UNITED STATES

None

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “non-accelerated filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act:Act.

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016,2018, was $407,443,871.$786,439,764. For purposes of this determination, common stock held by each officer and director and by each person who owns 10% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s common stock as of February 22, 201720, 2019 was 26,744,518.25,848,178.

SPECIALCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

References in this document to “the Registrant,” “Kforce,” “the Company,” “we,” “the Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.

This report, particularly Item 1. Business, Item 1A. Risk Factors, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), and the documents we incorporate into this report containscontain certain statements that are, or may be deemed to be, forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements may include, but may not be limited to, projections of revenue, income, losses, cash flows, capital expenditures, future prospects,financial or operational performance, our beliefs regarding potential government actions the impact ofor changes in laws and regulations, anticipated costs and benefits of proposed (or future) acquisitions, integration of acquisitions, transition of divestitures plans for future operations, capabilities of business operations,and investments, effects of interest rate variations, our ability to obtain financing and favorable terms, financing needs or plans, plans relating to services of Kforce, estimates concerning the effects of litigation or other disputes, the occurrence of unanticipated expenses, estimates concerning our ability to collect on our trade accounts receivable, expectations of the overall economic outlook, developments within the staffing sector including, but not limited to, the penetration rate (the percentage of temporary staffing to total employment) and growth in temporary staffing, a reduction in the supply of consultants and candidates for temporary employment or the Firm’s ability to attract such candidates, the success of the Firm in attracting and retaining revenue-generating talent,individuals, estimates concerning goodwill impairment, risk of contract non-performance, delays or termination or the failure to obtain awards, task orders or funding under contracts, changes in client demand for Firm services and our servicesability to adapt to such aschanges, the resulting impactentry of any significant organizational changes within our largestnew competitors in the market, the ability of the Firm to maintain and attract clients in the face of changing economic or competitive conditions, as well as assumptions as to any of the foregoing and all statements that are not based on historical fact but rather reflect our current expectations concerning future results and events. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, seerefer to the Risk Factors and MD&A sections. In addition, when used in this discussion, the terms “anticipate,” “assume,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “may,” “likely,” “could,” “should,” “suggest”“future” and variations thereof and similar expressions are intended to identify forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. Kforce undertakes no obligation to publicly publish the results ofupdate any adjustments to these forward-looking statements that may be made to reflect events on or after the date of this report or to reflect the occurrence of unexpected events.statements.

PART I

Company Overview

Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional and technical specialty staffing services and solutions to customersclients through the following segments: Technology (“Tech”),; Finance and Accounting (“FA”),; and Government Solutions (“GS”). Kforce provides flexible staffing services and solutions on both a temporary (“Flex”) and permanent (“Direct Hire”) basis. We operate through our corporate headquarters in Tampa, Florida and 61with approximately 60 field offices located throughout the U.S., as well as an office in Manila, Philippines. Kforce was incorporated in 1994 but its predecessor companies Romac & Associates, Inc. and Source Services Corporation have been providing staffing services since 1962. Kforce completed its Initial Public Offering in August 1995.

Kforce serves clients from theacross many industries and geographies as well as companies of all sizes with a particular focus on Fortune 1000 and similarly-sized companies. We also provide services and solutions as a prime contractor and subcontractor to the U.S. Federal Government (the “Federal Government”) as well as state and local governments, localgovernments. We believe that our portfolio of service offerings is focused in areas of expected growth and regional companies and smallare a key contributor to mid-sized companies.our long-term financial stability. Our 10 largest clients represented approximately 25% of revenuesrevenue and no single customerclient accounted for more than 6%5% of revenuestotal revenue for the year ended December 31, 2016.2018.

Substantially all of our revenues are derived from U.S. domestic operations with customersoperations. The asset sale of Kforce Global Solutions, Inc., (“Global”) a wholly-owned subsidiary located in the U.S. and substantially all long-lived assets were locatedPhilippines, was completed in September 2017. This sale did not meet the U.S. for the years ended December 31, 2016, 2015 and 2014. Our international operations comprised approximately 1%definition of net service revenues for the years ended December 31, 2016, 2015 and 2014 and arediscontinued operations. Global was included in our Tech segment.segment and contributed approximately 1% of revenue in 2017 and 2016.

For additional segment financial data see Note 132 – “Reportable Segments” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report.

Our largest segment, Tech, segment provides both temporary staffingFlex and permanent placementDirect Hire services to our clients, focusing primarily on areas of information technology such as systems/applications architecture and development, project management, enterprise data management, business intelligence, e-commerce, technology infrastructure,artificial intelligence, machine learning, network architecture and security. Revenues forWithin our Tech segment, decreased 1.4% to $883.5 million for the year ended December 31, 2016 as compared to $895.9 million for the year ended December 31, 2015. The average bill rate for our Tech segment for 2016 was approximately $67 per hour. Our Tech segment provideswe provide service to clients in a variety of industries with a strong footprint in the financial services, communications and insurance services and also to Federal government sectors. Aintegrators. Revenue for our Tech segment increased 9.1% to $990.1 million in 2018 on a year-over-year basis. The average bill rate for our Tech segment in 2018 was approximately $73 per hour.

