UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|
| | | | |
x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172019
OR
|
| | | | |
¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-26058
KFORCE INC.
Kforce Inc.
(Exact name of Registrant as specified in its charter)
_____________________________________________________________________________ |
| | | | | | | |
FLORIDAFlorida | | 59-3264661 |
| State or other jurisdiction of incorporation or organization | | IRS Employer Identification No. |
|
| | | | | | | |
1001 EAST PALM AVENUE, TAMPA, FLORIDAEast Palm Avenue, Tampa, Florida | | 33605 |
| Address of principal executive offices | | Zip Code |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 552-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
| | | | | | | |
TITLE OF EACH CLASSTitle of each class | Trading Symbol(s) | NAME OF EACH EXCHANGE ON WHICH REGISTEREDName of each exchange on which registered |
Common Stock, $0.01 par valueper share | KFRC | The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
|
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨☐ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | | | | |
| Large accelerated filer | | ¨x | | Accelerated filer | | x☐ |
| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company)
☐ | | Smaller reporting company | | ¨☐ |
| | | Emerging growth filer | | ¨
| | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.): Yes ¨☐ No x
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, 2017,2019, was $456,834,762.$753,609,332. 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 21, 201819, 2020 was 26,213,133.22,712,952.
DOCUMENTS INCORPORATED BY REFERENCE:
|
| | | | | | | |
| Document | | Parts Into Which
Incorporated
|
Portions of Proxy Statement for the Annual Meeting of Shareholders scheduled to be held April 24, 201828, 2020 (“Proxy Statement”) | | Part III |
KFORCE INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
KFORCE INC.
TABLE OF CONTENTS
| | | | | | | | |
| | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | |
| Item 15. | | |
| Item 16. | | |
| | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
References in this document to “the Registrant,the “Registrant,” “Kforce,” “the Company,the “Company,” “we,” “the Firm,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 contain 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 financial or operational performance, our beliefs regarding potential government actions or changes in laws and regulations, anticipated costs and benefits of proposed acquisitions, divestitures and investments, effects of interest rate variations, financing needs or plans, funding of employee benefit plans, estimates concerning the effects of litigation or other disputes, estimates concerning our ability to collect on our trade accounts receivable,the occurrence of unanticipated expenses, developments within the staffing sector including, but not limited to, the penetration rate (the percentage of temporary staffing to total employment) and growth rate in temporary staffing, a reduction in the supply of consultants and candidates or the Firm’s ability to attract such individuals, estimates concerning goodwill impairment, delays or termination or the failure to obtain awards, task orders or funding under contracts, changes in client demand for our services and our ability to adapt to such changes, the entry of new competitors in the market, the ability of the Firm servicesto 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, refer 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,” “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 update any forward-looking statements.
PART I
ITEM 1. BUSINESS.
Company OverviewCOMPANY OVERVIEW
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional staffing services and solutions to our clients through the following segments: Technology (“Tech”), Finance and Accounting (“FA”), and Government Solutions (“GS”). Kforce provides staffing services and solutions on both a temporary (“Flex”) and permanent (“Direct Hire”) basis.basis through our Technology (“Tech”) and Finance and Accounting (“FA”) segments. We operate through our corporate headquarters in Tampa, Florida and 59with 50 field offices located throughout the U.S. Kforce was incorporated in 1994 and completed its Initial Public Offering in August 1995, but its predecessor companies have been providing staffing services since 1962. Kforce completed its Initial Public Offering in August 1995.
Kforce serves clients across many industries geographies and our clients range in size from small to mid-sized companies to the largest companies in the Fortune 1000. We also provide services and solutions to the Federal Governmentgeographies as well as stateorganizations of all sizes, with a particular focus on Fortune 1000 and local governments, asother large companies. We believe that our portfolio of service offerings is a prime contractor and subcontractor. For perspective,key contributor to our long-term financial stability. Our 10 largest clients represented approximately 25%23% of revenuesrevenue and no single client accounted forcontributed more than 6%5% of revenuestotal revenue for the year ended December 31, 2017.2019.
Substantially all of our revenues are derived from U.S. domestic operations.During 2019, Kforce Globalsold its Government Solutions Inc., (“Global”("GS") a wholly-owned subsidiary locatedsegment, which has been reported as discontinued operations in the Philippines, has historically contributed approximately 1% of net service revenues and wasconsolidated financial statements. Except as specifically noted, our discussions in this report exclude any activity related to the GS segment. Refer to Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in our Tech segment. In September 2017, we completed the saleItem 8. Financial Statements and Supplementary Data of Global’s assets. This sale did not meet the definition of discontinued operations.this report, for a more detailed discussion.
Our periodicquarterly operating results can be affected by:
•the number of billing days in a particular quarter,quarter;
•the seasonality inof our clients’ businesses,businesses;
•increased holidays and vacation days taken, which is usually highest in the fourth quarter of each calendar year,year; and
•increased costs as a result of certain annual U.S. state and federal employment tax resets that occur at the beginning of each calendar year, which negatively impacts our gross profit and overall profitability in the first fiscal quarter of each calendar year.
The following charts depict the percentage of our total revenues for each of our segments for the years ended December 31, 2017, 2016 and 2015:
For additional segment financial data see Note 13 – “Reportable Segments” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report.
Tech Segment
Our largest segment, Tech, provides both Flex and Direct Hire services to our clients, focusing primarily on areas of information technology such as systems/applications architecture and development, project management, enterprise data management, business intelligence,and artificial intelligence, machine learning and network architecture and security. Increasingly, Kforce has been successfully winning more complex technology projects that require us to manage teams of consultants and deliver solutions to our clients. This level of project ownership has been an intentional, strategic shift by Kforce over the last few years as our clients look to their third party providers, such as Kforce, for these engagements. Within our Tech segment, we provide service to clients in a variety of industries with a strongdiversified footprint in the financial and business services, communications insurance services and government sectors. Revenuestechnology. Revenue for our Tech segment increased 2.7%6.8% to $907.5 million$1.1 billion in 2017 with quarterly growth rates accelerating in the second half of 20172019 on a year-over-year basis. The average bill rate for our Tech segmentFlex in the fourth quarter of 2017 (after the sale of Global’s assets was completed)2019 was approximately $72$76 per hour. hour, which increased 3.1% as compared to 2018. Our average assignment duration for Tech Flex is nearly 10 months, which has steadily increased over the last several years. Tech Flex continues to benefit from improving bill rates and longer assignment durations, which we believe is related to the acute labor shortage, especially with highly-skilled resources.
The September 20172019 report published by Staffing Industry Analysts (“SIA”) stated that temporary technology staffing is expected to experience growth of 4%3% in 2018.2020. Digital transformation, as a general trend, is driving organizations across all industries to increase their technology investments as competition and the speed of change intensifies. Nontraditional competitors are also entering new emerging technologies and markets. This development puts increased pressure on companies to invest in innovation and the evolution of their business models. We believe that the secular drivers of technology spend generally remain intact with many companies becoming increasingly lookingdependent on the efficiencies provided by technology and the need for innovation to technology investments to improve internal efficiencies, enhance their customer-facing applications in support of their business strategies and to sustain relevancy in thetoday’s rapidly changing marketplace. At the macro level, demand is also being driven by an ever-changing and complex corporate regulatory and employment law environment, which increases the overall cost of employment for many companies. TheseWe believe that these factors, among others, are continuing to drive companies to look to temporary staffing providers, such as Kforce, to meet their human capital needs.
An acute challenge within our Tech business is the scarcity of qualified consultants, especially in certain niche skillsets such as cybersecurity, business intelligence, and application developers with less common programming languages.
FA Segment
Our FA segment provides both Flex and Direct Hire services to our clients in areas such as general accounting, business and cost analysis, accounts payable, accounts receivable, financial analysis and reporting, taxation, budget preparation and analysis, mortgage andbudgeting, loan processing, cost analysis,servicing, professional administration, outsourced functional support, credit and collections, audit services and systems and controls analysis and documentation. Within our FA segment, we provide services to clients in a variety of industries with a strongdiversified footprint in the financial services, healthcare and governmentmanufacturing sectors. RevenuesRevenue for our FA segment increased 2.5%decreased 7.7% to $346.1$289.5 million in 2017 though our growth rates in this segment decelerated in the second half of 20172019 on a year-over-year basis as a result of certain client headwinds and large project ends.basis. The average bill rate for FA Flex in 2019 was approximately $37 per hour, which increased 5.7% as compared to 2018. This increase reflects our efforts to reposition our FA segment during 2017 was approximately $33 per hour.into more high-skilled positions that are less susceptible to being disrupted by technological advancements. The September 20172019 report published by SIA stated that finance and accounting temporary staffing is expected to experience growth of 5%4% in 2018.2019 and 2020.
While there are some new technical accounting standards and other factors that could result in some macro demand in FA temporary staffing providers, we believe that the relative limited demand stimuli present in the traditional areas
GS Segment
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. GS 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. This segment’s contracts are concentrated among clients, 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, though a prolonged government shutdown would be expected to negatively impact GS revenues. Revenues for our GS segment increased 5.7% to $104.3 million in 2017. Our GS segment also includes a product-based business specialized in manufacturing and delivering trauma-training manikins, which accounted for approximately 12% of total GS revenues in 2017. 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 and Austin, Texas.
Our backlog represents only those contracts for which funding has been provided for U.S. government contracts and subcontracts, excluding renewal option years. Our backlog was $59.3 million as of December 31, 2017 as compared to $42.9 million as of December 31, 2016.
Flex RevenuesRevenue
Flex revenues have representedrevenue represents approximately 96% of total revenuesrevenue 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 appropriateconsultant's set of skills and experience and areis the right match for our clients. We utilize a diversified set of recruitment platforms and databases to identify consultants including traditional job boards (both general and niche in nature), Kforce.com, social media sites and passive candidate marketing, where we identify individuals who are currently employed and not actively seeking another position. Theseemployment. The vast majority of our consultants can either beare directly employed by Kforce (both domestic and foreign workers sponsored by Kforce) with a smaller composition representing qualified independent contractors or foreign nationals sponsored by Kforce.contractors. Our success is dependent upon our internal employees’ (“associates”) ability to: (1) acknowledge, understand and participate in creating solutions for our clients’ needs; (2) determine and understand the experience and capabilities of the consultants being recruited; and (3) ensure excellence in delivering and managing the client-consultant relationship.relationship; and (4) have access to a sufficient pool of qualified consultants. We believe proper execution by our associates and consultants directly impacts the longevity of the assignments, increases the likelihood of being able to generategenerating repeat business with our clients and fosters a better experience for our consultants, which has a direct correlation to theirconsultant redeployment.
To gauge our success in providing quality service and support to our clients and consultants, we monitor our client and consultant net promoter scores, which is conducted by an independent third-party provider.
The key drivers of Flex revenuesrevenue are driven by the number of consultant assignments, total consultantconsultants on assignment, 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 relatedindependent contractor costs from Flex revenues.revenue. Associate and management commissions, relatedcompensation, 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. Thecosts. Our Flex business model involves attempting to maximizemaximizing 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 associates.
Direct Hire RevenuesRevenue
Our Direct Hire business is a significantly smaller, yet an 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 have the flexibility to meet the talent needs of our clients. We recruit candidates using methods that are consistent with Flex consultants. Candidate searches are generally performed on a contingency basis (as opposed to a retained search), therefore fees arerevenue is earned only earned if the candidates are ultimately hired by our clients. The typical fee structure is based upon a percentage of the candidate’s annual compensation in their first year of employment, which is knowndetermined or can be estimated at the time of placement. There
The key drivers of Direct Hire revenue are the number of placements and the associated placement fee. Direct Hire revenue also occasions where consultants areincludes conversion revenue, which may occur when a consultant initially assigned to a client on a temporary basis and areis later converted to a permanent placement for which we may also receive a conversion fee which are also recognized as . Direct Hire revenue.
Direct Hire revenues are driven by the number of candidates placed (or converted) and the associated placement fees and are recognizedrevenue is recorded net of an allowance for “fallouts,” which occuroccurs when candidates doa candidate does not complete the applicable contingency period (typically 90 days or less). There are no consultant payroll costs associated with Direct Hire placements, thus,therefore all Direct Hire revenues increaserevenue increases gross profit by the full amount of the fee.fee, which constitutes a disproportionate percentage of our gross profit. Commissions, compensation and benefits for Direct Hire associate commissions, compensation and benefitsassociates are included in SG&A.
Industry Overview
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. A report published by SIA in 20172019 indicated that Kforce is one of the 10 largest publicly-traded specialty staffing firms in the U.S. Per this SIA report, Kforce is the fifth largest technology temporary staffing firm and fourth largest finance and accounting temporary staffing firm.
Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional temporary workers in the U.S. and, conversely, an economic slowdown results in a contraction in demand for additional temporary workers in the U.S. From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continued to be generally positive during 2017,2019, based on data published by the Bureau of Labor Statistics (“BLS”) and SIA. The penetration rate (the percentage of temporary staffing to total employment) remained at a record high of 2.1%and unemployment rate were 2.0% and 3.5%, respectively, in December 2017. The unemployment rate2019. Although temporary help employment was 4.1%down 0.5% year over year as of December 2017 and a2019, total non-farm payroll of approximately 148,000 jobs were added in December 2017. Additionally,employment was up 1.4% year over year. In addition, the college-level unemployment rate, which we believe serves as a reasonable proxy for professional employment and as such, is a good data point fortherefore aligns well with the consultant and candidate population that Kforce most typically serves, was at 2.1%1.9% in December 2017.2019, which represented a decrease from December 2018. Further, we believe that the unemployment rate in the specialties we serve, especially in certain technology skill sets, is lower than the published averages, which weaverages. We believe this speaks to the high demand environment in which we are operating. Management believes thatcurrently operating as well as the overall tepid growth experienced in the U.S. economy during this recovery (despite recent acceleration in GDP growth), the recent change in administration, and the increasing costs and government regulationchallenges of employment may be driving a secular shift tofinding an increased useadequate supply of temporary staff as a percentage of the total workforce as employers may be reluctant to increase permanent hiring. If the penetration rate of temporary staffing grows in the coming months and years, we believe our Flex revenues can continue to 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 uncertainty and volatility and therefore no reliable predictions can be made about the general economy, the staffing industry as a whole, specialty staffing in particular or our future performance.qualified talent.
According to a U.S. Staffing Industry Forecast published bythe September 2019 SIA in September 2017,report, the technology temporary staffing industry and finance and accounting temporary staffing industry are expected to generate projected revenues of $30.9$33.0 billion and $8.4$8.9 billion, respectively, in 2018 and2019; based on these projected revenues, our current market share is approximately 3% and 4%, respectively.for each. Our business strategies are sharply focused around expanding our share of the U.S. temporary staffing industry, expanding our addressable market into higher level IT services and solutions,and further penetrating our existing clients’ human capital needs.
Business Strategies
Our primary objective is to driveobjectives are driving long-term shareholder value by achieving above-market revenue growth, making prudent investments to enhance efficiency and effectiveness within our operating model in terms of efficiency and effectiveness and generating significantly improvedimproving levels of operating profitability. We believe the following strategies will help us achieve our objectives.
Improving Productivity of our Talent. We continuebelieve that it is critical to focus on providingprovide our associates with the necessaryhigh quality tools to be more effectiveeffectively and efficient in performingefficiently perform their roles, to better evaluate business opportunities and to allow us to elevateadvance the value we bring to our clients and consultants. In the fourth quarter of 2016, we made a significant investmentWe continue to enhance our sales and delivery methodologies and processes toin ways we believe will allow us to better evaluate and shape business opportunities with our clients as well as train our sales and delivery associates on thisour consistent and uniform methodology. Since making this investment,
During 2019, we have been focused on conducting appropriate activities to seek to ensure sustainment of this methodology. We are also implementingbegan developing a new and upgrading existing technologiestalent relationship management system (“TRM”) that we expect should allow us to servewill better enable our clients, consultantsdelivery strategies and candidates more effectively and efficientlyprocesses and improve the productivity and scalability of our organization. To that end, in the third quarter of 2017,capabilities. In addition, we completed the deployment of our new client relationship management system, which has the elements of our sales methodology embedded within the application.
We have been investing in other areas of technological change including new time and expense applications for our consultants and associates, as well as continuedcontinue to make enhancements to our business and data intelligence capabilities. Beginning in 2018, we expect to invest in a new talent relationship management system to leverage our delivery strategies and processes. These investments are part of a multi-year effort to replace and upgrade our technology tools to equip our associates with improved capabilities to deliver exceptional service to our clients, consultants and candidates and improve the productivity of our associates.associates and the scalability of our organization.
Enhancing our Client Relationships.Relationships. We strive to differentiate ourselves by working collaboratively with our clients to better understand their business challenges and help them attain their organizational objectives. This collaboration focuses on building a consultative partnership rather than a transactional client relationship; thus, increasingrelationship, which increases the intimacy with our clients and improvingimproves our ability to offer higher value and a broader array of services and support to our clients. In order toTo accomplish this, we align our revenue-generating talent with the appropriate clients based on their experience with markets, products and industries.
We measure our success in building long-lasting relationships with our clients using staffing industry benchmarks and Net Promoter Score (“NPS”) surveys conducted by a specialized, independent third-party provider. Our client NPS ratings compare very favorably against staffing industry averages and give usprovide helpful insights directly from our clients on how to continue improving our relationships. We believe long-lasting relationships with our clients is a critical element to our ability to grow revenues.in revenue growth.
Improving the Job Seeker Experience.Our consultants are a critical component to our business and essential in sustaining our client relationships. In 2019, we launched a new referral technology through which an eligible individual can refer someone in their personal network and receive a referral fee if the candidate is successfully placed on an assignment with us. We believe this seamlessly connects the candidate with the recruiter, which improves the job seeker experience and provides a better quality candidate. We are focused on effective and efficient processes and tools to find and attract prospective consultants, matching them to a client assignment and supporting them during their tenure with Kforce. We expect to deploy our new TRM in 2020, which we believe will better enable these processes. Our success in this regard would be expected to positively influence the tenure and loyalty of our consultants and be their “Employeremployer of Choice,”choice, thus enabling us to deliver the highest quality talent to our clients.
We measure the quality of our service to and support of our consultants using staffing industry benchmarks and NPS surveys conducted by a specialized, independent third-party provider. Our consultant NPS ratings, similar to our client ratings, compare very favorably againstare above staffing industry averages and give us helpful insights directlyaverages. We continually seek direct feedback from our consultants, onwhich gives us valuable insight into where we have opportunities to refine our services.
Evolving our Technology Managed Services and how we can continue improving our service duringSolutions Offerings. Our clients increasingly look for resources to execute critical and more technical projects. We are leveraging the various phaseslongevity of our relationship.relationships, primarily with Fortune 1000 companies, and our understanding of existing client needs to provide talent beyond traditional staff augmentation into areas including resource and capacity management as well as managed services and solutions. We believe significant opportunity exists to expand our capabilities and provide differentiated managed services and solutions to our clients, which we believe could be accomplished through a potential acquisition to enhance our operating model and successfully provide these types of offerings.
Competition
We operate in a highly competitive and fragmented staffing industry comprised of large national and local staffing firms in each of our reporting segments.firms. The local firms are typically operator-owned, and each market generally has one or more significant competitors. We also face competition from national and regional accounting, consulting and advisory firms that offer both solutions and staffing services. However, we believe that our U.S. geographic presence, concentration of service offerings in areas of greatest demand (especially technology), national delivery teams, delivery channels for foreign consultants, longevity of our brand and reputation in the market, along with our dedicated compliance and regulatory infrastructure, all provide a competitive advantage.
Many clients utilize Managed Service Providers (“MSP”) or Vendor Management Organizations (“VMO”) for the management and procurement of staffing services. Generally, MSPs and VMOs are organizations that standardize processes through the use of Vendor Management Systems (“VMS”), which are tools used to aggregate spend and measure supplier performance. VMSs canare also be providedoffered through independent providers. Typically, MSPs, VMOs and/or VMS providers charge staffing firms administrative fees ofranging from 1% to 4% of total service revenues.revenue. In addition, the aggregation of services by MSPs for their clients into a single program can result in significant buying power and, thus, pricing power. Therefore, the use of MSPs by our clients has, in certain instances, resulted in margin compression. Kforce does not currently provide MSP or VMO services directly to itsour clients; rather, our strategy has been to work with MSPs, VMOs and VMS providers that enable us to best extend our services to current and prospective clients.
We believe that the principal elements of competition in our industry are qualityreputation, the availability and availabilityquality of associates, candidatesconsultants and consultants,candidates, level of service, effective monitoring of job performance, scope of geographic service and types of service offerings, and compliance orientation. We also compete for availability of quality, high skilled consultants and candidates, which is especially important to our Tech Flex business. In order toTo attract consultants and candidates, we place emphasis uponemphasize 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 individuals 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 relationship objectives. Additionally, in certain markets, 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,strategies, 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.
Regulatory Environment
Staffing firms are generally subject to one or more of the following types of government regulations: (1) regulation of the employer/employee relationship, 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; and (3) worker classification regulations 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 additional costs on our business.regulations.
Because we operate in a complex regulatory environment, one of our top priorities is compliance. For more discussion of the potential impact that the regulatory environment could have on Kforce’s financial results, refer to Item 1A. Risk Factors.
Operating Employees and Personnel
As of December 31, 2017,2019, Kforce employed nearly 2,600approximately 2,300 associates and we had more than 12,000approximately 10,600 consultants on assignment providing flexible staffing services and solutions to our clients. Approximately 91%90% of the consultants are employed directly by Kforce; the other 9%10% consists of 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.
Insurance
Kforce maintains a number of insurance policies including general commercial,liability, automobile liability, workers’ compensation and employers’ liability, withliability for certain foreign exposure, umbrella and excess liability, coverage for each. 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.
Availability of Reports and Other Information
We makeOur Annual Report on Form 10-K, along with all other reports and amendments filed with or furnished to the SEC, are publicly available, free of charge, through the Investor Relations page on our website and by requests addressed to Michael Blackman, 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 Actat www.kforce.com as soon as reasonably practicable after we electronically submit such materialsreports are filed with, or furnished 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 also provides reports, proxy and information statements on its website, free of charge, 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.
ITEM 1A. RISK FACTORS.
The U.S. professional staffing industry in which we operate is significantly affected by fluctuations in general economic and employment conditions.
Demand for staffing services is significantly affected by the general level of economic activity and employment in the U.S. Even in a strong demand environment, without significant uncertainty and volatility, it is difficult for us to forecast future demand for our services due to the inherent difficulties in forecasting the strength of economic cycles, availability of consultants and candidates, and the short-term nature of many of our agreements. As economic activity slows, companies may defer projects for which they utilize our services or reduce their use of temporary employees before laying off permanent employees. In addition, an economic downturn could result in a reduction in the temporary staffing penetration rate, an increase in the unemployment rate and a deceleration of growth in the segments in which we and our clients operate. We may also experience more competitive pricing pressures during periods of economic downturn. Any substantial economic downturn in the U.S. or global impact on the U.S. could have a material adverse effect on our business, financial condition, and operating results.
Kforce may not be able to recruit and retain qualified consultants and candidates.
Kforce depends upon the abilities of its staff to attract and retain consultants and candidates, particularly technical and professional 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 to continue or increase for the foreseeable future. The supply of available consultants and candidates has been constrained during this economic recovery, especially in our Tech segment. If qualified individuals are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material adverse effect on our business.
Kforce faces significant employment-related legal risk.
Kforce employs people internally andprimarily in the workplaces of our clients. An inherent risk of such activity includesInherent risks in our business include possible claims of or relating toto: discrimination and harassment; wrongful termination; violations of employment rights related to employment screening or privacy issues; misclassification of workers as employees or independent contractors; violations of wage and hour 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 whichthat 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 best 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, 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.
Our failure to keep pace with technological change in our industry could potentially place us at a competitive disadvantage.
KforceOur future success is likely to depend on our ability to successfully keep pace with technological changes and advances occurring across our industry. Our business is reliant on a variety of systems and technologies, including those that support consultant and candidate searching and matching, hiring and tracking, order management, billing, and client data analytics. Our success may depend on our ability to keep pace with rapid technological changes in the development and implementation of these services. If our systems become outdated, or if our investments in technology fail to provide the expected results, then we may be exposedunable to unforeseeable negative actsmaintain our technological capabilities relative to our competitors and our business could be negatively affected.
Cybersecurity risks and cyber incidents could adversely affect our business and disrupt operations.
In the ordinary course of our business, we collect and retain personal information of our associates and consultants and their dependents. We are also regularly subjected to cyberattacks and the number and sophistication of such cyberattacks continue to increase. Cyberattacks or other breaches of network or information technology used by our personnel thatassociates and consultants, as well as risks associated with compliance on data privacy could adversely impact our systems, services, operations and financial results. These attacks include, but are not limited to, attempts to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. While we have policies, procedures and systems in place to detect, prevent and deter cyberattacks or other breaches of our networks, techniques used to obtain unauthorized access or cause system interruption change frequently and may not immediately produce signs of intrusion. As a result, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.
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. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems or information. Our information technology may not provide sufficient protection, and as a result we may lose significant information about us, our employees or clients. Other results of these incidents could include, but are not limited to, increased cybersecurity protection costs, litigation, regulatory penalties, monetary damages, and reputational damage adversely affecting client or investor confidence.
Declines in business or a loss of our major client accounts could have a material adverse effect on our business.revenues and financial results.
An inherent riskPart of employing people internallyour business strategy includes enhancing our service offerings and relationships with large consumers of temporary staffing and other solutions, which is intended to enable us to profitably grow our revenues with these clients. However, it also creates the potential for concentrating a significant portion of our revenues among our largest clients and exposes us to increased risks arising from decreases in the workplacevolume of other businesses is that manybusiness from, the pricing of business with, or the possible loss of business with these individuals have access to client information systems and confidential information. The risksclients. Organizational changes occurring within those clients, or a deterioration of such activity include possible acts of errors and omissions; intentional misconduct; release, misusetheir financial condition 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, whichbusiness prospects, 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.
The U.S. professional staffing industry in which we operate is significantly affected by fluctuations in general economic and employment conditions.
Demand for staffing services is significantly affected by the general level of economic activity and employment in the U.S. Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional U.S. temporary workers and, conversely, an economic slowdown results in a contraction in demand for additional U.S. temporary workers. Even without uncertainty and volatility, it is difficult for us to forecast future demandtheir need for our services due to the inherent difficulties in forecasting the strength of economic cycles, and the short-term nature of many of our agreements. As economic activity slows, companies may defer projects for which they utilize our services or reduce their use of temporary employees before laying off permanent employees. In addition, an economic downturn could result in a reductionsignificant decrease in the temporary staffing penetration rate, an increase in the unemployment rate and a deceleration of growth in the segments inrevenues we derive from those clients, which we and our clients operate. We may also experience more competitive pricing pressures during periods of economic downturn. Any substantial economic downturn in the U.S. or global impact on the U.S. could have a material adverse effect on our business, financial condition, and results of operations.results.
Kforce may be adversely affected by government regulation of the staffing business and of the workplace.
Our business is subject to regulation and licensing in many states. There can be no assurance that we will be able to continue to obtain all necessary licenses or approvals or that the cost of compliance will not prove to be material. If we fail to comply, such failure could materially adversely affect Kforce’shave a material adverse effect on our financial results.
A large part of our business entails employing individuals on a temporary basis and placing such individuals in clients’ workplaces. Increased government regulation of the workplace or of the employer/employee relationship could have a material adverse effect on Kforce. For example, changes to government regulations, including changes to statutory hourly wage and overtime regulations, could adversely affect the Firm’s results of operations by increasing its costs.
Reclassification Due to the substantial number of our independent contractors by tax or regulatory authorities could materially and adversely affect our business model and could require us to pay significant retroactive wages, taxes and penalties.
We utilize individuals to provide services in connection with our business as qualified third-party independent contractors rather than our direct employees. Heightened state and federal scrutiny of independent contractor relationships could adversely affect us givenlocal jurisdictions in which we operate and the widening disparity among state and local laws (a trend which appears to be accelerating), there also is a risk that we utilize independent contractorsmay be unaware of, or unable to performadequately monitor, actual or proposed changes in, or the interpretation of, the laws or governmental regulations of such states and localities. Any delay in our services. An adverse determination related to the independent contractor status of these subcontracted personnelcompliance with changes in such laws or governmental regulations could result in a substantial taxpotential fines, penalties, or other liabilities to us.
Our collection, use and retention of personally identifiable information of our associates and consultants create risks that may harm our business.
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 and continually monitor our systemssanctions for potential breaches. However, as 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 cyber-attack, 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, foreign governments) may be able to circumvent our security measures and acquire or misuse such information, resulting in breaches of privacy, errors in the storage, use or transmission of such 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 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.non-compliance.
Kforce may be adversely affected by immigration restrictions and reform.
Our Tech segment 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. Vigorous enforcement and/or legislative or executive action relating to immigration could adversely affect our ability to recruit or retain foreign national consultants, and consequently, reduce our supply of skilled consultants and candidates and subject us to fines, penalties and sanctions, or result in increased labor and compliance costs.
Reclassification of our independent contractors by tax or regulatory authorities could have a material adverse effect on our business model and/or could require us to pay significant retroactive wages, taxes and penalties.
We utilize individuals to provide services in connection with our business as qualified third-party independent contractors rather than our direct employees. Heightened state and federal scrutiny of independent contractor relationships could adversely affect us given that we utilize independent contractors to perform our services. An adverse determination related to the independent contractor status of these subcontracted personnel could result in substantial taxes or other liabilities to us.
Kforce may be exposed to unforeseeable negative acts by our personnel that could have a material adverse effect on our business.
An inherent risk of employing people internally, and in the workplace of other businesses, is that many of these individuals have access to information systems and confidential information. The risks of such activity include 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. Misconduct by our employees could include intentional or unintentional failures to comply with federal government regulations, engaging in unauthorized activities or improper use of our clients’ sensitive or classified information, potentially in collusion with third parties, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could have a material adverse effect 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.
Significant increases in wages or payroll-related costs could have a material adverse effect on our financial results.
Kforce is required to pay a number of federal, state and local payroll and related costs or provide certain benefits such as paid time off, sick leave, unemployment taxes, workers’ compensation and insurance premiums and claims, FICA, and Medicare, among others, related to our employees. Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel. We may not be able to recruitincrease the fees charged to our clients in a timely manner or in a sufficient amount to cover these potential cost increases.
Our business is dependent upon maintaining our reputation, brand, relationships and retainperformance.
We depend on our overall professional reputation and brand name recognition to secure new engagements, maintain existing business and hire qualified consultants and candidates.
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 If 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
technicalreputation, brand or professional skills for the foreseeable future. The supply of available consultants and candidates has been constrained during this economic recovery, especially in our Tech segment. If qualified individualsrelationships are not available to us in sufficient numbers and upon economic terms acceptable to us,damaged, it could have a material adverse effect on our business.operations. In addition, if our performance does not meet our clients' expectations, our revenues and operating results could be materially harmed.
Kforce’s success depends upon retaining the services of its management team and key operating employees.
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, incentivizeTo 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.
Kforce depends on the proper functioning of its information systems.
Kforce is dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of Kforce’s daily operations, most significantly, in the identification and matching of staffing resources to client assignments and in the client billing and consultant or vendor payment functions. Kforce’s information systems may not perform as anticipated and are vulnerable to damage or interruption including natural disasters, fire or casualty theft, technical failures, terrorist acts, cybersecurity breaches, power outages, telecommunications failures, physical or software intrusions, computer viruses, employee errors or other similar events. Our corporate headquarters and data center are located in a hurricane-prone area. Although we have disaster recovery systems for most key information systems, this makes us reliant on third party providers for the restoration of these systems. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, which could have a material adverse effect on our business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyberattack or security breach on a third party carries the same risks to Kforce as those associated with our internal systems. We seek to reduce these risks by performing vendor due diligence procedures prior to engaging with any third party vendor who will have access to sensitive data. Additionally, we require audits of the relevant third parties’ information technology processes on an annual basis. However, there can be no assurance that such parties will not experience cybersecurity breaches that could adversely affect our employees, customers and businesses or that our audit or diligence processes will successfully deter or prevent such breach.
New business initiatives and strategic changes may divert management’s attention from normal business operations, which could have an adverse effect on our performance.
New business initiatives and strategic changes in the composition of our business mix can be a diversion to our management’s attention from other business concerns and could be disruptive to our operations, which could cause our business and results of operations to suffer materially. Acquisitions and new business initiatives could involve significant unanticipated challenges and risks, including the possibility that: they may not advance our business strategy; we may not realize our anticipated return on our investment; we may lose key personnel; we may incur and/or retain unforeseen liabilities; we may experience difficulty in implementing initiatives or integrating acquired operations; or management's attention may be diverted from our other businesses. These events could have a material adverse effect on our business, operating results or financial condition.
