AN N UAL REPORT 2015
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
As the 6th largest technology staffing
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:
• PROJECT MANAGEMENT AND
BUSINESS ANALYSIS offers a full
suite of functional professionals
to support the full scope of your
initiative.
• APPLICATION DEVELOPMENT
supports applications and systems
software creation and maintenance.
• ENTERPRISE DATA MANAGEMENT
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.
largest finance and
As the 4th
accounting staffing firm in the U.S., we
engage more than 15,000 highly skilled
professionals annually
in finance
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:
• OPERATIONAL AND TECHNICAL
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.
• PROFESSIONAL ADMINISTRATION
tasks include Loan Servicing,
Benefits Administration, Customer
Service/Call Center, Data Entry,
Human Resources and Professional
Administrative Support.
Kforce Government Solutions (KGS), a
wholly-owned subsidiary of Kforce, is
a government contracting services and
solutions provider that has offered a
comprehensive portfolio of solutions
to a wide range of Federal and Defense
agencies since 1970. Headquartered in
Fairfax, VA with offices in San Antonio,
TX and Tampa, FL:
• KGS offers a full range of solutions
in the areas of Healthcare
Informatics, Financial Management
and Accounting, Enterprise
Technology, Engineering and
Intelligence.
This Annual Report contains forward-
looking statements (within the meaning of
the federal securities laws). Please see the
“Special Note Regarding Forward-Looking
Statements” contained in the introductory
portion of our Annual Report on Form 10-K
for the year ended December 31, 2015 for
additional information regarding forward-
looking statements.
The total shareholder
return on our stock
has been 660%,
outperforming the S&P
500 Index, which has
returned 266% over the
same period.
800%
600%
400%
200%
0%
KFRC
S&P 500
Kforce stock performance vs. S&P 500 from 8/15/95 (IPO) to 12/31/15
TO OUR FELLOW SHAREHOLDERS, CLIENTS AND EMPLOYEES:
We are pleased with full-year financial results for 2015. Kforce
reported record annual revenues of $1.32 billion in 2015,
an increase of 8.4% from $1.22 billion in 2014. Net income
for the year ended December 31, 2015 was $42.8 million, or $1.52
per share, which represented an increase of 45.7%, or 63.4% per
share, compared to income and earnings per share from continuing
operations for the year ended December 31, 2014 of $29.4 million,
or $0.93 per share. This represents the second consecutive year of
approximately 50% earnings per share growth from continuing
operations. During 2015, we returned $49.2 million to shareholders
in the form of $36.7 million in share repurchases on the open
market and $12.5 million in dividends. In the fourth quarter, we
also increased our quarterly dividend for the second consecutive
year. We are continually evaluating our use of capital to include
share repurchases, debt retirement and acquisitions, and though
we would point out that Kforce has not completed an acquisition in
seven years, we maintain our focus on organic growth.
We believe the staffing industry is healthy, with domestic
specialty skilled firms like Kforce leading the way, driven by both
secular and cyclical forces. The overall employment environment
improved in 2015 with the addition of 2.7 million non-farm jobs
and the decline of unemployment to 5.0%. Of particular note to
staffing, temporary workers as a percentage of the total workforce
ended the year at 2.06%, near record levels. Even more relevant to
Kforce given our focus on highly skilled knowledge workers, the
college-level unemployment rate was 2.5%, about half the overall
unemployment rate. Against this backdrop, both our Technology
(“Tech Flex”) and Finance and Accounting (“FA Flex”) businesses
continued their growth trends in 2015. Both sectors are projected by
Staffing Industry Analysts (SIA) to continue their growth trajectory
for the next several years. In what has been an uneven economic
recovery, and now a highly uncertain macro-economic environment
as well, we believe our industry continues to experience a secular
shift as our clients seek workforce flexibility and just-in-time skilled
labor. In addition, the ever-expanding regulatory environment and
heightened scrutiny, particularly around employee classification,
have created a higher risk employment environment for clients.
We believe these trends will cause our clients to continue to rely on
larger staffing firms with robust compliance infrastructures as their
solution of choice for human capital.
billion and the finance & accounting staffing market is projected to
be $7.9 billion. We believe we have an opportunity to improve upon
our approximate 3% market share in each of these markets and
better serve our current clients and consultants.
Our 2015 success reflects the results of our executive team’s strategic
decisions over the past three years. We have simplified our business
model to narrow our focus on our core offerings and accelerated
investment in revenue-generating talent to build a model that we
believe will drive sustained organic revenue growth. We fostered
stronger partnerships with our Premier Partner clients and sought
optimization and efficiencies in our revenue enablement support
functions. We believe a greater understanding of client dynamics
has laid the foundation for continued growth. We believe this, along
with continued improvement of internal operating efficiencies, has
put Kforce squarely on the path to achieve operating margins of 7.5%
when we reach $1.6 billion in annualized revenues.
Looking at our business by service line in 2015:
• Revenues for our largest business unit, Tech Flex, of $873.6 million
represented 66.2% of our total net service revenues. Tech Flex
revenues increased 6.1% in 2015 over 2014. Our Tech Flex business
focuses primarily on areas of information technology such as
systems/applications architecture and development, project
management, enterprise data management, business intelligence,
e-commerce, technology infrastructure, network architecture and
security. We look forward to continued demand for our Tech Flex
business with the goal of increasing market share. As we moved
into the second half of 2015, we experienced deceleration in year-
over-year Tech Flex growth rates. This deceleration was greater
than we had anticipated due predominantly, we believe, to
specific large client dynamics, as a result of internal organization
changes and other business disruptions. We experienced early
project ends and a slowdown in hiring, and believe the activities
at these few clients are very natural given the magnitude of the
changes. Recent communications with these customers lead us to
anticipate that there are extensive projects planned, but awaiting
budget approval. We continue to believe that these client-specific
headwinds are shorter term in nature and not a fundamental
longer-term shift in spend.
In the New Era, that we began in late 2012, we have narrowed our
focus, simplified our business model and raised accountability. We
believe that our stakeholders are better served by our refined focus
on domestic technology and finance & accounting staffing. In 2016,
the market for technology staffing is projected to approach $28.9
We are also working to further diversify our portfolio by increasing
our emphasis on other existing significant clients. These clients
are the lead focus for a large portion of our accelerated hiring of
Tech Flex sales associates in the fourth quarter of 2015. Despite
the recent uncertainties in the macro-economic environment and
KFORCE INC. AND SUBSIDIARIES 1
deceleration in growth rates more broadly in technology staffing,
we are seeing continued solid demand in the specialties that we
serve. Much of our clients’ spend today is driven by their focus on
developing and enhancing their customer-facing applications and
technologies to improve their customers’ experience as they deliver
online products and services. In addition to mobility, we continue
to see big data, data security, project/program management, and
post-recession IT rebuilding fueling needs for talent in virtually all
commercial IT organization roles.
We are continuously evaluating and updating our strategy, including
our technology platform and service offerings, to drive efficiencies
that enhance our customer experience and improve speed to market.
We will also look to make opportunistic investments in technology
that will enhance our business analytics, improve consultant match
and sales strategies, and strengthen customer relationships as well
as drive further efficiencies across our platform. We will maintain a
watchful eye toward the investments that we have made, and will
continue to make, and we remain cautiously optimistic.
• Revenues for our FA Flex business of $294.2 million represented
22.3% of our total net service revenues. FA Flex revenues increased
18.0% in 2015 over 2014, almost doubling 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, budget preparation and analysis,
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 2016, driven by our
strategy of diversifying our client portfolio and leveraging our
National Recruiting Center for projects that continue to provide
growth, particularly around revenue cycle engagements where we
have increased our investment.
• Revenues for our Government Solutions (“GS”) segment of $97.4
million represented 7.4% of our total net service revenues. GS
revenues decreased 0.7% in 2015 compared to 2014. Our GS
segment provides services and solutions to the federal government
as both a prime contractor and a subcontractor in the fields of
information technology and finance and accounting, as well as
a product business specializing in manufacturing and delivering
trauma-training manikins to federal, state and local governments.
Government contractors may continue to see the negative impacts
from the challenging federal procurement environment that could
impact GS in the future.
• Direct Hire (formerly referred to as “Search”) revenues of $54.1
million represented 4.1% of our total net service revenues. Direct
Hire revenues increased 15.8% in 2015 over 2014. 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. Demand appears solid as clients
seek to secure hard-to-find talent. As a result, we saw a marked
increase in conversions (flexible resources converted to full-time
employment by our clients) in 2015.
2 KFORCE INC. AND SUBSIDIARIES
In August of 2015, Kforce proudly celebrated its 20th anniversary
as a publicly traded company. Over that 20-year period, according
to SIA, U.S. staffing revenue grew from $52 billion to an estimated
$134 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 strategic
decisions position us well for future success. We are very focused
on those actions we believe are necessary to reaccelerate revenue
growth, particularly in our Tech Flex business. We anticipate that
an acceleration in hiring, particularly in Tech Flex sales, along
with diversification within our client base should allow us to
reaccelerate revenue growth while generating significant returns
for our shareholders. The demand environment remains positive
and our client relationships are strong. We continue to manage
our investments and profitability and look for opportunities to
return capital to our shareholders in the form of dividends and
share repurchases. We are also very proud that Stewardship and
Community, a Kforce Core Value, is a way for our Great People to
give back to their communities and support charities, organizations,
and people in need by contributing time and making a difference in
the lives of others. In 2015, Kforce employees spent approximately
12,000 hours supporting more than 500 charities nationwide, as well
as participating in a number of international charitable initiatives.
We are very optimistic about our prospects in 2016 and beyond and
appreciate your continued interest and support. Thanks to each and
every member of our field and corporate teams, as well as 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 dividends declared per share
As of December 31,
(In thousands)
Working capital
Total assets
Total outstanding borrowings on credit facility
Total long-term liabilities
Stockholders’ equity
2015
2014(1)
2013(2)(3)
2012(4)(5)
2011
$1,319,238
414,114
330,416
—
9,831
2,195
71,672
28,848
42,824
$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
—
42,824
$
61,517
$ 90,915
5,493
$ 10,787
28,428
$ (13,703)
13,527
$ 27,156
$1.53
$0.94
$0.16
$(1.18)
$0.36
$1.52
$1.53
$1.52
27,910
28,190
$0.45
$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
$ —
2015
2014
2013
2012
2011
$ 126,788
$ 351,822
$
80,472
$ 124,449
$ 139,627
$ 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
(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”), 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.
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 2015 Industry Peer Group and the NASDAQ Stock Market (U.S.) Index (“NASDAQ”). 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,
2010 to December 31, 2015) by the price of Kforce common stock at the beginning of the measurement period. Cumulative total returns for
Kforce, the 2015 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, 2010, 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 TSR graph below, Kforce has been excluded from the 2015 Industry Peer Group.
s
r
a
l
l
o
D
250
225
200
175
150
125
100
75
2010
2011
2012
2013
2014
2015
End of Year
Kforce Inc.
NASDAQ Stock Market (Composite)
2015 Industry Peer Group
Investment of $100 on December 31, 2010
Kforce Inc.
NASDAQ Stock Market (Composite)
2015 Industry Peer Group (1)
2010
100.0
100.0
100.0
2011
76.2
98.2
76.5
2012
95.7
113.8
92.2
2013
137.3
157.4
147.4
2014
165.0
178.5
151.0
2015
176.1
188.8
154.8
(1) Our 2014 Industry Peer Group included Ciber, Inc. which was removed due to lack of comparability in market capitalization and size of the company, and was replaced with
Kelly Services, Inc. We have excluded the 2014 Industry Peer Group from the graph above as the 2014 and 2015 Industry Peer Groups’ cumulative total returns were very similar.
