500 thousand.
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 Pension Benefits
Kforce recognizes the underfunded status of its defined benefit
pension plans as a 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 pension
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 if, as of the beginning of the year, that
net gain or loss exceeds 10% of the projected 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
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
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.
30 KFORCE INC. AND SUBSIDIARIES
The following table sets forth the computation of basic and
diluted earnings (loss) per share for the three years ended
December 31 (in thousands, except per share amounts):
Years Ended December 31,
2014
2013
2012
Numerator:
Income (loss) from
continuing operations
Income from discontinued
operations, net of tax
$29,398 $ 5,294 $(42,131)
61,517
5,493 28,428
Net income (loss)
$90,915 $10,787 $(13,703)
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
31,475 33,511 35,791
—
132
216
31,691
33,643 35,791
$0.94 $0.16 $(1.18)
0.80
0.16
1.95
Earnings (loss) per share—basic
$2.89 $0.32 $(0.38)
Earnings (loss) per share—diluted:
From continuing operations
From discontinued operations
Earnings (loss) per share—diluted
$0.93
1.94
$2.87
$0.16
0.16
$0.32
$(1.18)
0.80
$(0.38)
For the years ended December 31, 2014 and 2013, there were no
shares of common stock excluded from the computation of diluted
earnings per share. For the year ended December 31, 2012, there
were 33 thousand shares of common stock excluded from the
computation of dilutive earnings per share because their inclusion
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.
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 stock-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: (1) the supplemental executive retirement plan which
covers a limited number of executives and (2) a defined benefit
plan covering all eligible employees in our Philippine operations.
Because each of these plans is unfunded as of December 31, 2014,
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 forfeitable restricted
stock, at the same rate as the cash dividend on common stock and
based on the closing stock price on the record date. Such additional
shares have the same vesting terms and conditions as the outstanding
and unvested restricted stock. The following summarizes the cash
dividends declared for the three years ended December 31:
Years Ended December 31,
2014
Cash dividends declared per share
$0.41
2013
$0.10
2012
$1.00
Kforce currently expects to continue to declare and pay quarterly
dividends of an amount similar to its December 2014 dividend
of $0.11 per share. However, the amount 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 and legal ability to pay.
New Accounting Standards
In August 2014, the FASB issued authoritative guidance regarding
disclosure of uncertainties about an entity’s ability to continue as
a going concern, which requires management to evaluate, at each
interim and annual reporting period, whether there are conditions
or events that raise substantial doubt about the entity’s ability to
continue as a going concern within one year after the date the financial
statements are issued, and provide related disclosures. This guidance
is to be applied for annual periods ending after December 15, 2016,
and for annual and interim periods thereafter, and early adoption is
permitted. We do not anticipate a material impact to the consolidated
financial statements upon adoption.
In May 2014, the FASB issued authoritative guidance regarding
revenue from contracts with customers, which specifies that revenue
should be recognized when promised goods or services are transferred
to customers in an amount that reflects the consideration which the
company expects to be entitled in exchange for those goods or services.
This guidance is to be applied for annual reporting periods beginning
on or after December 15, 2016 and interim periods within those annual
periods and will require enhanced disclosures. Kforce is currently
evaluating the potential impact of the accounting and disclosure
requirements on the consolidated financial statements; we do not
currently anticipate a material impact to the consolidated financial
statements upon adoption.
In April 2014, the FASB issued authoritative guidance regarding
reporting discontinued operations and disclosures of disposals of
components of an entity, which specifies additional thresholds for
a disposal to qualify as a discontinued operation and requires new
disclosures of both discontinued operations and certain other disposals
that do not meet the definition of a discontinued operation. The
guidance is to be applied for annual reporting periods beginning on
or after December 15, 2014, and early adoption is permitted. Kforce
elected not to adopt this standard early.
2. DISCONTINUED OPERATIONS
Effective August 3, 2014, Kforce sold to RCM Acquisition, Inc.
(the “Purchaser”), under a Stock Purchase Agreement (the “HIM
SPA”) dated August 4, 2014, all of the issued and outstanding stock
of KHI, a wholly-owned subsidiary of Kforce Inc. and operator of
KFORCE INC. AND SUBSIDIARIES 31
the former HIM reporting segment, for a total cash purchase price
of $119.0 million plus a post-closing working capital adjustment of
$96 thousand.
In connection with the sale, Kforce entered into a Transition
Services Agreement (the “HIM TSA”) with the Purchaser to provide
certain post-closing transitional services for a period not to exceed
12 months. The fees for these services will be generally equivalent to
Kforce’s cost, and additional services may be provided at negotiated
rates. Although the services provided under the HIM TSA generate
continuing cash flows between Kforce and the Purchaser, the
amounts are not considered to be direct cash flows of the discontinued
operation nor are they significant to the ongoing operations of either
entity. Kforce has no contractual ability through the HIM TSA, HIM
SPA or any other agreement to significantly influence the operating
or financial policies of the Purchaser. As a result, Kforce has no
significant continuing involvement in the operations of KHI and, as
such, has classified the operating results of the former HIM reporting
segment as discontinued operations.
In accordance with and defined within the HIM SPA, Kforce is
obligated to indemnify the Purchaser for certain losses, as defined,
in excess of $1.19 million, although this deductible does not
apply to certain specified losses. Kforce’s obligations under the
indemnification provisions of the HIM SPA, with the exception of
certain items, ceased 18 months after the sale closed and are, in some
cases, limited to an aggregate of $8.925 million; this only applies to
certain specified losses. While it cannot be certain, Kforce believes any
material exposure under the indemnification provisions is remote
and, as a result, has not recorded a liability as of December 31, 2014.
The total financial results of HIM have been presented as
discontinued operations in the accompanying Consolidated
Statements of Operations and Comprehensive Income (Loss).