Kforce’s current market share may decrease as a result of limited barriers to entry for new competitors and discontinuation of clients outsourcing their staffing needs.
Due to limited barriers to entry for new competitors, the competition among staffing services firms is intense and we face significant competition in the markets we serve. Kforce competes for potential clients with large national and local staffing firms and national and regional advisory firms that offer both solutions and staffing services. Some of our clients increasingly rely upon internal recruiting functions. Some of our competitors possess substantially greater resources than we do and others may develop new and unique technologies. From time to time, we experience significant pressure from our clients to reduce price levels due to competition. 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. Additionally, many clients are retaining third parties to provide vendor management services, which may subject us to greater risks or lower margins.
Adverse results in tax audits or interpretations of tax laws could have an adverse impact on our business.
Kforce is subject to periodic federal, state and local tax audits for various tax years. We also need to comply with new, evolving or revised tax laws and regulations. The Tax Cuts and Jobs Act, enacted in December 2017, continues to require significant interpretation; as additional regulatory guidance is issued and we continue to analyze the application of the new law, we may be required to refine our estimates, which could materially affect our tax obligations and effective tax rate. Although Kforce attempts to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on Kforce.
Impairment charges relating to our goodwill, long-lived assets and equity method investment could have a material adverse effect on our operating results.
We regularly monitor our goodwill, long-lived assets and equity method investment for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units with goodwill to the related net book value. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book value. We review our equity method investment for indicators of impairment on a periodic basis or whenever events or circumstances indicate the carrying amount may be other-than-temporarily impaired. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill, long-lived assets and/or equity method investment. In the event that we determine that there is an impairment, we may be required to record a significant non-cash charge to earnings which could have a material adverse effect on our operating results.
Delays in collecting our trade accounts receivable could have an adverse effect on our business.
We generate a significant amount of trade accounts receivable from our clients. Delays in payments owed to us could have a material adverse effect on our financial condition and cash flows generated by our business. Factors that could cause a delay include business failures, turmoil in the financial and credit markets, sluggish or recessionary U.S. economic conditions, our exposure to clients in high-risk sectors such as the financial services industry, declines in the credit worthiness of our clients, extension in payment terms with our clients and declines in the business of our clients.
Kforce maintains debt whichthat exposes us to interest rate risk and contains restrictive covenants that could trigger prepayment of obligations or additional costs.
We have a credit facility consisting of a revolving line of credit of up to $300.0 million, subject to certain limitations. Borrowings under the credit facility are secured by substantially all of the tangible and intangible assets of the Firm, excluding the Firm’s corporate headquarters and certain other designated executed collateral.
Adverse changes in credit markets, including increases in interest rates, could increase our cost of borrowing and/or make it more difficult to refinance our existing indebtedness, if necessary. We have reduced our exposure to rising interest rates by entering into an interest rate hedging arrangement, although this and other arrangements may result in us incurring higher interest expenses than we would have otherwise incurred. If interest rates increase in the absence of such arrangements though, we would need to dedicate more of our cash flow from operations to service our debt.
Kforce is subject to certain affirmative and negative covenants under our credit facility. Our failure to comply with such restrictive covenants could result in an event of default, which, if not cured or waived, could result in Kforce being required to repay the outstanding balance before the due date. If this occurs, we may not be able to repay our debt or we may be forced to refinance on terms not acceptable to us, which could have a material adverse effect on our operating results of operations and financial condition.
Declines in business or a loss of our major client accounts could have a material adverse effect on our revenues and financial results.
Part of our business strategy includes enhancing our service offerings and relationships with large consumers of temporary staffing, which is intended to enable us to profitably grow our revenues with these clients. However, it also creates the potential for concentrating a significant portion of our revenues among our largest clients and exposes us to increased risks arising from decreases in the volume of business from, the pricing of business with, or the possible loss of business with these clients. Organizational changes occurring within those clients, or a deterioration of their financial condition or business prospects, could reduce their need for our services and result in a significant decrease in the revenues we derive from those clients and could have a material adverse effect on our financial results.
Kforce’s temporary staffing business could be adversely impacted by health care reform.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “PPACA”) imposes mandates on individuals and employers, requiring most individuals to have health insurance. The PPACA assesses penalties on large employers that do not offer health insurance meeting certain coverage, value, or affordability standards to all full-time employees as defined under the PPACA. 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.
New business initiatives and strategic changes may divert management’s attention from normal business operations, which could adversely affect our performance.
New business initiatives and strategic changes in the composition of our business mix can be a diversion to our management’s attention from other business concerns and disruptive to our operations, causing our business and results of operations to suffer materially. Acquisitions and new business initiatives could involve significant unanticipated challenges and risks, including that they may not advance our business strategy, we may not realize our anticipated return on our investment, we may lose key personnel, we may retain unforeseen liabilities, we may experience difficulty in implementing initiatives or integrating acquired operations, or management's attention may be diverted from our other businesses. These events could cause material harm to our business, operating results, or financial condition.
We are exposed to intangible asset risk which could result in future impairment.
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 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.
Delays in collecting our trade accounts receivable could adversely affect our business.
We generate a significant amount of trade accounts receivable from our clients. Delays in payments owed to us could have a material adverse effect on our financial condition and cash flows generated by our business. Factors that could cause a delay include business failures, turmoil in the financial and credit markets, sluggish or recessionary U.S. economic conditions, our exposure to clients in high-risk sectors such as the financial services industry, declines in the credit worthiness of our clients, extension in payment terms with our clients and declines in the business of our clients.
Kforce depends on the proper functioning of its information systems.
Kforce is dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of Kforce’s daily operations, most significantly, in the identification and matching of staffing resources to client assignments and in the client billing and consultant or vendor payment functions. Kforce’s information systems may not perform as anticipated and are vulnerable to damage or interruption including natural disasters, fire or casualty theft, technical failures, terrorist acts, cybersecurity breaches, power outages, telecommunications failures, physical or software intrusions, computer viruses, employee errors, and similar events. Our corporate headquarters and data center are located in a hurricane-prone area though we have disaster recovery systems for some key information systems, such as billing and payroll, but not for all such key systems. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, causing a material adverse effect on our business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyberattack or security breach on a third party carries the same risks to Kforce as those associated with our internal systems. We seek to reduce these risks by performing vendor due diligence procedures prior to engaging with any third party vendor who will have access to sensitive data. Additionally, we require audits of the relevant third parties’ information technology processes on an annual basis. However, there can be no assurance that such parties will not experience cybersecurity breaches which could adversely affect our employees, customers and businesses or that our audit or diligence processes will successfully deter or prevent such breach.
Cybersecurity risks and cyber incidents could adversely affect our business and disrupt operations.
Cyber attacks 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 have an adverse effect 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 have policies, procedures and systems in place to detect, prevent and deter cyber attacks or other breaches of our networks, techniques used to obtain unauthorized access or cause system interruption change frequently and may not immediately produce signs of intrusion. As a result, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems or information. Our information technology may not provide sufficient protection, and as a result we may lose significant information about us, our employees or clients. Other results of these incidents could include, but are not limited to, increased cybersecurity protection costs, litigation, regulatory penalties, monetary damages, and reputational damage adversely affecting client or investor confidence.
Significant increases in wages or payroll-related costs could adversely affect Kforce’s business.
Significant increases in wages or the effective rates of any payroll-related costs could have a material adverse effect on Kforce. Kforce is required to pay a number of federal, state, and local payroll and related costs or provide certain benefits such as paid time off, sick leave, unemployment taxes, workers’ compensation and insurance premiums and claims, FICA, and Medicare, among others, related to our employees. Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel. We may not be able to increase the fees charged to our clients in a timely manner or in a sufficient amount to cover these potential cost increases.
Adverse results in tax audits or interpretations of tax laws could adversely impact our business.
Kforce is subject to periodic federal, state, and local tax audits for various tax years. We also need to comply with new, evolving or revised tax laws and regulations. The recently enacted Tax Cuts and Jobs Act (“TCJA”) requires significant interpretation and application of the new law. As additional regulatory guidance is issued and we continue to analyze the application of the new law, we may be required to refine our estimates, which could materially affect our tax obligations and effective tax rate. Although Kforce attempts to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on Kforce.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors and fraud, or in making all material information known in a timely manner to management.
Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matterregardless of how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Kforce have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls is also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations, misstatements due to error or fraud may occur and not be detected.
Our business is dependent upon maintaining our reputation, our relationships, and our performance.Kforce’s stock price may be volatile.
The reputation and relationships that we have established and currently maintain with our clients are important to maintaining existing business and identifying new business. If our reputation or relationships were damaged, it could have a material adverse effect on our operations. In addition, if our performance does not meet our clients’ expectations, our revenues and operating results could be materially harmed.
Agreements may be terminated by clients and consultants at will and the termination of a significant number of such agreements could adversely affect our revenues.
Our agreements do not provide for exclusive usemarket price of our services,stock has fluctuated substantially in the past 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,could fluctuate substantially in the growth of our business could be adversely affected and our revenues and results of operations could be harmed.
Our failure to keep pace with technological change in our industry will potentially place us at a competitive disadvantage.
Our future, success may depend on our ability to successfully keep pace with technological changes and advances occurring across our industry. Our business is reliantbased on a variety of systems and technologies,factors, including those which support candidate searching and matching, hiring and tracking, order management, billing, and client data analytics. Our success may depend on our ability to keep pace with rapid technologicaloperating results, changes in general conditions in the development and implementationeconomy, the financial markets, the staffing industry, a decrease in our outstanding shares or other developments affecting us, our clients, or our competitors; some of which may be unrelated to our performance.
In addition, the stock market in general, especially NASDAQ, along with market prices for staffing companies, has experienced historical volatility that has often been unrelated to the operating performance of these services. If our systems become outdated, or if our investments in technology fail to providecompanies. These broad market and industry fluctuations may adversely affect the expected results, then we may be unable to maintain our technological capabilities relative to our competitors and our business could be negatively affected.
Kforce’s current market share may decrease as a result of limited barriers to entry for new competitors and discontinuation of clients outsourcing their staffing needs.
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. Someprice of our competitors possess substantially greater resources than we do. From time to time, we experience significant pressure fromcommon stock, regardless of our clients to reduceoperating results.
Among other things, volatility in our stock price levels. During these periods, we may face increased competitive pricing pressures and maycould mean that investors will not be able to recruitsell their shares at or above the personnel necessary to fulfillprices they pay. The volatility also could impair 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.
Vendor management services are considered a competitor and increasing use by our clients could affect our relationships.
Increasingly, many clients and potential clients are retaining third parties to provide vendor management services. The third party, or vendor management company, is responsible for retaining companies that will provide temporary information technology personnel to the client. This results in Kforce contracting with such third parties and not directly with the end customer. This change can weaken Kforce’s relationship with its clients, which may make it more difficult to maintain and expand our business with existing customers. In addition, the agreements with vendor management companies are frequently structured as subcontracting agreements, with the vendor management company entering into a services agreement directly with the end customer. As a result,ability in the eventfuture to offer common stock as a source of a bankruptcyadditional capital or as consideration in the acquisition of a vendor management company, Kforce’s ability to collect its outstanding receivables and continue to provide services could be adversely affected.other businesses, or as compensation for our key employees.
Provisions in Kforce’s articles and bylaws and under Florida law may have certain anti-takeover effects.
Kforce’s articles of incorporation and bylaws and Florida law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. In particular, our articles of incorporation provide for a staggered Board of Directors (“Board”) and permit the removal of directors only for cause. Additionally, the Board may issue up to 15 million shares of preferred stock, and fix the rights and preferences thereof, without a further vote of the shareholders. In addition, certain of our officers and managers have employment agreements containing certain provisions that call for substantial payments to be made to such employees in certain circumstances after a change in control. Certain of these provisions may discourage a future acquisition of Kforce, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Moreover, the existence of these provisions could have a negative effect onnegatively impact the market price of our common stock.
Kforce’s stock price may be volatile.
The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, the staffing industry, or other developments affecting us, our clients, or our competitors; some of which may be unrelated to our performance.
In addition, the stock market in general, especially The NASDAQ Global Select Market (“NASDAQ”) tier, along with market prices for staffing companies, has experienced volatility that has often been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results.
Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above the prices they pay. The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses.
RISKS RELATED TO OUR GOVERNMENT BUSINESS
Our GS segment is substantially dedicated to contracting with and serving U.S. Federal Government agencies (the “Government Business”). In addition, Kforce supplies services to the Federal Government which poses additional risks to those mentioned previously. Federal contractors, including Kforce, face a number of risks, including but not limited to the following:
Our failure to comply with complex federal procurement laws and regulations could cause us to lose business, incur additional costs, and subject us to a variety of penalties, including suspension and debarment from contracting with 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, 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 contracting with Federal Government agencies.
The Federal Government also may reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that 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.
Unfavorable government audit results could force us to refund previously recognized revenues and could subject us to a variety of penalties and sanctions.
Federal agencies can audit and review our performance on contracts, pricing practices, cost structure, incurred cost submissions and compliance with applicable laws, regulations, and standards. An audit of our work, including an audit of work performed by companies Kforce has acquired or may acquire, or subcontractors we have hired or may hire, could force us to refund previously recognized revenues.
If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with Federal Government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true.
We are dependent upon the ability of government agencies to administratively manage our contracts.
After we are awarded a contract and the contract is funded by the Federal Government, we are still dependent upon the ability of the relevant agency to administratively manage our contract. We can be adversely impacted by delays in the start-up of already awarded and funded projects, including delays due to shortages of acquisition and contracting personnel within the Federal Government agencies.
Changes in the spending policies or budget priorities of the Federal Government including the failure by Congress to approve budgets, raise the U.S. debt ceiling or avoid sequestration on a timely basis for the federal agencies we support could delay, reduce or stop federal spending and cause us to lose revenue or impair our intangible assets.
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, or a government shutdown were to occur (as happened recently but of a sufficiently short duration to not cause significant harm to our business), 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.
Competition is intense in the Government Business.
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.
Loss of our General Services Administration (“GSA”) Schedules or other contracting vehicles could impair our ability to win new business.
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.
Our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business.
Some government contracts require us to maintain facility security clearances and require some of our employees to maintain individual security clearances. If our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, a government agency client may terminate the contract or decide not to renew it upon its expiration.
Our employees may engage in misconduct or other improper activities, which could harm our business.
Like all government contractors, we are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by our employees could include intentional or unintentional failures to comply with Federal Government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records. Employee misconduct could also involve the improper use of our clients’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could materially adversely affect our business.
Security breaches in sensitive government information systems could result in the loss of our clients and cause negative publicity.
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.
We are the prime contractor on many of our contracts and if our subcontractors fail to appropriately perform their obligations, our performance and our ability to win future contracts could be harmed.
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 clients. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed or client 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.
We are the subcontractor on many of our contracts and if we, or the applicable prime contractors, fail to appropriately perform our and their obligations, our financial condition may be harmed.
For many of our contracts, we are a subcontractor, and we therefore rely on the applicable prime contractor to secure contracts when they are put up for bid for a renewal or a new contract. There is a risk that the applicable prime contractor is unable to secure such bids for a number of reasons, including the prime contractor’s quality and timeliness of services, financial condition, and relationships with the Federal Government. In addition, there are risks that we are unable to provide such subcontractor services with the quality and timeliness demanded by the prime contractor or the ultimate end-client. Any failure by the applicable prime contractor to secure contracts or by us to perform adequately could materially adversely affect our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We own our corporate headquarters in Tampa, Florida, which is approximately 128,000 square feet of space. In addition, as of December 31, 2017,2019, we leased approximately 334,000247,000 square feet of total office space in 5950 field offices located throughout the U.S., with lease terms ranging from three to five-yearsseven years, although a limited number of leases contain short-term renewal provisions that range from month-to-month to one year.
Although additional field offices may be established based on the requirements of our operations, we believe that our facilities are adequate for our current needs, and we do not expect to materially expand or contract our facilities in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in legal proceedings, claims and administrative matters that arise in the ordinary course of our business. We have made accruals with respectdo not believe that any of our current such proceedings, claims or matters are material. For further information regarding legal proceedings, refer to certain of these matters, where appropriate, that are reflected in our consolidated financial statements but are not, individually orNote 17 - "Commitments and Contingencies" in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, we currently do not expect that these proceedings and claims, individually orNotes to Consolidated Financial Statements in the aggregate, will have a material effect on our financial position, resultssection entitled "Litigation," included in Item 8. Financial Statements and Supplementary Data of operations, or cash flows. The outcome of any litigationthis report, which is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our financial position, results of operations, or cash flows. Kforce maintains liability insurance in amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that Kforce insures against are workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, cyber liability, employment practices liability and fidelity losses. There can be no assurance that Kforce’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities. Accordingly, we disclose matters below for which a material loss is reasonably possible.incorporated into this Item 3 by reference.
On August 25, 2016, Kforce Flexible Solutions LLC (along with co-defendant BMO Harris Bank) was served with a complaint brought in the Northern District of Illinois, U.S. District Court, Eastern District of Illinois; Shepard v. BMO Harris Bank N.A. et al., Case No.: 1:16-cv-08288. The plaintiff purports to bring claims on her own behalf and on behalf of a putative class of telephone-dedicated workers for alleged violations of the Fair Labor Standards Act, the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Act based upon the defendants’ purported failure to pay her and other class members all earned regular and overtime pay for all time worked. More specifically, the plaintiff alleges that class employees were required to perform unpaid work before and after the start and end times of their shifts. She seeks unpaid back regular and overtime wages, liquidated damages, statutory penalties, and attorney fees and costs. On February 15, 2018, the judge granted final approval of the parties’ agreed resolution and the case will be dismissed following implementation of the parties’ settlement. This matter was resolved without any material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market InformationHolders of Common Stock
Our common stock trades on the NASDAQ using the ticker symbol “KFRC”. The following table sets forth, for the periods indicated, the high and low intra-day sales price of our common stock, as reported on the NASDAQ. These prices represent inter-dealer quotations without retail markups, markdowns or commissions, and may not represent actual transactions.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| 2017 | | | | | | | |
| High | $ | 26.95 |
| | $ | 24.30 |
| | $ | 20.65 |
| | $ | 26.75 |
|
| Low | $ | 21.28 |
| | $ | 17.45 |
| | $ | 16.75 |
| | $ | 19.10 |
|
| 2016 | | | | | | | |
| High | $ | 25.00 |
| | $ | 20.40 |
| | $ | 20.55 |
| | $ | 24.25 |
|
| Low | $ | 14.87 |
| | $ | 15.78 |
| | $ | 16.22 |
| | $ | 15.95 |
|
From January 1, 2018 through February 21, 2018, the high and low intra-day sales price of our common stock was $28.94 and $23.80, respectively. On February 21, 2018, the last reported sale price of our common stock on the NASDAQ was $28.20 per share.
Holders of Common Stock
As of February 21, 2018,19, 2020, there were approximately 158150 holders of record.
Dividends
Kforce’s Board may, at its discretion, declare and pay dividends on the outstanding shares of Kforce’s common stock out of retained earnings, subject to statutory requirements. Dividends for any outstanding and unvested restricted stock as of the record date are awarded in the form of additional shares of forfeitable restricted stock, at the same rate as the cash dividend on common stock and based on the closing stock price on the record date. Such additional shares have the same vesting terms and conditions as the outstanding and unvested restricted stock.
During the years ended December 31, 2017 and 2016, Kforce declared and paid a dividend of $0.12 in each quarter for all outstanding shares of common stock. Kforce currently expects to continue to declare and pay quarterly dividends of a similar amount. However, the declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board each quarter following its review of, among other things, the Firm’s current and expected financial performance and our legal ability to pay dividends. There can be no assurances that dividends will be paid in the future.
Purchases of Equity Securities by the Issuer
In March 2019, the Board approved an increase in our stock repurchase authorization bringing the then available authorization to $150.0 million. The following table presents information with respect to our repurchases of Kforce common stock during the three months ended December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased
(1)(2)(3) | | Average Price Paid
per Share | | Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs | | Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs |
| October 1, 2019 to October 31, 2019 | 703,579 | | | $ | 37.90 | | | 698,185 | | | $ | 44,297,260 | |
| November 1, 2019 to November 30, 2019 | 835 | | | $ | 40.18 | | | — | | | $ | 44,297,260 | |
| December 1, 2019 to December 31, 2019 | 118,754 | | | $ | 39.95 | | | — | | | $ | 44,297,260 | |
| Total | 823,168 | | | $ | 38.20 | | | 698,185 | | | $ | 44,297,260 | |
(1) Includes 5,394 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period October 1, 2019 to October 31, 2019.
(2) Includes 835 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2019 to November 30, 2019.
(3) Includes 118,754 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2019 to December 31, 2019.
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased
(1)(2) | | Average Price Paid
per Share | | Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs | | Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs |
| October 1, 2017 to October 31, 2017 | 155,279 |
| | $ | 20.24 |
| | 155,279 |
| | $ | 46,148,526 |
|
| November 1, 2017 to November 30, 2017 | 19,997 |
| | $ | 24.12 |
| | 12,364 |
| | $ | 45,862,824 |
|
| December 1, 2017 to December 31, 2017 | 379,730 |
| | $ | 25.83 |
| | 283,662 |
| | $ | 38,480,203 |
|
| Total | 555,006 |
| | $ | 24.20 |
| | 451,305 |
| | $ | 38,480,203 |
|
| |
(1) | Includes 7,633 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2017 to November 30, 2017. |
| |
(2) | Includes 96,068 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2017 to December 31, 2017. |
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | |
| | 2019 (1) | | 2018 (2) | | 2017 (2) | | 2016 (3) | | 2015 |
| | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) | | | | | | | | |
| Revenue | $ | 1,347,387 | | | $ | 1,303,937 | | | $ | 1,253,646 | | | $ | 1,221,078 | | | $ | 1,221,866 | |
| Gross profit | 395,038 | | | 386,487 | | | 375,597 | | | 376,393 | | | 380,757 | |
| Selling, general and administrative expenses | 314,167 | | | 307,250 | | | 308,313 | | | 318,970 | | | 309,998 | |
| Depreciation and amortization | 6,050 | | | 6,836 | | | 7,266 | | | 7,549 | | | 8,386 | |
| Other expense, net | 3,425 | | | 4,521 | | | 5,100 | | | 3,101 | | | 1,928 | |
| Income from continuing operations, before income taxes | 71,396 | | | 67,880 | | | 54,918 | | | 46,773 | | | 60,445 | |
| Income tax expense | 16,830 | | | 17,004 | | | 25,324 | | | 19,751 | | | 24,802 | |
| Income from continuing operations | 54,566 | | | 50,876 | | | 29,594 | | | 27,022 | | | 35,643 | |
| Income from discontinued operations, net of tax | 76,296 | | | 7,104 | | | 3,691 | | | 5,751 | | | 7,181 | |
| Net income | $ | 130,862 | | | $ | 57,980 | | | $ | 33,285 | | | $ | 32,773 | | | $ | 42,824 | |
| Earnings per share – basic, continuing operations | $ | 2.35 | | | $ | 2.05 | | | $ | 1.17 | | | $ | 1.04 | | | $ | 1.28 | |
| Earnings per share – diluted, continuing operations | $ | 2.29 | | | $ | 2.02 | | | $ | 1.16 | | | $ | 1.03 | | | $ | 1.26 | |
| Weighted average shares outstanding – basic | 23,186 | | | 24,738 | | | 25,222 | | | 26,099 | | | 27,910 | |
| Weighted average shares outstanding – diluted | 23,772 | | | 25,251 | | | 25,586 | | | 26,274 | | | 28,190 | |
| Dividends declared per share | $ | 0.72 | | | $ | 0.60 | | | $ | 0.48 | | | $ | 0.48 | | | $ | 0.45 | |
| | As of December 31, | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (IN THOUSANDS) | | | | | | | | |
| Cash and cash equivalents | $ | 19,831 | | | $ | 112 | | | $ | 379 | | | $ | 1,482 | | | $ | 1,497 | |
| Working capital | $ | 160,271 | | | $ | 158,104 | | | $ | 161,726 | | | $ | 135,353 | | | $ | 122,270 | |
| Total assets | $ | 381,125 | | | $ | 379,908 | | | $ | 384,304 | | | $ | 365,421 | | | $ | 351,822 | |
| Total outstanding borrowings on credit facility | $ | 65,000 | | | $ | 71,800 | | | $ | 116,523 | | | $ | 111,547 | | | $ | 80,472 | |
| Total long-term liabilities | $ | 128,898 | | | $ | 121,219 | | | $ | 166,308 | | | $ | 160,332 | | | $ | 124,449 | |
| Stockholders’ equity | $ | 167,263 | | | $ | 168,331 | | | $ | 134,277 | | | $ | 121,736 | | | $ | 139,627 | |
(1) SG&A expenses for the year ended December 31, 2019 include $2.0 million of severance and other costs due to actions taken as a result of the GS divestiture, which negatively impacted SG&A.
(2) The Tax Cuts and Jobs Act ("TCJA") was enacted in December 2017, which reduced the U.S. federal corporate tax rate from 35.0% to 21.0% in 2018. As a result, we revalued our net deferred income tax assets and recorded $3.6 million of additional income tax expense from continuing operations during the year ended December 31, 2017.
(3) During 2016, Kforce incurred approximately $6.0 million in severance costs associated with realignment activities focused on further streamlining our organization, which were recorded in SG&A.
During the year ended December 31, 2019, Kforce completed the sale of the GS segment and the results of operations for the GS segment have been presented as discontinued operations for all of the years presented above. Refer to Note 2 – “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 (1)
| | 2016 (2)
| | 2015 | | 2014 (3) | | 2013 (3)(4)(5)
|
| | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) |
| Net service revenues | $ | 1,357,940 |
| | $ | 1,319,706 |
| | $ | 1,319,238 |
| | $ | 1,217,331 |
| | $ | 1,073,728 |
|
| Gross profit | 408,056 |
| | 408,499 |
| | 414,114 |
| | 374,581 |
| | 344,376 |
|
| Selling, general and administrative expenses | 331,172 |
| | 340,742 |
| | 330,034 |
| | 314,966 |
| | 307,339 |
|
| Goodwill impairment | — |
| | — |
| | — |
| | — |
| | 14,510 |
|
| Depreciation and amortization | 8,255 |
| | 8,701 |
| | 9,831 |
| | 9,894 |
| | 9,846 |
|
| Other expense, net | 4,535 |
| | 3,101 |
| | 2,577 |
| | 1,764 |
| | 1,752 |
|
| Income from continuing operations, before income taxes | 64,094 |
| | 55,955 |
| | 71,672 |
| | 47,957 |
| | 10,929 |
|
| Income tax expense | 30,809 |
| | 23,182 |
| | 28,848 |
| | 18,559 |
| | 5,635 |
|
| Income from continuing operations | 33,285 |
| | 32,773 |
| | 42,824 |
| | 29,398 |
| | 5,294 |
|
| Income from discontinued operations, net of tax | — |
| | — |
| | — |
| | 61,517 |
| | 5,493 |
|
| Net income | $ | 33,285 |
| | $ | 32,773 |
| | $ | 42,824 |
| | $ | 90,915 |
| | $ | 10,787 |
|
| Earnings per share – basic, continuing operations | $ | 1.32 |
| | $ | 1.26 |
| | $ | 1.53 |
| | $ | 0.94 |
| | $ | 0.16 |
|
| Earnings per share – diluted, continuing operations | $ | 1.30 |
| | $ | 1.25 |
| | $ | 1.52 |
| | $ | 0.93 |
| | $ | 0.16 |
|
| Earnings per share – basic | $ | 1.32 |
| | $ | 1.26 |
| | $ | 1.53 |
| | $ | 2.89 |
| | $ | 0.32 |
|
| Earnings per share – diluted | $ | 1.30 |
| | $ | 1.25 |
| | $ | 1.52 |
| | $ | 2.87 |
| | $ | 0.32 |
|
| Weighted average shares outstanding – basic | 25,222 |
| | 26,099 |
| | 27,910 |
| | 31,475 |
| | 33,511 |
|
| Weighted average shares outstanding – diluted | 25,586 |
| | 26,274 |
| | 28,190 |
| | 31,691 |
| | 33,643 |
|
| Dividends declared per share | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.45 |
| | $ | 0.41 |
| | $ | 0.10 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (IN THOUSANDS) |
| Working capital | $ | 161,726 |
| | $ | 135,353 |
| | $ | 122,270 |
| | $ | 125,246 |
| | $ | 108,251 |
|
| Total assets | $ | 384,304 |
| | $ | 365,421 |
| | $ | 351,822 |
| | $ | 363,922 |
| | $ | 347,768 |
|
| Total outstanding borrowings on credit facility | $ | 116,523 |
| | $ | 111,547 |
| | $ | 80,472 |
| | $ | 93,333 |
| | $ | 62,642 |
|
| Total long-term liabilities | $ | 166,308 |
| | $ | 160,332 |
| | $ | 124,449 |
| | $ | 130,351 |
| | $ | 100,562 |
|
| Stockholders’ equity | $ | 134,277 |
| | $ | 121,736 |
| | $ | 139,627 |
| | $ | 139,388 |
| | $ | 157,233 |
|
| |
(1) | The TCJA was enacted in December 2017, which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% beginning in 2018. As a result, we revalued our net deferred income tax assets and recorded $5.4 million of additional income tax expense during the year ended December 31, 2017. |
| |
(2) | During 2016, Kforce incurred approximately $6.0 million in severance costs associated with realignment activities focused on further streamlining our organization which were recorded in SG&A. |
| |
(3) | During 2014, Kforce disposed of Kforce Healthcare, Inc. (“KHI”), a wholly-owned subsidiary of Kforce Inc. The results of operations for KHI have been presented as discontinued operations for the years ended December 31, 2014 and 2013. |
| |
(4) | Kforce recognized a $14.5 million goodwill impairment charge related to the GS reporting unit during 2013. The tax benefit associated with this impairment charge was $5.2 million resulting in an after-tax impairment charge of $9.3 million. |
| |
(5) | During 2013, Kforce commenced a plan to streamline its structure through an organizational realignment and incurred severance and termination-related expenses of $7.1 million which were recorded within SG&A. In connection with the realignment and succession planning, the Kforce’s Compensation Committee approved discretionary bonuses of $3.6 million paid to a broad group of senior management during the fourth quarter of 2013. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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
EXECUTIVE SUMMARY
During 2019, Kforce sold the MD&A,GS segment, which includes the following sections:
Executive Summary – An executive summary of our results ofhas been reported as discontinued operations for 2017.
Results of Operations – An analysis of Kforce’s consolidated results of operations for the three years presented in the consolidated financial statements. In orderstatements for all periods presented. Refer to assistNote 2 - “Discontinued Operations” in the readerNotes to Consolidated Financial Statements, included in understandingItem 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion. Except as specifically noted, our business as a whole, certain metrics are presented for each of our segments.
Liquidity and Capital Resources – An analysis of cash flows, credit facility, off-balance sheet arrangements, stock repurchases, contractual obligations and commitments.
Critical Accounting Estimates – Adiscussions below exclude any activity related to the GS segment, which is addressed separately in the discussion of the accounting estimates that are most criticalIncome from Discontinued Operations, Net of Tax, and certain prior year amounts have been reclassified to aid in fully understanding and evaluating our reported financial results and that require management’s most difficult, subjective or complex judgments.
New Accounting Standards – A discussion of recently issued accounting standards and the potential impact on our consolidated financial statements.
EXECUTIVE SUMMARYconform to current year presentation.
The following is an executive summary of what Kforce believes are highlights for 2017,2019, which should be considered in the context of the additional discussions herein and in conjunction with the consolidated financial statements and notes thereto.
Net service revenues•Revenue increased 2.9%3.3% to $1.36$1.35 billion in 20172019 from $1.32$1.30 billion in 2016. Net service revenues2018. Revenue increased 2.7%6.8% for Tech 2.5%and decreased 7.7% for FA and 5.7% for GS.FA.
•Flex revenuesrevenue increased 3.2%3.3% to $1.31$1.30 billion in 20172019 from $1.27$1.26 billion in 2016.2018. Flex revenuesrevenue increased 2.8%, 3.6% and 5.7%6.8% for Tech FA and GS, respectively. Quarterly year-over-year growth rates in Tech Flex, our largest segment, accelerated in the second half of 2017.decreased 8.6% for FA.
•Direct Hire revenues decreased 5.4%revenue increased 4.4% to $47.7 million in 20172019 from $50.4$45.7 million in 2016.2018.