2015 Industry Peer Group:
CDI Corporation
Computer Task Group Inc.
Kelly Services, Inc.
Manpower Inc.
On Assignment, Inc.
Resources Connection, Inc.
Robert Half International Inc.
TrueBlue Inc.
The industry peer group is one of the building blocks of the executive compensation program because it provides the Committee with
benchmarking data and insight into external compensation practices. In determining the industry peer group, we focus on selecting publicly
traded staffing companies that are active in recruiting and placing similar skill sets at similar types of clients. 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.
The industry peer group comparison provides information about pay levels, pay practices and performance. In addition to the specific staffing
industry in which companies operate, other 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.
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,
2015
High
Low
2014
High
Low
$24.99
$21.34
$22.59
$17.30
$23.92
$20.32
$23.80
$19.97
$29.33
$21.83
$22.76
$17.20
$28.84
$22.90
$24.72
$18.65
From January 1, 2016 through February 23, 2016, the high and low intra-day sales price of our common stock was $25.00 and $14.87,
respectively. On February 23, 2016, the last reported sale price of our common stock on the NASDAQ Global Select Market was $16.14 per
share.
Holders of Common Stock
As of February 23, 2016, there were approximately 167 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. The following table provides quarterly dividend information for the years ended December 31, 2015 and 2014:
Three Months Ended
March 31,
June 30,
September 30,
December 31,
2015
2014
$0.11
$0.10
$0.11
$0.10
$0.11
$0.10
$0.12
$0.11
Kforce currently expects to continue to declare and pay quarterly dividends of a similar amount. However, the declaration, payment and
amount of future dividends are discretionary and will be subject to determination by Kforce’s Board of Directors each quarter following
its review of, among other things, the Firm’s financial performance and our legal ability to pay dividends. 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, 2015, we had $80.5 million outstanding under our Credit Facility. Our weighted average effective interest rate on our
Credit Facility was 1.95% at December 31, 2015. A hypothetical 10% increase in interest rates in effect at December 31, 2015 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, 2015, 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, 2015,
2014 and 2013 (the chart for 2013 and 2014 excludes our former
Health Information Management (“HIM”) segment, which we sold
in 2014):
2015
7.4%
GS
2014
8.1%
GS
2013
8.5%
GS
22.7%
FA
67.9%
Tech
22.6%
FA
69.2%
Tech
68.9%
Tech
24.7%
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 architecture and development,
project management, enterprise data management, business intelligence,
e-commerce, technology infrastructure, network architecture and security.
Revenues for our Tech segment increased 6.3% to $895.9 million for the
year ended December 31, 2015 as compared to $842.5 million for the
year ended December 31, 2014. The average bill rate for our Tech segment
for 2015 was approximately $67 per hour. Our Tech segment provides
service to clients in a variety of industries with a strong footprint in the
communications, financial services, insurance services and government
sectors. A September 2015 report published by Staffing Industry Analysts
(“SIA”) stated that temporary technology staffing is expected to experience
growth of 6% in 2016 and should represent one of the highest growth
sectors within staffing. We believe the primary drivers of this growth and
the continuing use of temporary staffing as a solution during uncertain
economic cycles are the increasingly strict regulatory environment and cost
of employment, both of which are driving the systemic use of temporary
staffing, particularly in project-based work such as technology, and the
increasing demand for talent in areas like mobility, cloud-based computing
and data security. SIA also acknowledges that notable skill shortages in
certain technology skill sets will continue.
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
6 KFORCE INC. AND SUBSIDIARIES
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. Revenues for our FA segment increased 17.7%
to $325.9 million for the year ended December 31, 2015 as compared to
$276.8 million for the year ended December 31, 2014. The average bill
rate for our FA segment for 2015 was approximately $33 per hour. In its
September 2015 update, SIA stated that finance and accounting staffing is
expected to experience growth of 6% during 2016.
GS
Our GS segment provides services and solutions to the Federal
Government as both a prime contractor and a subcontractor in the fields
of information technology and finance and accounting. The GS contracts
are concentrated among customers that we believe are less likely to be
impacted by sequestration threats and budget constraints, such as the
U.S. Department of Veteran Affairs. GS offers integrated business solutions
to its customers in areas such as: information technology, healthcare
informatics, data and knowledge management, research and development,
audit readiness, financial management and accounting, among other areas.
Revenues for our GS segment decreased 0.7% to $97.4 million for the year
ended December 31, 2015 as compared to $98.1 million for the year ended
December 31, 2014. The services portion of our GS segment accounted
for approximately 84% of its total revenues in 2015. Our GS segment
also includes a product-based business specialized in manufacturing
and delivering trauma-training manikins. The product portion of our GS
segment accounted for approximately 16% of its total revenues in 2015.
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 (“Direct Hire”). For each of the three
years ended December 31, 2015, 2014 and 2013, Flex represented
approximately 96% of total Kforce revenues, respectively.
We target clients and recruits for both Flex and Direct Hire 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 candidate marketing, where we identify individuals who
are currently employed and not actively seeking another position. These
consultants can be directly employed by Kforce, independent contractors or
foreign nationals sponsored by Kforce. Our success is dependent upon our
internal employees’ (“associates”) ability to: (1) acknowledge, understand
and participate in creating solutions for 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 revenues are driven by the number of total hours billed and
pre-established bill rates. Flex gross profit is determined by deducting
consultant pay, benefits and other related costs from Flex revenues.
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 other
customary costs such as administrative and corporate compensation.
The Flex business model involves attempting to maximize the number of
billable consultant hours and bill rates, while managing consultant pay
rates and benefit costs, as well as compensation and benefits for our core
associates. Flex revenues also includes revenues for our GS segment. These
revenues involve providing longer-term contract services to the customer
primarily on a time-and-materials basis.
Direct Hire
Our Direct Hire business (formerly referred to as “Search”) 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 fee structure is based upon a percentage of the
placed individual’s annual compensation in their first year of employment,
which is known or can be estimated at the time of placement. We recruit
permanent employees using methods that are consistent with Flex. 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 fee (referred to as “conversion revenue”).
Direct Hire 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 can vary by contract, it is typically
90 days or less. This allowance for fallouts is estimated based upon
historical experience with Direct Hire placements that did not complete
the contingency period. There are no consultant payroll costs associated
with Direct Hire placements, thus, all Direct Hire revenues increase gross
profit by the full amount of the fee. Direct Hire associate commissions,
compensation and benefits are included in SG&A.
Business Strategy
Our primary goal is to enhance shareholder value by achieving above-
market revenue growth in the segments in which we are focused as well
as generating operating leverage. We believe the following strategies will
help us achieve our goal.
Invest in Talent of Revenue Generators. Given the current and expected
future demand in the marketplace for the services provided by Kforce and
the expectation that enhanced productivity will result from an increasing
mix of tenured associates, the Firm continues to focus on the hiring of
associates that are responsible for generating revenue. The increase in
revenue-generating talent from 2014 to 2015 was 9.5% and from 2013
to 2014 was 6.3%. New associates typically take six to twelve months to
ramp to a minimum acceptable standard and this increase in productivity
generally continues for up to four years. Our hiring focus over the last two
years prior to the fourth quarter of 2015 has been disproportionately focused
on delivery resources. In the fourth quarter of 2015, we accelerated growth
in our Tech Flex sales talent and currently expect an appropriately balanced
investment in talent to continue in 2016. We expect the investments in late
2015 and 2016 to result in re-accelerated revenue growth, particularly in
Tech Flex, during 2016. 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
clients’ 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 2015 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 NRC, which is strategically located in both Tampa, Florida
and Phoenix, Arizona, offers us a competitive advantage and supports
delivery needs in each of our operating segments. 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 INC. AND SUBSIDIARIES 7
Kforce.com, as well as other sources, then forwards qualified candidates
to Kforce field offices to be matched to available positions. We continue
to see a significant demand for our NRC resources and anticipate a
continuation of that trend.
During 2015, we continued to focus on job order prioritization, which
places greater attention on orders that we believe present the greatest
opportunity and further evolved the NRC’s focus to more specific industries,
customer segments and skill sets to create leverage. A continued focus for
2016 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 and expect that top performers in the NRC with a strong
knowledge of the delivery system will move into field-based roles.
Leverage Technology Infrastructure. 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. We leveraged our Agile development
methodology during 2015 to make
incremental and valuable
improvements to our front-end and back office systems. As we look into
the future, we expect to continue improving our technology infrastructure
and surrounding processes to generate additional operating leverage as
we grow, enhance flexibility in meeting our clients’ increasing needs and
improve the effectiveness of our associates.
Enhance Shareholder Value. Kforce is committed to enhancing
shareholder value. In 2015, the Firm continued to repurchase a significant
amount of stock under the Board authorized program, completed four
quarterly dividends, and continued to focus on reducing expenses. We
increased the quarterly dividend amount by 9% to $0.12 in December 2015
to keep the annual yield at approximately 2%. Kforce expects to continue
these initiatives in 2016.
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 26% of
revenues and no single customer accounted for more than 6% of revenues
for the year ended December 31, 2015. 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 2015, 122 companies reported at least $100 million in U.S. staffing
revenues in 2014 with these companies representing an estimated 55.9%
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 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 continued to be positive
during 2015, based on data published by the Bureau of Labor Statistics
(“BLS”). Total temporary employment increased 3.3% year-over-year and
the penetration rate remained near record levels at 2.06% in December
2015. While the macro-employment picture remains uncertain, it has
continuously improved, with the unemployment rate at 5.0% as of
December 2015, and non-farm payroll expanding an average of 221,000
jobs per month in 2015. 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 2.5% in December
2015. Further, we believe that the unemployment rate in the specialties
we serve is lower than the published averages, which we believe speaks
to the demand environment in which we are operating. 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, may continue to fuel growth in temporary staffing
as employers may be reluctant to increase full-time hiring. Additionally, we
believe the increasing costs and government regulation of employment
may be driving a secular shift to an increased use of temporary staff
as a percentage of total workforce. Given the near record levels of the
penetration rate, we believe that our Flex revenues may grow 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; however, the
economic environment includes considerable uncertainty and volatility and
therefore 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
2015, the U.S. temporary staffing industry generated estimated revenues
of $99.4 billion in 2012, $103.7 billion in 2013 and $109.2 billion in 2014,
and has projected revenues of $116.4 billion in 2015 and $123.0 billion in
2016. Based on projected revenues of $116.4 billion for the U.S. temporary
staffing industry, this would put the Firm’s overall 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 few years, we have undertaken and continue to progress
on several significant initiatives including: (1) executing a realignment
plan to streamline our leadership and revenue-enabling personnel 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-
generating talent to capitalize on targeted growth opportunities; (4)
further defining and monitoring our client portfolio to ensure appropriate
focus and prioritization; (5) further optimizing our NRC team in support of
our field operations; (6) upgrading our corporate systems; (7) focusing on
process improvements; and (8) divesting of HIM, which we considered a
non-core business. We believe our realigned field operations and revenue-
enabling operations models 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. and are focused in key areas of expected growth
in Tech and FA, are a key contributor to our long-term financial stability.
We believe the divestiture of HIM provides us the opportunity to further
dedicate our resources to exclusively providing technology and finance and
accounting talent in the commercial and government markets through
our staffing organization and Kforce Government Solutions, Inc., our
government solutions provider.
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 2015.