The September 20162018 report published by Staffing Industry Analysts (“SIA”) stated that temporary technology staffing is expected to experience growth of 6%3% in 2017.2019. Digital transformation, as a general trend, is driving organizations across all industries to increase their technology investments as competition and the speed of change intensifies. Nontraditional competitors are also entering new end markets; thus, putting increased pressure on companies to invest in innovation and the evolution of their business models. We believe these secular drivers will transcend traditional cyclical patterns as our clients' business models adjust. At the primary drivers of this growthmacro level, demand is also being driven by an ever-changing and complex regulatory and employment law environment, which increases the continuing use of temporary staffing as a solution during uncertain economic cycles are the increasingly strict regulatory environment andoverall cost of employment both of whichfor many companies. These factors, among others, are driving the systemic use ofcontinuing to drive companies to look to temporary staffing particularly in project-based workproviders, such as technology, and the increasing demand for talent in areas like cybersecurity, cloud-based computing, data analytics and application development. The secular drivers of technology spend have remained intact with many companies now becoming increasingly dependent on the efficiencies provided by technology and the need for innovationKforce, to support business strategies and sustain relevancy in today’s rapidly changing marketplace. The SIA report also provides that notable skill shortages in certain technology skill sets are expected to continue.meet their human capital needs.

Our FA segment provides both temporary staffingFlex and permanent placementDirect Hire services to our clients in areas such as general accounting, business analysis, accounts payable, accounts receivable, financial analysis and reporting, taxation, budget preparation and analysis, mortgage and loan processing, cost analysis, professional administration, outsourced functional support, credit and collections, audit services and systems and controls analysis and documentation. OurWithin our FA segment, provides servicewe provide services to clients in a variety of industries with a strong footprint in the financial services, healthcare and government sectors. RevenuesRevenue for our FA segment increased 3.6%decreased 9.3% to $337.6$313.8 million for the year ended December 31, 2016 as compared to $325.9 million for the year ended December 31, 2015.in 2018 on a year-over-year basis. The average bill rate for our FA segment for 2016in 2018 was approximately $32$35 per hour. AThe September 20162018 report published by SIA stated that finance and accounting temporary staffing is expected to experience growth of 6%4% in 2017.2019.

Our GS segment provides staffing services and solutions to the Federal Government as both a prime contractor and a subcontractor in the fields of information technology and finance and accounting. TheGS offers integrated business solutions to its clients in areas including but not limited to: information technology infrastructure transformation, healthcare informatics, data and knowledge management and analytics, research and development, audit readiness, financial management and accounting. GS contracts are concentrated among customersclients, such as the U.S. Department of Veteran Affairs, and the types of services and support that have historically been less likely to be impacted by sequestration threats and budget constraints, such as the U.S. Department of Veteran Affairs.though a prolonged government shutdown could be expected to negatively impact GS offers integrated business solutions to its customers in areas such as: information technology, healthcare informatics, data and knowledge management, research and development, audit readiness, financial management and accounting, among other areas. Revenuesrevenue. Revenue for our GS segment increased 1.3%9.7% to $98.6$114.4 million for the year ended December 31, 2016 as compared to $97.4 million for the year ended December 31, 2015.in 2018. Our GS segment also includes a product-basedproduct business specialized in manufacturing and delivering trauma-training manikins, which accounted for approximately 16%14% of its total revenuesGS revenue in 2016. Substantially all2018. The majority of GS services are supplied to the Federal Government (or through a prime contractor to the Federal Government) through field offices located in the Washington, D.C. metropolitan area and San Antonio Texas and Austin, Texas.

TypesOur backlog represents only those U.S. government contracts and subcontracts for which funding has been provided, excluding renewal option years. Our backlog was $47.4 million as of Staffing Services

Flex revenue represents approximately 96% of total Kforce revenues, respectively.revenue over the last three fiscal years. We provide our clients with qualified individuals (“consultants”) on a temporary basis when it is determined that they have the appropriate skills and experience and are the right match for our clients. We recruitutilize a diversified set of recruitment platforms and databases to identify consultants from the job boards, Kforce.com, social media networks and passive candidate marketing, where we identify individuals who are currently employed and not actively seeking another position.employment. These consultants can either be directly employed by Kforce, qualified independent contractors or foreign nationals sponsored by Kforce. Our success is dependent upon our internal employees’ (“associates”) ability to: (1) acknowledge, understand and participate in creating solutions for our clients’ needs; (2) determine and understand the experience and capabilities of the consultants being recruited; and (3) deliverensure excellence in delivering and managemanaging the client-consultant relationship to the satisfaction of both our clients and our consultants.relationship. We believe proper execution by our associates and our consultants directly impacts the longevity of the assignments, increases the likelihood of being able to generategenerating repeat business with our clients and fosters a better experience for our consultants, which has a direct correlation to their redeployment.