•Flex gross profit margin decreased 7040 basis points to 27.5%26.7% in 20172019 from 28.2%27.1% in 2016.2018. Flex gross profit margin decreased 6030 and 10 basis points for Tech 90 basis points forand FA, and 150 basis points for GS. These margin decreases were primarily a result of compression in the spread between our bill rates and pay rates, higher health insurance costs and the impact of Hurricanes Harvey and Irma. In the second half of 2017, we made progress in partially mitigating the spread compression we experienced in the first half of 2017 through increased pricing discipline and other operational programs.respectively.
•SG&A expenses as a percentage of revenuesrevenue for the year ended December 31, 20172019 decreased to 24.4%23.3% from 25.8%23.6% in 2016.2018. The 140 basis point decreaseoverall improvement was driven primarily by $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 such as travel and office related expenses. These benefits were partially offsetdriven by an increase in information technology investments.associate productivity, leverage created from our revenue growth and exercising better expense discipline.
Additionally, during 2017, Kforce completed the sale of Global’s assets and recorded a $3.3 million gain within SG&A. Prior to the sale, Global generated approximately $2.5 million in Tech Flex revenue per quarter.
Net income•Income from continuing operations for the year ended December 31, 20172019, increased 1.6%7.3% to $33.3$54.6 million, from $32.8 million in 2016 and diluted earningsor $2.29 per share, from $50.9 million, or $2.02 per share, in 2018.
•The Firm returned $134.4 million of capital to our shareholders in the form of quarterly dividends totaling $16.6 million, or $0.72 per share, and open market repurchases totaling $117.8 million, or 3.3 million shares, during the year ended December 31, 2019. During 2019, the Board approved an increase in our stock repurchase authorization and we utilized the net proceeds generated from the sale of our GS segment to return capital to our shareholders in the form of open market repurchases.
•The total amount outstanding under our Credit Facility decreased $6.8 million to $65.0 million as of December 31, 2019 as compared to $71.8 million as of December 31, 2018. We exited the year with $45.2 million of net debt as we had $19.8 million of cash.
•Cash provided by operating activities was $66.6 million during the year ended December 31, 2019 compared to $87.7 million for 2018, primarily due to the timing of income tax refunds and payments as well as a decrease in cash provided by the GS segment due to the divestiture.
RESULTS OF OPERATIONS
Certain discussions of the changes in our results of operations from the year ended December 31, 2017 increasedas compared to $1.30 from $1.25 per share in 2016, primarily driven by the SG&A items described above.
During 2017, Kforce repurchased 526 thousand shares of common stock on the open market at a total cost of approximately $12.2 million.
The Firm declared and paid dividends totaling $0.48 per share during the year ended December 31, 2017, resulting2018 have been omitted from this Form 10-K, but may be found in a total cash payout“Item 7. Management’s Discussion and Analysis of $12.1 million.
The Firm entered into a new credit facility on May 25, 2017, which, among other things, increasedFinancial Condition and Results of Operations” of our borrowing capacity by $130.0 million to $300.0 million. The total amount outstanding underForm 10-K for the credit facility increased $5.0 million to $116.5 million as offiscal year ended December 31, 2017 as compared to $111.5 million as of December 31, 2016. This increase was primarily driven by lower than anticipated operating cash flows as a result of an increase in accounts receivable due to our revenue growth, timing of collections and certain clients extending payment terms.
The Firm entered into a forward-starting interest rate swap agreement2018 filed with the SEC on April 21, 2017 to mitigate the risk of rising interest rates. The notional amount of the interest rate swap (the “Swap”) is $65.0 million for the first three years and decreases to $25.0 million for years four and five. The fair value of our Swap as of December 31, 2017 was a $0.5 million asset.
RESULTS OF OPERATIONSFebruary 22, 2019.
In 2017,2019, we continued to make progress on our strategic initiatives including:
Implementingincluding, among others, the completion of a multi-year effort to divest of non-core businesses with the divestiture of our GS segment, entering into a strategic joint venture, implementing a new consultant referral technology and making continued progress on implementing new and upgrading existing technologies that we believe will allow us to more effectively and efficiently serve our clients, consultants and candidates and improve the productivity of our people and scalability of our organization. We completed the deployment of our new customer relationship management system during 2017 and made significant progress towards the implementation of other technology initiatives related to our consultant time and expense management process, associate expense reimbursement, business and data intelligence applications among other areas, which we expect to benefit us in 2018 and beyond. We also laid the foundation during 2017 for future technology initiatives.
Continuing to align our revenue-generating talent to the markets, products, industries and clients that we believe present Kforce with the greatest opportunity for profitable revenue growth. During 2017, we further optimized the alignment of our revenue-generating and revenue-enabling organizations to enhance our efficiency and effectiveness in serving our clients, consultants and candidates. We also conducted sustainment activities related to our enhanced sales methodology that was rolled out in the fourth quarter of 2016.
During the third quarter of 2017, our results of operation were adversely impacted by Hurricanes Harvey and Irma and, more importantly, the devastation felt by our associates, clients and consultants was significant. We made the decision to prioritize the care and safety of our core associates and consultants by continuing to compensate them while our clients were closed and provided additional support for those with more critical needs. We also more broadly supported the recovery efforts with a pledge of $1.0 million in charitable contributions to support these efforts. The combined impact to our earnings per share was $0.04 during 2017.
Net Service Revenues. The following table presents certain items in our Consolidated Statements of Operations and Comprehensive Income as a percentage of net service revenuesrevenue for the years ended:
| | | | | | | | | | | | | | | | | |
| | DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Revenue by segment: | | | | | |
| Tech | 78.5 | % | | 75.9 | % | | 72.4 | % |
| FA | 21.5 | | | 24.1 | | | 27.6 | |
| Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Revenue by type: | | | | | |
| Flex | 96.5 | % | | 96.5 | % | | 96.2 | % |
| Direct Hire | 3.5 | | | 3.5 | | | 3.8 | |
| Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Gross profit | 29.3 | % | | 29.6 | % | | 30.0 | % |
| Selling, general and administrative expenses | 23.3 | % | | 23.6 | % | | 24.6 | % |
| Depreciation and amortization | 0.4 | % | | 0.5 | % | | 0.6 | % |
| Income from operations | 5.6 | % | | 5.6 | % | | 4.8 | % |
| Income from continuing operations, before income taxes | 5.3 | % | | 5.2 | % | | 4.4 | % |
| Income from continuing operations | 4.0 | % | | 3.9 | % | | 2.4 | % |
| Income from discontinued operations, net of tax | 5.7 | % | | 0.5 | % | | 0.3 | % |
| Net income | 9.7 | % | | 4.4 | % | | 2.7 | % |
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues by segment: | | | | | |
| Tech | 66.8 | % | | 66.9 | % | | 67.9 | % |
| FA | 25.5 |
| | 25.6 |
| | 24.7 |
|
| GS | 7.7 |
| | 7.5 |
| | 7.4 |
|
| Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Revenues by type: | | | | | |
| Flex | 96.5 | % | | 96.2 | % | | 95.9 | % |
| Direct Hire | 3.5 |
| | 3.8 |
| | 4.1 |
|
| Net service revenues | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Gross profit | 30.0 | % | | 31.0 | % | | 31.4 | % |
| Selling, general and administrative expenses | 24.4 | % | | 25.8 | % | | 25.0 | % |
| Depreciation and amortization | 0.6 | % | | 0.7 | % | | 0.7 | % |
| Income from operations | 5.1 | % | | 4.5 | % | | 5.6 | % |
| Income before income taxes | 4.7 | % | | 4.2 | % | | 5.4 | % |
| Net income | 2.5 | % | | 2.5 | % | | 3.2 | % |
Revenue.The following table presents net service revenuesrevenue by type for Flex and Direct Hire byeach segment and percentage change from the prior period for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | | | | | | | | | |
| Flex revenue | $ | 1,037,380 | | | 6.8 | % | | $ | 971,310 | | | 9.4 | % | | $ | 887,675 | |
| Direct Hire revenue | 20,479 | | | 9.1 | % | | 18,779 | | | (5.3) | % | | 19,836 | |
| Total Tech revenue | $ | 1,057,859 | | | 6.8 | % | | $ | 990,089 | | | 9.1 | % | | $ | 907,511 | |
| FA | | | | | | | | | |
| Flex revenue | $ | 262,307 | | | (8.6) | % | | $ | 286,939 | | | (9.9) | % | | $ | 318,294 | |
| Direct Hire revenue | 27,221 | | | 1.2 | % | | 26,909 | | | (3.3) | % | | 27,841 | |
| Total FA revenue | $ | 289,528 | | | (7.7) | % | | $ | 313,848 | | | (9.3) | % | | $ | 346,135 | |
| | | | | | | | | |
| Total Flex revenue | $ | 1,299,687 | | | 3.3 | % | | $ | 1,258,249 | | | 4.3 | % | | $ | 1,205,969 | |
| Total Direct Hire revenue | 47,700 | | | 4.4 | % | | 45,688 | | | (4.2) | % | | 47,677 | |
| Total Revenue | $ | 1,347,387 | | | 3.3 | % | | $ | 1,303,937 | | | 4.0 | % | | $ | 1,253,646 | |
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 |
| Tech revenues | | | | | | | | | |
| Flex revenues | $ | 887,675 |
| | 2.8 | % | | $ | 863,434 |
| | (1.2 | )% | | $ | 873,609 |
|
| Direct Hire revenues | 19,836 |
| | (1.0 | )% | | 20,043 |
| | (10.3 | )% | | 22,333 |
|
| Total Tech revenues | $ | 907,511 |
| | 2.7 | % | | $ | 883,477 |
| | (1.4 | )% | | $ | 895,942 |
|
| FA revenues | | | | | | | | | |
| Flex revenues | $ | 318,294 |
| | 3.6 | % | | $ | 307,245 |
| | 4.4 | % | | $ | 294,186 |
|
| Direct Hire revenues | 27,841 |
| | (8.3 | )% | | 30,356 |
| | (4.4 | )% | | 31,738 |
|
| Total FA revenues | $ | 346,135 |
| | 2.5 | % | | $ | 337,601 |
| | 3.6 | % | | $ | 325,924 |
|
| GS revenues | | | | | | | | | |
| Flex revenues | $ | 104,294 |
| | 5.7 | % | | $ | 98,628 |
| | 1.3 | % | | $ | 97,372 |
|
| Total GS revenues | $ | 104,294 |
| | 5.7 | % | | $ | 98,628 |
| | 1.3 | % | | $ | 97,372 |
|
| | | | | | | | | | |
| Total Flex revenues | $ | 1,310,263 |
| | 3.2 | % | | $ | 1,269,307 |
| | 0.3 | % | | $ | 1,265,167 |
|
| Total Direct Hire revenues | 47,677 |
| | (5.4 | )% | | 50,399 |
| | (6.8 | )% | | 54,071 |
|
| Total Net service revenues | $ | 1,357,940 |
| | 2.9 | % | | $ | 1,319,706 |
| | — | % | | $ | 1,319,238 |
|
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. The following 2017 quarterly information is presentedtable presents the year-over-year revenue growth rates, on a billing day basis, for informational purposes onlythe last five quarters (in thousands, except Billing Days).:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year-Over-Year Revenue Growth Rates | | | | | | | | |
| | (Per Billing Day) | | | | | | | | |
| | Q4 2019 | | Q3 2019 | | Q2 2019 | | Q1 2019 | | Q4 2018 |
| Billing days | | 62 | | 64 | | 64 | | 63 | | 62 |
| Tech Flex | | 4.8 | % | | 6.5 | % | | 6.2 | % | | 9.8 | % | | 9.0 | % |
| FA Flex | | (7.6) | % | | (5.3) | % | | (9.4) | % | | (11.7) | % | | (11.7) | % |
| Total Flex | | 2.1 | % | | 3.9 | % | | 2.6 | % | | 4.6 | % | | 3.6 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | December 31 | | September 30 | | June 30 | | March 31 |
| | Revenues | | Year-Over-Year Revenue Growth Rates
(Per Billing Day) | | Revenues | | Year-Over-Year Revenue Growth Rates
(Per Billing Day) | | Revenues | | Year-Over-Year Revenue Growth Rates
(Per Billing Day) | | Revenues | | Year-Over-Year Revenue Growth Rates
(Per Billing Day) |
| Flex revenues | | | | | | | | | | | | | | | |
| Tech | $ | 223,897 |
| | 5.4 | % | | $ | 224,148 |
| | 3.3 | % | | $ | 222,744 |
| | 1.5 | % | | $ | 216,886 |
| | 2.7 | % |
| FA | 79,098 |
| | 0.3 | % | | 78,209 |
| | 4.1 | % | | 80,038 |
| | 4.3 | % | | 80,949 |
| | 7.5 | % |
| GS | 29,421 |
| | 25.7 | % | | 26,547 |
| | 0.6 | % | | 23,674 |
| | (6.4 | )% | | 24,652 |
| | 6.6 | % |
| Total Flex revenues | $ | 332,416 |
| | 5.6 | % | | $ | 328,904 |
| | 3.3 | % | | $ | 326,456 |
| | 1.6 | % | | $ | 322,487 |
| | 4.2 | % |
| Direct Hire revenues | | | | | | | | | | | | | | | |
| Tech | $ | 3,919 |
| | (10.3 | )% | | $ | 5,133 |
| | 1.3 | % | | $ | 5,625 |
| | 9.3 | % | | $ | 5,159 |
| | (4.1 | )% |
| FA | 6,251 |
| | (9.6 | )% | | 7,016 |
| | (9.0 | )% | | 8,228 |
| | (2.4 | )% | | 6,346 |
| | (11.7 | )% |
| Total Direct Hire revenues | $ | 10,170 |
| | (9.9 | )% | | $ | 12,149 |
| | (4.9 | )% | | $ | 13,853 |
| | 2.1 | % | | $ | 11,505 |
| | (8.4 | )% |
| Revenue by segment | | | | | | | | | | | | | | | |
| Tech | $ | 227,816 |
| | 5.1 | % | | $ | 229,281 |
| | 3.3 | % | | $ | 228,369 |
| | 1.7 | % | | $ | 222,045 |
| | 2.5 | % |
| FA | 85,349 |
| | (0.5 | )% | | 85,225 |
| | 2.9 | % | | 88,266 |
| | 3.6 | % | | 87,295 |
| | 5.8 | % |
| GS | 29,421 |
| | 25.7 | % | | 26,547 |
| | 0.6 | % | | 23,674 |
| | (6.4 | )% | | 24,652 |
| | 6.6 | % |
| Total Net service revenues | $ | 342,586 |
| | 5.1 | % | | $ | 341,053 |
| | 3.0 | % | | $ | 340,309 |
| | 1.6 | % | | $ | 333,992 |
| | 3.7 | % |
| | | | | | | | | | | | | | | | |
| Billing Days | | | 61 |
| | | | 63 |
| | | | 64 |
| | | | 64 |
|
Flex Revenues.Revenue. The key drivers of Flex revenuesrevenue are the number of consultants on assignment, number of billable hours, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.
Flex revenuesrevenue for our largest segment, Tech, increased 2.8%6.8% during the year ended December 31, 2017,2019, as compared to 2016 and decreased 1.2%2018. Our growth rate exceeded SIA’s projected domestic temporary technology staffing growth rate for 2019 of 3% by more than two times. Our growth in 2016 from 2015. Our 2017 increase wasTech Flex in 2019 has been disporportionately driven by an acceleration of quarterly year-over-year growth rates in the second half of 2017, which we believe is a resultlargest consumers of our strategic portfolio alignment efforts as well as the investments we have made in an effort to improve the productivity and effectivenessservices, many of whom are also some of our revenue-generating talent.largest clients. We have been focusedbelieve the secular drivers of technology spend generally remain intact with many companies becoming increasingly dependent on diversifying our portfoliothe efficiencies provided by technology and the need for innovation to grow revenues with other Fortune 500 companies outside of our top 25 largest clients; much of the revenue growth that we experiencedsupport business strategies and sustain relevancy in the second half of 2017 was a result of these efforts.today’s rapidly changing marketplace. Our belief in the strength in the demand environment within Tech Flextechnology has not changed; thus, we expectedexpect continued Tech Flex growth in 2018 in this segment.2020.
Our FA segment experienced an increasea decrease in Flex revenuesrevenue of 3.6%8.6% during the year ended December 31, 2017,2019, as compared to 2016 and increased 4.4%2018. The year-over-year decrease in 20162019 from 2015. Over the last several years, we have seen greater opportunities from larger2018 was primarily due to a lower volume projects in centralized andof new assignments, which was partially outsourced functional areas such as benefits and enrollment support and other service and administrative functions as clients continue to evaluate their strategies for meeting their human capital needs. We expect our FA segment to grow on a year-over-year basis in 2018.
Our GS segment experiencedoffset by an increase in Flex revenuesaverage bill rates of 5.7% duringfor the year ended December 31, 2017,2019 as compared to 2016 and increased 1.3% in 2016 from 2015. Our GS segment was awarded two prime contract wins in2018. We continue to focus on the third quarterstrategic repositioning of 2017 under the T4 Next Generation contract vehicle with the U.S. Department of Veterans Affairs totaling nearly $100 million. Revenues for GS grew approximately 25% on a year-over-year basis in the fourth quarter of 2017 primarily as a result of these prime contract wins. Our GS segment’s largest contract isour FA Flex business into more high-skilled positions that are less susceptible to being recompeteddisrupted by the prime contractor in the first quarter of 2018. Provided GS is successful at retaining this contract,technological advancements. In 2020, we expect our GS segment should grow in the low double digits on a year-over-year basis in 2018.FA Flex revenue to be stable.
The following table presents the key drivers for the change in Flex revenues for our Tech and FA segmentsrevenue by segment over the prior period for the years ended December 31 (in thousands):
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Tech | | FA | | Tech | | FA |
| Key Drivers | | | | | | | |
| Volume (hours billed) | $ | 9,710 |
| | $ | 3,915 |
| | $ | (10,115 | ) | | $ | 15,198 |
|
| Bill rate | 14,563 |
| | 7,053 |
| | 896 |
| | (2,055 | ) |
| Billable expenses | (32 | ) | | 81 |
| | (956 | ) | | (84 | ) |
| Total change in Flex revenues | $ | 24,241 |
| | $ | 11,049 |
| | $ | (10,175 | ) | | $ | 13,059 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | | | YEAR ENDED DECEMBER 31, | | |
| 2019 vs. 2018 | | | | 2018 vs. 2017 | | |
| Key Drivers - Increase (Decrease) | Tech | | FA | | Tech | | FA |
| Volume - hours billed | $ | 35,194 | | | $ | (38,922) | | | $ | 18,284 | | | $ | (44,912) | |
| Bill rate | 30,469 | | | 14,145 | | | 62,036 | | | 13,298 | |
| Billable expenses | 407 | | | 145 | | | 3,315 | | | 259 | |
| Total change in Flex revenue | $ | 66,070 | | | $ | (24,632) | | | $ | 83,635 | | | $ | (31,355) | |
The following table presents total Flex hours billed for our Tech and FA segmentsby segment and percentage change over the prior period for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | 13,625 | | | 3.7 | % | | 13,145 | | | 2.1 | % | | 12,878 | |
| FA | 7,120 | | | (13.6) | % | | 8,241 | | | (14.1) | % | | 9,595 | |
| Total Flex hours billed | 20,745 | | | (3.0) | % | | 21,386 | | | (4.8) | % | | 22,473 | |
|
| | | | | | | | | | | | | | |
| | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 |
| Tech | 12,878 |
| | 1.1 | % | | 12,735 |
| | (1.2 | )% | | 12,885 |
|
| FA | 9,595 |
| | 1.3 | % | | 9,474 |
| | 5.2 | % | | 9,008 |
|
| Total Flex hours billed | 22,473 |
| | 1.2 | % | | 22,209 |
| | 1.4 | % | | 21,893 |
|
As the GS segment primarily provides integrated business solutions as compared to staffing services, Flex hours are not presented above.
Direct Hire Revenues.Revenue. The key drivers of Direct Hire revenuesrevenue are the number of placements and the associated placement fee. Direct Hire revenuesrevenue also includeincludes conversion revenues,revenue, which canmay occur when consultantsa consultant initially assigned to a client on a temporary basis areis later converted to a permanent placement for a fee. Our GS segment does not make permanent placements.
Direct Hire revenues decreased 5.4%revenue increased 4.4% during the year ended December 31, 20172019 as compared to 2016 and decreased 6.8% in 2016 from 2015. The decrease for 2017 as compared to 2016 and 2016 as compared to 2015 is primarily the result2018.
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):
|
| | | | | | | |
| | 2017 | | 2016 |
| Key Drivers | | | |
| Volume (number of placements) | $ | (3,084 | ) | | $ | (2,476 | ) |
| Placement fee | 362 |
| | (1,196 | ) |
| Total change in Direct Hire revenues | $ | (2,722 | ) | | $ | (3,672 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | | | YEAR ENDED DECEMBER 31, | | |
| 2019 vs. 2018 | | | | 2018 vs. 2017 | | |
| Key Drivers - Increase (Decrease) | Tech | | FA | | Tech | | FA |
| Volume - number of placements | $ | 1,113 | | | $ | (1,903) | | | $ | (1,743) | | | $ | (3,280) | |
| Placement fee | 587 | | | 2,215 | | | 686 | | | 2,348 | |
| Total change in Direct Hire revenue | $ | 1,700 | | | $ | 312 | | | $ | (1,057) | | | $ | (932) | |
The following table presents the total number of placements for our Tech and FA segmentsby segment and percentage change over the prior period for the years ended December 31:
| | | | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 | | 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | 1,139 |
| | (4.4 | )% | | 1,191 |
| | (14.6 | )% | | 1,395 |
| Tech | 1,101 | | | 6.0 | % | | 1,039 | | | (8.8) | % | | 1,139 | |
| FA | 2,355 |
| | (7.0 | )% | | 2,531 |
| | 1.0 | % | | 2,505 |
| FA | 1,930 | | | (7.1) | % | | 2,077 | | | (11.8) | % | | 2,355 | |
| Total number of placements | 3,494 |
| | (6.1 | )% | | 3,722 |
| | (4.6 | )% | | 3,900 |
| Total number of placements | 3,031 | | | (2.7) | % | | 3,116 | | | (10.8) | % | | 3,494 | |
The following table presents the average fee per placement for our Tech and FA segmentsby segment and percentage change over the prior period for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | $ | 18,604 | | | 3.0 | % | | $ | 18,070 | | | 3.8 | % | | $ | 17,410 | |
| FA | $ | 14,103 | | | 8.8 | % | | $ | 12,957 | | | 9.6 | % | | $ | 11,826 | |
| Total average placement fee | $ | 15,738 | | | 7.3 | % | | $ | 14,662 | | | 7.4 | % | | $ | 13,646 | |
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 |
| Tech | $ | 17,410 |
| | 3.4 | % | | $ | 16,836 |
| | 5.1 | % | | $ | 16,014 |
|
| FA | $ | 11,826 |
| | (1.4 | )% | | $ | 11,994 |
| | (5.3 | )% | | $ | 12,668 |
|
| Total average placement fee | $ | 13,646 |
| | 0.8 | % | | $ | 13,543 |
| | (2.3 | )% | | $ | 13,864 |
|
Gross Profit. Gross profit is determined by deducting the direct cost of servicescosts (primarily consultant compensation, payroll taxes, payroll-related insurance and certain fringe benefits, as well as subcontractorindependent contractor costs) from total revenues.revenue. In addition, there are no consultant payroll costs associated with Direct Hire placements,placements; thus, all Direct Hire revenues increaserevenue increases gross profit by the full amount of the placement fee.
The following table presents the gross profit percentage (gross profit as a percentage of total revenues)revenue) for each segment and percentage change over the prior period for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | 27.7 | % | | (1.1) | % | | 28.0 | % | | (1.1) | % | | 28.3 | % |
| FA | 35.2 | % | | 1.1 | % | | 34.8 | % | | 1.8 | % | | 34.2 | % |
| Total gross profit percentage | 29.3 | % | | (1.0) | % | | 29.6 | % | | (1.3) | % | | 30.0 | % |
|
| | | | | | | | | | | | | | |
| | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 |
| Tech | 28.3 | % | | (2.4 | )% | | 29.0 | % | | (0.7 | )% | | 29.2 | % |
| FA | 34.2 | % | | (4.2 | )% | | 35.7 | % | | (2.2 | )% | | 36.5 | % |
| GS | 31.1 | % | | (4.6 | )% | | 32.6 | % | | (5.0 | )% | | 34.3 | % |
| Total gross profit percentage | 30.0 | % | | (3.2 | )% | | 31.0 | % | | (1.3 | )% | | 31.4 | % |
The change in totalTotal gross profit percentage decreased 30 basis points for 2017the year ended December 31, 2019 as compared to 2016 and 20162018 as compared to 2015 is primarily thea result of a lower mix of Direct Hire revenues to total revenues as well as declinesdecline in our Flex gross profit.
Our Flex gross profit percentage (Flex gross profit as a percentage of Flex revenues)revenue) provides management with helpful insight into the other drivers of total gross profit percentage driven by our Flex business such as changes in the spread between the consultants’ bill rate and pay rate 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:
| | | | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 | | 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Tech | 26.7 | % | | (2.2 | )% | | 27.3 | % | | (0.4 | )% | | 27.4 | % | Tech | 26.3 | % | | (1.1) | % | | 26.6 | % | | (0.4) | % | | 26.7 | % |
| FA | 28.5 | % | | (3.1 | )% | | 29.4 | % | | (1.0 | )% | | 29.7 | % | FA | 28.5 | % | | (0.3) | % | | 28.6 | % | | 0.4 | % | | 28.5 | % |
| GS | 31.1 | % | | (4.6 | )% | | 32.6 | % | | (5.0 | )% | | 34.3 | % | |
| Total Flex gross profit percentage | 27.5 | % | | (2.5 | )% | | 28.2 | % | | (1.1 | )% | | 28.5 | % | Total Flex gross profit percentage | 26.7 | % | | (1.5) | % | | 27.1 | % | | (0.4) | % | | 27.2 | % |
The 40 basis point decrease in Flex gross profit percentage of 70 basis points in 2017 from 2016for the year ended December 31, 2019 as compared to 2018 was primarily due primarily to compression in the spread between our consultants’ bill rates and pay rates and higher health insurance and other benefit costs, andspreads as a result of the impactmix of Hurricanes Harvey and Irma. Kforce continues to focus on optimizing the spread between bill rates and pay rates by providing our associates with training and other defined programs to drive improvementgrowth, particularly in the effectivenesssome of our pricing strategy for our staffing services. The pricing environment for our services continues to be competitive and the scarcitylarger clients, which have a slightly lower margin profile.
The decrease in Flex gross profit percentage of 30 basis points in 2016 from 2015 was due primarily to lower realized margins for our GS segment 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 their number of vendor partners and are leveraging volume-based rebates in exchange for this increased concentration of business.
The following table presents the key drivers for the change in Flex gross profit by segment over the prior period for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | | | YEAR ENDED DECEMBER 31, | | |
| 2019 vs. 2018 | | | | 2018 vs. 2017 | | |
| Key Drivers - Increase (Decrease) | Tech | | FA | | Tech | | FA |
| Revenue impact | $ | 17,592 | | | $ | (7,056) | | | $ | 22,356 | | | $ | (8,929) | |
| Profitability impact | (3,700) | | | (297) | | | (1,029) | | | 481 | |
| Total change in Flex gross profit | $ | 13,892 | | | $ | (7,353) | | | $ | 21,327 | | | $ | (8,448) | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Key Drivers | | | |
| Volume (hours billed) | $ | 11,708 |
| | $ | 1,178 |
|
| Bill rate | (9,429 | ) | | (3,121 | ) |
| Total change in Flex gross profit | $ | 2,279 |
| | $ | (1,943 | ) |
SG&A Expenses. For the years ended December 31, 2017, 2016 and 2015, totalExpenses. Total compensation, commissions, payroll taxes and benefit costs represented 84.8%, 84.0%, and 84.2%as a percentage of SG&A represented 83.1%, 83.6%, and 85.0% of SG&A for the years ended December 31, 2019, 2018 and 2017, respectively. Commissions certainand other bonus incentives for our revenue-generating bonuses and related payroll taxes and benefit coststalent 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.revenue.
The following table presents certain components of SG&A as a percentage of total revenuesrevenue for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | % of
Revenue | | 2018 | | % of
Revenue | | 2017 | | % of
Revenue |
| Compensation, commissions, payroll taxes and benefits costs | $ | 261,185 | | | 19.4 | % | | $ | 256,793 | | | 19.7 | % | | $ | 262,006 | | | 20.9 | % |
Other (1) | 52,982 | | | 3.9 | % | | 50,457 | | | 3.9 | % | | 46,307 | | | 3.7 | % |
| Total SG&A | $ | 314,167 | | | 23.3 | % | | $ | 307,250 | | | 23.6 | % | | $ | 308,313 | | | 24.6 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | % of
Revenues | | 2016 | | % of
Revenues | | 2015 | | % of
Revenues |
| Compensation, commissions, payroll taxes and benefits costs | $ | 280,721 |
| | 20.7 | % | | $ | 286,261 |
| | 21.7 | % | | $ | 277,825 |
| | 21.1 | % |
| Other (1) | 50,451 |
| | 3.7 | % | | 54,481 |
| | 4.1 | % | | 52,209 |
| | 3.9 | % |
| Total SG&A | $ | 331,172 |
| | 24.4 | % | | $ | 340,742 |
| | 25.8 | % | | $ | 330,034 |
| | 25.0 | % |
(1) Includes items such as bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.
SG&A as a percentage of net service revenuesrevenue decreased 14030 basis points in 20172019 compared to 2016, which was2018, primarily driven primarily by $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 travel and office related expenses. These benefits were partially offset by an increase in information technology investments. Additionally, during 2017, Kforce recorded a $3.3associate productivity, leverage created from our revenue growth and better expense discipline. Included in the year ended December 31, 2019 was approximately $2.0 million gain on the sale of Global’s assets.
SG&Aseverance and other costs due to actions taken as a percentage of net service revenues increased 80 basis points in 2016 compared to 2015. This was primarily a result of the factors mentioned above as well as targeted investments in information technology and our revenue-generating talent,GS divestiture, which negatively impacted SG&A&A.
The Firm continues to focus on improving the productivity of our associates and exercising better expense discipline to generate future leverage as a percentage of revenue for 2016.grows, while also increasing our investments in enabling technology.
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | Increase
(Decrease) | | 2018 | | Increase
(Decrease) | | 2017 |
| Fixed asset depreciation (includes finance leases) | $ | 4,929 | | | (13.7) | % | | $ | 5,712 | | | (10.5) | % | | $ | 6,379 | |
| Capitalized software amortization | 1,121 | | | (0.3) | % | | 1,124 | | | 26.7 | % | | 887 | |
| Total Depreciation and amortization | $ | 6,050 | | | (11.5) | % | | $ | 6,836 | | | (5.9) | % | | $ | 7,266 | |
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | Increase
(Decrease) | | 2016 | | Increase
(Decrease) | | 2015 |
| Fixed asset depreciation (1) | $ | 6,939 |
| | 4.2 | % | | $ | 6,660 |
| | (1.2 | )% | | $ | 6,738 |
|
| Capitalized software amortization | 971 |
| | (32.9 | )% | | 1,448 |
| | (37.5 | )% | | 2,318 |
|
| Intangible asset amortization | 345 |
| | (41.8 | )% | | 593 |
| | (23.5 | )% | | 775 |
|
| Total Depreciation and amortization | $ | 8,255 |
| | (5.1 | )% | | $ | 8,701 |
| | (11.5 | )% | | $ | 9,831 |
|
| |
(1) | Includes amortization of capital leases. |
Other Expense, Net. Other expense, net was $3.4 million in 2019, $4.5 million in 2017, $3.12018 and $5.1 million in 2016,2017, and $2.6 million in 2015, and consistsconsisted primarily of interest expense related to outstanding borrowings under our credit facility. For the year ended December 31, 2019, Other expense, net also includes interest income from government money market funds.
We also recorded a loss on equity method investment of $0.8 million in Other expense, net for the year ended December 31, 2019. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion on our equity method investment.
Income Tax Expense. Income tax expense as a percentage of income from continuing operations, before income taxes (our “effective tax rate” for continuing operations) for the years ended December 31, 2019, 2018 and 2017 were 23.6%, 25.1% and 46.1%, respectively. The 2019 effective tax rate was favorably impacted primarily by a greater tax benefit from the vesting of restricted stock.