• 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 for the years ended
December 31, 2014 and 2013 include activity relating to HIM as
a discontinued operation. Except when specifically noted, our
discussions below exclude any activity related to HIM, 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 2015 highlights, which should be considered in the context of
the additional discussions in this report and in conjunction with
the consolidated financial statements and notes thereto. We believe
such highlights are as follows:
• Net service revenues increased 8.4% to $1.32 billion in 2015
from $1.22 billion in 2014. Net service revenues increased 6.3%
for Tech and 17.7% for FA and decreased 0.7% for GS.
• Flex revenues increased 8.1% to $1.27 billion in 2015 from $1.17
billion in 2014.
• Direct Hire revenues increased 15.8% to $54.1 million in 2015
from $46.7 million in 2014.
• Flex gross profit margin increased 50 basis points to 28.5%
in 2015 from 28.0% in 2014 principally as a result of an
expansion in the spread between our bill rates and pay rates
in the FA segment, improved profitability from our GS segment
primarily as a result of growth in its product business which
carries a higher margin profile, and a more favorable payroll tax
environment. Flex gross profit margin increased 20 basis points
for Tech, 20 basis points for FA and 330 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, 2015
was 25.0% compared to 25.9% in 2014 reflecting the leverage
provided by our revenue growth, lower relative compensation
costs and, we believe, continued spending discipline.
• Income from continuing operations of $42.8 million in 2015
increased $13.4 million compared with income from continuing
operations of $29.4 million in 2014.
• Net income of $42.8 million for the year ended December 31,
2015 decreased $48.1 million from net income of $90.9 million
for the year ended December 31, 2014 due primarily to the gain
on sale of HIM in 2014.
• Diluted earnings per share from continuing operations for the
year ended December 31, 2015 increased to $1.52, or 63.4%,
from $0.93 per share in 2014.
• During 2015, Kforce repurchased 1.5 million shares of common
stock on the open market at a total cost of approximately
$36.7 million.
• The Firm declared and paid dividends totaling $0.45 per share
during the year ended December 31, 2015 resulting in an
aggregated cash payout of $12.5 million. The dividend in the
fourth quarter increased to $0.12 per share.
• The total amount outstanding under the credit facility decreased
$12.8 million to $80.5 million as of December 31, 2015 as
compared to $93.3 million as of December 31, 2014 resulting
primarily from strong operating cash flows of $70.2 million.
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,
revenues, expenses and the related disclosures. We base our
assumptions, estimates and judgments on historical experience,
current trends, and other factors that management believes to
be relevant at the time our 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, 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, in establishing its allowance for
doubtful accounts.
Kforce estimates its allowance for Direct Hire
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
or circumstances indicate that the fair value of
a reporting unit is below its carrying value. We
monitor the existence of potential impairment
indicators throughout the year. 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.
The carrying value of goodwill as of
December 31, 2015 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, 2015 and 2014, these allowances
were 1.1% and 1.0% 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, 2015,
would have impacted our net income for 2015 by
approximately $0.1 million.
For our Tech and FA reporting units, Kforce
assessed the qualitative factors of each reporting
unit to determine if it was more likely than not
that the fair value of the reporting unit was
less than its carrying amount. Based upon the
qualitative assessments, it was determined
that it was not more likely than not that the fair
values of the reporting units were less than the
carrying values.
For our GS reporting unit, however, a
quantitative step one impairment assessment
was performed as of December 31, 2015. We
compared the carrying value of the GS reporting
unit to its estimated fair value noting that the fair
value exceeded carrying value by 63%. As a result,
no goodwill impairment charges were recognized
during the year ended December 31, 2015.
Although the valuation of the business
supported its carrying value in 2015, a
deterioration in any of the assumptions
discussed in Note 6—“Goodwill and Other
Intangible Assets” in the Notes to Consolidated
Financial Statements included in this Annual
Report, could result in an additional impairment
charge in the future.
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 that are below insurable limits. However,
we obtain third-party insurance coverage to limit
our exposure to claims in excess of insurable limits.
When estimating our self-insured liabilities, we
consider a number of factors, including historical
claims experience, plan structure, internal claims
management activities, demographic factors
and severity factors. Periodically, management
reviews its assumptions to determine the
adequacy of our self-insured liabilities.
Our liabilities for health insurance and workers’
compensation claims as of December 31, 2015
were $3.0 million and $1.3 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” and Note 13—“Stock Incentive Plans” in
the Notes to Consolidated Financial Statements,
included in this Annual Report for a complete
discussion of our stock-based compensation
programs.
We have not granted any stock options or
SARs over the last three years. We determine the
fair market value of our restricted stock based on
the closing stock price of Kforce’s common stock
on the date of grant.
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,
2015 or 2014.
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, 2015.
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.
The stock compensation expense recorded
is impacted by our estimated forfeiture rates,
which are based on historical forfeitures.
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 2015 and 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 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, 2015 would
have impacted our net income for 2015 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 $1.1 million for 2015.
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 2015 would have had an
insignificant impact on our net income for 2015.
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 approximately $0.1 million as of
December 31, 2015 related primarily to state net
operating losses.
A 0.50% change in our effective income tax
rate would have impacted our net income for
2015 by approximately $0.4 million.
KFORCE INC. AND SUBSIDIARIES 11
NEW ACCOUNTING STANDARDS
See Note 1—“Summary of Significant Accounting Policies” in the
Notes to Consolidated Financial Statements, included in this Annual
Report for a discussion of new accounting standards.
RESULTS OF OPERATIONS
Net service revenues for the years ended December 31, 2015,
2014 and 2013 were approximately $1.32 billion, $1.22 billion and
$1.07 billion, respectively, which represents an increase of 8.4%
from 2014 to 2015 and 13.4% from 2013 to 2014. The increase in
2015 from 2014 was composed of increases of 6.3% in our Tech
segment (which represented 67.9% of total net service revenues in
2015) and 17.7% in our FA segment (which represented 24.7% of
total net service revenues in 2015), and a decrease of 0.7% in our GS
segment (which represented 7.4% of total net service revenues in
2015). The increase in 2014 from 2013 was composed of increases
of 13.9% in our Tech segment (which represented 69.2% of total
net service revenues in 2014), 14.2% in our FA segment (which
represented 22.7% of total net service revenues in 2014) and 6.6%
in our GS segment (which represented 8.1% of total net service
revenues in 2014). Flex revenues increased 8.1% in 2015 compared
to 2014 and increased 14.2% in 2014 compared to 2013. Direct Hire
revenues increased 15.8% in 2015 compared to 2014 and decreased
3.6% in 2014 compared to 2013.
Flex gross profit margins increased 50 basis points to 28.5% for
the year ended December 31, 2015 as compared to 28.0% for the
year ended December 31, 2014. The increase is due primarily to
an expansion in the spread between our bill rates and pay rates in
the FA segment, improved profitability from our GS segment, and
a more favorable payroll tax environment as compared to 2014.
Flex gross profit margins decreased 90 basis points to 28.0% for
the year ended December 31, 2014 from 28.9% for the year ended
December 31, 2013. The decrease was 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. SG&A
expenses as a percentage of net service revenues were 25.0%, 25.9%
and 28.7% for the years ended December 31, 2015, 2014 and 2013,
respectively. The decreases in SG&A expenses as a percentage of
net service revenues were primarily driven by leverage provided by
our revenue growth and a decrease in compensation, commission,
payroll taxes and benefit related costs.
Additionally, during the year ended December 31, 2013, Kforce
recorded a goodwill impairment charge of $14.5 million in our GS
reporting unit. The 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 solutions opportunities with the
Federal Government.
Based upon previous economic cycles experienced by Kforce,
we believe that times of sustained economic recovery generally
stimulate demand for 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 continued to be positive during 2015, based on
data published by the BLS. Total temporary employment increased
3.3% year-over-year and the penetration rate remained near record
levels at 2.06% in December 2015. While the macro-employment
picture remains uncertain, it has continuously improved, with the
unemployment rate at 5.0% as of December 2015, and non-farm
payroll expanding an average of 221,000 jobs per month in 2015.
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 2.5% in December 2015.
Further, we believe that the unemployment rate in the specialties
we serve is lower than the published averages, which we believe
speaks to the demand environment in which we are operating.
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, may continue to
fuel growth in temporary staffing as employers may be reluctant to
increase full-time hiring. Additionally, we believe the increasing costs
and government regulation of employment may be driving a secular
shift to an increased use of temporary staff as a percentage of total
workforce. Given the near record levels of the penetration rate, we
believe that our Flex revenues may grow 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; however,
the economic environment includes considerable uncertainty and
volatility and therefore no reliable predictions can be made about
the general economy, the staffing industry as a whole, or specialty
staffing in particular.
Over the last few years, we have undertaken and continue to
progress on several significant initiatives including: (1) executing
a realignment plan to streamline our leadership and revenue-
enabling personnel 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-generating
talent to capitalize on targeted growth opportunities; (4) further
defining and monitoring our client portfolio to ensure appropriate
focus and prioritization; (5) further optimizing our NRC team
in support of our field operations; (6) upgrading our corporate
systems; (7) focusing on process improvements; and (8) divesting
of HIM, which we considered a non-core business. We believe our
realigned field operations and revenue-enabling operations models
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. and are focused in key areas of expected growth in Tech
and FA, are a key contributor to our long-term financial stability. We
believe the divestiture of HIM provides us the opportunity to further
dedicate our resources to exclusively providing technology and
finance and accounting talent in the commercial and government
markets through our staffing organization and Kforce Government
Solutions, Inc., our government solutions provider.
12 KFORCE INC. AND SUBSIDIARIES
Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our Consolidated Statements
of Operations and Comprehensive Income for the years ended:
December 31,
Revenues by Segment:
Tech
FA
GS
Net service revenues
Revenues by Type:
Flex
Direct Hire
Net service revenues
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Depreciation and amortization
Income from continuing operations, before income taxes
Income from continuing operations
Net income
2015
2014
2013
67.9%
24.7
7.4
100.0%
95.9%
4.1
100.0%
31.4%
25.0%
—%
0.7%
5.4%
3.2%
3.2%
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%
The following table details net service revenues for Flex and Direct Hire by segment and changes from the prior year (in thousands):
Tech
Flex
Direct Hire
Total Tech
FA
Flex
Direct Hire
Total FA
GS
Flex
Total GS
Total Flex
Total Direct Hire
Total Net Service Revenues
2015
Increase
(Decrease)
2014
Increase
(Decrease)
2013
$ 873,609
22,333
$ 895,942
$ 294,186
31,738
$ 325,924
$ 97,372
$ 97,372
$1,265,167
54,071
$1,319,238
6.1%
16.6%
6.3%
18.0%
15.3%
17.7%
(0.7)%
(0.7)%
8.1%
15.8%
8.4%
$ 823,311
19,158
$ 842,469
$ 249,274
27,537
$ 276,811
$ 98,051
$ 98,051
$1,170,636
46,695
$1,217,331
14.3%
(0.1)%
13.9%
$ 720,179
19,183
$ 739,362
16.9%
(5.9)%
14.2%
$ 213,158
29,259
$ 242,417
6.6%
6.6%
14.2%
(3.6)%
13.4%
$ 91,949
$ 91,949
$1,025,286
48,442
$1,073,728
KFORCE INC. AND SUBSIDIARIES 13
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 2015 quarterly information is presented for informational
purposes only (in thousands, except Billing Days).
