Great Results Through
Strategic Partnership and
Knowledge Sharing.®
Annual Report 2019
is a professional staffing services and solutions firm that specializes
in the areas of Technology and Finance and Accounting. Each year, through our network of
approximately 50 offices and two national delivery centers, we provide opportunities for over
30,000 highly skilled professionals who work with over 4,000 clients, including 70% of the
Fortune 100. Founded in 1962, our name stands for KnowledgeForce® which describes the
customer-centric Kforce Knowledge Process that delivers high-touch, relationship-driven results
backed by progressive technologies. At Kforce, our promise is to deliver great results through
strategic partnership and knowledge sharing.
TECHNOLOGY
FINANCE AND ACCOUNTING
As the 5th largest technology staffing firm in the U.S.,
we engage more than 15,000 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:
As the 4th largest finance and accounting staffing firm in the
U.S., we engage more than 15,000 highly skilled professionals
annually in finance and accounting roles on a temporary,
consulting and direct-hire basis. Our Finance and Accounting
professionals range from strategic and operational to
transactional and professional administration:
• PROJECT MANAGEMENT AND BUSINESS ANALYSIS offers
a full suite of functional professionals to support the full
scope of your initiative.
• OPERATIONAL AND TECHNICAL professionals perform
day-to-day accounting and staff-level analysis, which
includes directing, controlling and planning.
• APPLICATION DEVELOPMENT supports applications and
systems software creation and maintenance.
• TRANSACTIONAL functions include accounts receivable,
accounts payable and payroll.
• 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.
• PROFESSIONAL ADMINISTRATION tasks include loan
servicing, benefits administration, customer service/call
center, data entry, human resources and professional
administrative support.
Kforce’s total shareholder
return (TSR) has been
1,200%, outperforming the
Russell 2000 Index, which
has appreciated 455% over
the same period.
1,200%
–
900%
–
600%
–
300%
–
0%
KFRC
Russell 2000
Kforce TSR vs. Russell 2000 Index stock performance from
8/15/95 (IPO) to 12/31/19
This Annual Report contains forward-looking statements (within the meaning of the federal securities laws). Please see the “Cautionary
Note Regarding Forward-Looking Statements” contained in the introductory portion of our Annual Report on Form 10-K for the year ended
December 31, 2019 for additional information regarding forward-looking statements.
TO OUR FELLOW SHAREHOLDERS, CLIENTS, CONSULTANTS AND EMPLOYEES:
As we look back on 2019 and the activities completed to
position our Firm for significant future success, we are
very pleased with what we accomplished. Last year, with the successful
divestitures of our Kforce Government Solutions, Inc. (“KGS”) and
TraumaFX Solutions, Inc. (“TFX”) businesses, we completed a multi-
year effort to exit all non-core businesses and focus our offerings solely
on the domestic technical and professional staffing and solutions
markets. Our Technology business now comprises nearly 80% of
overall revenues. The completion of these efforts better positions
us to allocate our investments. We can now dedicate our resources
to grow our footprint and service offerings in technology and areas
within finance and accounting that complement the massive data
and digital transformation efforts taking place in all organizations.
We were successful at once again driving significant above-market
growth in our Technology business, which increased 6.8% in 2019.
Our compound annual revenue growth rate in our Technology
business over the last ten years has been 8.5%. Clients looking to
meet their talent needs in technology are looking for partners that
can provide resources at scale across a diverse range of skill sets and
project management models, over multiple geographies and with a
disciplined focus on compliance. We have built a business with core
competencies to do just that without distraction and it is helping us
to further increase client and market share.
We generated nearly $70 million of operating cash flows in 2019
and realized approximately $102 million of net proceeds from the
divestitures. This allowed us to return nearly $135 million in capital
to our shareholders in 2019 by repurchasing approximately 13% of
outstanding shares and continuing our quarterly dividend, while still
reducing net debt by approximately $27 million. We fully returned the
net proceeds from our 2019 divestitures via share repurchases more
quickly than originally anticipated. Consequently, we were able to
recapture the earnings per share lost from the divestitures of KGS and
TFX through the EPS accretion resulting from our share repurchases by
the end of the year. Going into 2020, we have a highly focused, more
profitable Firm along with a very strong balance sheet that provides
us flexibility to execute quickly on strategic or tuck-in acquisitions
or other ventures and strategic partnerships, while continuing to
return capital to our shareholders. Our confidence in the continued
strength in our business and in our future operating cash flows is
further demonstrated by our Board of Directors’ approval of an 11%
increase in our dividend to $0.80 per share annually, effective in the
first quarter of 2020.
We also significantly improved our profitability in 2019 generating
a return on invested capital of approximately 25%. Total revenue of
$1.35 billion in 2019 grew 3.3% year over year and earnings per share
of $2.29 improved 13.4% year over year. We expect profitability to
continue to improve as we grow and are firmly on track to achieve
our operating margin commitments. Shareholders continue to benefit
from our strong performance as demonstrated by an 82.7% total
shareholder return over the last three years, which was the highest in
our peer group of 14 other companies.
Revenue by Segment
Revenues for our Technology segment (approximately 78.5% of overall
revenues) of $1.1 billion grew 6.8% in 2019 on a year-over-year basis,
which was significantly above the market growth expectation. We
continued to put more people to work while benefiting from positive
trends in the length of our average assignment, which is approaching
ten months, and improving average bill rates. We believe this success
is driven by our ability to quickly identify and deliver high caliber,
qualified and skilled IT talent and a growing trend for clients to retain
scarce talent for longer periods.
Revenues for our Finance and Accounting (“FA”) segment (approximately
21.5% of overall revenues) of $289.5 million decreased 7.7% in 2019.
We continue to reposition this business to place greater emphasis on
higher bill rate opportunities within skill sets that we believe are less
susceptible to disruptions from technology advancements.
We provide Direct Hire services to our clients, which is an important
part of our business. Our goal is to meet the talent needs of our clients
through whatever means they prefer. Direct Hire revenues in our
Technology and FA segments, which are included in overall segment
revenues, improved 9.1% and 1.2%, respectively, in 2019 on a year-
over-year basis.
KFORCE INC. AND SUBSIDIARIES 1
rollout of our TRM system. We will continue to incorporate other
technologies into our processes to further enhance our capabilities
in providing exceptional service to our clients and consultants. We
expect the pace of change from a business model and technology
standpoint to continue and we believe that we, like virtually every
organization, need to maintain high levels of technology investment
for the foreseeable future.
Looking Ahead
As we look ahead, demand for technology resources continues to be
quite strong. Organizations across all industries are being confronted
with the imperative to invest and rapidly adapt to ever-changing
business models, new competitors and the changing preferences of
their customers. Market-leading companies understand the value of
a flexible resource model to execute on the project work necessary to
address this changing landscape where specialized skills, speed and
flexibility are critical—without sacrificing quality. Big data, artificial
intelligence and machine learning continue to be in high demand,
as well as cloud computing, cybersecurity, mobility and digital
marketing. Our discussions with many of these companies indicate
that leveraging flexible resources within their technology teams in
order to meet these project-driven needs remains a vital element of
their overall talent strategy.
These companies are also increasingly looking for third party partners,
such as Kforce, to both provide the resources necessary to execute
critical projects and to assume a greater role in more complex
technical projects that require managed teams and solutions. Our
clients have increasingly expressed a desire to engage with us to
serve as an effective, more cost-efficient alternative or complement
to the larger scale integrators as evidenced by our success in recently
winning several strategic engagements. This growing demand
expands our addressable opportunity into the IT services market,
which is significantly larger than the $30+ billion domestic technology
staffing market.
Our Clients
Fortune 1000 companies continue to be the primary consumers of
flexible technology talent. Our revenue growth in 2019 was driven
primarily by the diversification within our client portfolio beyond
our largest clients and deeper into other Fortune 1000 customers
where we have established long-standing relationships. This focus on
significant users of flexible staffing and solution services has better
enabled us to understand the technology issues and craft solutions
for these sophisticated and substantial consumers of our services.
In both the $30+ billion market for technology staffing and the
$100+ billion market for IT solutions, where staffing companies are
increasingly gaining a foothold, there are limited providers with the
infrastructure to not only provide quality and timely talent at scale,
but to also meet increasingly stringent compliance requirements. We
believe our capabilities represent significant competitive advantages
in today’s war for talent.
Our People
We are proud of the accomplishments of our people over the last
several years and 2019 was no different. The significant technology
and process investments along with the balancing of our revenue-
generating talent within our client portfolio has led to improved
productivity, which has grown approximately 10% on average over the
last three years. As we continue to refine our model, we believe we can
further improve our productivity while growing revenues.
Technology Investments
Changing technologies are impacting staffing as new tools become
available and non-traditional competitors enter the industry. At
Kforce, our strategy is to embrace technologies that will best enable
our associates to focus on serving our clients and consultants
through trusted relationships. We believe that technology will
facilitate enhanced productivity and improved customer service in
the sophisticated and complex world of professional and technical
staffing. We have been investing significantly in technology, including
continued enhancements to our customer relationship management
(“CRM”) system, our upcoming talent relationship management
(“TRM”) system, new technologies aimed at improving candidate
attraction, matching and engagement, and our business and data
intelligence capabilities. A key initiative in 2020 will be the initial
2 KFORCE INC. AND SUBSIDIARIES
Thank you for your interest in and support of Kforce. In August of
2020 we are looking forward to celebrating our 25th year as a public
company. Our total shareholder return since going public in August
1995 has been approximately 1,200%, roughly 2.5 times greater than
the Russell 2000 over the same period. Given that we are in the early
innings of the massive digital transformation of the U.S. economy, we
believe the future of Kforce has never been brighter. The results that
we are experiencing are the result of a lot of hard work, and tough
decisions, by our team and we are grateful for their tenacity. While
we have much more to do, we would like to say thank you to each and
every member of our field and corporate teams, and to our consultants
and our clients, for allowing us the privilege of serving you.
David L. Dunkel
Chairman and
Chief Executive Officer
Joseph J. Liberatore
President
We believe the secular drivers of demand in technology have
fundamentally changed the trajectory and persistence of technology
investments and utilization of flexible labor to meet this demand.
Given the strength in these secular drivers, we would expect the
performance of the domestic technology market to perform relatively
well, even during uncertain macroeconomic environments.
We also continued our Board of Directors refreshment activities.
Over the last five years, we have added three new members to our
Board. Ann Dunwoody, Randall Mehl and John Simmons each bring
unique and valuable experience to the Board. These additions have
been made knowing our long-time Board members would eventually
choose to step down after long and distinguished tenures. At our Q1
2020 Board of Directors meeting, John Allred, Richard Cocchiaro and
Gordon Tunstall each informed the Board that he would not stand
for re-election at the April 2020 Annual Shareholders’ Meeting. These
three outstanding individuals have been critical partners and advisors
to our Firm, from its entrance into the public markets through all
stages of its growth. We have been very blessed by their service and
they will be missed. However, the additions we have made result in a
more diverse and independent Board that should serve shareholders
well in the upcoming years.
Stewardship
Our social responsibility efforts reflect our desire to have a positive
impact on the communities in which we live and work, with a
focus on organizations that provide education, human services and
community development. Our associates in our headquarters in
Tampa, Florida, and in each of our 50 offices are dedicated to making
their communities better places to live and work. This commitment is
on display throughout the year and especially during our 2019 Annual
Day of Giving, an impactful day where 1,400 employees nationwide
volunteered, allowing us to participate in over 65 deserving events
throughout local communities. We are also active in sponsoring
events each year that further our commitment to social responsibility,
including Kforce Kids’ STEM Fairs, which advance our commitment to
educating the next generation of innovators, creators and experts
and events intended to celebrate our dynamic workforce and diverse
culture. We are also extremely proud of our “Flights of Hope” where
we delivered 68,000 pounds of critical supplies to the people of
The Bahamas in the aftermath of Hurricane Dorian. We also took
meaningful steps in 2019 to improve our environmental responsibility
program across the Firm.
KFORCE INC. AND SUBSIDIARIES 3
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 (“Consolidated Financial Statements”) incorporated into this
Annual Report.
Years Ended December 31,
(In thousands, except per share amounts)
Revenue
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Other expense, net
Income from continuing operations,
before income taxes
Income tax expense
Income from continuing operations
Income from discontinued operations,
net of tax
Net income
2019(1)
2018(2)
2017(2)
2016(3)
2015
$1,347,387
395,038
314,167
6,050
3,425
71,396
16,830
54,566
$1,303,937
386,487
307,250
6,836
4,521
67,880
17,004
50,876
$1,253,646
375,597
308,313
7,266
5,100
54,918
25,324
29,594
$1,221,078
376,393
318,970
7,549
3,101
46,773
19,751
27,022
$1,221,866
380,757
309,998
8,386
1,928
60,445
24,802
35,643
76,296
$ 130,862
7,104
$ 57,980
3,691
$ 33,285
5,751
$ 32,773
7,181
$ 42,824
Earnings per share—basic, continuing operations
Earnings per share—diluted, continuing operations
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Dividends declared per share
$2.35
$2.29
23,186
23,772
$0.72
$2.05
$2.02
24,738
25,251
$0.60
$1.17
$1.16
25,222
25,586
$0.48
$1.04
$1.03
26,099
26,274
$0.48
$1.28
$1.26
27,910
28,190
$0.45
As of December 31,
(In thousands)
Cash and cash equivalents
Working capital
Total assets
Total outstanding borrowings on credit facility
Total long-term liabilities
Stockholders’ equity
2019
2018
2017
2016
2015
$
19,831
$ 160,271
$ 381,125
$
65,000
$ 128,898
$ 167,263
$ 112
$ 158,104
$ 379,908
$ 71,800
$ 121,219
$ 168,331
$ 379
$ 161,726
$ 384,304
$ 116,523
$ 166,308
$ 134,277
$ 1,482
$ 135,353
$ 365,421
$ 111,547
$ 160,332
$ 121,736
$ 1,497
$ 122,270
$ 351,822
$ 80,472
$ 124,449
$ 139,627
(1) Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2019 include $2.0 milliom of severance and other costs due to actions taken as a result
of the Government Solutions (“GS”) divestiture, which negatively impacted SG&A.
(2) The Tax Cuts and Jobs Act (“TCJA”) was enacted in December 2017, which reduced the U.S. federal corporate tax rate from 35.0% to 21.0% in 2018. As a result, we revalued our
net deferred income tax assets and recorded $3.6 million of additional income tax expense from continuing operations during the year ended December 31, 2017.
(3) During 2016, Kforce incurred approximately $6.0 million in severance costs associated with realignment activities focused on further streamlining our organization, which were
recorded in SG&A.
During the year ended December 31, 2019, Kforce completed the sale of the GS segment and the results of operations for the GS segment
have been presented as discontinued operations for all of the years presented above. Refer to Note 2—“Discontinued Operations” in the
Consolidated Financial Statements included in this Annual Report, for a more detailed discussion.
4 KFORCE INC. AND SUBSIDIARIES
2019(1)
2018(2)
2017(2)
2016(3)
2015
$1,347,387
$1,303,937
$1,253,646
$1,221,078
$1,221,866
395,038
314,167
6,050
3,425
71,396
16,830
54,566
76,296
$2.35
$2.29
23,186
23,772
$0.72
386,487
307,250
6,836
4,521
67,880
17,004
50,876
$2.05
$2.02
24,738
25,251
$0.60
375,597
308,313
7,266
5,100
54,918
25,324
29,594
$1.17
$1.16
25,222
25,586
$0.48
376,393
318,970
7,549
3,101
46,773
19,751
27,022
$1.04
$1.03
26,099
26,274
$0.48
380,757
309,998
8,386
1,928
60,445
24,802
35,643
$1.28
$1.26
27,910
28,190
$0.45
$ 130,862
$ 57,980
$ 33,285
$ 32,773
$ 42,824
7,104
3,691
5,751
7,181
Annual Report.
Years Ended December 31,
(In thousands, except per share amounts)
Revenue
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Other expense, net
Income from continuing operations,
before income taxes
Income tax expense
Income from continuing operations
Income from discontinued operations,
net of tax
Net income
Earnings per share—basic, continuing operations
Earnings per share—diluted, continuing operations
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Dividends declared per share
As of December 31,
(In thousands)
Cash and cash equivalents
Working capital
Total assets
Total long-term liabilities
Stockholders’ equity
Total outstanding borrowings on credit facility
(1) Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2019 include $2.0 milliom of severance and other costs due to actions taken as a result
of the Government Solutions (“GS”) divestiture, which negatively impacted SG&A.
