Effective August 3, 2014, Kforce divested its HIM segment through a sale of all of the issued and outstanding stock of KHI. The results presented in the accompanying Consolidated Statements of Operations and Comprehensive Income for the yearsyear ended December 31, 2014 and 2013 include activity relating to HIM as a discontinued operation. Except when specifically noted, our discussions below exclude any activity related to HIM, which are addressed separately in the discussion of Income from Discontinued Operations, Net of Income Taxes.
EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are 20152016 highlights, which should be considered in the context of the additional discussions in this reportherein and in conjunction with the consolidated financial statements and notes thereto. We believe such highlights are as follows:
Net service revenues increased 8.4% toremained stable at $1.32 billion in 2015 from $1.22 billion in 2014.2016 and 2015. Net service revenues increased 6.3%decreased 1.4% for Tech and 17.7%increased 3.6% and 1.3% for FA and decreased 0.7% for GS.GS, respectively.
Flex revenues increased 8.1%0.3% in 2016 as compared to $1.27 billion2015. Flex revenues decreased 1.2% for Tech and increased 4.4% and 1.3% for FA and GS, respectively.
Direct Hire revenues decreased 6.8% to $50.4 million in 2016 from $54.1 million in 2015.
Flex gross profit margin decreased 30 basis points to 28.2% in 2016 from 28.5% in 2015. Flex gross profit margin decreased 10 basis points for Tech, 30 basis points for FA and 170 basis points for GS. These margin decreases were primarily a result of higher benefit costs in each of our segments, lower margins on some of GS recompete wins and spread compression in Tech Flex due to an increase in revenue concentration within our large client portfolio where certain of these clients have, in many cases, narrowed the number of vendor partners that they are looking to do business with and are leveraging volume-based rebates in exchange for this increased concentration of business.
SG&A expenses as a percentage of revenues for the year ended December 31, 2016 increased to 25.9% from 25.0% in 2015. The 90 basis point increase was primarily driven by approximately $6.0 million, or 50 basis points, in severance costs that were recorded during 2016 associated with realignment activities focused on further streamlining our organization and $2.2 million, or 20 basis points, in costs associated with our sales transformation activities. In addition, we have made targeted investments in information technology as well as our revenue-generating talent during 2016, which has negatively impacted SG&A as a percentage of revenue.
Net income for the year ended December 31, 2016 decreased 23.5% to $32.8 million from $42.8 million in 2015 primarily driven by the aforementioned $6.0 million in severance costs ($3.5 million after-tax), $2.2 million in costs associated with the investment in refining our sales methodology, messaging and process ($1.2 million after-tax), and reduction in our gross profit of $5.6 million ($3.3 million after-tax) as well as certain tax adjustments of $1.7 million during 2016.
Diluted earnings per share for the year ended December 31, 2016 decreased to $1.25 from $1.52 per share in 2015 primarily driven by the aforementioned factors noted in the net income description above.
During 2016, Kforce repurchased 2.3 million shares of common stock on the open market at a total cost of approximately $44.0 million.
The Firm declared and paid dividends totaling $0.48 per share during the year ended December 31, 2016, resulting in a total cash payout of $12.4 million.
The total amount outstanding under the credit facility increased $31.0 million to $111.5 million as of December 31, 2016 as compared to $80.5 million as of December 31, 2015. This increase was primarily driven by the return of capital to our shareholders in the form of dividends and common stock repurchases, which aggregated $56.4 million, but was also impacted by lower than anticipated operating cash flows in the fourth quarter as a result of the transition of certain back office processes from Manila to Tampa.
RESULTS OF OPERATIONS
Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional U.S. workers and, conversely, an economic slowdown results in a contraction in demand for additional U.S. workers. From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continued to be positive during 2016, based on data published by the Bureau of Labor Statistics (“BLS”) and SIA. The penetration rate (the percentage of temporary staffing to total employment) in December 2016 was at 2.04%, a slight decline from the December 2015 high of 2.06%. While the health of the macro-employment picture was uncertain at times during 2016, it generally continuously improved, with the unemployment rate at 4.7% as of December 2016, and non-farm payroll expanding an average of approximately 180,000 jobs per month in 2016. Also, the college-level unemployment rate, which we believe serves as a proxy for professional employment and therefore aligns with the candidate and consultant population that Kforce serves, was at 2.5% in December 2016. Further, we believe that the unemployment rate in the specialties we serve, especially in certain technology skill sets, is lower than the published averages, which we believe speaks to the demand environment in which we are operating. Management believes that the tepid growth in the overall U.S. economy seen through much of 2016, the recent change in administration, and the increasing costs and government regulation of employment may be driving a secular shift to an increased use of temporary staff as a percentage of total workforce as employers may be reluctant to increase permanent hiring. If the penetration rate of temporary staffing experiences growth in the coming months and years, we believe our Flex revenues may grow even in a relatively modest growth macro-economic environment. Kforce remains optimistic about the growth prospects of the temporary staffing industry, the penetration rate, and in particular, our revenue portfolio; however, the economic environment includes considerable uncertainty and volatility and therefore no reliable predictions can be made about the general economy, the staffing industry as a whole, or specialty staffing in particular.
We continued to evolve and make progress on our strategic initiatives including: (1) enhancing our sales methodology and training of our sales associates to engage in more strategic conversations and shape solutions with our clients; (2) balancing investment in our revenue-generating talent appropriately across our service offerings and allocating the talent toward markets, products, industries and clients that we believe present Kforce with the greatest opportunity for profitable revenue growth; (3) consolidating our sales and delivery organization and certain revenue-enabling support functions in an effort to allow us to more effectively compete for business, particularly with our largest customers; and (4) upgrading existing technology systems and implementing new technologies that allow us to more effectively and efficiently serve our clients, candidates and consultants and improve the productivity and scalability of our organization.
We believe that the proper alignment and balance of our combined revenue-generating talent and revenue-enabling talent are keys to our future growth and profitability. We also believe that our portfolio of service offerings, which are almost exclusively in the U.S. and are focused in Tech and FA (which we anticipate to be areas of expected growth), are a key contributor to our long-term financial stability.
Net Service Revenues. The following table presents, as a percentage of net service revenues, certain items in our Consolidated Statements of Operations and Comprehensive Income for the years ended:
|
| | | | | | | | |
| December 31, |
| 2016 | | 2015 | | 2014 |
Revenues by Segment: | | | | | |
Tech | 66.9 | % | | 67.9 | % | | 69.2 | % |
FA | 25.6 |
| | 24.7 |
| | 22.7 |
|
GS | 7.5 |
| | 7.4 |
| | 8.1 |
|
Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
Revenues by Type: | | | | | |
Flex | 96.2 | % | | 95.9 | % | | 96.2 | % |
Direct Hire | 3.8 |
| | 4.1 |
| | 3.8 |
|
Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | 31.0 | % | | 31.4 | % | | 30.8 | % |
Selling, general and administrative expenses | 25.9 | % | | 25.0 | % | | 25.9 | % |
Depreciation and amortization | 0.7 | % | | 0.7 | % | | 0.8 | % |
Income from continuing operations, before income taxes | 4.2 | % | | 5.4 | % | | 3.9 | % |
Income from continuing operations | 2.5 | % | | 3.2 | % | | 2.4 | % |
Net income | 2.5 | % | | 3.2 | % | | 7.5 | % |
The following table presents net service revenues for Flex and Direct Hire by segment and percentage change from the prior period for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | | | | | | | | | |
Flex | $ | 863,434 |
| | (1.2 | )% | | $ | 873,609 |
| | 6.1 | % | | $ | 823,311 |
|
Direct Hire | 20,043 |
| | (10.3 | )% | | 22,333 |
| | 16.6 | % | | 19,158 |
|
Total Tech | $ | 883,477 |
| | (1.4 | )% | | $ | 895,942 |
| | 6.3 | % | | $ | 842,469 |
|
FA | | | | | | | | | |
Flex | $ | 307,245 |
| | 4.4 | % | | $ | 294,186 |
| | 18.0 | % | | $ | 249,274 |
|
Direct Hire | 30,356 |
| | (4.4 | )% | | 31,738 |
| | 15.3 | % | | 27,537 |
|
Total FA | $ | 337,601 |
| | 3.6 | % | | $ | 325,924 |
| | 17.7 | % | | $ | 276,811 |
|
GS | | | | | | | | | |
Flex | $ | 98,628 |
| | 1.3 | % | | $ | 97,372 |
| | (0.7 | )% | | $ | 98,051 |
|
Total GS | $ | 98,628 |
| | 1.3 | % | | $ | 97,372 |
| | (0.7 | )% | | $ | 98,051 |
|
Total Flex | $ | 1,269,307 |
| | 0.3 | % | | $ | 1,265,167 |
| | 8.1 | % | | $ | 1,170,636 |
|
Total Direct Hire | 50,399 |
| | (6.8 | )% | | 54,071 |
| | 15.8 | % | | 46,695 |
|
Total Net Service Revenues | $ | 1,319,706 |
| | 0.0 | % | | $ | 1,319,238 |
| | 8.4 | % | | $ | 1,217,331 |
|
Certain quarterly revenue trends are referred to in discussing annual comparisons. Our quarterly operating results are affected by the number of billing days in a quarter, which is provided in the table below. The following 2016 quarterly information is presented for informational purposes only (in thousands, except Billing Days).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31 | | September 30 | | June 30 | | March 31 |
| Revenues | | Year-Over-Year Growth Rates Per Billing Day | | Revenues | | Year-Over-Year Growth Rates Per Billing Day | | Revenues | | Year-Over-Year Growth Rates Per Billing Day | | Revenues | | Year-Over-Year Growth Rates Per Billing Day |
Billing Days | | | 61 |
| | | | 64 |
| | | | 64 |
| | | | 64 |
|
Flex | | | | | | | | | | | | | | | |
Tech | $ | 212,437 |
| | 1.4 | % | | $ | 220,376 |
| | (2.7 | )% | | $ | 219,412 |
| | (2.9 | )% | | $ | 211,209 |
| | (0.3 | )% |
FA | 78,880 |
| | 2.1 | % | | 76,290 |
| | (0.5 | )% | | 76,769 |
| | 5.5 | % | | 75,306 |
| | 12.0 | % |
GS | 23,397 |
| | 4.0 | % | | 26,818 |
| | 10.1 | % | | 25,292 |
| | 4.2 | % | | 23,121 |
| | (12.1 | )% |
Total Flex | $ | 314,714 |
| | 1.8 | % | | $ | 323,484 |
| | (1.2 | )% | | $ | 321,473 |
| | (0.4 | )% | | $ | 309,636 |
| | 1.4 | % |
Direct Hire | | | | | | | | | | | | | | | |
Tech | $ | 4,370 |
| | (13.1 | )% | | $ | 5,148 |
| | (10.2 | )% | | $ | 5,146 |
| | (18.2 | )% | | $ | 5,379 |
| | 1.8 | % |
FA | 6,914 |
| | (15.4 | )% | | 7,828 |
| | (6.9 | )% | | 8,428 |
| | 3.4 | % | | 7,186 |
| | 2.8 | % |
Total Direct Hire | $ | 11,284 |
| | (14.5 | )% | | $ | 12,976 |
| | (8.2 | )% | | $ | 13,574 |
| | (6.0 | )% | | $ | 12,565 |
| | 2.4 | % |
Total | | | | | | | | | | | | | | | |
Tech | $ | 216,807 |
| | 1.1 | % | | $ | 225,524 |
| | (2.8 | )% | | $ | 224,558 |
| | (3.3 | )% | | $ | 216,588 |
| | (0.2 | )% |
FA | 85,794 |
| | 0.4 | % | | 84,118 |
| | (1.2 | )% | | 85,197 |
| | 5.3 | % | | 82,492 |
| | 11.1 | % |
GS | 23,397 |
| | 4.0 | % | | 26,818 |
| | 10.1 | % | | 25,292 |
| | 4.2 | % | | 23,121 |
| | (12.1 | )% |
Total | $ | 325,998 |
| | 1.1 | % | | $ | 336,460 |
| | (1.5 | )% | | $ | 335,047 |
| | (0.7 | )% | | $ | 322,201 |
| | 1.5 | % |
Flex Revenues. The primary drivers of Flex revenues are the number of consultant hours worked, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.
Flex revenues for our largest segment, Tech, decreased 1.2% during the year ended December 31, 2016 as compared to 2015 and increased 6.1% in 2015 from $1.17 billion2014. Our year-over-year decrease in 2014.2016 was due to a decline experienced in connection with several large clients after certain significant organizational changes occurred within a number of these clients in mid-2015 causing them to decrease their spending with the Firm (we had experienced revenue growth with these large clients in the first half of 2015). Despite this overall decrease, we experienced a reacceleration of year-over-year growth beginning in Q4 2016 within our overall Tech Flex business on a billing day basis as well as our Top 25 client portfolio, which suggests that the impact related to the shift in spend with certain large clients was temporary in nature. We believe that broad-based drivers to the demand in technology staffing such as cloud-computing, data analytics, mobility, e-commerce, machine learning and cybersecurity will continue as companies are becoming increasingly dependent upon technology investments to support business strategies and sustain relevancy in today’s rapidly changing marketplace. We believe we are well positioned in this space. We expect Tech Flex revenues to grow year-over-year in 2017 due to the market strength, the opportunities we see with our clients and the investments in revenue-generating resources that we intend to allocate to growing priority client accounts.
Our FA segment experienced an increase in Flex revenues of 4.4% during the year ended December 31, 2016 as compared to 2015 and increased 18.0% in 2015 from 2014. Due to the high year-over-year growth rate in FA Flex during 2015 we expected our 2016 year-over-year growth rate to slow against this challenging comparison. We have continued to diversify our FA service offerings outside of what may be viewed as more traditional finance and accounting roles. The opportunities we have seen include larger volume projects in centralized functions such as benefits and other service and administrative functions. The Firm believes the FA segment will continue to achieve year-over-year growth in 2017.
Our GS segment experienced an increase in net service revenues of 1.3% during the year ended December 31, 2016 as compared to 2015 and decreased 0.7% in 2015 from 2014. The 2016 year-over-year growth was driven by growth in service revenues as well as strength in our product-based business. While the business continues to operate in a challenging and evolving procurement and contracting environment, the Firm believes the GS segment will grow in 2017 primarily as a result of the anticipated subcontractor and, to a lesser extent, prime contractor opportunities under the T4 Next Generation prime contract, which was awarded to GS in March 2016.
The following table presents the key drivers for the change in Flex revenues for our Tech and FA segments over the prior period for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | |
| 2016 | | 2015 |
| Tech | | FA | | Tech | | FA |
Volume | $ | (10,115 | ) | | $ | 15,198 |
| | $ | 58,491 |
| | $ | 42,628 |
|
Bill rate | 896 |
| | (2,055 | ) | | (7,684 | ) | | 2,311 |
|
Billable expenses | (956 | ) | | (84 | ) | | (509 | ) | | (27 | ) |
Total | $ | (10,175 | ) | | $ | 13,059 |
| | $ | 50,298 |
| | $ | 44,912 |
|
The following table presents total Flex hours for our Tech and FA segments and percentage change over the prior period for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | 12,735 |
| | (1.2 | )% | | 12,885 |
| | 7.2 | % | | 12,024 |
|
FA | 9,474 |
| | 5.2 | % | | 9,008 |
| | 17.1 | % | | 7,691 |
|
Total hours | 22,209 |
| | 1.4 | % | | 21,893 |
| | 11.0 | % | | 19,715 |
|
As the GS segment primarily provides integrated business solutions as compared to staffing services, Flex hours are not presented above.
Direct Hire Revenues. The primary drivers of Direct Hire revenues are the number of placements and the fee for these placements. Direct Hire revenues also include conversion revenues. Our GS segment does not make permanent placements.
Direct Hire revenues decreased 6.8% during the year ended December 31, 2016 as compared to 2015. Direct Hire revenues increased 15.8% during the year ended December 31, 2015 as compared to $54.1 million2014.
The following table presents the key drivers for the change in Direct Hire revenues over the prior period for the years ended December 31 (in thousands):
|
| | | | | | | |
| 2016 | | 2015 |
Volume | $ | (2,476 | ) | | $ | 6,109 |
|
Placement fee | (1,196 | ) | | 1,267 |
|
Total | $ | (3,672 | ) | | $ | 7,376 |
|
The following table presents total placements for our Tech and FA segments and percentage change over the prior period for the years ended December 31:
|
| | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | 1,191 |
| | (14.6 | )% | | 1,395 |
| | 16.9 | % | | 1,193 |
|
FA | 2,531 |
| | 1.0 | % | | 2,505 |
| | 11.0 | % | | 2,256 |
|
Total placements | 3,722 |
| | (4.6 | )% | | 3,900 |
| | 13.1 | % | | 3,449 |
|
The following table presents the average fee per placement for our Tech and FA segments and percentage change over the prior period for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | $ | 16,836 |
| | 5.1 | % | | $ | 16,014 |
| | (0.3 | )% | | $ | 16,062 |
|
FA | 11,994 |
| | (5.3 | )% | | 12,668 |
| | 3.8 | % | | 12,205 |
|
Total average placement fee | $ | 13,543 |
| | (2.3 | )% | | $ | 13,864 |
| | 2.4 | % | | $ | 13,539 |
|
Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily consultant payroll wages, payroll taxes, payroll-related insurance and certain fringe benefits, as well as subcontractor costs) from net Flex service revenues. In addition, there are no consultant payroll costs associated with Direct Hire placements, thus, all Direct Hire revenues increase gross profit by the full amount of the fee.