The key drivers of Flex revenuesrevenue are driven by the number of totalconsultant assignments and billable hours, billedthe bill rate per hour and, pre-established bill rates.to a limited extent, the amount of billable expenses incurred by Kforce. Our Flex gross profit is determined by deducting consultant pay,related costs of employment for consultants, including compensation, payroll taxes, certain fringe benefits and other relatedsubcontractor costs from Flex revenues.revenue. Associate commissions, relatedand field management compensation, payroll taxes and other compensation andfringe benefits as well as field management compensation are included in selling, general and administrative expenses (“SG&A”), along with other customary costs such as administrative and corporate compensation.costs. The Flex business model involves attempting to maximize the number of billable consultant hours and bill rates, while managing consultant pay rates and benefit costs, as well as compensation and benefits for our core associates. Flex revenues also includes revenues for our GS segment. These revenues involve providing longer-term contract services to the customer primarily on a time-and-materials basis.

Our Direct Hire business is a significantly smaller, yet important, part of our business that involves locating qualified individuals (“candidates”) for permanent placement with our clients. Direct Hire revenue represents less than 4% of total revenue over the last three fiscal years; although it is a smaller portion of our business, it continues to be an important capability in ensuring that we can meet the talent needs of our clients through whatever means they prefer. We primarily perform theserecruit candidates using methods that are consistent with Flex consultants. Candidate searches are generally performed on a contingency basis; thus,basis (as opposed to a retained search), therefore fees are only earned if the candidates are ultimately hired by our clients. The typical fee structure is based upon a percentage of the placed individual’scandidate’s annual compensation in their first year of employment, which is known or can be estimated at the time of placement. We recruit candidates using methods that

The key drivers of Direct Hire revenue are consistent with Flex consultants. Also, there are occasions where consultants arethe number of placements and the associated placement fee. Direct Hire revenue also includes conversion revenue, which may occur when a consultant initially assigned to a client on a temporary basis andis later are converted to a permanent placement for which we may also receive a fee (referred to as “conversion revenue”).

The specialtyprofessional staffing industry is made up of thousands of companies, most of which are small local firms providing limited service offerings to a relatively small local client base. Based on aA report published by SIA in 2016 regarding the largest staffing firms in the United States, we estimate2018 indicated that Kforce is one of the 10 largest publicly-traded specialty staffing firms in the U.S. According to a report published by the SIA in June 2016, 134 companies reported at least $100 million in U.S. staffing revenues in 2015 and these companies represented an estimated 56.8% of the total market.

Our primary goalsobjectives are to enhancedriving long-term shareholder value by achieving above-market revenue growth, as compared to our peers in the segments in which we are focused, making prudent investments to enhance efficiency and effectiveness within our operating model and efficiency and generating improvedsignificantly improving levels of operating profitability. We believe the following strategies will help us achieve our goals.objectives.

We measure the quality of our service to and support of our consultants using staffing industry benchmarks and surveys conducted by a specialized, independent third-party provider. Our consultant satisfaction Net Promoter Score is 61%; additionally, 71% of consultants rated us a 9 or a 10 out of 10.

We operate in a highly competitive and fragmented specialty staffing services industry withincomprised of large national and local staffing firms in each of our reporting segments. We face substantial competition from large national firms and local specialty staffing firms. The local firms are typically operator-owned, and each market generally has one or more significant competitors. We also face competition from national clerical and light industrial staffing firms, and national and regional accounting, consulting and advisory firms that also offer certain specialtyboth solutions and staffing services. WeHowever, we believe however, that our U.S. geographic presence, diversifiedconcentration of service offerings in areas of greatest demand (especially technology), national delivery teams, enhanced sales methodology, focus on consistent servicedelivery channels for foreign consultants, longevity of our brand and deliveryreputation in the market, along with our dedicated compliance and effective job order prioritizationregulatory infrastructure, all provide a competitive advantage, particularly withadvantage.

Many clients that have operations in multiple geographic markets. In addition, we believe that our service offerings are primarily concentrated in areas with significant growth opportunities in both the short and long term.