(2) The Tax Cuts and Jobs Act (“TCJA”) was enacted in December 2017, which reduced the U.S. federal corporate tax rate from 35.0% to 21.0% in 2018. As a result, we revalued our
net deferred income tax assets and recorded $3.6 million of additional income tax expense from continuing operations during the year ended December 31, 2017.
(3) During 2016, Kforce incurred approximately $6.0 million in severance costs associated with realignment activities focused on further streamlining our organization, which were
recorded in SG&A.
During the year ended December 31, 2019, Kforce completed the sale of the GS segment and the results of operations for the GS segment
have been presented as discontinued operations for all of the years presented above. Refer to Note 2—“Discontinued Operations” in the
Consolidated Financial Statements included in this Annual Report, for a more detailed discussion.
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 (“Consolidated Financial Statements”) incorporated into this
STOCK PRICE PERFORMANCE
The following graph compares the cumulative five-year total return on our common stock, the NASDAQ Stock Market (U.S.) Index, our 2019
Peer Group and the 2018 Industry Peer Group using the value of an investment of $100 on December 31, 2014 with dividends fully reinvested.
All returns are weighted based on market capitalization at the end of each discrete measurement period. Historical stock prices of our common
stock are not necessarily indicative of future stock price performance.
$200
$175
$150
$125
$100
$75
2019
2018
2017
2016
2015
Kforce Inc.
NASDAQ Stock Market (Composite)
2019 Peer Group
2018 Industry Peer Group
$
19,831
$ 160,271
$ 381,125
$
65,000
$ 128,898
$ 167,263
$ 112
$ 158,104
$ 379,908
$ 71,800
$ 121,219
$ 168,331
$ 379
$ 161,726
$ 384,304
$ 116,523
$ 166,308
$ 134,277
$ 1,482
$ 135,353
$ 365,421
$ 111,547
$ 160,332
$ 121,736
$ 1,497
$ 122,270
$ 351,822
$ 80,472
$ 124,449
$ 139,627
Index
Kforce Inc.
NASDAQ Stock Market (Composite)
2019 Peer Group (1)
2018 Industry Peer Group (2)
(1) 2019 Peer Group:
2014
$100.0
100.0
100.0
100.0
2015
$106.7
105.7
107.4
104.0
2016
$ 99.9
113.7
112.0
110.5
2017
$111.8
145.8
139.6
142.5
2018
$139.3
140.1
119.2
111.8
2019
$182.6
189.5
145.6
141.2
2014
2015
2016
2017
2018
2019
AMN Healthcare Services, Inc.
ASGN Incorporated
Cross Country Healthcare, Inc.
Computer Task Group, Incorporated
The Hackett Group, Inc.
Heidrick & Struggles International, Inc.
Huron Consuting Group, Inc.
Kelly Services, Inc.
Korn/Ferry International
ManpowerGroup, Inc.
Resources Connection, Inc.
Robert Half International Inc.
True Blue, Inc.
Volt Information Sciences, Inc.
(2) 2018 Industry Peer Group:
ASGN Incorporated
Computer Task Group, Incorporated
Kelly Services, Inc.
ManpowerGroup, Inc.
Resources Connection, Inc.
Robert Half International Inc.
TrueBlue, Inc.
The Committee utilizes a peer group of companies as a source for executive compensation benchmarking data and comparisons to Kforce’s
executive compensation levels; for insight into external compensation practices; and for determining specific financial objectives for our
performance-based compensation. Additionally, our peer group is used to determine annual equity LTI compensation levels based on our
relative TSR performance.
The Committee focuses on selecting peers that are publicly traded professional staffing companies active in recruiting and placing similar skill
sets at similar types of clients, including companies we consider to be our direct business competitors. 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. According
to a report published by Staffing Industry Analysts in 2019, Kforce is one of the 10 largest publicly traded specialty staffing firms in the U.S., so the
size of our peer companies vary considerably. Therefore, the Committee selects other peers that are similar in terms of size (revenue and market
capitalization), but may not be in the staffing industry. We attempt to drive average size comparable to Kforce by balancing a selection of both
larger and smaller companies. The primary criteria for selection include customers, revenue footprint, geographical/domestic presence, talent,
complexity of operating model and companies with which we compete for executive level talent.
KFORCE INC. AND SUBSIDIARIES 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Holders of Common Stock
Our common stock trades on the NASDAQ using the ticker symbol “KFRC”. As of February 19, 2020, there were 150 holders of record.
Purchases of Equity Securities by the Issuer
In March 2019, the Board approved an increase in our stock repurchase authorization bringing the then available authorization to $150.0
million. The following table presents information with respect to our repurchases of Kforce common stock during the three months ended
December 31, 2019:
Period
October 1, 2019 to October 31, 2019
November 1, 2019 to November 30, 2019
December 1, 2019 to December 31, 2019
Total Number of
Shares Purchased
(1)(2)(3)
703,579
835
118,754
Average Price
Paid Per Share
$37.90
$40.18
$39.95
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
698,185
—
—
Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under the
Plans or Programs
$44,297,260
$44,297,260
$44,297,260
Total
823,168
$38.20
698,185
$44,297,260
(1) Includes 5,394 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period October 1, 2019 to October 31, 2019.
(2) Includes 835 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2019 to November 30, 2019.
(3) Includes 118,754 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2019 to December 31, 2019.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the inherent operational risks, Kforce is exposed to certain market risks, primarily related to changes in interest rates.
As of December 31, 2019, we had $65.0 million outstanding under our credit facility. Refer to Note 13—“Credit Facility” in the Consolidated
Financial Statements, included in this Annual Report, for further details on our credit facility. A hypothetical 10% increase in interest rates on
variable debt in effect would have no effect on our annual interest expense because we had no variable debt at December 31, 2019.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. to mitigate the risk of
rising interest rates on the Firm’s financial statements. The Swap rate is 1.81%, which is added to our interest rate margin to determine the
fixed rate that the Firm will pay to the counterparty during the term of the Swap based on the notional amount of the Swap. The effective date
of the Swap is May 31, 2017 and the maturity date is April 29, 2022. The notional amount of the Swap is $65.0 million, which will decrease
to $25.0 million at May 2020 through maturity.
LIBOR is expected to be discontinued after 2021. The expected discontinuation of LIBOR will require borrowers to transition from LIBOR to
an alternative benchmark interest rate. We are currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to
other potential alternative reference rates. We do not currently have material contracts, with the exception of the above mentioned items,
that are indexed to LIBOR. We will continue to actively assess the related opportunities and risks involved in this transition.
6 KFORCE INC. AND SUBSIDIARIES
BUSINESS OVERVIEW
Company Overview
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional
staffing services and solutions to our clients on both a temporary (“Flex”)
and permanent (“Direct Hire”) basis through our Technology (“Tech”)
and Finance and Accounting (“FA”) segments. We operate through our
corporate headquarters in Tampa, Florida with 50 field offices located
throughout the U.S. Kforce was incorporated in 1994 and completed its
Initial Public Offering in August 1995, but its predecessor companies have
been providing staffing services since 1962.
Kforce serves clients across many industries and geographies as well
as organizations of all sizes, with a particular focus on Fortune 1000
and other large companies. We believe that our portfolio of service
offerings is a key contributor to our long-term financial stability. Our 10
largest clients represented approximately 23% of revenue and no single
client contributed more than 5% of total revenue for the year ended
December 31, 2019.
During 2019, Kforce sold its GS segment, which has been
reported as discontinued operations in the consolidated financial
statements. Except as specifically noted, our discussions in this report
exclude any activity related to the GS segment. Refer to Note 2—
“Discontinued Operations” in the Consolidated Financial Statements,
included in this Annual Report, for a more detailed discussion.
Our quarterly operating results can be affected by:
• the number of billing days in a particular quarter;
• the seasonality of our clients’ businesses;
• increased holidays and vacation days taken, which is usually highest
in the fourth quarter of each calendar year; and
• increased costs as a result of certain annual U.S. state and federal
employment tax resets that occur at the beginning of each
calendar year, which negatively impacts our gross profit and overall
profitability in the first fiscal quarter of each calendar year.
Tech Segment
Our largest segment, Tech, provides both Flex and Direct Hire services to
our clients, focusing primarily on areas of information technology such as
systems/applications architecture and development, data management,
business and artificial intelligence, machine learning and network
architecture and security. Increasingly, Kforce has been successfully
winning more complex technology projects that require us to manage
teams of consultants and deliver solutions to our clients. This level of
project ownership has been an intentional, strategic shift by Kforce over
the last few years as our clients look to their third party providers, such
as Kforce, for these engagements. Within our Tech segment, we provide
service to clients in a variety of industries with a diversified footprint in
financial and business services, communications and technology. Revenue
for our Tech segment increased 6.8% to $1.1 billion in 2019 on a year-over-
year basis. The average bill rate for Tech Flex in 2019 was approximately
$76 per hour, which increased 3.1% as compared to 2018. Our average
assignment duration for Tech Flex is nearly 10 months, which has steadily
increased over the last several years. Tech Flex continues to benefit from
improving bill rates and longer assignment durations, which we believe is
related to the acute labor shortage, especially with highly-skilled resources.
The September 2019 report published by Staffing Industry Analysts
(“SIA”) stated that temporary technology staffing is expected to experience
growth of 3% in 2020. Digital transformation, as a general trend, is
driving organizations across all industries to increase their technology
investments as competition and the speed of change intensifies.
Nontraditional competitors are also entering new emerging technologies
and markets. This development puts increased pressure on companies to
invest in innovation and the evolution of their business models. We believe
the secular drivers of technology spend generally remain intact with many
companies 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. At the
macro level, demand is also being driven by an ever-changing and complex
regulatory and employment law environment, which increases the overall
cost of employment for many companies. We believe that these factors,
among others, are continuing to drive companies to look to temporary
staffing providers, such as Kforce, to meet their human capital needs.
FA Segment
Our FA segment provides both Flex and Direct Hire services to our
clients in areas such as general accounting, business and cost analysis,
financial analysis and reporting, taxation, budgeting, loan servicing,
professional administration, audit services and systems and controls
analysis and documentation. Within our FA segment, we provide services
to clients in a variety of industries with a diversified footprint in the
financial services, healthcare and manufacturing sectors. Revenue for
our FA segment decreased 7.7% to $289.5 million in 2019 on a year-over-
year basis. The average bill rate for FA Flex in 2019 was approximately
$37 per hour, which increased 5.7% as compared to 2018. This increase
reflects our efforts to reposition our FA segment into more high-skilled
positions that are less susceptible to being disrupted by technological
advancements. The September 2019 report published by SIA stated that
finance and accounting temporary staffing is expected to experience
growth of 4% in 2019 and 2020.
Flex Revenue
Flex revenue represents approximately 96% of total revenue over the
last three fiscal years. We provide our clients with qualified individuals
(“consultants”) on a temporary basis when the consultant’s set of skills
and experience is the right match for our clients. We utilize a diversified
set of recruitment platforms and databases to identify consultants who
are actively seeking employment. The vast majority of our consultants
are directly employed by Kforce (both domestic and foreign workers
sponsored by Kforce) with a smaller composition representing qualified
independent contractors. 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 experience and capabilities of the consultants
being recruited; (3) ensure excellence in delivering and managing the
KFORCE INC. AND SUBSIDIARIES 7
client-consultant relationship; and (4) have access to a sufficient pool of
qualified consultants. We believe proper execution by our associates and
consultants directly impacts the longevity of the assignments, increases
the likelihood of generating repeat business with our clients and fosters
a better experience for our consultants, which has a direct correlation to
consultant redeployment.
The key drivers of Flex revenue are the number of consultants on
assignment, billable hours, the bill rate per hour and, to a limited
extent, the amount of billable expenses incurred by Kforce. Our Flex
gross profit is determined by deducting related costs of employment for
consultants, including compensation, payroll taxes, certain fringe benefits
and independent contractor costs from Flex revenue. Associate and
management commissions, compensation, payroll taxes and other fringe
benefits are included in SG&A, along with other customary costs such
as administrative and corporate costs. Our Flex business model involves
maximizing the number of billable hours and bill rates, while managing
consultant pay rates and benefit costs, as well as compensation and
benefits for our associates.
Direct Hire Revenue
Our Direct Hire business involves locating qualified individuals
(“candidates”) for permanent placement with our clients. Direct Hire
revenue represents less than 4% of total revenue over the last three fiscal
years. Although it is a smaller portion of our business, it continues to be
an important capability in ensuring that we have the flexibility to meet
the talent needs of our clients. We recruit candidates using methods that
are consistent with Flex consultants. Candidate searches are generally
performed on a contingency basis (as opposed to a retained search),
therefore revenue is earned only if the candidates are ultimately hired
by our clients. The typical fee structure is based upon a percentage of
the candidate’s annual compensation in their first year of employment,
which is determined or estimated at the time of placement.
The key drivers of Direct Hire revenue are the number of placements
and the associated placement fee. Direct Hire revenue also includes
conversion revenue, which may occur when a consultant initially
assigned to a client on a temporary basis is later converted to a
permanent placement for a fee. Direct Hire revenue is recorded net of
an allowance for “fallouts,” which occurs when a candidate does not
complete the contingency period (typically 90 days or less). There are
no consultant payroll costs associated with Direct Hire placements,
therefore all Direct Hire revenue increases gross profit by the full
amount of the fee, which constitutes a disproportionate percentage of
our gross profit. Commissions, compensation and benefits for Direct Hire
associates are included in SG&A.
Industry Overview
The professional 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. A report published by SIA
in 2019 indicated that Kforce is one of the 10 largest publicly traded
specialty staffing firms in the U.S. Per this SIA report, Kforce is the fifth
largest technology temporary staffing firm and fourth largest finance
and accounting temporary staffing firm.
From an economic standpoint, temporary employment figures and
trends are important indicators of staffing demand, which continued
to be generally positive during 2019, based on data published by the
Bureau of Labor Statistics and SIA. The penetration rate (the percentage
of temporary staffing to total employment) and unemployment
rate were 2.0% and 3.5%, respectively, in December 2019. Although
temporary help employment was down 0.5% year over year as of
December 2019, total non-farm employment was up 1.4% year over
year. In addition, the college-level unemployment rate, which we believe
serves as a proxy for professional employment and therefore aligns well
with the consultant and candidate population that Kforce most typically
serves, was 1.9% in December 2019, which represented a decrease from
December 2018. Further, we believe that the unemployment rate in
the specialties we serve, especially in certain technology skill sets, is
lower than the published averages. We believe this speaks to the high
demand environment in which we are currently operating as well as the
challenges of finding an adequate supply of qualified talent.
According to the September 2019 SIA report, the technology
temporary staffing industry and finance and accounting temporary
staffing industry are expected to generate projected revenues of $33.0
billion and $8.9 billion, respectively, in 2019; based on these projected
revenues, our current market share is approximately 3% for each. Our
business strategies are sharply focused around expanding our share of
the U.S. temporary staffing industry, expanding our addressable market
into higher level IT services and solutions, and further penetrating our
existing clients’ human capital needs.
Business Strategies
Our primary objectives are driving long-term shareholder value by
achieving above-market revenue growth, making prudent investments
to enhance efficiency and effectiveness within our operating model and
significantly improving levels of operating profitability. We believe the
following strategies will help us achieve our objectives.
Improving Productivity of our Talent. We believe that it is critical
to provide our associates with high quality tools to effectively and
efficiently perform their roles, to better evaluate business opportunities
and to advance the value we bring to our clients and consultants. We
continue to enhance our sales and delivery methodologies and processes
in ways we believe will allow us to better evaluate and shape business
opportunities with our clients as well as train our sales and delivery
associates on our consistent and uniform methodology.
8 KFORCE INC. AND SUBSIDIARIES
would be expected to positively influence 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.
We measure the quality of our service to and support of our consultants
using staffing industry benchmarks and NPS surveys conducted by
a specialized, independent third-party provider. Our consultant NPS
ratings, similar to our client ratings, are above staffing industry averages.
We continually seek direct feedback from our consultants, which gives us
valuable insight into where we have opportunities to refine our services.