December 31
September 30
June 30
March 31
Three Months Ended
Year-Over-
Year Growth
Rates
0.2%
15.7%
(13.9)%
Revenues
$212,917
78,512
22,857
Revenues
$226,381
76,707
24,351
Flex
Tech
FA
GS
Total Flex
$314,286
2.4%
$327,439
Year-Over-
Year Growth
Rates
6.6%
19.4%
(1.8)%
8.7%
Revenues
$225,873
72,773
24,264
$322,910
Direct Hire
Tech
FA
$ 5,109
8,304
Total Direct Hire $ 13,413
7.8%
15.7%
12.6%
$ 5,732
8,404
$ 14,136
6.7%
17.9%
13.1%
$ 6,291
8,152
$ 14,443
Year-Over-
Year Growth
Rates
9.6%
21.2%
1.3%
11.3%
24.9%
7.9%
14.7%
9.9%
19.7%
1.3%
11.4%
Year-Over-
Year Growth
Rates
8.3%
15.9%
13.7%
10.4%
29.8%
21.0%
24.7%
8.7%
16.4%
13.7%
10.8%
Revenues
$208,438
66,194
25,900
$300,532
$ 5,201
6,878
$ 12,079
$213,639
73,072
25,900
$312,611
63
6.6%
19.2%
(1.8)%
8.8%
$232,164
80,925
24,264
$337,353
64
the investments in revenue-generating resources that we intend to
assign to growing priority client accounts.
Our FA segment experienced an increase in Flex revenues of 18.0%
during the year ended December 31, 2015 as compared to 2014 and
increased 16.9% in 2014 from 2013. In its September 2015 update,
SIA stated that finance and accounting staffing is expected to
experience growth of 10% in 2015 and an additional 6% in 2016. 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-generating talent added in FA
Flex in the last few years. The Firm believes the FA segment will
continue to achieve year-over-year growth in 2016.
Our GS segment experienced a decrease in net service revenues
of 0.7% during the year ended December 31, 2015 as compared
to 2014 and increased 6.6% in 2014 from 2013. There remains
continued uncertainty within this segment due to an increase in
competition and the lowest price technically acceptable government
procurement environment. Our GS segment had a significant
amount of its contracts go through a standard recompete cycle with
the Federal Government and retained each of these contracts. The
Firm believes the GS segment will grow in 2016.
Total
Tech
FA
GS
$218,026
86,816
22,857
0.4%
15.7%
(13.9)%
$232,113
85,111
24,351
Total
$327,699
2.8%
$341,575
Billing Days
62
64
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 6.1%
during the year ended December 31, 2015 as compared to 2014
and increased 14.3% in 2014 from 2013. In the second half of 2015,
we experienced deceleration in our year-over-year quarterly growth
rates, which were 9.6% in the second quarter, 6.6% in the third
quarter and 0.2% in the fourth quarter of 2015. This deceleration
was primarily the result of several large clients decreasing their
spending with Kforce as a result of conditions which we believe are
temporary in nature, arising after certain significant organizational
changes within these clients. We do not believe this decrease in
spending represents a fundamental longer-term shift in spend. A
September 2015 report published by SIA stated that temporary
technology staffing is expected to experience growth of 6% in
2015 and an additional 6% in 2016. We believe that the broad-
based drivers to the demand in technology staffing such as cloud-
computing, data analytics, mobility and cybersecurity will continue
and that we are well positioned in this space. The Firm believes the
Tech segment will continue to grow year-over-year in 2016 due to
the market strength, the opportunities we see with our clients and
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
2015
12,885
9,008
21,893
Increase
(Decrease)
7.2%
17.1%
11.0%
2014
12,024
7,691
19,715
Increase
(Decrease)
10.0%
17.4%
12.8%
2013
10,929
6,550
17,479
As the GS segment primarily provides integrated business
solutions as compared to staffing services, Flex hours are not
presented above.
The increase in Flex revenues for Tech for the year ended
December 31, 2015 compared to the year ended December 31,
2014 was $50.3 million, composed of a $58.5 million increase
in volume, a $7.7 million decrease in bill rate and a $0.5 million
decrease from the impact of billable expenses. The increase in Flex
revenues for FA for the year ended December 31, 2015 compared
to the year ended December 31, 2014 was $44.9 million, composed
of a $42.6 million increase in volume and a $2.3 million increase in
bill rate. 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 changes in billable expenses, which are included as a component of net services revenues, are primarily attributable to 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
2015
$5,584
282
363
$6,229
Increase
(Decrease)
(8.4)%
(8.7)%
(7.2)%
(8.3)%
2014
$6,093
309
391
$6,793
Increase
(Decrease)
8.2%
(27.0)%
12.4%
6.1%
2013
$5,630
423
348
$6,401
Direct Hire Fees. The primary drivers of Direct Hire fees are the
number of placements and the fee for these placements. Direct
Hire 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.
Direct Hire revenues increased 15.8% during the year ended
December 31, 2015 as compared to 2014. Direct Hire revenues
decreased 3.6% during the year ended December 31, 2014 as
compared to 2013.
Total placements for our Tech and FA segments were as follows for the years ended December 31:
Tech
FA
Total placements
2015
1,395
2,505
3,900
Increase
(Decrease)
16.9%
11.0%
13.1%
2014
1,193
2,256
3,449
Increase
(Decrease)
(2.4)%
(7.9)%
(6.0)%
The average fee per placement for our Tech and FA segments were as follows for the years ended December 31:
Tech
FA
Total average placement fee
2015
$16,014
12,668
$13,864
Increase
(Decrease)
(0.3)%
3.8%
2.4%
2014
$16,062
12,205
$13,539
Increase
(Decrease)
2.3%
2.2%
2.6%
2013
1,222
2,449
3,671
2013
$15,695
11,946
$13,194
The increase in Direct Hire revenues from 2014 to 2015 was $7.4 million, composed of a $6.1 million increase in volume and a $1.3 million
increase in rate. The decrease in Direct Hire 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.
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 Direct Hire fees are equal to revenues, because there are generally no direct costs associated with such
revenues. As noted above, our GS segment does not make permanent placements; as a result, its gross profit percentage is the same as its
Flex gross profit percentage.
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
2015
29.2%
36.5%
34.3%
31.4%
Increase
(Decrease)
1.0%
—%
10.6%
1.9%
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%
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
2015
27.4%
29.7%
34.3%
28.5%
Increase
(Decrease)
0.7%
0.7%
10.6%
1.8%
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%
The increase in Flex gross profit from 2014 to 2015 was $32.2
million, composed of a $26.5 million increase in volume and a $5.7
million increase in rate. 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 percentage of 50 basis points
in 2015 from 2014 was due primarily to an increase in the spread
between our bill rates and pay rates in the FA segment, improved
profitability from our GS segment primarily as a result of growth
in its product business which carries a higher margin profile, and
a more favorable payroll tax environment as compared to 2014. 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.
Selling, General and Administrative (“SG&A”) Expenses. For the
years ended December 31, 2015, 2014 and 2013, total commissions,
compensation, payroll taxes, and benefit costs as a percentage
of SG&A represented 84.2%, 84.8%, and 85.9%, respectively.
Commissions, certain revenue-generating bonuses 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):
2015
% of
Revenues
2014
% of
Revenues
2013
% of
Revenues
Compensation, commissions,
payroll taxes and benefits costs
Other
Total SG&A
$278,207
52,209
$330,416
21.1%
3.9%
25.0%
$267,471
47,867
$315,338
22.0%
3.9%
25.9%
$264,636
43,308
$307,944
24.7%
4.0%
28.7%
16 KFORCE INC. AND SUBSIDIARIES
SG&A as a percentage of net service revenues decreased 90 basis
points in 2015 compared to 2014. This was primarily attributable to
a decrease in compensation, commissions, payroll taxes and benefits
costs of 0.9% of net service revenues, which was primarily a result of
a reduction in salaries and wages, benefits costs and a decrease in
commissions, driven by changes made to our compensation plans
to drive improvement in associate productivity. We continue to be
diligent with managing our SG&A expenses and expect to generate
further leverage in 2016 as revenues grow, which may be partially
offset by an investment in revenue-generating talent and certain
technology initiatives.
SG&A as a percentage of net service revenues decreased 280 basis
points in 2014 compared to 2013. This was primarily attributable to
a 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 due to 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.
Goodwill Impairment. During the year ending December 31,
2015, for our Tech and FA reporting units, Kforce assessed the
qualitative factors of each reporting unit concluding there were no
impairments. For our GS reporting unit, Kforce performed a step
one goodwill impairment analysis as of December 31, 2015 which
resulted in no impairment. During the year ended December 31,
2014, Kforce performed a step one goodwill impairment analysis
for each of its reporting units, which resulted in no impairments.
During the fourth quarter of 2013, Kforce management made a
strategic business decision with regard to the GS reporting unit to
focus its service offerings and efforts on prime integrated business
solutions 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.
Depreciation and Amortization. The following table presents depreciation and amortization expense by major category for the years ended
December 31, 2015, 2014 and 2013, as well as the increases (decreases) experienced during 2015 and 2014 (in thousands):
Fixed asset depreciation
Capitalized software amortization
Intangible asset amortization
Total depreciation and amortization
2015
$6,738
2,318
775
$9,831
Increase
(Decrease)
6.2%
(20.2)%
20.2%
(0.6)%
2014
$6,345
2,904
645
$9,894
Increase
(Decrease)
8.2%
(10.3)%
(13.7)%
0.5%
2013
$5,863
3,236
747
$9,846
Fixed Asset Depreciation: The $0.4 million increase in 2015 is
primarily the result of the leasehold improvement additions made
during 2015. The $0.5 million increase in 2014 is primarily the result
of leasehold improvement and furniture and fixture additions made
during 2014.
Capitalized Software Amortization: The $0.6 million decrease in
2015 is primarily the result of several capitalized software balances
becoming fully amortized during 2015. The $0.3 million decrease in
2014 is primarily the result of software disposals during 2014.
Other Expense, Net. Other expense, net was $2.2 million in 2015,
$1.4 million in 2014, and $1.1 million in 2013, and consists primarily
of interest expense related to outstanding borrowings under our
credit facility.
Income Tax Expense. For the year ending December 31, 2015,
income tax expense as a percentage of income from continuing
operations before income taxes (our “effective rate”) was 40.3%.
The 2015 rate was unfavorably impacted by a change in the overall
mix of income in the various state jurisdictions and the increase in
particular uncertain tax positions. For the year ending December 31,
2014, income tax expense as a percentage of income from continuing
operations before income taxes 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.
Income from Discontinued Operations, Net of Income Taxes.
Discontinued operations for the years ended December 31, 2014 and
2013 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.
Income tax expense as a percentage of income from discontinued
operations, before income taxes, for the year ended December 31,
2014 and 2013 was 40.6% and 40.1%, respectively.
KFORCE INC. AND SUBSIDIARIES 17
Adjusted EBITDA and Adjusted EBITDA Per Share. “Adjusted
EBITDA,” a non-GAAP financial measure, is defined by Kforce
as net income before income from discontinued operations,
net of income taxes, non-cash impairment charges, interest,
income taxes, depreciation and amortization and stock-based
compensation expense. “Adjusted EBITDA Per Share,” a non-GAAP
financial measure, is Adjusted EBITDA divided by the number of
diluted weighted average shares outstanding. 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 are key measures used by management to evaluate our
operations, including our ability to generate cash flows and our
ability to repay our debt obligations, and management believes
they are good measures of our core profitability, consequently,
management believes they are useful information to investors. The
measures should not be considered in isolation or as alternatives
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 that may
have previously been 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 EBITDA Per Share to Earnings Per Share for the years ended December 31 (in thousands, except per share amounts):
Years Ended December 31,
Net income
Income from discontinued operations,
net of income taxes
Income from continuing operations
Goodwill impairment, pre-tax
Depreciation and amortization
Stock-based compensation expense
Interest expense and other
Income tax expense
Adjusted EBITDA
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
2015
Per Share
2014
Per Share
2013
Per Share
$42,824
$1.52
$90,915
$2.87
$10,787
$0.32
—
$42,824
—
9,831
5,819
1,960
28,848
$89,282
27,910
28,190
—
$1.52
—
0.35
0.21
0.07
1.02
$3.17
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
Free Cash Flow. “Free Cash Flow,” a non-GAAP financial measure, is defined by Kforce as net cash provided by (used in) operating activities
determined in accordance with GAAP, less capital expenditures. Management believes this provides useful information to investors about the
amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic
acquisitions, repurchasing common stock and paying dividends.