Kforce believesWe believe that the availabilityprincipal elements of competition in our industry are quality and qualityavailability of associates, candidates and consultants, level of service, effective monitoring of job performance, scope of geographic service and compliance orientationorientation. To attract consultants and price are the principal elements of competition in our industry. We believe that availability of quality associates, candidates, and consultants is especially important. In order to attract candidates and consultants, we place emphasis uponemphasize on our ability to provide competitive compensation and benefits, quality and varied assignments, scheduling flexibility and permanent placement opportunities, all of which are important to Kforce being the “Employeremployer of Choice.”choice. Because personnelindividuals pursue other employment opportunities on a regular basis, it is important that we respond to market conditions affecting these individuals and focus on our consultant carerelationship objectives. Additionally, in certain markets, and in response to economic softening, we have experienced significant pricing pressure as a result of our competitors’ pricing strategies. Although we believe we compete favorably with respect to these factors, we expect competition and pricing pressure to continue, which may result in us not being able to effectively compete or choosing to not participate in certain business that does not meet our profitability standard.

Staffing firms are generally subject to one or more of the following types of government regulations: (1) regulation of the employer/employee relationship, between a firm and its staff, such as wage and hour regulations, tax withholding and reporting, immigration regulations, social security and other retirement, anti-discrimination, employee benefits and workers’ compensation regulations; (2) registration, licensing, recordkeeping and reporting requirements; (3) worker classification regulationsregulations; and (4) substantive limitations on their operations.

In providing staffing and solution services to the Federal Government, we must comply with complex laws and regulations relating to the formation, administration and performance of Federal Government contracts. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may impose addedadditional costs on our business.

In the increasingly stringentBecause we operate in a complex regulatory environment, one of our top priorities is compliance. As we continue to evolve our infrastructure, compliance remains a primary focus. For more discussion of the potential impact that the regulatory environment could have on Kforce’s financial results, seerefer to Item 1A. Risk Factors below.Factors.

As of December 31, 2016,2018, Kforce employed nearly 2,800approximately 2,400 associates and had more than 11,80011,400 consultants on assignment providing flexible staffing services and solutions to our clients. Approximately 91%92% of the consultants are employed directly by Kforce (“Flexible Employees”);Kforce; the balanceother 8% consists of individuals who are employed by other entities (“Independent Contractors”) that provide their employees as subcontractors to Kforce for assignment to Kforce’s clients.qualified independent contractors. As the employer, Kforce is responsible for the employer’s share of applicable social security taxes (“FICA”), federal and state unemployment taxes, workers’ compensation insurance and other direct labor costs relating to our employees. We offer access to various health, life and disability insurance programs and other benefits for our employees. We have no collective bargaining agreements covering any of our employees, have never experienced any material labor disruption, and are unaware of any current efforts or plans to organize any of our employees.

Kforce maintains a number of insurance policies including general liability, automobile liability, workers’ compensation and employers’ liability; each withliability, liability for certain foreign exposure, umbrella and excess liability, coverage. We also maintain workers’ compensation, fidelity,property, crime, fiduciary, directors and officers, employment practices liability, cybersecurity, professional liability and excess health insurance and employment practices liability policies.coverage. These policies provide coverage subject to their terms, conditions, limits of liability and deductibles, for certain liabilities that may arise from Kforce’s operations. There can be no assurance that any of the above policies will be adequate for our needs or that we will maintain all such policies in the future.

We make available, free of charge, through the Investor Relations page on our website, and by responding tomailed requests addressed to Michael Blackman, our Chief Corporate Development Officer, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically submit such materials to the SEC. Our corporate website address is http://www.kforce.com. The information contained on our website, or on other websites linked to our website, is not part of this document. The SEC makes availablealso provides reports, proxy and information statements on its website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the SEC. The SEC’s website is http://www.sec.gov. Information provided on the SEC’s website is not part of this report.

Kforce employs people internally and in the workplaces of our clients. An inherent risk of such activity includes possible claims of or relating to discrimination and harassment claims;harassment; wrongful termination; violations of employment rights related to employment screening or privacy issues; classificationmisclassification of workers as employees or independent contractors; violations of wage and hour requirements;requirements and other labor laws; employment of illegal aliens; criminal activity; torts; breach of contract; failure to protect confidential personal information; intentional criminal misconduct; misuse or misappropriation of client intellectual property; employee benefits; or other claims. In some cases, we are contractually obligated to indemnify our clients against such risks. Such claims may result in negative publicity, injunctive relief, criminal investigations and/or charges, civil litigation, payment by Kforce of defense costs, monetary damages or fines that may be significant, discontinuation of client relationships or other material adverse effects on our business. To reduce our exposure, we maintain policies, procedures and guidelines to promote compliance with laws, rules, regulations and regulationsbest practices applicable to our business. Even claims without merit could cause us to incur significant expense or reputational harm. We also maintain insurance coverage for professional malpractice liability, fidelity, employment practices liability, and general liability in amounts and with deductibles that we believe are appropriate for our operations. However, the failure of any of our personnel to observe our policies and guidelines could result in negative publicity, injunctive relief, criminal investigation and/or charges, payments of monetary damages or fines, or other material adverse effects on our business. In addition, our insurance coverage may not cover all potential claims against us, may require us to meet a deductible or may not continue to be available to us at a reasonable cost. In this regard, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility. U.S. Courtscourts in recent years have been receiving large numbers of wage and hour class action claims alleging misclassification of overtime-eligible workers and/or failure to pay overtime-eligible workers for all hours worked.