The following summarizes the revenues and pretax profits of
HIM for the three years ended December 31 (in thousands):
Years Ended December 31,
2014
2013
2012
Net service revenues
Income from discontinued
operations, before
$ 56,670 $78,159 $76,992
income taxes
$103,512 $ 9,169 $10,792
For the year ended December 31, 2014, the income from
discontinued operations included a gain, net of transaction costs, on
the sale of discontinued operations of $94.3 million pretax, or $56.1
million after tax. The transaction costs primarily included legal fees,
stock-based compensation related to the acceleration of restricted
stock, commissions and transaction bonuses in the form of cash and
common stock, which, in the aggregate, totaled $11.0 million. Stock-
based compensation related to acceleration of restricted stock and
transaction bonuses paid in stock in lieu of cash was $2.4 million.
Kforce utilized the proceeds from the sale of HIM initially to pay
down the outstanding borrowings under our Credit Facility and
ultimately to repurchase shares of common stock.
Certain of the assets and liabilities pertaining to the discontinued
operations of HIM as of the closing date were sold to or assumed by
the Purchaser, and deconsolidated from Kforce. The following table
summarizes the carrying amounts of the major classes of assets
and liabilities at December 31, 2013 related to the discontinued
operation, including those not sold to or assumed by the Purchaser
(in thousands):
32 KFORCE INC. AND SUBSIDIARIES
December 31, 2013
Assets:
Trade receivables
Goodwill
Prepaid expenses and other current assets
Fixed assets, net
Other assets, net
Total assets
Liabilities:
Accounts payable and other accrued liabilities
Accrued payroll costs
Other long-term liabilities
Total liabilities
Net assets
$11,755
4,887
219
162
88
17,111
712
4,177
868
5,757
$11,354
On March 17, 2012, Kforce entered into a Stock Purchase
Agreement (the “KCR SPA”) to sell all of the issued and outstanding
stock of KCR to inVentiv Health, Inc. (“inVentiv”). On March 31, 2012,
the Firm closed the sale of KCR to the Purchaser for a total cash
purchase price of $57.3 million, after giving effect to a $7.3 million
post-closing working capital adjustment.
Kforce also entered into a Transition Services Agreement (the
“KCR TSA”) with inVentiv to provide certain post-closing transitional
services for a period not to exceed 18 months’ time. Services
provided by Kforce under the KCR 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 KCR SPA, Kforce was obligated to indemnify
inVentiv for certain losses, as defined, in excess of $375 thousand
although this deductible did not apply to certain losses. Kforce’s
obligations under the indemnification provisions of the KCR SPA,
with the exception of certain items, ceased 18 months after the sale
closed and were limited to an aggregate of $5.0 million, although
this cap did not apply to certain losses. Kforce believes any exposure
under the indemnification provisions is remote, particularly given
that the 18 months time period for general indemnification
claims has now passed, and, as a result, Kforce has not recorded a
liability as of December 31, 2014. 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 revenues and pretax profits of
KCR for the year ended December 31, 2012 (in thousands):
December 31, 2012
Net service revenues
Income from discontinued operations,
before income taxes
$29,808
$39,735
In connection with the disposition of KCR, 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 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
of $31.3 million, which included $0.8 million of payroll taxes.
This expense was classified in selling, general and administrative
expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss).
Income tax expense as a percentage of income from discontinued
operations, before income taxes, for the year ended December 31,
2014, 2013 and 2012 was 40.6%, 40.1% and 43.7%, respectively.
3. FIXED ASSETS
Major classifications of fixed assets and related useful lives are
summarized as follows (in thousands):
December 31,
Useful Life
2014
2013
Land
Building and improvements
Furniture and equipment
Computer equipment
Leasehold improvements
Capital leases
5-40 years
5-10 years
3-5 years
3-5 years
3-5 years
$ 5,892 $ 5,892
25,191
9,701
8,966
6,894
4,306
25,304
10,881
6,618
8,347
3,762
60,804
60,950
Less accumulated depreciation
and amortization
(25,474)
(24,222)
$ 35,330 $ 36,728
Depreciation and amortization expense during the years ended
December 31, 2014, 2013 and 2012 was $6.3 million, $5.9 million
and $5.4 million, respectively.
4. INCOME TAXES
The provision for income taxes from continuing operations
consists of the following (in thousands):
Years Ended December 31,
2014
2013
2012
Current:
Federal
State
Deferred
$15,782
2,527
250
$4,140
449
1,046
$ (4,371)
(1,716)
(18,140)
Deferred income tax assets and liabilities are composed of the
following (in thousands):
December 31,
Deferred taxes, current:
Assets:
2014
2013
Accounts receivable reserves
Accrued liabilities
Deferred compensation obligation
Pension and post-retirement
$ 804
3,123
1,426
$ 779
2,902
1,111
benefit plans
Other
—
75
19
75
Deferred tax assets, current
5,428
4,886
Liabilities:
Prepaid expenses
Deferred tax asset, net—current
Deferred taxes, non-current:
Assets:
Accrued liabilities
Deferred compensation obligation
Stock-based compensation
Pension and post-retirement
benefit plans
Goodwill and intangible assets
Deferred revenue
Other
Deferred tax assets, non-current
Liabilities:
Fixed assets
Other
Deferred tax liabilities, non-current
Valuation allowance
(448)
4,980
(224)
4,662
649
6,324
1,185
5,125
10,407
28
995
24,713
(1,651)
(122)
(1,773)
(85)
579
6,896
773
4,916
11,750
106
1,531
26,551
(2,693)
(503)
(3,196)
(85)
Deferred tax asset, net—non-current 22,855
23,270
$18,559
$5,635
$(24,227)
Net deferred tax asset
$27,835
$27,932
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,
2014
2013
2012
35.0%
Federal income tax rate
State income taxes,
net of Federal tax effect
3.2
Non-deductible goodwill impairment —
Non-deductible compensation
1.1
Non-deductible meals
and entertainment
Other
1.1
(1.7)
35.0%
35.0%
4.1
4.3
—
5.2
(3.4)
—
5.2
3.0
—
(0.3)
Effective tax rate
38.7%
51.6%
36.5%
At December 31, 2014, Kforce had approximately $26.8 million 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 2033.