The following table presents the gross profit percentage (gross profit as a percentage of revenues) for each segment and percentage change over the prior period for the years ended December 31:
|
| | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | 29.0 | % | | (0.7 | )% | | 29.2 | % | | 1.0 | % | | 28.9 | % |
FA | 35.7 | % | | (2.2 | )% | | 36.5 | % | | — | % | | 36.5 | % |
GS | 32.6 | % | | (5.0 | )% | | 34.3 | % | | 10.6 | % | | 31.0 | % |
Total gross profit percentage | 31.0 | % | | (1.3 | )% | | 31.4 | % | | 1.9 | % | | 30.8 | % |
The change in gross profit percentage for 2016 as compared to 2015 and 2015 as compared to 2014, is primarily the result of fluctuations in the concentration of Direct Hire revenues, which has no associated direct costs, as well as changes in our Flex gross profit.
Kforce also monitors the Flex gross profit percentage (Flex gross profit as a percentage of Flex revenues). This provides management with helpful insight into the other drivers of total gross profit percentage such as changes in volume evidenced by changes in hours billed for Flex and changes in the spread between the bill rate and pay rate for Flex. As noted above, our GS segment does not make permanent placements; as a result, its Flex gross profit percentage is the same as its gross profit percentage.
The following table presents the Flex gross profit percentage for each segment and percentage change over the prior period for the years ended December 31:
|
| | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Tech | 27.3 | % | | (0.4 | )% | | 27.4 | % | | 0.7 | % | | 27.2 | % |
FA | 29.4 | % | | (1.0 | )% | | 29.7 | % | | 0.7 | % | | 29.5 | % |
GS | 32.6 | % | | (5.0 | )% | | 34.3 | % | | 10.6 | % | | 31.0 | % |
Total Flex gross profit percentage | 28.2 | % | | (1.1 | )% | | 28.5 | % | | 1.8 | % | | 28.0 | % |
The decrease in Flex gross profit percentage of 30 basis points in 2016 from 2015 was due primarily to an increase in benefit costs in each of our segments. Additionally, our GS segment realized lower margins on some of its recompete wins and a lower mix of higher margin business. Furthermore, during 2016 we experienced an increase in the revenue concentration within our large client portfolio in Tech Flex, which resulted in a reduction in the Flex gross profit percentage, and spread compression within certain of these clients that have, in many cases, narrowed the number of vendor partners that they are looking to do business with and are leveraging volume-based rebates in exchange for this increased concentration of business. A continued focus for Kforce is optimizing the spread between bill rates and pay rates by providing our associates with tools, economic knowledge and defined programs to drive improvement in the effectiveness of our pricing strategy around the staffing services we provide and the clients that we serve.
The increase in Flex gross profit percentage of 50 basis points in 2015 from $46.7 million in 2014.
Flex gross profit margin increased 50 basis points2014 was due primarily to 28.5% in 2015 from 28.0% in 2014 principally as a result of an expansionincrease in the spread between our bill rates and pay rates in the FA segment, improved profitability from our GS segment primarily as a result of growth in its product business which carries a higher margin profile, and a more favorable payroll tax environment.environment as compared to 2014.
The following table presents the key drivers for the change in Flex gross profit margin increased 20 basis pointsover the prior period for Tech, 20 basis points for FAthe years ended December 31 (in thousands):
|
| | | | | | | |
| 2016 | | 2015 |
Volume | $ | 1,178 |
| | $ | 26,477 |
|
Rate | (3,121 | ) | | 5,680 |
|
Total | $ | (1,943 | ) | | $ | 32,157 |
|
SG&A Expenses. For the years ended December 31, 2016, 2015 and 330 basis points for GS year-over-year.
Selling, general2014, total commissions, compensation, payroll taxes, and administrative ("SG&A") expensesbenefit costs as a percentage of SG&A represented 84.0%, 84.2%, and 84.8%, respectively. Commissions, certain revenue-generating bonuses and related payroll taxes and benefit costs are variable costs driven primarily by revenue and gross profit levels, and associate performance. Therefore, as gross profit levels change, these expenses would also generally be anticipated to change, but remain relatively consistent as a percentage of revenues.
The following table presents these components of SG&A along with an “other” caption, which includes bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses, as an absolute amount and as a percentage of total net service revenues for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| 2016 | | % of Revenues | | 2015 | | % of Revenues | | 2014 | | % of Revenues |
Compensation, commissions, payroll taxes and benefits costs | $ | 286,715 |
| | 21.8 | % | | $ | 278,207 |
| | 21.1 | % | | $ | 267,471 |
| | 22.0 | % |
Other | 54,481 |
| | 4.1 | % | | 52,209 |
| | 3.9 | % | | 47,867 |
| | 3.9 | % |
Total SG&A | $ | 341,196 |
| | 25.9 | % | | $ | 330,416 |
| | 25.0 | % | | $ | 315,338 |
| | 25.9 | % |
SG&A as a percentage of net service revenues increased 90 basis points in 2016 compared to 2015. This increase was was primarily driven by approximately $6.0 million, or 50 basis points, in severance costs that were recorded during 2016 associated with realignment activities focused on further streamlining our organization and $2.2 million, or 20 basis points, in costs associated with our sales transformation activities. In addition, we have made targeted investments in information technology as well as our revenue-generating talent during 2016, which has negatively impacted SG&A as a percentage of revenue.
SG&A as a percentage of net service revenues decreased 90 basis points in 2015 compared to 2014. This was primarily a result of a reduction in salaries and wages, benefits costs and a decrease in commissions, driven by changes made to our compensation plans to drive improvement in associate productivity.
Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2016 | | Increase (Decrease) | | 2015 | | Increase (Decrease) | | 2014 |
Fixed asset depreciation (1) | $ | 6,660 |
| | (1.2 | )% | | $ | 6,738 |
| | 6.2 | % | | $ | 6,345 |
|
Capitalized software amortization | 1,448 |
| | (37.5 | )% | | 2,318 |
| | (20.2 | )% | | 2,904 |
|
Intangible asset amortization | 593 |
| | (23.5 | )% | | 775 |
| | 20.2 | % | | 645 |
|
Total depreciation and amortization | $ | 8,701 |
| | (11.5 | )% | | $ | 9,831 |
| | (0.6 | )% | | $ | 9,894 |
|
| |
(1) | Fixed asset depreciation includes amortization of capital leases. |
Other Expense, Net. Other expense, net was $2.6 million in 2016, $2.2 million in 2015, and $1.4 million in 2014, and consists primarily of interest expense related to outstanding borrowings under our credit facility.
Income Tax Expense. Income tax expense as a percentage of income before income taxes (our “effective rate”) for the year ended December 31, 20152016 was 25.0% compared to 25.9% in 2014 reflecting the leverage provided41.4%. Kforce’s effective rate during 2016 was negatively impacted by our revenue growth, lower relative compensation costs and, we believe, continued spending discipline.
Income from continuing operations of $42.8 million in 2015 increased $13.4 million compared with income from continuing operations of $29.4 million in 2014.
Net income of $42.8 million forcertain one-time non-cash adjustments. For the year ended December 31, 2015, decreased $48.1 millionour effective rate was 40.3%. The 2015 effective rate was unfavorably impacted by a change in the overall mix of income in the various state jurisdictions and the increase in particular uncertain tax positions. For the year ended December 31, 2014, income tax expense as a percentage of income from netcontinuing operations before income taxes was 38.7%.
Income from Discontinued Operations, Net of $90.9 millionIncome Taxes. Discontinued operations for the year ended December 31, 2014 due primarily toinclude the gain onconsolidated income and expenses for HIM. During the three months ended September 30, 2014, Kforce completed the sale of HIM resulting in 2014.
Diluted earnings per sharea pre-tax gain of $94.3 million. Included in the determination of the pre-tax gain is approximately $4.9 million of goodwill for HIM and transaction expenses totaling approximately $11.0 million, which primarily included legal fees, stock-based compensation related to acceleration of restricted stock due to change in control provisions, commissions and transaction bonuses. Income tax expense as a percentage of income from continuingdiscontinued operations, before income taxes, for the year ended December 31, 2015 increased2014 was 40.6%.
Non-GAAP Measures
Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, which is defined by Kforce as net income before income from discontinued operations, net of income taxes, depreciation and amortization, stock-based compensation expense, interest expense, net and income tax expense, and is based on the definition in our credit facility and is a key metric in our covenant calculations, as described in Note 8 - “Credit Facility” in the Notes to $1.52,Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations and management believes it provides a good metric of our core profitability in comparing our performance to our competitors. Consequently, management believes it is useful information to investors. The measure should not be considered in isolation or 63.4%, from $0.93 per shareas an alternative to net income, cash flows or other financial statement information presented in 2014.the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is thus susceptible to varying calculations. Also, Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
During 2015, Kforce repurchased 1.5 millionIn addition, although we excluded amortization of stock-based compensation expense (which we expect to continue to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholder ownership interest. We suggest that you evaluate these items and the potential risks of excluding such items when analyzing our financial position.
The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Net income | $ | 32,773 |
| | $ | 42,824 |
| | $ | 90,915 |
|
Income from discontinued operations, net of income taxes | — |
| | — |
| | 61,517 |
|
Income from continuing operations | $ | 32,773 |
| | $ | 42,824 |
| | $ | 29,398 |
|
Depreciation and amortization | 8,796 |
| | 9,831 |
| | 9,894 |
|
Stock-based compensation expense | 6,705 |
| | 5,819 |
| | 2,969 |
|
Interest expense, net | 2,596 |
| | 1,960 |
| | 1,396 |
|
Income tax expense | 23,182 |
| | 28,848 |
| | 18,559 |
|
Adjusted EBITDA | $ | 74,052 |
| | $ | 89,282 |
| | $ | 62,216 |
|
Free Cash Flow. “Free Cash Flow”, a non-GAAP financial measure, is defined by Kforce as net cash provided by (used in) operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic opportunities including investing in our business, making acquisitions, repurchasing common stock or paying dividends. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. Therefore, we believe it is important to view free cash flow as a complement to our Consolidated Statements of Cash Flows.
The following table presents Free Cash Flow (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Net income | | $ | 32,773 |
| | $ | 42,824 |
| | $ | 90,915 |
|
Gain on sale of discontinued operations | | — |
| | — |
| | (64,600 | ) |
Non-cash provisions and other | | 20,717 |
| | 21,602 |
| | 15,376 |
|
Changes in operating assets/liabilities | | (14,043 | ) | | 5,754 |
| | (67,273 | ) |
Net cash provided by (used in) operating activities | | 39,447 |
| | 70,180 |
| | (25,582 | ) |
Capital expenditures | | (12,420 | ) | | (8,328 | ) | | (6,010 | ) |
Free cash flow | | 27,027 |
| | 61,852 |
| | (31,592 | ) |
Proceeds from disposition of business | | — |
| | — |
| | 117,887 |
|
Change in debt | | 31,075 |
| | (12,861 | ) | | 30,726 |
|
Repurchases of common stock | | (46,013 | ) | | (38,471 | ) | | (101,771 | ) |
Cash dividend | | (12,447 | ) | | (12,545 | ) | | (12,776 | ) |
Other | | 343 |
| | 2,284 |
| | (2,111 | ) |
Change in cash | | $ | (15 | ) | | $ | 259 |
| | $ | 363 |
|
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our existing credit facility. At December 31, 2016, Kforce had $140.2 million in working capital compared to $126.8 million at December 31, 2015.
The accompanying Consolidated Statements of Cash Flows for each of the years ended December 31, 2016, 2015 and 2014 in Item 8. Financial Statements and Supplementary Data provide a more detailed description of our cash flows. Currently, Kforce is principally focused on achieving the appropriate balance in the following areas of cash flow: (1) achieving positive cash flow from operating activities; (2) returning capital to our shareholders through our quarterly dividends and common stock repurchase program; (3) maintaining an appropriate outstanding balance on our credit facility; (4) investing in our infrastructure to allow sustainable growth via capital expenditures; and (5) having sufficient liquidity for the possibility of completing an acquisition or for an unexpected necessary expense.
We believe that existing cash and cash equivalents, cash flow from operations, and available borrowings under our credit facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months. However, a material deterioration in the economic environment or market conditions, among other things, could negatively impact operating results and liquidity, as well as the ability of our lenders to fund borrowings.
Actual results could also differ materially from those indicated as a result of a number of factors, including the use of currently available resources for possible acquisitions and possible additional stock repurchases.
The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Cash provided by (used in): | | | | | |
Operating activities | $ | 39,447 |
| | $ | 70,180 |
| | $ | (25,582 | ) |
Investing activities | (12,420 | ) | | (8,364 | ) | | 110,535 |
|
Financing activities | (27,042 | ) | | (61,557 | ) | | (84,590 | ) |
Net (decrease) increase in cash and cash equivalents | $ | (15 | ) | | $ | 259 |
| | $ | 363 |
|
Discontinued Operations
As was previously discussed, Kforce divested of HIM during 2014. The accompanying Consolidated Statements of Cash Flows have been presented on a combined basis (continuing operations and discontinued operations) for the year ended December 31, 2014. Cash flows provided by discontinued operations for all prior periods were provided by operating activities and were not material to the capital resources of Kforce. In addition, the absence of cash flows from discontinued operations is not expected to have a significant effect on the open market atfuture liquidity, financial position, or capital resources of Kforce.
Operating Activities
Our largest source of operating cash flows is the collection of trade receivables and our largest use of operating cash flows is the payment of our employee and consultant populations’ compensation, which includes base salary, commissions and bonuses. When comparing cash flows from operating activities, the decrease in cash provided by operating activities during the year ended December 31, 2016 as compared to 2015 is primarily a total costresult of approximately $36.7 million.
lower earnings due to large cash usages related to severance costs associated with realignment activities focused on further streamlining our organization, costs associated with the investment in refining our sales methodology, and investments in information technology and our revenue-generating talent, as well as transitioning certain back office functions from our Manila location to our Tampa headquarters in the fourth quarter, which impacted the timing in collections of accounts receivable. The Firm declared and paid dividends totaling $0.45 per shareincrease in cash provided by operating activities during the year ended December 31, 2015 resultingas compared to 2014 is primarily a result of improved timing of collections of accounts receivable as well as growth in our profitability.
Investing Activities
Capital expenditures for the years ended December 31, 2016, 2015 and 2014, which exclude equipment acquired under capital leases, were $12.4 million, $8.3 million and $6.0 million, respectively. Proceeds from the divestiture of HIM were $117.9 million during the year ended December 31, 2014.
We expect to continue selectively investing in our infrastructure in order to support the expected future growth in our business. We believe that we have sufficient cash and availability under the credit facility to make any expected necessary capital expenditures in the foreseeable future. In addition, we continually review our portfolio of businesses and their operations in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses and further invest in, fully divest and/or sell parts of our current businesses.
Financing Activities
The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| 2016 (1) | | 2015 (2) | | 2014 |
Open market repurchases | $ | 44,109 |
| | $ | 37,125 |
| | $ | 100,196 |
|
Repurchase of shares related to tax withholding requirements for vesting of restricted stock | 1,904 |
| | 1,346 |
| | 1,575 |
|
| $ | 46,013 |
| | $ | 38,471 |
| | $ | 101,771 |
|
| |
(1) | Of the open market common stock repurchases, $1.0 million of the cash paid during the year ended December 31, 2016 related to the settlement of 2015 repurchases. |
| |
(2) | Of the open market common stock repurchases, $1.4 million of the cash paid during the year ended December 31, 2015 related to the settlement of 2014 repurchases. |
During the years ended December 31, 2016, 2015 and 2014, Kforce declared and paid dividends of $12.4 million, or $0.48 per share, $12.5 million, or $0.45 per share, and $12.8 million, or $0.41 per share, respectively. The declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board each quarter following its review of, among other things, the Firm’s financial performance and its legal ability to pay dividends.
Credit Facility
See Note 8 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of our credit facility. Our credit facility includes a maximum borrowing capacity of $170.0 million, as well as an aggregated cash payoutaccordion option of $12.5$50.0 million. The dividendmaximum borrowings available to Kforce under the credit facility, absent Kforce exercising all or a portion of the accordion, are limited to: (a) a revolving credit facility of up to $170.0 million and (b) a $15.0 million sub-limit included in the fourth quarter increased to $0.12 per share.
The total amountcredit facility for letters of credit. As of December 31, 2016 and 2015, $111.5 million and $80.5 million was outstanding under the credit facility, decreased $12.8respectively. As of February 22, 2017, $117.2 million was outstanding and $35.7 million was available under the credit facility.
Under the credit facility, Kforce is subject to $80.5certain affirmative and negative covenants including, but not limited to, a fixed charge coverage ratio, which is only applicable in the event that the Firm’s availability under the credit facility falls below the greater of (a) 10% of the aggregate amount of the commitment of all of the lenders under the credit facility and (b) $11 million. The numerator in the fixed charge coverage ratio is defined pursuant to the credit facility as earnings before interest expense, income taxes, depreciation and amortization, including the amortization of stock-based compensation expense (disclosed as “Adjusted EBITDA”), less cash paid for capital expenditures. The denominator is defined as Kforce’s fixed charges such as interest expense, principal payments paid or payable on outstanding debt other than borrowings under the credit facility, income taxes payable, and certain other payments. This financial covenant, if applicable, requires that the numerator be equal to or greater than the denominator.