An inherent risk of employing people internally and in the workplace of other businesses is that many of these individuals have access to client information systems and confidential information. SuchThe risks of such activity includesinclude possible acts of errors and omissions; intentional misconduct; release, misuse or misappropriation of client intellectual property, confidential information, personally identifiable information, funds, or other property; cybersecurity breaches affecting our clients and/or us; or other acts. These risks are particularly significant in our government business. Such acts may result in negative publicity or other material adverse effects on our business. In addition, these occurrences may give rise to litigation, which could be time-consuming and expensive. To reduce our exposure, we maintain policies, procedures and insurance coverage for types and amounts we believe are appropriate in light of the aforementioned exposures. There can be no assurance that the corporate policies and practices we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. In addition, our insurance coverage may not cover all potential claims against us, may require us to meet a deductible or may not continue to be available to us at a reasonable cost.

Kforce depends upon the abilities of its staff to attract and retain consultants and candidates, particularly technical, professional, and cleared government services individuals, who possess the skills and experience necessary to meet the staffing requirements of our clients. We must continually evaluate and upgrade our methods of attracting qualified consultants and candidates to keep pace with changing client needs and emerging technologies. We expect significant competition for individuals with proven technical or professional skills for the foreseeable future. The U.S. professional staffing industry in which we operate is significantly affected by fluctuations in general economicsupply of available consultants and employment conditions.

Our future success may depend on our ability to successfully keep pace with technological changes and results of operations.

Cyberattacks or other breaches of network or information technology used by our associates and consultants, as well as risks associated with compliance on data privacy could adversely affect on our systems, services, operations and financial results. These attacks include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. While we will be ablehave policies, procedures and systems in place to continuedetect, prevent and deter cyberattacks or other breaches of our networks, techniques used to obtain all necessary licensesunauthorized access or approvalscause system interruption change frequently and may not immediately produce signs of intrusion. As a result, we may be unable to anticipate these incidents or that the cost of compliance willtechniques, timely discover them, or implement adequate preventative measures. We maintain cyber risk insurance, but this insurance may not provebe sufficient to be material. If we fail to comply, such failure could materially adversely affect Kforce’s financial results.

In the ordinary course of our business, we collect and retain personal information of our associates and consultants and their dependents including, without limitation, full names, social security numbers, addresses, birth dates, and payroll-related information. We use commercially available information security technologies to protect such information in digital format. We also use security and business controls to limit access to such information.information and continually monitor our systems for potential breaches. However, employeesas our reliance on technology has increased so have the risks posed to our systems, both internal and those managed by third party service providers. It is possible that the controls in place will not be able to prevent the improper disclosure of personally identifiable information of our associates and consultants in the event of a computer virus, system breach or cyberattack, particularly in light of the increasing sophistication of perpetrators. Employees or third parties (including third parties with substantially greater resources than our own; for example,own, e.g. foreign governments) may be able to circumvent theseour security measures and acquire or misuse such information, resulting in breaches of privacy andbreaches, errors in the storage, use or transmission of such information.information, and an interruption to our operations. Privacy breaches may require notification and other remedies, which can be costly, and which may have other serious adverse consequences for our business, including regulatory penalties and fines, claims for breach of contract, claims for damages, adverse publicity, reduced demand for our services by clients and/or Flex employment consultants, harm to our reputation, and regulatory oversight by state or federal agencies.

The possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens. We may be required to incur significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

Our Tech businesssegment utilizes a significant number of foreign nationals employed by us on work visas, primarily under the H-1B visa classification. The H-1B visa classification that enables U.S. employers to hire qualified foreign nationals is subject to legislative and administrative changes, as well as changes in the application of standards and enforcement. Immigration laws and regulations can be significantly affected by political developments and levels of economic activity. Current and future restrictions on the availability of such visas could restrain our ability to employ the skilled professionals we need to meet our clients’ needs, which could have a material adverse effect on our business. The U.S. Citizenship and Immigration Service (“USCIS”) continues to closely scrutinize companies seeking to sponsor, renew or transfer H-1B status, including Kforce and Kforce’s subcontractors and has issued internal guidance to its field offices that appears to narrow the eligibility criteria for H-1B status in the context of staffing services. In addition to USCIS restrictions, certain aspects of the H-1B program are also subject to regulation and review by the U.S. Department of Labor and U.S. Department of State, which have recently increased enforcement activities in the program. A narrow interpretation and vigorousVigorous enforcement and/or legislative or executive action relating to immigration including legislation intended to reform existing immigration law or actions by executive order, could adversely affect our ability to obtain foreign national labor and/recruit or renew existingretain foreign national consultants, on assignment, and couldconsequently, reduce our supply of skilled consultants and candidates and subject us to fines, penalties and sanctions. There can be no assurance that we will be able to keepsanctions, or replace all foreign nationals currently on assignment, or continue to hire foreign national talent at the same rates asresult in the past.