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 IRS audits, as well as state and
other local income tax audits for various tax years. During 2014, the
IRS finished an examination of Kforce’s U.S. income tax return for
2010 and 2011 with no material adjustments. 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.
KFORCE INC. AND SUBSIDIARIES 33
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits for the years ended December 31, 2014,
2013 and 2012 is as follows (in thousands):
5. OTHER ASSETS
Other assets consisted of the following (in thousands):
December 31,
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
2014
$ 403
2013
$133
2012
$ 72
90
—
269
25
(35)
(24)
(180) —
36
25
—
—
Ending balance
$ 278
$403
$133
The entire amount of these unrecognized tax benefits as of
December 31, 2014, 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 2010.
December 31,
Assets held in Rabbi Trust
Capitalized software, net of amortization
Deferred loan costs, net of amortization
Other non-current assets
2014
2013
$25,715 $24,910
5,472
288
321
3,678
608
348
$30,349 $30,991
As of December 31, 2014, the assets held in Rabbi Trust were
$25.7 million, which was related to the cash surrender value of
life insurance policies. As of December 31, 2013, the assets held
in Rabbi Trust were $24.9 million, which was comprised of $24.0
million related to the cash surrender value of life insurance policies
and $0.9 million of money market 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.
Kforce capitalized software purchases, as well as direct costs
associated with software developed for internal use of approximately
$1.2 million and $2.2 million during the years ended December 31,
2014 and 2013, respectively. Accumulated amortization of capitalized
software was $37.6 million and $34.8 million as of December 31,
2014 and 2013, respectively. Amortization expense of capitalized
software during the years ended December 31, 2014, 2013 and 2012
was $2.9 million, $3.2 million and $4.6 million, 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, 2014 and 2013 (in thousands):
Health
Balance as of December 31, 2012
Impairment of goodwill
Balance as of December 31, 2013
Additions (a)
Disposition of HIM (b)
Balance as of December 31, 2014
$17,034
—
$ 17,034
—
—
$ 17,034
$8,006
—
$8,006
—
—
$8,006
$ 4,887
—
$ 4,887
—
(4,887)
$ —
$ 33,483
(14,510)
$ 18,973
1,955
—
Total
$ 63,410
(14,510)
$ 48,900
1,955
(4,887)
$ 20,928
$ 45,968
Technology Accounting Management
Information Government
Solutions
Finance and
(a) The increase is due to the acquisition of a business within our GS reporting segment.
(b) The decrease is due to the disposition of our HIM reporting segment. See Note 2 – “Discontinued Operations” for additional discussion.
Kforce performed its annual impairment assessment of the
carrying value of goodwill as of December 31, 2014 and 2013.
During the impairment test performed as of December 31, 2014,
Kforce performed a step 1 analysis for each reporting unit and
compared the carrying value of Tech, FA and GS to the respective
estimated fair values. Kforce concluded there were no indications
of impairment for its reporting units during the December 31, 2014
annual impairment tests. As of December 31, 2013 and 2012, for
our Tech and FA reporting units, we assessed qualitative factors
to determine whether the existence of events or circumstances
indicated that it was more likely than not that the fair value of the
reporting units was less than its carrying amount. We concluded
that it was more likely than not that the fair value of the reporting
units were more than its carrying amount and therefore we were
not required to perform any additional analysis. In 2013 and 2012,
for our GS reporting unit, we performed the two-step analysis and
compared the carrying value to its estimated fair value noting that
the carrying value exceeded the fair value of the reporting unit
which resulted in an impairment to goodwill in 2013 and 2012.
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 no indication that
the carrying values of any of our reporting units were likely impaired
throughout 2014.
As of December 31, 2014, for our Tech, FA and GS 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
34 KFORCE INC. AND SUBSIDIARIES
financial forecasts which were developed by management for
planning purposes and were consistent with those distributed
within Kforce. Cash flows beyond the discrete 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. The market approaches consist of: (1) the guideline company
method and (2) the 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. 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.
Upon completion of the first step of the goodwill impairment
analysis as of December 31, 2014 for our Tech, FA and GS
reporting units, it was determined that the fair value exceeded its
carrying value. As a result, no impairment charges were recognized
for the Tech, FA and GS reporting units during the year ended
December 31, 2014.
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. Upon completion of the first step of the goodwill
impairment analysis as of December 31, 2013 for our GS reporting
unit, it was determined that there was an indication of impairment.
Because indicators of impairment existed, we commenced the
second step of the goodwill impairment analysis. 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 $14.5 million which is presented separately
in the Consolidated Statements of Operations and Comprehensive
Income (Loss). A tax benefit in the amount of $5.2 million 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 $69.2 million
which included a related tax benefit of $24.7 million during the year
ended December 31, 2012. This impairment charge included an
incremental adjustment of $3.9 million with a related tax benefit
of $1.4 million resulting from the completion of the second step
analysis during the fourth quarter of 2012.