The following table presents Free Cash Flow for the years ended December 31 (in thousands):
Years Ended December 31,
Net income
Gain on sale of discontinued operations
Goodwill impairment
Non-cash provisions and other
Changes in operating assets/liabilities
Capital expenditures
Free cash flow
Proceeds from disposition of business
Change in debt
Repurchases of common stock
Cash dividend
Other
Change in cash
18 KFORCE INC. AND SUBSIDIARIES
2015
$ 42,824
—
—
21,602
5,754
(8,328)
61,852
—
(12,861)
(38,471)
(12,545)
2,284
2014
$ 90,915
(64,600)
—
15,376
(67,273)
(6,011)
(31,593)
117,887
30,726
(101,771)
(12,776)
(2,110)
2013
$ 10,787
—
14,510
17,906
(42,738)
(8,145)
(7,680)
—
41,607
(29,810)
(3,297)
(1,326)
$ 259
$ 363
$ (506)
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, 2015, Kforce had $126.8 million in
working capital compared to $130.2 million in 2014. Kforce’s current
ratio (current assets divided by current liabilities) was 2.4 at the end
of 2015 and 2014, respectively.
The accompanying Consolidated Statements of Cash Flows for
each of the three years ended December 31, 2015, 2014 and 2013
in this Annual 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 quarterly dividends and
common stock repurchase program; (3) maintaining an appropriate
outstanding balance on our credit facility; (4) investing in our
infrastructure to allow sustainable growth via capital expenditures;
and (5) having sufficient liquidity for the possibility of completing
an acquisition or for an unexpected necessary expense.
We believe that existing cash and cash equivalents, cash flow
from operations, and available borrowings under our credit facility
will be adequate to meet the capital expenditure and working capital
requirements of our operations for at least the next 12 months.
However, a material deterioration in the economic environment
or market conditions, among other things, could negatively impact
operating results and liquidity, as well as the ability of our lenders
to fund borrowings.
Actual results in the future 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):
gain on sale of discontinued operations and goodwill impairment
charges in prior years. These adjustments are more fully detailed
in our Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2015, 2014 and 2013, in this Annual
Report. Our largest source of operating cash flows is the collection
of trade receivables and our largest use of operating cash flows
is the payment of our employee and consultant populations’
compensation, which includes base salary, commissions and
bonuses. When comparing cash flows from operating activities for
the years ended December 31, 2015, 2014 and 2013, the increase
in cash provided by operating activities during the year ended
December 31, 2015 as compared to 2014 is primarily a result of
improved timing of collections of accounts receivable as well as
growth in our profitability. The increase in cash used in operating
activities during the year ended December 31, 2014, as compared to
2013, is primarily a result of the increase in accounts receivable due
to the timing of collections and certain tax payments made related
to the HIM divestiture and resulting gain on sale.
Investing Activities
Capital expenditures during 2015, 2014 and 2013, which exclude
equipment acquired under capital leases, were $8.3 million, $6.0
million and $8.1 million, respectively. Proceeds from the divestiture of
HIM were $117.9 million during the year ended December 31, 2014.
We expect to continue to selectively invest in our infrastructure
in order to support the expected future growth in our business. We
believe that we have sufficient cash and availability under the 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.
Years Ended December 31,
2015
2014
2013
Financing Activities
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
$ 70,180
(8,364)
(61,557)
$ (25,582)
110,535
(84,590)
$ 465
(8,547)
7,576
Net increase (decrease) in
cash and cash equivalents $ 259
$ 363
$ (506)
Discontinued Operations
As was previously discussed, Kforce divested of HIM on August 4,
2014. The accompanying Consolidated Statements of Cash
Flows have been presented on a combined basis (continuing
operations and discontinued operations) for each of the years
ended December 31, 2014 and 2013. 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 and stock-based compensation, as well as
During the year ended December 31, 2015, the Firm paid cash
for repurchases of common stock totaling $38.5 million, which
was composed of approximately $37.1 million of open market
common stock repurchases and $1.4 million of common stock
repurchases attributable to shares withheld for statutory minimum
tax withholding requirements pertaining to the vesting of restricted
stock awards. Of the $37.1 million of open market common stock
repurchases, $1.4 million of the cash paid during the year ended
December 31, 2015 related to the settlement of 2014 repurchases.
During 2014, Kforce 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 paid cash for repurchases of 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.
KFORCE INC. AND SUBSIDIARIES 19
During the year ended December 31, 2015, Kforce declared and
paid dividends in cash of $12.5 million, or $0.45 per share. 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
year ended December 31, 2013, Kforce declared and paid dividends
in cash of $3.3 million, or $0.10 per share. Kforce currently expects
to continue to declare and pay quarterly dividends of a similar
amount. However, the declaration, payment and amount of future
dividends are discretionary and will be subject to determination
by Kforce’s Board of Directors each quarter following its review of,
among other things, the Firm’s financial performance and our legal
ability to pay dividends.
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. As subsequently amended on March 30, 2012,
December 27, 2013 and on December 23, 2014 (as amended to
date, the “Credit Facility”), the Credit Facility includes 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. See Note 9—“Credit Facility” in the Notes to Consolidated
Financial Statements, included in this Annual Report for a complete
discussion of our Credit Facility.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2015, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $3.2 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, 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 of the Board-authorized common stock repurchase
program remained available for future repurchases. On July 31,
2015, our Board of Directors approved a $60.0 million increase to
the then remaining authorized amount. During the year ended
December 31, 2015, Kforce repurchased approximately 1.5 million
shares of common stock at a total cost of approximately $36.7
million under the Board-authorized common stock repurchase
program. As of December 31, 2015, $53.0 million remained
available for future repurchases.
20 KFORCE INC. AND SUBSIDIARIES
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2015 (in thousands):
Operating lease obligations
Capital lease obligations
Credit Facility (a)
Interest payable—Credit Facility (b)
Equipment notes (c)
Interest payable—equipment notes (c)
Purchase obligations
Liability for unrecognized tax positions (d)
Deferred compensation plan liability (e)
Other (f)
Supplemental executive retirement plan (g)
Foreign defined benefit pension plan (h)
Total
Total
$ 20,212
2,023
80,472
7,845
2,914
206
15,307
—
26,526
—
14,284
7,504
$177,293
Less than
1 year
$ 7,970
943
—
1,569
575
75
9,627
—
2,288
—
—
376
$23,423
Payments due by period
1-3 Years
3-5 Years
$ 9,722
1,006
—
3,138
1,150
98
5,562
—
2,895
—
—
4
$23,575
$ 2,520
74
80,472
3,138
1,189
33
118
—
1,326
—
10,297
82
$99,249
More than
5 years
$ —
—
—
—
—
—
—
—
20,017
—
3,987
7,042
$31,046
(a) The Credit Facility expires December 23, 2019.
(b) Kforce’s weighted average interest rate as of December 31, 2015 was 1.95%, 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 entered into separate notes with Wells Fargo and Bank of America N.A for the purchase of furniture, fixtures and equipment during 2015. The aggregate outstanding amounts
under these notes as of December 31, 2015 are included in the accompanying Consolidated Balance Sheets and classified in Other current liabilities if payable within the next year
or in Long-term debt—other if payable after the next year. The interest rate on the notes are 2.80% and 2.64%, respectively. The equipment notes expire in November 2020.
(d) Kforce’s liability for unrecognized tax positions as of December 31, 2015 was $0.8 million. This balance has been excluded from the table above due to the significant uncertainty
with respect to the timing and amount of settlement, if any.
(e) 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 included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and 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.
(f) Kforce provides letters of credit to certain vendors in lieu of cash deposits. Kforce currently has letters of credit totaling $3.7 million outstanding as security for workers’
compensation and property insurance policies, as well as facility lease deposits. Kforce maintains a sub-limit for letters of credit of $15.0 million under its Credit Facility.
(g) 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, 2015, in the table above. See Note 11—“Employee Benefit Plans” in the Notes to Consolidated Financial Statements for more detail.
(h) There is no funding requirement associated with this plan. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2015 in the
table above. See Note 11—“Employee Benefit Plans” in the Notes to Consolidated Financial Statements for more detail.
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 2015, there were
no on-going IRS examinations. 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 concerning any future income tax audits.
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, 2015. 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, 2015, 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, 2015 and
2014, and the related Consolidated Statements of Operations and Comprehensive Income, Changes in Stockholders’ Equity, and Cash Flows
for each of the three years in the period ended December 31, 2015. We also have audited Kforce’s internal control over financial reporting as
of December 31, 2015, 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, 2015 and 2014, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2015, 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, 2015,
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 26, 2016
KFORCE INC. AND SUBSIDIARIES 23
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(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 from operations
Other expense (income):
Interest expense
Other expense (income)
Income from continuing operations, before income taxes
Income tax expense
Income from continuing operations
Income from discontinued operations, net of income taxes
Net income
Other comprehensive income (loss):
Defined benefit pension and post-retirement plans, net of tax
Comprehensive income
Earnings per share—basic:
From continuing operations
From discontinued operations
Earnings per share—basic
Earnings per share—diluted
From continuing operations
From discontinued operations
Earnings per share—diluted
2015
$1,319,238
905,124
414,114
330,416
—
9,831
73,867
1,982
213
71,672
28,848
42,824
—
42,824
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
689
$ 43,513
(688)
$ 90,227
3,030
$ 13,817
$1.53
$ —
$1.53
$1.52
$ —
$1.52
$0.94
$1.95
$2.89
$0.93
$1.94
$2.87
$0.16
$0.16
$0.32
$0.16
$0.16
$0.32
Weighted average shares outstanding—basic
27,910
31,475
33,511
Weighted average shares outstanding—diluted
28,190
31,691
33,643
Cash dividends declared per share
$0.45
$0.41
$0.10
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 $2,121 and $2,040, 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, 70,558 and 70,029 issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost; 42,130 and 40,616 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2015
2014
$ 1,497
198,933
526
4,518
9,060
214,534
37,476
28,671
20,938
4,235
45,968
$ 351,822
$ 39,227
46,125
1,287
1,107
87,746
80,472
3,351
40,626
212,195
$ 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
—
705
420,276
318
155,096
(436,768)
139,627
$ 351,822
—
700
412,642
(371)
125,378
(398,961)
139,388
$ 363,922
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 dividend equivalents, 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 dividend equivalents, net of forfeitures
Exercise of stock options
Balance at end of period
Additional paid-in capital:
Balance at beginning of period
Issuance for stock-based compensation and dividend equivalents, 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 income (loss):
Balance at beginning of period
Pension and post-retirement plans, net of tax of $429, $394 and $1,919, respectively
Balance at end of period
Retained earnings:
Balance at beginning of period
Net income
Dividends and dividend equivalents, net of forfeitures
($0.45, $0.41 and $0.10 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.