Kforce is highly dependent on its management team and expects that continued success will depend largely upon their efforts, expertise and abilities. The loss of the services of any key executive for any reason could have a material adverse effect uponon Kforce. Success also depends upon our ability to identify, develop,To attract and retain qualified operating employees; particularlyexecutives and other key employees (particularly management, client servicing, and consultant and candidate recruiting employees.employees) in a competitive marketplace, we must provide a competitive compensation package, including cash-based and equity-based compensation. Kforce expends significant resources in the recruiting and training of its employees, as the pool of available applicants for these positions is limited. The loss of someor any sustained attrition of our key operating employees could have a material adverse effect on our business, including our ability to establish and maintain client, consultant and candidate, professional and technical relationships.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and the rules and regulations thereunder (the “PPACA”), imposes mandatesrequirements and restrictions, including, but not limited to, guaranteed coverage requirements, prohibitions on individualssome annual and employers, requiring most individualsall lifetime limits on amounts paid on behalf of or to have health insurance. The PPACA assesses penaltiesour employees, increased restrictions on large employers that do not offer healthrescinding coverage, establishment of minimum requirements, the establishment of state insurance meeting certain coverage, value, or affordability standards to all full-time employees as defined under the PPACA.exchanges and essential benefit packages, and greater limitations on product pricing. Because the regulations governing the PPACA’s employer mandate are subject to interpretation, it is possible that Kforce may incur liability in the form of penalties, fines, or damages if the health plans we offer are subsequently found not to meet minimum essential coverage, affordability or minimum value standards, or if our method for determining eligibility for coverage is found inadequate or our clients seek indemnification for health care claims resulting from consultants working on client assignments. The cost of any such penalties, fines or damages could have a material adverse effect on Kforce’s financial and operating results.

We regularly review our intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. We test goodwill and indefinite-lived intangible assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of the intangible assets may not be recoverable, include: macroeconomic conditions; industry and market considerations; increases in labor or other costs that have a negative effect on earnings and cash flows; negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; and other relevant entity-specific events, such as changes in key personnel, strategy, or customers,clients, and sustained decreases in share price. We may be required to record a charge in our financial statements, which could be material, during the period in which we determine an impairment of our acquired intangible assets has occurred, negatively impacting our financial results.

The reputation and relationships that we have established and currently maintain with our customersclients are important to maintaining existing business and identifying new business. If our reputation or relationships were damaged, it could have a material adverse effectmaterially adversely affect on our operations. In addition, if our performance does not meet our customers’clients’ expectations, our revenues and operating results could be materially harmed.

Our agreements do not provide for exclusive use of our services, and clients are free to place orders with our competitors. Each consultant’s relationship with us is terminable at will. If clients terminate a significant number of our agreements and we are unable to generate new contracts, or a significant number of our consultants cease performing services for us and we are unable to find suitable replacements, the growth of our business could be adversely affected, and our revenues and results of operations could be harmed.

We face significant competition in the markets we serve, and there are limited barriers to entry for new competitors. The competition among staffing services firms is intense. Kforce competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search firms, and other providers of staffing services. Some of our competitors possess substantially greater resources than we do. From time to time, we experience significant pressure from our clients to reduce price levels. During these periods, we may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fulfill our clients’ needs. We also face the risk that certain of our current and prospective clients will decide to provide similar services internally, particularly if regulatory burdens are reduced.

We must comply with complex laws and regulations relating to the formation, administration, and performance of Federal Government contracts. These laws and regulations create compliance risk, affect how we do business with our federal agency clients, and may impose added costs on our business. If a government review, audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines, and suspension or debarment from doing businesscontracting with Federal Government agencies.

The Federal Government also may reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, thatwhich could be costly to satisfy or that could impact our ability to obtain new contracts. A failure to comply with all applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with Federal Government agencies; each of which could lead to a material reduction in our revenues, cash flows and operating results.