Evolving our Technology Managed Services and Solutions Offerings.
Our clients increasingly look for resources to execute critical and more
technical projects. We are leveraging the longevity of our relationships,
primarily with Fortune 1000 companies, and our understanding
of existing client needs to provide talent beyond traditional staff
augmentation into areas including resource and capacity management
as well as managed services and solutions. We believe significant
opportunity exists to expand our capabilities and provide differentiated
managed services and solutions to our clients, which we believe could be
accomplished through a potential acquisition to enhance our operating
model and successfully provide these types of offerings.
During 2019, we began developing a new TRM that we expect will
better enable our delivery strategies and processes and improve our
capabilities. In addition, we continue to make enhancements to our
business and data intelligence capabilities. These investments are part
of a multi-year effort to upgrade our technology tools to equip our
associates with improved capabilities to deliver exceptional service to
our clients, consultants and candidates and improve the productivity of
our associates and the scalability of our organization.
Enhancing our Client Relationships. We strive to differentiate ourselves
by working collaboratively with our clients to better understand their
business challenges and help them attain their organizational objectives.
This collaboration focuses on building a consultative partnership rather
than a transactional client relationship, which increases the intimacy
with our clients and improves our ability to offer higher value and a
broader array of services and support to our clients. To accomplish this,
we align our revenue-generating talent with clients based on their
experience with markets, products and industries.
We measure our success in building long-lasting relationships with
our clients using staffing industry benchmarks and Net Promoter Score
(“NPS”) surveys conducted by a specialized, independent third-party
provider. Our client NPS ratings compare favorably against staffing
industry averages and provide helpful insights from our clients on
how to continue improving our relationships. We believe long-lasting
relationships with our clients is a critical element in revenue growth.
Improving the Job Seeker Experience. Our consultants are a critical
component to our business and essential in sustaining our client
relationships. In 2019, we launched a new referral technology through
which an eligible individual can refer someone in their personal network
and receive a referral fee if the candidate is successfully placed on an
assignment with us. We believe this seamlessly connects the candidate
with the recruiter, which improves the job seeker experience and
provides a better quality candidate. We are focused on effective and
efficient processes and tools to find and attract prospective consultants,
matching them to a client assignment and supporting them during their
tenure with Kforce. We expect to deploy our new TRM in 2020, which
we believe will better enable these processes. Our success in this regard
KFORCE INC. AND SUBSIDIARIES 9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
This MD&A should be read in conjunction with our Consolidated
Financial Statements and the Business Overview included in this Annual
Report, for an overview of our operations and business environment.
EXECUTIVE SUMMARY
During 2019, Kforce sold the GS segment, which has been reported as
discontinued operations in the consolidated financial statements for all
periods presented. Refer to Note 2—“Discontinued Operations” in the
Consolidated Financial Statements, included in this Annual Report, for
a more detailed discussion. Except as specifically noted, our discussions
below exclude any activity related to the GS segment, which is addressed
separately in the discussion of Income from Discontinued Operations,
Net of Tax, and certain prior year amounts have been reclassified to
conform to current year presentation.
The following is an executive summary of what Kforce believes are
highlights for 2019, which should be considered in the context of the
additional discussions herein and in conjunction with the consolidated
financial statements and notes thereto.
• Revenue increased 3.3% to $1.35 billion in 2019 from $1.30 billion
in 2018. Revenue increased 6.8% for Tech and decreased 7.7% for FA.
• Flex revenue increased 3.3% to $1.30 billion in 2019 from $1.26
billion in 2018. Flex revenue increased 6.8% for Tech and decreased
8.6% for FA.
• Direct Hire revenue increased 4.4% to $47.7 million in 2019 from
$45.7 million in 2018.
• Flex gross profit margin decreased 40 basis points to 26.7% in 2019
from 27.1% in 2018. Flex gross profit margin decreased 30 and 10
basis points for Tech and FA, respectively.
• SG&A expenses as a percentage of revenue for the year ended
December 31, 2019 decreased to 23.3% from 23.6% in 2018.
The overall improvement was primarily driven by an increase in
associate productivity, leverage created from our revenue growth
and exercising better expense discipline.
• Income from continuing operations for the year ended December 31,
2019, increased 7.3% to $54.6 million, or $2.29 per share, from
$50.9 million, or $2.02 per share, in 2018.
• The Firm returned $134.4 million of capital to our shareholders in
the form of quarterly dividends totaling $16.6 million, or $0.72 per
share, and open market repurchases totaling $117.8 million, or 3.3
million shares, during the year ended December 31, 2019. During
2019, the Board approved an increase in our stock repurchase
authorization and we utilized the net proceeds generated from the
sale of our GS segment to return capital to our shareholders in the
form of open market repurchases.
• The total amount outstanding under our Credit Facility decreased
$6.8 million to $65.0 million as of December 31, 2019 as compared
to $71.8 million as of December 31, 2018. We exited the year with
$45.2 million of net debt as we had $19.8 million of cash.
• Cash provided by operating activities was $66.6 million during the
year ended December 31, 2019 compared to $87.7 million for 2018,
primarily due to the timing of income tax refunds and payments as
well as a decrease in cash provided by the GS segment due to the
divestiture.
RESULTS OF OPERATIONS
Certain discussions of the changes in our results of operations from
the year ended December 31, 2017 as compared to the year ended
December 31, 2018 have been omitted from this Annual Report, but may
be found in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Form 10-K for the fiscal year
ended December 31, 2018 filed with the SEC on February 22, 2019.
In 2019, we continued to make progress on our strategic initiatives
including, among others, the completion of a multi-year effort to divest
of non-core businesses with the divestiture of our GS segment, entering
into a strategic joint venture, implementing a new consultant referral
technology and making continued progress on implementing new and
upgrading existing technologies that we believe will allow us to more
effectively and efficiently serve our clients, consultants and candidates
and improve the scalability of our organization.
10 KFORCE INC. AND SUBSIDIARIES
The following table presents certain items in our Consolidated Statements of Operations and Comprehensive Income as a percentage of
revenue for the years ended:
December 31,
Revenue by segment:
Tech
FA
Total Revenue
Revenue by type:
Flex
Direct Hire
Total Revenue
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Income from operations
Income from continuing operations, before income taxes
Income from continuing operations
Income from discontinued operations, net of tax
Net income
2019
2018
2017
78.5%
21.5
100.0%
96.5%
3.5
100.0%
29.3%
23.3%
0.4%
5.6%
5.3%
4.0%
5.7%
9.7%
75.9%
24.1
100.0%
96.5%
3.5
100.0%
29.6%
23.6%
0.5%
5.6%
5.2%
3.9%
0.5%
4.4%
72.4%
27.6
100.0%
96.2%
3.8
100.0%
30.0%
24.6%
0.6%
4.8%
4.4%
2.4%
0.3%
2.7%
Revenue. The following table presents revenue by type for each segment and percentage change from the prior period for the years ended
December 31 (in thousands):
Tech
Flex revenue
Direct Hire revenue
Total Tech revenue
FA
Flex revenue
Direct Hire revenue
Total FA revenue
Total Flex revenue
Total Direct Hire revenue
Total Revenue
2019
Increase
(Decrease)
2018
Increase
(Decrease)
2017
$1,037,380
20,479
$1,057,859
$ 262,307
27,221
$ 289,528
$1,299,687
47,700
$1,347,387
6.8%
9.1%
6.8%
(8.6)%
1.2%
(7.7)%
3.3%
4.4%
3.3%
$ 971,310
18,779
$ 990,089
$ 286,939
26,909
$ 313,848
$1,258,249
45,688
$1,303,937
9.4%
(5.3)%
9.1%
$ 887,675
19,836
$ 907,511
(9.9)%
(3.3)%
(9.3)%
4.3%
(4.2)%
4.0%
$ 318,294
27,841
$ 346,135
$1,205,969
47,677
$1,253,646
KFORCE INC. AND SUBSIDIARIES 11
Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year
revenue growth rates, on a billing day basis, for the last five quarters (in thousands, except Billing Days):
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
Billing days
Tech Flex
FA Flex
Total Flex
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
62
4.8%
(7.6)%
2.1%
64
6.5%
(5.3)%
3.9%
64
6.2%
(9.4)%
2.6%
63
9.8%
(11.7)%
4.6%
62
9.0%
(11.7)%
3.6%
Flex Revenue. The key drivers of Flex revenue are the number of
consultants on assignment, billable hours, the bill rate per hour
and, to a limited extent, the amount of billable expenses incurred
by Kforce.
Flex revenue for our largest segment, Tech, increased 6.8% during
the year ended December 31, 2019, as compared to 2018. Our growth
rate exceeded SIA’s projected domestic temporary technology
staffing growth rate for 2019 of 3% by more than two times. Our
growth in Tech Flex in 2019 has been disporportionately driven by
the largest consumers of our services, many of whom are also some
of our largest clients. We believe the secular drivers of technology
spend generally remain intact with many companies 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. Our belief
in the strength in the demand environment within technology has
not changed; thus, we expect continued Tech Flex growth in 2020.
Our FA segment experienced a decrease in Flex revenue of 8.6%
during the year ended December 31, 2019, as compared to 2018.
The year-over-year decrease in 2019 from 2018 was primarily due
to a lower volume of new assignments, which was partially offset
by an increase in average bill rates of 5.7% for the year ended
December 31, 2019 as compared to 2018. We continue to focus on
the strategic repositioning of our FA Flex business into more high-
skilled positions that are less susceptible to being disrupted by
technological advancements. In 2020, we expect FA Flex revenue to
be stable.
The following table presents the key drivers for the change in Flex revenue by segment over the prior period (in thousands):
Year Ended December 31,
Key Drivers—Increase (Decrease)
Volume—hours billed
Bill rate
Billable expenses
Total change in Flex revenue
2019 vs. 2018
2018 vs. 2017
Tech
FA
Tech
FA
$35,194
30,469
407
$66,070
$(38,922)
14,145
145
$(24,632)
$18,284
62,036
3,315
$83,635
$(44,912)
13,298
259
$(31,355)
The following table presents total Flex hours billed by segment and percentage change over the prior period for the years ended December 31
2019
13,625
7,120
20,745
Increase
(Decrease)
3.7%
(13.6)%
(3.0)%
2018
13,145
8,241
21,386
Increase
(Decrease)
2.1%
(14.1)%
(4.8)%
2017
12,878
9,595
22,473
(in thousands):
Tech
FA
Total Flex hours billed
12 KFORCE INC. AND SUBSIDIARIES
Direct Hire Revenue. The key drivers of Direct Hire revenue are the number of placements and the associated placement fee. Direct Hire
revenue also includes conversion revenue, which may occur when a consultant initially assigned to a client on a temporary basis is later
converted to a permanent placement for a fee.
Direct Hire revenue increased 4.4% during the year ended December 31, 2019 as compared to 2018.
The following table presents the key drivers for the change in Direct Hire revenue over the prior period (in thousands):
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
Key Drivers—Increase (Decrease)
Volume—number of placements
Placement fee
Total change in Direct Hire revenue
Tech
$1,113
587
$1,700
FA
Tech
FA
$(1,903)
2,215
$ 312
$(1,743)
686
$(1,057)
$(3,280)
2,348
$ (932)
The following table presents the total number of placements by segment and percentage change over the prior period for the years
ended December 31:
Tech
FA
Total number of placements
2019
1,101
1,930
3,031
Increase
(Decrease)
6.0%
(7.1)%
(2.7)%
2018
1,039
2,077
3,116
Increase
(Decrease)
(8.8)%
(11.8)%
(10.8)%
2017
1,139
2,355
3,494
The following table presents the average fee per placement by segment and percentage change over the prior period for the years
ended December 31:
Tech
FA
Total average placement fee
2019
$18,604
$14,103
$15,738
Increase
(Decrease)
3.0%
8.8%
7.3%
2018
$18,070
$12,957
$14,662
Increase
(Decrease)
3.8%
9.6%
7.4%
2017
$17,410
$11,826
$13,646
Gross Profit. Gross profit is determined by deducting direct costs (primarily consultant compensation, payroll taxes, payroll-related insurance
and certain fringe benefits, as well as independent contractor costs) from total revenue. In addition, there are no consultant payroll costs
associated with Direct Hire placements; thus, all Direct Hire revenue increases gross profit by the full amount of the placement fee.
The following table presents the gross profit percentage (gross profit as a percentage of total revenue) for each segment and percentage
change over the prior period for the years ended December 31:
Tech
FA
Total gross profit percentage
2019
27.7%
35.2%
29.3%
Increase
(Decrease)
(1.1)%
1.1%
(1.0)%
2018
28.0%
34.8%
29.6%
Increase
(Decrease)
(1.1)%
1.8%
(1.3)%
2017
28.3%
34.2%
30.0%
Total gross profit percentage decreased 30 basis points for the year ended December 31, 2019 as compared to 2018 as a result of a
decline in Flex gross profit.
Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue) provides management with helpful insight into the
other drivers of total gross profit percentage driven by our Flex business such as changes in the spread between the consultants’ bill rate
and pay rate.
KFORCE INC. AND SUBSIDIARIES 13
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
Total Flex gross profit percentage
2019
26.3%
28.5%
26.7%
Increase
(Decrease)
(1.1)%
(0.3)%
(1.5)%
2018
26.6%
28.6%
27.1%
Increase
(Decrease)
(0.4)%
0.4%
(0.4)%
2017
26.7%
28.5%
27.2%
The 40 basis point decrease in Flex gross profit percentage for the year ended December 31, 2019 as compared to 2018 was primarily due to
compression in bill and pay spreads as a result of the mix of growth, particularly in some of our larger clients, which have a slightly lower
margin profile.
The following table presents the key drivers for the change in Flex gross profit by segment over the prior period (in thousands):
Year Ended December 31,
Key Drivers—Increase (Decrease)
Revenue impact
Profitability impact
Total change in Flex gross profit
2019 vs. 2018
2018 vs. 2017
Tech
FA
Tech
FA
$17,592
(3,700)
$13,892
$(7,056)
(297)
$(7,353)
$22,356
(1,029)
$21,327
$(8,929)
481
$(8,448)
Kforce continues to focus on effective pricing and optimizing the spread between bill rates and pay rates. We believe this will serve over time
to obtain the optimal volume, rate, effort and duration of assignment, while ultimately maximizing the benefit for our clients, our consultants
and Kforce.
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 83.1%, 83.6%, and
85.0% of SG&A for the years ended December 31, 2019, 2018 and 2017, respectively. Commissions and other bonus incentives for our revenue-
generating talent 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 revenue.
The following table presents certain components of SG&A as a percentage of total revenue for the years ended December 31 (in thousands):
2019 % of Revenue
2018 % of Revenue
2017
% of Revenue
Compensation, commissions,
payroll taxes and benefits costs
Other(1)
Total SG&A
$261,185
52,982
$314,167
19.4%
3.9%
23.3%
$256,793
50,457
$307,250
19.7%
3.9%
23.6%
$262,006
46,307
$308,313
20.9%
3.7%
24.6%
(1) Includes items such as bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.
SG&A as a percentage of revenue decreased 30 basis points in 2019 compared to 2018, primarily driven by an increase in associate productivity,
leverage created from our revenue growth and better expense discipline. Included in the year ended December 31, 2019 was approximately
$2.0 million of severance and other costs due to actions taken as a result of the GS divestiture, which negatively impacted SG&A.
The Firm continues to focus on improving the productivity of our associates and exercising better expense discipline to generate future
leverage as revenue grows, while also increasing our investments in enabling technology.
14 KFORCE INC. AND SUBSIDIARIES
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 (includes finance leases)
Capitalized software amortization
Total Depreciation and amortization
2019
$4,929
1,121
$6,050
Increase
(Decrease)
(13.7)%
(0.3)%
(11.5)%
2018
$5,712
1,124
$6,836
Increase
(Decrease)
(10.5)%
26.7%
(5.9)%
2017
$6,379
887
$7,266
Other Expense, Net. Other expense, net was $3.4 million in
2019, $4.5 million in 2018 and $5.1 million in 2017, and consisted
primarily of interest expense related to outstanding borrowings
under our credit facility. For the year ended December 31, 2019,
Other expense, net also includes interest income from government
money market funds.
We also recorded a loss on equity method investment of $0.8
million in Other expense, net for the year ended December 31, 2019.
