Annual Report 2016
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. 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 5th largest technology staffing
firm in the U.S., we engage more
than 16,000 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 3rd
accounting staffing firm in the U.S., we
engage more than 21,000 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, 2016 for
additional information regarding forward-
looking statements.
The total shareholder
return on our stock
has been 611%,
outperforming the Russell
2000 Index, which has
returned 351% over the
same period.
800%
600%
400%
200%
0%
KFRC
Russell 2000
Kforce stock performance vs. Russell 2000 from 8/15/95 (IPO) to 12/31/16
TO OUR FELLOW SHAREHOLDERS, CLIENTS, CONSULTANTS AND EMPLOYEES:
2016 was a year of considerable transformation for
Kforce. Although we are disappointed with
our financial results, we are confident in the structure and strength
of our organization and believe that the actions we have taken
during the past year, in support of our longer-term strategy, position
us well to maximize our market opportunities.
One of the key changes we made was to consolidate and streamline
our sales and delivery organization under a single Chief Operations
Officer. This change has allowed us to rapidly rebalance and deploy
our talent to more effectively meet customer needs and also drive
greater consistency and accountability for revenue generating
activities across the enterprise. During the fourth quarter, we
commenced an ongoing sales transformation initiative to enhance
our sales methodology and train our sales associates to engage in
more strategic conversations and shape solutions with our clients.
During the past year, we also made significant progress toward a
rollout of a new customer relationship management system which
will incorporate our sales methodology to reinforce execution. This
rollout is a critical piece of a multi-year effort to replace and upgrade
our technology tools to equip our associates with significantly
improved capabilities to deliver exceptional service to our clients,
enhance productivity and accelerate associate ramp-up. As we move
into 2017, we believe these actions have laid a solid foundation for
acceleration of our year-over-year revenue growth.
With respect to market and industry observations, we believe the
domestic specialty staffing industry is healthy, driven by both
secular and cyclical forces. The overall employment environment
improved in 2016 with the addition of 2.2 million non-farm jobs and
the decline of unemployment to 4.7% in December 2016. Particularly
important to staffing, temporary workers as a percentage of the
total workforce ended the year at 2.04%, near record levels. Even
more relevant to Kforce given our focus on highly skilled knowledge
workers, the college-level unemployment rate was 2.5% in December
2016, about half the overall unemployment rate. In 2017, the
domestic market for technology staffing is projected to approach
$30 billion (about 6% growth) and the finance & accounting staffing
market is projected to be $8 billion (about 6% growth). We believe we
have an opportunity to improve upon our approximate 3% market
share in each of these markets.
Throughout much of 2016, the virulent presidential election
and expectations for a slowing period of economic growth
caused uncertainty and a hesitancy by our clients to make new
commitments for 2017 investments. It was widely anticipated that
we were approaching the end of the current economic cycle and that
the economy was close to a recession. The surprise election outcome
and corresponding policy expectations had a tangible effect on
optimism and brought greater clarity for economic prospects. We
believe this increased optimism combined with the commencement
of our sales transformation initiative resulted in improving trends
late in the fourth quarter of 2016. Given the pace of likely reform
under the Trump administration in large and complex areas such
as immigration, health care, financial regulation, and corporate
taxation, we are closely monitoring the potential impacts, both
positive and negative, on our business. To date, most of the details
regarding the potential reform in these areas have not yet been
clearly communicated.
Skilled technology talent continues to be in high demand and
the potential tightening of immigration standards is expected to
exacerbate the supply shortages. The secular drivers of technology
spend remain intact with many companies now becoming increasingly
dependent on the efficiencies provided by technology and the need
for innovation to support business strategies and sustain relevancy
in today’s rapidly changing marketplace. Technology investments,
in particular mobility, cloud computing, cybersecurity, e-commerce,
machine learning, digital marketing, advancements in the use of
big data, and business intelligence have contributed to the demand
landscape for technology resources. Given the ubiquitous nature of
technology, we believe that advancements in these areas will continue
to fuel demand, as companies strive to remain competitive and meet
evolving customer expectations. Overall, our industry continues to
experience a secular shift as our clients seek workforce flexibility and
just-in-time skilled labor. In addition, the heightened scrutiny around
immigration and 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.
In 2016 and early 2017, we were very pleased to have continued our
efforts toward refreshing and diversifying our Board of Directors
through the addition of two distinguished individuals to our
Board, General (Ret.) Ann Dunwoody and Randall Mehl. General
(Ret.) Dunwoody was the first woman in U.S. military history to
achieve the rank of four-star general, and also served as a strategic
planner for the Chief of Staff of the Army. She currently serves
on the Board of Directors of Republic Services Inc. (NYSE), L-3
Communications (NYSE) and Logistics Management Institute. Mr.
Mehl is President and Chief Investment Officer of Stewardship Capital
Advisors, LLC, which manages an equity fund focused on making
KFORCE INC. AND SUBSIDIARIES 1
investments in business and technology services. He previously served
as a Managing Director and a partner with Baird Capital, a middle
market private equity group, and led a team focused on the business
and technology services sector from 2005 until the end of 2016. From
1996 to 2005, Mr. Mehl was a senior equity research analyst with
Robert W. Baird & Company, covering various areas within the broader
business and technology services sector.
Looking at our overall financial performance and by service
line in 2016:
• Kforce reported annual revenues of $1.32 billion in 2016, which
was flat with 2015. Net income for the year ended December 31,
2016 was $32.8 million, or $1.25 per share, which represented a
decrease of 23.5%, or 17.8% per share, compared to net income and
diluted earnings per share for the year ended December 31, 2015
of $42.8 million, or $1.52 per share. During the year we returned a
total of $56.4 million in capital to our shareholders, in the form of
$44.0 million in open market share repurchases and $12.4 million
in dividends.
• Revenues for our largest business unit, Tech Flex, of $863.4 million
represented 65.4% of our total net service revenues. Tech Flex
revenues decreased 1.2% in 2016 over 2015. We began to see
improvements in sequential revenue trends coming out of the
summer months and experienced a 1.4% year-over-year increase on a
billing day basis in the fourth quarter. As we look to 2017, our activity
levels have remained elevated, which suggests continued strength
in demand within our Tech clients. We are also continuing to benefit
from positive trends in the length of our average assignment, which
we believe is driven by the desire of our clients to retain qualified
and skilled IT talent.
• Revenues for our FA Flex business of $307.2 million represented
23.3% of our total net service revenues. FA Flex revenues increased
4.4% in 2016 over 2015. Our activity levels and assignment starts
volume were particularly strong in the fourth quarter of 2016. From
an industry perspective, 9 out of our Top 10 verticals saw sequential
billing day improvement in the fourth quarter, with Financial
Services, Business Services and Retail experiencing notable growth.
• Revenues for our Government Solutions (“GS”) segment of $98.6
million represented 7.5% of our total net service revenues. GS
revenues increased 1.3% in 2016 compared to 2015. Our GS
segment provides staffing services and solutions to the Federal
Government as both a prime contractor and 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. Due to KGS’s successful
recompete efforts, we believe over 95% of KGS’ revenue base is
2 KFORCE INC. AND SUBSIDIARIES
secure heading into 2017, which will allow it to focus on efforts to
maximize the capture of prime and subcontractor opportunities
under the T4 Next Gen contract, as well as their other new business
development efforts.
• Direct Hire revenues of $50.4 million represented 3.8% of our total
net service revenues. Direct Hire revenues decreased 6.8% in 2016
over 2015. We provide direct hire services to our clients in both
Tech and FA. Our objective is to meet the talent needs of our clients
through whatever means they prefer, and we will continue to provide
this capability going forward.
We believe the actions taken in 2016 to realign our field leadership,
rebalance our sales and delivery talent, refine our sales strategy and
streamline our operations set us up to take advantage of a strong
and sustained market for highly skilled talent during 2017 and
beyond. We anticipate the combination of these actions will enhance
our ability to accelerate revenue growth and create additional
operating leverage as the Firm grows and the productivity of our
associates improves. We expect to supplement our capabilities with
selective additions to our revenue-generating talent and technology
enhancements and believe that this collective strategy will lead to
longer-term success. The actions we have taken in 2016 reinforce our
confidence in achieving our long-term stated goals of an operating
margin of at least 6.3% at $1.4 billion and at least 7.5% at $1.6 billion
in annualized revenue.
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 2016, Kforce employees spent approximately 15,000 hours
supporting more than 125 charities nationwide.
We are very optimistic about our prospects in 2017 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,
2016
2015
2014(1)
2013(2)(3)
2012(4)(5)
(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
$1,319,706
408,499
341,196
—
8,701
2,647
55,955
23,182
32,733
$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)
—
32,733
$
—
$ 42,824
61,517
$ 90,915
5,493
$ 10,787
28,428
$ (13,703)
$1.26
$1.53
$0.94
$0.16
$(1.18)
$1.25
$1.26
$1.25
26,099
26,274
$0.48
$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
As of December 31,
2016
2015
2014
2013
2012
(In thousands)
Working capital
Total assets
Total outstanding borrowings on credit facility
Total long-term liabilities
Stockholders’ equity
$ 140,152
$ 365,421
$ 111,547
$ 160,332
$ 121,736
$ 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
(1) During 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. The results of operations for KHI have been presented as discontinued operations for the years ended December 31, 2014, 2013 and 2012. See Note 2 –
“Discontinued Operations” in the Notes to Consolidated Financial Statements, included in this Annual Report for more detail.
(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 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 SG&A. 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., the Board exercised its discretion, as permitted within the Kforce Inc. 2006 Stock Incentive Plan, to accelerate
the vesting, for tax planning purposes, of substantially all of the outstanding and unvested restricted stock and alternative long-term incentive awards 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.
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 2016 Industry Peer Group and the NASDAQ Stock Market (U.S.) Index. Kforce’s cumulative return was computed by dividing the
difference between the price of Kforce common stock at the end of each year and the beginning of the measurement period (December 31,
2011 to December 31, 2016) by the price of Kforce common stock at the beginning of the measurement period. Cumulative total returns
for Kforce, the 2016 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, 2011, 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 2016 Industry Peer Group.
s
r
a
l
l
o
D
250
225
200
175
150
125
100
75
2011
2012
2013
2014
2015
2016
End of Year
Kforce Inc.
NASDAQ Stock Market (Composite)
2016 Industry Peer Group
Investment of $100 on December 31, 2011
Kforce Inc.
NASDAQ Stock Market (Composite)
2016 Industry Peer Group
2011
100.0
100.0
100.0
2012
125.6
115.9
120.6
2013
180.1
160.3
192.7
2014
216.5
181.8
197.3
2015
231.1
192.2
202.4
2016
216.3
206.6
215.3
2016 Industry Peer Group:
CDI Corporation
Computer Task Group, Inc.
Kelly Services, Inc.
ManpowerGroup Inc.
On Assignment, Inc.
Resources Connection, Inc.
Robert Half International Inc.
TrueBlue, Inc.
In determining the industry peer group, we focus on selecting publicly traded staffing companies 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. Based on a report published by Staffing Industry Analysts in 2016
regarding the largest staffing firms in the United States, we estimate Kforce is one of the 10 largest publicly-traded specialty staffing firms in
the United States.
In addition to the specific staffing industry in which companies operate, other primary criteria for this peer group selection includes peer
company customers, revenue footprint (i.e., revenue derived from different industries as a percentage of total revenue), geographical presence,
talent, capital, size (i.e., total revenue, market capitalization and domestic presence), complexity of operating model and companies with
which we compete for executive level talent. Most importantly, we consider the companies in the industry peer group as our direct business
competitors on a day-to-day basis and, as a result, their size and scope varies considerably.