2015
2014
2013
70,029
497
32
70,558
$ 700
5
0
$ 705
$ 412,642
556
381
551
5,819
327
$ 420,276
69,480
444
105
70,029
$ 695
4
1
$ 700
$ 404,600
369
1,213
595
5,475
390
$ 412,642
68,531
882
67
69,480
$ 685
9
1
$ 695
$ 400,688
72
597
399
2,570
274
$ 404,600
$ (371)
689
$ 318
$ 317
(688)
$ (371)
$ (2,713)
3,030
$ 317
$ 125,378
42,824
$ 47,612
90,915
$ 40,203
10,787
(13,106)
$ 155,096
(13,149)
$ 125,378
(3,378)
$ 47,612
40,616
1,540
—
(26)
42,130
35,751
4,896
4
(35)
40,616
33,980
1,812
—
(41)
35,751
$(398,961)
(38,058)
—
251
$(436,768)
$(295,991)
(103,195)
(84)
309
$(398,961)
$ (269,017)
(27,313)
—
339
$(295,991)
26 KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Gain on sale of discontinued operations
Goodwill impairment
Deferred income tax provision, 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
Excess tax benefit attributable to stock-based compensation
Loss on deferred compensation plan investments, net
Gain from Company-owned life insurance proceeds
Contingent consideration liability remeasurement
Other
Decrease (increase) 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 provided by (used in) 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 (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from bank line of credit
Payments on bank line of credit
Proceeds from financing agreement
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
2015
2014
2013
$ 42,824
$ 90,915
$ 10,787
—
—
2,380
1,553
9,849
5,819
1,846
122
(551)
77
—
321
186
4,223
2,785
1,110
(298)
1,788
(5,503)
(1,657)
3,306
70,180
(8,328)
—
—
445
(481)
—
—
(8,364)
604,668
(617,529)
2,914
(1,274)
—
(252)
381
551
(38,471)
(12,545)
(61,557)
259
1,238
(64,600)
—
491
825
10,058
3,028
1,424
105
—
446
(849)
—
(152)
(40,339)
4,409
530
(27)
5,653
(248)
(34,934)
(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
(110)
304
—
—
257
(28,071)
(5,970)
(3,170)
(57)
(12,471)
7,422
(504)
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
Cash and cash equivalents at end of year
$
1,497
$
1,238
$
875
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
Accounts Receivable Reserves
Organization and Nature of Operations
Kforce Inc. and its 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, 2015 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 in the
Consolidated Statements of Cash Flows to conform to the current
year presentation.
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 “the Registrant,” “Kforce,” “the Company,” “we,” “the
Firm,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except
where the context otherwise requires or indicates.
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.
Cash and Cash Equivalents
Kforce classifies all highly liquid investments with an original
initial maturity of three months or less as cash equivalents. Cash
and cash equivalents consist of cash on hand with banks, either in
commercial accounts, or overnight interest-bearing money market
accounts and at times may exceed federally insured limits. Cash and
cash equivalents are stated at cost, which approximates fair value
due to the short duration of their maturities.
28 KFORCE INC. AND SUBSIDIARIES
Kforce establishes its reserves for expected credit losses, fallouts,
early payment discounts and revenue adjustments based on past
experience and estimates of potential future activity. Specific to our
allowance for doubtful accounts, which comprises a majority of our
accounts receivable reserves, Kforce performs an ongoing analysis of
factors including recent write-off and delinquency trends, a specific
analysis of significant receivable balances that are past due, the
concentration of accounts receivable among clients and higher-risk
sectors, and the current state of the U.S. economy. Trade receivables
are written off by Kforce after all reasonable collection efforts have
been exhausted.
Accounts receivable reserves as a percentage of gross accounts
receivable was 1.1% and 1.0% as of December 31, 2015 and
December 31, 2014, 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 Direct
Hire 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.
Direct Hire 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 Direct Hire fees. Our GS segment,
which represents approximately 7% of total revenues, generates
revenues under the following contract arrangements.
• Revenues for time-and-materials contracts, which accounts for
approximately 62% of this segment’s revenue, are recognized
based on contractually established billing rates at the time
services are provided.
• Revenues for fixed-price contracts are recognized on the basis
of the estimated percentage-of-completion. Approximately 16%
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.
• Revenues for cost-plus arrangements are recognized based
on allowable costs incurred plus an estimate of the applicable
fees earned. Approximately 6% of this segment’s revenues are
recognized under these arrangements.
• Revenues for the product-based business, which accounts for
approximately 16% of this segment’s revenues, are recognized
at the time of shipment.
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.
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. Upon
sale or disposition of our fixed assets, the cost and accumulated
depreciation are removed and any resulting gain or loss, net of
proceeds, is reflected in the Consolidated Statements of Operations
and Comprehensive Income.
Taxes Assessed by Governmental Agencies—Revenue Producing
Transactions
Goodwill and Other Intangible Assets
Goodwill
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.
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 excess 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 Income tax expense in the accompanying Consolidated
Statements of Operations and Comprehensive Income.
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 a contingent consideration
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
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. Our trade names and trademarks, and
derivatives thereof, and GS’s “Data Confidence” trademark are
important to our business. Our primary trade names and trademark
are registered with the United States Patent and Trademark Office.
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 are capitalized and classified as capitalized software. Kforce
capitalized development-stage implementation costs of $0.3
million, $0.4 million and $1.0 million during the years ended
December 31, 2015, 2014 and 2013, 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 Direct Hire revenues) or gross profit
(for Flex revenues) 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.
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 $300 thousand in claims annually. Additionally,
for all claim amounts exceeding $300 thousand, Kforce retains the
risk of loss up to an aggregate annual loss of those claims of $450
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 per share is computed as earnings 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 per common
share is computed by dividing the earnings 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.
30 KFORCE INC. AND SUBSIDIARIES
The following table sets forth the computation of basic and
diluted earnings per share for the three years ended December 31
(in thousands, except per share amounts):
Years Ended December 31,
2015
2014
2013
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:
$42,824 $29,398 $ 5,294
Cash dividends declared per share
$0.45
Years Ended December 31,
2015
2014
$0.41
2013
$0.10
Numerator:
Income from
continuing operations
Income from discontinued
operations, net of tax
—
61,517
5,493
Net income
$42,824 $90,915 $10,787
Denominator:
Weighted average shares
outstanding—basic
Common stock equivalents
Weighted average shares
outstanding—diluted
Earnings per share—basic:
From continuing operations
From discontinued operations
Earnings per share—basic
Earnings per share—diluted:
From continuing operations
From discontinued operations
Earnings per share—diluted
27,910
280
31,475
216
33,511
132
28,190
31,691
33,643
$1.53
—
$1.53
$1.52
—
$1.52
$0.94
1.95
$2.89
$0.93
1.94
$2.87
$0.16
0.16
$0.32
$0.16
0.16
$0.32
For the years ended December 31, 2015, 2014 and 2013, there
were inconsequential common stock equivalents excluded from the
weighted average diluted common shares based on the fact that
their inclusion would have had an anti-dilutive effect on earnings
per share.
Treasury Stock
Kforce’s Board of Directors (“Board”) may authorize share
repurchases of Kforce’s common stock. Shares repurchased under
Board authorizations are held in treasury for general corporate
purposes, including issuances under the 2009 ESPP. 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 the SERP which covers a limited number of executives
and a defined benefit plan covering all eligible employees in our
Philippine operations. Because each of these plans is unfunded
as of December 31, 2015, 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.
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
Kforce currently expects to continue to declare and pay quarterly
dividends of a similar amount. However, the declaration, payment
and amount of future dividends are discretionary and will be
subject to determination by Kforce’s Board of Directors each quarter
following its review of, among other things, the Firm’s financial
performance and our legal ability to pay dividends.
New Accounting Standards
In February 2016, the FASB issued authoritative guidance
regarding the accounting for leases. The guidance is to be applied
for annual periods beginning after December 15, 2018 and interim
periods within those annual periods, and early adoption is permitted.
The guidance requires companies to apply the requirements
retrospectively to all prior periods presented, including interim
periods. Kforce elected not to adopt this standard early. Kforce is
currently evaluating the potential impact on the consolidated
financial statements.
In November 2015, the FASB issued authoritative guidance
requiring that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. This
guidance is to be applied for annual periods beginning after
December 15, 2016, and interim periods within those annual
periods, and early adoption is permitted. Kforce is still determining
if it will early adopt this standard. Kforce anticipates a change to
the presentation of the deferred tax liabilities and assets on the
consolidated balance sheets upon adoption.
In April 2015, the FASB issued authoritative guidance regarding
a customer’s accounting for fees paid in a cloud computing
arrangement. This guidance is to be applied for annual periods
beginning after December 15, 2015 and interim periods within those
annual periods, and early adoption is permitted. Kforce elected not
to adopt this standard early. Kforce does not anticipate a material
impact to the consolidated financial statements upon adoption.
In April 2015, the FASB issued authoritative guidance requiring
that debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct reduction from the carrying
amount of the debt liability, similar to debt discounts. The guidance
is to be applied for fiscal years beginning after December 15, 2015
and interim periods within those fiscal years, and early adoption is
permitted. Kforce elected not to adopt this standard early. Kforce
does 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. In August 2015, the FASB issued authoritative
guidance deferring the effective date of the new revenue standard
by one year for all entities. The one year deferral results in the
guidance being effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017 and entities
are not permitted to adopt the standard earlier than the original
effective date. The guidance permits companies to either apply the
KFORCE INC. AND SUBSIDIARIES 31
requirements retrospectively to all prior periods presented, or apply
the requirements in the year of adoption, through a cumulative
adjustment. We have not yet selected a transition method. We
do not currently anticipate a material impact to the consolidated
financial statements upon adoption; however, we do anticipate an
increase in the level of disclosure around revenue.
2. DISCONTINUED OPERATIONS
Effective August 3, 2014, Kforce sold to RCM Acquisition, Inc. (the
“Purchaser”), under a Stock Purchase Agreement (the “SPA”) dated
August 4, 2014, all of the issued and outstanding stock of KHI, a
wholly-owned subsidiary of Kforce Inc. and 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.
In connection with the sale, Kforce entered into a Transition
Services Agreement (the “TSA”) with the Purchaser to provide certain
post-closing transitional services for a period not to exceed 12
months. Services provided by Kforce under the TSA ceased during the
three months ended September 30, 2015. The fees for the services
under the TSA were generally equivalent to Kforce’s cost.
In accordance with and defined within the SPA, Kforce was 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 SPA, with the exception of certain items, ceased 12
months from the closing date and were limited to an aggregate of
$8.925 million, although these time and monetary caps do not apply
to certain specified losses. While it cannot be certain, Kforce believes
any material exposure under the indemnification provisions is
remote, particularly given that the 12 month time period for general
indemnification claims has now passed and, as a result, Kforce has
not recorded a liability as of December 31, 2015.
The total financial results of HIM have been presented as
discontinued operations in the accompanying Consolidated
Statements of Operations and Comprehensive Income. The following
summarizes the revenues and pretax profits of HIM for the two years
ended December 31 (in thousands):
3. FIXED ASSETS
Major classifications of fixed assets and related useful lives are
summarized as follows (in thousands):
December 31,
Land
Building and improvements
Furniture and equipment
Computer equipment
Leasehold improvements
Useful Life
5-40 years
5-10 years
3-5 years
3-5 years
Less accumulated depreciation
and amortization
2015
2014
$ 5,892 $ 5,892
25,304
10,881
10,380
8,347
60,804
25,516
11,802
11,393
11,632
66,235
(28,759)
(25,474)
$ 37,476 $ 35,330
Computer equipment at December 31, 2015 includes equipment
acquired under capital leases of $4.7 million and related
accumulated depreciation of $2.9 million. Computer equipment
at December 31, 2014 includes equipment acquired under capital
leases of $3.8 million and related accumulated depreciation of $2.3
million. Depreciation and amortization expense, which includes
amortization of capital leases, during the years ended December 31,
2015, 2014 and 2013 was $6.7 million, $6.3 million and $5.9 million,
respectively.