Income from Discontinued Operations, Net of Tax. During 2019, we completed the sale of the GS segment, which consisted of Kforce Government Solutions, Inc. (“KGS”), our federal government solutions business, and TraumaFX® Solutions, Inc. (“TFX”), our federal government product business. Kforce does not have significant continuing involvement in the operations of KGS or TFX after the sale and reported the GS segment as discontinued operations in the consolidated statements of operations for all years presented. Refer to Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion.
On April 1, 2019, Kforce completed the sale of all of the issued and outstanding stock of Kforce Government Holdings, Inc., including its wholly-owned subsidiary, KGS, to ManTech International Corporation for a cash purchase price of $115.0 million. Our gain on the sale of KGS, net of transaction costs, was $72.3 million. Total transaction costs were $9.6 million, which primarily includes legal and broker fees, transaction bonuses and accelerated stock-based compensation expense for KGS management triggered by a change in control of KGS.
On June 7, 2019, Kforce completed the sale of all of the issued and outstanding stock of TFX to an unaffiliated third party for a cash purchase price of $18.4 million less a post-closing working capital adjustment of $0.7 million. Our gain on the sale of TFX, net of transaction costs, was $7.0 million. Total transaction costs were $2.2 million, which primarily includes legal and broker fees and transaction bonuses. Due to the sale of TFX, we finalized the settlement of a contingent consideration liability related to the acquisition of TFX in 2014 and paid $0.6 million during the year ended December 31, 2019.
The effective tax rates for discontinued operations, including the gain on sale of discontinued operations, for the years ended December 31, 2019, 2018 and 2017 were 4.4%, 23.4%, and 59.8%, respectively. The GS effective tax rate for 2019 was 48.1%. Ourlow because of the minimal income tax obligation for the sale of KGS due to the efficient tax structure of the transaction. The GS effective tax rate for 2018 was positively impacted by the TCJA. The GS effective tax rate for 2017 was unfavorably impacted due toby the revaluation of our net deferred tax assets as a result of the TCJA. Excluding the impact of this revaluation, our effective tax rate would have been 39.7%. For the year ended December 31, 2016, our effective tax rate was 41.4%, which was unfavorably impacted by certain one-time non-cash adjustments. For the year ended December 31, 2015, our effective tax rate was 40.3%, which 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.
We expect that our effective tax rate will be in the range of 25.5% to 27.5% for 2018 as a result of the TCJA.
Non-GAAP Financial Measures
Free Cash Flow.“Free Cash Flow”, a non-GAAP financial measure, is defined by Kforce as net cash provided by (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. Free cash flows includes results from discontinued operations for the years ended December 31, 2019, 2018 and 2017.
The following table presents Free Cash Flow (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net income | | $ | 130,862 | | | $ | 57,980 | | | $ | 33,285 | |
| Non-cash provisions and other | | (51,650) | | | 22,643 | | | 29,134 | |
| Changes in operating assets/liabilities | | (12,595) | | | 7,100 | | | (33,080) | |
| Net cash provided by operating activities | | 66,617 | | | 87,723 | | | 29,339 | |
| Capital expenditures | | (10,359) | | | (5,170) | | | (5,846) | |
| Free cash flow | | 56,258 | | | 82,553 | | | 23,493 | |
| Equity method investment | | (9,000) | | | — | | | — | |
| Change in debt | | (6,800) | | | (44,723) | | | 4,976 | |
| Repurchases of common stock | | (124,453) | | | (22,187) | | | (14,622) | |
| Cash dividends | | (16,608) | | | (14,871) | | | (12,144) | |
| Net proceeds from the sale of assets held for sale | | 122,544 | | | 1,000 | | | 1,000 | |
| Other | | (2,222) | | | (2,039) | | | (3,806) | |
| Change in cash and cash equivalents | | $ | 19,719 | | | $ | (267) | | | $ | (1,103) | |
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net income | | $ | 33,285 |
| | $ | 32,773 |
| | $ | 42,824 |
|
| Non-cash provisions and other | | 29,134 |
| | 21,093 |
| | 22,153 |
|
| Changes in operating assets/liabilities | | (33,080 | ) | | (14,043 | ) | | 5,754 |
|
| Net cash provided by operating activities | | 29,339 |
| | 39,823 |
| | 70,731 |
|
| Capital expenditures | | (5,846 | ) | | (12,420 | ) | | (8,328 | ) |
| Free cash flow | | 23,493 |
| | 27,403 |
| | 62,403 |
|
| Change in debt | | 4,976 |
| | 31,075 |
| | (12,861 | ) |
| Repurchases of common stock | | (14,622 | ) | | (46,013 | ) | | (38,471 | ) |
| Cash dividend | | (12,144 | ) | | (12,447 | ) | | (12,545 | ) |
| Other | | (2,806 | ) | | (33 | ) | | 1,733 |
|
| Change in cash and cash equivalents | | $ | (1,103 | ) | | $ | (15 | ) | | $ | 259 |
|
Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, is defined by Kforce as net income before income from discontinued operations, net of tax, depreciation and amortization, stock-based compensation expense, interest expense, net, and income tax expense.expense and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations. Management believes it is useful information to investors as it provides a good metric of our core profitability in comparing our performance to our competitors, as well as our performance over different time periods. The measure should not be considered in isolation or as an alternative to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is susceptible to varying calculations, and as presented, may not be comparable to similarly titled measures of other companies.
In addition, although we excluded amortization of stock-based compensation expense (whichbecause it is a non-cash expense, we expect to continue to incur stock-based compensation in the future) because it is a non-cash expense,future and the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our shareholder ownership interest. We suggest that you evaluate these items and the potential risks of excluding such items when analyzing our financial position.
The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):
| | | | | | | | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 130,862 | | | $ | 57,980 | | | $ | 33,285 | |
| Income from discontinued operations, net of tax | 76,296 | | | 7,104 | | | 3,691 | |
| Income from continuing operations | 54,566 | | | 50,876 | | | 29,594 | |
| Depreciation and amortization | 6,050 | | | 6,836 | | | 7,266 | |
| Stock-based compensation expense | 9,825 | | | 8,489 | | | 7,401 | |
| Interest expense, net | 2,586 | | | 4,468 | | | 5,039 | |
| Income tax expense | 16,830 | | | 17,004 | | | 25,324 | |
| Loss from equity method investment | 831 | | | — | | | — | |
| Adjusted EBITDA | $ | 90,688 | | | $ | 87,673 | | | $ | 74,624 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 33,285 |
| | $ | 32,773 |
| | $ | 42,824 |
|
| Depreciation and amortization | 8,508 |
| | 8,796 |
| | 9,831 |
|
| Stock-based compensation expense | 7,600 |
| | 6,705 |
| | 5,819 |
|
| Interest expense, net | 5,039 |
| | 3,050 |
| | 2,342 |
|
| Income tax expense | 30,809 |
| | 23,182 |
| | 28,848 |
|
| Adjusted EBITDA | $ | 85,241 |
| | $ | 74,506 |
| | $ | 89,664 |
|
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our credit facility. We anticipate maintaining an outstanding balance of $65.0 million on our credit facility until the notional amount of our interest rate swap decreases to $25.0 million in May 2020. At December 31, 2017,2019, we had $19.8 million in cash and cash equivalents, which consisted primarily of government money market funds. At December 31, 2019, Kforce had $161.7$160.3 million in working capital compared to $135.4$158.1 million at December 31, 2016.2018.
Cash Flows
The accompanying Consolidated Statements of Cash Flows for each of the years ended December 31, 2017, 2016 and 2015 in Item 8. Financial Statements and Supplementary Data provide a more detailed description of our cash flows. Currently, Kforce isWe are principally focused on achieving thean appropriate balance in the followingof cash flow across several areas of cash flow: (1)opportunity such as: generating positive cash flow from operating activities; (2) returning capital to our shareholders through our quarterly dividends and common stock repurchase program; (3) sustainingmaintaining appropriate leverage under our credit facility; (4) investing in our infrastructure to allow sustainable growth via capital expenditures; and (5) maintaining sufficient availability under our credit facility for the possibility of completing an acquisitionliquidity to complete acquisitions or other strategic investments.
The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):
| | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| Cash Provided by (Used in) | 2019 | | 2018 | | 2017 |
| Operating activities | $ | 66,617 | | | $ | 87,723 | | | $ | 29,339 | |
| Investing activities | 103,185 | | | (4,170) | | | (4,846) | |
| Financing activities | (150,083) | | | (83,820) | | | (25,596) | |
| Change in cash and cash equivalents | $ | 19,719 | | | $ | (267) | | | $ | (1,103) | |
Our Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). As previously discussed, the GS segment was sold and has been reflected as discontinued operations. The absence of cash flows from the GS segment is not expected to have a resultsignificant effect on the future liquidity, financial position or capital resources of Kforce.
The following table provides information for the TCJA, we expect to generate an additional $10.0 million intotal operating and investing cash flows for the GS segment (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| Cash Provided by (Used in) | | 2019 | | 2018 | | 2017 |
| GS Operating Activities | | $ | 4,547 | | | | $ | 10,937 | | | | $ | 1,098 | |
| GS Investing Activities | | $ | 117,798 | | | | $ | (927) | | | | $ | (776) | |
Operating Activities
Our largest source of operating cash in 2018 related toflows is the collection of trade receivables and our largest use of operating cash flows is the payment of our consultant and associate compensation. When comparing cash flows from operating activities, the decrease in cash provided by operating activities during the year ended December 31, 2019, as compared to 2018 was primarily due to the receipt of a $6.8 million income tax refund in 2018 and no comparable receipt in 2019 and an increase of $11.5 million in cash used for income tax payments, as well as a decrease in cash provided by the GS segment due to the divestiture.
Investing Activities
Cash provided by investing activities for the year ended December 31, 2019 includes the net proceeds from the sale of assets held for sale offset by capital contributed for an equity method investment.
Financing Activities
The increase in cash used for financing activities in 2019 compared to 2018 was primarily driven by a large increase in common stock repurchases, a reduction in our effective tax rate. credit facility balance as well as an increase in cash used for dividends.
The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
| Open market repurchases | $ | 118,324 | | | $ | 16,069 | | | $ | 12,276 | |
| Repurchase of shares related to tax withholding requirements for vesting of restricted stock | 6,129 | | | 6,118 | | | 2,346 | |
| Total cash flow impact of common stock repurchases | $ | 124,453 | | | $ | 22,187 | | | $ | 14,622 | |
| | | | | |
| Cash paid in current year for settlement of prior year repurchases | | $ | 556 | | | $ | 3,323 | | | $ | 935 | |
During the years ended December 31, 2019, 2018 and 2017, Kforce declared and paid dividends of $16.6 million ($0.72 per share), $14.9 million ($0.60 per share), and $12.1 million ($0.48 per share), respectively. On January 31, 2020, Kforce’s Board approved an 11% increase to the Company's quarterly dividend from $0.18 per share to $0.20 per share. The declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board each quarter following its review of, among other things, the Firm’s current and expected financial performance as well as the ability to pay dividends under applicable law.
We believe that existing cash and cash equivalents, cash flow from operations and available borrowings under our credit facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months. However, a material deterioration in the economic environment or market conditions, among other things, could negatively impact operating results and liquidity, as well as the ability of our lenders to fund borrowings.
Actual results could also differ materially from those indicated as a result of a number of factors, including the use of currently available resources for potential acquisitions and additional stock repurchases.
The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 29,339 |
| | $ | 39,823 |
| | $ | 70,731 |
|
| Investing activities | (4,846 | ) | | (12,420 | ) | | (8,364 | ) |
| Financing activities | (25,596 | ) | | (27,418 | ) | | (62,108 | ) |
| Net (decrease) increase in cash and cash equivalents | $ | (1,103 | ) | | $ | (15 | ) | | $ | 259 |
|
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 associate and consultant populations’ compensation. When comparing cash flows from operating activities, the decrease in cash provided by operating activities during the year ended December 31, 2017, as compared to 2016 is primarily due to an increase in accounts receivable, which was driven by the revenue growth in our business, the timing of collections and continued pressure from certain larger clients for extended payment terms. The decrease in cash provided by operating activities during the year ended December 31, 2016 as compared to 2015 is primarily a result of lower earnings as well as the delayed timing in collections of accounts receivable.
Investing Activities
Capital expenditures for the years ended December 31, 2017, 2016 and 2015, which exclude equipment acquired under capital leases, were $5.8 million, $12.4 million and $8.3 million, respectively. We expect to continue selectively investing in our infrastructure in order to support the expected future profitable growth in our business. We believe that we have sufficient cash and availability under the credit facility to pursue new business acquisitions or 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.
During the year ended December 31, 2017, Kforce completed the sale of Global’s assets and received an initial $1.0 million in cash proceeds.
Financing Activities
The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Open market repurchases | $ | 12,276 |
| | $ | 44,109 |
| | $ | 37,125 |
|
| Repurchase of shares related to tax withholding requirements for vesting of restricted stock | 2,346 |
| | 1,904 |
| | 1,346 |
|
| Total cash flow impact of common stock repurchases | $ | 14,622 |
| | $ | 46,013 |
| | $ | 38,471 |
|
| | | | | | |
| Cash paid in current year for settlement of prior year repurchases | $ | 935 |
| | $ | 1,012 |
| | $ | 1,425 |
|
During the years ended December 31, 2017, 2016 and 2015, Kforce declared and paid dividends of $12.1 million ($0.48 per share), $12.4 million ($0.48 per share), and $12.5 million ($0.45 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 current and expected financial performance and its legal ability to pay dividends.
Credit Facility
On May 25, 2017, the Firm entered into a Credit Agreementcredit agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank of America, N.A., as syndication agent, Regions Bank and BMO Harris Bank, N.A., as co-documentation agents, Wells Fargo Securities, LLC, as lead arranger and bookrunner, and the lenders referred to in the credit facility. Our new credit facility includes a maximum borrowing capacity of $300.0 million which, subject to certain conditions and participationtherein (the “Credit Facility”). The maturity date of the lenders, may be increased up to an aggregate additional amount of $150.0 million in the form of revolving credit loans, swingline loans, and letters of credit. Letters of credit and swingline loansCredit Facility is May 25, 2022. Borrowings under the credit facilityCredit Facility are subject to sublimitssecured by substantially all of $10.0 million. Asthe tangible and intangible assets of December 31, 2017, $116.5 million was outstanding and $180.3 million was available, subject to the covenants described below and as of December 31, 2016, $111.5 million was outstanding under the previous credit facility, which was paid off usingFirm, excluding the Firm’s initial draw under the new credit facility.
The Firm will continually be subjectcorporate headquarters and certain other designated collateral. Refer to certain affirmative and negative covenants including (but not limited to), the maintenance of a fixed charge coverage ratio of no less than 1.25 to 1.00 and the maintenance of a total leverage ratio of no greater than 3.25 to 1.00. The numerator in the fixed charge coverage ratio is defined pursuant to the credit facility as earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense and other permitted items pursuant to our credit facility (disclosed as “Consolidated EBITDA”), less cash paid for capital expenditures, income taxes and dividends. The denominator is defined as Kforce’s fixed charges such as interest expense and principal payments paid or payable on outstanding debt other than borrowings under the credit facility. The total leverage ratio is defined pursuant to the credit facility as total indebtedness divided by Consolidated EBITDA. Our ability to make distributions or repurchases of equity securities could be limited if an event of default has occurred. Furthermore, our ability to repurchase equity securities could be limited if (a) the total leverage ratio is greater than 2.75 to 1.00 and (b) the Firm’s availability, under the credit facility plus unrestricted cash and cash equivalents, is less than $25.0 million. At December 31, 2017, Kforce was not limited in making distributions and executing repurchases of its equity securities. See Note 813 - “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.Credit Facility. As of December 31, 2019, $65.0 million was outstanding and $231.6 million, subject to certain covenants, was available and as of December 31, 2018, $71.8 million was outstanding under the Credit Facility.
Off-Balance Sheet Arrangements
Kforce provides lettersentered into a forward-starting interest rate swap agreement (the “Swap”) to mitigate the risk of creditrising interest rates and the Swap has been designated as a cash flow hedge. Refer to certain vendorsNote 14 - “Derivative Instrument and Hedging Activity” in lieuthe Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of cash deposits. Atthis report, for a complete discussion of our interest rate swap. As of December 31, 2017, Kforce had letters2019 and 2018, the fair value of credit outstanding for workers’ compensation and other insurance coverage totaling $2.9the Swap was a liability of $0.2 million and for facility lease deposits totaling $0.3 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.
an asset of $0.9 million, respectively.
Stock Repurchases
The following table presents the open market repurchase activity under the Board-authorized common stock repurchase program for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2019 (1) | | | 2018 | |
| Shares | $ | | Shares | $ |
| Open market repurchases | 3,315 | | $ | 117,768 | | | 553 | | $ | 15,727 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 (1) |
| | Shares | $ | | Shares | $ |
| Open market repurchases | 526 |
| $ | 12,239 |
| | 2,291 |
| $ | 44,032 |
|
| |
(1) | On July 29, 2016, our Board approved an increase in our stock repurchase authorization bringing the then available authorization to $75.0 million. |
As of December 31, 2017 and 2016, $38.52019, $44.3 million and $50.7 million, respectively, remained available for further repurchases under the Board-authorized common stock repurchase program. During the year ended December 31, 2019, we utilized the net proceeds from the GS divestiture to repurchase shares in the open market. We do not expect to repurchase at similar levels in 2020.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2019, Kforce had letters of credit outstanding for operating lease and insurance coverage deposits totaling $3.4 million.
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in a newly formed LLC that is accounted for as an equity method investment. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, which discusses a contingent obligation related to this equity method investment.
These off-balance sheet arrangements do not have a material impact on our liquidity or capital resources.
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 20172019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period | | | | | | | | |
| | Total | | Less than
1 year | | 1-3 Years | | 3-5 Years | | More than
5 years |
| Credit facility (1) | | $ | 69,799 | | | $ | 1,987 | | | $ | 67,812 | | | $ | — | | | $ | — | |
| Operating lease obligations | | 22,173 | | | 6,338 | | | 8,303 | | | 4,937 | | | 2,595 | |
| Finance lease obligations | | 364 | | | 241 | | | 115 | | | 8 | | | — | |
| Purchase obligations (2) | | 10,527 | | | 7,332 | | | 3,195 | | | — | | | — | |
| Notes and interest payable (3) | | 1,205 | | | 979 | | | 226 | | | — | | | — | |
| Deferred compensation plans liability (4) | | 33,913 | | | 3,244 | | | 5,833 | | | 5,382 | | | 19,454 | |
| Supplemental Executive Retirement Plan (5) | | 23,291 | | | — | | | 14,347 | | | — | | | 8,944 | |
| Liability for unrecognized tax positions (6) | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 161,272 | | | $ | 20,121 | | | $ | 99,831 | | | $ | 10,327 | | | $ | 30,993 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period |
| | | Total | | Less than
1 year | | 1-3 Years | | 3-5 Years | | More than
5 years |
| Credit facility (1) | | $ | 116,523 |
| | $ | — |
| | $ | — |
| | $ | 116,523 |
| | $ | — |
|
| Interest payable – credit facility (2) | | 14,808 |
| | 3,089 |
| | 6,405 |
| | 5,314 |
| | — |
|
| Operating lease obligations | | 25,928 |
| | 9,338 |
| | 12,420 |
| | 2,723 |
| | 1,447 |
|
| Capital lease obligations | | 1,958 |
| | 1,359 |
| | 594 |
| | 5 |
| | — |
|
| Purchase obligations (3) | | 14,543 |
| | 8,624 |
| | 5,919 |
| | — |
| | — |
|
| Notes payable (4) | | 3,077 |
| | 934 |
| | 1,919 |
| | 224 |
| | — |
|
| Interest payable - notes payable (4) | | 26 |
| | 13 |
| | 13 |
| | — |
| | — |
|
| Liability for unrecognized tax positions (5) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Deferred compensation plans liability (6) | | 31,446 |
| | 2,579 |
| | 2,615 |
| | 2,592 |
| | 23,660 |
|
| Supplemental Executive Retirement Plan (7) | | 17,070 |
| | — |
| | — |
| | 12,788 |
| | 4,282 |
|
| Total | | $ | 225,379 |
| | $ | 25,936 |
| | $ | 29,885 |
| | $ | 140,169 |
| | $ | 29,389 |
|
| |
(1) | Our credit facility matures May 25, 2022. |
| |
(2) | Kforce’s weighted average interest rate as of December 31, 2017 was utilized to forecast the expected future interest rate payments. These payments are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility. |
| |
(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, 2017 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, 2017 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 are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, as appropriate, and are payable based upon the elections of the plan participants (e.g. retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time. |
| |
(7) | There is no funding requirement associated with our Supplemental Executive Retirement Plan (“SERP”) and, as a result, no contributions have been made through the year ended December 31, 2017. Kforce does not currently anticipate funding our SERP during 2018. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2017, in the table above. |
(1) Our credit facility matures May 25, 2022. Our interest rate as of December 31, 2019 was used to forecast the expected future interest rate payments. These payments are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility.
(2) Purchase obligations include agreements to purchase goods and services that are enforceable, legally binding and specify all significant terms.
(3) Our notes payable as of December 31, 2019 are classified in Other current liabilities if payable within the next year or in Other long-term liabilities if payable after the next year in the accompanying Consolidated Balance Sheets. The interest rate on the notes range from 2.58% to 2.80% and expire between November 2020 and October 2021.
(4) Kforce maintains various non-qualified deferred compensation plans pursuant to which eligible management and highly-compensated key employees may elect to defer all or part of their compensation to later years. These amounts are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, as appropriate, and are payable based upon the elections of the plan participants (e.g. retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time.
(5) There is no funding requirement associated with our Supplemental Executive Retirement Plan (“SERP”) and, as a result, no contributions have been made through the year ended December 31, 2019. Kforce does not currently anticipate funding the SERP during 2020. Kforce has no material unrecorded commitments, losses, contingencies or guarantees associatedincluded the total undiscounted projected benefit payments, as determined at December 31, 2019, in the table above.
(6) Kforce’s liability for unrecognized tax positions, as of December 31, 2019, was $0.4 million. This balance has been excluded from the table above due to the significant uncertainty with any related parties or unconsolidated entities.respect to the timing and amount of settlement, if any.
CRITICAL ACCOUNTING ESTIMATES
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. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”).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. We have not made any material changes in our accounting methodologies used in prior years.
Allowance for Doubtful Accounts
Management performs an ongoing analysis of factors in establishing its allowance for doubtful accounts including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of accounts receivable among clients and higher-risk sectors, and the current state of the U.S. economy. A 10% change in accounts reserved, at December 31, 2019, would have impacted our net income by approximately $0.1 million in 2019.
Accounting for Income Taxes
Our effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we conduct business. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions, including those that may be uncertain.
We are also required to exercise judgment with respect to the realization of our net deferred tax assets. Management evaluates all positive and negative evidence and exercises judgment regarding past and future events to determine if it is more likely than not that all or some portion of the deferred tax assets may not be realized. If appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. A 0.5% change in our effective tax rate would have impacted our net income by approximately $0.4 million in 2019.
Refer to Note 6 – “Income Taxes” in the 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 our income tax expense, as well as the temporary differences that exist as of December 31, 2019.
Equity Method Investment
Initial Investment
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in an equity method investment. Under the joint venture operating agreement, Kforce is obligated to make additional cash contributions subsequent to the initial contribution, contingent on certain operational and financial milestones. Management evaluated the probability of the achievement of these milestones and recorded the estimated future contributions as part of the initial investment.
Impairment
We review the equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recognized in the event that an other-than-temporary decline in fair value of an investment occurs. Management’s estimate of fair value of an investment is based on the income approach and/or market approach. For the income approach, we utilize estimated discounted future cash flows expected to be generated by the investee. For the market approach, we utilize market multiples of revenue and earnings derived from comparable publicly-traded companies. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.
Refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our equity method investment.
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions
|
Allowance for Doubtful Accounts, Fallouts and Other Accounts Receivable Reserves |
See Note 1Goodwill ImpairmentGoodwill is tested at the reporting unit level which is generally an operating segment, or one level below the operating segment level, where a business operates and for which discrete financial information is available and reviewed by segment management. We evaluate goodwill for impairment annually or more frequently whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. We monitor the existence of potential impairment indicators throughout the year. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. When performing a quantitative assessment, we determine the fair value of our reporting units using widely accepted valuation techniques, including the discounted cash flow, guideline transaction and guideline company methods. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples. When performing a qualitative assessment, we assess qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Refer to Note 8 – “Goodwill” in the 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. Self-Insured Liabilities We are self-insured for certain losses related to health insurance and workers’ compensation claims that are below insurable limits. However, we obtain third-party insurance coverage to limit our exposure to claims in excess of insurable limits. When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, plan structure, internal claims management activities, demographic factors and severity factors. Periodically, management reviews its assumptions to determine the adequacy of our self-insured liabilities. Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate total cost to settle reported claims and claims incurred but not reported (“IBNR”) as of the balance sheet date. A 10% change in our self-insured liabilities related to health insurance and workers’ compensation, as of December 31, 2019, would have impacted our net income by approximately $0.4 million in 2019. Defined Benefit Pension Plan The SERP is a defined benefit pension plan that benefits certain named executive officers. The SERP was not funded as of December 31, 2019 or 2018. When estimating the obligation for our pension benefit plan, management is required to make certain assumptions and to apply judgment with respect to determining an appropriate discount rate, bonus percentage assumptions and expected effect of future compensation increases for the participants in the plan. A 10% change in the discount rate used to measure the net periodic pension cost for the SERP would have had an insignificant impact on our net income in 2019. Refer to Note 12 – “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.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our allowance for doubtful accounts, fallouts and other accounts receivable reserves. However, if our estimates regarding estimated accounts receivable losses are inaccurate, we may be exposed to losses or gains that could be material.
A 10% change in accounts receivable reserved at December 31, 2017, would have impacted our net income for 2017 by approximately $0.1 million.
|
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions
|
Accounting for Income Taxes |
See Note 3 – “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, 2017. | | 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 tax rate for 2017 or our liability for uncertain income tax positions.
However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses that could be material. Kforce recorded a valuation allowance of approximately $1.7 million as of December 31, 2017 related primarily to a foreign tax credit that we expect may not be realizable.
A 0.50% change in our effective income tax rate would have impacted our net income for 2017 by approximately $0.3 million.
|
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, 2017 were $2.6 million and $1.2 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.
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, 2017 would have impacted our net income for 2017 by approximately $0.2 million.
|
|
| | | | |
Description | | Judgments and Uncertainties | | Effect if Actual Results
Differ From Assumptions
|
Defined Benefit Pension Plans |
We have a defined benefit pension plan that benefits certain named executive officers, the SERP. See Note 7– “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, 2017 or 2016.
| | 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 2017 would have had an insignificant impact on our net income for 2017.
|
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 4 – “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, 2017 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 (Tech, FA and GS) 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.
| | Kforce performed a quantitative assessment for each of our reporting units (Tech, FA and GS) as of December 31, 2017. We compared the carrying value of each reporting unit to the respective estimated fair value as of December 31, 2017 and determined that the fair value significantly exceeded carrying value for each of our reporting units. As a result, no goodwill impairment charges were recognized during the year ended December 31, 2017.
Although the valuation of the business supported its carrying value in 2017, a deterioration in any of the assumptions could result in an impairment charge in the future.
|
NEW ACCOUNTING STANDARDS
SeeRefer to 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In addition to the risks inherent in its operations,operational risks, Kforce is exposed to certain market risks, primarily related to changes in interest rates.
As of December 31, 2017,2019, we had $116.5$65.0 million outstanding under our credit facility. SeeRefer to Note 813 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for further details on our credit facility.Credit Facility. A hypothetical 10% increase in interest rates on variable debt in effect would have no effect on our annual interest expense because we had no variable debt at December 31, 2017 would have an increase to annual interest expense of less than $0.4 million.2019.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. to mitigate the risk of rising interest rates on the Firm’s financial statements. The Swap rate is 1.81%, which is added to our interest rate margin to determine the fixed rate that the Firm will pay to the counterparty during the term of the Swap based on the notional amount of the Swap. The effective date of the Swap is May 31, 2017 and the maturity date is April 29, 2022. The notional amount of the Swap is $65.0 million, for the first three years and decreaseswhich will decrease to $25.0 million for years fourat May 2020 through maturity.
LIBOR is expected to be discontinued after 2021. The expected discontinuation of LIBOR will require borrowers to transition from LIBOR to an alternative benchmark interest rate. We are currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates. We do not currently have material contracts, with the exception of the above mentioned items, that are indexed to LIBOR. We will continue to actively assess the related opportunities and five.risks involved in this transition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Kforce Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kforce Inc. and subsidiaries (“Kforce”) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017,2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited Kforce’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kforce as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Kforce maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, effective January 2019, Kforce adopted the FASB’s new standard related to leases using the optional transition method without retrospective application to comparative periods.
Basis for Opinions
Kforce’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on Kforce’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Kforce in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Equity Method Investment – Refer to Note 1 to the Consolidated Financial Statements
Critical Audit Matter Description
In June 2019, Kforce entered into a joint venture whereby Kforce has a 50% noncontrolling ownership in WorkLLama, LLC ("WorkLLama"). The noncontrolling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity method, the investment carrying value is recorded at cost and adjusted for the proportionate share of earnings or losses. Under the joint venture operating agreement, Kforce is obligated to make additional future cash contributions to WorkLLama that are contingent upon the achievement of certain operational and financial milestones, which are centered around the market acceptance of their technologies and success with Kforce’s internal objectives. Management evaluated the probability of the joint venture meeting its future milestones to estimate the amount of all future contributions to record the initial investment. Under the operating agreement, Kforce’s maximum potential future capital contributions related to these milestones was $22.5 million. During the year ended December 31, 2019, Kforce contributed $9.0 million of capital contributions. The balance of the investment in WorkLLama of $8.2 million was included in Other assets, net in the Consolidated Balance Sheet at December 31, 2019.
We identified the equity method investment in WorkLLama as a critical audit matter because of the significant amount of judgment required by management when determining the timing and amount of future contributions to record the initial equity method investment, given the lack of operating history available for WorkLLama. This required a high degree of auditor judgment and an increased extent of effort while performing audit procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s determination of the timing of recognition of future contributions for the initial equity method investment included the following, among others:
•We tested the effectiveness of controls over management’s accounting for the equity method investment, including those over the determination of the timing and amount of future contributions.
•Due to the lack of operating history available for the equity method investment, we evaluated the reasonableness of management’s revenue forecasts as follows:
◦Obtained an understanding of management’s forecasting process, including the sources of information used, the underlying significant assumptions, and sensitivity to changes in these significant assumptions.
◦Compared the forecast to (1) internal communications to management and Board of Directors, (2) current year operating results, and (3) forecasted information included in analyst and industry reports for the Company.
| | |
|
|
| /s/ Deloitte & Touche LLP |
|
| Tampa, Florida |
February 23, 201821, 2020 |
We have served as Kforce’s auditor since 2000.