Refer to Note 1—“Summary of Significant Accounting Policies” in the
Consolidated Financial Statements, included in this Annual Report,
for a more detailed discussion on our equity method investment.
Income Tax Expense. Income tax expense as a percentage of income
from continuing operations, before income taxes (our “effective tax
rate” for continuing operations) for the years ended December 31,
2019, 2018 and 2017 were 23.6%, 25.1% and 46.1%, respectively. The
2019 effective tax rate was favorably impacted primarily by a greater
tax benefit from the vesting of restricted stock.
Income from Discontinued Operations, Net of Tax. During 2019,
we completed the sale of the GS segment, which consisted of KGS,
our federal government solutions business, and TFX, our federal
government product business. Kforce does not have significant
continuing involvement in the operations of KGS or TFX after the
sale and reported the GS segment as discontinued operations in
the consolidated statements of operations for all years presented.
Refer to Note 2—“Discontinued Operations” in the Consolidated
Financial Statements, included in this Annual Report, for a more
detailed discussion.
On April 1, 2019, Kforce completed the sale of all of the issued and
outstanding stock of Kforce Government Holdings, Inc., including
its wholly-owned subsidiary, KGS, to ManTech International
Corporation for a cash purchase price of $115.0 million. Our gain
on the sale of KGS, net of transaction costs, was $72.3 million. Total
transaction costs were $9.6 million, which primarily includes legal
and broker fees, transaction bonuses and accelerated stock-based
compensation expense for KGS management triggered by a change
in control of KGS.
On June 7, 2019, Kforce completed the sale of all of the issued
and outstanding stock of TFX to an unaffiliated third party for a
cash purchase price of $18.4 million less a post-closing working
capital adjustment of $0.7 million. Our gain on the sale of TFX,
net of transaction costs, was $7.0 million. Total transaction costs
were $2.2 million, which primarily includes legal and broker fees
and transaction bonuses. Due to the sale of TFX, we finalized the
settlement of a contingent consideration liability related to the
acquisition of TFX in 2014 and paid $0.6 million during the year
ended December 31, 2019.
The effective tax rates for discontinued operations, including
the gain on sale of discontinued operations, for the years ended
December 31, 2019, 2018 and 2017 were 4.4%, 23.4%, and 59.8%,
respectively. The GS effective tax rate for 2019 was low because of
the minimal income tax obligation for the sale of KGS due to the
efficient tax structure of the transaction. The GS effective tax rate
for 2018 was positively impacted by the TCJA. The GS effective tax
rate for 2017 was unfavorably impacted by the revaluation of our
net deferred tax assets as a result of the TCJA.
NON-GAAP FINANCIAL MEASURES
Free Cash Flow. “Free Cash Flow”, a non-GAAP financial measure,
is defined by Kforce as net cash provided by operating activities
determined in accordance with GAAP, less capital expenditures.
Management believes this provides an additional way of viewing
our liquidity that, when viewed with our GAAP results, provides a
more complete understanding of factors and trends affecting our
cash flows and is useful information to investors as it provides a
measure of the amount of cash generated from the business that
can be used for strategic opportunities including investing in our
business, making acquisitions, repurchasing common stock or
paying dividends. Free cash flow 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. Free cash flows includes results from
discontinued operations for the years ended December 31, 2019,
2018 and 2017.
KFORCE INC. AND SUBSIDIARIES 15
The following table presents Free Cash Flow (in thousands):
Years Ended December 31,
Net income
Non-cash provisions and other
Changes in operating assets/liabilities
Net cash provided by operating activities
Capital expenditures
Free cash flow
Equity method investment
Change in debt
Repurchases of common stock
Cash dividends
Net proceeds from the sale of assets held for sale
Other
Change in cash and cash equivalents
2019
$ 130,862
(51,650)
(12,595)
66,617
(10,359)
56,258
(9,000)
(6,800)
(124,453)
(16,608)
122,544
(2,222)
2018
$ 57,980
22,643
7,100
87,723
(5,170)
82,553
—
(44,723)
(22,187)
(14,871)
1,000
(2,039)
2017
$ 33,285
29,134
(33,080)
29,339
(5,846)
23,493
—
4,976
(14,622)
(12,144)
1,000
(3,806)
$ 19,719
$ (267)
$ (1,103)
Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial
measure, is defined by Kforce as net income before income from
discontinued operations, net of tax, depreciation and amortization,
stock-based compensation expense, interest expense, net,
income tax expense and loss from equity method investment.
Adjusted EBITDA should not be considered a measure of financial
performance under GAAP. Items excluded from Adjusted EBITDA
are significant components in understanding and assessing our
past and future financial performance, and this presentation
should not be construed as an inference by us that our future
results will be unaffected by those items excluded from Adjusted
EBITDA. Adjusted EBITDA is a key measure used by management
to assess our operations including our ability to generate cash
flows and our ability to repay our debt obligations. Management
believes it is useful information to investors as it provides a good
metric of our core profitability in comparing our performance to
our competitors, as well as our performance over different time
periods. 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 susceptible to varying
calculations, and as presented, may not be comparable to similarly
titled measures of other companies.
In addition, although we excluded amortization of stock-based
compensation expense because it is a non-cash expense, we
expect to continue to incur stock-based compensation in the future
and the associated stock issued may result in an increase in our
outstanding shares of stock, which may result in the dilution of
our shareholder ownership interest. We suggest that you evaluate
these items and the potential risks of excluding such items when
analyzing our financial position.
The following table presents 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 tax
Income from continuing operations
Depreciation and amortization
Stock-based compensation expense
Interest expense, net
Income tax expense
Loss from equity method investment
Adjusted EBITDA
2019
$130,862
76,296
54,566
6,050
9,825
2,586
16,830
831
2018
$57,980
7,104
50,876
6,836
8,489
4,468
17,004
—
2017
$33,285
3,691
29,594
7,266
7,401
5,039
25,324
—
$ 90,688
$87,673
$74,624
Adjusted EBITDA, for the year ended December 31, 2019, was negatively impacted by $2.0 million of severance and other costs due to
actions taken as a result of the GS divestiture.
16 KFORCE INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily
rely on operating cash flow, as well as borrowings under our credit
facility. We anticipate maintaining an outstanding balance of $65.0
million on our credit facility until the notional amount of our interest
rate swap decreases to $25.0 million in May 2020. At December 31,
2019, we had $19.8 million in cash and cash equivalents, which
consisted primarily of government money market funds. At
December 31, 2019, Kforce had $160.3 million in working capital
compared to $158.1 million at December 31, 2018.
Cash Flows
We are principally focused on achieving an appropriate balance
of cash flow across several areas of opportunity such as: generating
positive cash flow from operating activities; returning capital to our
shareholders through our quarterly dividends and common stock
repurchase program; maintaining appropriate leverage under our
credit facility; investing in our infrastructure to allow sustainable
growth via capital expenditures; and maintaining sufficient liquidity
to complete acquisitions or other strategic investments.
The following table presents a summary of our net cash flows
from operating, investing and financing activities (in thousands):
Years Ended December 31,
2019
2018
2017
Cash Provided by (Used in)
Operating activities
Investing activities
Financing activities
Change in cash and
cash equivalents
$ 66,617
103,185
(150,083)
$ 87,723
(4,170)
(83,820)
$ 29,339
(4,846)
(25,596)
$ 19,719
$ (267)
$ (1,103)
Our Consolidated Statements of Cash Flows are presented on a
combined basis (continuing operations and discontinued operations).
As previously discussed, the GS segment was sold and has been
reflected as discontinued operations. The absence of cash flows from
the GS segment is not expected to have a significant effect on the future
liquidity, financial position or capital resources of Kforce.
The following table provides information for the total operating and
investing cash flows for the GS segment (in thousands):
Years Ended December 31,
2019
2018
2017
Cash Provided by (Used in)
GS Operating Activities
$ 4,547
$10,937
$1,098
GS Investing Activities
$117,798
$ (927)
(776)
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 consultant and associate compensation. When comparing
cash flows from operating activities, the decrease in cash provided
by operating activities during the year ended December 31, 2019, as
compared to 2018 was primarily due to the receipt of a $6.8 million
income tax refund in 2018 and no comparable receipt in 2019 and an
increase of $11.5 million in cash used for income tax payments, as well
as a decrease in cash provided by the GS segment due to the divestiture.
Investing Activities
Cash provided by investing activities for the year ended December 31,
2019 includes the net proceeds from the sale of assets held for sale
offset by capital contributed for an equity method investment.
Financing Activities
The increase in cash used for financing activities in 2019 compared
to 2018 was primarily driven by a large increase in common stock
repurchases, a reduction in our credit facility balance as well as an
increase in cash used for dividends.
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
2019
2018
2017
$ 118,324
$ 16,069
$ 12,276
6,129
6,118
2,346
Total cash flow impact of
common stock repurchases $124,453
$22,187
$14,622
Cash paid in current year for
settlement of prior year
repurchases
$ 556
$ 3,323
$ 935
KFORCE INC. AND SUBSIDIARIES 17
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):
2019 (1)
2018
Shares
$ Shares $
Open market
repurchases
3,315 $117,768
553
$15,727
(1) In March 2019, our Board approved an increase in our stock repurchase authorization
bringing the then available authorization to $150.0 million.
As of December 31, 2019, $44.3 million remained available for
further repurchases under the Board-authorized common stock
repurchase program. During the year ended December 31, 2019,
we utilized the net proceeds from the GS divestiture to repurchase
shares in the open market. We do not expect to repurchase at
similar levels in 2020.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2019, Kforce had letters of credit
outstanding for operating lease and insurance coverage deposits
totaling $3.4 million.
In June 2019, we entered into a joint venture whereby Kforce has a
50% noncontrolling interest in a newly formed LLC that is accounted
for as an equity method investment. Refer to Note 1—“Summary
of Significant Accounting Policies” in the Consolidated Financial
Statements, included in this Annual Report, which discusses a
contingent obligation related to this equity method investment.
These off-balance sheet arrangements do not have a material
impact on our liquidity or capital resources.
During the years ended December 31, 2019, 2018 and 2017,
Kforce declared and paid dividends of $16.6 million ($0.72 per share),
$14.9 million ($0.60 per share), and $12.1 million ($0.48 per share),
respectively. On January 31, 2020, Kforce’s Board approved an 11%
increase to the Company’s quarterly dividend from $0.18 per share
to $0.20 per share. 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 current and expected financial performance as
well as the ability to pay dividends under applicable law.
We believe that existing cash and cash equivalents, cash flow
from operations and available borrowings under our credit facility
will be adequate to meet the capital expenditure and working
capital requirements of our operations for at least the next 12
months. However, a material deterioration in the economic
environment or market conditions, among other things, could
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
potential acquisitions and additional stock repurchases.
Credit Facility
On May 25, 2017, the Firm entered into a credit agreement with
Wells Fargo Bank, National Association, as administrative agent,
Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank
of America, N.A., as syndication agent, Regions Bank and BMO Harris
Bank, N.A., as co-documentation agents, and the lenders referred to
therein (the “Credit Facility”). The maturity date of the Credit Facility
is May 25, 2022. Borrowings under the Credit Facility are secured by
substantially all of the tangible and intangible assets of the Firm,
excluding the Firm’s corporate headquarters and certain other
designated collateral. Refer to Note 13—“Credit Facility” in the
Consolidated Financial Statements, included in this Annual Report,
for a complete discussion of our Credit Facility. As of December 31,
2019, $65.0 million was outstanding and $231.6 million, subject
to certain covenants, was available and as of December 31, 2018,
$71.8 million was outstanding under the Credit Facility.
Kforce entered into a forward-starting interest rate swap
agreement (the “Swap”) to mitigate the risk of rising interest rates
and the Swap has been designated as a cash flow hedge. Refer
to Note 14—“Derivative Instrument and Hedging Activity” in the
Consolidated Financial Statements, included in this Annual Report,
for a complete discussion of our interest rate swap. As of December
31, 2019 and 2018, the fair value of the Swap was a liability of $0.2
million and an asset of $0.9 million, respectively.
18 KFORCE INC. AND SUBSIDIARIES
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2019 (in thousands):
Credit facility (1)
Operating lease obligations
Finance lease obligations
Purchase obligations (2)
Notes and interest payable (3)
Deferred compensation plans liability (4)
Supplemental Executive Retirement Plan (5)
Liability for unrecognized tax positions (6)
Total
Less than
1 year
$ 1,987
6,338
241
7,332
979
3,244
—
—
$20,121
Payments due by period
1-3 Years
3-5 Years
$67,812
8,303
115
3,195
226
5,833
14,347
—
$99,831
$ —
4,937
8
—
—
5,382
—
—
$10,327
Total
$ 69,799
22,173
364
10,527
1,205
33,913
23,291
—
$161,272
More than
5 years
$ —
2,595
—
—
—
19,454
8,944
—
$30,993
(1) Our credit facility matures May 25, 2022. Our interest rate as of December 31, 2019 was used to forecast the expected future interest rate payments. These payments are inherently
uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility.
(2) Purchase obligations include agreements to purchase goods and services that are enforceable, legally binding and specify all significant terms.
(3) Our notes payable as of December 31, 2019 are classified in Other current liabilities if payable within the next year or in Other long-term liabilities if payable after the next year in
the accompanying Consolidated Balance Sheets. The interest rate on the notes range from 2.58% to 2.80% and expire between November 2020 and October 2021.
(4) 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 are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued
liabilities and Other long-term liabilities, as appropriate, and 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.
(5) There is no funding requirement associated with our Supplemental Executive Retirement Plan (“SERP”) and, as a result, no contributions have been made through the year ended
December 31, 2019. Kforce does not currently anticipate funding the SERP during 2020. Kforce has included the total undiscounted projected benefit payments, as determined
at December 31, 2019, in the table above.
(6) Kforce’s liability for unrecognized tax positions, as of December 31, 2019, was $0.4 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.
CRITICAL ACCOUNTING ESTIMATES
Allowance for Doubtful Accounts
Our significant accounting policies are discussed in Note 1—
“Summary of Significant Accounting Policies” in the Consolidated
Financial Statements, included in this Annual Report. Our consolidated
financial statements are prepared in accordance with 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.
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. We
have not made any material changes in our accounting methodologies
used in prior years.
Management performs an ongoing analysis of factors in
establishing its allowance for doubtful accounts 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. A 10% change in accounts reserved,
at December 31, 2019, would have impacted our net income by
approximately $0.1 million in 2019.
Accounting for Income Taxes
Our 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.
We are 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. A 0.5%
change in our effective tax rate would have impacted our net income
by approximately $0.4 million in 2019.
Refer to Note 6—“Income Taxes” in the Consolidated Financial
Statements, included in this Annual Report, for a complete
discussion of the components of our income tax expense, as well as
the temporary differences that exist as of December 31, 2019.
KFORCE INC. AND SUBSIDIARIES 19
(4) expectations for future economic cycles; (5) market comparable
companies and appropriate adjustments thereto; and (6) market
multiples. When performing a qualitative assessment, we assess
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 unit was less than its carrying amount.
Refer to Note 8—“Goodwill” in the Consolidated Financial
Statements, included in this Anual Report, for a complete discussion
of the valuation methodologies employed.
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 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. A 10% change in our self-insured liabilities related to health
insurance and workers’ compensation, as of December 31, 2019,
would have impacted our net income by approximately $0.4 million
in 2019.
Defined Benefit Pension Plan
The SERP is a defined benefit pension plan that benefits certain
named executive officers. The SERP was not funded as of December 31,
2019 or 2018. 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.
A 10% change in the discount rate used to measure the net
periodic pension cost for the SERP would have had an insignificant
impact on our net income in 2019.
Refer to Note 12—“Employee Benefit Plans” in the Consolidated
Financial Statements, included in this Annual Report, for a complete
discussion of the terms of this plan.
NEW ACCOUNTING STANDARDS
Refer to Note 1 – “Summary of Significant Accounting Policies”
in the Consolidated Financial Statements, included in this Annual
Report, for a discussion of new accounting standards.
Equity Method Investment
Initial Investment. In June 2019, we entered into a joint venture
whereby Kforce has a 50% noncontrolling interest in an equity
method investment. Under the joint venture operating agreement,
Kforce is obligated to make additional cash contributions subsequent
to the initial contribution, contingent on certain operational and
financial milestones. Management evaluated the probability of the
achievement of these milestones and recorded the estimated future
contributions as part of the initial investment.