4. INCOME TAXES
The provision for income taxes from continuing operations
consists of the following (in thousands):
Years Ended December 31,
2015
2014
2013
Current:
Federal
State
Deferred
$22,265
4,632
1,951
$15,782
2,527
250
$28,848
$18,559
$4,140
449
1,046
$5,635
Years Ended December 31,
Net service revenues
Income from discontinued operations,
before income taxes
2014
2013
$ 56,670 $78,159
$103,512 $ 9,169
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,
2015
2014
2013
35.0%
Federal income tax rate
State income taxes,
net of Federal tax effect
6.1
Non-deductible goodwill impairment —
Non-deductible compensation
—
Non-deductible meals and
entertainment
Other
0.7
(1.5)
35.0%
35.0%
3.2
—
1.1
1.1
(1.7)
4.1
4.3
—
5.2
3.0
Effective tax rate
40.3%
38.7%
51.6%
The 2015 rate was unfavorably impacted by a change in the
overall mix of income in the various state jurisdictions and the
increase in particular uncertain tax positions.
For the year ended December 31, 2014, the income from
discontinued operations included a gain, net of transaction costs,
on the sale of HIM 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.
Income tax expense as a percentage of income from discontinued
operations, before income taxes, for the year ended December 31,
2014 and 2013 was 40.6% and 40.1%, respectively.
32 KFORCE INC. AND SUBSIDIARIES
Deferred income tax assets and liabilities are composed of the
following (in thousands):
December 31,
Deferred taxes, current:
Assets:
2015
2014
Accounts receivable reserves
Accrued liabilities
Deferred compensation obligation
Other
$ 982
2,753
895
74
$ 804
3,123
1,426
75
Deferred tax assets, current
4,704
5,428
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
22,552
Liabilities:
Fixed assets
Other
Deferred tax liabilities, non-current
Valuation allowance
(1,198)
(331)
(1,529)
(85)
Deferred tax asset, net—non-current 20,938
22,855
Net deferred tax asset
$25,456
$27,835
At December 31, 2015, Kforce had approximately $4.7 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.
(186)
4,518
(448)
4,980
613
6,956
1,817
5,303
7,543
27
293
649
6,324
1,185
5,125
10,407
28
995
24,713
(1,651)
(122)
(1,773)
(85)
Kforce is periodically subject to IRS audits, as well as state and
other local income tax audits for various tax years. During 2015,
there were no ongoing IRS examinations. 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 concerning any future
income tax audits.
Uncertain Income Tax Positions
An uncertain income tax position taken on the income tax return
must be recognized in the consolidated financial statements at the
largest amount that is more likely than not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50% likelihood
of being sustained.
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits for the years ended December 31, 2015,
2014 and 2013 is as follows (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
Ending balance
2015
$278
2014
$ 403
2013
$133
625
—
90
—
269
25
(33)
(82)
(35)
(180)
(24)
—
$788
$ 278
$403
The entire amount of these unrecognized tax benefits as of
December 31, 2015, 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 2011.
KFORCE INC. AND SUBSIDIARIES 33
5. OTHER ASSETS
Other assets consisted of the following (in thousands):
December 31,
Assets held in Rabbi Trust
Capitalized software, net of amortization
Deferred loan costs, net of amortization
Other non-current assets
2015
2014
$25,489 $25,715
3,678
608
348
2,049
487
646
$28,671 $30,349
As of December 31, 2015 and 2014, the assets held in Rabbi
Trust were $25.5 million and $25.7 million, respectively, which
was primarily related to the cash surrender value of life insurance
policies. 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 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 $0.7 million and $1.2 million during the years
ended December 31, 2015 and 2014, respectively. Accumulated
amortization of capitalized software was $37.7 million and
$37.6 million as of December 31, 2015 and 2014, respectively.
Amortization expense of capitalized software during the years
ended December 31, 2015, 2014 and 2013 was $2.3 million, $2.9
million and $3.2 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, 2015 and 2014 (in thousands):
Balance as of December 31, 2013
Additions (a)
Disposition of HIM (b)
Balance as of December 31, 2014
Balance as of December 31, 2015
Finance and
Accounting
Health
Information
Management
Government
Solutions
$8,006
—
—
$8,006
$8,006
$ 4,887
—
(4,887)
$ —
$ —
$18,973
1,955
—
$20,928
$20,928
Technology
$17,034
—
—
$17,034
$17,034
Total
$48,900
1,955
(4,887)
$45,968
$45,968
(a) The increase is due to a non-significant acquisition of a business within our GS reporting unit in the fourth quarter of 2014.
(b) The decrease is due to the disposition of our HIM reporting segment. See Note 2—“Discontinued Operations” for additional discussion.
Throughout 2015, 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.
Kforce performed its annual impairment assessment of the
carrying value of goodwill as of December 31, 2015. For our
Technology and Finance and Accounting 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 these
reporting units was more than their carrying amounts.
For our GS reporting unit, we compared its carrying value to
the estimated fair value based on a weighting of both the income
approach and market approaches. Discounted cash flows, which
serve as the primary basis for the income approach, were based on
a discrete financial forecast which was developed by management
for planning purposes and was 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. 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 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.
Our assessment indicated that the fair value of the GS reporting
unit exceeded its carrying value.
Based on our impairment assessments results, no impairment
charges were recognized for the Tech, FA and GS reporting units
during the year ended December 31, 2015.
For 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 and as a result no impairment charges
were recognized.
34 KFORCE INC. AND SUBSIDIARIES
For the impairment tests performed as of December 31, 2013,
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 these reporting
units was more than its carrying amount. 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 solutions. 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 performed 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. A tax benefit in the amount of $5.2 million was recorded
related to the goodwill impairment charge.
Total goodwill impairment for the years ending December 31,
2015, 2014 and 2013 was nil, nil and $14.5 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, 2015
(in thousands):
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
Goodwill Carrying Value by Reporting Unit as of:
December 31, 2015
December 31, 2014
December 31, 2013
$ 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
$ 104,596
(83,668)
$ 20,928
$ 156,391
(139,357)
$ 17,034
$ 19,766
(11,760)
$ 8,006
$ 102,641
(83,668)
$ 18,973
Other Intangible Assets
The gross and net carrying values of intangible assets as of December 31, 2015 and 2014, by major intangible asset class, are as follows
(in thousands):
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 carrying value
December 31, 2015
December 31, 2014
$ 28,603
(26,608)
$ 1,995
$ 2,240
$ 28,603
(25,832)
$ 2,771
$ 2,240
Amortization expense on intangible assets for each of the three years ended December 31, 2015, 2014 and 2013 was $0.8 million, $0.7
million and $0.7 million, respectively. Amortization expense for 2016, 2017, 2018, 2019, 2020 and thereafter is expected to be approximately
$0.6 million, $0.3 million, $0.3 million, $0.3 million, $0.2 million and $0.2 million, respectively.
There was no impairment expense related to indefinite-lived intangible assets during the years ended December 31, 2015, 2014 or 2013.
KFORCE INC. AND SUBSIDIARIES 35
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
2015
2014
$23,513
15,714
$21,863
16,241
$39,227
$38,104
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
2015
2014
$39,043
2,832
2,968
1,282
$43,797
3,062
3,417
1,932
$46,125
$52,208
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.
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, a fixed charge
coverage ratio, which is only applicable in the event that the Firm’s
availability under the Credit Facility falls below the greater of (i) 10%
of the aggregate amount of the commitment of all of the lenders
under the Credit Facility and (ii) $11 million. The numerator in the
fixed charge coverage ratio is defined pursuant to the Credit Facility
as earnings before interest expense, income taxes, depreciation
and amortization, including the amortization of stock-based
compensation expense, less cash paid for capital expenditures. The
denominator is defined as Kforce’s fixed charges such as interest
expense, principal payments paid or payable on outstanding debt
other than borrowings under the Credit Facility, income taxes
payable, and certain other payments. This financial covenant, if
applicable, requires that the numerator be equal to or greater than
the denominator.
Also, our ability to make distributions or repurchase equity
securities could be limited if the Firm’s availability is less than the
greater of (i) 12.5% of the aggregate amount of the commitment
of all lenders under the Credit Facility or (ii) $20.6 million. Since
Kforce had availability under the Credit Facility of $48.5 million as
of December 31, 2015, the fixed charge coverage ratio covenant
was not applicable nor was Kforce limited in making distributions
or repurchases of its equity securities. 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 be limited in 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, 2015 and 2014, $80.5 million and $93.3
million was outstanding under the Credit Facility, respectively. As of
February 23, 2016, $88.4 million was outstanding and $43.5 million
was available under the Credit Facility.
10. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following (in
thousands):
December 31,
Deferred compensation plan (Note 11)
Supplemental executive
retirement plan (Note 11)
Other
2015
2014
$24,238
$22,425
11,337
5,051
10,197
3,834
$40,626
$36,456
36 KFORCE INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS
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 GS. 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 $1.4 million and $1.3
million for the above plans as of December 31, 2015 and 2014,
respectively. The Kforce 401(k) Plan and Government 401(k) Plan
held a combined 218 thousand and 229 thousand shares of Kforce’s
common stock as of December 31, 2015 and 2014, 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 26 thousand, 35 thousand and 41 thousand shares of
common stock at an average purchase price of $22.61, $19.76 and
$14.88 per share during the years ended December 31, 2015, 2014
and 2013, 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, 2015 and 2014,
amounts included in accounts payable and other accrued liabilities
related to the deferred compensation plan totaled $2.3 million
and $3.7 million, respectively. Amounts included in other long-
term liabilities related to the deferred compensation plan totaled
$24.2 million and $22.4 million as of December 31, 2015 and 2014,
respectively. Kforce has insured the lives of certain participants
in the deferred compensation plan to assist in the funding of
the deferred compensation liability. Compensation expense of
$401 thousand was recognized for the plans for the year ended
December 31, 2015. Compensation income from continuing
operations of $187 thousand was recognized for the plans for the
year ended December 31, 2014 and compensation expense from
continuing operations of $566 thousand was recognized for the
plans for the year ended December 31, 2013.
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 $25.5 million and $25.7 million as of December 31, 2015
and 2014, respectively, and is recorded in Other assets, net in the
accompanying Consolidated Balance Sheets. For the years ended
December 31, 2015, 2014 and 2013, there was nil, nil and $15
thousand in losses, respectively, attributable to the investments in
trading securities, including money market funds, which is included
in Selling, general and administrative expenses in the Consolidated
Statements of Operations and Comprehensive Income.
Foreign Pension Plan
Kforce maintains a foreign defined benefit pension plan (the
“Foreign Pension Plan”) for eligible employees of the Philippine
branch of Global that is required by Philippine labor laws. The
Foreign Pension 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 Foreign Pension Plan
equate to one-half month’s salary for each year of credited service.
Benefits under the Foreign Pension 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, 2015, 2014 and 2013, the discount rate
used to determine the actuarial present value of the projected
benefit obligation and pension expense was 5.2%, 4.7% and 5.0%,
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, 2015,
2014 and 2013 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,
2015, 2014 and 2013, net periodic benefit cost was $280 thousand,
$124 thousand and $92 thousand, respectively.
As of December 31, 2015 and 2014, the projected benefit
obligation associated with our foreign defined benefit pension plan
was $1.2 million and $1.6 million, respectively, which is classified
in Other long-term liabilities in the accompanying Consolidated
Balance Sheets. The decrease in the projected benefit obligation is
the result of changes in the actuarial assumptions and a reduction in
the number of plan participants. There is no requirement for Kforce
to fund the Foreign Pension Plan and, as a result, no contributions
were made to the Foreign Pension Plan during the year ended
December 31, 2015. Kforce does not currently anticipate funding
the Foreign Pension Plan during the year ending December 31, 2016.