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, | | | 2019 | | 2018 | | 2017 |
| | 2017 | | 2016 | | 2015 | |
| Net service revenues | $ | 1,357,940 |
| | $ | 1,319,706 |
| | $ | 1,319,238 |
| |
| Direct costs of services | 949,884 |
| | 911,207 |
| | 905,124 |
| |
| Revenue | | Revenue | | $ | 1,347,387 | | | $ | 1,303,937 | | | $ | 1,253,646 | |
| Direct costs | | Direct costs | | 952,349 | | | 917,450 | | | 878,049 | |
| Gross profit | 408,056 |
| | 408,499 |
| | 414,114 |
| Gross profit | | 395,038 | | | 386,487 | | | 375,597 | |
| Selling, general and administrative expenses | 331,172 |
| | 340,742 |
| | 330,034 |
| Selling, general and administrative expenses | | 314,167 | | | 307,250 | | | 308,313 | |
| Depreciation and amortization | 8,255 |
| | 8,701 |
| | 9,831 |
| Depreciation and amortization | | 6,050 | | | 6,836 | | | 7,266 | |
| Income from operations | 68,629 |
| | 59,056 |
| | 74,249 |
| Income from operations | | 74,821 | | | 72,401 | | | 60,018 | |
| Other expense, net | 4,535 |
| | 3,101 |
| | 2,577 |
| Other expense, net | | 3,425 | | | 4,521 | | | 5,100 | |
| Income before income taxes | 64,094 |
| | 55,955 |
| | 71,672 |
| |
| Income from continuing operations, before income taxes | | Income from continuing operations, before income taxes | | 71,396 | | | 67,880 | | | 54,918 | |
| Income tax expense | 30,809 |
| | 23,182 |
| | 28,848 |
| Income tax expense | | 16,830 | | | 17,004 | | | 25,324 | |
| Income from continuing operations | | Income from continuing operations | | 54,566 | | | 50,876 | | | 29,594 | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | 76,296 | | | 7,104 | | | 3,691 | |
| Net income | 33,285 |
| | 32,773 |
| | 42,824 |
| Net income | | 130,862 | | | 57,980 | | | 33,285 | |
| Other comprehensive (loss) income: | | | | | | Other comprehensive (loss) income: | | | | | | |
| Defined benefit pension plans, net of tax | (373 | ) | | (134 | ) | | 689 |
| Defined benefit pension plans, net of tax | | (2,183) | | | 881 | | | (373) | |
| Change in fair value of interest rate swap, net of tax | 289 |
| | — |
| | — |
| Change in fair value of interest rate swap, net of tax | | (807) | | | 315 | | | 289 | |
| Comprehensive income | $ | 33,201 |
| | $ | 32,639 |
| | $ | 43,513 |
| Comprehensive income | | $ | 127,872 | | | $ | 59,176 | | | $ | 33,201 | |
| | | | | | | | | | | | | |
| Earnings per share - basic: | | Earnings per share - basic: | | | | | | | | | |
| Continuing operations | | Continuing operations | | $ | 2.35 | | | $ | 2.05 | | | $ | 1.17 | |
| Discontinued operations | | Discontinued operations | | 3.29 | | | 0.29 | | | 0.15 | |
| Earnings per share – basic | $ | 1.32 |
| | $ | 1.26 |
| | $ | 1.53 |
| Earnings per share – basic | | $ | 5.64 | | | $ | 2.34 | | | $ | 1.32 | |
| | Earnings per share - diluted: | | Earnings per share - diluted: | | | | | | |
| Continuing operations | | Continuing operations | | $ | 2.29 | | | $ | 2.02 | | | $ | 1.16 | |
| Discontinued operations | | Discontinued operations | | 3.21 | | | 0.28 | | | 0.14 | |
| Earnings per share – diluted | $ | 1.30 |
| | $ | 1.25 |
| | $ | 1.52 |
| Earnings per share – diluted | | $ | 5.50 | | | $ | 2.30 | | | $ | 1.30 | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding – basic | 25,222 |
| | 26,099 |
| | 27,910 |
| Weighted average shares outstanding – basic | | 23,186 | | | 24,738 | | | 25,222 | |
| Weighted average shares outstanding – diluted | 25,586 |
| | 26,274 |
| | 28,190 |
| Weighted average shares outstanding – diluted | | 23,772 | | | 25,251 | | | 25,586 | |
| | | | | | | |
| Dividends declared per share | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.45 |
| |
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, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| ASSETS | | | | ASSETS | |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 379 |
| | $ | 1,482 |
| Cash and cash equivalents | $ | 19,831 | | | $ | 112 | |
| Trade receivables, net of allowances of $2,333 and $2,066, respectively | 225,865 |
| | 206,361 |
| |
| Income tax refund receivable | 7,116 |
| | 172 |
| |
| Trade receivables, net of allowances of $2,078 and $2,800, respectively | | Trade receivables, net of allowances of $2,078 and $2,800, respectively | 217,929 | | | 210,559 | |
| | Prepaid expenses and other current assets | 12,085 |
| | 10,691 |
| Prepaid expenses and other current assets | 7,475 | | | 8,018 | |
| Current assets held for sale | | Current assets held for sale | — | | | 29,773 | |
| Total current assets | 245,445 |
| | 218,706 |
| Total current assets | 245,235 | | | 248,462 | |
| Fixed assets, net | 39,680 |
| | 43,145 |
| Fixed assets, net | 29,975 | | | 34,322 | |
| Other assets, net | 38,598 |
| | 30,511 |
| Other assets, net | 72,838 | | | 36,664 | |
| Deferred tax assets, net | 11,316 |
| | 23,449 |
| Deferred tax assets, net | 8,037 | | | 7,147 | |
| Intangible assets, net | 3,297 |
| | 3,642 |
| |
| Goodwill | 45,968 |
| | 45,968 |
| Goodwill | 25,040 | | | 25,040 | |
| Noncurrent assets held for sale | | Noncurrent assets held for sale | — | | | 28,273 | |
| Total assets | $ | 384,304 |
| | $ | 365,421 |
| Total assets | $ | 381,125 | | | $ | 379,908 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| Current liabilities: | | | | Current liabilities: | |
| Accounts payable and other accrued liabilities | $ | 34,873 |
| | $ | 37,230 |
| Accounts payable and other accrued liabilities | $ | 33,232 | | | $ | 32,542 | |
| Accrued payroll costs | 46,886 |
| | 44,137 |
| Accrued payroll costs | 44,001 | | | 39,384 | |
| Current portion of operating lease liabilities | | Current portion of operating lease liabilities | 5,685 | | | — | |
| Other current liabilities | 1,960 |
| | 1,765 |
| Other current liabilities | 1,168 | | | 1,616 | |
| Income taxes payable | — |
| | 221 |
| Income taxes payable | 878 | | | 4,553 | |
| Current liabilities held for sale | | Current liabilities held for sale | — | | | 12,263 | |
| Total current liabilities | 83,719 |
| | 83,353 |
| Total current liabilities | 84,964 | | | 90,358 | |
| Long-term debt – credit facility | 116,523 |
| | 111,547 |
| Long-term debt – credit facility | 65,000 | | | 71,800 | |
| Long-term debt – other | 2,597 |
| | 3,984 |
| |
| Other long-term liabilities | 47,188 |
| | 44,801 |
| Other long-term liabilities | 63,898 | | | 44,868 | |
| Noncurrent liabilities held for sale | | Noncurrent liabilities held for sale | — | | | 4,551 | |
| Total liabilities | 250,027 |
| | 243,685 |
| Total liabilities | 213,862 | | | 211,577 | |
| Commitments and contingencies (Note 12) |
| |
| |
| Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | | | | |
| Stockholders’ equity: | | | | Stockholders’ equity: | |
| Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding | — |
| | — |
| |
| Common stock, $0.01 par; 250,000 shares authorized, 71,494 and 71,268 issued, respectively | 715 |
| | 713 |
| |
| Preferred stock, $0.01 par; 15,000 shares authorized, NaN issued and outstanding | | Preferred stock, $0.01 par; 15,000 shares authorized, NaN issued and outstanding | — | | | — | |
| Common stock, $0.01 par; 250,000 shares authorized, 72,202 and 71,856 issued and outstanding, respectively | | Common stock, $0.01 par; 250,000 shares authorized, 72,202 and 71,856 issued and outstanding, respectively | 722 | | | 719 | |
| Additional paid-in capital | 437,394 |
| | 428,212 |
| Additional paid-in capital | 459,545 | | | 447,337 | |
| Accumulated other comprehensive income | 100 |
| | 184 |
| |
| Accumulated other comprehensive (loss) income | | Accumulated other comprehensive (loss) income | (1,526) | | | 1,296 | |
| Retained earnings | 195,143 |
| | 174,967 |
| Retained earnings | 350,545 | | | 237,308 | |
| Treasury stock, at cost; 45,167 and 44,469 shares, respectively | (499,075 | ) | | (482,340 | ) | |
| Treasury stock, at cost; 49,277 and 45,822 shares, respectively | | Treasury stock, at cost; 49,277 and 45,822 shares, respectively | (642,023) | | | (518,329) | |
| Total stockholders’ equity | 134,277 |
| | 121,736 |
| Total stockholders’ equity | 167,263 | | | 168,331 | |
| Total liabilities and stockholders’ equity | $ | 384,304 |
| | $ | 365,421 |
| Total liabilities and stockholders’ equity | $ | 381,125 | | | $ | 379,908 | |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | | | Shares | | Amount | | |
| Balance, December 31, 2016 | 71,268 | | | $ | 713 | | | $ | 428,212 | | | $ | 184 | | | $ | 174,967 | | | 44,469 | | | $ | (482,340) | | | $ | 121,736 | |
| Net income | — | | | — | | | — | | | — | | | 33,285 | | | — | | | — | | | 33,285 | |
| Cumulative effect of share-based payment accounting standard | — | | | — | | | 769 | | | — | | | (469) | | | — | | | — | | | 300 | |
| Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 221 | | | 2 | | | 494 | | | — | | | (496) | | | — | | | — | | | — | |
| Exercise of stock options | 5 | | | — | | | 72 | | | — | | | — | | | — | | | — | | | 72 | |
| Stock-based compensation expense | — | | | — | | | 7,600 | | | — | | | — | | | — | | | — | | | 7,600 | |
| Employee stock purchase plan | — | | | — | | | 247 | | | — | | | — | | | (25) | | | 275 | | | 522 | |
| Dividends ($0.48 per share) | — | | | — | | | — | | | — | | | (12,144) | | | — | | | — | | | (12,144) | |
| Defined benefit pension plans, net of tax benefit of $207 | — | | | — | | | — | | | (373) | | | — | | | — | | | — | | | (373) | |
| Change in fair value of interest rate swap, net of tax of $189 | — | | | — | | | — | | | 289 | | | — | | | — | | | — | | | 289 | |
| Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 723 | | | (17,010) | | | (17,010) | |
| Balance, December 31, 2017 | 71,494 | | | 715 | | | 437,394 | | | 100 | | | 195,143 | | | 45,167 | | | (499,075) | | | 134,277 | |
| Net income | — | | | — | | | — | | | — | | | 57,980 | | | — | | | — | | | 57,980 | |
| Cumulative effect of revenue recognition accounting standard, net of tax of $63 | — | | | — | | | — | | | — | | | (179) | | | — | | | — | | | (179) | |
| Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 357 | | | 4 | | | 762 | | | — | | | (766) | | | — | | | — | | | — | |
| Exercise of stock options | 5 | | | — | | | 46 | | | — | | | — | | | 1 | | | (46) | | | — | |
| Stock-based compensation expense | — | | | — | | | 8,797 | | | — | | | — | | | — | | | — | | | 8,797 | |
| Employee stock purchase plan | — | | | — | | | 338 | | | — | | | — | | | (19) | | | 211 | | | 549 | |
| Dividends ($0.60 per share) | — | | | — | | | — | | | — | | | (14,870) | | | — | | | — | | | (14,870) | |
| Defined benefit pension plan, net of tax of $314 | — | | | — | | | — | | | 881 | | | — | | | — | | | — | | | 881 | |
| Change in fair value of interest rate swap, net of tax of $107 | — | | | — | | | — | | | 315 | | | — | | | — | | | — | | | 315 | |
| Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 673 | | | (19,419) | | | (19,419) | |
| Balance, December 31, 2018 | 71,856 | | | $ | 719 | | | $ | 447,337 | | | $ | 1,296 | | | $ | 237,308 | | | 45,822 | | | $ | (518,329) | | | $ | 168,331 | |
|
| | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, |
| | 2017 | | 2016 | | 2015 |
| Common stock – shares: | | | | | |
| Shares at beginning of year | 71,268 |
| | 70,558 |
| | 70,029 |
|
| Issuance for stock-based compensation and dividends, net of forfeitures | 221 |
| | 695 |
| | 497 |
|
| Exercise of stock options | 5 |
| | 15 |
| | 32 |
|
| Shares at end of year | 71,494 |
| | 71,268 |
| | 70,558 |
|
| Common stock – par value: | | | | | |
| Balance at beginning of year | $ | 713 |
| | $ | 705 |
| | $ | 700 |
|
| Issuance for stock-based compensation and dividends, net of forfeitures | 2 |
| | 8 |
| | 5 |
|
| Exercise of stock options | — |
| | — |
| | — |
|
| Balance at end of year | $ | 715 |
| | $ | 713 |
| | $ | 705 |
|
| Additional paid-in capital: | | | | | |
| Balance at beginning of year | $ | 428,212 |
| | $ | 420,276 |
| | $ | 412,642 |
|
| Cumulative effect upon adoption of new accounting standard (Note 1) | 769 |
| | — |
| | — |
|
| Issuance for stock-based compensation and dividends, net of forfeitures | 494 |
| | 447 |
| | 556 |
|
| Exercise of stock options | 72 |
| | 172 |
| | 381 |
|
| Income tax benefit from stock-based compensation | — |
| | 307 |
| | 551 |
|
| Stock-based compensation expense | 7,600 |
| | 6,705 |
| | 5,819 |
|
| Employee stock purchase plan | 247 |
| | 305 |
| | 327 |
|
| Balance at end of year | $ | 437,394 |
| | $ | 428,212 |
| | $ | 420,276 |
|
| Accumulated other comprehensive income (loss): | | | | | |
| Balance at beginning of year | $ | 184 |
| | $ | 318 |
| | $ | (371 | ) |
| Defined benefit pension plans, net of tax benefit of $207 and $89, and tax expense of $429, respectively | (373 | ) | | (134 | ) | | 689 |
|
| Change in fair value of interest rate swap, net of tax of $189 | 289 |
| | — |
| | — |
|
| Balance at end of year | $ | 100 |
| | $ | 184 |
| | $ | 318 |
|
| Retained earnings: | | | | | |
| Balance at beginning of year | $ | 174,967 |
| | $ | 155,096 |
| | $ | 125,378 |
|
| Cumulative effect upon adoption of new accounting standard (Note 1), net of tax of $300 | (469 | ) | | — |
| | — |
|
| Net income | 33,285 |
| | 32,773 |
| | 42,824 |
|
| Dividends, net of forfeitures ($0.48, $0.48 and $0.45 per share, respectively) | (12,640 | ) | | (12,902 | ) | | (13,106 | ) |
| Balance at end of year | $ | 195,143 |
| | $ | 174,967 |
| | $ | 155,096 |
|
| Treasury stock – shares: | | | | | |
| Shares at beginning of year | 44,469 |
| | 42,130 |
| | 40,616 |
|
| Repurchases of common stock | 723 |
| | 2,370 |
| | 1,540 |
|
| Shares tendered in payment of the exercise price of stock options | — |
| | 3 |
| | — |
|
| Employee stock purchase plan | (25 | ) | | (34 | ) | | (26 | ) |
| Shares at end of year | 45,167 |
| | 44,469 |
| | 42,130 |
|
| Treasury stock – cost: | | | | | |
| Balance at beginning of year | $ | (482,340 | ) | | $ | (436,768 | ) | | $ | (398,961 | ) |
| Repurchases of common stock | (17,010 | ) | | (45,873 | ) | | (38,058 | ) |
| Shares tendered in payment of the exercise price of stock options | — |
| | (63 | ) | | — |
|
| Employee stock purchase plan | 275 |
| | 364 |
| | 251 |
|
| Balance at end of year | $ | (499,075 | ) | | $ | (482,340 | ) | | $ | (436,768 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | | | Shares | | Amount | | |
| Balance, December 31, 2018 | 71,856 | | | $ | 719 | | | $ | 447,337 | | | $ | 1,296 | | | $ | 237,308 | | | 45,822 | | | $ | (518,329) | | | $ | 168,331 | |
| Net income | — | | | — | | | — | | | — | | | 130,862 | | | — | | | — | | | 130,862 | |
| Reclassification of stranded tax effects (Note 1) | — | | | — | | | — | | | 168 | | | (168) | | | — | | | — | | | — | |
| Issuance for stock-based compensation and dividend equivalents, net of forfeitures | 346 | | | 3 | | | 846 | | | — | | | (849) | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | 11,007 | | | — | | | — | | | — | | | — | | | 11,007 | |
| Employee stock purchase plan | — | | | — | | | 355 | | | — | | | — | | | (17) | | | 203 | | | 558 | |
| Dividends ($0.72 per share) | — | | | — | | | — | | | — | | | (16,608) | | | — | | | — | | | (16,608) | |
| Defined benefit pension plan, no tax benefit | — | | | — | | | — | | | (2,183) | | | — | | | — | | | — | | | (2,183) | |
| Change in fair value of interest rate swap, net of tax benefit of $272 | — | | | — | | | — | | | (807) | | | — | | | — | | | — | | | (807) | |
| Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 3,472 | | | (123,897) | | | (123,897) | |
| Balance, December 31, 2019 | 72,202 | | | $ | 722 | | | $ | 459,545 | | | $ | (1,526) | | | $ | 350,545 | | | 49,277 | | | $ | (642,023) | | | $ | 167,263 | |
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, | |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | Cash flows from operating activities: | |
| Net income | $ | 33,285 |
| | $ | 32,773 |
| | $ | 42,824 |
| Net income | $ | 130,862 | | | $ | 57,980 | | | $ | 33,285 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | Adjustments to reconcile net income to cash provided by operating activities: | |
| Gain on sale of assets held for sale | | Gain on sale of assets held for sale | (79,318) | | | — | | | (3,148) | |
| Deferred income tax provision, net | 12,243 |
| | 2,007 |
| | 2,380 |
| Deferred income tax provision, net | (49) | | | 989 | | | 12,243 | |
| Provision for bad debt | 1,031 |
| | 976 |
| | 1,553 |
| |
| Provision for bad debts | | Provision for bad debts | 1,209 | | | 1,820 | | | 1,031 | |
| Depreciation and amortization | 8,508 |
| | 8,796 |
| | 9,849 |
| Depreciation and amortization | 6,481 | | | 8,265 | | | 8,508 | |
| Stock-based compensation expense | 7,600 |
| | 6,705 |
| | 5,819 |
| Stock-based compensation expense | 9,912 | | | 8,797 | | | 7,600 | |
| Defined benefit pension plans expense | 937 |
| | 1,733 |
| | 1,846 |
| Defined benefit pension plans expense | 862 | | | 1,821 | | | 937 | |
| Loss on deferred compensation plan investments, net | 510 |
| | 597 |
| | 77 |
| Loss on deferred compensation plan investments, net | 245 | | | 563 | | | 510 | |
| Gain on sale of Global's assets | (3,148 | ) | | — |
| | — |
| |
| Loss on disposal or impairment of assets | | Loss on disposal or impairment of assets | 1,084 | | | 38 | | | 196 | |
| Noncash lease expense | | Noncash lease expense | 6,282 | | | — | | | — | |
| Loss on equity method investment | | Loss on equity method investment | 831 | | | — | | | — | |
| Contingent consideration liability remeasurement | 565 |
| | (42 | ) | | 321 |
| Contingent consideration liability remeasurement | 459 | | | — | | | 565 | |
| Other | 888 |
| | 321 |
| | 308 |
| Other | 352 | | | 350 | | | 692 | |
| (Increase) decrease in operating assets | | | | | | (Increase) decrease in operating assets | |
| Trade receivables, net | (20,535 | ) | | (8,403 | ) | | 4,223 |
| Trade receivables, net | (5,360) | | | (10,851) | | | (20,535) | |
| Income tax refund receivable | (6,944 | ) | | 354 |
| | 2,785 |
| |
| Prepaid expenses and other current assets | (1,471 | ) | | (1,631 | ) | | 1,110 |
| |
| Other assets, net | (556 | ) | | (495 | ) | | (298 | ) | |
| (Decrease) increase in operating liabilities | | | | | | |
| Accounts payable and other current liabilities | (1,537 | ) | | (1,920 | ) | | 1,788 |
| |
| Other assets | | Other assets | (9,639) | | | 5,741 | | | (8,971) | |
| Increase (decrease) in operating liabilities | | Increase (decrease) in operating liabilities | |
| Accrued payroll costs | 1,954 |
| | (1,320 | ) | | (5,503 | ) | Accrued payroll costs | 4,567 | | | 1,350 | | | 1,954 | |
| Income taxes payable | (221 | ) | | (489 | ) | | (1,657 | ) | |
| Other long-term liabilities | (3,770 | ) | | (139 | ) | | 3,306 |
| |
| Other liabilities | | Other liabilities | (2,163) | | | 10,860 | | | (5,528) | |
| Cash provided by operating activities | 29,339 |
| | 39,823 |
| | 70,731 |
| Cash provided by operating activities | 66,617 | | | 87,723 | | | 29,339 | |
| Cash flows from investing activities: | | | | | | Cash flows from investing activities: | |
| Capital expenditures | (5,846 | ) | | (12,420 | ) | | (8,328 | ) | Capital expenditures | (10,359) | | | (5,170) | | | (5,846) | |
| Proceeds from sale of Global's assets | 1,000 |
| | — |
| | — |
| |
| Proceeds from the disposition of assets held within the Rabbi Trust | — |
| | — |
| | 445 |
| |
| Purchase of assets held within the Rabbi Trust | — |
| | — |
| | (481 | ) | |
| Cash used in investing activities | (4,846 | ) | | (12,420 | ) | | (8,364 | ) | |
| Equity method investment | | Equity method investment | (9,000) | | | — | | | — | |
| Net proceeds from the sale of assets held for sale | | Net proceeds from the sale of assets held for sale | 122,544 | | | 1,000 | | | 1,000 | |
| Cash provided by (used in) investing activities | | Cash provided by (used in) investing activities | 103,185 | | | (4,170) | | | (4,846) | |
| Cash flows from financing activities: | | | | | | Cash flows from financing activities: | |
| Proceeds from credit facility | 1,038,593 |
| | 937,083 |
| | 604,668 |
| Proceeds from credit facility | 80,100 | | | 450,400 | | | 1,038,593 | |
| Payments on credit facility | (1,033,617 | ) | | (906,008 | ) | | (617,529 | ) | Payments on credit facility | (86,900) | | | (495,123) | | | (1,033,617) | |
| Proceeds from other financing arrangements | — |
| | 1,783 |
| | 2,914 |
| |
| Payments on other financing arrangements | (2,148 | ) | | (1,830 | ) | | (1,274 | ) | Payments on other financing arrangements | (1,720) | | | (2,039) | | | (2,148) | |
| Payments of loan financing fees | (1,730 | ) | | (158 | ) | | — |
| |
| Proceeds from exercise of stock options, net of shares tendered in payment of exercise | 72 |
| | 172 |
| | 381 |
| |
| Repurchases of common stock | (14,622 | ) | | (46,013 | ) | | (38,471 | ) | Repurchases of common stock | (124,453) | | | (22,187) | | | (14,622) | |
| Cash dividend | (12,144 | ) | | (12,447 | ) | | (12,545 | ) | |
| Cash dividends | | Cash dividends | (16,608) | | | (14,871) | | | (12,144) | |
| Payment of contingent consideration liability | | Payment of contingent consideration liability | (477) | | | — | | | — | |
| Other | — |
| | — |
| | (252 | ) | Other | (25) | | | — | | | (1,658) | |
| Cash used in financing activities | (25,596 | ) | | (27,418 | ) | | (62,108 | ) | Cash used in financing activities | (150,083) | | | (83,820) | | | (25,596) | |
| Change in cash and cash equivalents | (1,103 | ) | | (15 | ) | | 259 |
| Change in cash and cash equivalents | 19,719 | | | (267) | | | (1,103) | |
| Cash and cash equivalents at beginning of year | 1,482 |
| | 1,497 |
| | 1,238 |
| Cash and cash equivalents at beginning of year | 112 | | | 379 | | | 1,482 | |
| Cash and cash equivalents at end of year | $ | 379 |
| | $ | 1,482 |
| | $ | 1,497 |
| Cash and cash equivalents at end of year | $ | 19,831 | | | $ | 112 | | | $ | 379 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, | | | | |
| Supplemental Disclosure of Cash Flow Information | 2019 | | 2018 | | 2017 |
| Cash paid during the year for: | | | | | |
Income taxes (1) | $ | 24,935 | | | $ | 13,442 | | | $ | 24,330 | |
| Operating lease liabilities | 8,186 | | | — | | | — | |
| Interest, net | 1,480 | | | 3,814 | | | 3,518 | |
| Non-Cash Financing and Investing Transactions: | | | | | |
| ROU assets obtained from operating leases | $ | 9,205 | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
| Employee stock purchase plan | 558 | | | 549 | | | 522 | |
| | | | | |
| Unsettled repurchases of common stock | — | | | 556 | | | 898 | |
| | | | | |
| Receivable for sale of Kforce Global Solutions, Inc.'s assets | — | | | — | | | 1,979 | |
(1) During the year ended December 31, 2018, cash provided by operating activities included the receipt of an income tax refund in the amount of $6.8 million.
The accompanying notes are an integral part of these consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. GAAP and the rules of the SEC.
Certain prior year amounts have been reclassified to conform with the current period presentation for amounts related to discontinued operations. Refer to Note 2 - “Discontinued Operations” for further information.
Principles of Consolidation
The consolidated financial statements include the accounts of Kforce Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “Kforce,” “the Company,the "Company,” “we,” “the Firm,the "Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context indicates otherwise.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 importantcritical of these estimates and assumptions relate to the following: allowance for doubtful accounts, fallouts and other trade accounts receivable reserves;accounts; income taxes; self-insured liabilities for workers’ compensation and health insurance; obligations for defined benefitthe pension plansplan; and the impairment of goodwill, and identifiable intangibleother long-lived assets and any related impairment.the equity method investment. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Revenue Recognition
All of our revenue and trade receivables are generated from contracts with customers and substantially all of our revenues are derived from U.S. domestic operations.
Revenue is considered earned once evidencerecognized when control of the promised services is transferred to our customers at an arrangement has been obtained, serviceamount that reflects the consideration to which we expect to be entitled to in exchange for those services. Revenue is performedrecorded net of sales or delivery has occurred, fees are fixed or determinable,other transaction taxes collected from clients and collectability is reasonably assured. Kforce’s primary sourcesremitted to taxing authorities.
For substantially all of our revenue transactions, we have determined that the gross reporting of revenues are Flexas a principal versus net as an agent is the appropriate accounting treatment because Kforce: (i) is primarily responsible for fulfilling the promise to provide the specified service to the customer, (ii) has discretion in selecting and Direct Hire.assigning the temporary workers to particular jobs and establishing the bill rate, and (iii) bears the risk and rewards of the transaction, including credit risk if the customer fails to pay for services performed.
Flex revenues areRevenue
Flex revenue is recognized over time as the temporary staffing services are provided by Kforce’s consultants. Flex revenues are recordedour consultants at the contractually established bill rates, net of credits, discounts, rebates and revenue-related reserves.applicable variable consideration. Reimbursements of travel and out-of-pocket expenses (“("billable expenses”expenses") are also recorded within Flex revenues with anrevenue when incurred and the equivalent amount of expense is recorded in directDirect costs in the Consolidated Statements of services.Operations and Comprehensive Income. We recognize revenue in the amount of consideration to which we have the right to invoice when it corresponds directly to the services transferred to the customer satisfied over time.
Direct Hire revenues are recognized when candidates accept offers of permanent employment and are scheduled to commence employment within 30 days. Revenue
Direct Hire revenues arerevenue is recognized at the agreed upon rate at the point in time when the performance obligation is considered complete. Our policy requires the following criteria to be met in order for the performance obligation to be considered complete: (i) the candidate accepted the position; (ii) the candidate resigned from their current employer; and (iii) the agreed upon start date falls within the following month. Since the client has accepted the candidate and can direct the use of and obtains the significant risk and rewards of the placement, we consider this point as the transfer of control to our client.
Variable Consideration
Transaction prices for Flex revenue include variable consideration, such as customer rebates and discounts. Management evaluates the facts and circumstances of each contract to estimate the variable consideration using the most likely amount method which utilizes management’s expectation of the volume of services to be provided over the applicable period.
Direct Hire revenue is recorded net of an estimated reserve fora fallout reserve. Direct Hire fallouts which is estimated based on Kforce’s historical fallout experience. Fallouts occur when a candidate does not remain employed with the client through the respective contingency period which is typically(typically 90 days or less. Our GS segment doesless). Management uses the expected value method to estimate the fallout reserve based on a combination of past experience and current trends.
Variable consideration reduces revenue, but may be constrained to the extent that it is probable a significant reversal will not generate any Direct Hire revenues.occur.
Payment Terms
Our GS segment generates its revenues under contracts thatpayment terms and conditions vary by arrangement, although terms are in general, greater in durationtypically less than our other segments and which can often span several years, inclusive of renewal periods. Our GS segment, which represents approximately 8% of total revenues, generates revenues under90 days. Generally, the following contract arrangements:
Revenues for time-and-materials contracts, which accounts for approximately 58% of this segment’s revenue, are recognized based on contractually established billing rates attiming between the time services are provided.
Revenues for fixed-price contracts are recognized on the basissatisfaction of the estimated percentage-of-completion. Approximately 30%performance obligation and the payment is not significant and we do not currently have any significant financing components.
Unsatisfied Performance Obligations
We do not disclose the value of this segment’s revenues are recognized under this method. Progress towards completionunsatisfied performance obligations for contracts if either the original expected length is typically measured based on costs incurred as a proportion of estimated total costsone year or other measures of progress when applicable. Profit in a given periodless or if revenue is reported at the expected profit margin to be achieved on the overall contract.
Revenues for the product-based business, which accounts for approximately 12% of this segment’s revenues, are recognized at the timeamount to which we have the right to invoice for services performed.
Contract Balances
We record accounts receivable when our right to consideration becomes unconditional and services have been performed. Other than our trade receivable balance, we do 0t have any material contract assets as of delivery.December 31, 2019 and 2018.
Kforce collects sales tax for various taxing authoritiesWe record a contract liability when we receive consideration from a customer prior to transferring services to the customer. We recognize the contract liability as revenue after we have transferred control of the goods or services to the customer. Contract liabilities are recorded within Accounts payable and our policy isother accrued liabilities if expected to record these amounts on a net basis; thus, gross sales tax amounts are not includedbe recognized in net service revenues.less than one year and Other long-term liabilities, if over one year, in the Consolidated Balance Sheets. We do 0t have any material contract liabilities as of December 31, 2019 and 2018.
Direct CostsCost of Services
Direct costs of services are composed of all related costs of employment for consultants, including compensation, payroll taxes, payroll-related insurance and certain fringe benefits as well asand subcontractor costs. Direct costs of services exclude depreciation and amortization expense, (except for the GS product-based business), which is presented on a separate line in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Associate and field management compensation, payroll taxes and fringe benefits are included in SG&A along with other customary costs such as administrative and corporate costs.
Commissions
Our associates make placements and earn commissions as a percentage of revenue or gross profit for Flex or Direct Hire revenues pursuant to a commission plan. The amount of associate commissions paid increases as volume increases. Kforce accrues commissionsCommissions are accrued at a percentagean amount equal to the percent of total expected commissions payable to total revenuesrevenue or gross profit for the commission-plan period, as applicable. We generally expense sales commissions and any other incremental costs of obtaining a contract as incurred because the amortization period is typically less than one year.
Stock-Based Compensation
Stock-based compensation is measured using the grant-date fair value of the award of equity instruments. The expense is recognized over the requisite service period. Effective January 1, 2017,period and forfeitures are recognized as a result of our adoption of a recently issued accounting standard, the Firm changed its accounting policy regarding forfeitures and elected to recognize as incurred.
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. Effective January 1, 2017, as a result of our adoption of a recently issued accounting standard, excess Excess tax benefits or deficiencies of deductions attributable to employees’ vesting of restricted stock are reflected in Income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Income Taxes
Income taxes are recorded using the asset and liability approach for deferred tax assets and liabilities and the expected future tax consequences of differences between carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded unless it is more likely than not that the deferred tax asset can be utilized to offset future taxes.
Management evaluates tax positions that have been taken or are expected to be taken in itsour tax returns and records a liability for uncertain tax positions. Kforce recognizesWe recognize tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. The Company recognizes interest and penalties related to uncertain tax positions in Income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Cash and Cash Equivalents
Kforce classifies allAll highly liquid investments with an original initial maturity dates of three months or less at the time of purchase are classified 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 tobecause of the short durationshort-term nature of their maturities.these instruments. Our cash equivalents are held in government money market funds and at times may exceed federally insured limits.
Trade Accounts ReceivableReceivables and Related Reserves
Kforce records trade accountsTrade receivables at the invoiced amount,are recorded net of reserves for allowance for doubtful accounts, fallouts, early payment discounts and revenue adjustments based on historical trends and estimates of potential future activity.accounts. The allowance for doubtful accounts which comprises a majority of our trade accounts receivable reserves, is determined based on factors including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of trade accounts receivables among clients and higher-risk sectors, and the current state of the U.S. economy. Trade accounts receivables are written off after all reasonable collection efforts have been exhausted. Trade accounts receivable reserves as a percentage of gross trade receivables was approximately 1.0% at December 31, 20172019 and 2016.2018.
Fixed Assets
Fixed assets are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the expected terms of the related leases, which generally range from three to five years.leases. Upon sale or disposition of our fixed assets, the cost and accumulated depreciation are removed and any resulting gain or loss, net of proceeds, is reflected within SG&A in the Consolidated Statements of Operations and Comprehensive Income.
LeasesLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If an analysis indicates the carrying amount of these long-lived assets exceeds the fair value, an impairment loss is recognized to reduce the carrying amount to its fair market value, as determined based on the present value of projected future cash flows.