Impairment. We review the equity method investment for
impairment whenever events or changes in circumstances
indicate that the carrying amount of the investment may not be
recoverable. An impairment loss is recognized in the event that
an other-than-temporary decline in fair value of an investment
occurs. Management’s estimate of fair value of an investment is
based on the income approach and/or market approach. For the
income approach, we utilize estimated discounted future cash flows
expected to be generated by the investee. For the market approach,
we utilize market multiples of revenue and earnings derived from
comparable publicly-traded companies. 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. Changes in key assumptions about the financial condition
of an investee or actual conditions that differ from estimates could
result in an impairment charge.
Refer to Note 1—“Summary of Significant Accounting Policies”
in the Consolidated Financial Statements, included in this Annual
Report, for a complete discussion of our equity method investment.
Goodwill Impairment
Goodwill is tested at the reporting unit level which is generally
an operating segment, or one level below the operating segment
level, where a business operates and for which discrete financial
information is available and reviewed by segment management.
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. 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.
When performing a quantitative assessment, we determine the
fair value of our reporting units using widely accepted valuation
techniques, including the discounted cash flow, guideline transaction
and guideline company methods. 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;
20 KFORCE INC. AND SUBSIDIARIES
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 the Board 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, 2019. 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, 2019, 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, which is included herein.
KFORCE INC. AND SUBSIDIARIES 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kforce Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kforce Inc. and subsidiaries (“Kforce”) as of December 31, 2019 and
2018, 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, 2019, and the related notes (collectively referred to as the “financial statements”).
We also have audited Kforce’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kforce as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2019, 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, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, effective January 2019, Kforce adopted the FASB’s new standard related
to leases using the optional transition method without retrospective application to comparative periods.
Basis for Opinions
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 are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Kforce in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
22 KFORCE INC. AND SUBSIDIARIES
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Equity Method Investment—Refer to Note 1 to the Consolidated Financial Statements
Critical Audit Matter Description
In June 2019, Kforce entered into a joint venture whereby Kforce has a 50% noncontrolling ownership in WorkLLama, LLC (“WorkLLama”).
The noncontrolling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity
method, the investment carrying value is recorded at cost and adjusted for the proportionate share of earnings or losses. Under the joint
venture operating agreement, Kforce is obligated to make additional future cash contributions to WorkLLama that are contingent upon
the achievement of certain operational and financial milestones, which are centered around the market acceptance of their technologies
and success with Kforce’s internal objectives. Management evaluated the probability of the joint venture meeting its future milestones to
estimate the amount of all future contributions to record the initial investment. Under the operating agreement, Kforce’s maximum potential
future capital contributions related to these milestones was $22.5 million. During the year ended December 31, 2019, Kforce contributed
$9.0 million of capital contributions. The balance of the investment in WorkLLama of $8.2 million was included in Other assets, net in the
Consolidated Balance Sheet at December 31, 2019.
We identified the equity method investment in WorkLLama as a critical audit matter because of the significant amount of judgment
required by management when determining the timing and amount of future contributions to record the initial equity method investment,
given the lack of operating history available for WorkLLama. This required a high degree of auditor judgment and an increased extent of effort
while performing audit procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s determination of the timing of recognition of future contributions for the initial equity
method investment included the following, among others:
• We tested the effectiveness of controls over management’s accounting for the equity method investment, including those over the
determination of the timing and amount of future contributions.
• Due to the lack of operating history available for the equity method investment, we evaluated the reasonableness of management’s
revenue forecasts as follows:
• Obtained an understanding of management’s forecasting process, including the sources of information used, the underlying
significant assumptions, and sensitivity to changes in these significant assumptions.
• Compared the forecast to (1) internal communications to management and Board of Directors, (2) current year operating results,
and (3) forecasted information included in analyst and industry reports for the Company.
Tampa, Florida
February 21, 2020
We have served as Kforce’s auditor since 2000.
KFORCE INC. AND SUBSIDIARIES 23
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
Years Ended December 31,
Revenue
Direct costs
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 tax
Net income
Other comprehensive (loss) income:
Defined benefit pension plans, net of tax
Change in fair value of interest rate swap, net of tax
Comprehensive income
Earnings per share—basic:
Continuing operations
Discontinued operations
Earnings per share—basic
Earnings per share—diluted:
Continuing operations
Discontinued operations
Earnings per share—diluted
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
The accompanying notes are an integral part of these consolidated financial statements.
2019
2018
2017
$1,347,387
952,349
$1,303,937
917,450
$1,253,646
878,049
395,038
314,167
6,050
74,821
3,425
71,396
16,830
54,566
76,296
130,862
(2,183)
(807)
386,487
307,250
6,836
72,401
4,521
67,880
17,004
50,876
7,104
57,980
881
315
375,597
308,313
7,266
60,018
5,100
54,918
25,324
29,594
3,691
33,285
(373)
289
$ 127,872
$ 59,176
$ 33,201
$2.35
3.29
$5.64
$2.29
3.21
$5.50
23,186
23,772
$2.05
0.29
$2.34
$2.02
0.28
$2.30
24,738
25,251
$1.17
0.15
$1.32
$1.16
0.14
$1.30
25,222
25,586
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 $2,078 and $2,800, respectively
Prepaid expenses and other current assets
Current assets held for sale
Total current assets
Fixed assets, net
Other assets, net
Deferred tax assets, net
Goodwill
Noncurrent assets held for sale
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities
Accrued payroll costs
Current portion of operating lease liabilities
Other current liabilities
Income taxes payable
Current liabilities held for sale
Total current liabilities
Long-term debt—credit facility
Other long-term liabilities
Noncurrent liabilities held for sale
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
Common stock, $0.01 par; 250,000 shares authorized, 72,202 and 71,856 issued and
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Treasury stock, at cost; 49,277 and 45,822 shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2019
2018
$ 19,831
217,929
7,475
—
245,235
29,975
72,838
8,037
25,040
—
$ 112
210,559
8,018
29,773
248,462
34,322
36,664
7,147
25,040
28,273
$ 381,125
$ 379,908
$ 33,232
44,001
5,685
1,168
878
—
84,964
65,000
63,898
—
$ 32,542
39,384
—
1,616
4,553
12,263
90,358
71,800
44,868
4,551
213,862
211,577
—
—
722
459,545
(1,526)
350,545
(642,023)
719
447,337
1,296
237,308
(518,329)
167,263
168,331
$ 381,125
$ 379,908
KFORCE INC. AND SUBSIDIARIES 25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock
Shares Amount
71,268
—
—
221
5
—
—
—
—
—
—
71,494
—
—
357
5
—
—
—
—
—
—
71,856
—
—
346
—
—
—
—
—
—
72,202
$713
—
—
2
—
—
—
—
—
—
—
715
—
—
4
—
—
—
—
—
—
—
719
—
—
3
—
—
—
—
—
—
$722
(In thousands)
Balance, December 31, 2016
Net income
Cumulative effect of share-based payment accounting standard
Issuance for stock-based compensation and dividend equivalents, net of forfeitures
Exercise of stock options
Stock-based compensation expense
Employee stock purchase plan
Dividends ($0.48 per share)
Defined benefit pension plans, net of tax benefit of $207
Change in fair value of interest rate swap, net of tax of $189
Repurchases of common stock
Balance, December 31, 2017
Net income
Cumulative effect of revenue recognition accounting standard, net of tax of $63
Issuance for stock-based compensation and dividend equivalents, net of forfeitures
Exercise of stock options
Stock-based compensation expense
Employee stock purchase plan
Dividends ($0.60 per share)
Defined benefit pension plan, net of tax of $314
Change in fair value of interest rate swap, net of tax of $107
Repurchases of common stock
Balance, December 31, 2018
Net income
Reclassification of stranded tax effects (Note 1)
Issuance for stock-based compensation and dividend equivalents, net of forfeitures
Stock-based compensation expense
Employee stock purchase plan
Dividends ($0.72 per share)
Defined benefit pension plan, no tax benefit
Change in fair value of interest rate swap, net of tax benefit of $272
Repurchases of common stock
Balance, December 31, 2019
The accompanying notes are an integral part of these consolidated financial statements.
26 KFORCE INC. AND SUBSIDIARIES
Additional
Paid-In
Capital
Accumulated Other
Comprehensive
Income (Loss)
$428,212
—
769
494
72
7,600
247
—
—
—
—
437,394
—
—
762
46
8,797
338
—
—
—
—
447,337
—
—
846
11,007
355
—
—
—
—
$ 184
—
—
—
—
—
—
—
(373)
289
—
100
—
—
—
—
—
—
—
881
315
—
1,296
—
168
—
—
—
—
(2,183)
(807)
—
Retained
Earnings
$174,967
33,285
(469)
(496)
—
—
—
(12,144)
—
—
—
195,143
57,980
(179)
(766)
—
—
—
(14,870)
—
—
—
237,308
130,862
(168)
(849)
—
—
(16,608)
—
—
—
$459,545
$(1,526)
$350,545
Treasury Stock
Shares Amount
Total
Stockholders’
Equity
44,469
—
—
—
—
—
(25)
—
—
—
723
45,167
—
—
—
1
—
(19)
—
—
—
673
45,822
—
—
—
—
(17)
—
—
—
3,472
49,277
$(482,340)
—
—
—
—
—
275
—
—
—
(17,010)
(499,075)
—
—
—
(46)
—
211
—
—
—
(19,419)
(518,329)
—
—
—
—
203
—
—
—
(123,897)
$ 121,736
33,285
300
—
72
7,600
522
(12,144)
(373)
289
(17,010)
134,277
57,980
(179)
—
—
8,797
549
(14,870)
881
315
(19,419)
168,331
130,862
—
—
11,007
558
(16,608)
(2,183)
(807)
(123,897)
$(642,023)
$ 167,263
KFORCE INC. AND SUBSIDIARIES 27
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 operating activities:
2019
2018
2017
$ 130,862
$ 57,980
$ 33,285
Gain on sale of assets held for sale
Deferred income tax provision, net
Provision for bad debts
Depreciation and amortization
Stock-based compensation expense
Defined benefit pension plans expense
Loss on deferred compensation plan investments, net
Loss on disposal or impairment of assets
Noncash lease expense
Loss on equity method investment
Contingent consideration liability remeasurement
Other
(Increase) decrease in operating assets
Trade receivables, net
Other assets
Increase (decrease) in operating liabilities
Accrued payroll costs
Other liabilities
Cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Equity method investment
Net proceeds from the sale of assets held for sale
Cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from credit facility
Payments on credit facility
Payments on other financing arrangements
Repurchases of common stock
Cash dividends
Payment of contingent consideration liability
Other
Cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Income taxes (1)
Operating lease liabilities
Interest, net
Non-Cash Financing and Investing Transactions:
ROU assets obtained from operating leases
Employee stock purchase plan
Unsettled repurchases of common stock
Receivable for sale of Kforce Global Solutions, Inc.’s assets
(79,318)
(49)
1,209
6,481
9,912
862
245
1,084
6,282
831
459
352
(5,360)
(9,639)
4,567
(2,163)
66,617
(10,359)
(9,000)
122,544
103,185
80,100
(86,900)
(1,720)
(124,453)
(16,608)
(477)
(25)
(150,083)
19,719
112
—
989
1,820
8,265
8,797
1,821
563
38
—
—
—
350
(10,851)
5,741
1,350
10,860
87,723
(5,170)
—
1,000
(4,170)
450,400
(495,123)
(2,039)
(22,187)
(14,871)
—
—
(3,148)
12,243
1,031
8,508
7,600
937
510
196
—
—
565
692
(20,535)
(8,971)
1,954
(5,528)
29,339
(5,846)
—
1,000
(4,846)
1,038,593
(1,033,617)
(2,148)
(14,622)
(12,144)
—
(1,658)
(83,820)
(25,596)
(267)
379
(1,103)
1,482
$ 379
$ 19,831
$ 112
$ 24,935
8,186
1,480
$ 9,205
558
—
—
$ 13,442
—
3,814
$ 24,330
—
3,518
$ —
549
556
—
$ —
522
898
1,979
(1) During the year ended December 31, 2018, cash provided by operating activities included the receipt of an income tax refund in the amount of $6.8 million.
The accompanying notes are an integral part of these consolidated financial statements.
28 KFORCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Flex Revenue
Basis of Presentation
The consolidated financial statements have been prepared in
conformity with GAAP and the rules of the SEC.
Certain prior year amounts have been reclassified to conform with
the current period presentation for amounts related to discontinued
operations. Refer to Note 2—“Discontinued Operations” for further
information.
Principles of Consolidation
The consolidated financial statements include the accounts
of Kforce Inc. and its subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation. References
in this document to “Kforce,” the “Company,” “we,” the “Firm,”
“management,” “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 critical of these
estimates and assumptions relate to the following: allowance for
doubtful accounts; income taxes; self-insured liabilities for workers’
compensation and health insurance; obligations for the pension
plan; and the impairment of goodwill, other long-lived assets and
the equity method investment. 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
All of our revenue and trade receivables are generated from
contracts with customers and substantially all of our revenues are
derived from U.S. domestic operations.
Revenue is recognized when control of the promised services
is transferred to our customers at an amount that reflects the
consideration to which we expect to be entitled to in exchange for
those services. Revenue is recorded net of sales or other transaction
taxes collected from clients and remitted to taxing authorities.
For substantially all of our revenue transactions, we have
determined that the gross reporting of revenues as a principal
versus net as an agent is the appropriate accounting treatment
because Kforce: (i) is primarily responsible for fulfilling the promise
to provide the specified service to the customer, (ii) has discretion
in selecting and assigning the temporary workers to particular jobs
and establishing the bill rate, and (iii) bears the risk and rewards of
the transaction, including credit risk if the customer fails to pay for
services performed.
Flex revenue is recognized over time as temporary staffing services
are provided by our consultants at the contractually established
bill rates, net of applicable variable consideration. Reimbursements
of travel and out-of-pocket expenses (“billable expenses”) are also
recorded within Flex revenue when incurred and the equivalent
amount of expense is recorded in Direct costs in the Consolidated
Statements of Operations and Comprehensive Income. We recognize
revenue in the amount of consideration to which we have the right
to invoice when it corresponds directly to the services transferred to
the customer satisfied over time.
Direct Hire Revenue
Direct Hire revenue is recognized at the agreed upon rate at
the point in time when the performance obligation is considered
complete. Our policy requires the following criteria to be met in
order for the performance obligation to be considered complete:
(i) the candidate accepted the position; (ii) the candidate resigned
from their current employer; and (iii) the agreed upon start date
falls within the following month. Since the client has accepted the
candidate and can direct the use of and obtains the significant risk
and rewards of the placement, we consider this point as the transfer
of control to our client.
Variable Consideration
Transaction prices for Flex revenue include variable consideration,
such as customer rebates and discounts. Management evaluates the
facts and circumstances of each contract to estimate the variable
consideration using the most likely amount method which utilizes
management’s expectation of the volume of services to be provided
over the applicable period.
Direct Hire revenue is recorded net of a fallout reserve. Direct Hire
fallouts occur when a candidate does not remain employed with the
client through the respective contingency period (typically 90 days
or less). Management uses the expected value method to estimate
the fallout reserve based on a combination of past experience and
current trends.
Variable consideration reduces revenue, but may be constrained
to the extent that it is probable a significant reversal will not occur.
Payment Terms
Our payment terms and conditions vary by arrangement,
although terms are typically less than 90 days. Generally, the
timing between the satisfaction of the performance obligation and
the payment is not significant and we do not currently have any
significant financing components.
Unsatisfied Performance Obligations
We do not disclose the value of unsatisfied performance obligations
for contracts if either the original expected length is one year or less
or if revenue is recognized at the amount to which we have the right
to invoice for services performed.
KFORCE INC. AND SUBSIDIARIES 29
Contract Balances
We record accounts receivable when our right to consideration
becomes unconditional and services have been performed. Other
than our trade receivable balance, we do not have any material
contract assets as of December 31, 2019 and 2018.
We record a contract liability when we receive consideration from a
customer prior to transferring services to the customer. We recognize
the contract liability as revenue after we have transferred control of
the goods or services to the customer. Contract liabilities are recorded
within Accounts payable and other accrued liabilities if expected to
be recognized in less than one year and Other long-term liabilities,
if over one year, in the Consolidated Balance Sheets. We do not have
any material contract liabilities as of December 31, 2019 and 2018.