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 will
be 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, 2015,
Kforce has assumed that all participants will elect to take the lump
sum present value option based on historical trends.
Actuarial Assumptions
Due to the SERP being unfunded as of December 31, 2015 and
2014, it is not necessary for Kforce to determine the expected
long-term rate of return on plan assets. The following represents
the actuarial assumptions used to determine the actuarial present
value of projected benefit obligations at:
December 31,
Discount rate
Rate of future compensation increase
2015
2014
4.00%
4.00%
3.75%
4.00%
The following represents the weighted average actuarial
assumptions used to determine net periodic benefit cost for the
years ended:
December 31,
2015
2014
2013
Discount rate
3.75%
Rate of future compensation increase 4.00%
3.75%
4.00%
2.50%
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.
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
2015
$1,323
383
—
—
$1,706
2014
$1,164
294
—
—
$1,458
2013
$2,018
471
97
24
$2,610
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
2015
2014
$10,197
1,323
383
$ 7,852
1,164
294
in actuarial assumptions
(566)
887
Projected benefit obligation, ending
$11,337
$10,197
There were no payments made under the SERP during the years
ended December 31, 2015 and 2014, respectively. The projected
benefit obligation is recorded in Other long-term liabilities in the
accompanying Consolidated Balance Sheets. The accumulated
benefit obligation is the actuarial present value of all benefits
attributed to past service, excluding future salary increases. The
accumulated benefit obligation as of December 31, 2015 and 2014
was $11.0 million and $9.5 million, respectively.
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, 2015. Kforce does not currently anticipate
funding the SERP during the year ending December 31, 2016.
38 KFORCE INC. AND SUBSIDIARIES
Estimated Future Benefit Payments
12. FAIR VALUE MEASUREMENTS
Undiscounted benefit payments by the SERP, which reflect the
anticipated future service of participants, expected to be paid are
as follows (in thousands):
2016
2017
2018
2019
2020
2021-2025
Thereafter
Projected Annual
Benefit Payments
$ —
—
—
10,297
—
—
3,987
Supplemental Executive Retirement Health Plan
Kforce maintained a 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 $0.7 million recorded in
Selling, general and administrative expenses in the corresponding
Consolidated Statements of Operations and Comprehensive
Income. The termination effectively removed Kforce’s related post-
retirement benefit obligation.
During the year 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
Statements of Operations and Comprehensive Income.
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
(359)
$ 510
Changes in Post-retirement Benefit Obligation
The following represents the changes in the post-retirement
benefit obligation for the year ended (in thousands):
December 31,
2014
Accumulated post-retirement benefit obligation, beginning $ 2,674
174
Service cost
78
Interest cost
234
725
(3,885)
Actuarial experience and changes in actuarial assumptions
Settlement/curtailment loss/(gain)
Benefits Paid
Accumulated post-retirement benefit obligation, ending $ —
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 carrying value of the outstanding borrowings under the Credit
Facility approximates its fair value as it is based on a variable rate that
changes based on market conditions. The inputs used to calculate the
fair value of the Credit Facility are considered to be Level 2 inputs.
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. Refer to Note 11—“Employee Benefit
Plans” and Note 5—“Other Assets” for additional discussion.
The contingent consideration liability, which is related to a
non-significant acquisition of a business within our GS reporting
segment in the fourth quarter of 2014, is measured on a recurring
basis and is recorded at fair value, determined using the discounted
cash flow method. The inputs used to calculate the fair value of
the contingent consideration liability are considered to be Level 3
inputs due to the lack of relevant market activity and significant
management judgment. An increase in future cash flows may result
in a higher estimated fair value while a decrease in future cash
flows may result in a lower estimated fair value of the contingent
consideration liability. The remeasurements to fair value are
recorded in Other expense, net within the Consolidated Statements
of Operations and Comprehensive Income. For the year ended
December 31, 2015, $0.3 million was recognized in Other expense,
net due to the remeasurement of our contingent consideration
liability. The contingent consideration liability is recorded in Other
long-term liabilities within the Consolidated Balance Sheets.
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, 2015 and 2014. 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 basis as of December 31, 2015 and 2014 were as follows (in thousands):
Assets/(Liabilities) Measured at Fair Value:
As of December 31, 2015
Money market funds
Contingent consideration liability
As of December 31, 2014
Contingent consideration liability
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Asset/(Liability)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
$ 36
$(798)
$(477)
$36
$—
$—
$—
$—
$—
$ —
$(798)
$(477)
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, 2015, 2014
and 2013 was $5.8 million, $5.5 million and $2.6 million, respectively.
During the years ended December 31, 2015, 2014 and 2013, Kforce
recognized stock-based compensation expense from continuing
operations of $5.8 million, $3.0 million and $2.6 million, respectively.
The related tax benefit for the years ended December 31, 2015, 2014
and 2013 was $2.3 million, $1.2 million and $1.0 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,
2015, 2014 and 2013 (in thousands, except per share amounts):
Exercisable as of December 31, 2012
Exercised
Exercisable as of December 31, 2013
Exercised
Forfeited/Cancelled
Exercisable as of December 31, 2014
Exercised
Exercisable as of December 31, 2015
Incentive
Stock Option Plan
154
(57)
97
(57)
(18)
22
(22)
—
2006 Stock
Incentive
Plan
93
(10)
83
(48)
—
35
(10)
25
Total
247
(67)
180
(105)
(18)
57
(32)
25
Weighted
Average Exercise
Total Intrinsic
Value of
Price Per Share Options Exercised
$10.87
$ 8.98
$11.57
$11.61
$11.00
$11.69
$11.78
$11.58
$ 573
$1,029
$ 359
The following table summarizes information about employee and director stock options under all of the plans mentioned above as of
December 31, 2015 (in thousands, except per share amounts):
Range of Exercise Prices
$9.13—$14.45
Number of Awards
(#)
25
Weighted Average Remaining
Contractual Term (Yrs)
1.57
Weighted Average
Exercise Price ($)
$11.58
Total
Intrinsic Value
$342
Outstanding and Exercisable
No compensation expense was recorded during the years ended December 31, 2015, 2014 or 2013 as a result of the grant date fair value
having been fully amortized as of December 31, 2009. As of December 31, 2015, there was no unrecognized compensation cost related to
non-vested options.
40 KFORCE INC. AND SUBSIDIARIES
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, 2015 will vest over a period of between
one to ten years, with equal vesting annually.
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) changed 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, 2015 (in thousands, except per share amounts):
Outstanding as of December 31, 2012
Granted
Vested
Forfeited
Outstanding as of December 31, 2013
Granted
Vested
Forfeited
Outstanding as of December 31, 2014
Granted
Vested
Forfeited
Outstanding as of December 31, 2015
Number of Restricted Stock
Weighted Average
Grant Date
Fair Value
Total Intrinsic
Value of Restricted
Stock Vested
38
904
(109)
(22)
811
528
(273)
(84)
982
556
(186)
(59)
1,293
$12.11
$16.72
$14.15
$15.43
$16.89
$20.18
$17.37
$18.38
$18.55
$24.01
$18.28
$19.37
$20.89
$2,092
$5,624
$4,580
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 during the year ended December 31, 2014.
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 year ended December 31, 2013.
As of December 31, 2015, total unrecognized compensation
expense related to restricted stock was $18.4 million, which will be
recognized over a weighted average remaining period of 4.4 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 accompanying
Consolidated Statements of Operations and Comprehensive Income.
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
2016
2017
2018
2019
2020
Thereafter
Total
$ 837
106
$ 943
$7,886
84
$7,970
$8,913
$ 594
36
$ 630
$6,031
—
$6,031
$6,661
$ 351
25
$ 376
$3,691
—
$3,691
$4,067
$
$
67
7
74
$1,914
—
$1,914
$1,988
$ —
—
$ —
$606
—
$606
$606
$—
—
$—
$—
—
$—
$—
$ 1,849
174
$ 2,023
$20,128
84
$20,212
$22,235
The present value of the minimum lease payments for capital
lease obligations has been classified in Other current liabilities and
Long-term debt—other in the accompanying Consolidated Balance
Sheets, according to their respective maturities. Rental expense under
operating leases was $6.7 million, $5.6 million and $5.3 million for the
years ended December 31, 2015, 2014 and 2013, 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, 2015,
these commitments amounted to approximately $15.3 million and
are expected to be paid as follows: $9.6 million in 2016; $4.5 million
in 2017; $1.1 million in 2018; $0.1 million in 2019; and nil in 2020.
Letters of Credit
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2015, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $3.2 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 financial position,
results of operations, or cash flows. The outcome of any litigation is
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 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.
42 KFORCE INC. AND SUBSIDIARIES
Tax Audits
Kforce is periodically subject to IRS audits, as well as state and
other local income tax audits for various tax years. During 2015, there
were no ongoing IRS examinations. 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 concerning any future income tax audits.
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 after their employment ends 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, 2015 would be approximately
$46.3 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 $19.8
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.
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 Direct Hire fees separately
by segment, which has been incorporated into the table below. The
following table has been updated to reflect the disposition of HIM.
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 taxes,
in the accompanying Consolidated Statements of Operations and
Comprehensive Income.
Historically, and through our year ended December 31, 2015,
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, 2015,
2014 and 2013 (in thousands):
2015
Net service revenues
Flexible billings
Direct Hire fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2014
Net service revenues
Flexible billings
Direct Hire fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2013
Net service revenues
Flexible billings
Direct Hire fees
Total revenue
Gross profit
Operating expenses
Income from continuing operations, before income taxes
Tech
FA
GS
Total
$873,609
22,333
$895,942
$261,721
$294,186
31,738
$325,924
$119,036
$97,372
—
$97,372
$33,357
$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
$1,265,167
54,071
$1,319,238
$ 414,114
342,442
$
71,672
$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
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, 2015 and 2014 (in thousands, except per share amounts):
Three Months Ended
March 31,
June 30,
Sept. 30,
Dec. 31,
2015
Net service revenues
Gross profit
Income from continuing operations, net of income taxes
Income from discontinued operations, net of income taxes
Net income
Earnings per share—basic
Earnings per share—diluted
$312,611
94,740
5,785
—
5,785
$0.20
$0.20
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
$337,353
106,038
11,593
—
11,593
$0.41
$0.41
$302,758
94,386
7,953
2,750
10,703
$0.33
$0.33
$341,575
109,821
13,545
—
13,545
$0.49
$0.48
$313,810
98,291
7,995
57,023
65,018
$2.07
$2.06
$327,699
103,515
11,901
—
11,901
$0.43
$0.43
$318,739
98,378
9,061
(116)
8,945
$0.30
$0.30
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.
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:
Shares tendered in payment of exercise price of stock options
Employee stock purchase plan
Equipment acquired under capital leases
Unsettled repurchases of common stock
Contingent consideration for acquisition
2015
2014
2013
$25,395
$ 1,609
—
$
$
578
$ 1,470
$ 1,012
—
$
$52,565
$ 1,048
84
$
699
$
$
313
$ 1,425
477
$
$14,789
800
$
$ —
$
613
$ 1,929
$ —
$ —
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.
Richard M. Cocchiaro
Vice Chairman,
Kforce Inc.
Mark F. Furlong
President and
Chief Executive Officer (Ret.),
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
EXECUTIVE AND
SENIOR OFFICERS
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
David M. Kelly
Chief Financial Officer
and Secretary
Michael R. Blackman
Chief Corporate Development Officer
Robert W. Edmund
General Counsel and
Assistant Secretary
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 19, 2016 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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