Total goodwill impairment for the years ending December 31,
2014, 2013 and 2012 was nil, $14.5 million and $69.2 million,
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 three years ended December 31,
2014 (in thousands):
Goodwill Carrying Value by Reporting Unit as of:
December 31, 2014
December 31, 2013
December 31, 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
Other Intangible Assets
$ 156,391
(139,357)
$ 17,034
$ 19,766
(11,760)
$ 8,006
$ 104,596
(83,668)
$ 20,928
$ 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
The gross and net carrying values of intangible assets as of December 31, 2014 and 2013, by major intangible asset class, are as follows
(in thousands):
December 31, 2014
December 31, 2013
Definite-lived intangible assets
Customer relationships, customer contracts, technology and other
Gross amount
Accumulated amortization
Carrying value
Indefinite-lived intangible assets
Trade name and trademark
Gross amount
Accumulated impairment losses
Carrying value
$ 28,603
(25,832)
$ 2,771
$ 2,240
—
$ 2,240
$ 27,940
(25,187)
$ 2,753
$ 2,240
—
$ 2,240
KFORCE INC. AND SUBSIDIARIES 35
Amortization expense on intangible assets for each of the three
years ended December 31, 2014, 2013 and 2012 was $0.7 million,
$0.7 million and $0.9 million, respectively. Amortization expense
for 2015, 2016, 2017, 2018, 2019 and thereafter is expected to be
approximately $0.8 million, $0.6 million, $0.3 million, $0.3 million,
$0.3 million and $0.4 million, respectively.
There was no impairment expense related to indefinite-lived
intangible assets during the years ended December 31, 2014, 2013
or 2012.
7. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the
following (in thousands):
December 31,
Accounts payable
Accrued liabilities
2014
2013
$21,863
16,241
$19,445
12,376
$38,104
$31,821
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, 2014 and 2013 was $535
thousand and $695 thousand, 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 (in thousands):
December 31,
Payroll and benefits
Payroll taxes
Health insurance liabilities
Workers’ compensation liabilities
2014
2013
$43,797
3,062
3,417
1,932
$43,059
9,111
2,993
1,709
$52,208
$56,872
9. 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 through the
execution of a Consent and First Amendment, on December 27,
2013 through the execution of a Second Amendment and Joinder,
and further amended on December 23, 2014 through the execution
of a Third Amendment resulting in a maximum borrowing capacity
of $170.0 million, as well as an accordion option of $50.0 million.
The maximum borrowings available to Kforce under the Credit
Facility are limited to: (a) a revolving Credit Facility of up to $170.0
million (the “Revolving Loan Amount”) and (b) a $15.0 million sub-
limit included in the Credit Facility for letters of credit.
Available borrowings under the Credit Facility are limited to 85%
of the net amount of eligible accounts receivable, plus 85% of the
net amount of eligible unbilled accounts receivable, plus 80% of the
net amount of eligible employee placement accounts, minus certain
minimum availability reserve; provided, that the Firm may, subject
to certain conditions, elect to increase the available borrowing
limitation based on a percentage of the appraised fair market value
of the Firm’s corporate headquarters property and/or an additional
percentage of net eligible accounts receivable, net eligible unbilled
accounts receivable and net eligible employee placement accounts.
36 KFORCE INC. AND SUBSIDIARIES
Borrowings under the Credit Facility are secured by substantially all
of the assets of the Firm, excluding the real estate located at the
Firm’s corporate headquarters in Tampa, Florida, unless the eligible
real estate conditions are met. 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 (1)
the prime rate, (2) the federal funds rate plus 0.50% or (3) 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 on a monthly basis equal to:
(a) if the average daily aggregate revolver outstanding are less than
35% of the amount of the commitments, 0.35% or (b) if the average
daily aggregate revolver outstanding are greater than 35% of the
amount of the commitments, 0.25% times the amount by which the
maximum revolver amount exceeded the sum of the average daily
aggregate revolver outstanding, during the immediately preceding
month or shorter period if calculated for the first month hereafter
or on the termination date.
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. Our
ability to make distributions or repurchase equity securities could be
limited if the Firm’s availability is less than the greater of 12.5% of
the aggregate amount of the commitment of all lenders under the
Credit Facility and $20.6 million. Kforce had availability under the
Credit Facility of $39.6 million as of December 31, 2014; therefore,
the minimum fixed charge coverage ratio was not applicable and
our ability to make distributions or repurchase equity securities was
not restricted. Kforce believes that it will be able to maintain these
minimum availability requirements; 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, or could limit our
ability to make distributions or repurchase equity securities. Kforce
believes the likelihood of default is remote. The Credit Facility
expires December 23, 2019.
As of December 31, 2014 and 2013, $93.3 million and $62.6
million was outstanding under the Credit Facility, respectively.
During the three months ended December 31, 2014, maximum
outstanding borrowings under the Credit Facility were $93.3 million.
As of February 24, 2015, $97.0 million was outstanding and $39.7
million was available under the Credit Facility.
10. OTHER LONG-TERM LIABILITIES
long-term
Other
liabilities consisted of the following
(in thousands):
December 31,
Deferred compensation plan (Note 11)
Supplemental executive
retirement plan (Note 11)
Supplemental executive
retirement health plan (Note 11)
Other
2014
2013
$22,425
$22,247
10,197
7,852
—
3,834
2,627
3,830
$36,456
$36,556
11. 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 $9.8 million was paid in April 2012. Kforce
recognized total compensation expense related to the ALTI of $9.8
million during the year ended December 31, 2012. No compensation
expense related to the ALTI was recorded during the years ended
December 31, 2014 or 2013.
401(k) Savings Plans
Kforce has a qualified defined contribution 401(k) Retirement
Savings Plan (the “Kforce 401(k) Plan”) covering substantially all
Kforce 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 KGS. 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 $1.3 million and $1.0
million for the above plans as of December 31, 2014 and 2013,
respectively. The Kforce 401(k) Plan and Government 401(k) Plan
held a combined 229 thousand and 317 thousand shares of Kforce’s
common stock as of December 31, 2014 and 2013, 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 35 thousand, 41 thousand and 51 thousand
shares of common stock at an average purchase price of $19.76,
$14.88 and $12.55 per share during the years ended December 31,
2014, 2013 and 2012, respectively. All shares purchased under
the employee stock purchase plan were settled using Kforce’s
treasury stock.