Changes in Federal Government fiscal or spending policies could materially adversely affect our Government Business; in particular, our business could be materially adversely affected by decreases in Federal Government spending. In addition, on an annual basis, Congress must approve, and the President must sign the appropriation bills that govern spending by each of the federal agencies we support. If Congress is unable to agree on budget priorities and is unable to appropriate funds or pass the annual budget on a timely basis, as has been the case in recent years,or a prolonged government shutdown were to occur (as happened recently), there may be delays, reductions or cessations of funding for our services and solutions. In addition, from time to time it has been necessary for Congress to raise the U.S. debt ceiling in order to allow for borrowing necessary to fund government operations. If that becomes necessary again and Congress fails to raise the debt ceiling on a timely basis, there may be delays, reductions or cessations of funding for our services and solutions. Furthermore, legislatively mandated cuts in federal programs, known as sequestration, could result in delays, reductions or cessation of funding for our services and solutions.

There is often intense competition to win federal agency contracts. The competitive bidding process entails substantial costs and management time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Even when a contract is awarded to us, we may encounter significant expenses, delays, contract modifications or bid protests from competitors. If we are unable to successfully compete for new business or win competitions to maintain existing business, our operations could be materially adversely affected. Many of our competitors are larger and have greater resources, larger client bases and greater brand recognition than we do. Our larger competitors also may be able to provide clients with different or greater capabilities or benefits than we can provide.

GSA Schedules constitute a significant percentage of revenues from our federal agency clients. If we were to lose one or more of these Schedules or other contracting vehicles, we could lose revenues and our operating results could be materially adversely affected. These Schedules or contracts typically have an initial term with multiple options that may be exercised by our government agency clients to extend the contract for successive periods of one or more years. We can provide no assurance that our clients will exercise these options.

Many of the systems we develop, install, and maintain involve managing and protecting information used in intelligence, national security, and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for Federal Government clients. We could incur losses from such a security breach that could exceed the policy limits under our insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of our systems could materially reduce our revenues.

For many of our contracts where we are the prime contractor, we involve subcontractors, which we rely on to perform a portion of the services that we must provide to our customers.clients. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed or customerclient concerns about the subcontractor’s performance. In addition, the contracting parties on which we rely may be affected by changes in the economic environment and constraints on available financing to meet their performance requirements or provide needed supplies on a timely basis. A failure by one or more of those contracting parties to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis may affect our ability to perform our obligations.

PART II

Purchases of Equity Securities by the Issuer

 

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the information within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.Data of this report.

This MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained in Item 8. Financial Statements and Supplementary Data of this report, as well as Item 1. Business of this report for an overview of our operations and business environment.

This overview summarizes the MD&A, which includes the following sections:

The following is an executive summary of what Kforce believes are 2016 highlights for 2018, which should be considered in the context of the additional discussions herein and in conjunction with the consolidated financial statements and notes thereto.

RESULTS OF OPERATIONS

To align the discussion of our sales associatesOperating Results with Note 3 - “Revenue” in the Notes to engageConsolidated Financial Statements, included in more strategic conversationsItem 8. Financial Statements and shape solutions withSupplementary Data of this report, we have disaggregated our clients; (2) balancing investment in our revenue-generating talent appropriately across our service offeringsGS product business and allocatingmodified the talent toward markets, products, industriespresentation to exclude it from Flex revenue and clients that we believe present KforceFlex gross profit. Prior periods have been adjusted to align 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.current presentation.

Flex revenuesrevenue for our largest segment, Tech, decreased 1.2%increased 9.4% during the year ended December 31, 20162018 as compared to 20152017 and increased 6.1%2.8% in 20152017 from 2014. Our year-over-year decrease in 2016 was due to a decline experienced in connection with several large clients after certain significant organizational changes occurred within a number of these clients in mid-2015 causing them to decrease their spending with the Firm (we had experienced revenue growth with these large clients in the first half of 2015). Despite this overall decrease, we experienced a reacceleration of year-over-year growth beginning in Q4 2016 within our overall Tech Flex business on a billing day basis as well as our Top 25 client portfolio, which suggests that the impact related to the shift in spend with certain large clients was temporary in nature.2016. We believe that broad-basedthe secular drivers to the demand inof technology staffing such as cloud-computing, data analytics, mobility, e-commerce, machine learning and cybersecurity will continue asspend remain intact with many companies are becoming increasingly dependent uponon the efficiencies provided by technology investmentsand the need for innovation to support business strategies and sustain relevancy in today’s rapidly changing marketplace. We believeOur belief in the strength in the demand environment within Tech Flex has not changed; thus, we are well positionedexpected continued growth in 2019 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.segment.

Our FA segment experienced an increasea decrease in Flex revenuesrevenue of 4.4%9.9% during the year ended December 31, 20162018 as compared to 20152017 and increased 18.0%3.6% in 20152017 from 2014. Due2016. The year-over-year decrease in 2018 from 2017 was primarily due to the high year-over-year growthreduced volume of lower bill rate inassignments as we begin to shift our focus towards higher skillset opportunities. In 2019, we expect FA Flex during 2015 we expected our 2016 year-over-year growth raterevenue 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.remain stable or slightly decrease year-over-year.