Our ability to repurchase equity securities could be limited if the Firm’s availability is less than the greater of (a) 15.0% of the aggregate amount of the commitment of all lenders under the credit facility or (b) $15.0 million. Also, our ability to make distributions could be limited if the Firm’s availability is less than the greater of (a) 12.5% of the aggregate amount of the commitment of all lenders under the credit facility and (b) $20.6 million. Since Kforce had availability under the credit facility of $41.4 million as of December 31, 2016, the fixed charge coverage ratio covenant was not applicable nor was Kforce limited in making distributions or executing repurchases of its equity securities. Kforce believes that it will be able to maintain these minimum availability requirements; however, in the event that Kforce is unable to do so, Kforce could fail the fixed charge coverage ratio, which would constitute an event of default, or we could be limited in our ability to make distributions or repurchase equity securities.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2016, Kforce had letters of credit outstanding for workers’ compensation and other insurance coverage totaling $3.1 million, and for facility lease deposits totaling $0.4 million. Aside from certain obligations more fully described in the Contractual Obligations and Commitments section below, we do not have any additional off-balance sheet arrangements that have had, or are expected to have, a material effect on our consolidated financial statements.
Stock Repurchases
The following table presents the open market repurchase activity under the Board-authorized common stock repurchase program for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| 2016 (1) | | 2015 (2) |
| Shares | $ | | Shares | $ |
Open market repurchases | 2,291 |
| $ | 44,032 |
| | 1,487 |
| $ | 36,712 |
|
| |
(1) | On July 29, 2016, our Board approved an increase in our stock repurchase authorization bringing the then available authorization to $75.0 million. |
| |
(2) | On July 31, 2015, our Board approved a $60.0 million increase to the then remaining authorized amount under the Board-authorized common stock repurchase program. |
As of December 31, 2016 and 2015, as compared to $93.3$50.7 million and $53.0 million, respectively, remained available for further repurchases under the Board-authorized common stock repurchase program.
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2014 resulting primarily from strong operating cash flows of $70.22016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1-3 Years | | 3-5 Years | | More than 5 years |
Credit facility (1) | | $ | 111,547 |
| | $ | — |
| | $ | 111,547 |
| | $ | — |
| | $ | — |
|
Interest payable – credit facility (2) | | 8,031 |
| | 2,677 |
| | 5,354 |
| | — |
| | — |
|
Operating lease obligations | | 22,469 |
| | 8,699 |
| | 10,990 |
| | 2,737 |
| | 43 |
|
Capital lease obligations | | 2,147 |
| | 1,110 |
| | 1,034 |
| | 3 |
| | — |
|
Purchase obligations (3) | | 14,558 |
| | 7,436 |
| | 6,742 |
| | 380 |
| | — |
|
Notes payable (4) | | 4,000 |
| | 923 |
| | 1,893 |
| | 1,184 |
| | — |
|
Interest payable - notes payable (4) | | 234 |
| | 97 |
| | 116 |
| | 21 |
| | — |
|
Liability for unrecognized tax positions (5) | | — |
| | — |
| | — |
| | — |
| | — |
|
Deferred compensation plans liability (6) | | 30,252 |
| | 2,715 |
| | 3,275 |
| | 1,424 |
| | 22,838 |
|
Defined benefit pension plans (7) | | 18,403 |
| | 1,089 |
| | — |
| | 12,450 |
| | 4,864 |
|
Total | | $ | 211,641 |
| | $ | 24,746 |
| | $ | 140,951 |
| | $ | 18,199 |
| | $ | 27,745 |
|
| |
(1) | Our credit facility expires December 23, 2019. |
| |
(2) | Kforce’s weighted average interest rate as of December 31, 2016 was 2.40%, which was utilized to forecast the expected future interest rate payments. These payments are inherently uncertain due to interest rate and outstanding borrowings fluctuations that will occur over the remaining term of the credit facility. |
| |
(3) | Purchase obligations include agreements to purchase goods and services that are enforceable, legally binding, and specify all significant terms. |
| |
(4) | Our notes payable as of December 31, 2016 are included in the accompanying Consolidated Balance Sheets and classified in Other current liabilities if payable within the next year or in Long-term debt - other if payable after the next year. The interest rate on the notes range from 2.58% to 2.80% and expire between November 2020 and October 2021. |
| |
(5) | Kforce’s liability for unrecognized tax positions as of December 31, 2016 was $1.1 million. This balance has been excluded from the table above due to the significant uncertainty with respect to the timing and amount of settlement, if any. |
| |
(6) | Kforce maintains various non-qualified deferred compensation plans pursuant to which eligible management and highly-compensated key employees may elect to defer all or part of their compensation to later years. These amounts, which are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, respectively, are payable based upon the elections of the plan participants (e.g. retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time. |
| |
(7) | There is no funding requirement associated with our defined benefit pension plans and, as a result, no contributions have been made to our defined benefit pension plans through the year ended December 31, 2016. Kforce does not currently anticipate funding our defined benefit pension plans during 2017. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2016, in the table above. |
Kforce has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
Income Tax Audits
Kforce is periodically subject to IRS audits, as well as state and other local income tax audits for various tax years. During 2016 and 2015, there were no on-going IRS examinations. Although Kforce has not experienced any material liabilities in the past due to income tax audits, Kforce can make no assurances concerning any future income tax audits.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United StatesU.S. (“GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results Differ From Assumptions |
Allowance for Doubtful Accounts, Fallouts and Other Accounts Receivable Reserves | | | | |
| | |
See Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our policies related to determining our allowance for doubtful accounts, fallouts and other accounts receivable reserves. | | Kforce performs an ongoing analysis of factors including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of accounts receivable among clients and higher-risk sectors, and the current state of the U.S. economy, in establishing its allowance for doubtful accounts. Kforce estimates its allowance for Direct Hire fallouts based on our historical experience with the actual occurrence of fallouts. Kforce estimates its reserve for future revenue adjustments (e.g. bill rate adjustments, time card adjustments, early pay discounts) based on our historical experience. | | We have not made any material changes in the accounting methodology used to establish our allowance for doubtful accounts, fallouts and other accounts receivable reserves. As of December 31, 20152016 and 2014,2015, these allowances were 1.1%1.0% and 1.0%1.1% as a percentage of gross accounts receivable, respectively. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our allowance for doubtful accounts, fallouts and other accounts receivable reserves. However, if our estimates regarding estimated accounts receivable losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% differencechange in actual accounts receivable losses reserved at December 31, 2015,2016, would have impacted our net income for 20152016 by approximately $0.1 million. |
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results Differ From Assumptions |
Goodwill Impairment | | | | |
| | |
We evaluate goodwill for impairment annually or more frequently whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. We monitor the existence of potential impairment indicators throughout the year. See Note 65 – “Goodwill and Other Intangible Assets” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of the valuation methodologies employed.
The carrying value of goodwill as of December 31, 20152016 by reporting unit was approximately $17.0 million, $8.0 million and $20.9 million for our Tech, FA and GS reporting units, respectively. | | We determine the fair value of our reporting units using widely accepted valuation techniques, including the discounted cash flow, guideline transaction method and guideline company method. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples.
It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. | | For our Tech and FA reporting units, Kforce assessed the qualitative factors of each reporting unit to determine if it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Based upon the qualitative assessments, it was determined that it was not more likely than not that the fair values of the reporting units were less than the carrying values.
For our GS reporting unit, however, a quantitative step one impairment assessment was performed as of December 31, 2015.2016. We compared the carrying value of the GS reporting unit to its estimated fair value noting that the fair value exceeded carrying value by 63%over 100%. As a result, no goodwill impairment charges were recognized during the year ended December 31, 2015.2016.
Although the valuation of the business supported its carrying value in 2015,2016, a deterioration in any of the assumptions discussed in Note 6 – “Goodwill and Other Intangible Assets” in the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this report, could result in an additional impairment charge in the future. |
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results Differ From Assumptions |
Self-Insured Liabilities | | | | |
| | |
We are self-insured for certain losses related to health insurance and workers’ compensation claims that are below insurable limits. However, we obtain third-party insurance coverage to limit our exposure to claims in excess of insurable limits. When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, plan structure, internal claims management activities, demographic factors and severity factors. Periodically, management reviews its assumptions to determine the adequacy of our self-insured liabilities. Our liabilities for health insurance and workers’ compensation claims as of December 31, 20152016 were $3.0$2.8 million and $1.3 million, respectively. | | 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. | | We have not made any material changes in the accounting methodologies used to establish our self-insured liabilities during 20152016 and 2014.2015. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our self-insured liabilities related to health insurance and workers’ compensation as of December 31, 20152016 would have impacted our net income for 20152016 by approximately $0.3$0.2 million. |
| | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions
|
Stock-Based Compensation | | | | |
| | |
We have stock-based compensation programs, which include options, stock appreciation rights (“SARs”) and restricted stock awards. See Note 1 – “Summary of Significant Accounting Policies” and Note 13 – “Stock Incentive Plans” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of our stock-based compensation programs.
We have not granted any stock options or SARs over the last three years. We determine the fair market value of our restricted stock based on the closing stock price of Kforce’s common stock on the date of grant.
| | The stock compensation expense recorded is impacted by our estimated forfeiture rates, which are based on historical forfeitures. | | We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material or the stock-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the stock-based compensation.
|
A 10% change in unrecognized stock-based compensation expense would have impacted our net income by $1.1 million for 2015.
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results Differ From Assumptions |
Defined Benefit Pension Plan – U.S. | | | | |
| | |
We have a defined benefit pension plan that benefits certain named executive officers, the Supplemental Executive Retirement Plan (“SERP”). See Note 119 – “Employee Benefit Plans” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of the terms of this plan. The SERP was not funded as of December 31, 20152016 or 2014.2015. | | 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. | | We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our obligation. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in the discount rate used to measure the net periodic pension cost for the SERP during 20152016 would have had an insignificant impact on our net income for 2015.2016. |
| | |
Description | | Judgments and Uncertainties | | Effect if Actual Results Differ From Assumptions |
Accounting for Income Taxes | | | | |
| | |
See Note 4 – “Income Taxes” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of the components of Kforce’s income tax expense, as well as the temporary differences that exist as of December 31, 2015.2016. | | Our consolidated effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we conduct business. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions, including those that may be uncertain. Kforce is also required to exercise judgment with respect to the realization of our net deferred tax assets. Management evaluates all positive and negative evidence and exercises judgment regarding past and future events to determine if it is more likely than not that all or some portion of the deferred tax assets may not be realized. If appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. | | We do not believe that there is a reasonable likelihood that there will be a material change in our effective income tax rate or our liability for uncertain income tax positions or our effective income tax rate.positions. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses that could be material. Kforce recorded a valuation allowance of approximately $0.1 million as of December 31, 20152016 related primarily to state net operating losses. A 0.50% change in our effective income tax rate would have impacted our net income for 20152016 by approximately $0.4$0.3 million. |
NEW ACCOUNTING STANDARDS
See Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a discussion of new accounting standards.
RESULTS OF OPERATIONS
Net service revenues for the years ended December 31, 2015, 2014 and 2013 were approximately $1.32 billion, $1.22 billion and $1.07 billion, respectively, which represents an increase of 8.4% from 2014 to 2015 and 13.4% from 2013 to 2014. The increase in 2015 from 2014 was composed of increases of 6.3% in our Tech segment (which represented 67.9% of total net service revenues in 2015) and 17.7% in our FA segment (which represented 24.7% of total net service revenues in 2015), and a decrease of 0.7% in our GS segment (which represented 7.4% of total net service revenues in 2015). The increase in 2014 from 2013 was composed of increases of 13.9% in our Tech segment (which represented 69.2% of total net service revenues in 2014), 14.2% in our FA segment (which represented 22.7% of total net service revenues in 2014) and 6.6% in our GS segment (which represented 8.1% of total net service revenues in 2014). Flex revenues increased 8.1% in 2015 compared to 2014 and increased 14.2% in 2014 compared to 2013. Direct Hire revenues increased 15.8% in 2015 compared to 2014 and decreased 3.6% in 2014 compared to 2013.
Flex gross profit margins increased 50 basis points to 28.5% for the year ended December 31, 2015 as compared to 28.0% for the year ended December 31, 2014. The increase is due primarily to an expansion in the spread between our bill rates and pay rates in the FA segment, improved profitability from our GS segment, and a more favorable payroll tax environment as compared to 2014. Flex gross profit margins decreased 90 basis points to 28.0% for the year ended December 31, 2014 from 28.9% for the year ended December 31, 2013. The decrease was due primarily to the impact of a change in spread between our bill rates and pay rates as a result of higher concentration of our revenue growth coming from larger, lower-margin profile clients and an increase in benefit costs. SG&A expenses as a percentage of net service revenues were 25.0%, 25.9% and 28.7% for the years ended December 31, 2015, 2014 and 2013, respectively. The decreases in SG&A expenses as a percentage of net service revenues were primarily driven by leverage provided by our revenue growth and a decrease in compensation, commission, payroll taxes and benefit related costs.
Additionally, during the year ended December 31, 2013, Kforce recorded a goodwill impairment charge of $14.5 million in our GS reporting unit. The impairment charge was a result of a business strategy decision made during the fourth quarter of 2013, regarding the GS reporting unit, to focus its service offerings and efforts on prime integrated business solutions opportunities with the Federal Government.
Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional U.S. workers and, conversely, an economic slowdown results in a contraction in demand for additional U.S. workers. From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continued to be positive during 2015, based on data published by the BLS. Total temporary employment increased 3.3% year-over-year and the penetration rate remained near record levels at 2.06% in December 2015. While the macro-employment picture remains uncertain, it has continuously improved, with the unemployment rate at 5.0% as of December 2015, and non-farm payroll expanding an average of 221,000 jobs per month in 2015. Also, the college-level unemployment rate, which we believe serves as a proxy for professional employment and is more closely aligned with the Firm’s business strategy, was at 2.5% in December 2015. Further, we believe that the unemployment rate in the specialties we serve is lower than the published averages, which we believe speaks to the demand environment in which we are operating. Management believes that uncertainty in the overall U.S. economic outlook related to the political landscape, potential tax changes, geo-political risk and impact of health care reform, may continue to fuel growth in temporary staffing as employers may be reluctant to increase full-time hiring. Additionally, we believe the increasing costs and government regulation of employment may be driving a secular shift to an increased use of temporary staff as a percentage of total workforce. Given the near record levels of the penetration rate, we believe that our Flex revenues may grow even in a relatively modest growth macro-economic environment. Kforce remains optimistic about the growth prospects of the temporary staffing industry, the penetration rate, and in particular, our revenue portfolio; however, the economic environment includes considerable uncertainty and volatility and therefore no reliable predictions can be made about the general economy, the staffing industry as a whole, or specialty staffing in particular.
Over the last few years, we have undertaken and continue to progress on several significant initiatives including: (1) executing a realignment plan to streamline our leadership and revenue-enabling personnel in an effort to better align a higher percentage of roles closer to the customer; (2) increasing our focus on consultant care processes and communications to redeploy our consultants in a timely fashion; (3) increasing revenue-generating talent to capitalize on targeted growth opportunities; (4) further defining and monitoring our client portfolio to ensure appropriate focus and prioritization; (5) further optimizing our NRC team in support of our field operations; (6) upgrading our corporate systems; (7) focusing on process improvements; and (8) divesting of HIM, which we considered a non-core business. We believe our realigned field operations and revenue-enabling operations models are keys to our future growth and profitability. We also believe that our portfolio of service offerings, which are almost exclusively in the U.S. and are focused in key areas of expected growth in Tech and FA, are a key contributor to our long-term financial stability. We believe the divestiture of HIM provides us the opportunity to further dedicate our resources to exclusively providing technology and finance and accounting talent in the commercial and government markets through our staffing organization and Kforce Government Solutions, Inc., our government solutions provider.
Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our Consolidated Statements of Operations and Comprehensive Income for the years ended:
|
| | | | | | | | |
| December 31, |
| 2015 | | 2014 | | 2013 |
Revenues by Segment: | | | | | |
Tech | 67.9 | % | | 69.2 | % | | 68.9 | % |
FA | 24.7 |
| | 22.7 |
| | 22.6 |
|
GS | 7.4 |
| | 8.1 |
| | 8.5 |
|
Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
Revenues by Type: | | | | | |
Flex | 95.9 | % | | 96.2 | % | | 95.5 | % |
Direct Hire | 4.1 |
| | 3.8 |
| | 4.5 |
|
Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | 31.4 | % | | 30.8 | % | | 32.1 | % |
Selling, general and administrative expenses | 25.0 | % | | 25.9 | % | | 28.7 | % |
Goodwill impairment | — | % | | — | % | | 1.4 | % |
Depreciation and amortization | 0.7 | % | | 0.8 | % | | 0.9 | % |
Income from continuing operations, before income taxes | 5.4 | % | | 3.9 | % | | 1.0 | % |
Income from continuing operations | 3.2 | % | | 2.4 | % | | 0.5 | % |
Net income | 3.2 | % | | 7.5 | % | | 1.0 | % |
The following table details net service revenues for Flex and Direct Hire by segment and changes from the prior year (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | | | | | | | | | |
Flex | $ | 873,609 |
| | 6.1 | % | | $ | 823,311 |
| | 14.3 | % | | $ | 720,179 |
|
Direct Hire | 22,333 |
| | 16.6 | % | | 19,158 |
| | (0.1 | )% | | 19,183 |
|
Total Tech | $ | 895,942 |
| | 6.3 | % | | $ | 842,469 |
| | 13.9 | % | | $ | 739,362 |
|
FA | | | | | | | | | |
Flex | $ | 294,186 |
| | 18.0 | % | | $ | 249,274 |
| | 16.9 | % | | $ | 213,158 |
|
Direct Hire | 31,738 |
| | 15.3 | % | | 27,537 |
| | (5.9 | )% | | 29,259 |
|
Total FA | $ | 325,924 |
| | 17.7 | % | | $ | 276,811 |
| | 14.2 | % | | $ | 242,417 |
|
GS | | | | | | | | | |
Flex | $ | 97,372 |
| | (0.7 | )% | | $ | 98,051 |
| | 6.6 | % | | $ | 91,949 |
|
Total GS | $ | 97,372 |
| | (0.7 | )% | | $ | 98,051 |
| | 6.6 | % | | $ | 91,949 |
|
Total Flex | $ | 1,265,167 |
| | 8.1 | % | | $ | 1,170,636 |
| | 14.2 | % | | $ | 1,025,286 |
|
Total Direct Hire | 54,071 |
| | 15.8 | % | | 46,695 |
| | (3.6 | )% | | 48,442 |
|
Total Net Service Revenues | $ | 1,319,238 |
| | 8.4 | % | | $ | 1,217,331 |
| | 13.4 | % | | $ | 1,073,728 |
|
Certain quarterly revenue trends are referred to in discussing annual comparisons. Our quarterly operating results are affected by the number of billing days in a quarter, which is provided in the table below. The following 2015 quarterly information is presented for informational purposes only (in thousands, except Billing Days).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31 | | September 30 | | June 30 | | March 31 |
| Revenues | | Year-Over-Year Growth Rates | | Revenues | | Year-Over-Year Growth Rates | | Revenues | | Year-Over-Year Growth Rates | | Revenues | | Year-Over-Year Growth Rates |
Flex | | | | | | | | | | | | | | | |
Tech | $ | 212,917 |
| | 0.2 | % | | $ | 226,381 |
| | 6.6 | % | | $ | 225,873 |
| | 9.6 | % | | $ | 208,438 |
| | 8.3 | % |
FA | 78,512 |
| | 15.7 | % | | 76,707 |
| | 19.4 | % | | 72,773 |
| | 21.2 | % | | 66,194 |
| | 15.9 | % |
GS | 22,857 |
| | (13.9 | )% | | 24,351 |
| | (1.8 | )% | | 24,264 |
| | 1.3 | % | | 25,900 |
| | 13.7 | % |
Total Flex | $ | 314,286 |
| | 2.4 | % | | $ | 327,439 |
| | 8.7 | % | | $ | 322,910 |
| | 11.3 | % | | $ | 300,532 |
| | 10.4 | % |
Direct Hire | | | | | | | | | | | | | | | |
Tech | $ | 5,109 |
| | 7.8 | % | | $ | 5,732 |
| | 6.7 | % | | $ | 6,291 |
| | 24.9 | % | | $ | 5,201 |
| | 29.8 | % |
FA | 8,304 |
| | 15.7 | % | | 8,404 |
| | 17.9 | % | | 8,152 |
| | 7.9 | % | | 6,878 |
| | 21.0 | % |
Total Direct Hire | $ | 13,413 |
| | 12.6 | % | | $ | 14,136 |
| | 13.1 | % | | $ | 14,443 |
| | 14.7 | % | | $ | 12,079 |
| | 24.7 | % |
Total | | | | | | | | | | | | | | | |
Tech | $ | 218,026 |
| | 0.4 | % | | $ | 232,113 |
| | 6.6 | % | | $ | 232,164 |
| | 9.9 | % | | $ | 213,639 |
| | 8.7 | % |
FA | 86,816 |
| | 15.7 | % | | 85,111 |
| | 19.2 | % | | 80,925 |
| | 19.7 | % | | 73,072 |
| | 16.4 | % |
GS | 22,857 |
| | (13.9 | )% | | 24,351 |
| | (1.8 | )% | | 24,264 |
| | 1.3 | % | | 25,900 |
| | 13.7 | % |
Total | $ | 327,699 |
| | 2.8 | % | | $ | 341,575 |
| | 8.8 | % | | $ | 337,353 |
| | 11.4 | % | | $ | 312,611 |
| | 10.8 | % |
| | | | | | | | | | | | | | | |
Billing Days | 62 |
| | | | 64 |
| | | | 64 |
| | | | 63 |
| | |
Flex Revenues. The primary drivers of Flex revenues are the number of consultant hours worked, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.
Flex revenues for our largest segment, Tech, increased 6.1% during the year ended December 31, 2015 as compared to 2014 and increased 14.3% in 2014 from 2013. In the second half of 2015, we experienced deceleration in our year-over-year quarterly growth rates, which were 9.6% in the second quarter, 6.6% in the third quarter and 0.2% in the fourth quarter of 2015. This deceleration was primarily the result of several large clients decreasing their spending with Kforce as a result of conditions which we believe are temporary in nature, arising after certain significant organizational changes within these clients. We do not believe this decrease in spending represents a fundamental longer-term shift in spend. A September 2015 report published by SIA stated that temporary technology staffing is expected to experience growth of 6% in 2015 and an additional 6% in 2016. We believe that the broad-based drivers to the demand in technology staffing such as cloud-computing, data analytics, mobility and cybersecurity will continue and that we are well positioned in this space. The Firm believes the Tech segment will continue to grow year-over-year in 2016 due to the market strength, the opportunities we see with our clients and the investments in revenue-generating resources that we intend to assign to growing priority client accounts.
Our FA segment experienced an increase in Flex revenues of 18.0% during the year ended December 31, 2015 as compared to 2014 and increased 16.9% in 2014 from 2013. In its September 2015 update, SIA stated that finance and accounting staffing is expected to experience growth of 10% in 2015 and an additional 6% in 2016. The Firm believes it is well-positioned to take advantage of this growth as a result of the expected increase in productivity, which normally comes with tenure, of the revenue-generating talent added in FA Flex in the last few years. The Firm believes the FA segment will continue to achieve year-over-year growth in 2016.
Our GS segment experienced a decrease in net service revenues of 0.7% during the year ended December 31, 2015 as compared to 2014 and increased 6.6% in 2014 from 2013. There remains continued uncertainty within this segment due to an increase in competition and the lowest price technically acceptable government procurement environment. Our GS segment had a significant amount of its contracts go through a standard recompete cycle with the Federal Government and retained each of these contracts. The Firm believes the GS segment will grow in 2016.
The following table details total Flex hours for our Tech and FA segments and percentage changes over the prior period for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | 12,885 |
| | 7.2 | % | | 12,024 |
| | 10.0 | % | | 10,929 |
|
FA | 9,008 |
| | 17.1 | % | | 7,691 |
| | 17.4 | % | | 6,550 |
|
Total hours | 21,893 |
| | 11.0 | % | | 19,715 |
| | 12.8 | % | | 17,479 |
|
As the GS segment primarily provides integrated business solutions as compared to staffing services, Flex hours are not presented above.
The increase in Flex revenues for Tech for the year ended December 31, 2015 compared to the year ended December 31, 2014 was $50.3 million, composed of a $58.5 million increase in volume, a $7.7 million decrease in bill rate and a $0.5 million decrease from the impact of billable expenses. The increase in Flex revenues for FA for the year ended December 31, 2015 compared to the year ended December 31, 2014 was $44.9 million, composed of a $42.6 million increase in volume and a $2.3 million increase in bill rate. The increase in Flex revenues for Tech for the year ended December 31, 2014 compared to the year ended December 31, 2013 was $103.1 million, composed of a $71.6 million increase in volume, a $31.0 million increase in bill rate and a $0.5 million increase from the impact of billable expenses. The increase in Flex revenues for FA for the year ended December 31, 2014 compared to the year ended December 31, 2013 was $36.1 million, composed of a $37.0 million increase in volume, a $0.8 million decrease in bill rate and a $0.1 million decrease from the impact of billable expenses.
The changes in billable expenses, which are included as a component of net services revenues, are primarily attributable to project-based work. Flex billable expenses for each of our segments were as follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | $ | 5,584 |
| | (8.4 | )% | | $ | 6,093 |
| | 8.2 | % | | $ | 5,630 |
|
FA | 282 |
| | (8.7 | )% | | 309 |
| | (27.0 | )% | | 423 |
|
GS | 363 |
| | (7.2 | )% | | 391 |
| | 12.4 | % | | 348 |
|
Total billable expenses | $ | 6,229 |
| | (8.3 | )% | | $ | 6,793 |
| | 6.1 | % | | $ | 6,401 |
|
Direct Hire Fees. The primary drivers of Direct Hire fees are the number of placements and the fee for these placements. Direct Hire fees also include conversion revenues (conversions occur when consultants initially assigned to a client on a temporary basis are later converted to a permanent placement). Our GS segment does not make permanent placements.
Direct Hire revenues increased 15.8% during the year ended December 31, 2015 as compared to 2014. Direct Hire revenues decreased 3.6% during the year ended December 31, 2014 as compared to 2013.
Total placements for our Tech and FA segments were as follows for the years ended December 31:
|
| | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | 1,395 |
| | 16.9 | % | | 1,193 |
| | (2.4 | )% | | 1,222 |
|
FA | 2,505 |
| | 11.0 | % | | 2,256 |
| | (7.9 | )% | | 2,449 |
|
Total placements | 3,900 |
| | 13.1 | % | | 3,449 |
| | (6.0 | )% | | 3,671 |
|
The average fee per placement for our Tech and FA segments were as follows for the years ended December 31:
|
| | | | | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | $ | 16,014 |
| | (0.3 | )% | | $ | 16,062 |
| | 2.3 | % | | $ | 15,695 |
|
FA | 12,668 |
| | 3.8 | % | | 12,205 |
| | 2.2 | % | | 11,946 |
|
Total average placement fee | $ | 13,864 |
| | 2.4 | % | | $ | 13,539 |
| | 2.6 | % | | $ | 13,194 |
|
The increase in Direct Hire revenues from 2014 to 2015 was $7.4 million, composed of a $6.1 million increase in volume and a $1.3 million increase in rate. The decrease in Direct Hire revenues from 2013 to 2014 was $1.7 million, composed of a $2.9 million decrease in volume, partially offset by a $1.2 million increase in rate.
Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily flexible personnel payroll wages, payroll taxes, payroll-related insurance, and subcontractor costs) from net Flex service revenues. In addition, consistent with industry practices, gross profit dollars from Direct Hire fees are equal to revenues, because there are generally no direct costs associated with such revenues. As noted above, our GS segment does not make permanent placements; as a result, its gross profit percentage is the same as its Flex gross profit percentage.
The following table presents, for each segment, the gross profit percentage (gross profit as a percentage of revenues) for the year, as well as the increase or decrease over the preceding period, as follows:
|
| | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | 29.2 | % | | 1.0 | % | | 28.9 | % | | (2.7 | )% | | 29.7 | % |
FA | 36.5 | % | | — | % | | 36.5 | % | | (5.4 | )% | | 38.6 | % |
GS | 34.3 | % | | 10.6 | % | | 31.0 | % | | (9.1 | )% | | 34.1 | % |
Total gross profit percentage | 31.4 | % | | 1.9 | % | | 30.8 | % | | (4.0 | )% | | 32.1 | % |
Kforce also monitors the gross profit percentage as a percentage of Flex revenues, which is referred to as the Flex gross profit percentage. This provides management with helpful insight into the other drivers of total gross profit percentage such as changes in volume evidenced by changes in hours billed for Flex and changes in the spread between bill rate and pay rate for Flex.
The following table presents, for each segment, the Flex gross profit percentage for the years ended December 31:
|
| | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Tech | 27.4 | % | | 0.7 | % | | 27.2 | % | | (2.2 | )% | | 27.8 | % |
FA | 29.7 | % | | 0.7 | % | | 29.5 | % | | (2.3 | )% | | 30.2 | % |
GS | 34.3 | % | | 10.6 | % | | 31.0 | % | | (9.1 | )% | | 34.1 | % |
Total Flex gross profit percentage | 28.5 | % | | 1.8 | % | | 28.0 | % | | (3.1 | )% | | 28.9 | % |
The increase in Flex gross profit from 2014 to 2015 was $32.2 million, composed of a $26.5 million increase in volume and a $5.7 million increase in rate. The increase in Flex gross profit from 2013 to 2014 was $32.0 million, composed of a $42.0 million increase in volume, partially offset by a $10.0 million decrease in rate.
The increase in Flex gross profit percentage of 50 basis points in 2015 from 2014 was due primarily to an increase in the spread between our bill rates and pay rates in the FA segment, improved profitability from our GS segment primarily as a result of growth in its product business which carries a higher margin profile, and a more favorable payroll tax environment as compared to 2014. A continued focus for Kforce is optimizing the spread between bill rates and pay rates by providing our associates with tools, economic knowledge and defined programs to drive improvement in the effectiveness of our pricing strategy around the staffing services we provide. We believe this strategy will serve to balance the desire for optimal volume, rate, effort and duration of assignment, while ultimately maximizing the benefit for our clients, our consultants and Kforce.
Selling, General and Administrative (“SG&A”) Expenses. For the years ended December 31, 2015, 2014 and 2013, total commissions, compensation, payroll taxes, and benefit costs as a percentage of SG&A represented 84.2%, 84.8%, and 85.9%, respectively. Commissions, certain revenue-generating bonuses and related payroll taxes and benefit costs are variable costs driven primarily by revenue and gross profit levels, and associate performance. Therefore, as gross profit levels change, these expenses would also generally be anticipated to change, but remain relatively consistent as a percentage of revenues.
The following table presents these components of SG&A along with an “other” caption, which includes bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses, as an absolute amount and as a percentage of total net service revenues for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| 2015 | | % of Revenues | | 2014 | | % of Revenues | | 2013 | | % of Revenues |
Compensation, commissions, payroll taxes and benefits costs | $ | 278,207 |
| | 21.1 | % | | $ | 267,471 |
| | 22.0 | % | | $ | 264,636 |
| | 24.7 | % |
Other | 52,209 |
| | 3.9 | % | | 47,867 |
| | 3.9 | % | | 43,308 |
| | 4.0 | % |
Total SG&A | $ | 330,416 |
| | 25.0 | % | | $ | 315,338 |
| | 25.9 | % | | $ | 307,944 |
| | 28.7 | % |
SG&A as a percentage of net service revenues decreased 90 basis points in 2015 compared to 2014. This was primarily attributable to a decrease in compensation, commissions, payroll taxes and benefits costs of 0.9% of net service revenues, which was primarily a result of a reduction in salaries and wages, benefits costs and a decrease in commissions, driven by changes made to our compensation plans to drive improvement in associate productivity. We continue to be diligent with managing our SG&A expenses and expect to generate further leverage in 2016 as revenues grow, which may be partially offset by an investment in revenue-generating talent and certain technology initiatives.
SG&A as a percentage of net service revenues decreased 280 basis points in 2014 compared to 2013. This was primarily attributable to a decrease in compensation, commissions, payroll taxes and benefits cost of 2.7% of net service revenues, which was primarily a result of a reduction in compensation expense due to the organizational realignment executed by the Firm during the fourth quarter of 2013, as well as a decrease in the annual effective commission rate due to certain changes made to our compensation plans.
Goodwill Impairment. During the year ending December 31, 2015, for our Tech and FA reporting units, Kforce assessed the qualitative factors of each reporting unit concluding there were no impairments. For our GS reporting unit, Kforce performed a step one goodwill impairment analysis as of December 31, 2015 which resulted in no impairment. During the year ended December 31, 2014, Kforce performed a step one goodwill impairment analysis for each of its reporting units, which resulted in no impairments. During the fourth quarter of 2013, Kforce management made a strategic business decision with regard to the GS reporting unit to focus its service offerings and efforts on prime integrated business solutions and as a result we recorded an impairment charge on the GS reporting unit goodwill in the amount of approximately $14.5 million, with a related tax benefit of approximately $5.2 million during the year ended December 31, 2013.
Depreciation and Amortization. The following table presents depreciation and amortization expense by major category for the years ended December 31, 2015, 2014 and 2013, as well as the increases (decreases) experienced during 2015 and 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2015 | | Increase (Decrease) | | 2014 | | Increase (Decrease) | | 2013 |
Fixed asset depreciation | $ | 6,738 |
| | 6.2 | % | | $ | 6,345 |
| | 8.2 | % | | $ | 5,863 |
|
Capitalized software amortization | 2,318 |
| | (20.2 | )% | | 2,904 |
| | (10.3 | )% | | 3,236 |
|
Intangible asset amortization | 775 |
| | 20.2 | % | | 645 |
| | (13.7 | )% | | 747 |
|
Total depreciation and amortization | $ | 9,831 |
| | (0.6 | )% | | $ | 9,894 |
| | 0.5 | % | | $ | 9,846 |
|
Fixed Asset Depreciation: The $0.4 million increase in 2015 is primarily the result of the leasehold improvement additions made during 2015. The $0.5 million increase in 2014 is primarily the result of leasehold improvement and furniture and fixture additions made during 2014.