There was no change in the industry peer group between 2015 and 2016.
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,
2016
High
Low
2015
High
Low
$25.00
$14.87
$24.99
$21.34
$20.40
$15.78
$23.92
$20.32
$20.55
$16.22
$29.33
$21.83
$24.25
$15.95
$28.84
$22.90
From January 1, 2017 through February 22, 2017, the high and low intra-day sales price of our common stock was $21.28 and $26.95,
respectively. On February 22, 2017, the last reported sale price of our common stock on the NASDAQ Global Select Market was $25.20 per share.
Holders of Common Stock
As of February 22, 2017, there were approximately 162 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, 2016 and 2015:
Three Months Ended
2016
2015
March 31,
$0.12
$0.11
June 30,
$0.12
$0.11
September 30,
December 31,
$0.12
$0.11
$0.12
$0.12
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 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, 2016, we had $111.5 million outstanding under our credit facility. Our weighted average effective interest rate on our
credit facility was 2.40% at December 31, 2016. A hypothetical 10% increase in interest rates in effect at December 31, 2016 would have an
increase to Kforce’s annual interest expense of less than $0.3 million.
We do not believe that we have a material exposure to fluctuations in foreign currencies because our international operations represented
less than 1% of net service revenues for the year ended December 31, 2016, 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
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide
professional and technical specialty staffing services and solutions
to customers through the following segments: Technology (“Tech”),
Finance and Accounting (“FA”), and Government Solutions (“GS”). Kforce
provides flexible staffing services and solutions on both a temporary
(“Flex”) and permanent (“Direct Hire”) basis. We operate through our
corporate headquarters in Tampa, Florida and 61 field offices located
throughout the U.S., as well as an 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.
Kforce serves clients from the Fortune 1000, the Federal Government,
state and local governments, local and regional companies and small to
mid-sized companies. Our 10 largest clients represented approximately
25% of revenues and no single customer accounted for more than 6% of
revenues for the year ended December 31, 2016.
Substantially all of our revenues are derived from domestic operations
with customers located in the U.S. and substantially all long-lived assets
were located in the U.S. for the years ended December 31, 2016, 2015
and 2014. Our international operations comprised approximately 1% of
net service revenues for the years ended December 31, 2016, 2015 and
2014 and are included in our Tech segment.
Our quarterly operating results are affected by the number of billing
days in a quarter and the seasonality of our customers’ businesses. Our
reporting segments are significantly impacted by the increase in the
number of holidays and vacation days taken during the fourth quarter
of the calendar year. In addition, we experience an increase in direct costs
of services and a corresponding decrease in gross profit in the first fiscal
quarter of each year as a result of certain annual U.S. state and federal
employment tax resets that occur at the beginning of each year.
The following charts depict the percentage of our total revenues for
each of our segments for the years ended December 31, 2016, 2015
and 2014 (the chart for 2014 excludes our former Health Information
Management (“HIM”) segment, which we sold in 2014):
2016
7.5%
GS
2015
7.4%
GS
2014
8.1%
GS
25.6%
FA
24.7%
FA
66.9%
Tech
22.7%
FA
67.9%
Tech
69.2%
Tech
For additional segment financial data see Note 13 – “Reportable
Segments” in the Notes to Consolidated Financial Statements, included in
this Annual Report.
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 decreased 1.4%
to $883.5 million for the year ended December 31, 2016 as compared to
$895.9 million for the year ended December 31, 2015. The average bill rate
6 KFORCE INC. AND SUBSIDIARIES
for our Tech segment for 2016 was approximately $67 per hour. Our Tech
segment provides service to clients in a variety of industries with a strong
footprint in the financial services, communications, insurance services
and government sectors. A September 2016 report published by Staffing
Industry Analysts (“SIA”) stated that temporary technology staffing is
expected to experience growth of 6% in 2017. 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 cybersecurity, cloud-based computing, data analytics and
application development. The secular drivers of technology spend have
remained intact with many companies now becoming increasingly
dependent on the efficiencies provided by technology and the need for
innovation to support business strategies and sustain relevancy in today’s
rapidly changing marketplace. The SIA report also provides that notable
skill shortages in certain technology skill sets are expected to 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,
outsourced functional support, credit and collections, audit services,
and systems and controls analysis and documentation. Our FA segment
provides service to clients in a variety of industries with a strong footprint
in the financial services, healthcare and government sectors. Revenues
for our FA segment increased 3.6% to $337.6 million for the year ended
December 31, 2016 as compared to $325.9 million for the year ended
December 31, 2015. The average bill rate for our FA segment for 2016
was approximately $32 per hour. A September 2016 report published by
SIA stated that finance and accounting staffing is expected to experience
growth of 6% in 2017.
GS
Our GS segment provides staffing 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 have historically been 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 increased 1.3% to
$98.6 million for the year ended December 31, 2016 as compared to
$97.4 million for the year ended December 31, 2015. Our GS segment
also includes a product-based business specialized in manufacturing
and delivering trauma-training manikins, which accounted for
approximately 16% of its total revenues in 2016. 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
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
For each of the years ended December 31, 2016, 2015 and 2014, Flex
represented approximately 96% of total Kforce revenues, respectively.
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, social media networks and
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, qualified 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 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 candidates using methods that
are consistent with Flex consultants. Also, there are occasions where
consultants are initially assigned to a client on a temporary 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 candidates do not complete the applicable contingency
period. Although the contingency period can vary by contract, it is
typically 90 days or less. 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.
Industry Overview
to a relatively small local client base. Based on a report published by
SIA in 2016 regarding the largest staffing firms in the United States, we
estimate Kforce is one of the 10 largest publicly-traded specialty staffing
firms in the U.S. According to a report published by the SIA in June 2016,
134 companies reported at least $100 million in U.S. staffing revenues
in 2015 and these companies represented an estimated 56.8% of the
total market.
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 2016, based on data published by the Bureau of
Labor Statistics (“BLS”) and SIA. The penetration rate (the percentage
of temporary staffing to total employment) in December 2016 was at
2.04%, a slight decline from the December 2015 high of 2.06%. While the
health of the macro-employment picture was uncertain at times during
2016, it generally continuously improved, with the unemployment rate at
4.7% as of December 2016, and non-farm payroll expanding an average
of approximately 180,000 jobs per month in 2016. Also, the college-level
unemployment rate, which we believe serves as a proxy for professional
employment and therefore aligns with the candidate and consultant
population that Kforce serves, was at 2.5% in December 2016. Further,
we believe that the unemployment rate in the specialties we serve,
especially in certain technology skill sets, is lower than the published
averages, which we believe speaks to the demand environment in which
we are operating. Management believes that the tepid growth in the
overall U.S. economy seen through much of 2016, the recent change in
administration, and 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 as employers may
be reluctant to increase permanent hiring. If the penetration rate of
temporary staffing experiences growth in the coming months and
years, we believe 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 2016,
the U.S. temporary staffing industry generated estimated revenues of
$103.7 billion in 2013, $109.2 billion in 2014 and $115.7 billion in 2015,
and has projected revenues of $120.0 billion in 2016 and $124.8 billion in
2017. Based on projected revenues of $120.0 billion for the U.S. temporary
staffing industry, this would put the Firm’s overall market share at
approximately 1%. Therefore, our business strategies are sharply focused
around expanding our share of the U.S. temporary staffing market and
further penetrating our existing clients’ staffing needs.
Business Strategies
Our primary goals are to enhance long-term shareholder value by
achieving above-market revenue growth as compared to our peers in
the segments in which we are focused, making prudent investments to
enhance our operating model and efficiency and generating improved
levels of operating profitability. We believe the following strategies will
help us achieve our goals.
The specialty staffing industry is made up of thousands of companies,
most of which are small local firms providing limited service offerings
Invest in Revenue-Generating Talent. We continue to focus on providing
our talent with the necessary tools to be more effective and efficient in
KFORCE INC. AND SUBSIDIARIES 7
performing their roles and to better evaluate our business opportunities
and allow us to elevate the value we are bringing to our clients and
candidates. This includes enhancing our sales methodology and training
our sales associates to engage in more strategic conversations and shape
solutions with our clients. We completed the initial rollout of our sales
transformation initiative in the fourth quarter of 2016 and will continue
to make progress on ensuring it is fully engrained within the Firm. We also
expect to enhance our delivery methodology and training of our delivery
associates. This includes our national delivery team, which focuses on
quality and speed of delivery services to our clients with demands for high
volume staffing. Additionally, the Firm expects to continue to selectively
hire and allocate revenue-generating talent in markets, products,
industries and clients that present us with the greatest opportunity for
profitable revenue growth.
Enhanced Customer Focus. During 2016, Kforce consolidated our sales
and delivery organization under a single leader, our Chief Operations
Officer, and certain revenue-enabling support functions were realigned
in an effort to allow us to more effectively compete for business,
particularly with our largest customers. We believe the new alignment,
coupled with the rebalancing of our sales and delivery talent through a
disproportionate investment in sales talent, will enable us to allocate
additional sales talent to provide exceptional service to our largest
customers with whom we have long-term relationships. In order to
achieve greater penetration within each of our largest accounts, we work
to foster an understanding of our clients’ human capital needs holistically
while building a consultative partnership rather than a transactional
client relationship.
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.
Leverage Technology Infrastructure. We have made significant progress
toward a rollout of our new customer relationship management system
which incorporates our enhanced sales methodology to reinforce
execution. This rollout is a major piece of a multi-year effort to replace
and upgrade our technology tools to equip our talented associates with
significantly improved capabilities to deliver exceptional service to our
clients, enhance productivity and accelerate associate ramp-up. 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.
Retain our Great People. A significant focus of Kforce is on the retention
of our tenured and top performing associates. We ended fiscal 2016 with
a strong, streamlined management, revenue-generating, and revenue-
enabling teams, 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. Overall, Kforce’s consultant satisfaction Net
Promoter Score is 61%; additionally, 71% of consultants rated us a 9 or
a 10 out of 10.
Enhance Shareholder Value. Kforce is committed to continue to invest in
our business to generate long-term shareholder value while appropriately
balancing the return of capital to our shareholders. In 2016, the Firm
continued to repurchase a significant amount of stock under the Board-
authorized program and completed four quarterly dividends. Kforce
expects to focus on reducing expenses and anticipates continuing with
our share repurchase program and dividends in 2017.
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 2016.
• 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.
• 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.
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 year ended December 31, 2014
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 2016 highlights, which should be considered in the context
of the additional discussions herein and in conjunction with the
consolidated financial statements and notes thereto.
• Net service revenues remained stable at $1.32 billion in 2016
and 2015. Net service revenues decreased 1.4% for Tech and
increased 3.6% and 1.3% for FA and GS, respectively.
• Flex revenues increased 0.3% in 2016 as compared to 2015. Flex
revenues decreased 1.2% for Tech and increased 4.4% and 1.3%
for FA and GS, respectively.
• Direct Hire revenues decreased 6.8% to $50.4 million in 2016
from $54.1 million in 2015.
• Flex gross profit margin decreased 30 basis points to 28.2% in
2016 from 28.5% in 2015. Flex gross profit margin decreased
10 basis points for Tech, 30 basis points for FA and 170 basis
points for GS. These margin decreases were primarily a result
of higher benefit costs in each of our segments, lower margins
on some of GS recompete wins and spread compression in
Tech Flex due to an increase in revenue concentration within
our large client portfolio where certain of these clients have, in
many cases, narrowed the number of vendor partners that they
are looking to do business with and are leveraging volume-
based rebates in exchange for this increased concentration of
business.