LeasesEquity Method Investment
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama, LLC ("WorkLLama"). WorkLLama has and continues to develop the technology for a SaaS platform focused on consultant engagement and referral technologies, which we believe will enhance our opportunities to efficiently and effectively identify and place consultants on assignment. Our noncontrolling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity method, our carrying value is at cost and adjusted for our field offices, whichproportionate share of earnings or losses. There are located throughoutno basis differences between our carrying value and the U.S., range from threeunderlying equity in net assets that would result in adjustments to five-year terms althoughour proportionate share of earnings or losses. We recorded a limited numberloss on equity method investment of leases contain short-term renewal provisions that range from month-to-month to one year.
For leases that contain escalations$0.8 million during the year ended December 31, 2019. The balance 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 liabilityinvestment in Accounts payable and other accrued liabilities orWorkLLama of $8.2 million was included in Other long-term liabilities, as appropriate,assets, net in the Consolidated Balance Sheets.Sheet at December 31, 2019.
The Company records incentives provided by landlordsUnder the joint venture operating agreement for leasehold improvementsWorkLLama, Kforce is obligated to make additional cash contributions subsequent to the initial contribution, contingent on WorkLLama's achievement of certain operational and financial milestones, which are centered around the market acceptance of their technologies and success with internal operating and strategic objectives. Management evaluated the probability of WorkLLama’s achievement of these milestones and recorded the estimated future contributions as part of the initial investment. Under the operating agreement, our maximum potential capital contributions was $22.5 million. During the year ended December 31, 2019, we contributed $9.0 million of capital contributions.
We review the equity method investment for impairment whenever events or changes in Accounts payable and other accrued liabilities or Other long-term liabilities, as appropriate,circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recognized in the Consolidated Balance Sheets and records a corresponding reductionevent that an other-than-temporary decline in rent expensefair value of an investment occurs. Management’s estimate of fair value of an investment is based on a straight-line basis over the lease term.
Goodwill and Other Intangible Assetsincome approach and/or market approach. At December 31, 2019, management determined there was no need to test for impairment for our equity method investment as no events or changes in circumstances indicated that the carrying amount of the investments may not be recoverable.
Goodwill
Management has determined that the reporting units for the goodwill analysis is consistent with our reporting segments. We evaluate goodwill for impairment either through a qualitative or quantitative approach annually, or more frequently if an event occurs or circumstances change that indicate the carrying value of a reporting unit may not be recoverable. If we perform a quantitative assessment that indicates the carrying amount of a reporting unit exceeds its fair market value, an impairment loss is recognized to reduce the carrying amount to its fair market value. Kforce determines the fair market value of each reporting unit based on a weighting of the present value of projected future cash flows (the “income approach”) and the use of comparative market approaches under both the guideline company method and guideline transaction method (collectively, the “market approach”). Fair market value using the income approach is based on Kforce’s estimated future cash flows on a discounted basis. The market approach compares each reporting unit to other comparable companies based on valuation multiples derived from operational and transactional data to arrive at a fair value. Factors requiring significant judgment include, among others, the assumptions related to discount rates, forecasted operating results, long-term growth rates, the determination of comparable companies, and market multiples. Changes in economic and operating conditions or changes in Kforce’s business strategies that occur after the annual impairment analysis may impact these assumptions and result in a future goodwill impairment charge, which could be material to our consolidated financial statements.
Other Intangible Assets
Identifiable intangible assets arising from certain of Kforce’s acquisitions include non-compete and employment agreements, contractual relationships, client contracts, technology, and a trade name and trademark. Our trade names and trademarks, and derivatives thereof, and GS’s Data Confidence trademark are important to our business. Our primary trade names and trademark are registered with the U.S. Patent and Trademark Office.
For definite-lived intangible assets, amortization is computed using the straight-line method over the period of expected benefit, which ranges from one to fifteen years. The impairment evaluation for indefinite-lived intangible assets, our 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 AssetsOperating Leases
Kforce reviews long-livedleases property for our field offices as well as certain office equipment, which limits our exposure to risks related to ownership. We determine if a contract or arrangement meets the definition of a lease at inception. We elected not to separate lease and non-lease components when determining the consideration in the contract. Right-of-use (“ROU”) assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If an analysis indicates the carrying amount of these long-lived assets exceeds the fair value, an impairment loss isand lease liabilities are recognized to reduce the carrying amount to its fair market value, as determined based on the present value of projected future cash flows.the lease payments over the lease term at the commencement date. If there is no rate implicit in the lease, we use our incremental borrowing rate in the present value calculation, which is based on our collateralized borrowing rate and determined based on the terms of our leases and the economic environment in which they exist. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
ROU assets for operating leases, net of amortization, are recorded within Other assets, net and operating lease liabilities are recorded within current liabilities if expected to be recognized in less than one year and in Other long-term liabilities, if over one year, in the Consolidated Balance Sheet. Operating lease additions are non-cash transactions and the amortization of the ROU assets is reflected as Noncash lease expense within operating activities in the Consolidated Statement of Cash Flows.
Our lease terms typically range from three to five years with some containing options to renew or terminate. The exercise of renewal options is at our sole discretion and is included in the lease term if we are reasonably certain that the renewal option will be exercised.
We elected the short-term practical expedient for leases with an initial term of 12 months or less and do not recognize ROU assets or lease liabilities for these short-term leases.
In addition to base rent, certain of our operating leases require variable payments of property taxes, insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred.
Capitalized Software
Kforce purchases, develops and implements software to enhance the performance of our technology infrastructure. Direct internal costs, such as payroll and payroll-related costs, and external costs incurred during the development stage are capitalized and classified as capitalized software. Capitalized software development costs and the associated accumulated amortization are classified asincluded in Other assets, net in the accompanying Consolidated Balance Sheets. Amortization expense is computed using the straight-line method over the estimated useful lives of the software, which range from one to sevennine years.
Amortization expense of capitalized software during the years ended December 31, 2019, 2018 and 2017 was $1.1 million, $1.1 million and $0.9 million, respectively.
Workers’ Compensation
Kforce retains the economic burden for the first $250 thousand per occurrence in workers’ compensation claims except: (1)except in states that require participation in state-operated insurance funds and (2) for Kforce Government Solutions, Inc. which is fully insured for workers’ compensation claims.funds. Workers’ compensation includes ongoing health care and indemnity coverage for claims and may be paid over numerous years following the date of injury. Workers’ compensation expense includesincludes: insurance premiums paid,paid; claims administration fees charged by Kforce’s workers’ compensation administrator,administrator; premiums paid to state-operated insurance fundsfunds; and an estimate for Kforce’s liability for IBNR claims and for the ongoing development of existing claims.
KforceManagement estimates its workers’ compensation liability based upon historical claims experience, actuarially determinedactuarially-determined loss development factors, and qualitative considerations such as claims management activities.
Health Insurance
Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss for each health insurance plan participant up to $350$500 thousand in claims annually. Additionally, for all claim amounts exceeding $350 thousand, Kforce retains the risk of loss up to an aggregate annual loss of those claims of $700 thousand. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and IBNRincurred but not reported claims, which are primarily based upon an evaluation of historical claims experience, actuarially-determined completion factors and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.
Legal Costs
Legal costs incurred in connection with loss contingencies are expensed as incurred.
Defined Benefit Pension PlansPlan
Kforce recognizes the unfunded status of itsBecause our defined benefit pension plans as a liability in its Consolidated Balance Sheets. Because our plans areplan is unfunded as of December 31, 2017,2019, actuarial gains and losses may arise as a result of the actuarial experience of the plans,plan, as well as changes in actuarial assumptions in measuring the associated obligation as of year-end, or an interim date if any re-measurement is necessary. The net after-tax impact of unrecognized actuarial gains and losses related to our defined benefit pensions planspension plan is recorded in accumulatedAccumulated other comprehensive (loss) income (loss) in our consolidated financial statements. The unfunded status of the defined benefit pension plan is recorded as a liability in our Consolidated Balance Sheets.
Amortization of a net unrecognized gain or loss in accumulated other comprehensive (loss) income (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. The interest cost component of the net periodic benefit cost is included in Other expense, net in the Consolidated Statements of Operations and Comprehensive Income.
Earnings per Share
Basic earnings per share is computed as net income divided by the weighted averageweighted-average number of common shares outstanding (“WASO”) during the period. WASO excludes unvested shares of restricted stock. Diluted earnings per share is computed by dividing net income by diluted WASO. Diluted WASO includes the dilutive effect of stock options and other potentially dilutive securities such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, there were 364586 thousand, 175513 thousand, and 280364 thousand common stock equivalents, respectively, included in the diluted WASO. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, there were 5271 thousand, 32 thousandnil and 1527 thousand, respectively, of anti-dilutive common stock equivalents.
Treasury Stock
Kforce’sThe Board may authorize share repurchases of Kforce’sour common stock. Shares repurchased under Board authorizations are held in treasury for general corporate purposes, including issuances under the 2009 Employee Stock Purchase Plan.purposes. Treasury shares are accounted for under the cost method and reported as a reduction of stockholders’ equity in the accompanying consolidated financial statements.
Derivative Instrument
Kforce’sOur interest rate swap derivative instrument has been designated as a cash flow hedge and is recorded at fair value on the Consolidated Balance Sheets. The derivative instrument has been designated as a cash flow hedge; the effective portion of the gain or loss on the derivative instrument is recorded as a component of Accumulated other comprehensive (loss) income, (loss), net of tax, and reclassified into earnings when the hedged item affects earnings and into the line item of the hedged item. Any ineffective portion of the gain or loss is recognized immediately into Other expense, net on the Consolidated Statements of Operations and Comprehensive Income. Cash flows from the derivative instrument are classified in the Consolidated Statements of Cash Flows in the same category as the hedged item.
Fair Value Measurements
Kforce usesFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
The fair value measurementshierarchy uses a framework which requires categorizing assets and liabilities into one of three levels based on the inputs used in areasvaluing the asset or liability.
| | | | | |
| • | Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities. |
| • | Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| • | Level 3 inputs include unobservable inputs that are supported by little, infrequent or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability. |
Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Fair value measurements include, but are not limited to: the impairment testing of goodwill, other intangiblelong-lived assets and other long-lived assets;the equity method investment; stock-based compensation;compensation and the interest rate swap and a contingent consideration liability.swap. The carrying values of cash and cash equivalents, trade accounts receivable,receivables, other current assets and accounts payable and other accrued liabilities approximate fair value because of the short-term nature of these instruments. Using available market information and appropriate valuation methodologies, Kforcemanagement has determined the estimated fair value measurements; however, considerable judgment is required in interpreting data to develop the estimates of fair value.
New Accounting Standards
Recently Adopted Accounting Standards
In March 2017,August 2018, the FASB issued authoritative guidance requiringregarding a customer’s accounting for implementation costs incurred for a cloud computing arrangement that an employer disaggregateis a service contract. The amendment aligns the requirements for capitalizing these implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and defer these costs over the non-cancelable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised. This amendment also requires entities to present cash flows, capitalized costs and amortization expense in the same financial statement line items as the service cost component from the other components of net periodic benefit costcosts incurred for defined benefit pension plans. The amendments also provide explicit guidance on how to present the service cost component and the other components of net periodic benefit cost in the income statement.such arrangements. The guidance is to be appliedeffective for annualfiscal periods beginning after December 15, 2017, including interim periods within those annual periods, and2019, with retrospective application or prospective to all implementation costs incurred after the date of adoption. We early adoption is permitted. The guidance should be applied retrospectively foradopted this standard effective January 1, 2019, using the presentation of the service cost component and the other components of net periodic benefit costprospective method. Historically, these implementation costs were recorded as amortization expense in the income statements. We electedstatement, capital expenditures within investing cash flows and Other assets, net in the consolidated balance sheets. Due to early adoptthe adoption of this guidance as ofstandard and effective January 1, 2017 due2019, these implementation costs are recorded within SG&A, operating cash flows and Prepaid expenses and other current assets if expected to the easebe recognized within one year and Other assets, net, if over one year. As of implementation. The impact of early adoption resulted in a retrospective adjustment to the Consolidated Statements of Operations and Comprehensive Income to reclass the interest cost component of net periodic benefit cost from Selling, general and administrative expenses to Other expense, net. The amount of the reclassification was approximately $0.5 million, $0.5 million and $0.4 million for the yearsyear ended December 31, 2017, 2016 and 2015, respectively.2019, these costs were not material to our operations.
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 and 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. We elected to early adopt this guidance as of January 1, 2017. The adoption of this guidance did not have an impact on the Firm’s consolidated financial statements.
In March 2016,February 2018, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, includingreclassification of certain stranded tax effects from accumulated other comprehensive (loss) income tax consequences, classification of awards as either equity or liability, and classification in the statement of cash flows. This guidance was effective for us on January 1, 2017. The impact of this guidance resulted in the following:
•All excess tax benefits and deficiencies will be recognized as income tax benefit or expense in the income statement. Prior to the effective date, they were recognized as a change to additional paid-in capital. The Firm applied this amendment prospectively. For the year ended December 31, 2017, the Firm recorded approximately $0.8 million of excess tax benefits as a reduction to income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income. This resulted in a reduction to our effective tax rate of 1.2% and an increase to our diluted earnings per share of $0.03 for the year ended December 31, 2017. This accounting standard guidance is likely to create volatility in the Firm’s effective tax rate in the future, though the impact is uncertain and based upon future stock price changes.
•Excess tax benefits and deficiencies will be classified as an operating activity in the statement of cash flows. Prior to the effective date, they were included in financing activities in the statement of cash flows. The Firm elected to apply this amendment retrospectively. This change increased our net cash provided by operating activities by $0.8 million, $0.4 million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, in the accompanying Consolidated Statements of Cash Flows.
•An entity is allowed to make a policy election as to whether it will include an estimate for awards expected to be forfeited or whether it will account for forfeitures as incurred. The Firm elected to change its policy on accounting for forfeitures and to recognize as incurred. This policy election is to be applied using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as a result of the effective date. The impactchange in tax rates related to the Tax Cuts and Jobs Act. The guidance is effective for fiscal periods beginning balance of retainedafter December 15, 2018. We elected to adopt this optional standard and reclassified approximately $168 thousand from Accumulated other comprehensive (loss) income to Retained earnings was $0.5 million, which is net of taxes of $0.3 million,in the consolidated financial statements on January 1, 2017.2019, using the period of adoption method.
In November 2015, the FASB issued authoritative guidance requiring that deferred tax assets and liabilities be classified as noncurrent in a classified statement
Accounting Standards Not Yet Adopted
In August 2017, the FASB issued authoritative guidance targeting improvements to accounting for hedging activities, by simplifying the rules aroundwhich expands and clarifies hedge accounting for nonfinancial and improvingfinancial risk components, aligns the disclosure requirements.recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements, and simplifies the requirements for assessing effectiveness in a hedging relationship. The guidance is to be appliedeffective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, and early adoption is permitted in any interim period. The hedge accounting guidance should be implemented2018. We adopted this standard as of January 1, 2019 using athe modified retrospective approach for any hedges that exist on the date of adoption, whilewith no cumulative adjustment required. Additionally, we adopted the presentation and disclosure requirements must be applied prospectively. Kforceusing the prospective method as required. Refer to Note 14 - “Derivative Instrument and Hedging Activity” for the additional disclosures of the Firm’s derivative instrument.
In February 2016, the FASB issued authoritative guidance regarding the accounting for leases, and has since issued subsequent updates to the initial guidance. The amended guidance requires the recognition of assets and liabilities for operating leases. The guidance is currently evaluatingeffective for annual periods beginning after December 15, 2018. We adopted this standard using the potential impactoptional transition method as of January 1, 2019, without retrospective application to comparative periods. We recorded approximately $17.6 million of ROU assets and $21.0 million of lease liabilities on our consolidated balance sheet on January 1, 2019 related to operating leases upon adoption of the new lease standard. The difference between the ROU assets and lease liabilities balances relates to the lease incentive liabilities recorded as of December 31, 2018 in accordance with the previous lease accounting guidance. We elected the package of practical expedients and did not reassess our prior conclusions regarding lease identification, lease classification and initial direct costs. We did not elect the hindsight practical expedient. We determined that no cumulative effect adjustment to retained earnings was necessary upon adoption. Finance leases are not significant to our operations as of and for the year ended December 31, 2019. Refer to Note 11 - "Operating Leases" for disclosures related to our operating leases.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued authoritative guidance regarding changes to the disclosure requirement for defined benefit plans including additions and deletions to certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The guidance is effective for fiscal periods beginning after December 15, 2020 with the retrospective method required for all periods presented. The adoption of this guidance will modify our disclosures but is not expected to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued authoritative guidance on accounting for credit losses on financial instruments, including trade receivables.receivables, and has since issued subsequent updates to the initial guidance. The amended guidance requires the application of a current expected credit loss model, a new impairment model, which measures expected credit losses based on relevant information, about past events, including historical experience, current conditions and reasonable and supportable forecasts. The guidance is to be appliedeffective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, and earlyrequires adoption is permitted no sooner than annual periods beginning after December 15, 2018. The guidance requires companies to apply the requirements using a modified retrospective approach. Kforce is currently evaluatingWe finalized the potential impact onchanges to our allowance methodology for our trade receivables as a result of the consolidated financial statements.
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. The Firm has made progress with assessing contractual arrangements that may be impacted by the new standard. Kforce anticipates that the adoptionimplementation of this standard, will have a significant impact to its consolidated balance sheet as it will result in recording substantially all operating leases as a right-to-use asset and lease obligation. Kforce continues to assess all potential impacts of the standard, especially with respect to our disclosures.
In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers, which specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued authoritative guidance deferring the effective date of the new revenue standard by one year for all entities. The one-year deferral results in the guidance being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and entities are not permitted to adopt the standard earlier than the original effective date. Since May 2014, the FASB has issued additional and amended authoritative guidance regarding revenue from contracts with customers to clarify and improve the understanding of the implementation guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have selected the modified retrospective transition method. We have completed our assessment and have concluded that it will not have a material impact on the timing of our revenue recognition as substantially all of our contracts with customers will continue to be recognized over time as services are rendered. Upon adoption, we will recognizeexpect the cumulative effectimpact of adopting this guidancestandard will be immaterial to our financial statements. The cumulative adjustment will be recorded as an adjustmenta reduction to ourthe opening balance of retained earnings net of tax, primarily relatedwith the offset to certain GS contracts; this adjustment will be approximately $0.2 million. We will also reclassify the allowance for Direct Hire fallouts from tradedoubtful accounts receivableon January 1, 2020.
2. Discontinued Operations
During 2019, management committed to a contract liabilityplan to divest the GS segment as a result of the Firm’s decision to focus solely on the consolidated balance sheets. Additionally, there will becommercial technical and professional staffing services and solutions space. The GS segment consisted of KGS, our federal government solutions business, and TFX, our federal government product business.
On April 1, 2019, Kforce completed the sale of all of the issued and outstanding stock of Kforce Government Holdings, Inc., including its wholly-owned subsidiary KGS, to ManTech International Corporation for a cash purchase price of $115.0 million. Our gain on the sale of KGS, net of transaction costs, was $72.3 million. Total transaction costs were $9.6 million, which primarily includes legal and broker fees, transaction bonuses and accelerated stock-based compensation expense for KGS management triggered by a change in control of KGS.
On June 7, 2019, Kforce completed the sale of all of the issued and outstanding stock of TFX to an increaseunaffiliated third party for a cash purchase price of $18.4 million less a post-closing working capital adjustment of $0.7 million. Our gain on the sale of TFX, net of transaction costs, was $7.0 million. Total transaction costs were $2.2 million, which primarily includes legal and broker fees and transaction bonuses. Due to the sale of TFX, we finalized the settlement of a contingent consideration liability related to the acquisition of TFX in 2014 and paid $0.6 million during the year ended December 31, 2019.
Since the divestitures, Kforce has no significant continuing involvement in the leveloperations of disclosure aroundKGS and TFX.
The results of operations for both KGS and TFX have been reported as discontinued operations in our arrangementsconsolidated financial statements prior to their disposition. The following table summarizes the line items of pretax profit for the GS segment (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Revenue | | $ | 27,737 | | | $ | 114,416 | | | $ | 104,294 | |
| Direct costs | | 19,494 | | | 82,295 | | | 71,835 | |
| Gross profit | | 8,243 | | | 32,121 | | | 32,459 | |
| Selling, general and administrative expenses | | 6,988 | | | 21,862 | | | 22,861 | |
| Depreciation and amortization | | 307 | | | 995 | | | 989 | |
| Income from discontinued operations | | 948 | | | 9,264 | | | 8,609 | |
| Gain on sale of discontinued operations | | 79,318 | | | — | | | — | |
| Other (expense) income, net | | (436) | | | 9 | | | 567 | |
| Income from discontinued operations, before income taxes | | 79,830 | | | 9,273 | | | 9,176 | |
| Income tax expense | | 3,534 | | | 2,169 | | | 5,485 | |
| Income from discontinued operations, net of tax | | $ | 76,296 | | | | $ | 7,104 | | | | $ | 3,691 | |
The effective tax rates for discontinued operations, including the gain on sale of discontinued operations, were 4.4%, 23.4%, and resulting59.8% for the years ended December 31, 2019, 2018 and 2017, respectively. For the year ended December 31, 2019, there was minimal income tax obligation for the sale of KGS due to the efficient tax structure of the transaction. The GS effective tax rate for 2018 was positively impacted by the TCJA. The GS effective tax rate for 2017 was unfavorably impacted by the revaluation of our net deferred tax assets as a result of the TCJA.
The following table summarizes the assets and liabilities held for sale for the GS segment as of December 31, 2018 (in thousands):
| | | | | | | | |
| | DECEMBER 31, 2018 |
| ASSETS | | |
| Current assets held for sale: | | |
| Trade receivables | | | $ | 24,336 | |
| Prepaid expenses and other current assets | | | 5,437 | |
| Total Current assets held for sale | | | $ | 29,773 | |
| Noncurrent assets held for sale: | | | | |
| Fixed assets, net | | | $ | 1,496 | |
| Other assets, net | | | 293 | |
| Deferred tax assets, net | | | 2,604 | |
| Intangible assets | | | 2,952 | |
| Goodwill | | | 20,928 | |
| Total Noncurrent assets held for sale | | | $ | 28,273 | |
| LIABILITIES | | |
| Current liabilities held for sale: | | |
| Accounts payable and other accrued liabilities | | | $ | 6,064 | |
| Accrued payroll costs | | | 5,878 | |
| Other current liabilities | | | 16 | |
| Income taxes payable | | | 305 | |
| Total Current liabilities held for sale | | | $ | 12,263 | |
| Noncurrent liabilities held for sale: | | | | |
| Other long-term liabilities | | | $ | 4,551 | |
| Total Noncurrent liabilities held for sale | | | $ | 4,551 | |
The accompanying Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). The following table provides information for the total operating and investing cash flows for the GS segment (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| Cash Provided by (Used in) | | 2019 | | 2018 | | 2017 |
| GS Operating Activities | | $ | 4,547 | | | | $ | 10,937 | | | | $ | 1,098 | |
| GS Investing Activities | | $ | 117,798 | | | | $ | (927) | | | | $ | (776) | |
3. Reportable Segments
Kforce’s reportable segments are Tech and FA. Historically, and for the year ended December 31, 2019, Kforce has generated only sales and gross profit information on a segment basis. We do not report total assets or income from continuing operations separately by segment as our operations are largely combined.
The following table provides information concerning the operations of our segments for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | |
| Tech | | FA | | Total |
| 2019 | | | | | |
| Revenue | $ | 1,057,859 | | | $ | 289,528 | | | $ | 1,347,387 | |
| Gross profit | $ | 292,980 | | | $ | 102,058 | | | $ | 395,038 | |
| Operating and other expenses | | | | | 323,642 | |
| Income from continuing operations, before income taxes | | | | | $ | 71,396 | |
| 2018 | | | | | |
| Revenue | $ | 990,089 | | | $ | 313,848 | | | $ | 1,303,937 | |
| Gross profit | $ | 277,388 | | | $ | 109,099 | | | $ | 386,487 | |
| Operating and other expenses | | | | | 318,607 | |
| Income from continuing operations, before income taxes | | | | | $ | 67,880 | |
| 2017 | | | | | |
| Revenue | $ | 907,511 | | | $ | 346,135 | | | $ | 1,253,646 | |
| Gross profit | $ | 257,118 | | | $ | 118,479 | | | $ | 375,597 | |
| Operating and other expenses | | | | | 320,679 | |
| Income from continuing operations, before income taxes | | | | | $ | 54,918 | |
4. Disaggregation of Revenue
The following table provides information about disaggregated revenue recognition.by segment and revenue type for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | |
| Tech | | FA | | Total |
| 2019 | | | | | |
| | | | | |
| Flex revenue | $ | 1,037,380 | | | $ | 262,307 | | | $ | 1,299,687 | |
| Direct Hire revenue | 20,479 | | | 27,221 | | | 47,700 | |
| Total Revenue | $ | 1,057,859 | | | $ | 289,528 | | | $ | 1,347,387 | |
| 2018 | | | | | |
| | | | | |
| Flex revenue | $ | 971,310 | | | $ | 286,939 | | | $ | 1,258,249 | |
| Direct Hire revenue | 18,779 | | | 26,909 | | | 45,688 | |
| Total Revenue | $ | 990,089 | | | $ | 313,848 | | | $ | 1,303,937 | |
| 2017 | | | | | |
| | | | | |
| Flex revenue | $ | 887,675 | | | $ | 318,294 | | | $ | 1,205,969 | |
| Direct Hire revenue | 19,836 | | | 27,841 | | | 47,677 | |
| Total Revenue | $ | 907,511 | | | $ | 346,135 | | | $ | 1,253,646 | |
2.
5. Fixed Assets, Net
The following table presents major classifications of fixed assets and related useful lives (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | DECEMBER 31, | | |
| | USEFUL LIFE | | 2019 | | 2018 |
| Land | | | $ | 5,892 | | | $ | 5,892 | |
| Building and improvements | 1-40 years | | 25,990 | | | 25,755 | |
| Furniture and equipment | 1-20 years | | 8,760 | | | 14,938 | |
| Computer equipment | 1-5 years | | 6,446 | | | 5,944 | |
| Leasehold improvements | 1-7 years | | 9,482 | | | 10,484 | |
| Total fixed assets | | | 56,570 | | | 63,013 | |
| Less accumulated depreciation | | | (26,595) | | | (28,691) | |
| Total Fixed assets, net | | | $ | 29,975 | | | $ | 34,322 | |
|
| | | | | | | | | |
| | | | DECEMBER 31, |
| | USEFUL LIFE | | 2017 | | 2016 |
| Land | | | $ | 5,892 |
| | $ | 5,892 |
|
| Building and improvements | 5-40 years | | 25,733 |
| | 25,701 |
|
| Furniture and equipment | 5-20 years | | 17,285 |
| | 17,084 |
|
| Computer equipment | 3-5 years | | 9,231 |
| | 11,003 |
|
| Leasehold improvements | 3-5 years | | 13,424 |
| | 13,345 |
|
| | | | 71,565 |
| | 73,025 |
|
| Less accumulated depreciation | | | (31,885 | ) | | (29,880 | ) |
| Total Fixed assets, net | | | $ | 39,680 |
| | $ | 43,145 |
|
Computer equipment as of December 31, 2017 and 2016 includes equipment acquired under capital leases of $3.5Depreciation expense was $4.9 million, $5.7 million and $4.0$6.4 million respectively, and related accumulated depreciation of $2.1 million and $2.3 million, respectively. Depreciation expense, which includes capital leases, during the years ended December 31, 2017, 20162019, 2018 and 2015 was $6.9 million, $6.7 million, and $6.7 million,2017, respectively.
3.6. Income Taxes
The Tax Cuts and Jobs Act was enacted in December 2017, which will reduce the U.S. federal corporate tax rate from 35.0% to 21.0% beginning in 2018. As a result, we revalued our net deferred income tax assets and recorded $5.4 million of additional Income tax expense in the Consolidated Statement of Operations and Comprehensive Income.
The provision for income taxes from continuing operations consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Current tax expense: | | | | | |
| Federal | $ | 12,074 | | | $ | 12,032 | | | $ | 14,296 | |
| State | 5,057 | | | 5,369 | | | 3,004 | |
Deferred tax expense(1) | (301) | | | (397) | | | 8,024 | |
| Total Income tax expense | $ | 16,830 | | | $ | 17,004 | | | $ | 25,324 | |
|
| | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, |
| | 2017 | | 2016 | | 2015 |
| Current tax expense: | | | | | |
| Federal | $ | 15,060 |
| | $ | 16,677 |
| | $ | 22,265 |
|
| State | 3,244 |
| | 3,829 |
| | 4,632 |
|
| Deferred tax expense (1) | 12,505 |
| | 2,676 |
| | 1,951 |
|
| Total Income tax expense | $ | 30,809 |
| | $ | 23,182 |
| | $ | 28,848 |
|
(1) IncludesThe TCJA was enacted in December 2017, which reduced the impactU.S. federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018. As a result, we revalued our net deferred income tax assets and recorded $3.6 million of TCJA.additional Income tax expense for continuing operations in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2017.
The provision for income taxes from continuing operations shown above varied from the statutory federal income tax rate for those periods as follows:
| | | | | | | | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Federal income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income taxes, net of Federal tax effect | 5.8 | | | 6.1 | | | 4.4 | |
| Non-deductible compensation and meals and entertainment | 1.6 | | | 1.7 | | | 0.8 | |
| Tax credits | (2.1) | | | (2.5) | | | (1.9) | |
| Tax benefit from restricted stock vesting | (1.6) | | | (0.8) | | | (1.2) | |
| Valuation allowance on foreign tax credit | — | | | — | | | 2.5 | |
| Enactment of TCJA | — | | | — | | | 5.4 | |
| Other | (1.1) | | | (0.4) | | | 1.1 | |
| Effective tax rate | 23.6 | % | | 25.1 | % | | 46.1 | % |
|
| | | | | | | | |
| | YEARS ENDED DECEMBER 31, |
| | 2017 | | 2016 | | 2015 |
| Federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of Federal tax effect | 3.8 |
| | 6.8 |
| | 6.1 |
|
| Non-deductible compensation and meals and entertainment | 0.7 |
| | 1.2 |
| | 0.7 |
|
| Tax credits | (2.2 | ) | | (2.1 | ) | | (1.0 | ) |
| Valuation allowance on foreign tax credit | 2.5 |
| | — |
| | — |
|
| Enactment of TCJA | 9.1 |
| | — |
| | — |
|
| Other | (0.8 | ) | | 0.5 |
| | (0.5 | ) |
| Effective tax rate | 48.1 | % | | 41.4 | % | | 40.3 | % |
The 2019 effective tax rate was favorably impacted primarily by a greater tax benefit from the vesting of restricted stock. The 2018 effective tax rate was favorably impacted by the TCJA. The 2017 effective tax rate was unfavorably impacted due to the revaluation of our net deferred tax assets as a result of TCJA. The 2016Refer to Note 2 - "Discontinued Operations" for further discussion of the effective tax rate was unfavorably impacted by certain one-time non-cash adjustments. The 2015 effective tax rate was unfavorably impacted by a change infor the overall mixGS segment.
Deferred tax assets and liabilities are composed of the following (in thousands):
| | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Deferred tax assets: | | | | Deferred tax assets: | |
| Accounts receivable reserves | $ | 611 |
| | $ | 812 |
| Accounts receivable reserves | $ | 542 | | | $ | 738 | |
| Accrued liabilities | 1,953 |
| | 3,400 |
| Accrued liabilities | 1,161 | | | 1,274 | |
| Deferred compensation obligation | 5,423 |
| | 9,206 |
| Deferred compensation obligation | 4,715 | | | 5,545 | |
| Stock-based compensation | 598 |
| | 2,196 |
| Stock-based compensation | 739 | | | 723 | |
| Operating lease liabilities | | Operating lease liabilities | 5,497 | | | — | |
| Pension and post-retirement benefit plans | 3,767 |
| | 6,029 |
| Pension and post-retirement benefit plans | 3,745 | | | 3,471 | |
| Goodwill and intangible assets | 526 |
| | 3,869 |
| |
| | Foreign tax credit | 1,632 |
| | — |
| Foreign tax credit | — | | | 1,630 | |
| Other | 289 |
| | 230 |
| Other | 160 | | | 224 | |
| Deferred tax assets | 14,799 |
| | 25,742 |
| Deferred tax assets | 16,559 | | | 13,605 | |
| Deferred tax liabilities: | | | | Deferred tax liabilities: | |
| Prepaid expenses | (251 | ) | | (260 | ) | Prepaid expenses | (459) | | | (159) | |
| Fixed assets | (1,482 | ) | | (1,593 | ) | Fixed assets | (965) | | | (1,174) | |
| Goodwill | | Goodwill | (1,889) | | | (3,123) | |
| ROU assets for operating leases | | ROU assets for operating leases | (4,767) | | | — | |
| Other | (17 | ) | | (355 | ) | Other | (328) | | | (255) | |
| Deferred tax liabilities | (1,750 | ) | | (2,208 | ) | Deferred tax liabilities | (8,408) | | | (4,711) | |
| Valuation allowance | (1,733 | ) | | (85 | ) | Valuation allowance | (114) | | | (1,747) | |
| Deferred tax assets, net | $ | 11,316 |
| | $ | 23,449 |
| |
| Total Deferred tax assets, net | | Total Deferred tax assets, net | $ | 8,037 | | | $ | 7,147 | |
At December 31, 2017,2019, Kforce had approximately $6.1$1.0 million of state tax net operating losses (“NOLs”) which will be carried forward to be offset against future state taxable income. The state tax NOLs expire in varying amounts through 2033.2038.