Capitalized Software Amortization: The $0.6 million decrease in 2015 is primarily the result of several capitalized software balances becoming fully amortized during 2015. The $0.3 million decrease in 2014 is primarily the result of software disposals during 2014.
Other Expense, Net. Other expense, net was $2.2 million in 2015, $1.4 million in 2014, and $1.1 million in 2013, and consists primarily of interest expense related to outstanding borrowings under our credit facility.
Income Tax Expense. For the year ending December 31, 2015, income tax expense as a percentage of income from continuing operations before income taxes (our “effective rate”) was 40.3%. The 2015 rate was unfavorably impacted by a change in the overall mix of income in the various state jurisdictions and the increase in particular uncertain tax positions. For the year ending December 31, 2014, income tax expense as a percentage of income from continuing operations before income taxes was 38.7%. There were no individual items that had a material impact on Kforce's effective rate. For the year ending December 31, 2013, income tax expense as a percentage of income from continuing operations before income taxes was 51.6%, which was impacted by certain non-deductible meals and entertainment, the partially non-deductible goodwill impairment charge and certain other non-deductible expenses.
Income from Discontinued Operations, Net of Income Taxes. Discontinued operations for the years ended December 31, 2014 and 2013 include the consolidated income and expenses for HIM. During the three months ended September 30, 2014, Kforce completed the sale of HIM resulting in a pre-tax gain of $94.3 million. Included in the determination of the pre-tax gain is approximately $4.9 million of goodwill for HIM and transaction expenses totaling approximately $11.0 million, which primarily included legal fees, stock-based compensation related to acceleration of restricted stock due to change in control provisions, commissions and transaction bonuses.
Income tax expense as a percentage of income from discontinued operations, before income taxes, for the year ended December 31, 2014 and 2013 was 40.6% and 40.1%, respectively.
Adjusted EBITDA and Adjusted EBITDA Per Share. "Adjusted EBITDA", a non-GAAP financial measure, is defined by Kforce as net income before income from discontinued operations, net of income taxes, non-cash impairment charges, interest, income taxes, depreciation and amortization and stock-based compensation expense. "Adjusted EBITDA Per Share", a non-GAAP financial measure, is Adjusted EBITDA divided by the number of diluted weighted average shares outstanding. Adjusted EBITDA and Adjusted EBITDA Per Share should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA and Adjusted EBITDA Per Share are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA and Adjusted EBITDA Per Share. Adjusted EBITDA and Adjusted EBITDA Per Share are key measures used by management to evaluate our operations, including our ability to generate cash flows and our ability to repay our debt obligations, and management believes they are good measures of our core profitability, consequently, management believes they are useful information to investors. The measures should not be considered in isolation or as alternatives to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is thus susceptible to varying calculations. Also, Adjusted EBITDA and Adjusted EBITDA Per Share, as presented, may not be comparable to similarly titled measures of other companies.
Some of the items that are excluded also impacted certain balance sheet assets, resulting in all or a portion of an asset being written off without a corresponding recovery of cash that may have previously been spent with respect to the asset. In addition, although we excluded amortization of stock-based compensation expense (which we expect to continue to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholder ownership interest. We encourage you to evaluate these items and the potential risks of excluding such items when analyzing our financial position.
The following table presents Adjusted EBITDA and Adjusted EBITDA Per Share results and includes a reconciliation of Adjusted EBITDA to net income and Adjusted EBITDA Per Share to Earnings Per Share for the years ended December 31 (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2015 | | Per Share | | 2014 | | Per Share | | 2013 | | Per Share |
Net income | $ | 42,824 |
| | $ | 1.52 |
| | $ | 90,915 |
| | $ | 2.87 |
| | $ | 10,787 |
| | $ | 0.32 |
|
Income from discontinued operations, net of income taxes | — |
| | — |
| | 61,517 |
| | 1.94 |
| | 5,493 |
| | 0.16 |
|
Income from continuing operations | $ | 42,824 |
| | $ | 1.52 |
| | $ | 29,398 |
| | $ | 0.93 |
| | $ | 5,294 |
| | $ | 0.16 |
|
Goodwill impairment, pre-tax | — |
| | — |
| | — |
| | — |
| | 14,510 |
| | 0.43 |
|
Depreciation and amortization | 9,831 |
| | 0.35 |
| | 9,894 |
| | 0.31 |
| | 9,846 |
| | 0.29 |
|
Stock-based compensation expense | 5,819 |
| | 0.21 |
| | 2,969 |
| | 0.09 |
| | 2,555 |
| | 0.07 |
|
Interest expense and other | 1,960 |
| | 0.07 |
| | 1,396 |
| | 0.04 |
| | 1,212 |
| | 0.04 |
|
Income tax expense | 28,848 |
| | 1.02 |
| | 18,559 |
| | 0.59 |
| | 5,635 |
| | 0.17 |
|
Adjusted EBITDA | $ | 89,282 |
| | $ | 3.17 |
| | $ | 62,216 |
| | $ | 1.96 |
| | $ | 39,052 |
| | $ | 1.16 |
|
Weighted average shares outstanding - basic | 27,910 |
| | | | 31,475 |
| | | | 33,511 |
| | |
Weighted average shares outstanding - diluted | 28,190 |
| | | | 31,691 |
| | | | 33,643 |
| | |
Free Cash Flow. "Free Cash Flow", a non-GAAP financial measure, is defined by Kforce as net cash provided by (used in) operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides useful information to investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions, repurchasing common stock and paying dividends.
The following table presents Free Cash Flow for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
Net income | | $ | 42,824 |
| | $ | 90,915 |
| | $ | 10,787 |
|
Gain on sale of discontinued operations | | — |
| | (64,600 | ) | | — |
|
Goodwill impairment | | — |
| | — |
| | 14,510 |
|
Non-cash provisions and other | | 21,602 |
| | 15,376 |
| | 17,906 |
|
Changes in operating assets/liabilities | | 5,754 |
| | (67,273 | ) | | (42,738 | ) |
Capital expenditures | | (8,328 | ) | | (6,011 | ) | | (8,145 | ) |
Free cash flow | | 61,852 |
| | (31,593 | ) | | (7,680 | ) |
Proceeds from disposition of business | | — |
| | 117,887 |
| | — |
|
Change in debt | | (12,861 | ) | | 30,726 |
| | 41,607 |
|
Repurchases of common stock | | (38,471 | ) | | (101,771 | ) | | (29,810 | ) |
Cash dividend | | (12,545 | ) | | (12,776 | ) | | (3,297 | ) |
Other | | 2,284 |
| | (2,110 | ) | | (1,326 | ) |
Change in cash | | $ | 259 |
| | $ | 363 |
| | $ | (506 | ) |
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our existing credit facility. At December 31, 2015, Kforce had $126.8 million in working capital compared to $130.2 million in 2014. Kforce’s current ratio (current assets divided by current liabilities) was 2.4 at the end of 2015 and 2014, respectively.
The accompanying Consolidated Statements of Cash Flows for each of the three years ended December 31, 2015, 2014 and 2013 in Item 8. Financial Statements and Supplementary Data provide a more detailed description of our cash flows. Currently, Kforce is principally focused on achieving the appropriate balance in the following areas of cash flow: (1) achieving positive cash flow from operating activities; (2) returning capital to our shareholders through our quarterly dividends and common stock repurchase program; (3) maintaining an appropriate outstanding balance on our credit facility; (4) investing in our infrastructure to allow sustainable growth via capital expenditures; and (5) having sufficient liquidity for the possibility of completing an acquisition or for an unexpected necessary expense.
We believe that existing cash and cash equivalents, cash flow from operations, and available borrowings under our credit facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months. However, a material deterioration in the economic environment or market conditions, among other things, could negatively impact operating results and liquidity, as well as the ability of our lenders to fund borrowings.
Actual results in the future could also differ materially from those indicated as a result of a number of factors, including the use of currently available resources for possible acquisitions and possible additional stock repurchases.
The following table presents a summary of our cash flows from operating, investing and financing activities, as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Cash provided by (used in): | | | | | |
Operating activities | $ | 70,180 |
| | $ | (25,582 | ) | | $ | 465 |
|
Investing activities | (8,364 | ) | | 110,535 |
| | (8,547 | ) |
Financing activities | (61,557 | ) | | (84,590 | ) | | 7,576 |
|
Net increase (decrease) in cash and cash equivalents | $ | 259 |
| | $ | 363 |
| | $ | (506 | ) |
Discontinued Operations
As was previously discussed, Kforce divested of HIM on August 4, 2014. The accompanying Consolidated Statements of Cash Flows have been presented on a combined basis (continuing operations and discontinued operations) for each of the years ended December 31, 2014 and 2013. Cash flows provided by discontinued operations for all prior periods were provided by operating activities and were not material to the capital resources of Kforce. In addition, the absence of cash flows from discontinued operations is not expected to have a significant effect on the future liquidity, financial position, or capital resources of Kforce.
Operating Activities
The significant variations in cash provided by operating activities and net income are principally related to adjustments to net income for certain non-cash charges such as depreciation and amortization expense and stock-based compensation, as well as gain on sale of discontinued operations and goodwill impairment charges in prior years. These adjustments are more fully detailed in our Consolidated Statements of Cash Flows for each of the three years ended December 31, 2015, 2014 and 2013, in Item 8. Financial Statement and Supplementary Data. Our largest source of operating cash flows is the collection of trade receivables and our largest use of operating cash flows is the payment of our employee and consultant populations' compensation, which includes base salary, commissions and bonuses. When comparing cash flows from operating activities for the years ended December 31, 2015, 2014 and 2013, the increase in cash provided by operating activities during the year ended December 31, 2015 as compared to 2014 is primarily a result of improved timing of collections of accounts receivable as well as growth in our profitability. The increase in cash used in operating activities during the year ended December 31, 2014, as compared to 2013, is primarily a result of the increase in accounts receivable due to the timing of collections and certain tax payments made related to the HIM divestiture and resulting gain on sale.
Investing Activities
Capital expenditures during 2015, 2014 and 2013, which exclude equipment acquired under capital leases, were $8.3 million, $6.0 million and $8.1 million, respectively. Proceeds from the divestiture of HIM were $117.9 million during the year ended December 31, 2014.
We expect to continue to selectively invest in our infrastructure in order to support the expected future growth in our business. We believe that we have sufficient cash and availability under the credit facility to make any expected necessary capital expenditures in the foreseeable future. In addition, we continually review our portfolio of businesses and their operations in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses and further invest in, fully divest and/or sell parts of our current businesses.
Financing Activities
During the year ended December 31, 2015, the Firm paid cash for repurchases of common stock totaling $38.5 million, which was composed of approximately $37.1 million of open market common stock repurchases and $1.4 million of common stock repurchases attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards. Of the $37.1 million of open market common stock repurchases, $1.4 million of the cash paid during the year ended December 31, 2015 related to the settlement of 2014 repurchases. During 2014, Kforce paid cash for repurchases of common stock totaling $101.8 million, which was composed of approximately $100.2 million of open market common stock repurchases and $1.6 million of common stock repurchases attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards. During 2013, Kforce paid cash for repurchases of common stock totaling $29.8 million, which was composed of approximately $29.0 million of open market common stock repurchases (including the settlement of approximately $2.5 million of common stock repurchases from the fourth quarter of 2012) and $0.8 million of common stock repurchases attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards.
During the year ended December 31, 2015, Kforce declared and paid dividends in cash of $12.5 million, or $0.45 per share. During the year ended December 31, 2014, Kforce declared and paid dividends in cash of $12.8 million, or $0.41 per share. During the year ended December 31, 2013, Kforce declared and paid dividends in cash of $3.3 million, or $0.10 per share. Kforce currently expects to continue to declare and pay quarterly dividends of a similar amount. However, the declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board of Directors each quarter following its review of, among other things, the Firm’s financial performance and our legal ability to pay dividends.
Credit Facility
On September 20, 2011, Kforce entered into a Third Amended and Restated Credit Agreement, with a syndicate led by Bank of America, N.A. As subsequently amended on March 30, 2012, December 27, 2013 and on December 23, 2014 (as amended to date, the "Credit Facility"), the Credit Facility includes a maximum borrowing capacity of $170.0 million, as well as an accordion option of $50.0 million. The maximum borrowings available to Kforce under the Credit Facility are limited to: (a) a revolving Credit Facility of up to $170.0 million (the “Revolving Loan Amount”) and (b) a $15.0 million sub-limit included in the Credit Facility for letters of credit. See Note 9 – “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a complete discussion of our Credit Facility.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2015, Kforce had letters of credit outstanding for workers’ compensation and other insurance coverage totaling $3.2 million, and for facility lease deposits totaling $0.5 million. Aside from certain obligations more fully described in the Contractual Obligations and Commitments section below, we do not have any additional off-balance sheet arrangements that have had, or are expected to have, a material effect on our consolidated financial statements.
Stock Repurchases
During the year ended December 31, 2014, Kforce repurchased approximately 4.9 million shares of common stock at a total cost of approximately $102.9 million under the Board-authorized common stock repurchase program. As of December 31, 2014, $29.7 million of the Board-authorized common stock repurchase program remained available for future repurchases. On July 31, 2015, our Board of Directors approved a $60.0 million increase to the then remaining authorized amount. During the year ended December 31, 2015, Kforce repurchased approximately 1.5 million shares of common stock at a total cost of approximately $36.7 million under the Board-authorized common stock repurchase program. As of December 31, 2015, $53.0 million remained available for future repurchases.
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1-3 Years | | 3-5 Years | | More than 5 years |
Operating lease obligations | | $ | 20,212 |
| | $ | 7,970 |
| | $ | 9,722 |
| | $ | 2,520 |
| | $ | — |
|
Capital lease obligations | | 2,023 |
| | 943 |
| | 1,006 |
| | 74 |
| | — |
|
Credit Facility (a) | | 80,472 |
| | — |
| | — |
| | 80,472 |
| | — |
|
Interest payable – Credit Facility (b) | | 7,845 |
| | 1,569 |
| | 3,138 |
| | 3,138 |
| | — |
|
Equipment notes (c) | | 2,914 |
| | 575 |
| | 1,150 |
| | 1,189 |
| | — |
|
Interest payable - equipment notes (c) | | 206 |
| | 75 |
| | 98 |
| | 33 |
| | — |
|
Purchase obligations | | 15,307 |
| | 9,627 |
| | 5,562 |
| | 118 |
| | — |
|
Liability for unrecognized tax positions (d) | | — |
| | — |
| | — |
| | — |
| | — |
|
Deferred compensation plan liability (e) | | 26,526 |
| | 2,288 |
| | 2,895 |
| | 1,326 |
| | 20,017 |
|
Other (f) | | — |
| | — |
| | — |
| | — |
| | — |
|
Supplemental executive retirement plan (g) | | 14,284 |
| | — |
| | — |
| | 10,297 |
| | 3,987 |
|
Foreign defined benefit pension plan (h) | | 7,504 |
| | 376 |
| | 4 |
| | 82 |
| | 7,042 |
|
Total | | $ | 177,293 |
| | $ | 23,423 |
| | $ | 23,575 |
| | $ | 99,249 |
| | $ | 31,046 |
|
| |
(a) | The Credit Facility expires December 23, 2019. |
| |
(b) | Kforce’s weighted average interest rate as of December 31, 2015 was 1.95%, which was utilized to forecast the expected future interest rate payments. These payments are inherently uncertain due to interest rate and outstanding borrowings fluctuations that will occur over the remaining term of the Credit Facility. |
| |
(c) | Kforce entered into separate notes with Wells Fargo and Bank of America N.A for the purchase of furniture, fixtures and equipment during 2015. The aggregate outstanding amounts under these notes as of December 31, 2015 are included in the accompanying Consolidated Balance Sheets and classified in Other current liabilities if payable within the next year or in Long-term debt - other if payable after the next year. The interest rate on the notes are 2.80% and 2.64%, respectively. The equipment notes expire in November 2020. |
| |
(d) | Kforce’s liability for unrecognized tax positions as of December 31, 2015 was $0.8 million. This balance has been excluded from the table above due to the significant uncertainty with respect to the timing and amount of settlement, if any. |
| |
(e) | Kforce has a non-qualified deferred compensation plan pursuant to which eligible highly-compensated key employees may elect to defer part of their compensation to later years. These amounts, which are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, respectively, are payable based upon the elections of the plan participants (e.g. retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time. |
| |
(f) | Kforce provides letters of credit to certain vendors in lieu of cash deposits. Kforce currently has letters of credit totaling $3.7 million outstanding as security for workers’ compensation and property insurance policies, as well as facility lease deposits. Kforce maintains a sub-limit for letters of credit of $15.0 million under its Credit Facility. |
| |
(g) | There is no funding requirement associated with the SERP. Kforce does not currently anticipate funding the SERP during 2015. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2015, in the table above. See Note 11 – “Employee Benefit Plans” in the Notes to Consolidated Financial Statements for more detail. |
| |
(h) | There is no funding requirement associated with this plan. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2015 in the table above. See Note 11 – “Employee Benefit Plans” in the Notes to Consolidated Financial Statements for more detail. |
Kforce has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
Income Tax Audits
Kforce is periodically subject to IRS audits, as well as state and other local income tax audits for various tax years. During 2015, there were no on-going IRS examinations. During 2014, the IRS finished an examination of Kforce’s U.S. income tax return for 2010 and 2011 with no material adjustments. Although Kforce has not experienced any material liabilities in the past due to income tax audits, Kforce can make no assurances concerning any future income tax audits.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In addition to the risks inherent in its operations, Kforce is exposed to certain market risks, primarily changes in interest rates.