Our GS segment experienced an increase in net service revenuesFlex revenue of 1.3%6.5% during the year ended December 31, 20162018 as compared to 20152017 and decreased 0.7%increased 11.9% in 20152017 from 2014.2016. The 2016 year-over-year growthincrease in 2018 from 2017 was drivenpowered by high growth in servicethe first half of 2018, primarily a result of two new prime contract wins secured in the third quarter of 2017. Flex revenue for GS was lower than our expectations in the second half of 2018 due to anticipated new business awards not materializing as quickly as anticipated and billable headcount attrition on lower margin contracts. In October 2018, GS was awarded a subcontract having an estimated contract value of $150 million to $200 million. In November 2018, the award to the prime contractor was protested by two unsuccessful bidders. On February 21, 2019, we received notification that the protest was sustained and, as such, are working with the prime contractor to determine appropriate next steps. We expect revenues as well as strength in our product-based business. While the business continuesGS segment to operategrow in 2019 on a challenging and evolving procurement and contracting environment, the Firm believesyear-over-year basis.

As the GS segment will growprimarily provides integrated business solutions as compared to staffing services, key drivers for the change in 2017 primarily as a result ofFlex revenue and Flex hours are not presented in 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.tables below.

The following table presents the key drivers for the change in Flex revenuesrevenue for our Tech and FA segments over the prior period for the years ended December 31 (in thousands):

The following table presents total Flex hours billed for our Tech and FA segments and percentage change over the prior period for the years ended December 31 (in thousands):

Direct Hire revenuesrevenue decreased 6.8%4.2% during the year ended December 31, 20162018 as compared to 2015. Direct Hire revenues increased 15.8% during2017 and decreased 5.4% in 2017 from 2016. These decreases are primarily the year ended December 31, 2015 as comparedresult of management’s strategy to 2014.make selective investments only where client needs exist.

The following table presents the key drivers for the change in Direct Hire revenuesrevenue over the prior period for the years ended December 31 (in thousands):

The following table presents the total number of placements for our Tech and FA segments and percentage change over the prior period for the years ended December 31:

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:

The following table presents the gross profit percentage (gross profit as a percentage of revenues)total revenue) for each segment and percentage change over the prior period for the years ended December 31:

Kforce also monitors the Flex gross profit percentage (Flex gross profit as a percentage of Flex revenues). Thisrevenue) provides management with helpful insight into the other drivers of total gross profit percentage driven by our Flex business such as changes in volume evidenced by changes in hours billed for Flex and changes in the spread between the consultants’ 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.rate.

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:

The 40 basis point decrease in Flex gross profit percentage of 30 basis points in 2016 from 2015for the year ended December 31, 2018 as compared to 2017 was due primarily to an increase in benefit costs in each of our segments. Additionally, ourdriven by the decrease for GS. Tech and FA remained fairly stable year-over-year. 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,margin decreased 430 basis points primarily due to compression in bill and spread compression withinpay spreads as well as higher benefit costs. GS business is operating in a cost competitive environment and, as such, has experienced reduced profitability in 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 increasedecrease in Flex gross profit percentage of 50 basis points in 20152017 from 20142016 was due primarily to an increasecompression in the spread between our consultants’ bill rates and pay rates inand higher health insurance and other benefit costs, as well as the FA segment, improved profitability from our GS segment primarily as a resultimpact of growth in its product business which carries a higher margin profile,Hurricanes Harvey and a more favorable payroll tax environment as compared to 2014.Irma.

The following table presents the key drivers for the change in Flex gross profit for our Tech and FA segments over the prior period for the years ended December 31 (in thousands):

The following table presents thesecertain components of SG&A along with an “other” caption, which includesas a percentage of total revenue for the years ended December 31 (in thousands):

(1) Includes items such as 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):

SG&A as a percentage of net service revenues increased 90revenue decreased 120 basis points in 20162018 compared to 2015. This increase was was2017, 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&Aincreased leverage as a percentageresult of revenue.enhancements to our performance-based compensation plans; improved associate productivity; lower revenue-generating headcount; reduced costs as a result of previous realignment activities; and a continued focus on expense discipline. Additionally, during 2017, Kforce recorded a $3.3 million gain on the sale of Global’s assets, which was partially offset by a $1.0 million disaster relief contribution to support recovery efforts related to Hurricanes Harvey and Irma.

SG&A as a percentage of net service revenuesrevenue decreased 90140 basis points in 20152017 compared to 2014. This2016, which was driven primarily a resultby $6.0 million in severance costs recognized in 2016 related to realignment activities, improving associate productivity levels in 2017, and overall continued discipline in areas of a reductiontravel and office related expenses. These benefits were partially offset by an increase 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.information technology investments.