In evaluating the realizability of Kforce’s deferred tax assets, management assesses whether it is more likely than not that some portion, or all, of the deferred tax assets, will be realized. Management considers, among other things, the ability to generate future taxable income (including reversals of deferred tax liabilities) during the periods in which the related temporary differences will become deductible. The increase invaluation allowance, as of December 31, 2018, includes a foreign tax credit. In 2019, management elected to treat foreign taxes paid as a deduction on our tax return and, accordingly, reversed the deferred tax asset and corresponding valuation allowance during the year ended December 31, 2017 was related to the foreign tax credit, which we expect may not be realizable as a result of reduction in our foreign income.2019.
Kforce is periodically subject to IRS audits, as well as state and other local income tax audits for various tax years. During 20172018, the IRS commenced an audit for the tax year ended December 31, 2016. In 2019, the auditor notified the Company that a no-change report was submitted and 2016, there were no on-goingwe are waiting for the IRS examinations.to finalize the audit. Although Kforce has not experienced any material liabilities in the past due to income tax audits, Kforce can make no assurances concerning any future income tax audits.
Uncertain Income Tax Positions
The following table presents a reconciliation of the beginning and ending balance of unrecognized tax benefits for the years ended (in thousands): | | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Unrecognized tax benefits, beginning | $ | 1,115 |
| | $ | 788 |
| | $ | 278 |
| Unrecognized tax benefits, beginning | $ | 906 | | | $ | 1,127 | | | $ | 1,115 | |
| Additions for prior year tax positions | 50 |
| | 454 |
| | 625 |
| Additions for prior year tax positions | — | | | 41 | | | 50 | |
| Additions for current year tax positions | 29 |
| | — |
| | — |
| Additions for current year tax positions | — | | | — | | | 29 | |
| Lapse of statute of limitations | | Lapse of statute of limitations | (497) | | | (248) | | | (67) | |
| Reductions for tax positions of prior years | — |
| | (25 | ) | | (8 | ) | Reductions for tax positions of prior years | — | | | (14) | | | — | |
| Lapse of statute of limitations | (67 | ) | | (102 | ) | | (25 | ) | |
| Settlements | — |
| | — |
| | (82 | ) | Settlements | (26) | | | — | | | — | |
| Unrecognized tax benefits, ending | $ | 1,127 |
| | $ | 1,115 |
| | $ | 788 |
| Unrecognized tax benefits, ending | $ | 383 | | | $ | 906 | | | $ | 1,127 | |
As of December 31, 2017,2019, the amount of unrecognized tax benefit that would impact the effective tax rate, if recognized, is $0.7$0.4 million. Kforce does not expect any significant changes to its uncertain tax positions in the next 12 months.
Kforce and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. Kforce Global Solutions, Inc. files income tax returns in the Philippines. With a few exceptions, Kforce is no longer subject to federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2014.2016.
4. Goodwill7. Other Assets, Net
Other assets, net consisted of the following (in thousands):
| | | | | | | | | | | |
| DECEMBER 31, | | |
| 2019 | | 2018 |
| Assets held in Rabbi Trust | $ | 35,413 | | | | $ | 29,134 | |
| ROU assets for operating leases, net | 18,344 | | | | — | |
| Equity method investment | 8,169 | | | | — | |
Capitalized software, net (1) | 8,759 | | | | 4,828 | |
| Deferred loan costs, net | 855 | | | | 1,182 | |
| Interest rate swap derivative instrument | — | | | | 900 | |
| Other non-current assets | 1,298 | | | | 620 | |
| Total Other assets, net | $ | 72,838 | | | $ | 36,664 | |
(1) Accumulated amortization of capitalized software was $34.2 million and Other Intangible Assets$34.1 million as of December 31, 2019 and 2018, respectively.
8. Goodwill
The following table presents the gross amount and accumulated impairment losses for each of our reporting units as of December 31, 2017, 20162019, 2018 and 20152017 (in thousands):
| | | | Technology | | Finance and
Accounting | | Government
Solutions | | Total | | Technology | | Finance and
Accounting | | Total |
| Goodwill, gross amount | $ | 156,391 |
| | $ | 19,766 |
| | $ | 104,596 |
| | $ | 280,753 |
| Goodwill, gross amount | $ | 156,391 | | | $ | 19,766 | | | $ | 176,157 | |
| Accumulated impairment losses | (139,357 | ) | | (11,760 | ) | | (83,668 | ) | | (234,785 | ) | Accumulated impairment losses | (139,357) | | | (11,760) | | | (151,117) | |
| Goodwill, carrying value | $ | 17,034 |
| | $ | 8,006 |
| | $ | 20,928 |
| | $ | 45,968 |
| Goodwill, carrying value | $ | 17,034 | | | $ | 8,006 | | | $ | 25,040 | |
There was no0 impairment expense related to goodwill for each of the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
Throughout 2017,2019, we considered the qualitative and quantitative factors associated with each of our reporting units and determined that there was no indication that the carrying values of any of our reporting units were likely impaired.
Management performed its annual impairment assessment of the carrying value of goodwill as of December 31, 2019 and 2018. For each of our reporting units, we assessed qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the reporting units was less than its carrying amount. Based on the qualitative assessments, management determined that it was not more likely than not that the fair values of the reporting units were less than the carrying values at December 31, 2019 and 2018. A deterioration in any of the assumptions could result in an impairment charge in the future.
Kforce performed a quantitative analysis for each reporting unit and compared the carrying value of Tech, FA and GSfor each to the respective estimated fair values as of December 31, 2017. Discounted cash flows, which serve as the primary basis for the income approach, were based on a discrete financial forecast developed by management. Cash flows beyond the discrete forecast period of five years were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends and also considered long-term earnings growth rates for publicly-traded peer companies, as well as the risk-free rate of return. The market approach consistconsists of: (1) the guideline company method and (2) the guideline transaction method. The guideline company method applies pricing multiples derived from publicly-traded guideline companies that are comparable to the reporting unit to determine its value. The guideline transaction method applies pricing multiples derived from recently completed acquisitions that we believe are reasonably comparable to the reporting unit to determine fair value. Kforce concluded there were no indications of impairment for its reporting units duringfor the December 31, 2017 annual impairment tests.
As of December 31, 2016 and 2015, for our GS reporting unit, we performed a quantitative analysis and compared the carrying value to the estimated fair value, using a similar approach as described above noting no indications of impairment. As of December 31, 2016 and 2015, for our Tech and FA reporting units, we assessed qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the reporting units was less than its carrying amount. We concluded that it was more likely than not that the fair value of the reporting units were more than its carrying amount.
Other Intangible Assets
Our other intangible assets balance includes an indefinite-lived trademark of $2.2 million as of December 31, 2017 and 2016 and is recorded in Intangible assets, net in the accompanying Consolidated Balance Sheets. As of December 31, 2017 and 2016, our definite-lived intangible assets balance of $1.1 million and $1.4 million, respectively, included accumulated amortization of $27.5 million and $27.2 million, respectively. There was no impairment expense related to our other intangible assets during the yearsyear ended December 31, 2017, 2016 and 2015.2017.
5. Accounts Payable and Other Accrued
9. Current Liabilities
Accounts payable and other accruedThe following table provides information on certain current liabilities consisted of the following (in thousands):
| | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Accounts payable | $ | 21,591 |
| | $ | 20,321 |
| Accounts payable | $ | 20,267 | | | $ | 18,793 | |
| Accrued liabilities | 13,282 |
| | 16,909 |
| Accrued liabilities | 12,965 | | | 13,749 | |
| Total Accounts payable and other accrued liabilities | $ | 34,873 |
| | $ | 37,230 |
| Total Accounts payable and other accrued liabilities | $ | 33,232 | | | $ | 32,542 | |
| | | |
| Payroll and benefits | | Payroll and benefits | $ | 38,035 | | | $ | 34,768 | |
| Payroll taxes | | Payroll taxes | 992 | | | 920 | |
| Health insurance liabilities | | Health insurance liabilities | 3,907 | | | 2,680 | |
| Workers’ compensation liabilities | | Workers’ compensation liabilities | 1,067 | | | 1,016 | |
| Total Accrued payroll costs | | Total Accrued payroll costs | $ | 44,001 | | | $ | 39,384 | |
Our accounts payable balance includes trade creditorvendor and independent contractor payables. Our accrued liabilities balance includes the current portion of our deferred compensation plans liability, accruedcontract liabilities from contracts with customers (such as customer rebatesrebates), and other accrued liabilities.
6. Accrued Payroll Costs10. Other Long-Term Liabilities
Accrued payroll costsOther long-term liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| DECEMBER 31, | | |
| 2019 | | 2018 |
| Deferred compensation plan | $ | 30,361 | | | | $ | 25,672 | |
| Supplemental executive retirement plan | 18,080 | | | | 15,035 | |
| Operating lease liabilities | 14,627 | | | | — | |
| Interest rate swap derivative instrument | 179 | | | | — | |
| Other long-term liabilities | 651 | | | | 4,161 | |
| Total Other long-term liabilities | $ | 63,898 | | | | $ | 44,868 | |
11. Operating Leases
The following table presents weighted-average terms for our operating leases for the year ended December 31, 2019 (in thousands):
| | | | | |
| |
| Weighted-average discount rate | 3.8 | % |
| Weighted-average remaining lease term | 4.5 years |
The following table presents operating lease expense included in SG&A for the year ended December 31, 2019 (in thousands):
| | | | | | | | | | | |
| Lease Cost | | | |
| Operating lease expense | | | $ | 6,847 | |
| Variable lease costs | | | 1,689 | |
| Short-term lease expense | | | 792 | |
| Sublease income | | | (445) | |
| Total operating lease expense | | | $ | 8,883 | |
|
| | | | | | | |
| | DECEMBER 31, |
| | 2017 | | 2016 |
| Payroll and benefits | $ | 37,788 |
| | $ | 37,409 |
|
| Payroll taxes | 5,270 |
| | 2,640 |
|
| Health insurance liabilities | 2,596 |
| | 2,790 |
|
| Workers’ compensation liabilities | 1,232 |
| | 1,298 |
|
| Total Accrued payroll costs | $ | 46,886 |
| | $ | 44,137 |
|
| | | | | | | | |
| 2020 | | | $ | 6,338 | |
| 2021 | | | 4,999 | |
| 2022 | | | 3,304 | |
| 2023 | | | 2,925 | |
| 2024 | | | 2,012 | |
| Thereafter | | | 2,595 | |
| Total maturities of operating lease liabilities | | | 22,173 | |
| Less: imputed interest | | | 1,861 | |
| Total operating lease liabilities | | | $ | 20,312 | |
7.The following table presents the expected future contractual operating lease obligations as of December 31, 2018 in accordance with the previous guidance (in thousands):
| | | | | | | | |
| 2019 | | | $ | 6,994 | |
| 2020 | | | 6,177 | |
| 2021 | | | 3,731 | |
| 2022 | | | 2,142 | |
| 2023 | | | 1,745 | |
| Thereafter | | | 1,199 | |
| Total future contractual operating lease obligations | | | $ | 21,988 | |
12. Employee Benefit Plans
401(k) Savings Plans
The Firm maintains various qualified defined contribution 401(k) retirement savings plans for eligible employees. Assets of these plans are held in trust for the sole benefit of employees and/or their beneficiaries. Employer matching contributions are discretionary and are funded annually as approved by Kforce’sthe Board.
Kforce accrued matching 401(k) contributions for continuing operations of $1.6$1.4 million and $1.5 million as of December 31, 20172019 and 2016, respectively. The plans held a combined 167 thousand and 201 thousand shares of Kforce’s common stock as of December 31, 2017 and 2016,2018, respectively.
Employee Stock Purchase Plan
Kforce’s employee stock purchase plan allows all eligible employees to enroll each quarter to purchase Kforce’s common stock at a 5% discount from its market price on the last day of the quarter. Kforce issued 2517 thousand, 3419 thousand, and 2625 thousand shares of common stock at an average purchase price of $20.65, $19.37,$32.79, $28.93, and $22.61$20.65 per share during the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. All shares purchased under the employee stock purchase plan were settled using Kforce’s treasury stock.
Deferred Compensation Plans
The Firm maintains various non-qualified deferred compensation plans, pursuant to which eligible management and highly compensated key employees, as defined by IRS regulations, may elect to defer all or part of their compensation to later years. These amounts are classified in Accounts payable and other accrued liabilities if payable within the next year or in Other long-term liabilities if payable after the next year, upon retirement or termination of employment in the accompanying Consolidated Balance Sheets. At December 31, 20172019 and 2016,2018, amounts related to the deferred compensation plans included in Accounts payable and other accrued liabilities related to the deferred compensation plans totaled $2.9were $3.6 million and $2.7$1.3 million, respectively. Amountsrespectively, and $30.4 million and $25.7 million was included in Other long-term liabilities related to the deferred compensation plans totaled $28.9 million and $27.5 million as ofat December 31, 20172019 and 2016, respectively.2018, respectively, in the Consolidated Balance Sheets. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, we recognized compensation expense for continuing operations for the plans of $722 thousand, $881 thousand$0.4 million, $0.8 million and $401 thousand,$0.6 million, respectively.
Kforce maintains a Rabbi Trust and holds life insurance policies on certain individuals to assist in the funding of the deferred compensation liability. If necessary, employee distributions are funded through proceeds from the sale of assets held within ourthe Rabbi Trust. The balance of the assets held within the Rabbi Trust, including the cash surrender value of the Company-owned life insurance policies, was $31.4$35.4 million and $27.3$29.1 million as of December 31, 20172019 and 2016,2018, respectively, and is recorded in Other assets, net in the accompanying Consolidated Balance Sheets. As of December 31, 2017,2019, the life insurance policies had a cumulative face value of $213.1 million. Kforce had no realized gains or losses attributable to investments in trading securities for the years ended December 31, 2017, 2016 and 2015.
Supplemental Executive Retirement Plan
Kforce maintains a SERP for the benefit of certaintwo executive officers. The primary goals of the SERP are to create an additional wealth accumulation opportunity, restore lost qualified pension benefits due to government limitations and retain our covered executive officers. The SERP is a non-qualified benefit plan and does not include elective deferrals of covered executive officers’ compensation.
Normal retirement age under the SERP is defined as age 65; however, certain conditions allow for early retirement as early as age 55 or upon a change in control. Vesting underBoth participants are fully vested in accordance with the plan is defined as 100% upon a participant’s attainment of age 55 and 10 years of service and 0% prior to a participant’s attainment of age 55 and 10 years of service. Full vesting also occurs if a participant with five years or more of service is involuntarily terminated by Kforce without cause or upon death, disability or a change in control.provisions. The SERP will be funded entirely by Kforce, and benefits are taxable to the covered executive officer upon receipt and will be deductible by Kforce when paid. Benefits payable under the SERP upon the occurrence of a qualifying distribution event, as defined, are targeted at 45% of the covered executive officers’ average salary and bonus, as defined, from the three years in which the covered executive officer earned the highest salary and bonus during the last 10 years of employment, which is subject to adjustment for retirement prior to the normal retirement age and the participant’s vesting percentage. The benefits under the SERP are reduced for a participant that has not reached age 62 with 10 years of service or age 55 with 25 years of service with a percentage reduction up to the normal retirement age.
Benefits under the SERP are based on the lump sum present value but may be paid over the life of the covered executive officer or 10-year annuity, as elected by the covered executive officer upon commencement of participation in the SERP. None of the benefits earned pursuant to the SERP are attributable to services provided prior to the effective date of the plan. For purposes of the measurement of the benefit obligation as of December 31, 2017,2019, Kforce has assumed that allboth participants will elect to take the lump sum present value option based on historical trends.
Actuarial Assumptions
Due to the SERP being unfunded as of December 31, 20172019 and 2016,2018, it is not necessary for Kforce to determine the expected long-term rate of return on plan assets. The following table presents the weighted averageweighted-average actuarial assumptions used to determine the actuarial present value of projected benefit obligations at:
| | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Discount rate | 3.25 | % | | 4.00 | % | Discount rate | 2.75 | % | | 4.00 | % |
| Rate of future compensation increase | 2.90 | % | | 3.60 | % | Rate of future compensation increase | 2.90 | % | | 2.90 | % |
The following table presents the weighted averageweighted-average actuarial assumptions used to determine net periodic benefit cost for the years ended:
| | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Discount rate | 4.00 | % | | 4.00 | % | | 3.75 | % | Discount rate | 4.00 | % | | 3.25 | % | | 4.00 | % |
| Rate of future compensation increase | 3.60 | % | | 4.00 | % | | 4.00 | % | Rate of future compensation increase | 2.90 | % | | 2.90 | % | | 3.60 | % |
The discount rate was determined using the Moody’s Aa long-term corporate bond yield as of the measurement date with a maturity commensurate with the expected payout of the SERP obligation. This rate is also compared against the Citigroup Pension Discount Curve and Liability Index to ensure the rate used is reasonable and may be adjusted accordingly. This index is widely used by companies throughout the U.S. and is considered to be one of the preferred standards for establishing a discount rate.
The assumed rate of future compensation increases is based on a combination of factors, including the historical compensation increases for its covered executive officers and future target compensation levels for its covered executive officers, taking into account the covered executive officers’ assumed retirement date.
The periodic benefit cost is based on actuarial assumptions that are reviewed on an annual basis; however, Kforcemanagement monitors these assumptions on a periodic basis to ensure that they accurately reflect current expectations of the cost of providing retirement benefits.
Net Periodic Benefit Cost
The following table presents the components of net periodic benefit cost for the years ended (in thousands):
| | | | | | | | | | | | | | | | | |
| | DECEMBER 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Service cost | $ | 261 | | | $ | 1,353 | | | $ | 319 | |
| Interest cost | 601 | | | 468 | | | 537 | |
| Net periodic benefit cost | $ | 862 | | | $ | 1,821 | | | $ | 856 | |
The service cost is recorded in SG&A and the interest cost is recorded in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.
|
| | | | | | | | | | | |
| | DECEMBER 31, |
| | 2017 | | 2016 | | 2015 |
| Service cost | $ | 319 |
| | $ | 1,310 |
| | $ | 1,323 |
|
| Interest cost | 537 |
| | 453 |
| | 383 |
|
| Net periodic benefit cost | $ | 856 |
| | $ | 1,763 |
| | $ | 1,706 |
|
Changes in Benefit Obligation
The following table presents the changes in the projected benefit obligation for the years ended (in thousands):
| | | | DECEMBER 31, | | DECEMBER 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Projected benefit obligation, beginning | $ | 13,436 |
| | $ | 11,337 |
| Projected benefit obligation, beginning | $ | 15,035 | | | $ | 14,409 | |
| Service cost | 319 |
| | 1,310 |
| Service cost | 261 | | | 1,353 | |
| Interest cost | 537 |
| | 453 |
| Interest cost | 601 | | | 468 | |
| Actuarial experience and changes in actuarial assumptions | 117 |
| | 336 |
| Actuarial experience and changes in actuarial assumptions | 2,183 | | | (1,195) | |
| Projected benefit obligation, ending | $ | 14,409 |
| | $ | 13,436 |
| Projected benefit obligation, ending | $ | 18,080 | | | $ | 15,035 | |
There were no0 payments made under the SERP during the years ended December 31, 20172019 and 2016,2018, respectively. The projected benefit obligation is recorded in Other long-term liabilities in the accompanying Consolidated Balance Sheets. The accumulated benefit obligation is the actuarial present value of all benefits attributed to past service, excluding future salary increases. The accumulated benefit obligation as of December 31, 20172019 and 20162018 was $14.3$18.1 million and $12.7$15.0 million, respectively.
Contributions
There is no requirement for Kforce to fund the SERP and, as a result, no0 contributions have been made to the SERP through the year ended December 31, 2017.2019. Kforce does not0t currently anticipate funding the SERP during the year ending December 31, 2018.2020.
Estimated Future Benefit Payments
Undiscounted projected benefit payments byattributed to the SERP, which reflect the anticipated future service of participants, are expected to be paid are as follows during the years ended December 31 (in thousands):
| | | | | |
| | Projected Annual
Benefit Payments |
| 2020 | $ | — | |
| 2021 | 14,347 | |
| 2022 | — | |
| 2023 | — | |
| 2024 | — | |
| 2025-2030 | 8,944 | |
| |
The estimated future benefit amounts and timing of these payments were determined using assumed retirement dates for the participants, among other assumptions, as of December 31, 2019; however, no specific plans or timelines have been established for or by these participants and the assumptions are subject to change, which could impact the future amounts and timing of payments.
|
| | | |
| | PROJECTED ANNUAL
BENEFIT PAYMENTS |
| 2018 | $ | — |
|
| 2019 | — |
|
| 2020 | — |
|
| 2021 | 12,788 |
|
| 2022 | — |
|
| 2023-2027 | — |
|
| Thereafter | 4,282 |
|
8.13. Credit Facility
On May 25, 2017, the Firm entered into a credit agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank of America, N.A., as syndication agent, Regions Bank and BMO Harris Bank, N.A., as co-documentation agents, and the lenders referred to therein (the “Credit Facility”). In connection with entering into the Credit Facility, the Firm satisfied and terminated its previous credit facility in its entirety.therein. Under the Credit Facility, the Firm will havehas a maximum borrowing capacity of $300.0 million, which may, subject to certain conditions and the participation of the lenders, be increased up to an aggregate additional amount of $150.0 million, (the “Commitment”), which will beis available to the Firm in the form of revolving credit loans, swingline loans, and letters of credit. Letters of credit and swingline loans under the Credit Facility are subject to sublimits of $10.0 million. The maturity date of the Credit Facility is May 25, 2022. Borrowings under the Credit Facility are secured by substantially all of the tangible and intangible assets of the Firm, excluding the Firm’s corporate headquarters and certain other designated executed collateral.
Revolving credit loans under the Credit Facility will bearbears interest at a rate equal to: (a) the Base Rate (as described below) plus the Applicable Margin (as described below); or (b) the LIBOR Rate plus the Applicable Margin. Swingline loans under the Credit Facility will bearbears interest at a rate equal to the Base Rate plus the Applicable Margin. The Base Rate is the highest of: (i) the Wells Fargo Bank, National Association prime rate; (ii) the federal funds rate plus 0.50%; or (iii) one-month LIBOR plus 1.00%, and the LIBOR Rate is reserve-adjusted LIBOR for the applicable interest period, but not less than zero. The Applicable Margin is based on the Firm’s total leverage ratio. The Applicable Margin for Base Rate loans ranges from 0.25% to 0.75% and the Applicable Margin for LIBOR Rate loans ranges from 1.25% to 1.75%. The Firm will pay a quarterly non-refundable commitment fee equal to the Applicable Margin on the average daily unused portion of the Commitment (swingline loans do not constitute usage for this purpose). The Applicable Margin for the commitment fee is based on the Firm’s total leverage ratio and ranges between 0.20% and 0.35%.
The Firm will continually beis subject to certain affirmative and negative covenants including (but not limited to), the maintenance of a fixed charge coverage ratio of no less than 1.25 to 1.00 and the maintenance of a total leverage ratio of no greater than 3.25 to 1.00. The numerator in the fixed charge coverage ratio is defined pursuant to the Credit Facility as earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense and other permitted items pursuant to our Credit Facility, (disclosed as “Consolidated EBITDA”), less cash paid for capital expenditures, income taxes and dividends. The denominator is defined as Kforce’s fixed charges such as interest expense and principal payments paid or payable on outstanding debt other than borrowings under the Credit Facility. The total leverage ratio is defined pursuant to the Credit Facility as total indebtedness divided by Consolidated EBITDA. Our ability to make distributions or repurchases of equity securities could be limited if an event of default has occurred. Furthermore, our ability to repurchase equity securities could be limited if: (a) the total leverage ratio is greater than 2.75 to 1.00; and (b) the Firm’s availability, inclusive of unrestricted cash, is less than $25.0 million. At December 31, 2017,2019, Kforce was not limited in making distributions and executing repurchases of itsour equity securities.
As of December 31, 2017, $116.52019 and 2018, $65.0 million and $71.8 million was outstanding and $180.3 million was available underon the Credit Facility, subject to the covenants described above.respectively. Kforce hashad $3.4 million and $3.2 million of outstanding letters of credit at December 31, 20172019 and 2018, respectively, which pursuant to the Credit Facility, reducereduces the availability. As of December 31, 2016, $111.5 million was outstanding under the previous credit facility.
9.14. Derivative Instrument and Hedging Activity
Kforce is exposed to interest rate risk as a result of our corporate borrowing activities. The Firm uses an interest rate swap derivative as a risk management tool to mitigate the potential impact of rising interest rate riskrates on our financial results.variable rate debt.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. The Swap was effective on May 31, 2017 and matures on April 29, 2022. The Swap rate is 1.81%, which is added to our interest rate margin to determine the fixed rate that the Firm will pay to the counterparty during the term of the Swap based on the notional amount of the Swap. The effective date of the Swap is May 31, 2017 and the maturity date is April 29, 2022. The notional amount of the Swap is $65.0 million, for the first three years and decreaseswhich will decrease to $25.0 million for years four and five. The Swap is recorded in Other long-term liabilities within the accompanying Consolidated Balance Sheets.at May 2020 through maturity.
The Swap has been designated as a cash flow hedge and was effective as of December 31, 2017.2019. The change in the fair value of the Swap wasis recorded as a component of Accumulated other comprehensive (loss) income (loss), net of tax, in the Consolidated Statements of Operations and Comprehensive Income. As ofconsolidated financial statements.
The following table sets forth the activity in the accumulated derivative instrument gain (loss) for the year ended December 31, 2017, the fair value of the Swap was a $0.5 million asset.2019 (in thousands):
| | | | | |
| Accumulated derivative instrument gain, beginning of year | $ | 900 | |
| Net change associated with current period hedging transactions | (1,079) | |
| |
| Accumulated derivative instrument loss, end of year | $ | (179) | |
10.
15. Fair Value Measurements
Kforce’s interest rate swapThe Swap is measured at fair value using readily observable inputs, such as the LIBOR interest rate. The inputs used to calculate the fair value of the Swap derivative instrumentrate, which are considered to be Level 2 inputs. The Swap is recorded in Other assets, net within the accompanying Consolidated Balance Sheets. Refer to Note 914 - “Derivative Instrument and Hedging Activity” in the Notes to the Consolidated Financial Statements, included in this report for a complete discussion of the Firm’s derivative instrument.
Kforce has a contingent consideration liability related to a non-significant acquisition of a business within our GS reporting segment, which is measured on a recurring basis and is recorded at fair value, determined using the discounted cash flow method. The inputs used to calculate the fair value of the contingent consideration liability are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. An increase in future cash flows may result in a higher estimated fair value while a decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liability. Remeasurements to fair value are recorded in Other expense, net within the Consolidated Statements of Operations and Comprehensive Income. For the years ended December 31, 2017 and 2016, approximately $565 thousand and $42 thousand of income, respectively, was recognized due to the remeasurement of our contingent consideration liability. The contingent consideration liability is recorded in Other long-term liabilities within the Consolidated Balance Sheets and the estimated fair value as of December 31, 2017 and 2016 was $191 thousand and $756 thousand, respectively.
Certain assets, in specific circumstances, are measured at fair value on a non-recurring basis utilizing Level 3 inputs such as goodwill, other intangiblelong-lived assets and other long-lived assets.the equity method investment. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets were determined to be impaired.
The following table sets forth by level, within the fair value hierarchy, estimated fair values as ofon a recurring basis at December 31, 20172019 and 20162018 were as follows (in thousands):
| | | Assets/(Liabilities) Measured at Fair Value: | Asset/(Liability) | | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) | Assets/(Liabilities) Measured at Fair Value: | Asset/(Liability) | | Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| As of December 31, 2017 | | | | | | | | |
| At December 31, 2019 | | At December 31, 2019 | |
| Recurring basis: | | | | | | | | Recurring basis: | |
| Interest rate swap derivative instrument | $ | 479 |
| | $ | — |
| | $ | 479 |
| | $ | — |
| Interest rate swap derivative instrument | $ | (179) | | | $ | — | | | $ | (179) | | | $ | — | |
| Contingent consideration liability | $ | (191 | ) | | $ | — |
| | $ | — |
| | $ | (191 | ) | |
| As of December 31, 2016 | | | | | | | | |
| At December 31, 2018 | | At December 31, 2018 | |
| Recurring basis: | | | | | | | | Recurring basis: | |
| Contingent consideration liability | $ | (756 | ) | | $ | — |
| | $ | — |
| | $ | (756 | ) | |
| Interest rate swap derivative instrument | | Interest rate swap derivative instrument | $ | 900 | | | $ | — | | | $ | 900 | | | $ | — | |
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the years ended December 31, 20172019 and 2016.2018.
11.
16. Stock Incentive Plans
On April 18, 2017,23, 2019, the Kforce shareholders approved the 20172019 Stock Incentive Plan (“2017(the “2019 Plan”). The 20172019 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock awards (including restricted stock awards (“RSAs”) and restricted stock units (“RSUs”)) and other stock-based awards. The aggregate number of shares of common stock that are subject to awards under the 20172019 Plan is approximately 3.02.8 million shares. The 20172019 Plan terminates on April 18, 2027.23, 2029. Prior to the effective date of the 20172019 Plan, the Company granted stock awards to eligible participants under our 2017 Stock Incentive Plan, 2016 Stock Incentive Plan 2013 Stock Incentive Plan and 20062013 Stock Incentive Plan (collectively the “Prior Plans”). NoAs of the effective date of the 2019 Plan, no additional awards may be granted pursuant to the Prior Plans; however, awards outstanding as of the effective date will continue to vest in accordance with the terms of the Prior Plans.
During the years ended December 31, 2017, 20162019, 2018 and 2015, Kforce recognized total2017, stock-based compensation expense of $7.6from continuing operations was $9.8 million, $6.7$8.5 million, and $5.8$7.4 million, respectively. The related tax benefit for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $3.0$2.3 million, $2.8$2.1 million, and $2.3$2.9 million, respectively.
Restricted Stock
Restricted stock (including RSAs and RSUs) are granted to executives and management either: (1) for awards related to Kforce’s annual long-term incentive (“LTI”) compensation program, or (2) as part of a compensation package and in order to retain directors, executives and management. The LTI award amounts are generally based on total shareholder return performance goals, which are established by Kforce’s Compensation Committee during the first quarter of the year of performance.goals. The LTI restricted stock granted during the year ended December 31, 20172019, will vest ratably over a period between three to five years, with equal vesting annually.four years. Other restricted stock granted during the year ended December 31, 20172019, will vest ratably over a period of between one to ten years, with equal vesting annually.years.
RSAs contain the same voting rights as other common stock as well as the right to forfeitable dividends in the form of additional RSAs at the same rate as the cash dividend on common stock and containing the same vesting provisions as the underlying award. RSUs contain no voting rights, but have the right to forfeitable dividend equivalents in the form of additional RSUs at the same rate as the cash dividend on common stock and containing the same vesting provisions as the underlying award. The distribution of shares of common stock for each RSU, pursuant to the terms of the Kforce Inc. Director’s Restricted Stock Unit Deferral Plan, can be deferred to a date later than the vesting date if an appropriate election was made. In the event of such deferral, vested RSUs have the right to dividend equivalents.