As of December 31, 2015,2016, we had $80.5$111.5 million outstanding under our Credit Facility.credit facility. Our weighted average effective interest rate on our Credit Facilitycredit facility was 1.95%2.40% at December 31, 2015.2016. A hypothetical 10% increase in interest rates in effect at December 31, 20152016 would have an increase to Kforce’s annual interest expense of less than $0.2$0.3 million.
We do not believe that we have a material exposure to fluctuations in foreign currencies because our international operations represented less than 2%1% of net service revenues for the year ended December 31, 2015,2016, and because our international operations’ functional currency is the U.S. Dollar. However, Kforce will continue to assess the impact which currency fluctuations could have on our operations going forward.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kforce Inc.
Tampa, FL
We have audited the accompanying consolidated balance sheets of Kforce Inc. and subsidiaries (“Kforce”) as of December 31, 20152016 and 2014,2015, and the related Consolidated Statementsconsolidated statements of Operationsoperations and Comprehensive Income, Changescomprehensive income, changes in Stockholders' Equity,stockholders' equity, and Cash Flowscash flows for each of the three years in the period ended December 31, 2015.2016. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited Kforce’s internal control over financial reporting as of December 31, 2015,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Kforce's management is responsible for these financial statements and financial statement schedule, 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 financial statement schedule and an opinion on Kforce’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kforce Inc. and subsidiaries as of December 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015,2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, Kforce maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
|
|
|
/s/ Deloitte & Touche LLP |
|
Certified Public Accountants |
Tampa, Florida |
February 26, 201624, 2017 |
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| | | YEARS ENDED DECEMBER 31, | YEARS ENDED DECEMBER 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
Net service revenues | $ | 1,319,238 |
| | $ | 1,217,331 |
| | $ | 1,073,728 |
| $ | 1,319,706 |
| | $ | 1,319,238 |
| | $ | 1,217,331 |
|
Direct costs of services | 905,124 |
| | 842,750 |
| | 729,352 |
| 911,207 |
| | 905,124 |
| | 842,750 |
|
Gross profit | 414,114 |
| | 374,581 |
| | 344,376 |
| 408,499 |
| | 414,114 |
| | 374,581 |
|
Selling, general and administrative expenses | 330,416 |
| | 315,338 |
| | 307,944 |
| 341,196 |
| | 330,416 |
| | 315,338 |
|
Goodwill impairment | — |
| | — |
| | 14,510 |
| |
Depreciation and amortization | 9,831 |
| | 9,894 |
| | 9,846 |
| 8,701 |
| | 9,831 |
| | 9,894 |
|
Income from operations | 73,867 |
| | 49,349 |
| | 12,076 |
| 58,602 |
| | 73,867 |
| | 49,349 |
|
Other expense (income): | | | | | | |
Interest expense | 1,982 |
| | 1,411 |
| | 1,225 |
| |
Other expense (income) | 213 |
| | (19 | ) | | (78 | ) | |
Other expense, net | | 2,647 |
| | 2,195 |
| | 1,392 |
|
Income from continuing operations, before income taxes | 71,672 |
| | 47,957 |
| | 10,929 |
| 55,955 |
| | 71,672 |
| | 47,957 |
|
Income tax expense | 28,848 |
| | 18,559 |
| | 5,635 |
| 23,182 |
| | 28,848 |
| | 18,559 |
|
Income from continuing operations | 42,824 |
| | 29,398 |
| | 5,294 |
| 32,773 |
| | 42,824 |
| | 29,398 |
|
Income from discontinued operations, net of income taxes | — |
| | 61,517 |
| | 5,493 |
| — |
| | — |
| | 61,517 |
|
Net income | 42,824 |
| | 90,915 |
| | 10,787 |
| 32,773 |
| | 42,824 |
| | 90,915 |
|
Other comprehensive income (loss): | | | | | | |
Other comprehensive (loss) income: | | | | | | |
Defined benefit pension and post-retirement plans, net of tax | 689 |
| | (688 | ) | | 3,030 |
| (134 | ) | | 689 |
| | (688 | ) |
Comprehensive income | $ | 43,513 |
| | $ | 90,227 |
| | $ | 13,817 |
| $ | 32,639 |
| | $ | 43,513 |
| | $ | 90,227 |
|
Earnings per share – basic: | | | | | | | | | | |
From continuing operations | $ | 1.53 |
| | $ | 0.94 |
| | $ | 0.16 |
| $ | 1.26 |
| | $ | 1.53 |
| | $ | 0.94 |
|
From discontinued operations | $ | — |
| | $ | 1.95 |
| | $ | 0.16 |
| $ | — |
| | $ | — |
| | $ | 1.95 |
|
Earnings per share – basic | $ | 1.53 |
| | $ | 2.89 |
| | $ | 0.32 |
| $ | 1.26 |
| | $ | 1.53 |
| | $ | 2.89 |
|
Earnings per share – diluted | | | | | | |
Earnings per share – diluted: | | | | | | |
From continuing operations | $ | 1.52 |
| | $ | 0.93 |
| | $ | 0.16 |
| $ | 1.25 |
| | $ | 1.52 |
| | $ | 0.93 |
|
From discontinued operations | $ | — |
| | $ | 1.94 |
| | $ | 0.16 |
| $ | — |
| | $ | — |
| | $ | 1.94 |
|
Earnings per share – diluted | $ | 1.52 |
| | $ | 2.87 |
| | $ | 0.32 |
| $ | 1.25 |
| | $ | 1.52 |
| | $ | 2.87 |
|
| | | | | | | | | | |
Weighted average shares outstanding – basic | 27,910 |
| | 31,475 |
| | 33,511 |
| 26,099 |
| | 27,910 |
| | 31,475 |
|
Weighted average shares outstanding – diluted | 28,190 |
| | 31,691 |
| | 33,643 |
| 26,274 |
| | 28,190 |
| | 31,691 |
|
| | | | | | | | | | |
Cash dividends declared per share | $ | 0.45 |
| | $ | 0.41 |
| | $ | 0.10 |
| $ | 0.48 |
| | $ | 0.45 |
| | $ | 0.41 |
|
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
| | | DECEMBER 31, | DECEMBER 31, |
| 2015 | | 2014 | 2016 | | 2015 |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | $ | 1,497 |
| | $ | 1,238 |
| $ | 1,482 |
| | $ | 1,497 |
|
Trade receivables, net of allowances of $2,121 and $2,040, respectively | 198,933 |
| | 204,710 |
| |
Trade receivables, net of allowances of $2,066 and $2,121, respectively | | 206,361 |
| | 198,933 |
|
Income tax refund receivable | 526 |
| | 3,311 |
| 172 |
| | 526 |
|
Deferred tax assets, net | 4,518 |
| | 4,980 |
| 4,799 |
| | 4,518 |
|
Prepaid expenses and other current assets | 9,060 |
| | 10,170 |
| 10,691 |
| | 9,060 |
|
Total current assets | 214,534 |
| | 224,409 |
| 223,505 |
| | 214,534 |
|
Fixed assets, net | 37,476 |
| | 35,330 |
| 43,145 |
| | 37,476 |
|
Other assets, net | 28,671 |
| | 30,349 |
| 30,511 |
| | 28,671 |
|
Deferred tax assets, net | 20,938 |
| | 22,855 |
| 18,650 |
| | 20,938 |
|
Intangible assets, net | 4,235 |
| | 5,011 |
| 3,642 |
| | 4,235 |
|
Goodwill | 45,968 |
| | 45,968 |
| 45,968 |
| | 45,968 |
|
Total assets | $ | 351,822 |
| | $ | 363,922 |
| $ | 365,421 |
| | $ | 351,822 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current Liabilities: | | | | | | |
Accounts payable and other accrued liabilities | $ | 39,227 |
| | $ | 38,104 |
| $ | 37,230 |
| | $ | 39,227 |
|
Accrued payroll costs | 46,125 |
| | 52,208 |
| 44,137 |
| | 46,125 |
|
Other current liabilities | 1,287 |
| | 986 |
| 1,765 |
| | 1,287 |
|
Income taxes payable | 1,107 |
| | 2,885 |
| 221 |
| | 1,107 |
|
Total current liabilities | 87,746 |
| | 94,183 |
| 83,353 |
| | 87,746 |
|
Long-term debt – credit facility | 80,472 |
| | 93,333 |
| 111,547 |
| | 80,472 |
|
Long-term debt – other | 3,351 |
| | 562 |
| 3,984 |
| | 3,351 |
|
Other long-term liabilities | 40,626 |
| | 36,456 |
| 44,801 |
| | 40,626 |
|
Total liabilities | 212,195 |
| | 224,534 |
| 243,685 |
| | 212,195 |
|
Commitments and contingencies (see Note 15) |
| |
| |
Commitments and contingencies (see Note 12) | |
| |
|
Stockholders’ Equity: | | | | | | |
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding | — |
| | — |
| — |
| | — |
|
Common stock, $0.01 par; 250,000 shares authorized, 70,558 and 70,029 issued, respectively | 705 |
| | 700 |
| |
Common stock, $0.01 par; 250,000 shares authorized, 71,268 and 70,558 issued, respectively | | 713 |
| | 705 |
|
Additional paid-in capital | 420,276 |
| | 412,642 |
| 428,212 |
| | 420,276 |
|
Accumulated other comprehensive income (loss) | 318 |
| | (371 | ) | |
Accumulated other comprehensive income | | 184 |
| | 318 |
|
Retained earnings | 155,096 |
| | 125,378 |
| 174,967 |
| | 155,096 |
|
Treasury stock, at cost; 42,130 and 40,616 shares, respectively | (436,768 | ) | | (398,961 | ) | |
Treasury stock, at cost; 44,469 and 42,130 shares, respectively | | (482,340 | ) | | (436,768 | ) |
Total stockholders’ equity | 139,627 |
| | 139,388 |
| 121,736 |
| | 139,627 |
|
Total liabilities and stockholders’ equity | $ | 351,822 |
| | $ | 363,922 |
| $ | 365,421 |
| | $ | 351,822 |
|
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
| | | YEARS ENDED DECEMBER 31, | YEARS ENDED DECEMBER 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
Common stock – shares: | | | | | | | | | | |
Shares at beginning of period | 70,029 |
| | 69,480 |
| | 68,531 |
| 70,558 |
| | 70,029 |
| | 69,480 |
|
Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 497 |
| | 444 |
| | 882 |
| |
Issuance for stock-based compensation and dividends, net of forfeitures | | 695 |
| | 497 |
| | 444 |
|
Exercise of stock options | 32 |
| | 105 |
| | 67 |
| 15 |
| | 32 |
| | 105 |
|
Shares at end of period | 70,558 |
| | 70,029 |
| | 69,480 |
| 71,268 |
| | 70,558 |
| | 70,029 |
|
Common stock – par value: | | | | | | | | | | |
Balance at beginning of period | $ | 700 |
| | $ | 695 |
| | $ | 685 |
| $ | 705 |
| | $ | 700 |
| | $ | 695 |
|
Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 5 |
| | 4 |
| | 9 |
| |
Issuance for stock-based compensation and dividends, net of forfeitures | | 8 |
| | 5 |
| | 4 |
|
Exercise of stock options | 0 |
| | 1 |
| | 1 |
| 0 |
| | 0 |
| | 1 |
|
Balance at end of period | $ | 705 |
| | $ | 700 |
| | $ | 695 |
| $ | 713 |
| | $ | 705 |
| | $ | 700 |
|
Additional paid-in capital: | | | | | | | | | | |
Balance at beginning of period | $ | 412,642 |
| | $ | 404,600 |
| | $ | 400,688 |
| $ | 420,276 |
| | $ | 412,642 |
| | $ | 404,600 |
|
Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 556 |
| | 369 |
| | 72 |
| |
Issuance for stock-based compensation and dividends, net of forfeitures | | 447 |
| | 556 |
| | 369 |
|
Exercise of stock options | 381 |
| | 1,213 |
| | 597 |
| 172 |
| | 381 |
| | 1,213 |
|
Income tax benefit from stock-based compensation | 551 |
| | 595 |
| | 399 |
| 307 |
| | 551 |
| | 595 |
|
Stock-based compensation expense | 5,819 |
| | 5,475 |
| | 2,570 |
| 6,705 |
| | 5,819 |
| | 5,475 |
|
Employee stock purchase plan | 327 |
| | 390 |
| | 274 |
| 305 |
| | 327 |
| | 390 |
|
Balance at end of period | $ | 420,276 |
| | $ | 412,642 |
| | $ | 404,600 |
| $ | 428,212 |
| | $ | 420,276 |
| | $ | 412,642 |
|
Accumulated other comprehensive income (loss): | | | | | | | | | | |
Balance at beginning of period | $ | (371 | ) | | $ | 317 |
| | $ | (2,713 | ) | $ | 318 |
| | $ | (371 | ) | | $ | 317 |
|
Pension and post-retirement plans, net of tax of $429, $394 and $1,919, respectively | 689 |
| | (688 | ) | | 3,030 |
| |
Defined benefit pension and post-retirement plans, net of tax of $89, $429 and $394, respectively | | (134 | ) | | 689 |
| | (688 | ) |
Balance at end of period | $ | 318 |
| | $ | (371 | ) | | $ | 317 |
| $ | 184 |
| | $ | 318 |
| | $ | (371 | ) |
Retained earnings: | | | | | | | | | | |
Balance at beginning of period | $ | 125,378 |
| | $ | 47,612 |
| | $ | 40,203 |
| $ | 155,096 |
| | $ | 125,378 |
| | $ | 47,612 |
|
Net income | 42,824 |
| | 90,915 |
| | 10,787 |
| 32,773 |
| | 42,824 |
| | 90,915 |
|
Dividends and dividend equivalents, net of forfeitures ($0.45, $0.41 and $0.10 per share, respectively) | (13,106 | ) | | (13,149 | ) | | (3,378 | ) | |
Dividends, net of forfeitures ($0.48, $0.45 and $0.41 per share, respectively) | | (12,902 | ) | | (13,106 | ) | | (13,149 | ) |
Balance at end of period | $ | 155,096 |
| | $ | 125,378 |
| | $ | 47,612 |
| $ | 174,967 |
| | $ | 155,096 |
| | $ | 125,378 |
|
Treasury stock – shares: | | | | | | | | | | |
Shares at beginning of period | 40,616 |
| | 35,751 |
| | 33,980 |
| 42,130 |
| | 40,616 |
| | 35,751 |
|
Repurchases of common stock | 1,540 |
| | 4,896 |
| | 1,812 |
| 2,370 |
| | 1,540 |
| | 4,896 |
|
Shares tendered in payment of the exercise price of stock options | — |
| | 4 |
| | — |
| 3 |
| | — |
| | 4 |
|
Employee stock purchase plan | (26 | ) | | (35 | ) | | (41 | ) | (34 | ) | | (26 | ) | | (35 | ) |
Shares at end of period | 42,130 |
| | 40,616 |
| | 35,751 |
| 44,469 |
| | 42,130 |
| | 40,616 |
|
Treasury stock – cost: | | | | | | | | | | |
Balance at beginning of period | $ | (398,961 | ) | | $ | (295,991 | ) | | $ | (269,017 | ) | $ | (436,768 | ) | | $ | (398,961 | ) | | $ | (295,991 | ) |
Repurchases of common stock | (38,058 | ) | | (103,195 | ) | | (27,313 | ) | (45,873 | ) | | (38,058 | ) | | (103,195 | ) |
Shares tendered in payment of the exercise price of stock options | — |
| | (84 | ) | | — |
| (63 | ) | | — |
| | (84 | ) |
Employee stock purchase plan | 251 |
| | 309 |
| | 339 |
| 364 |
| | 251 |
| | 309 |
|
Balance at end of period | $ | (436,768 | ) | | $ | (398,961 | ) | | $ | (295,991 | ) | $ | (482,340 | ) | | $ | (436,768 | ) | | $ | (398,961 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| | | YEARS ENDED DECEMBER 31, | YEARS ENDED DECEMBER 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
Cash flows from operating activities: | | | | | | | | | | |
Net income | $ | 42,824 |
| | $ | 90,915 |
| | $ | 10,787 |
| $ | 32,773 |
| | $ | 42,824 |
| | $ | 90,915 |
|
Adjustments to reconcile net income to cash provided by (used in) operating activities: | | | | | | | | | | |
Gain on sale of discontinued operations | — |
| | (64,600 | ) | | — |
| — |
| | — |
| | (64,600 | ) |
Goodwill impairment | — |
| | — |
| | 14,510 |
| |
Deferred income tax provision, net | 2,380 |
| | 491 |
| | 1,166 |
| 2,007 |
| | 2,380 |
| | 491 |
|
Provision for bad debts on accounts receivable | 1,553 |
| | 825 |
| | 546 |
| 976 |
| | 1,553 |
| | 825 |
|
Depreciation and amortization | 9,849 |
| | 10,058 |
| | 9,846 |
| 8,796 |
| | 9,849 |
| | 10,058 |
|
Stock-based compensation | 5,819 |
| | 3,028 |
| | 2,570 |
| |
Pension and post-retirement benefit plans expense | 1,846 |
| | 1,424 |
| | 3,237 |
| |
Amortization of deferred financing costs | 122 |
| | 105 |
| | 90 |
| |
Stock-based compensation expense | | 6,705 |
| | 5,819 |
| | 3,028 |
|
Defined benefit pension and post-retirement plans expense | | 1,733 |
| | 1,846 |
| | 1,424 |
|
Excess tax benefit attributable to stock-based compensation | (551 | ) | | — |
| | (110 | ) | (376 | ) | | (551 | ) | | — |
|
Loss on deferred compensation plan investments, net | 77 |
| | 446 |
| | 304 |
| 597 |
| | 77 |
| | 446 |
|
Gain from Company-owned life insurance proceeds | — |
| | (849 | ) | | — |
| — |
| | — |
| | (849 | ) |
Contingent consideration liability remeasurement | 321 |
| | — |
| | — |
| (42 | ) | | 321 |
| | — |
|
Other | 186 |
| | (152 | ) | | 257 |
| 321 |
| | 308 |
| | (47 | ) |
Decrease (increase) in operating assets: | | | | | | |
(Increase) decrease in operating assets: | | | | | | |
Trade receivables, net | 4,223 |
| | (40,339 | ) | | (28,071 | ) | (8,403 | ) | | 4,223 |
| | (40,339 | ) |
Income tax refund receivable | 2,785 |
| | 4,409 |
| | (5,970 | ) | 354 |
| | 2,785 |
| | 4,409 |
|
Prepaid expenses and other current assets | 1,110 |
| | 530 |
| | (3,170 | ) | (1,631 | ) | | 1,110 |
| | 530 |
|
Other assets, net | (298 | ) | | (27 | ) | | (57 | ) | (495 | ) | | (298 | ) | | (27 | ) |
Increase (decrease) in operating liabilities: | | | | | | |
(Decrease) increase in operating liabilities: | | | | | | |
Accounts payable and other current liabilities | 1,788 |
| | 5,653 |
| | (12,471 | ) | (1,920 | ) | | 1,788 |
| | 5,653 |
|
Accrued payroll costs | (5,503 | ) | | (248 | ) | | 7,422 |
| (1,320 | ) | | (5,503 | ) | | (248 | ) |
Income taxes payable | (1,657 | ) | | (34,934 | ) | | (504 | ) | (489 | ) | | (1,657 | ) | | (34,934 | ) |
Other long-term liabilities | 3,306 |
| | (2,317 | ) | | 83 |
| (139 | ) | | 3,306 |
| | (2,317 | ) |
Cash provided by (used in) operating activities | 70,180 |
| | (25,582 | ) | | 465 |
| 39,447 |
| | 70,180 |
| | (25,582 | ) |
Cash flows from investing activities: | | | | | | | | | | |
Capital expenditures | (8,328 | ) | | (6,011 | ) | | (8,145 | ) | (12,420 | ) | | (8,328 | ) | | (6,010 | ) |
Acquisition, net of cash received | — |
| | (2,611 | ) | | — |
| — |
| | — |
| | (2,611 | ) |
Proceeds from disposition of business | — |
| | 117,887 |
| | — |
| — |
| | — |
| | 117,887 |
|
Proceeds from the disposition of assets held within the Rabbi Trust | 445 |
| | 2,668 |
| | 3,278 |
| — |
| | 445 |
| | 2,668 |
|
Purchase of assets held within the Rabbi Trust | (481 | ) | | (2,436 | ) | | (3,697 | ) | — |
| | (481 | ) | | (2,436 | ) |
Proceeds from Company-owned life insurance | — |
| | 1,037 |
| | — |
| — |
| | — |
| | 1,037 |
|
Other | — |
| | 1 |
| | 17 |
| |
Cash (used in) provided by investing activities | (8,364 | ) | | 110,535 |
| | (8,547 | ) | (12,420 | ) | | (8,364 | ) | | 110,535 |
|
Cash flows from financing activities: | | | | | | | | | | |
Proceeds from bank line of credit | 604,668 |
| | 684,427 |
| | 591,688 |
| |
Payments on bank line of credit | (617,529 | ) | | (653,701 | ) | | (550,081 | ) | |
Proceeds from financing agreement | 2,914 |
| | — |
| | — |
| |