Deferred Compensation Plan
Kforce has a Non-Qualified Deferred Compensation Plan
(the “Kforce NQDC Plan”) and a Kforce Non-Qualified Deferred
Compensation Government Practice Plan (the “Government
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, 2014 and
2013, amounts included in accounts payable and other accrued
liabilities related to the deferred compensation plan totaled $3.7
million and $3.1 million, respectively. Amounts included in other
long-term liabilities related to the deferred compensation plan
totaled $22.4 million and $22.2 million as of December 31, 2014 and
2013, 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 income from
continuing operations of $187 thousand was recognized for the
plans for the year ended December 31, 2014. Compensation expense
from continuing operations of $566 thousand and $635 thousand
was recognized for the plans for the years ended December 31, 2013
and 2012, 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 and money market
funds, was $25.7 million and $24.9 million as of December 31, 2014
and 2013, respectively, and is recorded in Other assets, net in the
accompanying Consolidated Balance Sheets. For the years ended
December 31, 2014, 2013 and 2012, there was nil, $15 thousand
in losses and $519 thousand 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).
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, 2014, 2013 and 2012, the discount rate used
to determine the actuarial present value of the projected benefit
obligation and pension expense was 4.7%, 5.0% and 6.0%, 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, 2014, 2013 and 2012
was 3.0%, 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, 2014, 2013 and
2012, net periodic benefit cost was $124 thousand, $92 thousand
and $128 thousand, respectively.
As of December 31, 2014 and 2013, the projected benefit obligation
associated with our foreign defined benefit pension plan was $1.6
million and $1.4 million, respectively, which is classified in other long-
term liabilities in the accompanying Consolidated Balance Sheets.
Supplemental Executive Retirement Plan
Kforce maintains a SERP for the benefit of certain executive
officers. 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 covered
executive officers. The SERP is a non-qualified benefit plan
and does not include elective deferrals of covered executive
officers’ compensation.
KFORCE INC. AND SUBSIDIARIES 37
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
covered 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 covered 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, 2014,
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
2014
2013
3.75%
3.75%
—% —%
4.00%
4.00%
The following represents the weighted average actuarial
assumptions used to determine net periodic benefit cost for the
years ended:
December 31,
2014
2013
2012
Discount rate
Expected long-term rate of return
on plan assets
—%
Rate of future compensation increase 4.00%
3.75%
2.50%
3.25%
—% —%
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 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, 2014 and 2013,
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 covered
executive officers and future target compensation levels for its
covered executive officers taking into account the covered executive
officers’ 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 (in thousands):
December 31,
Service cost
Interest cost
Amortization of actuarial loss
Settlement loss
Net periodic benefit cost
2014
$1,164
294
—
—
$1,458
2013
2012
$2,018
471
97
24
$2,087
560
164
—
$2,610
$2,811
Changes in Benefit Obligation
The following represents the changes in the benefit obligation for
the years ended (in thousands):
December 31,
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial experience and changes
in actuarial assumptions
Curtailment
Benefits paid
2014
2013
$ 7,852
1,164
294
$ 19,658
2,018
471
887
—
—
(1,475)
(2,138)
(10,682)
Projected benefit obligation, ending
$10,197
$ 7,852
During the year ended December 31, 2014, there were no
payments made under the SERP. 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 $2.1 million 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 $10.7 million as a result of the participant’s separation from
service on June 1, 2013. The present value of the projected benefit
obligation as of December 31, 2014 and 2013 was $10.2 million
and $7.9 million, respectively, and is recorded in other long-term
liabilities in the accompanying Consolidated Balance Sheets.
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, 2014. Kforce does not currently anticipate
funding the SERP during the year ending December 31, 2015.
38 KFORCE INC. AND SUBSIDIARIES
Estimated Future Benefit Payments
Undiscounted benefit payments by the SERP, which reflect the
anticipated future service of participants, expected to be paid are
as follows (in thousands):
Changes in Post-retirement Benefit Obligation
The following represents the changes in the post-retirement
benefit obligation for the years ended (in thousands):
December 31,
2014
2013
Projected Annual
Benefit Payments
Accumulated post-retirement
benefit obligation, beginning
2015
2016
2017
2018
2019
2020-2024
Thereafter
$ —
—
—
—
9,187
—
4,081
Supplemental Executive Retirement Health Plan
Kforce maintained a Supplemental Executive Retirement
Health Plan (“SERHP”) to provide post-retirement health and
welfare benefits to certain executives. The vesting and eligibility
requirements mirrored that of the SERP, and no advance funding
was required by Kforce or the participants. Consistent with the SERP,
none of the benefits earned were attributable to services provided
prior to the effective date of the plan.
During the year ended December 31, 2014, Kforce terminated
the Company’s SERHP and settled all future benefit obligations by
making lump sum payments totaling approximately $3.9 million,
which resulted in a net settlement loss of $725 thousand recorded
in selling, general and administrative expenses in the corresponding
Consolidated Statement of Operations and Comprehensive Income
(Loss). The termination effectively removed Kforce’s related post-
retirement benefit obligation.
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 thousand to the projected benefit obligation and in the
recognition of a curtailment gain of $359 thousand recorded in
selling, general and administrative expenses in the corresponding
Consolidated Statement of Operations and Comprehensive Income
(Loss). The current portion of the accumulated post-retirement
benefit obligation as recorded in other current liabilities in the
accompanying Consolidated Balance Sheets was $47 thousand as
of December 31, 2013. The long-term portion of the accumulated
post-retirement benefit obligation as of December 31, 2013 was
$2.6 million and is recorded in other long-term liabilities in the
accompanying Consolidated Balance Sheets.