Cost of Services
Direct costs are composed of all related costs of employment for
consultants, including compensation, payroll taxes, certain fringe
benefits and subcontractor costs. Direct costs exclude depreciation
and amortization expense, which is presented on a separate line
in the accompanying Consolidated Statements of Operations and
Comprehensive Income.
Associate and field management compensation, payroll taxes and
fringe benefits are included in SG&A along with other customary
costs such as administrative and corporate costs.
Commissions
Our associates make placements and earn commissions as a
percentage of revenue or gross profit pursuant to a commission
plan. The amount of associate commissions paid increases as
volume increases. Commissions are accrued at an amount equal to
the percent of total expected commissions payable to total revenue
or gross profit for the commission-plan period, as applicable. We
generally expense sales commissions and any other incremental costs
of obtaining a contract as incurred because the amortization period is
typically less than one year.
Stock-Based Compensation
Stock-based compensation is measured using the grant-date fair
value of the award of equity instruments. The expense is recognized
over the requisite service period and forfeitures are recognized as
incurred. Excess tax benefits or deficiencies of deductions attributable
to employees’ vesting of restricted stock are reflected in Income tax
expense in the accompanying Consolidated Statements of Operations
and Comprehensive Income.
Income Taxes
Income taxes are recorded using the asset and liability approach
for deferred tax assets and liabilities and the expected future tax
consequences of differences between carrying amounts and the tax
basis of assets and liabilities. A valuation allowance is recorded unless
it is more likely than not that the deferred tax asset can be utilized to
offset future taxes.
30 KFORCE INC. AND SUBSIDIARIES
Management evaluates tax positions taken or expected to be taken
in our tax returns and records a liability for uncertain tax positions.
We recognize tax benefits from uncertain tax positions when it
is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation
processes. The Company recognizes interest and penalties related to
uncertain tax positions in Income tax expense in the accompanying
Consolidated Statements of Operations and Comprehensive Income.
Cash and Cash Equivalents
All highly liquid investments with original maturity dates of
three months or less at the time of purchase are classified as cash
equivalents. Cash and cash equivalents are stated at cost, which
approximates fair value because of the short-term nature of these
instruments. Our cash equivalents are held in government money
market funds and at times may exceed federally insured limits.
Trade Receivables and Related Reserves
Trade receivables are recorded net of allowance for doubtful
accounts. The allowance for doubtful accounts is determined based
on factors including recent write-off and delinquency trends, a
specific analysis of significant receivable balances that are past due,
the concentration of trade receivables among clients and higher-risk
sectors, and the current state of the U.S. economy. Trade receivables
are written off after all reasonable collection efforts have been
exhausted. Trade accounts receivable reserves as a percentage of
gross trade receivables was approximately 1.0% at December 31,
2019 and 2018.
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 lesser of the estimated useful lives of the assets or the expected
terms of the related leases. 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 within SG&A in the
Consolidated Statements of Operations and Comprehensive Income.
Long-lived assets are reviewed 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 an analysis indicates the carrying amount of
these long-lived assets exceeds the fair value, an impairment loss is
recognized to reduce the carrying amount to its fair market value, as
determined based on the present value of projected future cash flows.
Equity Method Investment
In June 2019, we entered into a joint venture whereby Kforce has
a 50% noncontrolling interest in WorkLLama, LLC (“WorkLLama”).
WorkLLama has and continues to develop the technology for a
SaaS platform focused on consultant engagement and referral
technologies, which we believe will enhance our opportunities
to efficiently and effectively identify and place consultants on
assignment. Our noncontrolling interest in WorkLLama, a variable
interest entity, is accounted for as an equity method investment.
Under the equity method, our carrying value is at cost and adjusted
for our proportionate share of earnings or losses. There are no basis
differences between our carrying value and the underlying equity
in net assets that would result in adjustments to our proportionate
share of earnings or losses. We recorded a loss on equity method
investment of $0.8 million during the year ended December 31,
2019. The balance of the investment in WorkLLama of $8.2 million
was included in Other assets, net in the Consolidated Balance Sheet
at December 31, 2019.
Under the joint venture operating agreement for WorkLLama,
Kforce is obligated to make additional cash contributions subsequent
to the initial contribution, contingent on WorkLLama’s achievement
of certain operational and financial milestones, which are centered
around the market acceptance of their technologies and success
with internal operating and strategic objectives. Management
evaluated the probability of WorkLLama’s achievement of these
milestones and recorded the estimated future contributions as
part of the initial investment. Under the operating agreement, our
maximum potential capital contributions was $22.5 million. During
the year ended December 31, 2019, we contributed $9.0 million of
capital contributions.
We review the equity method investment for impairment whenever
events or changes in circumstances indicate that the carrying amount
of the investment may not be recoverable. An impairment loss is
recognized in the event that an other-than-temporary decline in fair
value of an investment occurs. Management’s estimate of fair value
of an investment is based on the income approach and/or market
approach. At December 31, 2019, management determined there
was no need to test for impairment for our equity method investment
as no events or changes in circumstances indicated that the carrying
amount of the investments may not be recoverable.
Goodwill
Management has determined that the reporting units for the
goodwill analysis is consistent with our reporting segments. We
evaluate goodwill for impairment either through a qualitative or
quantitative approach annually, or more frequently if an event
occurs or circumstances change that indicate the carrying value of a
reporting unit may not be recoverable. If we perform a quantitative
assessment that indicates the carrying amount of a reporting unit
exceeds its fair market value, an impairment loss is recognized
to reduce the carrying amount to its fair market value. Kforce
determines the fair market value of each reporting unit 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 estimated future cash flows on a
discounted basis. The market approach compares each reporting unit
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 and operating conditions
or changes in Kforce’s business strategies that occur after the annual
impairment analysis may impact these assumptions and result in a
future goodwill impairment charge, which could be material to our
consolidated financial statements.
Operating Leases
Kforce leases property for our field offices as well as certain office
equipment, which limits our exposure to risks related to ownership.
We determine if a contract or arrangement meets the definition of
a lease at inception. We elected not to separate lease and non-lease
components when determining the consideration in the contract.
Right-of-use (“ROU”) assets and lease liabilities are recognized based
on the present value of the lease payments over the lease term at
the commencement date. If there is no rate implicit in the lease, we
use our incremental borrowing rate in the present value calculation,
which is based on our collateralized borrowing rate and determined
based on the terms of our leases and the economic environment in
which they exist. Our lease agreements do not contain any material
residual value guarantees or restrictive covenants.
ROU assets for operating leases, net of amortization, are recorded
within Other assets, net and operating lease liabilities are recorded
within current liabilities if expected to be recognized in less than
one year and in Other long-term liabilities, if over one year, in the
Consolidated Balance Sheet. Operating lease additions are non-cash
transactions and the amortization of the ROU assets is reflected as
Noncash lease expense within operating activities in the Consolidated
Statement of Cash Flows.
Our lease terms typically range from three to five years with some
containing options to renew or terminate. The exercise of renewal
options is at our sole discretion and is included in the lease term if
we are reasonably certain that the renewal option will be exercised.
We elected the short-term practical expedient for leases with an
initial term of 12 months or less and do not recognize ROU assets or
lease liabilities for these short-term leases.
In addition to base rent, certain of our operating leases require
variable payments of property taxes, insurance and common area
maintenance. These variable lease costs, other than those dependent
upon an index or rate, are expensed when the obligation for those
payments is incurred.
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
and the associated accumulated amortization are included in Other
assets, net in the accompanying Consolidated Balance Sheets.
Amortization expense is computed using the straight-line method
over the estimated useful lives of the software, which range from one
to nine years. Amortization expense of capitalized software during
the years ended December 31, 2019, 2018 and 2017 was $1.1 million,
$1.1 million and $0.9 million, respectively.
Workers’ Compensation
Kforce retains the economic burden for the first $250 thousand
per occurrence in workers’ compensation claims except in states that
require participation in state-operated insurance funds. 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 ongoing development of existing claims.
KFORCE INC. AND SUBSIDIARIES 31
Management 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 $500 thousand in claims annually. For its partially
self-insured lines of coverage, health insurance costs are accrued
using estimates to approximate the liability for reported claims and
incurred but not reported 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.
Legal Costs
Legal costs incurred in connection with loss contingencies are
expensed as incurred.
Defined Benefit Pension Plan
Because our defined benefit pension plan is unfunded as of
December 31, 2019, actuarial gains and losses may arise as a result
of the actuarial experience of the plan, 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 pension plan is recorded in Accumulated
other comprehensive (loss) income in our consolidated financial
statements. The unfunded status of the defined benefit pension plan
is recorded as a liability in our Consolidated Balance Sheets.
Amortization of a net unrecognized gain or loss in accumulated
other comprehensive (loss) income 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. The
interest cost component of the net periodic benefit cost is included
in Other expense, net in the Consolidated Statements of Operations
and Comprehensive Income.
Earnings per Share
Basic earnings per share is computed as net income divided by the
weighted-average number of common shares outstanding (“WASO”)
during the period. WASO excludes unvested shares of restricted stock.
Diluted earnings per share is computed by dividing net income by
diluted WASO. Diluted WASO includes the dilutive effect of 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, 2019, 2018 and 2017, there
were 586 thousand, 513 thousand, and 364 thousand common
stock equivalents, respectively, included in the diluted WASO. For
the years ended December 31, 2019, 2018 and 2017, there were
1 thousand, nil and 527 thousand, respectively, of anti-dilutive
common stock equivalents.
32 KFORCE INC. AND SUBSIDIARIES
Treasury Stock
The Board may authorize share repurchases of our common stock.
Shares repurchased under Board authorizations are held in treasury
for general corporate purposes. Treasury shares are accounted for
under the cost method and reported as a reduction of stockholders’
equity in the accompanying consolidated financial statements.
Derivative Instrument
Our interest rate swap derivative instrument has been designated
as a cash flow hedge and is recorded at fair value on the Consolidated
Balance Sheets. The effective portion of the gain or loss on the
derivative instrument is recorded as a component of Accumulated
other comprehensive (loss) income, net of tax, and reclassified into
earnings when the hedged item affects earnings and into the line
item of the hedged item. Any ineffective portion of the gain or loss is
recognized immediately into Other expense, net on the Consolidated
Statements of Operations and Comprehensive Income. Cash flows
from the derivative instrument are classified in the Consolidated
Statements of Cash Flows in the same category as the hedged item.
Fair Value Measurements
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy uses a framework which requires
categorizing assets and liabilities into one of three levels based on
the inputs used in valuing the asset or liability.
• Level 1 inputs are unadjusted, quoted market prices in active
markets for identical assets or liabilities.
• Level 2 inputs are observable inputs other than quoted prices
included in Level 1, such as quoted prices for similar assets or
liabilities in active markets or quoted prices for identical assets or
liabilities in inactive markets.
• Level 3 inputs include unobservable inputs that are supported by
little, infrequent or no market activity and reflect management’s
own assumptions about inputs used in pricing the asset or liability.
Level 1 provides the most reliable measure of fair value, while Level 3
generally requires significant management judgment. Assets and
liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
Fair value measurements include, but are not limited to: the
impairment of goodwill, other long-lived assets and the equity
method investment; stock-based compensation and the interest
rate swap. The carrying values of cash and cash equivalents, trade
receivables, other current assets and accounts payable and other
accrued liabilities approximate fair value because of the short-term
nature of these instruments. Using available market information and
appropriate valuation methodologies, management 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
Recently Adopted Accounting Standards
In August 2018, the FASB issued authoritative guidance regarding a
customer’s accounting for implementation costs incurred for a cloud
computing arrangement that is a service contract. The amendment
aligns the requirements for capitalizing these implementation costs
with the requirements for capitalizing implementation costs incurred
to develop or obtain internal-use software, and defer these costs
over the non-cancelable term of the cloud computing arrangements
plus any optional renewal periods that are reasonably certain to be
exercised. This amendment also requires entities to present cash
flows, capitalized costs and amortization expense in the same
financial statement line items as the service costs incurred for such
arrangements. The guidance is effective for fiscal periods beginning
after December 15, 2019, with retrospective application or prospective
to all implementation costs incurred after the date of adoption. We
early adopted this standard effective January 1, 2019, using the
prospective method. Historically, these implementation costs were
recorded as amortization expense in the income statement, capital
expenditures within investing cash flows and Other assets, net in the
consolidated balance sheets. Due to the adoption of this standard and
effective January 1, 2019, these implementation costs are recorded
within SG&A, operating cash flows and Prepaid expenses and other
current assets if expected to be recognized within one year and Other
assets, net, if over one year. As of and for the year ended December 31,
2019, these costs were not material to our operations.
In February 2018, the FASB issued authoritative guidance
regarding the reclassification of certain stranded tax effects from
accumulated other comprehensive (loss) income to retained
earnings as a result of the change in tax rates related to the Tax Cuts
and Jobs Act. The guidance is effective for fiscal periods beginning
after December 15, 2018. We elected to adopt this optional standard
and reclassified approximately $168 thousand from Accumulated
other comprehensive (loss) income to Retained earnings in the
consolidated financial statements on January 1, 2019, using the
period of adoption method.
In August 2017, the FASB issued authoritative guidance targeting
improvements to accounting for hedging activities, which expands
and clarifies hedge accounting for nonfinancial and financial
risk components, aligns the recognition and presentation of
the effects of the hedging instrument and hedged item in the
financial statements, and simplifies the requirements for assessing
effectiveness in a hedging relationship. The guidance is effective
for annual periods beginning after December 15, 2018. We adopted
this standard as of January 1, 2019 using the modified retrospective
approach with no cumulative adjustment required. Additionally,
we adopted the presentation and disclosure requirements using
the prospective method as required. Refer to Note 14—“Derivative
Instrument and Hedging Activity” for the additional disclosures of
the Firm’s derivative instrument.
In February 2016, the FASB issued authoritative guidance regarding
the accounting for leases, and has since issued subsequent updates to
the initial guidance. The amended guidance requires the recognition
of assets and liabilities for operating leases. The guidance is effective
for annual periods beginning after December 15, 2018. We adopted
this standard using the optional transition method as of January 1,
2019, without retrospective application to comparative periods. We
recorded approximately $17.6 million of ROU assets and $21.0 million
of lease liabilities on our consolidated balance sheet on January 1,
2019 related to operating leases upon adoption of the new lease
standard. The difference between the ROU assets and lease liabilities
balances relates to the lease incentive liabilities recorded as of
December 31, 2018 in accordance with the previous lease accounting
guidance. We elected the package of practical expedients and did not
reassess our prior conclusions regarding lease identification, lease
classification and initial direct costs. We did not elect the hindsight
practical expedient. We determined that no cumulative effect
adjustment to retained earnings was necessary upon adoption.
Finance leases are not significant to our operations as of and for the
year ended December 31, 2019. Refer to Note 11—“Operating Leases”
for disclosures related to our operating leases.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued authoritative guidance regarding
changes to the disclosure requirement for defined benefit plans
including additions and deletions to certain disclosure requirements
for employers that sponsor defined benefit pension or other post-
retirement plans. The guidance is effective for fiscal periods beginning
after December 15, 2020 with the retrospective method required
for all periods presented. The adoption of this guidance will modify
our disclosures but is not expected to have a material effect on our
consolidated financial statements.
In June 2016, the FASB issued authoritative guidance on
accounting for credit losses on financial instruments, including
trade receivables, and has since issued subsequent updates to the
initial guidance. The amended guidance requires the application of a
current expected credit loss model, a new impairment model, which
measures expected credit losses based on relevant information,
including historical experience, current conditions and reasonable
and supportable forecasts. The guidance is effective for annual
periods beginning after December 15, 2019 and requires adoption
using a modified retrospective approach. We finalized the changes
to our allowance methodology for our trade receivables as a result of
the implementation of this standard, and we expect the cumulative
impact of adopting this standard will be immaterial to our financial
statements. The cumulative adjustment will be recorded as a
reduction to the opening balance of retained earnings with the offset
to the allowance for doubtful accounts on January 1, 2020.
2. DISCONTINUED OPERATIONS
During 2019, management committed to a plan to divest the
GS segment as a result of the Firm’s decision to focus solely on the
commercial technical and professional staffing services and solutions
space. The GS segment consisted of KGS, our federal government
solutions business, and TFX, our federal government product business.