• SG&A expenses as a percentage of revenues for the year ended
December 31, 2016 increased to 25.9% from 25.0% in 2015. The
90 basis point increase was primarily driven by approximately
$6.0 million, or 50 basis points, in severance costs that were
recorded during 2016 associated with realignment activities
focused on further streamlining our organization and $2.2
million, or 20 basis points, in costs associated with our sales
transformation activities. In addition, we have made targeted
investments in information technology as well as our revenue-
generating talent during 2016, which has negatively impacted
SG&A as a percentage of revenue.
• Net income for the year ended December 31, 2016 decreased
23.5% to $32.8 million from $42.8 million in 2015 primarily
driven by the aforementioned $6.0 million in severance costs
($3.5 million after-tax), $2.2 million in costs associated with
the investment in refining our sales methodology, messaging
and process ($1.2 million after-tax), and reduction in our gross
profit of $5.6 million ($3.3 million after-tax) as well as certain tax
adjustments of $1.7 million during 2016.
• Diluted earnings per share for the year ended December 31,
2016 decreased to $1.25 from $1.52 per share in 2015 primarily
driven by the aforementioned factors noted in the net income
description above.
• During 2016, Kforce repurchased 2.3 million shares of common
stock on the open market at a total cost of approximately
$44.0 million.
• The Firm declared and paid dividends totaling $0.48 per share
during the year ended December 31, 2016, resulting in a total
cash payout of $12.4 million.
• The total amount outstanding under the credit facility
increased $31.0 million to $111.5 million as of December 31,
2016 as compared to $80.5 million as of December 31, 2015.
This increase was primarily driven by the return of capital to
our shareholders in the form of dividends and common stock
repurchases, which aggregated $56.4 million, but was also
impacted by lower than anticipated operating cash flows in the
fourth quarter as a result of the transition of certain back office
processes from Manila to Tampa.
RESULTS OF OPERATIONS
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 2016, based on
data published by the Bureau of Labor Statistics (“BLS”) and SIA.
The penetration rate (the percentage of temporary staffing to total
employment) in December 2016 was at 2.04%, a slight decline
from the December 2015 high of 2.06%. While the health of the
macro-employment picture was uncertain at times during 2016,
KFORCE INC. AND SUBSIDIARIES 9
it generally continuously improved, with the unemployment rate
at 4.7% as of December 2016, and non-farm payroll expanding an
average of approximately 180,000 jobs per month in 2016. Also,
the college-level unemployment rate, which we believe serves as a
proxy for professional employment and therefore aligns with the
candidate and consultant population that Kforce serves, was at 2.5%
in December 2016. Further, we believe that the unemployment rate
in the specialties we serve, especially in certain technology skill sets,
is lower than the published averages, which we believe speaks to
the demand environment in which we are operating. Management
believes that the tepid growth in the overall U.S. economy seen
through much of 2016, the recent change in administration, and
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 as employers may be reluctant
to increase permanent hiring. If the penetration rate of temporary
staffing experiences growth in the coming months and years, we
believe 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.
We continued to evolve and make progress on our strategic
initiatives including: (1) enhancing our sales methodology and
training of our sales associates to engage in more strategic
conversations and shape solutions with our clients; (2) balancing
investment in our revenue-generating talent appropriately across
our service offerings and allocating the talent toward markets,
products, industries and clients that we believe present Kforce
with the greatest opportunity for profitable revenue growth;
(3) consolidating our sales and delivery organization and certain
revenue-enabling support functions in an effort to allow us to
more effectively compete for business, particularly with our largest
customers; and (4) upgrading existing technology systems and
implementing new technologies that allow us to more effectively
and efficiently serve our clients, candidates and consultants and
improve the productivity and scalability of our organization.
We believe that the proper alignment and balance of our
combined revenue-generating talent and revenue-enabling talent
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 Tech and FA (which we anticipate to
be areas of expected growth), are a key contributor to our long-
term financial stability.
10 KFORCE INC. AND SUBSIDIARIES
Net Service Revenues. The following table presents, 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
Depreciation and amortization
Income from continuing operations, before income taxes
Income from continuing operations
Net income
2016
2015
2014
66.9%
25.6
7.5
100.0%
96.2%
3.8
100.0%
31.0%
25.9%
0.7%
4.2%
2.5%
2.5%
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%
The following table presents net service revenues for Flex and Direct Hire by segment and percentage change from the prior period for the
years ended December 31 (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
2016
Increase
(Decrease)
2015
Increase
(Decrease)
$ 863,434
20,043
$ 883,477
$ 307,245
30,356
$ 337,601
$ 98,628
$ 98,628
$1,269,307
50,399
$1,319,706
(1.2)%
(10.3)%
(1.4)%
$ 873,609
22,333
$ 895,942
4.4%
(4.4)%
3.6%
1.3%
1.3%
0.3%
(6.8)%
0.0%
$ 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%
2014
$ 823,311
19,158
$ 842,469
$ 249,274
27,537
$ 276,811
$ 98,051
$ 98,051
$1,170,636
46,695
$1,217,331
KFORCE INC. AND SUBSIDIARIES 11
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 2016 quarterly information is presented for
informational purposes only (in thousands, except Billing Days).
December 31
September 30
June 30
March 31
Three Months Ended
(0.3)%
12.0%
(12.1)%
1.4%
1.8%
2.8%
2.4%
(0.2)%
11.1%
(12.1)%
1.5%
Year-Over-
Year Growth
Rates Per
Billng Day
61
1.4%
2.1%
4.0%
1.8%
Billing Days
Flex
Tech
FA
GS
Revenues
$212,437
78,880
23,397
Total Flex
$314,714
Direct Hire
Tech
FA
$ 4,370
6,914
Total Direct Hire $ 11,284
Year-Over-
Year Growth
Rates Per
Billng Day
64
Year-Over-
Year Growth
Rates Per
Revenues Billng Day
64
Revenues
Year-Over-
Year Growth
Rates Per
Billng Day
64
Revenues
$220,376
76,290
26,818
(2.7)%
(0.5)%
10.1%
$219,412
(2.9)%
$211,209
76,769
25,292
5.5%
4.2%
75,306
23,121
$323,484
(1.2)%
$321,473
(0.4)%
$309,636
(13.1)%
(15.4)%
(14.5)%
$ 5,148
(10.2)%
$ 5,146
(18.2)%
$ 5,379
7,828
$ 12,976
(6.9)%
(8.2)%
8,428
$ 13,574
3.4%
(6.0)%
7,186
$ 12,565
Total
Tech
FA
GS
Total
$216,807
85,794
23,397
$325,998
1.1%
0.4%
4.0%
1.1%
$225,524
84,118
26,818
(2.8)%
(1.2)%
10.1%
$224,558
(3.3)%
$216,588
85,197
25,292
5.3%
4.2%
82,492
23,121
$336,460
(1.5)%
$335,047
(0.7)%
$322,201
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, decreased 1.2%
during the year ended December 31, 2016 as compared to 2015 and
increased 6.1% in 2015 from 2014. Our year-over-year decrease in
2016 was due to a decline experienced in connection with several
large clients after certain significant organizational changes
occurred within a number of these clients in mid-2015 causing
them to decrease their spending with the Firm (we had experienced
revenue growth with these large clients in the first half of 2015).
Despite this overall decrease, we experienced a reacceleration of
year-over-year growth beginning in Q4 2016 within our overall
Tech Flex business on a billing day basis as well as our Top 25 client
portfolio, which suggests that the impact related to the shift in
spend with certain large clients was temporary in nature. We believe
that broad-based drivers to the demand in technology staffing such
as cloud-computing, data analytics, mobility, e-commerce, machine
learning and cybersecurity will continue as companies are becoming
increasingly dependent upon technology investments to support
business strategies and sustain relevancy in today’s rapidly changing
marketplace. We believe we are well positioned in this space. We
expect Tech Flex revenues to grow year-over-year in 2017 due to
the market strength, the opportunities we see with our clients and
the investments in revenue-generating resources that we intend to
allocate to growing priority client accounts.
Our FA segment experienced an increase in Flex revenues of 4.4%
during the year ended December 31, 2016 as compared to 2015 and
increased 18.0% in 2015 from 2014. Due to the high year-over-year
growth rate in FA Flex during 2015 we expected our 2016 year-over-
year growth rate to slow against this challenging comparison. We
have continued to diversify our FA service offerings outside of what
may be viewed as more traditional finance and accounting roles.
The opportunities we have seen include larger volume projects
in centralized functions such as benefits and other service and
administrative functions. The Firm believes the FA segment will
continue to achieve year-over-year growth in 2017.
Our GS segment experienced an increase in net service revenues
of 1.3% during the year ended December 31, 2016 as compared
to 2015 and decreased 0.7% in 2015 from 2014. The 2016 year-
over-year growth was driven by growth in service revenues as well
as strength in our product-based business. While the business
continues to operate in a challenging and evolving procurement
and contracting environment, the Firm believes the GS segment will
grow in 2017 primarily as a result of the anticipated subcontractor
and, to a lesser extent, prime contractor opportunities under the
T4 Next Generation prime contract, which was awarded to GS in
March 2016.
12 KFORCE INC. AND SUBSIDIARIES
The following table presents the key drivers for the change in Flex revenues for our Tech and FA segments over the prior period for the
years ended December 31 (in thousands):
Volume
Bill rate
Billable expenses
Total
2016
2015
Tech
$(10,115)
896
(956)
$(10,175)
FA
$15,198
(2,055)
(84)
$13,059
Tech
$58,491
(7,684)
(509)
$50,298
FA
$42,628
2,311
(27)
$44,912
The following table presents total Flex hours for our Tech and FA segments and percentage change over the prior period for the years ended
December 31 (in thousands):
Tech
FA
Total hours
2016
12,735
9,474
22,209
Increase
(Decrease)
(1.2)%
5.2%
1.4%
2015
12,885
9,008
21,893
Increase
(Decrease)
7.2%
17.1%
11.0%
2014
12,024
7,691
19,715
As the GS segment primarily provides integrated business solutions as compared to staffing services, Flex hours are not presented above.
Direct Hire Revenues. The primary drivers of Direct Hire revenues
are the number of placements and the fee for these placements.
Direct Hire revenues also include conversion revenues. Our GS
segment does not make permanent placements.
Direct Hire revenues decreased 6.8% during the year ended
December 31, 2016 as compared to 2015. Direct Hire revenues
increased 15.8% during the year ended December 31, 2015 as
compared to 2014.
The following table presents the key drivers for the change in Direct Hire revenues over the prior period for the years ended December 31
(in thousands):
Volume
Placement fee
Total
2016
$(2,476)
(1,196)
$(3,672)
2015
$6,109
1,267
$7,376
The following table presents total placements for our Tech and FA segments and percentage change over the prior period for the years
ended December 31:
Tech
FA
Total placements
2016
1,191
2,531
3,722
Increase
(Decrease)
(14.6)%
1.0%
(4.6)%
2015
1,395
2,505
3,900
Increase
(Decrease)
16.9%
11.0%
13.1%
2014
1,193
2,256
3,449
KFORCE INC. AND SUBSIDIARIES 13
The following table presents the average fee per placement for our Tech and FA segments and percentage change over the prior period
for the years ended December 31:
Tech
FA
Total average placement fee
2016
$16,836
11,994
$13,543
Increase
(Decrease)
5.1%
(5.3)%
(2.3)%
2015
$16,014
12,668
$13,864
Increase
(Decrease)
(0.3)%
3.8%
2.4%
2014
$16,062
12,205
$13,539
Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily consultant payroll wages, payroll taxes,
payroll-related insurance and certain fringe benefits, as well as subcontractor costs) from net Flex service revenues. In addition, 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.
The following table presents the gross profit percentage (gross profit as a percentage of revenues) for each segment and percentage change
over the prior period for the years ended December 31:
Tech
FA
GS
Total gross profit percentage
2016
29.0%
35.7%
32.6%
31.0%
Increase
(Decrease)
(0.7)%
(2.2)%
(5.0)%
(1.3)%
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%
The change in gross profit percentage for 2016 as compared to 2015 and 2015 as compared to 2014, is primarily the result of fluctuations
in the concentration of Direct Hire revenues, which has no associated direct costs, as well as changes in our Flex gross profit.
Kforce also monitors the Flex gross profit percentage (Flex gross profit as a percentage of Flex revenues). 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 the bill rate and pay rate for Flex. As noted above, our GS segment does not make permanent placements;
as a result, its Flex gross profit percentage is the same as its gross profit percentage.
The following table presents the Flex gross profit percentage for each segment and percentage change over the prior period for the years
ended December 31:
Tech
FA
GS
Total Flex gross profit percentage
2016
27.3%
29.4%
32.6%
28.2%
Increase
(Decrease)
(0.4)%
(1.0)%
(5.0)%
(1.1)%
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%
The decrease in Flex gross profit percentage of 30 basis points in
2016 from 2015 was due primarily to an increase in benefit costs
in each of our segments. Additionally, our GS segment realized
lower margins on some of its recompete wins and a lower mix of
higher margin business. Furthermore, during 2016 we experienced
an increase in the revenue concentration within our large client
portfolio in Tech Flex, which resulted in a reduction in the Flex gross
profit percentage, and spread compression within certain of these
clients that have, in many cases, narrowed the number of vendor
partners that they are looking to do business with and are leveraging
volume-based rebates in exchange for this increased concentration
of business. 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 and the clients that we serve.
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
14 KFORCE INC. AND SUBSIDIARIES
in its product business which carries a higher margin profile, and a
more favorable payroll tax environment as compared to 2014.
The following table presents the key drivers for the change in Flex
gross profit over the prior period for the years ended December 31
(in thousands):
Volume
Rate
Total
2016
$ 1,178
(3,121)
$(1,943)
2015
$26,477
5,680
$32,157
SG&A Expenses. For the years ended December 31, 2016, 2015
and 2014, total commissions, compensation, payroll taxes, and
benefit costs as a percentage of SG&A represented 84.0%, 84.2%,
and 84.8%, 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):
2016
% of
Revenues
2015
% of
Revenues
2014
% of
Revenues
Compensation, commissions,
payroll taxes and benefits costs
Other
Total SG&A
$286,715
54,481
$341,196
21.8%
4.1%
25.9%
$278,207
52,209
$330,416
21.1%
3.9%
25.0%
$267,471
47,867
$315,338
22.0%
3.9%
25.9%
SG&A as a percentage of net service revenues increased 90 basis
points in 2016 compared to 2015. This increase was was primarily
driven by approximately $6.0 million, or 50 basis points, in severance
costs that were recorded during 2016 associated with realignment
activities focused on further streamlining our organization and
$2.2 million, or 20 basis points, in costs associated with our sales
transformation activities. In addition, we have made targeted
investments in information technology as well as our revenue-
generating talent during 2016, which has negatively impacted
SG&A as a percentage of revenue.
SG&A as a percentage of net service revenues decreased 90 basis
points in 2015 compared to 2014. This 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.
Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior
period by major category for the years ended December 31 (in thousands):
Fixed asset depreciation (1)
Capitalized software amortization
Intangible asset amortization
Total depreciation and amortization
2016
$6,660
1,448
593
$8,701
Increase
(Decrease)
(1.2)%
(37.5)%
(23.5)%
(11.5)%
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
(1) Fixed asset depreciation includes amortization of capital leases.
Other Expense, Net. Other expense, net was $2.6 million in 2016,
$2.2 million in 2015, and $1.4 million in 2014, and consists primarily
of interest expense related to outstanding borrowings under our
credit facility.
Income Tax Expense. Income tax expense as a percentage of
income before income taxes (our “effective rate”) for the year ended
December 31, 2016 was 41.4%. Kforce’s effective rate during 2016 was
negatively impacted by certain one-time non-cash adjustments. For
the year ended December 31, 2015, our effective rate was 40.3%.
The 2015 effective 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, income tax expense as a percentage of income
from continuing operations before income taxes was 38.7%.
Income from Discontinued Operations, Net of Income Taxes.
Discontinued operations for the year ended December 31, 2014
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 was 40.6%.
KFORCE INC. AND SUBSIDIARIES 15
NON-GAAP MEASURES
Adjusted EBITDA. “Adjusted EBITDA,” a non-GAAP financial
measure, which is defined by Kforce as net income before income
from discontinued operations, net of income taxes, depreciation
and amortization, stock-based compensation expense, interest
expense, net and income tax expense, and is based on the
definition in our credit facility and is a key metric in our covenant
calculations, as described in Note 8 - “Credit Facility” in the Notes
to Consolidated Financial Statements, included in this Annual
Report. Adjusted EBITDA should not be considered a measure of
financial performance under GAAP. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing
our past and future financial performance, and this presentation
should not be construed as an inference by us that our future
results will be unaffected by those items excluded from Adjusted
EBITDA. Adjusted EBITDA is a key measure used by management to
assess our operations including our ability to generate cash flows
and our ability to repay our debt obligations and management
believes it provides a good metric of our core profitability in
comparing our performance to our competitors. Consequently,
management believes it is useful information to investors. The
measure should not be considered in isolation or as an alternative
to net income, cash flows or other financial statement information
presented in the consolidated financial statements as indicators of
financial performance or liquidity. The measure is not determined
in accordance with GAAP and is thus susceptible to varying
calculations. Also, Adjusted EBITDA, as presented, may not be
comparable to similarly titled measures of other companies.
In addition, although we excluded amortization of stock-based
compensation expense (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 suggest that you evaluate these items and the potential risks of
excluding such items when analyzing our financial position.
The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):
Years Ended December 31,
Net income
Income from discontinued operations, net of income taxes
Income from continuing operations
Depreciation and amortization
Stock-based compensation expense
Interest expense, net
Income tax expense
Adjusted EBITDA
2016
$32,773
—
$32,773
8,796
6,705
2,596
23,182
$74,052
2015
$42,824
—
$42,824
9,831
5,819
1,960
28,848
$89,282
2014
$90,915
61,517
$29,398
9,894
2,969
1,396
18,559
$62,216
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 an additional way of viewing our liquidity
that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is
useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic
opportunities including investing in our business, making acquisitions, repurchasing common stock or paying dividends. Free cash flow has
limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. Therefore, we believe it
is important to view free cash flow as a complement to our Consolidated Statements of Cash Flows.
The following table presents Free Cash Flow (in thousands):
Years Ended December 31,
Net income
Gain on sale of discontinued operations
Non-cash provisions and other
Changes in operating assets/liabilities
Net cash provided by (used in) operating activities
Capital expenditures
Free cash flow
Proceeds from disposition of business
Change in debt
Repurchases of common stock
Cash dividend
Other
Change in cash
16 KFORCE INC. AND SUBSIDIARIES
2016
$ 32,773
—
20,717
(14,043)
39,447
(12,420)
27,027
—
31,075
(46,013)
(12,447)
343
2015
$ 42,824
—
21,602
5,754
70,180
(8,328)
61,852
—
(12,861)
(38,471)
(12,545)
2,284
2014
$ 90,915
(64,600)
15,376
(67,273)
(25,582)
(6,010)
(31,592)
117,887
30,726
(101,771)
(12,776)
(2,111)
$ (15)
$ 259
$ 363
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, 2016, Kforce had $140.2 million in
working capital compared to $126.8 million at December 31, 2015.
The accompanying Consolidated Statements of Cash Flows for
each of the years ended December 31, 2016, 2015 and 2014 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 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 net cash flows
from operating, investing and financing activities (in thousands):
bonuses. When comparing cash flows from operating activities,
the decrease in cash provided by operating activities during the
year ended December 31, 2016 as compared to 2015 is primarily
a result of lower earnings due to large cash usages related to
severance costs associated with realignment activities focused on
further streamlining our organization, costs associated with the
investment in refining our sales methodology, and investments
in information technology and our revenue-generating talent, as
well as transitioning certain back office functions from our Manila
location to our Tampa headquarters in the fourth quarter, which
impacted the timing in collections of accounts receivable. 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.
Investing Activities
Capital expenditures for the years ended December 31, 2016,
2015 and 2014, which exclude equipment acquired under capital
leases, were $12.4 million, $8.3 million and $6.0 million, respectively.
Proceeds from the divestiture of HIM were $117.9 million during the
year ended December 31, 2014.
We expect to continue selectively investing 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,
2016
2015
2014
Financing Activities
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
$ 39,447
(12,420)
(27,042)
$ 70,180 $ (25,582)
(8,364) 110,535
(84,590)
(61,557)
Net (decrease) increase in
cash and cash equivalents $ (15)
$ 259
$ 363
Discontinued Operations
As was previously discussed, Kforce divested of HIM during 2014.
The accompanying Consolidated Statements of Cash Flows have been
presented on a combined basis (continuing operations and discontinued
operations) for the year ended December 31, 2014. 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
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
The following table presents the cash flow impact of the common
stock repurchase activity for the years ended December 31 (in thousands):
Open market repurchases
Repurchase of shares related to
tax withholding requirements
for vesting of restricted stock
2016(1)
$44,109
2015 (2)
2014
$37,125 $100,196
1,904
1,346
1,575
$46,013
$38,471 $101,771
(1) Of the open market common stock repurchases, $1.0 million of the cash paid during
the year ended December 31, 2016 related to the settlement of 2015 repurchases.
(2) Of the 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 the years ended December 31, 2016, 2015 and 2014,
Kforce declared and paid dividends of $12.4 million, or $0.48
per share, $12.5 million, or $0.45 per share, and $12.8 million,
or $0.41 per share, respectively. The declaration, payment and
amount of future dividends are discretionary and will be subject to
determination by Kforce’s Board each quarter following its review
of, among other things, the Firm’s financial performance and its
legal ability to pay dividends.
KFORCE INC. AND SUBSIDIARIES 17
Credit Facility
See Note 8—“Credit Facility” in the Notes to Consolidated
Financial Statements, included in this Annual Report for a complete
discussion of our credit facility. Our 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, absent Kforce exercising
all or a portion of the accordion, are limited to: (a) a revolving credit
facility of up to $170.0 million and (b) a $15.0 million sub-limit
included in the credit facility for letters of credit. As of December 31,
2016 and 2015, $111.5 million and $80.5 million was outstanding
under the credit facility, respectively. As of February 22, 2017, $117.2
million was outstanding and $35.7 million was available under the
credit facility.
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 (a) 10%
of the aggregate amount of the commitment of all of the lenders
under the credit facility and (b) $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 (disclosed as “Adjusted EBITDA”), 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.
Our ability to repurchase equity securities could be limited if the
Firm’s availability is less than the greater of (a) 15.0% of the aggregate
amount of the commitment of all lenders under the credit facility
or (b) $15.0 million. Also, our ability to make distributions could be
limited if the Firm’s availability is less than the greater of (a) 12.5%
of the aggregate amount of the commitment of all lenders under
the credit facility and (b) $20.6 million. Since Kforce had availability
under the credit facility of $41.4 million as of December 31, 2016,
the fixed charge coverage ratio covenant was not applicable nor was
Kforce limited in making distributions or executing 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 we
could be limited in our ability to make distributions or repurchase
equity securities.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2016, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $3.1 million, and for facility lease deposits totaling
$0.4 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
The following table presents the open market repurchase activity
under the Board-authorized common stock repurchase program for
the years ended December 31 (in thousands):
2016 (1)
2015(2)
Shares
$ Shares $
Open market
repurchases
2,291
$44,032
1,487 $36,712
(1) On July 29, 2016, our Board approved an increase in our stock repurchase
authorization bringing the then available authorization to $75.0 million.