Net Periodic Post-retirement Benefit Cost
The following represents the components of net periodic post-
retirement benefit cost for the years ended (in thousands):
December 31,
Service cost
Interest cost
Amortization of actuarial loss
Settlement/curtailment
loss/(gain)
Net periodic benefit cost
2014
$174
78
—
725
$977
2013
$ 649
134
86
2012
$ 919
150
272
(359)
—
$ 510
$1,341
Service cost
Interest cost
Actuarial experience and changes
in actuarial assumptions
Settlement/curtailment
loss/(gain)
Benefits paid
Accumulated post-retirement benefit
obligation, ending
$ 2,674
174
78
$3,574
649
134
234
(834)
725
(3,885)
(785)
(64)
$ —
$2,674
12. 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 plan have included money market funds, which are
held within the Rabbi Trust. Assets held within the money market
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, 2014 and 2013. Transfers between
levels are deemed to have occurred if the lowest level of input were
to change.
KFORCE INC. AND SUBSIDIARIES 39
Kforce’s measurements at fair value on a recurring and non-recurring basis as of December 31, 2014 and 2013 were as follows
(in thousands):
Assets/(Liabilities) Measured at Fair Value:
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Asset/(Liability)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
As of December 31, 2014:
Recurring basis:
Money market funds (1)
Contingent liability (2)
As of December 31, 2013:
Recurring basis:
Money market funds (1)
Non-recurring basis:
Goodwill (3)
$ —
$ (477)
$ 869
$48,900
$ —
$ —
$869
$ —
$—
$—
$ —
$ (477)
$—
$ —
$ —
$48,900
(1) See Note 11 – “Employee Benefit Plans” and Note 5 – “Other Assets” for additional discussion.
(2) The contingent liability relates to the acquisition of a business within our GS reporting segment.
(3) This amount is representative of the aggregated goodwill balance. The portion measured at fair value as of December 31, 2013 of $19.0 million 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.
13. STOCK INCENTIVE PLANS
On April 5, 2013, the shareholders approved the 2013 Stock
Incentive Plan, which was previously adopted by the Board 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 4.0 million. 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 7.9 million.
The 2013 Stock Incentive Plan and 2006 Stock Incentive Plan allow
for the issuance of stock options, SARs, restricted stock and common
stock, subject to share availability. Vesting of equity 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 stock-based compensation expense recognized related
to all equity awards during the years ended December 31, 2014,
2013 and 2012 was $5.5 million, $2.6 million and $26.2 million,
respectively. During the years ended December 31, 2014, 2013
and 2012, Kforce recognized stock-based compensation expense
from continuing operations of $3.0 million, $2.6 million and $26.2
million, respectively. The related tax benefit for the three years
ended December 31, 2014 was $1.2 million, $1.0 million and $10.2
million, respectively.
Stock Options
The following table presents the activity under each of the stock
incentive plans discussed above for the three years ended December 31,
2014, 2013 and 2012 (in thousands, except per share amounts):
Outstanding as of December 31, 2011
Exercised
Forfeited/Cancelled
Outstanding as of December 31, 2012
Exercised
Forfeited/Cancelled
Outstanding as of December 31, 2013
Exercised
Forfeited/Cancelled
Outstanding and Exercisable as of December 31, 2014
Incentive
Stock Option Plan
226
(65)
(7)
154
(57)
—
97
(57)
(18)
22
2006 Stock
Incentive
Plan
98
(5)
—
93
(10)
—
83
(48)
—
35
Weighted
Average Exercise
Total Intrinsic
Value of
Price Per Share Options Exercised
$10.79
$10.48
$11.00
$10.87
$ 8.98
$ —
$11.57
$11.61
$11.00
$11.69
$ 238
$ 573
$1,029
Total
324
(70)
(7)
247
(67)
—
180
(105)
(18)
57
The following table summarizes information about employee and director stock options under all of the plans mentioned above as of
December 31, 2014 (in thousands, except per share amounts):
Outstanding and Exercisable
Number of Awards
(#)
—
57
57
Weighted Average Remaining
Contractual Term (Yrs)
—
1.56
1.56
Weighted Average
Exercise Price ($)
$ —
$11.69
$11.69
Total
Intrinsic Value
$ —
713
$713
Range of Exercise Prices
$0.00—$ 9.13
$9.13—$14.45
40 KFORCE INC. AND SUBSIDIARIES
No compensation expense was recorded during the years ended
December 31, 2014, 2013 or 2012 as a result of the grant date fair
value having been fully amortized as of December 31, 2009. As of
December 31, 2014, there was no unrecognized compensation cost
related to non-vested options.
Restricted Stock
Kforce’s annual restricted stock grants made to 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 determined by the
Compensation Committee. Additionally, Kforce, with the approval
of the Compensation Committee, grants restricted stock in varying
amounts as determined appropriate during the year to retain
executives and management. Restricted stock granted during the
year ended December 31, 2014 will vest over a period of two to ten
years, with equal vesting annually.
During the three months ended December 31, 2013, Kforce
granted certain restricted stock awards containing time-based
vesting terms of ten years with an equal number of shares vesting in
each of years six through ten, as well as a performance-accelerations
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 for a period of ten trading days. During
the three months ended March 31, 2014, the Firm modified all
awards containing a performance-acceleration feature that were
granted during the three months ended December 31, 2013, as
follows: (1) eliminated the performance-acceleration feature and
(2) reduced the time-based vesting term to five years, with equal
vesting annually. The total number of restricted shares impacted
by this modification was 268 thousand, excluding already forfeited
shares, and the number of employees impacted was 87. The total
incremental compensation cost resulting from the modification
was $109 thousand, which will be amortized on a straight-line basis
over the requisite service period of the modified awards.