On April 1, 2019, Kforce completed the sale of all of the issued and
outstanding stock of Kforce Government Holdings, Inc., including its
wholly-owned subsidiary KGS, to ManTech International Corporation
for a cash purchase price of $115.0 million. Our gain on the sale of
KGS, net of transaction costs, was $72.3 million. Total transaction
costs were $9.6 million, which primarily includes legal and broker
fees, transaction bonuses and accelerated stock-based compensation
expense for KGS management triggered by a change in control of KGS.
On June 7, 2019, Kforce completed the sale of all of the issued
and outstanding stock of TFX to an unaffiliated third party for a
cash purchase price of $18.4 million less a post-closing working
capital adjustment of $0.7 million. Our gain on the sale of TFX, net of
transaction costs, was $7.0 million. Total transaction costs were $2.2
million, which primarily includes legal and broker fees and transaction
bonuses. Due to the sale of TFX, we finalized the settlement of a
contingent consideration liability related to the acquisition of TFX in
2014 and paid $0.6 million during the year ended December 31, 2019.
Since the divestitures, Kforce has no significant continuing
involvement in the operations of KGS and TFX.
KFORCE INC. AND SUBSIDIARIES 33
The results of operations for both KGS and TFX have been reported as discontinued operations in our consolidated financial statements prior
to their disposition. The following table summarizes the line items of pretax profit for the GS segment (in thousands):
Years Ended December 31,
Revenue
Direct costs
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Income from discontinued operations
Gain on sale of discontinued operations
Other (expense) income, net
Income from discontinued operations, before income taxes
Income tax expense
2019
$27,737
19,494
8,243
6,988
307
948
79,318
(436)
79,830
3,534
2018
2017
$114,416
82,295
$104,294
71,835
32,121
21,862
995
9,264
—
9
9,273
2,169
32,459
22,861
989
8,609
—
567
9,176
5,485
Income from discontinued operations, net of tax
$76,296
$ 7,104
$ 3,691
The effective tax rates for discontinued operations, including the gain on sale of discontinued operations, were 4.4%, 23.4%, and 59.8% for the
years ended December 31, 2019, 2018 and 2017, respectively. For the year ended December 31, 2019, there was minimal income tax obligation
for the sale of KGS due to the efficient tax structure of the transaction. The GS effective tax rate for 2018 was positively impacted by the TCJA.
The GS effective tax rate for 2017 was unfavorably impacted by the revaluation of our net deferred tax assets as a result of the TCJA.
The accompanying Consolidated Statements of Cash Flows
are presented on a combined basis (continuing operations and
discontinued operations). The following table provides information
for the total operating and investing cash flows for the GS segment
(in thousands):
Years Ended December 31,
Cash Provided by (Used in)
GS Operating Activities
GS Investing Activities
3. REPORTABLE SEGMENTS
2019
2018
2017
$ 4,547
$117,798
$10,937
$ (927)
$1,098
$(776)
Kforce’s reportable segments are Tech and FA. Historically, and
for the year ended December 31, 2019, Kforce has generated only
sales and gross profit information on a segment basis. We do not
report total assets or income from continuing operations separately
by segment as our operations are largely combined.
The following table summarizes the assets and liabilities held for
sale for the GS segment as of December 31, 2018 (in thousands):
December 31, 2018
ASSETS
Current assets held for sale:
Trade receivables
Prepaid expenses and other current assets
Total Current assets held for sale
Noncurrent assets held for sale:
Fixed assets, net
Other assets, net
Deferred tax assets, net
Intangible assets
Goodwill
Total Noncurrent assets held for sale
LIABILITIES
Current liabilities held for sale:
Accounts payable and other accrued liabilities
Accrued payroll costs
Other current liabilities
Income taxes payable
Total Current liabilities held for sale
Noncurrent liabilities held for sale:
Other long-term liabilities
Total Noncurrent liabilities held for sale
$24,336
5,437
$29,773
$ 1,496
293
2,604
2,952
20,928
$28,273
$ 6,064
5,878
16
305
$12,263
$ 4,551
$ 4,551
34 KFORCE INC. AND SUBSIDIARIES
The following table provides information concerning the operations of our segments for the years ended December 31 (in thousands):
2019
Revenue
Gross profit
Operating and other expenses
Income from continuing operations, before income taxes
2018
Revenue
Gross profit
Operating and other expenses
Income from continuing operations, before income taxes
2017
Revenue
Gross profit
Operating and other expenses
Income from continuing operations, before income taxes
Tech
FA
Total
$1,057,859
$ 292,980
$289,528
$102,058
$ 990,089
$ 277,388
$313,848
$109,099
$ 907,511
$ 257,118
$346,135
$118,479
$1,347,387
$ 395,038
323,642
$ 71,396
$1,303,937
$ 386,487
318,607
$ 67,880
$1,253,646
$ 375,597
320,679
$ 54,918
4. DISAGGREGATION OF REVENUE
The following table provides information about disaggregated revenue by segment and revenue type for the years ended December 31
(in thousands):
2019
Flex revenue
Direct Hire revenue
Total Revenue
2018
Flex revenue
Direct Hire revenue
Total Revenue
2017
Flex revenue
Direct Hire revenue
Total Revenue
Tech
FA
Total
$1,037,380
20,479
$1,057,859
$ 971,310
18,779
$ 990,089
$ 887,675
19,836
$ 907,511
$262,307
27,221
$289,528
$1,299,687
47,700
$1,347,387
$286,939
26,909
$313,848
$1,258,249
45,688
$1,303,937
$318,294
27,841
$346,135
$1,205,969
47,677
$1,253,646
5. FIXED ASSETS, NET
The following table presents major classifications of fixed assets and related useful lives (in thousands):
December 31,
Land
Building and improvements
Furniture and equipment
Computer equipment
Leasehold improvements
Total fixed assets
Less accumulated depreciation
Total Fixed assets, net
USEFUL LIFE
2019
2018
1-40 years
1-20 years
1-5 years
1-7 years
$ 5,892
25,990
8,760
6,446
9,482
56,570
(26,595)
$ 29,975
$ 5,892
25,755
14,938
5,944
10,484
63,013
(28,691)
$ 34,322
Depreciation expense was $4.9 million, $5.7 million and $6.4 million during the years ended December 31, 2019, 2018 and 2017, respectively.
KFORCE INC. AND SUBSIDIARIES 35
6. INCOME TAXES
The provision for income taxes from continuing operations
consists of the following (in thousands):
Years Ended December 31,
Current tax expense:
Federal
State
Deferred tax expense(1)
Total Income tax expense
2019
2018
2017
$12,074
5,057
(301)
$16,830
$12,032 $14,296
3,004
8,024
$17,004 $25,324
5,369
(397)
(1) The TCJA was enacted in December 2017, which reduced the U.S. federal corporate
tax rate from 35.0% to 21.0% effective January 1, 2018. As a result, we revalued our
net deferred income tax assets and recorded $3.6 million of additional Income tax
expense for continuing operations in the Consolidated Statement of Operations and
Comprehensive Income for the year ended December 31, 2017.
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,
Federal income tax rate
State income taxes,
net of Federal tax effect
Non-deductible compensation
and meals and entertainment
Tax credits
Tax benefit from restricted
stock vesting
Valuation allowance on
foreign tax credit
Enactment of TCJA
Other
Effective tax rate
2019
21.0%
2018
21.0%
2017
35.0%
5.8
1.6
(2.1)
(1.6)
—
—
(1.1)
23.6%
6.1
4.4
1.7
(2.5)
0.8
(1.9)
(0.8)
(1.2)
—
—
(0.4)
25.1%
2.5
5.4
1.1
46.1%
The 2019 effective tax rate was favorably impacted primarily by
a greater tax benefit from the vesting of restricted stock. The 2018
effective tax rate was favorably impacted by the TCJA. The 2017
effective tax rate was unfavorably impacted due to the revaluation
of our net deferred tax assets as a result of TCJA. Refer to Note 2—
“Discontinued Operations” for further discussion of the effective tax
rate for the GS segment.
Deferred tax assets and liabilities are composed of the following
(in thousands):
December 31,
Deferred tax assets:
Accounts receivable reserves
Accrued liabilities
Deferred compensation obligation
Stock-based compensation
Operating lease liabilities
Pension and post-retirement benefit plans
Foreign tax credit
Other
Deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Fixed assets
Goodwill
ROU assets for operating leases
Other
Deferred tax liabilities
Valuation allowance
Total Deferred tax assets, net
2019
2018
$ 542 $ 738
1,274
5,545
723
—
3,471
1,630
224
13,605
1,161
4,715
739
5,497
3,745
—
160
16,559
(459)
(965)
(1,889)
(4,767)
(328)
(8,408)
(114)
(159)
(1,174)
(3,123)
—
(255)
(4,711)
(1,747)
$ 8,037 $ 7,147
At December 31, 2019, Kforce had approximately $1.0 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 2038.
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. The valuation allowance, as of December 31,
2018, includes a foreign tax credit. In 2019, management elected
to treat foreign taxes paid as a deduction on our tax return and,
accordingly, reversed the deferred tax asset and corresponding
valuation allowance during the year ended December 31, 2019.
Kforce is periodically subject to IRS audits, as well as state and
other local income tax audits for various tax years. During 2018,
the IRS commenced an audit for the tax year ended December 31,
2016. In 2019, the auditor notified the Company that a no-change
report was submitted and we are waiting for the IRS to finalize the
audit. 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.
36 KFORCE INC. AND SUBSIDIARIES
Uncertain Income Tax Positions
The following table presents a reconciliation of the beginning and ending balance of unrecognized tax benefits for the years ended
(in thousands):
December 31,
Unrecognized tax benefits, beginning
Additions for prior year tax positions
Additions for current year tax positions
Lapse of statute of limitations
Reductions for tax positions of prior years
Settlements
Unrecognized tax benefits, ending
2019
$ 906
—
—
(497)
—
(26)
$ 383
2018
$1,127
41
—
(248)
(14)
—
$ 906
2017
$1,115
50
29
(67)
—
—
$1,127
As of December 31, 2019, the amount of unrecognized tax benefit that would impact the effective tax rate, if recognized, is $0.4 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 2016.
7. OTHER ASSETS, NET
There was no impairment expense related to goodwill for each of
Other assets, net consisted of the following (in thousands):
the years ended December 31, 2019, 2018 and 2017.
December 31,
Assets held in Rabbi Trust
ROU assets for operating leases, net
Equity method investment
Capitalized software, net(1)
Deferred loan costs, net
Interest rate swap derivative instrument
Other non-current assets
Total Other assets, net
2019
2018
$35,413 $29,134
—
—
4,828
1,182
900
620
$72,838 $36,664
18,344
8,169
8,759
855
—
1,298
(1) Accumulated amortization of capitalized software was $34.2 million and $34.1
million as of December 31, 2019 and 2018, respectively.
8. GOODWILL
The following table presents the gross amount and accumulated
impairment losses for each of our reporting units as of December 31,
2019, 2018 and 2017 (in thousands):
Goodwill, gross amount
Accumulated impairment
losses
Goodwill, carrying value
Finance and
Technology Accounting
$ 156,391
Total
$ 19,766 $ 176,157
(139,357)
$ 17,034
(11,760)
(151,117)
$ 8,006 $ 25,040
Throughout 2019, 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.
Management performed its annual impairment assessment of
the carrying value of goodwill as of December 31, 2019 and 2018.
For each of our reporting units, we assessed qualitative factors
to determine whether the existence of events or circumstances
indicated that it was more likely than not that the fair value of
the reporting units was less than its carrying amount. Based on
the qualitative assessments, management determined that it
was not more likely than not that the fair values of the reporting
units were less than the carrying values at December 31, 2019 and
2018. A deterioration in any of the assumptions could result in an
impairment charge in the future.
Kforce performed a quantitative analysis for each reporting unit
and compared the carrying value for each to the respective estimated
fair values as of December 31, 2017. Discounted cash flows, which
serve as the primary basis for the income approach, were based on
a discrete financial forecast developed by management. 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 market approach consists 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
completed acquisitions that we believe are reasonably comparable
to the reporting unit to determine fair value. Kforce concluded there
were no indications of impairment for its reporting units for the year
ended December 31, 2017.
KFORCE INC. AND SUBSIDIARIES 37
9. CURRENT LIABILITIES
The following table provides information on certain current
The following table presents the maturities of operating lease
liabilities as of December 31, 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total maturities of operating lease liabilities
Less: imputed interest
Total operating lease liabilities
$ 6,338
4,999
3,304
2,925
2,012
2,595
22,173
1,861
$20,312
The following table presents the expected future contractual
operating lease obligations as of December 31, 2018 in accordance
with the previous guidance (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total future contractual operating lease obligations
$ 6,994
6,177
3,731
2,142
1,745
1,199
$21,988
12. 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 the
Board. Kforce accrued matching 401(k) contributions for continuing
operations of $1.4 million and $1.5 million as of December 31, 2019
and 2018, 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 17 thousand, 19 thousand, and 25 thousand
shares of common stock at an average purchase price of $32.79,
$28.93, and $20.65 per share during the years ended December 31,
2019, 2018 and 2017, respectively. All shares purchased under
the employee stock purchase plan were settled using Kforce’s
treasury stock.
liabilities (in thousands):
December 31,
Accounts payable
Accrued liabilities
Total Accounts payable and
other accrued liabilities
Payroll and benefits
Payroll taxes
Health insurance liabilities
Workers’ compensation liabilities
Total Accrued payroll costs
2019
$20,267
12,965
2018
$18,793
13,749
$33,232
$38,035
992
3,907
1,067
$44,001
$32,542
$34,768
920
2,680
1,016
$39,384
Our accounts payable balance includes vendor and independent
contractor payables. Our accrued liabilities balance includes the
current portion of our deferred compensation plans liability, contract
liabilities from contracts with customers (such as customer rebates),
and other accrued liabilities.
10. OTHER LONG-TERM LIABILITIES
long-term
Other
liabilities consisted of the following
(in thousands):
December 31,
Deferred compensation plan
Supplemental executive retirement plan
Operating lease liabilities
Interest rate swap derivative instrument
Other long-term liabilities
Total Other long-term liabilities
2019
$30,361
18,080
14,627
179
651
$63,898
2018
$25,672
15,035
—
—
4,161
$44,868
11. OPERATING LEASES
The following table presents weighted-average terms for
our operating leases for the year ended December 31, 2019
(in thousands):
Weighted-average discount rate
Weighted-average remaining lease term
3.8 %
4.5 years
The following table presents operating lease expense included in
SG&A for the year ended December 31, 2019 (in thousands):
Lease Cost
Operating lease expense
Variable lease costs
Short-term lease expense
Sublease income
Total operating lease expense
$6,847
1,689
792
(445)
$8,883
38 KFORCE INC. AND SUBSIDIARIES
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, 2019 and 2018, amounts related
to the deferred compensation plans included in Accounts payable
and other accrued liabilities were $3.6 million and $1.3 million,
respectively, and $30.4 million and $25.7 million was included
in Other long-term liabilities at December 31, 2019 and 2018,
respectively, in the Consolidated Balance Sheets. For the years ended
December 31, 2019, 2018 and 2017, we recognized compensation
expense for continuing operations for the plans of $0.4 million, $0.8
million and $0.6 million, respectively.
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
the Rabbi Trust. The balance of the assets held within the Rabbi
Trust, including the cash surrender value of the Company-owned
life insurance policies, was $35.4 million and $29.1 million as of
December 31, 2019 and 2018, respectively, and is recorded in Other
assets, net in the accompanying Consolidated Balance Sheets. As of
December 31, 2019, the life insurance policies had a cumulative face
value of $213.1 million.
Supplemental Executive Retirement Plan
Kforce maintains a SERP for the benefit of two executive officers.
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. Both participants are fully vested
in accordance with the plan provisions. The SERP will be funded
entirely by Kforce, and benefits are taxable to the covered executive
officer upon receipt and will be 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, 2019,
Kforce has assumed that both 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, 2019 and
2018, 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
2019
2.75%
2.90%
2018
4.00%
2.90%
The following table presents the weighted-average actuarial
assumptions used to determine net periodic benefit cost for the
years ended:
2019
December 31,
4.00%
Discount rate
Rate of future compensation increase 2.90%
2018
3.25%
2.90%
2017
4.00%
3.60%
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.