(2) On July 31, 2015, our Board approved a $60.0 million increase to the then remaining
authorized amount under the Board-authorized common stock repurchase program.
As of December 31, 2016 and 2015, $50.7 million and $53.0
million, respectively, remained available for further repurchases
under the Board-authorized common stock repurchase program.
18 KFORCE INC. AND SUBSIDIARIES
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2016 (in thousands):
Credit facility (1)
Interest payable—credit facility (2)
Operating lease obligations
Capital lease obligations
Purchase obligations (3)
Notes payable (4)
Interest payable—notes payable (4)
Liability for unrecognized tax positions (5)
Deferred compensation plans liability (6)
Defined benefit pension plans (7)
Total
Payments due by period
Total
$111,547
8,031
22,469
2,147
14,558
4,000
234
—
30,252
18,403
$211,641
Less than
1 year
$ —
2,677
8,699
1,110
7,436
923
97
—
2,715
1,089
$24,746
1-3 Years
$111,547
5,354
10,990
1,034
6,742
1,893
116
—
3,275
—
$140,951
3-5 Years
$ —
—
2,737
3
380
1,184
21
—
1,424
12,450
$18,199
More than
5 years
$ —
—
43
—
—
—
—
—
22,838
4,864
$27,745
(1) Our credit facility expires December 23, 2019.
(2) Kforce’s weighted average interest rate as of December 31, 2016 was 2.40%, 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.
(3) Purchase obligations include agreements to purchase goods and services that are enforceable, legally binding, and specify all significant terms.
(4) Our notes payable as of December 31, 2016 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 range from 2.58% to 2.80% and expire between November 2020 and October 2021.
(5) Kforce’s liability for unrecognized tax positions as of December 31, 2016 was $1.1 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.
(6) Kforce maintains various non-qualified deferred compensation plans pursuant to which eligible management and highly-compensated key employees may elect to defer all or
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.
(7) There is no funding requirement associated with our defined benefit pension plans and, as a result, no contributions have been made to our defined benefit pension plans through
the year ended December 31, 2016. Kforce does not currently anticipate funding our defined benefit pension plans during 2017. Kforce has included the total undiscounted
projected benefit payments, as determined at December 31, 2016, in the table above.
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 2016
and 2015, there were no ongoing IRS examinations. 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.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the U.S. (“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 19
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 5—“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,
2016 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, 2016 and 2015, these allowances
were 1.0% and 1.1% as a percentage of gross
accounts receivable, respectively.
We do not believe there is a reasonable
likelihood that there will be a material change
in the future estimates or assumptions we use
to calculate our allowance for doubtful accounts,
fallouts and other accounts receivable reserves.
However, if our estimates regarding estimated
accounts receivable losses are inaccurate,
we may be exposed to losses or gains that
could be material. A 10% change in accounts
receivable reserved at December 31, 2016, would
have impacted our net income for 2016 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, 2016. We
compared the carrying value of the GS reporting
unit to its estimated fair value noting that
the fair value exceeded carrying value by over
100%. As a result, no goodwill impairment
charges were recognized during the year ended
December 31, 2016.
Although the valuation of the business
supported its carrying value in 2016, a deterioration
in any of the assumptions could result in an
additional impairment charge in the future.
20 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, 2016
were $2.8 million and $1.3 million, respectively.
DEFINED BENEFIT PENSION PLAN
We have a defined benefit pension plan
that benefits certain named executive officers,
the Supplemental Executive Retirement Plan
(“SERP”). See Note 9 – “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,
2016 or 2015.
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, 2016.
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.
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 2016 and 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 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, 2016 would
have impacted our net income for 2016 by
approximately $0.2 million.
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 2016 would have had an
insignificant impact on our net income for 2016.
We do not believe that there is a reasonable
likelihood that there will be a material change
in our effective income tax rate or our liability
for uncertain income tax positions. 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, 2016 related primarily
to state net operating losses.
A 0.50% change in our effective income tax
rate would have impacted our net income for
2016 by approximately $0.3 million.
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.
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, 2016. 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, 2016, 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, 2016 and
2015, 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, 2016. We also have audited Kforce’s internal control over financial reporting as of
December 31, 2016, 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2016, 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, 2016, 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 24, 2017
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
Depreciation and amortization
Income from operations
Other expense, net
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 (loss) income:
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
2016
$1,319,706
911,207
408,499
341,196
8,701
58,602
2,647
55,955
23,182
32,773
—
32,773
2015
$1,319,238
905,124
414,114
330,416
9,831
73,867
2,195
71,672
28,848
42,824
—
42,824
2014
$1,217,331
842,750
374,581
315,338
9,894
49,349
1,392
47,957
18,559
29,398
61,517
90,915
(134)
689
(688)
$ 32,639
$ 43,513
$ 90,227
$1.26
$ —
$1.26
$1.25
$ —
$1.25
$1.53
$ —
$1.53
$1.52
$ —
$1.52
$0.94
$1.95
$2.89
$0.93
$1.94
$2.87
Weighted average shares outstanding—basic
26,099
27,910
31,475
Weighted average shares outstanding—diluted
26,274
28,190
31,691
Cash dividends declared per share
$0.48
$0.45
$0.41
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 $2,066 and $2,121, 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 12)
Stockholders’ Equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
Common stock, $0.01 par; 250,000 shares authorized, 71,268 and 70,558 issued, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Treasury stock, at cost; 44,469 and 42,130 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2016
2015
$ 1,482
206,361
172
4,799
10,691
223,505
43,145
30,511
18,650
3,642
45,968
$ 365,421
$ 37,230
44,137
1,765
221
83,353
111,547
3,984
44,801
243,685
$ 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
—
713
428,212
184
174,967
(482,340)
121,736
$ 365,421
—
705
420,276
318
155,096
(436,768)
139,627
$ 351,822
KFORCE INC. AND SUBSIDIARIES 25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Years Ended December 31,
Common stock—shares:
Shares at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures
Exercise of stock options
Shares at end of period
Common stock—par value:
Balance at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures
Exercise of stock options
Balance at end of period
Additional paid-in capital:
Balance at beginning of period
Issuance for stock-based compensation and dividends, net of forfeitures
Exercise of stock options
Income tax benefit from stock-based compensation
Stock-based compensation expense
Employee stock purchase plan
Balance at end of period
Accumulated other comprehensive income (loss):
Balance at beginning of period
Defined benefit pension and post-retirement plans,
net of tax of $89, $429 and $394, respectively
Balance at end of period
Retained earnings:
Balance at beginning of period
Net income
Dividends, net of forfeitures ($0.48, $0.45 and $0.41 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.
2016
2015
2014
70,558
695
15
71,268
$ 705
8
0
$ 713
$ 420,276
447
172
307
6,705
305
$ 428,212
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
$ 318
$ (371)
$ 317
(134)
$ 184
689
$ 318
(688)
$ (371)
$ 155,096
32,773
(12,902)
$ 174,967
$ 125,378
42,824
(13,106)
$ 155,096
$ 47,612
90,915
(13,149)
$ 125,378
42,130
2,370
3
(34)
44,469
40,616
1,540
—
(26)
42,130
35,751
4,896
4
(35)
40,616
$(436,768)
(45,873)
(63)
364
$(482,340)
$(398,961)
(38,058)
—
251
$(436,768)
$(295,991)
(103,195)
(84)
309
$(398,961)
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
Deferred income tax provision, net
Provision for bad debts on accounts receivable
Depreciation and amortization
Stock-based compensation expense
Defined benefit pension and post-retirement plans expense
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
(Increase) decrease in operating assets:
Trade receivables, net
Income tax refund receivable
Prepaid expenses and other current assets
Other assets, net
(Decrease) increase 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
Cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from credit facility
Payments on credit facility
Proceeds from other financing arrangements
Payments on other financing arrangements
Payments of deferred financing fees
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
Other
Cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
2016
2015
2014
$ 32,773
$ 42,824
$ 90,915
—
2,007
976
8,796
6,705
1,733
(376)
597
—
(42)
321
(8,403)
354
(1,631)
(495)
(1,920)
(1,320)
(489)
(139)
39,447
(12,420)
—
—
—
—
—
(12,420)
937,083
(906,008)
1,783
(1,830)
(158)
172
376
(46,013)
(12,447)
—
(27,042)
(15)
1,497
—
2,380
1,553
9,849
5,819
1,846
(551)
77
—
321
308
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)
—
381
551
(38,471)
(12,545)
(252)
(61,557)
259
1,238
(64,600)
491
825
10,058
3,028
1,424
—
446
(849)
—
(47)
(40,339)
4,409
530
(27)
5,653
(248)
(34,934)
(2,317)
(25,582)
(6,010)
(2,611)
117,887
2,668
(2,436)
1,037
110,535
684,427
(653,701)
—
(1,280)
(460)
1,131
—
(101,771)
(12,776)
(160)
(84,590)
363
875
Cash and cash equivalents at end of year
$ 1,482
$ 1,497
$ 1,238
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
Basis of Presentation
The consolidated financial statements have been prepared in
conformity with U.S. GAAP and the rules of the SEC.
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 indicates otherwise.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The most important of these estimates
and assumptions relate to the following: allowance for doubtful
accounts, fallouts and other accounts receivable reserves; accounting
for goodwill and identifiable intangible assets and any related
impairment; self-insured liabilities for workers’ compensation and
health insurance; 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.
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.
Kforce’s primary sources of revenues are Flex and Direct Hire.
Flex revenues are recognized as the services are provided by
Kforce’s consultants. Kforce records revenues net of 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 revenues 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 revenues. 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
22% 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
28 KFORCE INC. AND SUBSIDIARIES
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 the product-based business, which accounts for
approximately 16% of this segment’s revenues, are recognized
at the time of delivery.
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.
Direct Costs of Services
Direct costs of services are composed of all related costs of
employment for its 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.
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.
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.
Cash and Cash Equivalents
Kforce classifies all highly liquid investments with an original
initial maturity of three months or less as cash equivalents. Cash
and cash equivalents consist of cash on hand with banks, either in
commercial accounts, or overnight interest-bearing money market
accounts and at times may exceed federally insured limits. Cash and
cash equivalents are stated at cost, which approximates fair value
due to the short duration of their maturities.
Accounts Receivable and Accounts Receivable Reserves
Kforce records accounts receivable at the invoiced amount.
Kforce establishes its reserves for expected credit losses, fallouts,
early payment discounts and revenue adjustments based on past
experience and estimates of potential future activity. Specific to our
allowance for doubtful accounts, which comprises a majority of our
accounts receivable reserves, Kforce performs an ongoing analysis of
factors including recent write-off and delinquency trends, a specific
analysis of significant receivable balances that are past due, the
concentration of accounts receivable among clients and higher-risk
sectors, and the current state of the U.S. economy. Trade receivables
are written off by Kforce after all reasonable collection efforts have
been exhausted. Accounts receivable reserves as a percentage of
gross accounts receivable was 1.0% and 1.1% as of December 31,
2016 and December 31, 2015, respectively.
Fixed Assets
Fixed assets are carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The cost of leasehold
improvements is amortized using the straight-line method over the
shorter of the estimated useful lives of the assets or the terms of the
related leases, which generally range from three to five years. 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.
Leases
Leases for our field offices, which are located throughout the
U.S., range from three to five-year terms although a limited number
of leases contain short-term renewal provisions that range from
month-to-month to one year.
For leases that contain escalations of the minimum rent, we
recognize the related rent expense on a straight-line basis over the
lease term. We record any difference between the straight-line rent
amounts and amounts payable under the leases as a deferred rent
liability in Accounts payable and other accrued liabilities or Other
long-term liabilities, as appropriate.
The Company records incentives provided by landlords for
leasehold improvements in Accounts payable and other accrued
liabilities or Other long-term liabilities, as appropriate, and records
a corresponding reduction in rent expense on a straight-line basis
over the lease term.
Goodwill and Other Intangible Assets
Goodwill
We evaluate goodwill for impairment annually or more
frequently if an event occurs or circumstances change that
indicate the carrying value may not be recoverable. In testing
for goodwill impairment, we may elect to utilize a qualitative
assessment to evaluate whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If
our qualitative assessment indicates that the fair value may be
impaired or if we elect not to utilize a qualitative assessment for
the evaluation, we perform a two-step impairment test. 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 reporting 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 U.S. Patent and Trademark Office.
For definite-lived intangible assets, amortization is computed
using the straight-line method 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.
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 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. Capitalized software development costs
KFORCE INC. AND SUBSIDIARIES 29
and the associated accumulated amortization are classified as
Other assets, net in the accompanying Consolidated Balance Sheets;
amortization is computed using the straight-line method over the
estimated useful lives of the software, which range from one to
seven years.
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 Kforce Government Solutions, Inc. 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 $350 thousand in claims annually. Additionally,
for all claim amounts exceeding $350 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 unfunded status of its defined benefit
pension plans as a liability in its Consolidated Balance Sheets.
Because our plans are unfunded as of December 31, 2016, actuarial
gains and losses may 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. The net after-
tax impact of unrecognized actuarial gains and losses related to
our defined benefit pensions plans is recorded in accumulated
other comprehensive income (loss) in our consolidated financial
statements.
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
(“WASO”) during the period. WASO excludes unvested shares of
restricted stock. Diluted earnings per common share is computed
by dividing the earnings attributable to common shareholders by
diluted WASO. Diluted WASO includes 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.
For the years ended December 31, 2016, 2015 and 2014, there
were 175 thousand, 280 thousand and 216 thousand, respectively,
common stock equivalents included in the diluted WASO. For the
years ended December 31, 2016, 2015 and 2014, there was an
insignificant amount of anti-dilutive common stock equivalents.
Treasury Stock
Kforce’s 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 Employee Stock Purchase Plan. Treasury
shares are accounted for under the cost method and reported
as a reduction of stockholders’ equity in the accompanying
consolidated financial statements.
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;
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.
New Accounting Standards
In January 2017, the FASB issued authoritative guidance
simplifying the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. Under this
guidance, an entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. The guidance
is to be applied for annual or any interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The guidance
requires companies to apply the requirements prospectively.
Kforce is currently evaluating the impact on the consolidated
financial statements.
In December 2016, the FASB issued authoritative guidance
clarifying language when accounting for internal-use software
licensed from third parties that is within the scope of Subtopic
350-40. According to the clarifying language, internal-use software
licensed from third parties shall be accounted for as the acquisition
of an intangible asset. The guidance is to be applied for annual
periods beginning after December 15, 2016 and interim periods
30 KFORCE INC. AND SUBSIDIARIES
within those annual periods, and early adoption is permitted.
Kforce elected not to adopt this standard early. The guidance
requires companies to apply the requirements prospectively or
retrospectively. Upon adoption, Kforce anticipates retrospectively
applying a change in the classification of internal-use software
licensed from third parties from other assets to intangible assets on
the consolidated balance sheet.
In August 2016, the FASB issued authoritative guidance
clarifying eight cash flow classification issues that are not currently
addressed or unclear under current GAAP and thereby reducing
the current and potential future diversity in practice. The guidance
is to be applied for annual periods beginning after December 15,
2017 and interim periods within those annual periods, and early
adoption is permitted. The guidance requires companies to apply
the requirements retrospectively, unless it is impracticable to apply
the requirements retrospectively at which the requirements should
be applied prospectively as of the earliest date practicable. Kforce
elected not to adopt this standard early. Kforce does not anticipate
that this guidance will have an impact on its consolidated financial
statements as the cash flow classification issues are either not
applicable or we are currently accounting for them in accordance
with the clarified guidance.
In March 2016, the FASB issued authoritative guidance regarding
the accounting for share-based payment transactions, including
income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash
flows. The 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. The guidance requires
companies to apply the requirements retrospectively, modified
retrospectively, or prospectively depending on the amendment(s)
applied. Kforce elected not to adopt this standard early. Upon
adoption, Kforce anticipates a prospective impact to our income tax
expense line within our consolidated statements of operations and
comprehensive income, the amount of which will depend on the
vesting activity in any given period and Kforce’s stock price on the
vesting date. Additionally, we expect a retrospective change in the
presentation of excess tax benefits from a financing to operating
activity within our consolidated statements of cash flows. Kforce
elected to change its policy regarding forfeitures and to account
for forfeitures when they occur as opposed to applying an estimate
to simplify our internal accounting practices. This change will be
applied using a modified retrospective transition method by means
of a cumulative-effect adjustment to retained earnings as of the
beginning of the period of adoption.
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 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 elected not to adopt
this standard early. Kforce anticipates a change to the presentation
of the deferred tax liabilities and assets on the consolidated balance
sheets 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. Since May 2014, the FASB has issued
additional and amended authoritative guidance regarding revenue
from contracts with customers in order to clarify and improve the
understanding of the implementation guidance. The guidance
permits companies to either apply the requirements retrospectively
to all prior periods presented, or apply the requirements in the year
of adoption, through a cumulative adjustment. We have selected
the modified retrospective transition method. Based on our
preliminary assessment, we believe that the timing of our revenue
recognition will not be impacted for at least 95% of our revenues.
The remainder of our revenues are derived from GS fixed-price
contracts. We are reviewing these contracts in order to determine if
there may be any change to the timing. Additionally, we anticipate
a change in the classification of bad debt expense from SG&A to
net service revenues. We are continuing to evaluate other items
that may impact our revenue transaction prices. Furthermore,
we do anticipate an increase in the level of disclosure around our
arrangements and resulting revenue recognition.
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.
KFORCE INC. AND SUBSIDIARIES 31
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 year ended December 31 (in thousands):
Net service revenues
Income from discontinued operations,
before income taxes
2014
$ 56,670
$103,512
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 was approximately $0.6 million and transaction bonuses
was approximately $1.8 million, or 92 thousand shares of common
stock. 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 was 40.6%.
3. FIXED ASSETS
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,
2016
2015
2014
Federal income tax rate
State income taxes,
net of Federal tax effect
Non-deductible compensation
Non-deductible meals and
entertainment
Other
35.0%
35.0%
35.0%
6.8
0.2
1.0
(1.6)
6.1
—
0.7
(1.5)
3.2
1.1
1.1
(1.7)
Effective tax rate
41.4%
40.3%
38.7%
The 2016 rate was unfavorably impacted by certain one-time non-
cash adjustments. 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.
Deferred income tax assets and liabilities are composed of the
following (in thousands):
December 31,
Deferred taxes, current:
Assets:
Accounts receivable reserves
Accrued liabilities
Deferred compensation obligation
Pension and post-retirement
2016
2015
$ 812
3,005
1,060
$ 982
2,753
895
755
11
—
74
The following table presents major classifications of fixed assets
and related useful lives (in thousands):
benefit plans
Other
December 31,
Land
Building and improvements
Furniture and equipment
Computer equipment
Leasehold improvements
Useful Life
5-40 years
5-20 years
3-5 years
3-5 years
Less accumulated depreciation
and amortization
2016
2015
$ 5,892 $ 5,892
25,516
11,802
11,393
11,632
66,235
25,701
17,084
11,003
13,345
73,025
(29,880)
(28,759)
$ 43,145 $ 37,476
Computer equipment as of December 31, 2016 includes equipment
acquired under capital leases of $4.0 million and related accumulated
depreciation of $2.3 million. Computer equipment as of December 31,
2015 includes equipment acquired under capital leases of $4.7 million
and related accumulated depreciation of $2.9 million. Depreciation
and amortization expense, which includes amortization of capital
leases, during the years ended December 31, 2016, 2015 and 2014
was $6.7 million, $6.7 million and $6.3 million, respectively.
4. INCOME TAXES
The provision for income taxes from continuing operations
Deferred tax assets, current
5,643
4,704
Liabilities:
Prepaid expenses
Fixed assets
Other
(260)
(232)
(352)
(186)
—
—
Deferred tax asset, net—current
4,799
4,518
Deferred taxes, non-current:
Assets:
Accrued liabilities
Deferred compensation obligation
Stock-based compensation
Pension and post-retirement
benefit plans
Goodwill and intangible assets
Other
395
8,146
2,196
5,274
3,869
219
613
6,956
1,817
5,303
7,543
320
Deferred tax assets, non-current
20,099
22,552
Liabilities:
Fixed assets
Other
Deferred tax liabilities, non-current
Valuation allowance
(1,361)
(3)
(1,364)
(85)
(1,198)
(331)
(1,529)
(85)
Deferred tax asset, net—non-current 18,650
20,938
consists of the following (in thousands):
Net deferred tax asset
$23,449
$25,456
Years Ended December 31,
Current:
Federal
State
Deferred
32 KFORCE INC. AND SUBSIDIARIES
2016
2015
2014
$16,677 $22,265 $15,782
2,527
250
3,829
2,676
4,632
1,951
$23,182 $28,848 $18,559
At December 31, 2016, Kforce had approximately $5.6 million of state tax net operating losses (“NOLs”) which will be carried forward to be
offset against future state taxable income. The state tax NOLs expire in varying amounts through 2033.
In evaluating the realizability of Kforce’s deferred tax assets, management assesses whether it is more likely than not that some portion,
or all, of the deferred tax assets, will be realized. Management considers, among other things, the ability to generate future taxable income
(including reversals of deferred tax liabilities) during the periods in which the related temporary differences will become deductible.
Kforce is periodically subject to IRS audits, as well as state and other local income tax audits for various tax years. During 2016 and 2015,
there were no ongoing IRS examinations. 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
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended (in thousands):
December 31,
Beginning balance
Additions for tax positions of prior years
Reductions for tax positions of prior years
Lapse of statute of limitations
Settlements
Ending balance
2016
$ 788
454
(25)
(102)
—
$1,115
2015
$278
625
(8)
(25)
(82)
$788
2014
$ 403
90
(11)
(24)
(180)
$ 278
As of December 31, 2016, the amount of unrecognized tax benefit that would impact the effective tax rate, if recognized, is $0.7 million.
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. Kforce Global Solutions, Inc. 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 2012.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents the gross amount and accumulated impairment losses for each of our reporting units as of December 31,
2016, 2015 and 2014, respectively (in thousands):
Gross amount
Accumulated impairment losses
Carrying value
Technology
$ 156,391
(139,357)
$ 17,034
Finance and
Accounting
Government
Solutions
Total
$ 19,766
(11,760)
$ 8,006
$104,596
(83,668)
$ 280,753
(234,785)
$ 20,928
$ 45,968
There was no impairment expense related to goodwill for the years ended December 31, 2016, 2015 and 2014, respectively.
Throughout 2016, 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.
For our annual impairment assessment of the carrying value
of goodwill for our Technology and Finance and Accounting
reporting units as of December 31, 2016 and 2015, 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 annual impairment assessment of the carrying value
of goodwill for our Government Solutions reporting unit as of
December 31, 2016 and 2015, we compared its carrying value to the
estimated fair value based on a weighting of the income approach
and market approaches (“step one”). 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. 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 Government Solutions
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 Government Solutions reporting unit
exceeded its carrying value.
For the impairment test performed as of December 31, 2014,
Kforce performed a step one analysis for each reporting unit and
compared the carrying value of Technology, Finance and Accounting
and Government Solutions to the respective estimated fair values.
Our assessments indicated that the fair value of the reporting units
exceeded their carrying value.
KFORCE INC. AND SUBSIDIARIES 33
Outstanding borrowings under the revolving Credit Facility 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 (a) 10%
of the aggregate amount of the commitment of all of the lenders
under the Credit Facility and (b) $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 (disclosed as “Adjusted EBITDA”), 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.
Our ability to repurchase equity securities could be limited if the
Firm’s availability is less than the greater of (a) 15.0% of the aggregate
amount of the commitment of all lenders under the Credit Facility
or (b) $15.0 million. Also, our ability to make distributions could be
limited if the Firm’s availability is less than the greater of (a) 12.5%
of the aggregate amount of the commitment of all lenders under
the Credit Facility and (b) $20.6 million. Since Kforce had availability
under the Credit Facility of $41.4 million as of December 31, 2016,
the fixed charge coverage ratio covenant was not applicable nor was
Kforce limited in making distributions or executing 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 we
could be limited in our ability to make distributions or repurchase
equity securities. The Credit Facility expires December 23, 2019.
As of December 31, 2016 and 2015, $111.5 million and $80.5
million was outstanding under the Credit Facility, respectively. As
of February 22, 2017, $117.2 million was outstanding and $35.7
million was available under the Credit Facility.
Other Intangible Assets
Our other intangible assets balance includes an indefinite-
lived trademark of $2.2 million as of December 31, 2016 and
2015, respectively, and is recorded in Intangible assets, net in the
accompanying Consolidated Balance Sheets. As of December 31,
2016 and 2015, our definite-lived intangible assets balance of $1.4
million and $2.0 million included accumulated amortization of $27.2
million and $26.6 million, respectively. There was no impairment
expense related to our other intangible assets during the years
ended December 31, 2016, 2015 and 2014.
6. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
Accounts payable and other accrued liabilities consisted of the
following (in thousands):
December 31,
Accounts payable
Accrued liabilities
2016
2015
$20,321
16,909
$23,513
15,714
$37,230
$39,227
Our accounts payable balance includes trade creditor and
independent contractor payables. Our accrued liabilities balance
includes the current portion of our deferred compensation plans
liability, accrued customer rebates and other accrued liabilities.
7. 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
2016
2015
$37,409
2,640
2,790
1,298
$39,043
2,832
2,968
1,282
$44,137
$46,125
8. CREDIT FACILITY
On September 20, 2011, Kforce entered into a Third Amended and
Restated Credit Agreement, with a syndicate led by Bank of America,
N.A. This was amended on March 30, 2012 through the execution
of a Consent and First Amendment, on December 27, 2013 through
the execution of a Second Amendment and Joinder, and further
amended on December 23, 2014 through the execution of a Third
Amendment (as amended to date, the “Credit Facility”) resulting
in a maximum borrowing capacity of $170.0 million, as well as
an accordion option of $50.0 million. The maximum borrowings
available to Kforce under the Credit Facility, absent Kforce exercising
all or a portion of the accordion, are limited to: (a) a revolving Credit
Facility of up to $170.0 million 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 (billed
and unbilled), plus 80% of the net amount of eligible employee
placement accounts, plus 80% of the appraised market value of the
Firm’s corporate headquarters reduced each subsequent quarter
by an amount equal to 1/80th of the initial amount, minus certain
minimum availability reserves.
Borrowings under the Credit Facility are secured by substantially
all of the assets of the Firm, including the Firm’s corporate
headquarters property.
34 KFORCE INC. AND SUBSIDIARIES
9. EMPLOYEE BENEFIT PLANS
401(k) Savings Plans
The Firm maintains various qualified defined contribution 401(k)
retirement savings plans for eligible employees. Assets of these
plans 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 Kforce’s Board.
Kforce accrued matching 401(k) contributions of $1.5 million
and $1.4 million as of December 31, 2016 and 2015, respectively.
The plans held a combined 201 thousand and 218 thousand
shares of Kforce’s common stock as of December 31, 2016 and
2015, respectively.
Employee Stock Purchase Plan
Kforce’s employee stock purchase plan allows all eligible employees
to enroll each quarter to purchase Kforce’s common stock at a 5%
discount from its market price on the last day of the quarter. Kforce
issued 34 thousand, 26 thousand and 35 thousand shares of common
stock at an average purchase price of $19.37, $22.61 and $19.76 per
share during the years ended December 31, 2016, 2015 and 2014,
respectively. All shares purchased under the employee stock purchase
plan were settled using Kforce’s treasury stock.
Deferred Compensation Plans
The Firm maintains various non-qualified deferred compensation
plans, 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 in Other long-
term liabilities if payable after the next year, upon retirement or
termination of employment in the accompanying Consolidated
Balance Sheets. At December 31, 2016 and 2015, amounts included
in Accounts payable and other accrued liabilities related to the
deferred compensation plans totaled $2.7 million and $2.3 million,
respectively. Amounts included in Other long-term liabilities
related to the deferred compensation plans totaled $27.5 million
and $24.2 million as of December 31, 2016 and 2015, respectively.
For the years ended December 31, 2016 and 2015, we recognized
compensation expense for the plans of $881 thousand and $401
thousand, respectively. For the year ended December 31, 2014, we
recognized compensation income from continuing operations for
the plans of $187 thousand.
Kforce maintains a Rabbi Trust and holds life insurance policies
on certain individuals to assist in the funding of the deferred
compensation liability. If necessary, employee distributions are
funded through proceeds from the sale of assets held within our
Rabbi Trust. The balance of the assets within the Rabbi Trust,
including the cash surrender value of the Company-owned life
insurance policies, was $27.3 million and $25.5 million as of
December 31, 2016 and 2015, respectively, and is recorded in Other
assets, net in the accompanying Consolidated Balance Sheets. As of
December 31, 2016, the life insurance policies had a cumulative face
value of $213.1 million. Kforce had no gains or losses attributable to
investments in trading securities for the years ended December 31,
2016, 2015 and 2014.
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.
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 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, 2016,
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, 2016 and
2015, it is not necessary for Kforce to determine the expected long-
term rate of return on plan assets. The following table presents the
weighted average actuarial assumptions used to determine the
actuarial present value of projected benefit obligations at:
December 31,
Discount rate
Rate of future compensation increase
2016
2015
4.00%
3.60%
4.00%
4.00%
The following table presents the weighted average actuarial
assumptions used to determine net periodic benefit cost for the
years ended:
December 31,
2016
2015
2014
4.00%
Discount rate
Rate of future compensation increase 4.00%
3.75%
4.00%
3.75%
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 U.S. and is considered to be one of the preferred
standards for establishing a discount rate.
KFORCE INC. AND SUBSIDIARIES 35
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 table presents the components of net periodic
benefit cost for the years ended (in thousands):
December 31,
Service cost
Interest cost
Net periodic benefit cost
2016
$1,310
453
$1,763
2015
$1,323
383
$1,706
2014
$1,164
294
$1,458
Changes in Benefit Obligation
The following table presents 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
2016
2015
$11,337
1,310
453
$10,197
1,323
383
in actuarial assumptions
336
(566)
Projected benefit obligation, ending
$13,436
$11,337
There were no payments made under the SERP during the years
ended December 31, 2016 and 2015, 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, 2016 and 2015
was $12.7 million and $11.0 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, 2016. Kforce does not currently anticipate
funding the SERP during the year ending December 31, 2017.
Estimated Future Benefit Payments
Undiscounted benefit payments by the SERP, which reflect the
anticipated future service of participants, expected to be paid are
as follows (in thousands):
2017
2018
2019
2020
2021
2022-2026
Thereafter
36 KFORCE INC. AND SUBSIDIARIES
Projected Annual
Benefit Payments
$ —
—
—
—
12,450
—
4,864
Supplemental Executive Retirement Health Plan
Kforce maintained a Supplemental Executive Retirement
Health Plan (“SERHP”) to provide post-retirement health and
welfare benefits to certain executives. The vesting and eligibility
requirements mirrored that of the SERP, and no advance funding
was required by Kforce or the participants. Consistent with the SERP,
none of the benefits earned were attributable to services provided
prior to the effective date of the plan.
During the year ended December 31, 2014, Kforce terminated
the Company’s SERHP and settled all future benefit obligations by
making lump sum payments totaling approximately $3.9 million,
which resulted in a net settlement loss of $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.
Net Periodic Post-retirement Benefit Cost
The following represents the components of net periodic
post-retirement benefit cost for the year ended December 31
(in thousands):
Service cost
Interest cost
Settlement/curtailment loss
Net periodic benefit cost
2014
$174
78
725
$977
10. FAIR VALUE MEASUREMENTS
There were no transfers into or out of Level 1, 2 or 3 assets or
liabilities during the years ended December 31, 2016 and 2015.
Kforce’s financial statements include a contingent consideration
liability related to a non-significant acquisition of a business within
our Government Solutions reporting segment, which 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. Remeasurements to fair value are
recorded in Other expense, net within the Consolidated Statements
of Operations and Comprehensive Income. For the years ended
December 31, 2016 and 2015, approximately $42 thousand of
income and $321 thousand of expense, respectively, was recognized
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 and the estimated
fair value as of December 31, 2016 and 2015 was $756 thousand
and $798 thousand, respectively.
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.
11. STOCK INCENTIVE PLANS
On April 19, 2016, the Kforce shareholders approved the 2016
Stock Incentive Plan (“2016 Plan”). The 2016 Plan allows for the
issuance of stock options, stock appreciation rights, stock awards
(including restricted stock awards (“RSAs”) and restricted stock units
(“RSUs”)) and other stock-based awards. The aggregate number of
shares of common stock that are subject to awards under the 2016
Plan is approximately 1.6 million shares. The 2016 Plan terminates
on April 19, 2026. Prior to the effective date of the 2016 Plan, the
Company granted stock awards to eligible participants under our
2013 Stock Incentive Plan (“2013 Plan”) and 2006 Stock Incentive
Plan (“2006 Plan”). As of the effective date of the 2016 Plan, no
additional awards may be granted pursuant to the 2013 Plan and
2006 Plan; however, awards outstanding as of the effective date will
continue to vest in accordance with the terms of the 2013 Plan and
2006 Plan, respectively.
During the years ended December 31, 2016, 2015 and 2014, Kforce
recognized total stock-based compensation expense of $6.7 million,
$5.8 million and $5.5 million, respectively. During the year ended
December 31, 2014, Kforce recognized stock-based compensation
expense from continuing operations of $3.0 million. The related tax
benefit for the years ended December 31, 2016, 2015 and 2014 was
$2.8 million, $2.3 million and $1.2 million, respectively.
Stock Options
The following table presents the activity under each of the stock incentive plans discussed above for the years ended December 31, 2016,
2015 and 2014 (in thousands, except per share amounts):
Exercisable as of December 31, 2013
Exercised
Forfeited/Cancelled
Exercisable as of December 31, 2014
Exercised
Exercisable as of December 31, 2015
Exercised
Exercisable as of December 31, 2016
Incentive
Stock Option Plan
97
(57)
(18)
22
(22)
—
—
—
2006 Stock
Incentive
Plan
83
(48)
—
35
(10)
25
(15)
10
Total
180
(105)
(18)
57
(32)
25
(15)
10
Weighted
Average Exercise
Total Intrinsic
Value of
Price Per Share Options Exercised
$11.57
$11.61
$11.00
$11.69
$11.78
$11.58
$11.44
$11.79
$1,029
$ 359
$ 75
The following table summarizes information about employee and director stock options under all of the plans mentioned above as of
December 31, 2016 (in thousands, except per share amounts):
Range of Exercise Prices
$9.13—$14.45
Number of Awards
(#)
10
Weighted Average Remaining
Contractual Term (Yrs)
1.07
Weighted Average
Exercise Price ($)
$11.79
Total
Intrinsic Value
$113
Outstanding and Exercisable
No compensation expense was recorded during the years ended December 31, 2016, 2015 or 2014 as a result of the grant date fair value
having been fully amortized as of December 31, 2009. As of December 31, 2016, there was no unrecognized compensation cost related to
non-vested options.
Restricted Stock
Restricted stock (including RSAs and RSUs) are granted to executives
and management either: (1) for awards related to Kforce’s annual
long-term incentive (“LTI”) compensation program, or (2) as part of
a compensation package and in order to retain directors, executives
and management. The LTI award amounts are generally based on
total shareholder return performance goals, which are established
by Kforce’s Compensation Committee during the first quarter of the
year of performance. The LTI restricted stock granted during the year
ended December 31, 2016 will vest over a period of five years, with
equal vesting annually. Other restricted stock granted during the year
ended December 31, 2016 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.
RSAs contain the same voting rights as other common stock as
well as the right to forfeitable dividends in the form of additional
RSAs at the same rate as the cash dividend on common stock and
containing the same vesting provisions as the underlying award.
RSUs contain no voting rights, but have the right to forfeitable
dividend equivalents in the form of additional RSUs at the same
rate as the cash dividend on common stock and containing the
same vesting provisions as the underlying award. The distribution
of shares of common stock for each RSU issued under the 2016
Plan pursuant to the terms of the Kforce Inc. Director’s Restricted
Stock Unit Deferral Plan can be deferred to a date later than the
vesting date if an appropriate election was made. In the event of
such deferral, vested RSUs have the right to dividend equivalents.
KFORCE INC. AND SUBSIDIARIES 37
The following table presents the restricted stock activity for the years ended December 31, 2016, 2015 and 2014 (in thousands, except per
share amounts):
Outstanding as of December 31, 2013
Granted
Forfeited/Cancelled
Vested
Outstanding as of December 31, 2014
Granted
Forfeited/Cancelled
Vested
Outstanding as of December 31, 2015
Granted (1)
Forfeited/Cancelled
Vested
Outstanding as of December 31, 2016
Number of Restricted Stock
Weighted Average
Grant Date
Fair Value
Total Intrinsic
Value of Restricted
Stock Vested
811
528
(84)
(273)
982
556
(59)
(186)
1,293
1,048
(353)
(280)
1,708
$16.89
$20.18
$18.38
$17.37
$18.55
$24.01
$19.37
$18.28
$20.89
$22.46
$21.04
$20.67
$21.86
$5,624
$4,580
$6,434
(1) The increase in shares granted during the year ended December 31, 2016 as compared to 2015 and 2014 was due to a change in the grant date practice for our annual LTI
awards. For greater clarity, Kforce has historically granted these annual awards on the first business day of the year following the end of the performance period; however, for the
performance period ending December 31, 2016, the grant date was shifted to the last day of the performance period. This administrative change resulted in two annual grants
being made during the year ended December 31, 2016 (a grant on January 4, 2016 for the performance period ending December 31, 2015 and a grant on December 31, 2016 for
the performance period ending December 31, 2016).
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.
As of December 31, 2016, total unrecognized compensation expense related to restricted stock was $27.5 million, which will be recognized
over a weighted average remaining period of 4.4 years.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Kforce leases space and operating assets under operating and capital leases expiring at various dates, with some leases cancelable upon
30 to 90 days’ notice and with some leases containing escalation in rent clauses. The leases require Kforce to pay taxes, insurance and
maintenance costs, in addition to rental payments.
Future minimum lease payments, inclusive of accelerated lease payments, under non-cancelable capital and operating leases are
summarized as follows (in thousands):
Capital leases
Present value of payments
Interest
Capital lease payments
Operating leases
Facilities
Furniture and equipment
Total operating leases
Total leases
2017
2018
2019
2020
2021
Thereafter
Total
$ 965
145
$1,110
$8,651
48
$8,699
$9,809
$ 756
80
$ 836
$6,642
—
$6,642
$7,478
$ 148
50
$ 198
$4,348
—
$4,348
$4,546
$
$
3
—
3
$1,953
—
$1,953
$1,956
$ —
—
$ —
$784
—
$784
$784
$—
—
$—
$43
—
$43
$43
$ 1,872
275
$ 2,147
$22,421
48
$ 22,469
$24,616
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 $7.7 million, $6.7 million and $5.6 million for the
years ended December 31, 2016, 2015 and 2014, respectively.
Purchase Commitments
Kforce has various commitments to purchase goods and services
in the ordinary course of business; these commitments are primarily
related to software and online application licenses and hosting.
As of December 31, 2016, these commitments amounted to
approximately $14.6 million and are expected to be paid as follows:
$7.4 million in 2017; $4.2 million in 2018; $2.6 million in 2019; $0.4
million in 2020; and nil in 2021.
38 KFORCE INC. AND SUBSIDIARIES
Letters of Credit
Income Tax Audits
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2016, Kforce had letters of credit
outstanding for workers’ compensation and other insurance
coverage totaling $3.1 million, and for facility lease deposits totaling
$0.4 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 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, cyber liability,
employment practices liability and fidelity losses. There can be no
assurance that Kforce’s liability insurance will cover all events or that
the limits of coverage will be sufficient to fully cover all liabilities.
Accordingly, we disclose matters below for which a material loss is
reasonably possible.
On August 25, 2016, Kforce Flexible Solutions LLC (along with
co-defendant BMO Harris Bank) was served with a complaint
brought in the Northern District of Illinois, U.S. District Court, Eastern
District of Illinois. Shepard v. BMO Harris Bank N.A. et al., Case No.:
1:16-cv-08288. The plaintiff purports to bring claims on her own
behalf and on behalf of putative class of telephone-dedicated
workers for alleged violations of the Fair Labor Standards Act, the
Illinois Minimum Wage Law, and the Illinois Wage Payment and
Collection Act based upon the defendants’ purported failure to pay
her and other class members all earned regular and overtime pay
for all time worked. More specifically, the plaintiff alleges that class
employees were required to perform unpaid work before and after
the start and end times of their shifts. She seeks unpaid back regular
and overtime wages, liquidated damages, statutory penalties, and
attorney fees and costs. We are vigorously defending each of the
plaintiff’s claims. At this stage in the litigation it is not feasible to
predict the outcome of this matter or reasonably estimate a range
of loss, should a loss occur, from this proceeding; however, based
on our current knowledge, we believe that the final outcome of this
matter is unlikely to have a material adverse effect on our business,
consolidated financial position, results of operations, or cash flows.
Kforce is periodically subject to IRS audits, as well as state and
other local income tax audits for various tax years. During 2016 and
2015, there were no ongoing IRS examinations. 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, 2016 would be approximately
$43.6 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 $17.6
million if, in the absence of a change in control, all of the executives
under contract were terminated by Kforce without good cause or if
the executives resigned for good reason.
Kforce has not recorded any liability related to the employment
agreements as no events have occurred that would require payment
under the agreements.
13. 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 Kforce’s Board and our CODM. Kforce
also reports Flex and Direct Hire revenues separately by segment,
which has been incorporated into the table below. The following
information for the year ended December 31, 2014 has been
updated to reflect the disposition of HIM, for which 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 for the year ended December 31, 2016, Kforce has
generated only sales and gross profit information on a segment basis.
Substantially all operations and long-lived assets are located in the U.S.
We do not report total assets or income from continuing operations
separately by segment as our operations are largely combined.
KFORCE INC. AND SUBSIDIARIES 39
The following table provides information concerning the operations of our segments for the years ended December 31 (in thousands):
Tech
FA
GS
Total
2016
Net service revenues
Flexible billings
Direct Hire fees
Total net service revenues
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2015
Net service revenues
Flexible billings
Direct Hire fees
Total net service revenues
Gross profit
Operating expenses
Income from continuing operations, before income taxes
2014
Net service revenues
Flexible billings
Direct Hire fees
Total net service revenues
Gross profit
Operating expenses
Income from continuing operations, before income taxes
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
$863,434
20,043
$883,477
$255,842
$307,245
30,356
$337,601
$120,551
$98,628
—
$98,628
$32,106
$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
$1,269,307
50,399
$1,319,706
$ 408,499
352,544
$ 55,955
$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
The following table provides quarterly information for the years ended December 31, 2016 and 2015 (in thousands, except per
share amounts):
Three Months Ended
2016
Net service revenues
Gross profit
Net income
Earnings per share—basic
Earnings per share—diluted
2015
Net service revenues
Gross profit
Net income
Earnings per share—basic
Earnings per share—diluted
March 31,
June 30,
Sept. 30,
Dec. 31,
$322,201
97,189
3,650
$0.14
$0.14
$312,611
94,740
5,785
$0.20
$0.20
$335,047
106,282
10,864
$0.41
$0.41
$337,353
106,038
11,593
$0.41
$0.41
$336,460
105,380
9,020
$0.35
$0.34
$341,575
109,821
13,545
$0.49
$0.48
$325,998
99,648
9,239
$0.36
$0.36
$327,699
103,515
11,901
$0.43
$0.43
15. 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
Acquisition of fixed assets through accounts payable
Contingent consideration for acquisition
40 KFORCE INC. AND SUBSIDIARIES
2016
2015
2014
$21,324
$ 2,101
$ 63
$
669
$ 1,153
$ 935
$ 12
$ —
$25,395
$ 1,609
$ —
$ 578
$ 1,470
$ 1,012
$ 41
$ —
$52,565
$ 1,048
$ 84
$ 699
$ 313
$ 1,425
$ 19
$ 477
CORPORATE INFORMATION
EXECUTIVE AND
SENIOR OFFICERS
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
David M. Kelly
Chief Financial Officer
and Secretary
Kye L. Mitchell
Chief Operations Officer
Michael R. Blackman
Chief Corporate Development Officer
Robert W. Edmund
Chief Legal and Compliance Officer,
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 call Investor Relations:
1 (813) 552-2927.
ANNUAL MEETING
The annual meeting of shareholders
will be held on April 18, 2017 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.
BOARD OF DIRECTORS
David L. Dunkel
Chairman and
Chief Executive Officer,
Kforce Inc.
John N. Allred
President, A.R.G., Inc.
Richard M. Cocchiaro
Ann E. Dunwoody
President
First 2 Four, LLC
Mark F. Furlong
President and
Chief Executive Officer (Ret.),
BMO Harris Bank N.A.
Randall A. Mehl
President and
Chief Investment Officer,
Stewardship Capital Advisors, LLC
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, Inc.
KFORCE—63 TOTAL OFFICES TO SERVE YOU.
To find the location nearest you, visit our Website at www.kforce.com or call (800) 395-5575.
Corporate Headquarters: 1001 East Palm Avenue, Tampa, Florida 33605, (813) 552-5000
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