Restricted stock contain the same voting rights as other common
stock and are included in the number of shares of common stock
issued and outstanding. Restricted stock contain the right to
forfeitable 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, 2014 (in thousands, except per share amounts):
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
Granted
Vested
Forfeited
Outstanding as of December 31, 2014
Number of Restricted Stock
Weighted Average
Grant Date
Fair Value
Total Intrinsic
Value of Restricted
Stock Vested
3,334
288
(3,191)
(393)
38
904
(109)
(22)
811
528
(273)
(84)
982
$14.30
$12.67
$14.15
$16.37
$12.11
$16.72
$14.15
$15.43
$16.89
$20.18
$17.37
$18.38
$18.55
$47,407
$ 2,092
$ 5,624
(a) In February 2012, the Compensation Committee certified 2011 performance measures, which resulted in the forfeiture of approximately 393 thousand of these shares of restricted
stock which was consistent with estimated forfeitures during 2011 that was used for compensation expense recognition purposes.
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.
In connection with the disposition of HIM, as discussed within
Note 2—“Discontinued Operations,” stock-based compensation
related to acceleration of restricted stock was approximately
$0.6 million.
In connection with the Firm’s organizational realignment,
Kforce terminated two of its covered executive officers 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 $1.1 million
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 $22.2
million during the three months ended December 31, 2013.
As of December 31, 2014, total unrecognized compensation
expense related to restricted stock was $11.5 million, which will be
recognized over a weighted average remaining period of 4.8 years.
Common Stock
As discussed within Note 2 – “Discontinued Operations,” the
transaction expense related to the sale of HIM included commissions
and transaction bonuses paid by the Firm in the form of Kforce
common stock. As a result, during the year ended December 31,
2014, Kforce issued 92 thousand shares of common stock and
recognized stock-based compensation expense of approximately
$1.8 million.
KFORCE INC. AND SUBSIDIARIES 41
14. ORGANIZATIONAL REALIGNMENT
15. COMMITMENTS AND CONTINGENCIES
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 was 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 $7.1 million during the three
months ended December 31, 2013, which was 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 $1.1 million.
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 (in thousands):
Capital leases
Present value of payments
Interest
Capital lease payments
Operating leases
Facilities
Furniture and equipment
Total operating leases
Total leases
2015
2016
2017
2018
2019
Thereafter
Total
$1,090
51
$1,141
$6,236
112
$6,348
$7,489
$ 429
41
$ 470
$5,464
34
$5,498
$5,968
$ 129
13
$ 142
$3,601
—
$3,601
$3,743
$ 4
2
$ 6
$1,634
—
$1,634
$1,640
$ —
—
$ —
$716
—
$716
$716
$ —
—
$ —
$339
—
$339
$339
$ 1,652
107
$ 1,759
$17,990
146
$18,136
$19,895
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 $5.6 million, $5.3 million
and $5.2 million for the years ended December 31, 2014, 2013 and
2012, 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, 2014,
these commitments amounted to approximately $12.6 million and
are expected to be paid as follows: $7.6 million in 2015; $4.0 million
in 2016; $1.0 million in 2017; $11 thousand in 2018; and nil in 2019.
Letters of Credit
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2014, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $2.7 million, and for facility lease deposits totaling
$0.5 million.
Litigation
We are involved in legal proceedings, claims, and administrative
matters that arise in the ordinary course of our business. We
have made accruals with respect to certain of these matters,
where appropriate, that are reflected in our consolidated financial
statements but are not, individually or in the aggregate, considered
material. For other matters for which an accrual has not been made,
we have not yet determined that a loss is probable or the amount of
loss cannot be reasonably estimated. While the ultimate outcome
of the matters cannot be determined, we currently do not expect
that these proceedings and claims, individually or in the aggregate,
will have a material effect on our consolidated financial position,
results of operations, or cash flows. The outcome of any litigation is
42 KFORCE INC. AND SUBSIDIARIES
inherently uncertain, however, and if decided adversely to us, or if
we determine that settlement of particular litigation is appropriate,
we may be subject to liability that could have a material adverse
effect on our consolidated financial position, results of operations,
or cash flows. 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.
Accordingly, we disclose matters below for which a material loss is
reasonably possible. In each case, however, except where otherwise
noted, we have either determined that the range of loss is not
reasonably estimable or that any reasonably estimable range of loss
is not material to our 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 2013.
The complaint was filed against Kforce and Kforce Government
Solutions Inc., was captioned United States of America and William
Turner, Relator v. Kforce Government Solutions Inc. and Kforce Inc.,
Case No. 8:13-cv-1517-T-36TBM, and was amended on April 14,
2014. The amended complaint alleges False Claims Act and federal
and state whistleblower statute violations and certain accounting
irregularities, as well as employment law and defamation claims.
On June 13, 2014, the defendants filed a motion to dismiss the
complaint. On October 8, 2014, the United States government
filed a notice of its election to decline to intervene in the case. On
November 10, 2014, the court granted the defendants’ motion to
dismiss all federal claims with prejudice, and also dismissed the
state law claims without prejudice for lack of jurisdiction. Mr. Turner
appealed the court’s ruling to the United States Court of Appeals for
the Eleventh Circuit, where the case is currently pending as USCA
Case No. 14-15529.
Tax Audits
Kforce is periodically subject to IRS audits, as well as state and other
local income tax audits for various tax years. During 2014, the IRS
finished an examination of Kforce’s U.S. income tax return for 2010
and 2011 with no material adjustments. During 2013, the IRS finished
an examination of Kforce’s United States income tax return for 2009
with no material adjustments, and no settlements. 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.
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 Kforce
or for good reason by the executive. These agreements contain
certain post-employment restrictive covenants. Kforce’s liability
at December 31, 2014 would be approximately $19.2 million if,
following a change in control, all of the executives under contract
were terminated without good cause by the employer or if the
executives resigned for good reason and $41.6 million if, in the
absence of a change in control, all of the executives under contract
were terminated by Kforce without good cause or if the executives
resigned for good reason.
Kforce has not recorded any liability related to the employment
agreements as no events have occurred that would require
payment under the agreements.
2014
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2013
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2012
Net service revenues
Flexible billings
Search fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
16. REPORTABLE SEGMENTS
Kforce’s reportable segments are as follows: (1) Tech; (2) FA; and
(3) GS. This determination is supported by, among other factors:
the existence of individuals responsible for the operations of each
segment and who also report directly to our chief operating decision
maker (“CODM”), the nature of the segment’s operations and
information presented to the Board of Directors and our CODM.
Kforce also reports Flexible billings and Search fees separately by
segment, which has been incorporated into the table below. The
following table has been updated to reflect the disposition of HIM and
KCR. As described in Note 2 – “Discontinued Operations,” all revenues
and gross profit associated with the discontinued operations have
been recorded within income from discontinued operations, net of
tax, in the Consolidated Statement of Operations and Comprehensive
Income (Loss).
Historically, and through our year ended December 31, 2014, 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 or income from
continuing operations separately by segment as our operations are
largely combined.
The following table provides information concerning the operations
of our segments for the years ended December 31, 2014, 2013 and
2012 (in thousands):
Technology
Finance and
Accounting
Government
Solutions
Total
$823,311
19,158
$842,469
$243,085
$249,274
27,537
$276,811
$101,071
$98,051
—
$98,051
$30,425
$720,179
19,183
$739,362
$219,360
$213,158
29,259
$242,417
$ 93,663
$91,949
—
$91,949
$31,353
$655,062
20,525
$675,587
$200,738
$211,797
26,679
$238,476
$ 91,124
$91,424
—
$91,424
$28,724
$1,170,636
46,695
$1,217,331
$ 374,581
326,624
$ 47,957
$1,025,286
48,442
$1,073,728
$ 344,376
333,447
$ 10,929
$ 958,283
47,204
$1,005,487
$ 320,586
386,944
$ (66,358)
KFORCE INC. AND SUBSIDIARIES 43
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data presented below has been adjusted, where applicable, to reflect the discontinued operations of HIM, which is
more fully described in Note 2 – “Discontinued Operations.” Certain prior quarter amounts have been reclassified to conform with current year
presentation and may not tie back to quarterly filings. The following table provides quarterly information for the years ended December 31,
2014, 2013 and 2012 (in thousands, except per share amounts):
March 31,
June 30,
Sept. 30,
Dec. 31,
Three Months Ended
2014
Net service revenues
Gross profit
Income from continuing operations, net of income taxes
Income (loss) from discontinued operations, net of income taxes
Net income
Earnings per share—basic
Earnings per share—diluted
$282,024
83,526
4,389
1,860
6,249
$0.19
$0.19
2013
Net service revenues
Gross profit
Income (loss) 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
$246,991
77,355
1,929
1,165
3,094
$0.09
$0.09
$302,758
94,386
7,953
2,750
10,703
$0.33
$0.33
$264,720
86,595
5,443
1,505
6,948
$0.21
$0.21
$313,810
98,291
7,995
57,023
65,018
$2.07
$2.06
$279,956
91,055
7,636
1,343
8,979
$0.27
$0.27
$318,739
98,378
9,061
(116)
8,945
$0.30
$0.30
$282,061
89,371
(9,714)
1,480
(8,234)
$(0.25)
$(0.25)
During the third quarter of 2014, in connection with the disposition of HIM, the income from discontinued operations included a gain,
net of transactions costs, on the sale of discontinued operations of $94.3 million pretax, or $56.1 million after tax. The transactions costs
primarily included legal fees, stock-based compensation related to the acceleration of restricted stock, commissions and transaction bonuses
in the form of cash and common stock, which in the aggregate, totaled $11.0 million. Stock-based compensation related to the acceleration
of restricted stock and transaction bonuses paid in stock in lieu of cash was $2.4 million.
During the fourth quarter of 2013, the Firm executed an organizational realignment plan and incurred severance and termination-related
expenses of $7.1 million and a Compensation Committee approved discretionary bonuses related to the realignment of $3.6 million.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows for the year ended December 31 (in thousands):
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
Employee stock purchase plan
Equipment acquired under capital leases
Unsettled repurchases of common stock
Contingent consideration for acquisition
2014
2013
2012
$52,565
$ 1,048
$ 128
$ 84
$ 699
$ 313
$ 1,425
$ 477
$14,789
$ 800
$ 15
$ —
$ 613
$ 1,929
$ —
$ —
$ 14,456
$ 554
$ 36
$ 161
$ 647
$ 672
$ 2,498
$ —
44 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.
EXECUTIVE AND
SENIOR OFFICERS
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
W.R. Carey, Jr.
Chief Executive Officer,
Corporate Resource Development, Inc.
David M. Kelly
Chief Financial Officer
and Secretary
Richard M. Cocchiaro
Vice Chairman
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
N. John Simmons
Chief Executive Officer,
Growth Advisors
Ralph E. Struzziero
Consultant
Howard W. Sutter
Vice Chairman
Kforce Inc.
A. Gordon Tunstall
President and
Chief Executive Officer,
Tunstall Consulting
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
David J. Bair
Executive Director, Technology
Michael R. Blackman
Chief Corporate Development Officer
Robert W. Edmund
General Counsel and
Assistant Secretary
Denis L. Edwards
Chief Information Officer
Graig D. Paglieri
Chief Delivery Officer
Andrew G. Thomas
Chief Field Services 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 21, 2015 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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