Payments of capital expenditure financing | (1,274 | ) | | (1,280 | ) | | (1,452 | ) | |
Payments of loan financing costs | — |
| | (460 | ) | | — |
| |
Short-term vendor financing | (252 | ) | | (160 | ) | | (180 | ) | |
Proceeds from credit facility | | 937,083 |
| | 604,668 |
| | 684,427 |
|
Payments on credit facility | | (906,008 | ) | | (617,529 | ) | | (653,701 | ) |
Proceeds from other financing arrangements | | 1,783 |
| | 2,914 |
| | — |
|
Payments on other financing arrangements | | (1,830 | ) | | (1,274 | ) | | (1,280 | ) |
Payments of deferred financing fees | | (158 | ) | | — |
| | (460 | ) |
Proceeds from exercise of stock options, net of shares tendered in payment of exercise | 381 |
| | 1,131 |
| | 598 |
| 172 |
| | 381 |
| | 1,131 |
|
Excess tax benefit attributable to stock-based compensation | 551 |
| | — |
| | 110 |
| 376 |
| | 551 |
| | — |
|
Repurchases of common stock | (38,471 | ) | | (101,771 | ) | | (29,810 | ) | (46,013 | ) | | (38,471 | ) | | (101,771 | ) |
Cash dividend | (12,545 | ) | | (12,776 | ) | | (3,297 | ) | (12,447 | ) | | (12,545 | ) | | (12,776 | ) |
Cash (used in) provided by financing activities | (61,557 | ) | | (84,590 | ) | | 7,576 |
| |
Other | | — |
| | (252 | ) | | (160 | ) |
Cash used in financing activities | | (27,042 | ) | | (61,557 | ) | | (84,590 | ) |
Change in cash and cash equivalents | 259 |
| | 363 |
| | (506 | ) | (15 | ) | | 259 |
| | 363 |
|
Cash and cash equivalents at beginning of year | 1,238 |
| | 875 |
| | 1,381 |
| 1,497 |
| | 1,238 |
| | 875 |
|
Cash and cash equivalents at end of year | $ | 1,497 |
| | $ | 1,238 |
| | $ | 875 |
| $ | 1,482 |
| | $ | 1,497 |
| | $ | 1,238 |
|
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional staffing services and solutions to customers in the following segments: Technology (“Tech”), Finance and Accounting (“FA”), and Government Solutions (“GS”). Kforce provides flexible staffing services and solutions on both a temporary and full-time basis. Kforce operates through its corporate headquarters in Tampa, Florida and 62 field offices located throughout the United States. Additionally, one of our subsidiaries, Kforce Global Solutions, Inc. (“Global”), provides information technology outsourcing services internationally through an office in Manila, Philippines. Our international operations comprised less than 2% of net service revenues for each of the three years ended December 31, 2015 and are included in our Tech segment.
Kforce serves clients from the Fortune 1000, the Federal Government, state and local governments, local and regional companies and small to mid-sized companies.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP")U.S. GAAP and the rules of the SEC.
Certain prior year amounts have been reclassified in the Consolidated Statements of Cash Flows to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of Kforce Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “the Registrant,” “Kforce,” “the Company,” “we,” “the Firm,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.indicates otherwise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most important of these estimates and assumptions relate to the following: allowance for doubtful accounts, fallouts and other accounts receivable reserves; accounting for goodwill and identifiable intangible assets and any related impairment; self-insured liabilities for workers’ compensation and health insurance; stock-based compensation; obligations for pension plans and accounting for income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Cash and Cash Equivalents
Kforce classifies all highly liquid investments with an original initial maturity of three months or less as cash equivalents. Cash and cash equivalents consist of cash on hand with banks, either in commercial accounts, or overnight interest-bearing money market accounts and at times may exceed federally insured limits. Cash and cash equivalents are stated at cost, which approximates fair value due to the short duration of their maturities.
Accounts Receivable Reserves
Kforce establishes its reserves for expected credit losses, fallouts, early payment discounts and revenue adjustments based on past experience and estimates of potential future activity. Specific to our allowance for doubtful accounts, which comprises a majority of our accounts receivable reserves, Kforce performs an ongoing analysis of factors including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of accounts receivable among clients and higher-risk sectors, and the current state of the U.S. economy. Trade receivables are written off by Kforce after all reasonable collection efforts have been exhausted.
Accounts receivable reserves as a percentage of gross accounts receivable was 1.1% and 1.0% as of December 31, 2015 and December 31, 2014, respectively.
Revenue Recognition
Kforce considers amounts to be earned once evidence of an arrangement has been obtained, delivery has occurred, fees are fixed or determinable, and collectability is reasonably assured. We earnKforce’s primary sources of revenues from two primary sources: Flexible billingsare Flex and Direct Hire fees.Hire.
Flexible billingsFlex revenues are recognized as the services are provided by Kforce’s Flexible Consultants. Net serviceconsultants. Kforce records revenues represent services rendered to customers lessnet of credits, discounts, rebates and revenue-related reserves. Revenues include reimbursements of travel and out-of-pocket expenses (“billable expenses”) with equivalent amounts of expense recorded in direct costs of services.
Direct Hire feesrevenues are recognized by Kforce when employment candidates accept offers of permanent employment and are scheduled to commence employment within 30 days. Kforce records revenues net of an estimated reserve for “fallouts,”fallouts, which is based on Kforce’s historical fallout experience. Fallouts occur when a candidate does not remain employed with the client through the contingency period, which is typically 90 days or less.
Our GS segment generates its revenues under contracts that are, in general, greater in duration than our other segments and which can often span several years, inclusive of renewal periods. Our GS segment does not generate any Direct Hire fees.revenues. Our GS segment, which represents approximately 7% of total revenues, generates revenues under the following contract arrangements.
Revenues for time-and-materials contracts, which accounts for approximately 62% of this segment’s revenue, are recognized based on contractually established billing rates at the time services are provided.
Revenues for fixed-price contracts are recognized on the basis of the estimated percentage-of-completion. Approximately 16%22% of this segment’s revenues are recognized under this method. Progress towards completion is typically measured based on costs incurred as a proportion of estimated total costs or other measures of progress when applicable. Profit in a given period is reported at the expected profit margin to be achieved on the overall contract.
Revenues for cost-plus arrangements are recognized based on allowable costs incurred plus an estimate of the applicable fees earned. Approximately 6% of this segment’s revenues are recognized under these arrangements.
Revenues for the product-based business, which accounts for approximately 16% of this segment'ssegment’s revenues, are recognized at the time of shipment.delivery.
Kforce collects sales tax for various taxing authorities and it is our policy to record these amounts on a net basis; thus, sales tax amounts are not included in net service revenues.
Direct Costs of Services
Direct costs of services are composed of all related costs of employment for its Flexible Consultants,consultants, including payroll wages, payroll taxes, payroll-related insurance and certain fringe benefits, as well as subcontractor costs. Direct costs of services exclude depreciation and amortization expense, which is presented on a separate line in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Taxes Assessed by Governmental Agencies – Revenue Producing TransactionsCommissions
Our associates make placements and earn commissions as a percentage of revenues (for Direct Hire revenues) or gross profit (for Flex revenues) pursuant to a calendar-year-basis commission plan. The amount of commissions paid as a percentage of revenues or gross profit increases as volume increases. Kforce accrues commissions for revenues or gross profit at a percentage equal to the percent of total expected commissions payable to total revenues or gross profit for the year, as applicable.
Stock-Based Compensation
Kforce collects sales taxaccounts for various taxing authorities and itstock-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is our policyrecognized over the requisite service period, net of estimated forfeitures. If the actual number of forfeitures differs from those estimated, additional adjustments to record these amounts on a net basis; thus, sales tax amounts are not includedcompensation expense may be required in net service revenues.future periods.
Income Taxes
Kforce accounts for income taxes using the asset and liability approach to the recognition of deferred tax assets and liabilities for the expected future tax consequences of differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Unless it is more likely than not that a deferred tax asset can be utilized to offset future taxes, a valuation allowance is recorded against that asset. The excess tax benefits of deductions attributable to employees’ disqualifying dispositions of shares obtained from incentive stock options, exercises of non-qualified stock options, and vesting of restricted stock are reflected as increases in additional paid-in capital.
Kforce evaluates tax positions that have been taken or are expected to be taken in its tax returns, and records a liability for uncertain tax positions. Kforce uses a two-step approach to recognize and measure uncertain tax positions. First, tax positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, tax positions are measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement. Kforce recognizes interest and penalties related to unrecognized tax benefits in Income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Fair Value MeasurementsCash and Cash Equivalents
Kforce uses fair value measurements in areas that include, but are not limited to: the impairment testingclassifies all highly liquid investments with an original initial maturity of goodwill and intangible and long-lived assets; stock-based compensation arrangements; valuing the investment in money market funds within Kforce’s deferred compensation plan; and a contingent consideration liability. The carrying values ofthree months or less as cash equivalents. Cash and cash equivalents consist of cash on hand with banks, either in commercial accounts, or overnight interest-bearing money market accounts and at times may exceed federally insured limits. Cash and cash equivalents are stated at cost, which approximates fair value due to the short duration of their maturities.
Accounts Receivable and Accounts Receivable Reserves
Kforce records accounts receivable at the invoiced amount. Kforce establishes its reserves for expected credit losses, fallouts, early payment discounts and revenue adjustments based on past experience and estimates of potential future activity. Specific to our allowance for doubtful accounts, payable,which comprises a majority of our accounts receivable reserves, Kforce performs an ongoing analysis of factors including recent write-off and otherdelinquency 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 assets and liabilities approximate fair value becausestate of the short-term natureU.S. economy. Trade receivables are written off by Kforce after all reasonable collection efforts have been exhausted. Accounts receivable reserves as a percentage of these instruments. Using available market informationgross accounts receivable was 1.0% and appropriate valuation methodologies, Kforce has determined the estimated fair value measurements; however, considerable judgment is required in interpreting data to develop the estimates1.1% as of fair value.December 31, 2016 and December 31, 2015, respectively.
Fixed Assets
Fixed assets are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the related leases, which generally range from three to five years. Upon sale or disposition of our fixed assets, the cost and accumulated depreciation are removed and any resulting gain or loss, net of proceeds, is reflected in the Consolidated Statements of Operations and Comprehensive Income.
Leases
Leases for our field offices, which are located throughout the U.S., range from three to five-year terms although a limited number of leases contain short-term renewal provisions that range from month-to-month to one year.
For leases that contain escalations of the minimum rent, we recognize the related rent expense on a straight-line basis over the lease term. We record any difference between the straight-line rent amounts and amounts payable under the leases as a deferred rent liability in Accounts payable and other accrued liabilities or Other long-term liabilities, as appropriate.
The Company records incentives provided by landlords for leasehold improvements in Accounts payable and other accrued liabilities or Other long-term liabilities, as appropriate, and records a corresponding reduction in rent expense on a straight-line basis over the lease term.
Goodwill and Other Intangible Assets
Goodwill
Kforce performs aWe evaluate goodwill for impairment analysis, using the two-step analysis method, onannually or more frequently if an annual basis and whenever eventsevent occurs or changes in circumstances change that indicate that the carrying value may not be recoverable unless it is determined, based uponrecoverable. In testing for goodwill impairment, we may elect to utilize a review of the qualitative factors of a reporting unit, thatassessment to evaluate whether it is more likely than not that the fair value of a reporting unit exceedsis less than its carrying amount, including goodwill.amount. If our qualitative assessment indicates that the fair value may be impaired or if we elect not to utilize a qualitative assessment for the evaluation, we perform a two-step impairment test. Under the two-step analysis method, the recoverability of goodwill is measured at the reporting unit level, which Kforce has determined to be consistent with its operatingreporting segments, by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. Kforce determines the fair market value of its reporting units based on a weighting of the present value of projected future cash flows (the “income approach”) and the use of comparative market approaches under both the guideline company method and guideline transaction method (collectively, the “market approach”). Fair market value using the income approach is based on Kforce’s estimated future cash flows on a discounted basis. The market approach compares each of Kforce’s reporting units to other comparable companies based on valuation multiples derived from operational and transactional data to arrive at a fair value. Factors requiring significant judgment include, among others, the assumptions related to discount rates, forecasted operating results, long-term growth rates, the determination of comparable companies, and market multiples. Changes in economic or operating conditions or changes in Kforce’s business strategies that occur after the annual impairment analysis and which impact these assumptions may result in a future goodwill impairment charge, which could be material to Kforce’s consolidated financial statements.
Other Intangible Assets
Identifiable intangible assets arising from certain of Kforce’s acquisitions include non-compete and employment agreements, contractual relationships, customer contracts, technology, and a trade name and trademark. Our trade names and trademarks, and derivatives thereof, and GS’s “Data Confidence”Data Confidence trademark are important to our business. Our primary trade names and trademark are registered with the United StatesU.S. Patent and Trademark Office.
For definite-lived intangible assets, Kforce has determined thatamortization is computed using the straight-line method is an appropriate methodology to allocate the cost over the period of expected benefit, which ranges from one to fifteen years. The impairment evaluation for indefinite-lived intangible assets, which for Kforce consists of a trademark and trade name, is conducted on an annual basis or more frequently if events or changes in circumstances indicate that an asset may be impaired.
Impairment of Long-Lived Assets
Kforce reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If such assets are considered to be impaired, the impairment charge recognized is the amount by which the carrying amounts of the assets exceed the fair value of the assets, as determined based on the present value of projected future cash flows.