The following table presents the restricted stock activity for the yearsyear ended December 31, 2017, 2016 and 20152019 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Number of
Restricted Stock | | Weighted-Average
Grant Date
Fair Value | | Total Intrinsic
Value of Restricted
Stock Vested |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Outstanding at December 31, 2018 (1) | 1,320 | | | $ | 24.94 | | | |
| Granted | 399 | | | $ | 38.37 | | | |
| Forfeited/Canceled | (53) | | | $ | 24.68 | | | |
Vested(2) | (486) | | | $ | 24.89 | | | $ | 18,813 | |
| Outstanding at December 31, 2019 | 1,180 | | | $ | 29.51 | | | |
|
| | | | | | | | | | |
| | Number of Restricted Stock | | Weighted Average
Grant Date
Fair Value | | Total Intrinsic
Value of Restricted
Stock Vested |
| Outstanding as of December 31, 2014 | 982 |
| | $ | 18.55 |
| | |
| Granted | 556 |
| | $ | 24.01 |
| | |
| Forfeited/Canceled | (59 | ) | | $ | 19.37 |
| | |
| Vested | (186 | ) | | $ | 18.28 |
| | $ | 4,580 |
|
| Outstanding as of December 31, 2015 | 1,293 |
| | $ | 20.89 |
| | |
| Granted (1) | 1,048 |
| | $ | 22.46 |
| | |
| Forfeited/Canceled | (353 | ) | | $ | 21.04 |
| | |
| Vested | (280 | ) | | $ | 20.67 |
| | $ | 6,434 |
|
| Outstanding as of December 31, 2016 | 1,708 |
| | $ | 21.86 |
| | |
| Granted | 427 |
| | $ | 24.03 |
| | |
| Forfeited/Canceled | (206 | ) | | $ | 21.70 |
| | |
| Vested (2) | (574 | ) | | $ | 21.60 |
| | $ | 13,668 |
|
| Outstanding as of December 31, 2017 | 1,355 |
| | $ | 22.67 |
| | |
| |
(1) | The increase in shares granted during the year ended December 31, 2016 was due to a change in the grant date practice for our annual LTI awards. Kforce has historically granted these annual awards on the first business day of the year following the end of the performance period; however, for the performance period ending December 31, 2016 and thereafter, the grant date was shifted to the last day of the performance period. This administrative change resulted in two annual grants being made during the year ended December 31, 2016 (a grant on January 4, 2016 for the performance period ending December 31, 2015 and a grant on December 31, 2016 for the performance period ending December 31, 2016). |
| |
(2) | The increase in shares vested during the year ended December 31, 2017 was due to a shift in the vesting date of our outstanding annual LTI awards from January 2, 2018 and January 4, 2018 to December 31, 2017 as a tax planning strategy. |
(2) The increase in shares vested during the year ended December 31, 2019, was due to the acceleration of stock-based compensation expense for KGS management triggered by a change in control of KGS.
The weighted-average grant date fair value of restricted stock granted was $38.37, $29.72 and $24.03 during the years ended December 31, 2019, 2018 and 2017, respectively. The total intrinsic value of restricted stock vested was $18.8 million, $11.9 million and $13.7 million during the years ended December 31, 2019, 2018 and 2017, respectively.
The fair market value of restricted stock is determined based on the closing stock price of Kforce’s common stock at the date of grant, and is amortized on a straight-line basis over the requisite service period.
As of December 31, 2017,2019, total unrecognized stock-based compensation expense related to restricted stock was $27.6$32.0 million, which will be recognized over a weighted averageweighted-average remaining period of 4.33.5 years.
12.17. Commitments and Contingencies
Lease Commitments
Kforce leases office space and operating assets under operating and capital leases expiring at various dates, with some leases cancelable upon 30 to 90 days’ notice and with some leases containing escalation in rent clauses. In addition to rental payments, certain leases require payments for taxes, insurance and maintenance costs.
Future minimum lease payments, inclusive of accelerated lease payments, under non-cancelable capital and operating leases are summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Capital leases | | | | | | | | | | | | | |
| Present value of payments | $ | 1,140 |
| | $ | 334 |
| | $ | 115 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 1,594 |
|
| Interest | 219 |
| | 140 |
| | 5 |
| | — |
| | — |
| | — |
| | 364 |
|
| Total Capital lease payments | $ | 1,359 |
| | $ | 474 |
| | $ | 120 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 1,958 |
|
| Operating leases | | | | | | | | | | | | | |
| Facilities | $ | 9,331 |
| | $ | 7,642 |
| | $ | 4,764 |
| | $ | 1,937 |
| | $ | 772 |
| | $ | 1,447 |
| | $ | 25,893 |
|
| Furniture and equipment | 7 |
| | 7 |
| | 7 |
| | 7 |
| | 7 |
| | — |
| | 35 |
|
| Total Operating lease payments | $ | 9,338 |
| | $ | 7,649 |
| | $ | 4,771 |
| | $ | 1,944 |
| | $ | 779 |
| | $ | 1,447 |
| | $ | 25,928 |
|
| Total Lease payments | $ | 10,697 |
| | $ | 8,123 |
| | $ | 4,891 |
| | $ | 1,949 |
| | $ | 779 |
| | $ | 1,447 |
| | $ | 27,886 |
|
The present value of the minimum lease payments for capital lease obligations has been classified in Other current liabilities and Long-term debt – other in the accompanying Consolidated Balance Sheets, according to their respective maturities. Rental expense under operating leases was $7.7 million, $7.7 million and $6.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Purchase Commitments
Kforce has various commitments to purchase goods and services in the ordinary course of business. These commitments are primarily related to software and online application licenses and hosting. As of December 31, 2017,2019, these purchase commitments amounted to approximately $14.5$10.5 million and are expected to be paid as follows: $8.6$7.3 million in 2018; $4.52020; $3.0 million in 2019;2021 and $1.4$0.2 million in 2020.2022.
Letters of Credit
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2017,2019, Kforce had letters of credit outstanding for workers’ compensationoperating lease and other insurance coverage totaling $2.9 million, and for facility lease deposits totaling $0.3$3.4 million.
Litigation
We are involved in legal proceedings, claims and administrative matters that arise in the ordinary course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our financial position, results of operations or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our financial position, results of operations or cash flows. Kforce maintains liability insurance in amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that Kforce insures against are workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, cyber liability, employment practices liability and fidelity losses. There can be no assurance that Kforce’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities. Accordingly, we disclose matters below for which a material loss is reasonably possible.
On August 25, 2016,23, 2019, Kforce Flexible Solutions LLC (along with co-defendant BMO Harris Bank)Inc. was served with a complaint, as amended, brought in the Northern District of Illinois, U.S. District Court, EasternMiddle District of Illinois; ShepardFlorida, Tampa Division. Maurcus Smith, Alvin Hodge and David Kortright, et al. v. BMO Harris Bank N.A. et al.Kforce Inc., Case No.: 1:16-cv-08288.8:19-cv-02068-CEH-CPT. The plaintiff purportsplaintiffs purport to bring claims on hertheir own behalf and on behalf of a putative class of telephone-dedicated workersconsumers/applicants who were the subject of consumer reports used for employment purposes for alleged violations of the Fair Labor StandardsCredit Reporting Act the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Actof 1970, as amended, (“FCRA”), 15 U.S.C. § 1681 et seq. based upon the defendants’defendant’s purported failure to pay herprovide stand-alone FCRA disclosures and obtain valid authorizations. The plaintiffs seek statutory damages, punitive damages, costs, attorney’s fees and other class members all earned regular and overtime pay for all time worked. More specifically,relief under the plaintiff alleges that class employees were required to perform unpaid work before and after the start and end times of their shifts. She seeks unpaid back regular and overtime wages, liquidated damages, statutory penalties, and attorney fees and costs.FCRA. On February 15, 2018,10, 2020, the judge granted final approvalparties reached a preliminary settlement of the parties’ agreed resolution andcase, which is subject to approval by the caseCourt, however, there can be no assurance that the Court will be dismissed following implementation ofapprove the parties’preliminary settlement. ThisWe believe that this matter was resolved without anyis unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On December 17, 2019, Kforce Inc., et al. was served with a complaint brought in Superior Court of the State of California, Alameda County. Kathleen Wahrer, et al. v. Kforce Inc., et al., Case No.: RG19047269. The former employee purports to bring a representative action on her own behalf and on behalf of other current and former aggrieved employees pursuant to Private Attorneys General Act (“PAGA”) alleging violations of the California Labor Code (“Labor Code”). The purported Labor Code violations include failure to provide and pay proper wages for meal and rest periods, failure to properly calculate and pay minimum and overtime wages, failure to provide compliant wage statements, failure to timely pay wages during employment and upon termination, and failure to reimburse business expenses. The plaintiff seeks civil penalties, interest, attorneys’ fees and costs under the Labor Code. At this stage in the litigation it is not feasible to predict the outcome of this matter or reasonably estimate a range of loss, should a loss occur, from this proceeding.
Employment Agreements
Kforce has entered into employment agreements with certain executives that provide for minimum compensation, salary and continuation of certain benefits for a six-monthsix-month to a three-yearthree-year period after their employment ends under certain circumstances. Certain of the agreements also provide for a severance payment ofranging from one to three times annual salary and one-half to three times average annual bonus if such an agreement is terminated without good cause by Kforce or for good reason by the executive. These agreements containexecutive subject to certain post-employment restrictive covenants. Kforce’s liability atAt December 31, 20172019, our liability would be approximately $32.7$39.4 million if, following a change in control, all of the executives under contract were terminated without good cause by the employer or if the executives resigned for good reason and $12.7$16.5 million if, in the absence of a change in control, all of the executives under contract were terminated by Kforce without good cause or if the executives resigned for good reason. As of December 31, 2017, approximately $0.6 million of severance was accrued for two former executives.
13. Reportable Segments18. Quarterly Financial Data (Unaudited)
Kforce’s reportable segments are as follows: (1) Tech; (2) FA; and (3) GS. This determination is supported by, among other factors: the nature of the segment’s operations,Our quarterly operating results are regularly reviewedaffected by the Firm’s chief operating decision maker (“CODM”),number of billing days in a particular quarter, the seasonality of our clients’ businesses and discrete financial information is presentedincreased holiday and vacation days taken. In addition, we typically experience an increase in costs in the first quarter of each fiscal year as a result of certain U.S. state and federal employment tax resets, which negatively impacts our gross profit and overall profitability. The results of operations for any interim period may be impacted by these factors and are not necessarily indicative of, nor comparable to, Kforce’s Board and our CODM. Kforce also reports Flex and Direct Hire revenues separately by segment, which has been incorporated into the table below.
Historically, our Tech segment has included the results of operations for Global, a wholly-owned subsidiary located in Manila, Philippines. During the year ended December 31, 2017, Kforce completed the sale of Global’s assets. This sale did not meet the definition of discontinued operations. Kforce recorded a $3.3 million gain on sale of Global’s assets, which was recorded in Selling, general and administrative expenses within the accompanying Consolidated Statements of Operations and Comprehensive Income.
Historically, and for the year ended December 31, 2017, Kforce has generated only sales and gross profit information on a segment basis. We do not report total assets or income from continuing operations separately by segment as our operations are largely combined.
The following table provides information concerning the operations of our segments for the years ended December 31 (in thousands):full year.
|
| | | | | | | | | | | | | | | |
| | Tech | | FA | | GS | | Total |
| 2017 | | | | | | | |
| Net service revenues | | | | | | | |
| Flex revenues | $ | 887,675 |
| | $ | 318,294 |
| | $ | 104,294 |
| | $ | 1,310,263 |
|
| Direct Hire revenues | 19,836 |
| | 27,841 |
| | — |
| | 47,677 |
|
| Total Net service revenues | $ | 907,511 |
| | $ | 346,135 |
| | $ | 104,294 |
| | $ | 1,357,940 |
|
| Gross profit | $ | 257,118 |
| | $ | 118,479 |
| | $ | 32,459 |
| | $ | 408,056 |
|
| Operating expenses | | | | | | | 343,962 |
|
| Income before income taxes | | | | | | | $ | 64,094 |
|
| 2016 | | | | | | | |
| Net service revenues | | | | | | | |
| Flex revenues | $ | 863,434 |
| | $ | 307,245 |
| | $ | 98,628 |
| | $ | 1,269,307 |
|
| Direct Hire revenues | 20,043 |
| | 30,356 |
| | — |
| | 50,399 |
|
| Total Net service revenues | $ | 883,477 |
| | $ | 337,601 |
| | $ | 98,628 |
| | $ | 1,319,706 |
|
| Gross profit | $ | 255,842 |
| | $ | 120,551 |
| | $ | 32,106 |
| | $ | 408,499 |
|
| Operating expenses | | | | | | | 352,544 |
|
| Income before income taxes | | | | | | | $ | 55,955 |
|
| 2015 | | | | | | | |
| Net service revenues | | | | | | | |
| Flex revenues | $ | 873,609 |
| | $ | 294,186 |
| | $ | 97,372 |
| | $ | 1,265,167 |
|
| Direct Hire revenues | 22,333 |
| | 31,738 |
| | — |
| | 54,071 |
|
| Total Net service revenues | $ | 895,942 |
| | $ | 325,924 |
| | $ | 97,372 |
| | $ | 1,319,238 |
|
| Gross profit | $ | 261,721 |
| | $ | 119,036 |
| | $ | 33,357 |
| | $ | 414,114 |
|
| Operating expenses | | | | | | | 342,442 |
|
| Income before income taxes | | | | | | | $ | 71,672 |
|
14. Quarterly Financial Data (Unaudited)
The following table provides quarterly information for the years ended December 31, 20172019 and 20162018 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | | | | |
| | MARCH 31 | | JUNE 30 | | SEPTEMBER 30 | | DECEMBER 31 |
| 2019 | | | | | | | |
| Revenue | $ | 326,738 | | | $ | 338,861 | | | $ | 345,558 | | | $ | 336,230 | |
| Gross profit | 93,176 | | | 101,026 | | | 102,811 | | | 98,025 | |
| Income from continuing operations | 7,974 | | | | 16,076 | | | | 15,907 | | | 14,609 | |
| Income (loss) from discontinued operations, net of tax | 18,881 | | | | 58,783 | | | | (967) | | | (401) | |
| Net income | $ | 26,855 | | | $ | 74,859 | | | $ | 14,940 | | | $ | 14,208 | |
| | | | | | | |
| Earnings per share – basic, continuing operations | $ | 0.33 | | | $ | 0.67 | | | $ | 0.70 | | | $ | 0.68 | |
| Earnings per share – diluted, continuing operations | $ | 0.32 | | | $ | 0.66 | | | $ | 0.68 | | | $ | 0.66 | |
| Earnings per share-basic | $ | 1.10 | | | $ | 3.13 | | | $ | 0.66 | | | $ | 0.66 | |
| Earnings per share-diluted | $ | 1.07 | | | $ | 3.06 | | | $ | 0.64 | | | $ | 0.64 | |
| 2018 | | | | | | | |
| Revenue | $ | 317,441 | | | $ | 329,535 | | | $ | 326,584 | | | $ | 330,377 | |
| Gross profit | 92,509 | | | 100,220 | | | 96,045 | | | 97,713 | |
| Income from continuing operations | 7,957 | | | 15,173 | | | 14,156 | | | 13,590 | |
| Income from discontinued operations, net of tax | 1,218 | | | 1,099 | | | 2,021 | | | 2,766 | |
| Net income | $ | 9,175 | | | $ | 16,272 | | | $ | 16,177 | | | $ | 16,356 | |
| | | | | | | |
| Earnings per share – basic, continuing operations | $ | 0.32 | | | $ | 0.61 | | | $ | 0.57 | | | $ | 0.55 | |
| Earnings per share – diluted, continuing operations | $ | 0.32 | | | $ | 0.60 | | | $ | 0.56 | | | $ | 0.54 | |
| Earnings per share-basic | $ | 0.37 | | | $ | 0.66 | | | $ | 0.65 | | | $ | 0.66 | |
| Earnings per share-diluted | $ | 0.37 | | | $ | 0.65 | | | $ | 0.64 | | | $ | 0.65 | |
During the second quarter of 2019, in connection with the disposition of the GS segment, income from discontinued operations included a gain on the sale of discontinued operations, net of transactions costs, of $80.0 million. There were post-closing working capital adjustments included in the loss from discontinued operations during the third and fourth quarter of 2019 of $0.4 million and $0.3 million, respectively. Refer to Note 2 - “Discontinued Operations” for a more detailed discussion.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| 2017 | | | | | | | |
| Net service revenues | $ | 333,992 |
| | $ | 340,309 |
| | $ | 341,053 |
| | $ | 342,586 |
|
| Gross profit | 97,135 |
| | 103,919 |
| | 104,375 |
| | 102,627 |
|
| Net income | 5,902 |
| | 11,144 |
| | 10,099 |
| | 6,140 |
|
| Earnings per share-basic | $ | 0.23 |
| | $ | 0.44 |
| | $ | 0.40 |
| | $ | 0.25 |
|
| Earnings per share-diluted | $ | 0.23 |
| | $ | 0.44 |
| | $ | 0.40 |
| | $ | 0.24 |
|
| 2016 | | | | | | | |
| Net service revenues | $ | 322,201 |
| | $ | 335,047 |
| | $ | 336,460 |
| | $ | 325,998 |
|
| Gross profit | 97,189 |
| | 106,282 |
| | 105,380 |
| | 99,648 |
|
| Net income | 3,650 |
| | 10,864 |
| | 9,020 |
| | 9,239 |
|
| Earnings per share-basic | $ | 0.14 |
| | $ | 0.41 |
| | $ | 0.35 |
| | $ | 0.36 |
|
| Earnings per share-diluted | $ | 0.14 |
| | $ | 0.41 |
| | $ | 0.34 |
| | $ | 0.36 |
|
15. Supplemental Cash Flow Information
Supplemental cash flow information is as follows for the years ended December 31 (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Cash paid during the year for: | | | | | |
| Income taxes, net | $ | 24,330 |
| | $ | 21,324 |
| | $ | 25,395 |
|
| Interest, net | $ | 3,518 |
| | $ | 2,101 |
| | $ | 1,609 |
|
| Non-Cash Financing and Investing Transactions: | | | | | |
| Receivable for sale of Global's assets | $ | 1,979 |
| | $ | — |
| | $ | — |
|
| Equipment acquired under capital leases | $ | 937 |
| | $ | 1,153 |
| | $ | 1,470 |
|
| Unsettled repurchases of common stock | $ | 898 |
| | $ | 935 |
| | $ | 1,012 |
|
| Employee stock purchase plan | $ | 522 |
| | $ | 669 |
| | $ | 578 |
|
| Shares tendered in payment of exercise price of stock options | $ | — |
| | $ | 63 |
| | $ | — |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act (the “Evaluation”), as of the end of the period covered by this report, under the supervision and with the participation of our CEO and CFO, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”). Based on the Evaluation, our CEO and CFO concluded that the design and operation of our Disclosure Controls were effective as of December 31, 20172019 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and formsforms; and (2) accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There has not been any change in our internal controls over financial reporting identified in connection with the Evaluation thatwhich occurred during the quarter ended December 31, 20172019 that has materially affected, or is reasonably likely to materially affect, those controls.
Inherent Limitations of Internal Control Over Financial Reporting
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.
CEO and CFO Certifications
Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item of this report, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
Management Report on Internal Control Over Financial Reporting
The management of Kforce is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. Kforce’s internal control system was designed to provide reasonable assurance to Kforce’s management and the Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of the CEO and the CFO, Kforce’s management assessed the effectiveness of Kforce’s internal control over financial reporting as of December 31, 2017.2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on our assessment we believe that, as of December 31, 2017,2019, Kforce’s internal control over financial reporting is effective based on those criteria.
Kforce’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our internal control over financial reporting, which is presented in Item 8. Financial Statements and Supplementary Data.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVESEXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 relating to our directors, executive officers and corporate governance is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of December 31, 2017.2019.
Our Commitment to Integrity applies to all of our directors, officers and employees, as well as consultants, agents and other representatives retained by Kforce and is publicly available on our website at www.kforce.com. Any amendments to, or waiver from, any provision of our Commitment to Integrity will be posted on our website at the above address.
ITEM 11. EXECUTIVE COMPENSATION.COMPENSATION.
The information required by Item 11 relating to executive compensation is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of December 31, 2017.2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 relating to security ownership of certain beneficial owners and management, securities authorized for issuance under equity compensation plans and related stockholders matters is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of December 31, 2017.2019.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by Item 13 relating to certain relationships and related transactions, and director independence is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of December 31, 2017.2019.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.SERVICES.
The information required by Item 14 relating to principal accounting fees and services is incorporated herein by reference to our definitive proxy statement for the 20182020 Annual Meeting of Shareholders, to be filed with the SEC within 120 days of December 31, 2017.2019.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| |
(a) | The following documents are filed as part of this Report: |
a.The following documents are filed as part of this Report:
1. Financial Statements. The list of consolidated financial statements, and related notes thereto, along with the independent auditors’ report are set forth in Part IV of this report in the Index to Consolidated Financial Statements and Schedule presented below.
2. Consolidated Financial Statement Schedule. The consolidated financial statement schedule of Kforce is included in Part IV of this report on the page indicated by the Index to Consolidated Financial Statements and Schedule presented below. This financial statement schedule should be read in conjunction with the consolidated financial statements and related notes thereto of Kforce.
Schedules not listed in the Index to Consolidated Financial Statements and Schedule have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
3. Exhibits. See Item 15(b) below.
| |
(b) | Exhibits. The exhibits listed on the Exhibit Index are incorporated by reference into this Item 15(b) and are a part of this report.
|
b.Exhibits. The exhibits listed on the Exhibit Index are incorporated by reference into this Item 15(b) and are a part of this report.
KFORCE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
| | | | |
| |
| |
| Consolidated Financial Statements: | |
| |
| |
| |
| |
| |
| |
| Consolidated Financial Statement Schedule: | |
| |
SCHEDULE II
KFORCE INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SUPPLEMENTAL SCHEDULE
(IN THOUSANDS)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| COLUMN A | COLUMN B | | | | COLUMN C | | | | COLUMN D | | COLUMN E |
| DESCRIPTION | BALANCE AT
BEGINNING OF PERIOD | | | | CHARGED TO
COSTS AND
EXPENSES | | CHARGED
TO OTHER
ACCOUNTS | | DEDUCTIONS | | BALANCE AT
END OF
PERIOD |
Accounts receivable reserves (1) | 2017 | | $ | 2,066 | | | 1,155 | | | (91) | | | (797) | | | $ | 2,333 | |
| 2018 | | $ | 1,858 | | | 1,874 | | | — | | | (932) | | | $ | 2,800 | |
| 2019 | | $ | 2,800 | | | 1,255 | | | — | | | (1,977) | | | $ | 2,078 | |
| Deferred tax assets valuation allowance | 2017 | | $ | 85 | | | 1,648 | | | — | | | — | | | $ | 1,733 | |
| 2018 | | $ | 1,733 | | | 14 | | | — | | | — | | | $ | 1,747 | |
| 2019 | | $ | 1,747 | | | — | | | — | | | (1,633) | | | $ | 114 | |
(1) The beginning balance for 2018 was adjusted by $475 thousand due to the adoption of the revenue recognition accounting standard and the reclassification of the Direct Hire fallouts as a contract liability effective January 1, 2018.
|
| | | | | | | | | | | | | | | | | | |
| COLUMN A | COLUMN B | | COLUMN C | | COLUMN D | | COLUMN E |
| DESCRIPTION | BALANCE AT
BEGINNING OF PERIOD | | CHARGED TO
COSTS AND
EXPENSES | | CHARGED
TO OTHER
ACCOUNTS (1) | | DEDUCTIONS (2) | | BALANCE AT
END OF
PERIOD |
| Accounts receivable reserves | 2015 | | $ | 2,040 |
| | 1,653 |
| | 1 |
| | (1,573 | ) | | $ | 2,121 |
|
| | 2016 | | $ | 2,121 |
| | 795 |
| | 39 |
| | (889 | ) | | $ | 2,066 |
|
| | 2017 | | $ | 2,066 |
| | 1,155 |
| | (91 | ) | | (797 | ) | | $ | 2,333 |
|
| |
(1) | Charged to other accounts includes the provision for fallouts of Direct Hire placements that has been deducted from net service revenues in the accompanying Consolidated Statements of Operations and Comprehensive Income. |
| |
(2) | Deductions include write-offs of uncollectible accounts receivable and fallouts of Direct Hire placements that have been charged against the allowance for doubtful accounts, fallouts and other accounts receivables reserves. |
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
EXHIBIT INDEX
| | | | | | | | |
Exhibit
Number | | Description |
| | |
Exhibit
Number
3.1 | | Description |
| |
3.1 | | Amended and Restated Articles of Incorporation, incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 33-91738) filed with the SEC on April 28, 1995. |
| | |
| | Articles of Amendment to Articles of Incorporation, incorporated by reference to the Registrant’s Registration Statement on Form S-4/A (File No. 333-111566) filed with the SEC on February 9, 2004, as amended. |
| | |
| | Articles of Amendment to Articles of Incorporation, incorporated by reference to the Registrant’s Registration Statement on Form S-4/A (File No. 333-111566) filed with the SEC on February 9, 2004, as amended. |
| | |
| | Articles of Amendment to Articles of Incorporation, incorporated by reference to the Registrant’s Registration Statement on Form S-4/A (File No. 333-111566) filed with the SEC on February 9, 2004, as amended. |
| | |
| | Articles of Amendment to Articles of Incorporation, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on May 17, 2000. |
| | |
| | Articles of Amendment to Articles of Incorporation, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on March 29, 2002. |
| | |
| | Amended & Restated Bylaws, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on April 29, 2013. |
| | |
| | Form of Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 (File No. 333-158086) filed with the SEC on March 18, 2009. |
| | |
| | Description of the Company's Common Stock, par value $0.01 per share, filed electronically herewith. |
| | |
| | Credit Agreement, dated May 25, 2017, between Kforce Inc. and its subsidiaries and Wells Fargo Bank, N.A. and the other lenders thereto, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on May 25, 2017. |
| | | |
| | First Amendment and Consent, dated February 28, 2019, between Kforce Inc. and its subsidiaries, Wells Fargo Bank, National Association, and the other lenders thereto, incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on May 2, 2019. |
| | |
| | Stock Purchase Agreement, dated February 28, 2019, by and among ManTech International Corporation, Kforce Government Solutions, Inc., Kforce Government Holdings, Inc., and Kforce, Inc., incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on May 2, 2019. |
| | |
| | Amendment No. 1 to the Stock Purchase Agreement, dated March 29, 2019, by and among ManTech International Corporation, Kforce Government Solutions, Inc., Kforce Government Holdings, Inc., and Kforce, Inc., incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on May 2, 2019. |
| | |
| | Employment Agreement, dated as of December 31, 2006, between the Registrant and David L. Dunkel, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on January 8, 2007. |
| | |
| | Amendment to Employment Agreement, dated as of December 24, 2008, between Kforce Inc. and David L. Dunkel, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on December 29, 2008. |
| | |
| | Employment Agreement, dated as of December 31, 2006, between the Registrant and Joseph J. Liberatore, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on January 8, 2007. |
| | |
| | Amendment to Employment Agreement, dated as of December 24, 2008, between Kforce Inc. and Joseph J. Liberatore, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on December 29, 2008. |
| | |
| | Employment Agreement, dated as of July 1, 2003, between the Registrant and Howard Sutter, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on March 11, 2009. |
| | |
| | Amendment to Employment Agreement, dated as of December 30, 2008, between Kforce Inc. and Howard Sutter, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on March 11, 2009. |
| | |
| | Kforce Inc. 2006 Stock Incentive Plan, incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-168529) filed with the SEC on August 4, 2010. |
| | |
| | Kforce Inc. 2013 Stock Incentive Plan, incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-188631) filed with the SEC on May 15, 2013. |
| |
|
| | |
Exhibit
| | DescriptionForm of Restricted Stock Award Agreement under the 2013 Stock Incentive Plan, incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on October 30, 2013. |
| | | | | | | | |
Exhibit
Number | | Description |
| | |
| | Kforce Inc. 2016 Stock Incentive Plan, incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-211008) filed with the SEC on April 29, 2016. |
| | |
| | Form of Restricted Stock Award Agreement under the 2016 Stock Incentive Plan, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on February 23, 2018. |
| | |
| | Kforce Inc. 2017 Stock Incentive Plan, incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 000-26058) filed with the SEC on April 28, 2017. |
| | |
| | Form of Restricted Stock Award Agreement under the 20062017 Stock Incentive Plan, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on March 4, 2011.February 23, 2018. |
| | |
| | Form of Restricted Stock Award Agreement under the 2016 Stock Incentive Plan, filed electronically herewith.
|
| |
| | Amended and Restated Employment Agreement, dated as of January 1, 2013, between Kforce Inc. and David M. Kelly, incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26058) filed with the SEC on January 3, 2013. |
| | |
| | Form of Restricted Stock Award Agreement under the 2013 Stock Incentive Plan, incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on October 30, 2013. |
| | |
| | Amended and Restated Kforce Inc. Directors’ Restricted Stock Unit Deferral Plan, dated November 15, 2017, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed electronically herewith.
with the SEC on February 23, 2018. |
| | |
| | Amended and Restated Employment Agreement, dated as of January 1, 2013, between Kforce Inc. and Kye L. Mitchell, incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26058) filed with the SEC on November 2, 2016. |
| | |
| | Amended and Restated Employment Agreement, dated as of January 1, 2013, between Kforce Inc. and Peter M. Alonso,Andrew G. Thomas, incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26058) filed with the SEC on February 24, 2017.22, 2019. |
| | |
| | Amendment to Amended and Restated Employment Agreement, dated February 20, 2017, between Kforce Inc. and Peter M. Alonso,2019 Stock Incentive Plan, incorporated by reference to the Registrant’s AnnualRegistration Statement on Form S-8 (File No. 333-231073) filed with the SEC on April 26, 2019. |
| | |
| | Form of Restricted Stock Award Agreement under the 2019 Stock Incentive Plan incorporated by reference to the Registrant’s Quarterly Report on Form 10-K10-Q (File No. 000-26058) filed with the SEC on February 24, 2017.May 2, 2019. |
| | |
| | Employment Agreement, dated February 8, 2016, between Kforce Inc. and Robert W. Edmund, filed electronically herewith.
List of Subsidiaries. |
| | |
| | Form of Restricted Stock Award Agreement under the 2017 Stock Incentive Plan, filed electronically herewith.
|
| | |
| | List of Subsidiaries. |
| |
| | Consent of Deloitte & Touche LLP. |
| | |
| | Certification by the Chief Executive Officer of Kforce Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification by the Chief Financial Officer of Kforce Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification by the Chief Executive Officer of Kforce Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification by the Chief Financial Officer of Kforce Inc. pursuant to 18 U.S.C. Section 2350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 101.1 | | The following financial statements from the Company’s annual report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and Schedule listed in Part IV, Item 15 of this Form 10-Kdetail. |
| | |
| 104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are formatted in XBRL.embedded within the Inline XBRL document. |
| | | | | |
| * | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | | | | |
| | | | KFORCE INC. | | |
| | | | | | |
| | | | KFORCE INC. |
| | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ DAVID L. DUNKEL |
| | | | | | David L. Dunkel |
| | | | | | Chairman of the Board,
Chief Executive Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ DAVID L. DUNKEL |
| | | | | | David L. Dunkel |
| | | | | | Chairman of the Board,
Chief Executive Officer and Director
|
| | | | | | (Principal Executive Officer) |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ DAVID M. KELLY |
| | | | | | David M. Kelly |
| | | | | | SeniorExecutive Vice President and Chief Financial Officer |
| | | | | | (Principal Financial Officer) |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ JEFFREY B. HACKMAN |
| | | | | | Jeffrey B. Hackman |
| | | | | | Senior Vice President, Finance and Accounting |
| | | | | | (Principal Accounting Officer) |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ JOHN N. ALLRED |
| | | | | | John N. Allred |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ RICHARD M. COCCHIARO |
| | | | | | Richard M. Cocchiaro |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ ANN E. DUNWOODY |
| | | | | | Ann E. Dunwoody |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ MARK F. FURLONG |
| | | | | | Mark F. Furlong |
| | | | | | Director |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ RANDALL A. MEHL |
| | | | | | Randall A. Mehl |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ ELAINE D. ROSEN |
| | | | | | Elaine D. Rosen |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ N. JOHN SIMMONS |
| | | | | | N. John Simmons |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ RALPH E. STRUZZIERO |
| | | | | | Ralph E. Struzziero |
| | | | | | Director |
| | | | | | |
Date: February 23, 201821, 2020 | | | | By: | | /s/ HOWARD W. SUTTER |
| | | | | | Howard W. Sutter |
| | | | | | Vice Chairman and Director |
| | | |
Date: February 23, 2018 | | | | By: | | /s/ A. GORDON TUNSTALL |
| | | | | | A. Gordon Tunstall |
| | | | | | Director |