The assumed rate of future compensation increases is based on
a combination of factors, including the historical compensation
increases 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, management monitors these
assumptions on a periodic basis to ensure that they accurately reflect
current expectations of the cost of providing retirement benefits.
KFORCE INC. AND SUBSIDIARIES 39
The estimated future benefit amounts and timing of these
payments were determined using assumed retirement dates for the
participants, among other assumptions, as of December 31, 2019;
however, no specific plans or timelines have been established for or
by these participants and the assumptions are subject to change,
which could impact the future amounts and timing of payments.
13. CREDIT FACILITY
On May 25, 2017, the Firm entered into a credit agreement with
Wells Fargo Bank, National Association, as administrative agent,
Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank
of America, N.A., as syndication agent, Regions Bank and BMO Harris
Bank, N.A., as co-documentation agents, and the lenders referred to
therein. Under the Credit Facility, the Firm has a maximum borrowing
capacity of $300.0 million, which may, subject to certain conditions
and the participation of the lenders, be increased up to an aggregate
additional amount of $150.0 million, which is available to the Firm
in the form of revolving credit loans, swingline loans, and letters of
credit. Letters of credit and swingline loans under the Credit Facility
are subject to sublimits of $10.0 million. The maturity date of the
Credit Facility is May 25, 2022. Borrowings under the Credit Facility
are secured by substantially all of the tangible and intangible assets
of the Firm, excluding the Firm’s corporate headquarters and certain
other designated collateral.
Revolving credit loans under the Credit Facility bears interest
at a rate equal to: (a) the Base Rate (as described below) plus the
Applicable Margin (as described below); or (b) the LIBOR Rate plus
the Applicable Margin. Swingline loans under the Credit Facility
bears interest at a rate equal to the Base Rate plus the Applicable
Margin. The Base Rate is the highest of: (i) the Wells Fargo Bank,
National Association prime rate; (ii) the federal funds rate plus
0.50%; or (iii) one-month LIBOR plus 1.00%, and the LIBOR Rate is
reserve-adjusted LIBOR for the applicable interest period, but not
less than zero. The Applicable Margin is based on the Firm’s total
leverage ratio. The Applicable Margin for Base Rate loans ranges
from 0.25% to 0.75% and the Applicable Margin for LIBOR Rate
loans ranges from 1.25% to 1.75%. The Firm will pay a quarterly non-
refundable commitment fee equal to the Applicable Margin on the
average daily unused portion of the Commitment (swingline loans
do not constitute usage for this purpose). The Applicable Margin for
the commitment fee is based on the Firm’s total leverage ratio and
ranges between 0.20% and 0.35%.
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
2019
$261
601
$862
2018
$1,353
468
$1,821
2017
$319
537
$856
The service cost is recorded in SG&A and the interest cost is
recorded in Other expense, net in the accompanying Consolidated
Statements of Operations and Comprehensive Income.
Changes in Benefit Obligation
The following table presents the changes in the projected benefit
obligation for the years ended (in thousands):
December 31,
Projected benefit obligation, beginning
Service cost
Interest cost
Actuarial experience and changes
in actuarial assumptions
Projected benefit obligation, ending
2019
2018
$15,035 $14,409
1,353
468
261
601
2,183
(1,195)
$18,080 $15,035
There were no payments made under the SERP during the years
ended December 31, 2019 and 2018, 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, 2019 and 2018
was $18.1 million and $15.0 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, 2019. Kforce does not currently anticipate
funding the SERP during the year ending December 31, 2020.
Estimated Future Benefit Payments
Undiscounted projected benefit payments attributed to the SERP,
which reflect the anticipated future service of participants, are
expected to be paid as follows during the years ended December 31
(in thousands):
Projected Annual Benefit Payments
2020
2021
2022
2023
2024
2025-2030
$ —
14,347
—
—
—
8,944
40 KFORCE INC. AND SUBSIDIARIES
The Firm is subject to certain affirmative and negative covenants
including (but not limited to), the maintenance of a fixed charge
coverage ratio of no less than 1.25 to 1.00 and the maintenance of
a total leverage ratio of no greater than 3.25 to 1.00. 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, stock-based compensation expense
and other permitted items pursuant to our Credit Facility, less cash
paid for capital expenditures, income taxes and dividends. The
denominator is defined as Kforce’s fixed charges such as interest
expense and principal payments paid or payable on outstanding
debt other than borrowings under the Credit Facility. The total
leverage ratio is defined pursuant to the Credit Facility as total
indebtedness divided by Consolidated EBITDA. Our ability to make
distributions or repurchases of equity securities could be limited if an
event of default has occurred. Furthermore, our ability to repurchase
equity securities could be limited if: (a) the total leverage ratio is
greater than 2.75 to 1.00; and (b) the Firm’s availability, inclusive
of unrestricted cash, is less than $25.0 million. At December 31,
2019, Kforce was not limited in making distributions and executing
repurchases of our equity securities.
As of December 31, 2019 and 2018, $65.0 million and $71.8
million was outstanding on the Credit Facility, respectively. Kforce
had $3.4 million and $3.2 million of outstanding letters of credit at
December 31, 2019 and 2018, respectively, which pursuant to the
Credit Facility, reduces the availability.
14. DERIVATIVE INSTRUMENT AND HEDGING ACTIVITY
Kforce is exposed to interest rate risk as a result of our corporate
borrowing activities. The Firm uses an interest rate swap derivative
as a risk management tool to mitigate the potential impact of rising
interest rates on our variable rate debt.
On April 21, 2017, Kforce entered into a forward-starting interest
rate swap agreement with Wells Fargo Bank, N.A. The Swap was
effective on May 31, 2017 and matures on April 29, 2022. The
Swap rate is 1.81%, which is added to our interest rate margin to
determine the fixed rate that the Firm will pay to the counterparty
during the term of the Swap based on the notional amount of the
Swap. The notional amount of the Swap is $65.0 million, which will
decrease to $25.0 million at May 2020 through maturity.
The Swap has been designated as a cash flow hedge and was
effective as of December 31, 2019. The change in the fair value
of the Swap is recorded as a component of Accumulated other
comprehensive (loss) income in the consolidated financial statements.
The following table sets forth the activity in the accumulated
derivative instrument gain (loss) for the year ended December 31,
2019 (in thousands):
Accumulated derivative instrument gain,
beginning of year
Net change associated with current period
hedging transactions
Accumulated derivative instrument loss, end of year
$ 900
(1,079)
$ (179)
15. FAIR VALUE MEASUREMENTS
The Swap is measured at fair value using readily observable
inputs, such as the LIBOR interest rate, which are considered to
be Level 2 inputs. Refer to Note 14—“Derivative Instrument and
Hedging Activity” in the Notes to the Consolidated Financial
Statements, included in this report for a complete discussion of the
Firm’s derivative instrument.
Certain assets, in specific circumstances, are measured at fair
value on a non-recurring basis utilizing Level 3 inputs such as
goodwill, other long-lived assets and the equity method investment.
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.
The following table sets forth by level, within the fair value hierarchy, estimated fair values on a recurring basis at December 31, 2019 and
2018 were as follows (in thousands):
Assets/(Liabilities) Measured at Fair Value:
At December 31, 2019
Recurring basis:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Asset/
(Liability)
Interest rate swap derivative instrument
$(179)
At December 31, 2018
Recurring basis:
Interest rate swap derivative instrument
$ 900
$—
$—
Significant
Other
Observable
Inputs
(Level 2)
$(179)
$ 900
Significant
Unobservable
Inputs
(Level 3)
$—
$—
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the years ended December 31, 2019 and 2018.
KFORCE INC. AND SUBSIDIARIES 41
16. STOCK INCENTIVE PLANS
Restricted Stock
On April 23, 2019, the Kforce shareholders approved the 2019 Stock
Incentive Plan (the “2019 Plan”). The 2019 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 2019 Plan is
approximately 2.8 million shares. The 2019 Plan terminates on April 23,
2029. Prior to the effective date of the 2019 Plan, the Company
granted stock awards to eligible participants under our 2017 Stock
Incentive Plan, 2016 Stock Incentive Plan and 2013 Stock Incentive
Plan (collectively the “Prior Plans”). As of the effective date of the
2019 Plan, no additional awards may be granted pursuant to the
Prior Plans; however, awards outstanding as of the effective date will
continue to vest in accordance with the terms of the Prior Plans.
During the years ended December 31, 2019, 2018 and 2017, stock-
based compensation expense from continuing operations was $9.8
million, $8.5 million, and $7.4 million, respectively. The related tax
benefit for the years ended December 31, 2019, 2018 and 2017 was
$2.3 million, $2.1 million, and $2.9 million, respectively.
Restricted stock (including RSAs and RSUs) are granted to
executives and management either: for awards related to Kforce’s
annual long-term incentive (“LTI”) compensation program, or as part
of a compensation package in order to retain directors, executives
and management. The LTI award amounts are generally based on
total shareholder return performance goals. The LTI restricted stock
granted during the year ended December 31, 2019, will vest ratably
over a period between three to four years. Other restricted stock
granted during the year ended December 31, 2019, will vest ratably
over a period of between one to ten years.
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, 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.
The following table presents the restricted stock activity for the year ended December 31, 2019 (in thousands, except per share amounts):
Outstanding at December 31, 2018(1)
Granted
Forfeited/Canceled
Vested(2)
Outstanding at December 31, 2019
Number of
Restricted Stock
1,320
399
(53)
(486)
1,180
Weighted-Average
Grant Date
Fair Value
$24.94
$38.37
$24.68
$24.89
$29.51
Total Instrinsic
Value of Restricted
Stock Vested
$18,813
(1) The weighted-average grant date fair value at December 31, 2018, has been updated to correct an immaterial reporting error in our 2018 Annual Report on Form 10-K.
(2) The increase in shares vested during the year ended December 31, 2019, was due to the acceleration of stock-based compensation expense for KGS management triggered by a
cha nge in control of KGS.
The weighted-average grant date fair value of restricted stock granted was $38.37, $29.72 and $24.03 during the years ended
December 31, 2019, 2018 and 2017, respectively. The total intrinsic value of restricted stock vested was $18.8 million, $11.9 million and $13.7
million during the years ended December 31, 2019, 2018 and 2017, respectively.
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, 2019, total unrecognized stock-based compensation
expense related to restricted stock was $32.0 million, which will be recognized over a weighted-average remaining period of 3.5 years.
42 KFORCE INC. AND SUBSIDIARIES
17. COMMITMENTS AND CONTINGENCIES
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, 2019, these purchase commitments amounted to
approximately $10.5 million and are expected to be paid as follows:
$7.3 million in 2020; $3.0 million in 2021 and $0.2 million in 2022.
Letters of Credit
Kforce provides letters of credit to certain vendors in lieu of
cash deposits. At December 31, 2019, Kforce had letters of credit
outstanding for operating lease and insurance coverage deposits
totaling $3.4 million.
Litigation
We are involved in legal proceedings, claims and administrative
matters that arise in the ordinary course of 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.
On August 23, 2019, Kforce Inc. was served with a complaint,
as amended, brought in the U.S. District Court, Middle District of
Florida, Tampa Division. Maurcus Smith, Alvin Hodge and David
Kortright, et al. v. Kforce Inc., Case No.: 8:19-cv-02068-CEH-CPT. The
plaintiffs purport to bring claims on their own behalf and on behalf
of a putative class of consumers/applicants who were the subject
of consumer reports used for employment purposes for alleged
violations of the Fair Credit Reporting Act of 1970, as amended,
(“FCRA”), 15 U.S.C. § 1681 et seq. based upon the defendant’s
purported failure to provide stand-alone FCRA disclosures and
obtain valid authorizations. The plaintiffs seek statutory damages,
punitive damages, costs, attorney’s fees and other relief under
the FCRA. On February 10, 2020, the parties reached a preliminary
settlement of the case, which is subject to approval by the Court,
however, there can be no assurance that the Court will approve
the preliminary settlement. We believe that this matter is unlikely
to have a material adverse effect on our business, consolidated
financial position, results of operations, or cash flows.
On December 17, 2019, Kforce Inc., et al. was served with a
complaint brought in Superior Court of the State of California,
Alameda County. Kathleen Wahrer, et al. v. Kforce Inc., et al.,
Case No.: RG19047269. The former employee purports to bring a
representative action on her own behalf and on behalf of other
current and former aggrieved employees pursuant to Private
Attorneys General Act (“PAGA”) alleging violations of the California
Labor Code (“Labor Code”). The purported Labor Code violations
include failure to provide and pay proper wages for meal and rest
periods, failure to properly calculate and pay minimum and overtime
wages, failure to provide compliant wage statements, failure to
timely pay wages during employment and upon termination, and
failure to reimburse business expenses. The plaintiff seeks civil
penalties, interest, attorneys’ fees and costs under the Labor Code.
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.
Employment Agreements
Kforce has 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 ranging from 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 subject to certain post-
employment restrictive covenants. At December 31, 2019, our liability
would be approximately $39.4 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 $16.5 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.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Our quarterly operating results are affected by the number of
billing days in a particular quarter, the seasonality of our clients’
businesses and increased holiday and vacation days taken. In addition,
we typically experience an increase in costs in the first quarter of each
fiscal year as a result of certain U.S. state and federal employment
tax resets, which negatively impacts our gross profit and overall
profitability. The results of operations for any interim period may be
impacted by these factors and are not necessarily indicative of, nor
comparable to, the results of operations for a full year.
KFORCE INC. AND SUBSIDIARIES 43
The following table provides quarterly information for the years ended December 31, 2019 and 2018 (in thousands, except per share amounts):
Three Months Ended
2019
Revenue
Gross profit
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income
Earnings per share—basic, continuing operations
Earnings per share—diluted, continuing operations
Earnings per share—basic
Earnings per share—diluted
2018
Revenue
Gross profit
Income from continuing operations
Income from discontinued operations, net of tax
Net income
Earnings per share—basic, continuing operations
Earnings per share—diluted, continuing operations
Earnings per share—basic
Earnings per share—diluted
March 31
June 30
September 30
December 31
$326,738
93,176
7,974
18,881
$ 26,855
$0.33
$0.32
$1.10
$1.07
$317,441
92,509
7,957
1,218
$ 9,175
$0.32
$0.32
$0.37
$0.37
$338,861
101,026
16,076
58,783
$ 74,859
$0.67
$0.66
$3.13
$3.06
$329,535
100,220
15,173
1,099
$ 16,272
$0.61
$0.60
$0.66
$0.65
$345,558
102,811
15,907
(967)
$ 14,940
$0.70
$0.68
$0.66
$0.64
$326,584
96,045
14,156
2,021
$ 16,177
$0.57
$0.56
$0.65
$0.64
$336,230
98,025
14,609
(401)
$ 14,208
$0.68
$0.66
$0.66
$0.64
$330,377
97,713
13,590
2,766
$ 16,356
$0.55
$0.54
$0.66
$0.65
During the second quarter of 2019, in connection with the disposition of the GS segment, income from discontinued operations included a
gain on the sale of discontinued operations, net of transactions costs, of $80.0 million. There were post-closing working capital adjustments
included in the loss from discontinued operations during the third and fourth quarter of 2019 of $0.4 million and $0.3 million, respectively.
Refer to Note 2—“Discontinued Operations” for a more detailed discussion.
44 KFORCE INC. AND SUBSIDIARIES
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE 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
Andrew G. Thomas
Chief Marketing Officer
Michael R. Blackman
Chief Corporate
Development Officer
Jeffrey B. Hackman
Senior Vice President,
Finance and Accounting
CORPORATE COUNSEL
Holland & Knight LLP
Tampa, Florida
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Tampa, Florida
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
COO/CFO,
DeMert Brands, Inc.
Ralph E. Struzziero
Consultant
A. Gordon Tunstall
President and
Chief Executive Officer,
Tunstall Consulting, Inc.
TRANSFER AGENT
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
www.computershare.com/investor
Shareholder services:
1 (877) 373-6374
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 28, 2020 at
8:00 a.m. ET at Kforce Inc.
headquarters in Tampa, Florida.
WEBSITE INFORMATION
For a comprehensive profile of
Kforce Inc., visit the Firm’s website at:
www.kforce.com.
KFORCE—OVER 50 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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