Capitalized Software
Kforce purchases, develops, and implements new computer software to enhance the performance of our technology infrastructure. Direct internal costs, such as payroll and payroll-related costs, and external costs incurred during the development stage are capitalized and classified as capitalized software. Kforce capitalized development-stage implementation costs of $0.3 million, $0.4 million and $1.0 million during the years ended December 31, 2015, 2014 and 2013, respectively. Capitalized software development costs and the associated accumulated amortization are classified as Other assets, net in the accompanying Consolidated Balance Sheets and are being amortizedSheets; amortization is computed using the straight-line method over the estimated useful lives of the software, which range from one to five years, using the straight-line method.
Commissions
Our associates make placements and earn commissions as a percentage of revenues (for Direct Hire revenues) or gross profit (for Flex revenues) pursuant to a calendar-year-basis commission plan. The amount of commissions paid as a percentage of revenues or gross profit increases as volume increases. Kforce accrues commissions for revenues or gross profit at a percentage equal to the percent of total expected commissions payable to total revenues or gross profit for the year, as applicable.
Stock-Based Compensation
Kforce accounts for stock-based compensation by measuring the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost is recognized over the requisite service period, net of estimated forfeitures. If the actual number of forfeitures differs from those estimated, additional adjustments to compensation expense may be required in future periods.seven years.
Workers’ Compensation
Kforce retains the economic burden for the first $250 thousand per occurrence in workers’ compensation claims except: (1) in states that require participation in state-operated insurance funds and (2) for its GS segmentKforce Government Solutions, Inc. which is fully insured for workers’ compensation claims. Workers’ compensation includes ongoing health care and indemnity coverage for claims and may be paid over numerous years following the date of injury. Workers’ compensation expense includes insurance premiums paid, claims administration fees charged by Kforce’s workers’ compensation administrator, premiums paid to state-operated insurance funds and an estimate for Kforce’s liability for IBNR claims and for the ongoing development of existing claims.
Kforce estimates its workers’ compensation liability based upon historical claims experience, actuarially determined loss development factors, and qualitative considerations such as claims management activities.
Health Insurance
Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss for each health insurance plan participant up to $300$350 thousand in claims annually. Additionally, for all claim amounts exceeding $300$350 thousand, Kforce retains the risk of loss up to an aggregate annual loss of those claims of $450 thousand. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and IBNR claims, which are primarily based upon an evaluation of historical claims experience, actuarially-determined completion factors and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.
Accounting for Pension Benefits
Kforce recognizes the underfundedunfunded status of its defined benefit pension plans as a liability in its Consolidated Balance SheetsSheets. Because our plans are unfunded as of December 31, 2016, actuarial gains and recognizeslosses may arise as a result of the actuarial experience of the plans, as well as changes in that funded statusactuarial assumptions in measuring the yearassociated obligation as of year-end, or an interim date if any re-measurement is necessary. The net after-tax impact of unrecognized actuarial gains and losses related to our defined benefit pensions plans is recorded in which the changes occur throughaccumulated other comprehensive income (loss). Kforce also measures the funded status of the defined benefit pension plans as of the date of its fiscal year-end, with limited exceptions. in our consolidated financial statements.
Amortization of a net unrecognized gain or loss in accumulated other comprehensive income (loss) is included as a component of net periodic benefit cost if, as of the beginning of the year, that net gain or loss exceeds 10% of the projected benefit obligation. If amortization is required, the minimum amortization shall be that excess divided by the average remaining service period of active plan participants.
Earnings per Share
Basic earnings per share is computed as earnings divided by the weighted average number of common shares outstanding (“WASO”) during the period. Basic weighted average shares outstandingWASO excludes unvested shares of restricted stock. Diluted earnings per common share is computed by dividing the earnings attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period plusdiluted WASO. Diluted WASO includes the dilutive effect of stock options and other potentially dilutive securities such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31 (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Numerator: | | | | | |
Income from continuing operations | $ | 42,824 |
| | $ | 29,398 |
| | $ | 5,294 |
|
Income from discontinued operations, net of tax | — |
| | 61,517 |
| | 5,493 |
|
Net income | $ | 42,824 |
| | $ | 90,915 |
| | $ | 10,787 |
|
Denominator: | | | | | |
Weighted average shares outstanding – basic | 27,910 |
| | 31,475 |
| | 33,511 |
|
Common stock equivalents | 280 |
| | 216 |
| | 132 |
|
Weighted average shares outstanding – diluted | 28,190 |
| | 31,691 |
| | 33,643 |
|
Earnings per share – basic: | | | | | |
From continuing operations | $ | 1.53 |
| | $ | 0.94 |
| | $ | 0.16 |
|
From discontinued operations | — |
| | 1.95 |
| | 0.16 |
|
Earnings per share – basic | $ | 1.53 |
| | $ | 2.89 |
| | $ | 0.32 |
|
Earnings per share – diluted: | | | | | |
From continuing operations | $ | 1.52 |
| | $ | 0.93 |
| | $ | 0.16 |
|
From discontinued operations | — |
| | 1.94 |
| | 0.16 |
|
Earnings per share – diluted | $ | 1.52 |
| | $ | 2.87 |
| | $ | 0.32 |
|
For the years ended December 31, 2016, 2015 2014 and 2013,2014, there were inconsequential175 thousand, 280 thousand and 216 thousand common stock equivalents excluded fromincluded in the weighted average diluted WASO. For the years ended December 31, 2016, 2015 and 2014, there was an insignificant amount of anti-dilutive common shares based on the fact that their inclusion would have had an anti-dilutive effect on earnings per share.stock equivalents.
Treasury Stock
Kforce’s Board of Directors (“Board”) may authorize share repurchases of Kforce’s common stock. Shares repurchased under Board authorizations are held in treasury for general corporate purposes, including issuances under the 2009 ESPP.Employee Stock Purchase Plan. Treasury shares are accounted for under the cost method and reported as a reduction of stockholders’ equity in the accompanying consolidated financial statements.
Comprehensive Income (Loss)Fair Value Measurements
AccumulatedKforce uses fair value measurements in areas that include, but are not limited to: the impairment testing of goodwill and intangible and long-lived assets; stock-based compensation arrangements; and a contingent consideration liability. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and other comprehensive income (loss) representscurrent assets and liabilities approximate fair value because of the net after-taxshort-term nature of these instruments. Using available market information and appropriate valuation methodologies, Kforce has determined the estimated fair value measurements; however, considerable judgment is required in interpreting data to develop the estimates of fair value.
New Accounting Standards
In January 2017, the FASB issued authoritative guidance simplifying the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is to be applied for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance requires companies to apply the requirements prospectively. Kforce is currently evaluating the impact on the consolidated financial statements.
In December 2016, the FASB issued authoritative guidance clarifying language when accounting for internal-use software licensed from third parties that is within the scope of unrecognized actuarial gains and losses relatedSubtopic 350-40. According to the SERP which coversclarifying language, internal-use software licensed from third parties shall be accounted for as the acquisition of an intangible asset. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. Kforce elected not to adopt this standard early. The guidance requires companies to apply the requirements prospectively or retrospectively. Upon adoption, Kforce anticipates retrospectively applying a limited numberchange in the classification of executives and a defined benefit plan covering all eligible employees in our Philippine operations. Because each of these plans is unfunded as of December 31, 2015, the actuarial gains and losses arise as a result of the actuarial experience of the plans, as well as changes in actuarial assumptions in measuring the associated obligation as of year-end, or an interim date if any re-measurement is necessary. This information is provided in our Consolidated Statements of Operations and Comprehensive Income.
Dividends
Kforce’s Board may, at its discretion, declare and pay dividendsinternal-use software licensed from third parties from other assets to intangible assets on the outstanding shares of Kforce’s common stock out of retained earnings, subjectconsolidated balance sheet.
In August 2016, the FASB issued authoritative guidance clarifying eight cash flow classification issues that are not currently addressed or unclear under current GAAP and thereby reducing the current and potential future diversity in practice. The guidance is to statutory requirements. Dividendsbe applied for any outstandingannual periods beginning after December 15, 2017 and unvested restricted stockinterim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, unless it is impracticable to apply the requirements retrospectively at which the requirements should be applied prospectively as of the recordearliest date are awarded in the form of additional shares of forfeitable restricted stock, at the same ratepracticable. Kforce elected not to adopt this standard early. Kforce does not anticipate that this guidance will have an impact on its consolidated financial statements as the cash dividend on common stockflow classification issues are either not applicable or we are currently accounting for them in accordance with the clarified guidance.
In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and basedclassification on the closingstatement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. Kforce elected not to adopt this standard early. Upon adoption, Kforce anticipates a prospective impact to our income tax expense line within our consolidated statements of operations and comprehensive income, the amount of which will depend on the vesting activity in any given period and Kforce’s stock price on the recordvesting date. Such additional shares haveAdditionally, we expect a retrospective change in the same vesting termspresentation of excess tax benefits from a financing to operating activity within our consolidated statements of cash flows. Kforce elected to change its policy regarding forfeitures and conditionsto account for forfeitures when they occur as the outstanding and unvested restricted stock. The following summarizes the cash dividends declared for the three years ended December 31:
|
| | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, |
| 2015 | | 2014 | | 2013 |
Cash dividends declared per share | $ | 0.45 |
| | $ | 0.41 |
| | $ | 0.10 |
|
Kforce currently expectsopposed to continueapplying an estimate to declare and pay quarterly dividendssimplify our internal accounting practices. This change will be applied using a modified retrospective transition method by means of a similar amount. However,cumulative-effect adjustment to retained earnings as of the declaration, payment and amountbeginning of future dividends are discretionary and will be subject to determination by Kforce’s Boardthe period of Directors each quarter following its review of, among other things, the Firm’s financial performance and our legal ability to pay dividends.adoption.
New Accounting Standards
In February 2016, the FASB issued authoritative guidance regarding the accounting for leases. The guidance is to be applied for annual periods beginning after December 15, 2018 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented, including interim periods. Kforce elected not to adopt this standard early. Kforce is currently evaluating the potential impact on the consolidated financial statements.
In November 2015, the FASB issued authoritative guidance requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is to be applied for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption is permitted. Kforce is still determining if it will earlyelected not to adopt this standard.standard early. Kforce anticipates a change to the presentation of the deferred tax liabilities and assets on the consolidated balance sheets upon adoption.
In April 2015, the FASB issued authoritative guidance regarding a customer's accounting for fees paid in a cloud computing arrangement. This guidance is to be applied for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and early adoption is permitted. Kforce elected not to adopt this standard early. Kforce does not anticipate a material impact to the consolidated financial statements upon adoption.
In April 2015, the FASB issued authoritative guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, similar to debt discounts. The guidance is to be applied for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, and early adoption is permitted. Kforce elected not to adopt this standard early. Kforce does not anticipate a material impact to the consolidated financial statements upon adoption.
In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers, which specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued authoritative guidance deferring the effective date of the new revenue standard by one year for all entities. The one yearone-year deferral results in the guidance being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and entities are not permitted to adopt the standard earlier than the original effective date. Since May 2014, the FASB has issued additional and amended authoritative guidance regarding revenue from contracts with customers in order to clarify and improve the understanding of the implementation guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected athe modified retrospective transition method. Based on our preliminary assessment, we believe that the timing of our revenue recognition will not be impacted for at least 95% of our revenues. The remainder of our revenues are derived from GS fixed-price contracts. We do not currentlyare reviewing these contracts in order to determine if there may be any change to the timing. Additionally, we anticipate a materialchange in the classification of bad debt expense from SG&A to net service revenues. We are continuing to evaluate other items that may impact to the consolidated financial statements upon adoption; however,our revenue transaction prices. Furthermore, we do anticipate an increase in the level of disclosure around revenue.our arrangements and resulting revenue recognition.
2. Discontinued Operations
Effective August 3, 2014, Kforce sold to RCM Acquisition, Inc. (the “Purchaser”), under a Stock Purchase Agreement (the “SPA”) dated August 4, 2014, all of the issued and outstanding stock of KHI, a wholly-owned subsidiary of Kforce Inc. and operator of the former HIM reporting segment, for a total cash purchase price of $119.0 million plus a post-closing working capital adjustment of $96 thousand.
In connection with the sale, Kforce entered into a Transition Services Agreement (the “TSA”) with the Purchaser to provide certain post-closing transitional services for a period not to exceed 12 months. Services provided by Kforce under the TSA ceased during the three months ended September 30, 2015. The fees for the services under the TSA were generally equivalent to Kforce'sKforce’s cost.
In accordance with and defined within the SPA, Kforce was obligated to indemnify the Purchaser for certain losses, as defined, in excess of $1.19 million, although this deductible does not apply to certain specified losses. Kforce’s obligations under the indemnification provisions of the SPA, with the exception of certain items, ceased 12 months from the closing date and were limited to an aggregate of $8.925 million, although these time and monetary caps do not apply to certain specified losses. While it cannot be certain, Kforce believes any material exposure under the indemnification provisions is remote, particularly given that the 12 month12-month time period for general indemnification claims has now passed and, as a result, Kforce has not recorded a liability as of December 31, 2015.
The total financial results of HIM have been presented as discontinued operations in the accompanying Consolidated Statements of Operations and Comprehensive Income. The following summarizes the revenues and pretax profits of HIM for the two yearsyear ended December 31 (in thousands):
| | | | YEARS ENDED DECEMBER 31, | | | |
| | 2014 | | 2013 | 2014 |
Net service revenues | | $ | 56,670 |
| | $ | 78,159 |
| $ | 56,670 |
|
Income from discontinued operations, before income taxes | | $ | 103,512 |
| | $ | 9,169 |
| $ | 103,512 |
|
For the year ended December 31, 2014, the income from discontinued operations included a gain, net of transaction costs, on the sale of HIM of $94.3 million pretax, or $56.1 million after tax. The transaction costs primarily included legal fees, stock-based compensation related to the acceleration of restricted stock, commissions and transaction bonuses in the form of cash and common stock, which, in the aggregate, totaled $11.0 million. Stock-based compensation related to acceleration of restricted stock was approximately $0.6 million and transaction bonuses paid in stock in lieuwas approximately $1.8 million, or 92 thousand shares of cash was $2.4 million.common stock. Kforce utilized the proceeds from the sale of HIM initially to pay down the outstanding borrowings under our Credit Facilitycredit facility and ultimately to repurchase shares of common stock.
Income tax expense as a percentage of income from discontinued operations, before income taxes, for the year ended December 31, 2014 and 2013 was 40.6% and 40.1%, respectively..
3. Fixed Assets
MajorThe following table presents major classifications of fixed assets and related useful lives are summarized as follows (in thousands):
| | | | | DECEMBER 31, | | | DECEMBER 31, |
| USEFUL LIFE | | 2015 | | 2014 | USEFUL LIFE | | 2016 | | 2015 |
Land | | $ | 5,892 |
| | $ | 5,892 |
| | $ | 5,892 |
| | $ | 5,892 |
|
Building and improvements | 5-40 years | | 25,516 |
| | 25,304 |
| 5-40 years | | 25,701 |
| | 25,516 |
|
Furniture and equipment | 5-10 years | | 11,802 |
| | 10,881 |
| 5-20 years | | 17,084 |
| | 11,802 |
|
Computer equipment | 3-5 years | | 11,393 |
| | 10,380 |
| 3-5 years | | 11,003 |
| | 11,393 |
|
Leasehold improvements | 3-5 years | | 11,632 |
| | 8,347 |
| 3-5 years | | 13,345 |
| | 11,632 |
|
| | 66,235 |
| | 60,804 |
| | 73,025 |
| | 66,235 |
|
Less accumulated depreciation and amortization | | (28,759 | ) | | (25,474 | ) | | (29,880 | ) | | (28,759 | ) |
| | $ | 37,476 |
| | $ | 35,330 |
| | $ | 43,145 |
| | $ | 37,476 |
|
Computer equipment atas of December 31, 2016 includes equipment acquired under capital leases of $4.0 million and related accumulated depreciation of $2.3 million. Computer equipment as of December 31, 2015 includes equipment acquired under capital leases of $4.7 million and related accumulated depreciation of $2.9 million. Computer equipment at December 31, 2014 includes equipment acquired under capital leases of $3.8 million and related accumulated depreciation of $2.3 million. Depreciation and amortization expense, which includes amortization of capital leases, during the years ended December 31, 2016, 2015 2014 and 20132014 was $6.7 million, $6.7 million and $6.3 million, and $5.9 million, respectively.
4. Income Taxes
The provision for income taxes from continuing operations consists of the following (in thousands):
| | | YEARS ENDED DECEMBER 31, | YEARS ENDED DECEMBER 31, |
| 2015 | | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
Current: | | | | | | | | | | |
Federal | $ | 22,265 |
| | $ | 15,782 |
| | $ | 4,140 |
| $ | 16,677 |
| | $ | 22,265 |
| | $ | 15,782 |
|
State | 4,632 |
| | 2,527 |
| | 449 |
| 3,829 |
| | 4,632 |
| | 2,527 |
|
Deferred | 1,951 |
| | 250 |
| | 1,046 |
| 2,676 |
| | 1,951 |
| | 250 |
|
| $ | 28,848 |
| | $ | 18,559 |
| | $ | 5,635 |
| $ | 23,182 |
| | $ | 28,848 |
| | $ | 18,559 |
|
The provision for income taxes from continuing operations shown above varied from the statutory federal income tax rate for those periods as follows: