WASHINGTON, D.C. 20549
Kforce Inc.
KFORCE INC.
References in this document to the “Registrant,” “Kforce,” the “Company,” “we,” the “Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.
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.
ITEM 1. FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 1 - “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of the 20202021 Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnotes normally required by GAAP for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although management believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 20202021 Annual Report on Form 10-K. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 20202021, was derived from our audited Consolidated Balance Sheet as of December 31, 2020,2021, as presented in our 20202021 Annual Report on Form 10-K.
Our quarterly operating results are affected by the number of billing days in a particular quarter, the seasonality of our clients’ businesses and increased holiday and vacation days taken. In addition, we typically experience higher costs in the first quarter of each fiscal year as a result of certain U.S. state and federal employment tax resets, which adversely affects our gross profit and overall profitability. The impactprofitability relative to the remainder of the COVID-19 pandemic on our business was somewhat unpredictable in 2020, but based on our current assessment, we do not expect any material impact on our long-term strategic plans, operations and liquidity due to COVID-19. However, we continue to assess the effect on our operations by monitoring the spread of COVID-19 (and associated variants) and the actions implemented to combat the virus as reported in the official agency reports.fiscal year. As such, the results of operations for any interim period may be impacted by these factors, among others, and are not necessarily indicative of, nor comparable to, the results of operations for a full year.
The unaudited condensed consolidated financial statements include the accounts of Kforce Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “Kforce,” the “Company,” “we,” the “Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context indicates otherwise.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical of these estimates and assumptions relate to the following: allowance for credit losses; income taxes; self-insured liabilities for health insurance; and the impairment of goodwill, other long-lived assets and the equity method investment. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates. The severity, magnitude and duration, as well asIn addition, the potential economic consequences of the COVID-19 pandemic, inflationary pressures, and supply constraints, among others, have been and may continue to be uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions might change materially in future periods in response to the COVID-19 pandemic.periods.
Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss per participant for each health insurance claim up to $600 thousand in claims annually. Additionally, for all claim amounts exceeding $600 thousand, Kforce retains the risk of loss up to an aggregate annual loss of those claims of $200 thousand. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and incurred but not reported claims, which are primarily based upon an evaluation of historical claims experience, completion factors determined by an actuary and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.
Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding (“WASO”) during the period. WASO excludes unvested shares of restricted stock. Diluted earnings per share is computed by dividing net income by diluted WASO. Diluted WASO includes the dilutive effect of potentially dilutive securities such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
The allowance for credit losses on trade receivables is determined based on a number of factors such as recent and historical write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of trade receivables among clients and the current state of the U.S. economy. As part of our analysis, we apply credit loss rates to outstanding receivables by aging category. For certain clients, we perform a quarterly credit review, which considers the client’s credit rating and financial position as well as our total credit loss exposure. Trade receivables are written off after all reasonable collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received and are immaterial for the three and nine months ended September 30, 2021.2022.
The allowances on trade receivables presented in the Unaudited Condensed Consolidated Balance Sheets include $0.6 million and $0.4$0.6 million at September 30, 20212022 and December 31, 2020,2021, respectively, for reserves unrelated to credit losses.
Note E - Sale of Corporate Headquarters
On May 19, 2021, Kforce completed the sale of its corporate headquarters, which had a net book value of $21.7 million, to an independent third party. Kforce received net proceeds of $23.7 million and recognized a gain on the sale in the amount of $2.0 million, which is recorded in SG&A expenses.
Note F - Other Assets, NetNet
Other assets, net consisted of the following (in thousands): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| Assets held in Rabbi Trust | Assets held in Rabbi Trust | $ | 39,418 | | | $ | 36,164 | | Assets held in Rabbi Trust | $ | 30,199 | | | $ | 41,607 | |
| Right-of-use assets for operating leases, net | Right-of-use assets for operating leases, net | 16,351 | | | 16,835 | | Right-of-use assets for operating leases, net | 10,331 | | | 15,395 | |
| Capitalized software, net (1) | Capitalized software, net (1) | 15,243 | | | 12,802 | | Capitalized software, net (1) | 16,404 | | | 14,666 | |
| Equity method investment (2) | Equity method investment (2) | 15,779 | | | 10,488 | | Equity method investment (2) | 14,772 | | | 17,008 | |
| Deferred loan costs, net | Deferred loan costs, net | 236 | | | 501 | | Deferred loan costs, net | 939 | | | 1,115 | |
| | Notes receivable (3) | | Notes receivable (3) | 4,500 | | | — | |
| Other non-current assets | Other non-current assets | 1,038 | | | 785 | | Other non-current assets | 4,613 | | | 2,838 | |
| Total Other assets, net | Total Other assets, net | $ | 88,065 | | | $ | 77,575 | | Total Other assets, net | $ | 81,758 | | | $ | 92,629 | |
(1) Accumulated amortization of capitalized software was $35.2$36.3 million and $34.0$35.5 million as of September 30, 20212022 and December 31, 2020,2021, respectively.
(2) In June 2019, Kforce entered into a joint venture resulting in a 50% noncontrolling interest in WorkLLama, LLC (“WorkLLama”), which is accounted for as an equity method investment. The loss on this WorkLLama investment was $0.7$0.9 million and $1.7$2.7 million for the three months and nine months ended September 30, 2021,2022, respectively. In addition, Kforce contributed $7.0$0.5 million and $4.0$9.0 million of capital during the nine months ended September 30, 20212022 and the year ended December 31, 2020,2021, respectively. Refer to Note ML - “Commitments and Contingencies” for more information on contingencies related to WorkLLama.
(3) In the three months ended June 30, 2022, Kforce loaned WorkLLama LLC $2.0 million, pursuant to a secured promissory note. In the three months ended September 30, 2022, Kforce amended the secured promissory note and increased the total amount available to loan to WorkLLama by an additional $4.0 million, of which an additional $2.5 million was extended, resulting in an outstanding balance of $4.5 million at September 30, 2022. All of the notes have the same terms, bearing interest at 7% annually with principal and accrued interest payable in a single payment in June 2025.
Note GF - Current Liabilities
The following table provides information on certain current liabilities (in thousands): | | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| Accounts payable and other accrued liabilities: | Accounts payable and other accrued liabilities: | | Accounts payable and other accrued liabilities: | |
| Accounts payable | Accounts payable | $ | 41,836 | | | $ | 20,177 | | Accounts payable | $ | 52,032 | | | $ | 40,241 | |
| Accrued liabilities | Accrued liabilities | 36,147 | | | 15,356 | | Accrued liabilities | 20,998 | | | 41,167 | |
| Total Accounts payable and other accrued liabilities | Total Accounts payable and other accrued liabilities | $ | 77,983 | | | $ | 35,533 | | Total Accounts payable and other accrued liabilities | $ | 73,030 | | | $ | 81,408 | |
| Accrued payroll costs: | Accrued payroll costs: | | Accrued payroll costs: | |
| Payroll and benefits | Payroll and benefits | $ | 60,402 | | | $ | 38,257 | | Payroll and benefits | $ | 54,470 | | | $ | 43,738 | |
| Payroll taxes | Payroll taxes | 7,623 | | | 21,842 | | Payroll taxes | 22,432 | | | 22,466 | |
| Health insurance liabilities | Health insurance liabilities | 4,184 | | | 4,641 | | Health insurance liabilities | 3,895 | | | 4,474 | |
| Workers’ compensation liabilities | Workers’ compensation liabilities | 797 | | | 1,109 | | Workers’ compensation liabilities | 822 | | | 746 | |
| Total Accrued payroll costs | Total Accrued payroll costs | $ | 73,006 | | | $ | 65,849 | | Total Accrued payroll costs | $ | 81,619 | | | $ | 71,424 | |
Our accounts payable balance includes vendor and independent contractorthird party payables. Our accrued liabilities balance includes the current portion of theour deferred compensation plans liability, obligations related to the supplemental executive retirement plan,contract liabilities from contracts with customers (such as customer rebates) and, other accrued liabilities and amounts owed under the Supplemental Executive Retirement Plan (‘SERP ”). Effective April 30, 2021, Kforce’s Board of Directors irrevocably terminated the SERP. The benefits owed to the two participants under the SERP, as of June 30, 2022 and December 31, 2021, was $20.0 million in the aggregate. In July 2022, the amount owed was fully paid thereby reducing accrued liabilities and relieving us of any future obligation related to the SERP.
Our payroll taxes as of September 30, 2022 and December 31, 2021 include approximately $19.3 million in payroll tax payments as a result of the application of the CARES Act 2020, which is anticipated to be repaid no later than December 31, 2022.
Note G - Credit Facility
On October 20, 2021, the Firm entered into an amended and restated 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, BMO Harris Bank, N.A., as documentation agent, and the lenders referred to therein (the “Amended and Restated Credit Facility”). Under the Amended and Restated Credit Facility, the Firm has a maximum borrowing capacity of $200.0 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 maturity date of the Amended and Restated Credit Facility is October 20, 2026.
In May 2022, the Firm repaid the outstanding balance of $100.0 million in connection with the termination of its Swap B (as defined in Note J - “Derivative Instruments and Hedging Activity” to these financial statements) with a notional amount of $100.0 million. As of September 30, 2022 and December 31, 2021, $0 and $100.0 million was outstanding under the Amended and Restated Credit Facility.
Note H - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands): | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| Deferred compensation plan | $ | 38,749 | | | $ | 34,501 | |
| Supplemental executive retirement plan (1) | — | | | 20,628 | |
| Operating lease liabilities | 12,712 | | | 14,692 | |
| Interest rate swap derivative instruments | 296 | | | 1,774 | |
| Other long-term liabilities (2) | 19,321 | | | 19,353 | |
| Total Other long-term liabilities | $ | 71,078 | | | $ | 90,948 | |
(1) The Company terminated its supplemental executive retirement plan on April 30, 2021 and expects to pay out the obligation in July 2022. The obligation, as of September 30, 2021, is included as part of Accrued liabilities under Current Liabilities in Note G - Current Liabilities, above.
(2) As a result of the application of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), we have approximately $19.3 million in payroll tax deferrals recorded within Other long-term liabilities as of September 30, 2021 and December 31, 2020 (expected to be paid by December 31, 2022). | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Deferred compensation plan | $ | 32,990 | | | $ | 42,623 | |
| Operating lease liabilities | 7,877 | | | 11,919 | |
| Other long-term liabilities | 8 | | | 22 | |
| Total Other long-term liabilities | $ | 40,875 | | | $ | 54,564 | |
Note I - Employee Benefit Plans
Supplemental Executive Retirement Plan
Prior to April 30, 2021, Kforce maintained a Supplemental Executive Retirement Plan (“SERP”), which benefited 2 executives. The SERP was a non-qualified benefit plan and did not include elective deferrals of covered executive officers’ compensation. The related net periodic benefit costs were comprised of service cost and interest cost. The service cost amounted to $199 thousand in the nine months ending September 30, 2021, and $87 thousand and $259 thousand in the three and nine months ended September 30, 2020, respectively, and were recorded in SG&A. The interest cost amounted to $138 thousand in the nine months ending September 30, 2021, and $124 thousand and $373 thousand in the three and nine months ended September 30, 2020, respectively, and were recorded in Other expense, net in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.
Effective April 30, 2021, Kforce’s Board of Directors irrevocably terminated the SERP. The benefits owed to the 2 participants under the SERP as of September 30, 2021 amount to $20.0 million in the aggregate, which is recorded in Other accrued liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. Kforce must
make the benefit payments to the participants within 24 months of the termination date but no sooner than 12 months after the termination date. We anticipate making the benefit payments during the third quarter ending September 30, 2022. No contributions were made to the SERP during the four months ended April 30, 2021.
As a result of the termination of the SERP, Kforce recognized a net loss of $1.8 million in the nine months ending September 30, 2021. The loss is reflected in Other expense, net in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.
Note J - Stock Incentive Plans
On April 22, 2021, Kforce’s shareholders approved the 2021 Stock Incentive Plan (the “2021 Plan”). The 2021 Plan allows for the issuance of stock options, stock appreciation rights (“SAR”), stock awards (including restricted stock awards (“RSAs”) and restricted stock units (“RSUs”)) and other stock-based awards. The aggregate number of shares reserved under the 2021 Plan is approximately 3.9 million. Grants of an option or SAR reduce the reserve by 1one share, while a stock award reduces the reserve by 2.72 shares. The 2021 Plan terminates on April 22, 2031.
Restricted stock (including RSAs and RSUs) areis granted to directors, executives and management either for awards related to Kforce’s annual long-term incentive program or as part of a compensation package for attraction and retention purposes. Restricted stock granted during the nine months ended September 30, 2021,2022 will vest over a period of one to ten years, with vesting occurring in equal annual installments.
During the three and nine months ended September 30, 2021,2022, stock-based compensation expense was $3.5$4.5 million and $10.5$13.3 million, respectively. During the three and nine months ended September 30, 2020,2021, stock-based compensation expense was $2.9$3.5 million and $8.7$10.5 million, respectively.respectively, and is included in Selling, general and administrative expenses.
The following table presents the restricted stock activity for the nine months ended September 30, 20212022 (in thousands, except per share amounts): | | | Number of
Restricted Stock | | Weighted-Average
Grant Date
Fair Value | | Total Intrinsic
Value of Restricted
Stock Vested | | Number of
Restricted Stock | | Weighted-Average
Grant Date
Fair Value | | Total Intrinsic
Value of Restricted
Stock Vested |
| Outstanding at December 31, 2020 | 1,137 | | | $ | 33.63 | | | |
| Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | 1,083 | | | $ | 48.86 | | |
| Granted | Granted | 60 | | | $ | 50.74 | | | Granted | 42 | | | $ | 61.38 | | |
| Forfeited | Forfeited | (20) | | | $ | 26.93 | | | Forfeited | (33) | | | $ | 51.24 | | |
| Vested | Vested | (47) | | | $ | 25.43 | | | $ | 2,607 | | Vested | (43) | | | $ | 45.69 | | | $ | 2,831 | |
| Outstanding at September 30, 2021 | 1,130 | | | $ | 34.98 | | | |
| Outstanding at September 30, 2022 | | Outstanding at September 30, 2022 | 1,049 | | | $ | 49.65 | | |
As of September 30, 2021,2022, total unrecognized stock-based compensation expense related to restricted stock was $27.3$37.2 million, which will be recognized over a weighted-average remaining period of 3.14.3 years.
Note KJ - Derivative Instruments and Hedging Activity
As of September 30, 2022, the Firm did not have any outstanding derivative instruments. On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A (“Swap A”). Swap A was effective on May 31, 2017 and maturesmatured on April 29, 2022. Other information related to Swap A has a fixedis as follows: Notional amount - $25.0 million; and Fixed interest rate of- 1.81%, which we add to our interest rate margin to determine the fixed rate that the Firm will pay to the counterparty during the term of Swap A based on the notional amount of Swap A. The notional amount of Swap A through maturity is $25.0 million..
On March 12, 2020, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A (“Swap B”, together with Swap A, the "Swaps"). Swap B was effective on March 17, 2020 and matures on2020. Other information related to Swap B is as follows: Scheduled maturity date - May 30, 2025. Swap B has a fixed2025; Fixed interest rate of- 0.61%; and a notionalNotional amount of $75.0 million and increases to- $100.0 million in May 2022, and subsequently decreases to $75.0 million and $40.0 million in May 2023 and May 2024, respectively. The increase in the notional amount of Swap B in May 2022 corresponds to the decrease in the notional amount for Swap A.million.
The Firm usesused the Swaps as an interest rate risk management tool to mitigate the potential impact of rising interest rates on variable rate debt. The fixed interest rate for each Swap (which will remain throughout the remainder of the hedging arrangement), plus the applicable interest margin under our credit facility, iswas included in interest expense and recorded in Other (income) expense, net in the accompanying Consolidated Financial Statements of Operations and Comprehensive Income.
In May 2022, the Firm terminated Swap B in anticipation of paying the outstanding amount on its credit facility, which was $100.0 million. At the termination of Swap B, the amount recorded in Accumulated other comprehensive income was recognized. The Firm received $4.1 million in income, which represented the gain and fair value of Swap B at the time of termination, and is included in other income in the accompanying Consolidated Financial Statements of Operations and Comprehensive Income.
Both Swap A and B have beenwere designated as cash flow hedges and were effective as of September 30, 2021.hedges. The change in the fair value of the Swaps arewas previously recorded as a component of Accumulated other comprehensive income (loss) in the unaudited consolidated financial statements.
The following table sets forth the activity in the accumulated derivative instrument activity (in thousands): | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 | | |
| Accumulated derivative instrument loss, beginning of period | $ | (1,774) | | | $ | (179) | | | |
| Net change associated with current period hedging transactions | 1,478 | | | (1,978) | | | |
| | | | | |
| Accumulated derivative instrument loss, end of period | $ | (296) | | | $ | (2,157) | | | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 | | |
| Accumulated derivative instrument gain (loss), beginning of period | $ | 823 | | | $ | (1,774) | | | |
| Net change associated with current period hedging transactions (1) | (823) | | | 1,478 | | | |
| | | | | |
| Accumulated derivative instrument gain (loss), end of period | $ | — | | | $ | (296) | | | |
(1) The accumulated derivative instrument activity as of the end the nine month period ending September 30, 2022, includes the beginning balance of $823 thousand, a change in fair value of $3.1 million and a reversal due to termination of $3.9 million resulting in an ending balance of zero.
Note LK - Fair Value Measurements
Our interest rate swaps arewere previously measured at fair value using readily observable inputs, which are considered to be Level 2 inputs and arewere recorded in Other long-term liabilities within the accompanying Unaudited Condensed Consolidated Balance Sheets. In April 2022, Swap A matured and in May 2022, we terminated Swap B. At September 30, 2022, Kforce had no interest rate swaps. Refer to Note J - “Derivative Instruments and Hedging Activity” for a complete discussion of our interest rate swaps.
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the nine months ended September 30, 2021.2022. The following table sets forth by level, within the fair value hierarchy, estimated fair values onof the interest rate swap derivative instrument asset at December 31, 2021 was $823 thousand and was classified as a recurring basis (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Asset/(Liability) 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) |
| At September 30, 2021 | | | | | | | |
| | | | | | | |
| Interest rate swap derivative instruments | $ | (296) | | | $ | — | | | $ | (296) | | | $ | — | |
| At December 31, 2020 | | | | | | | |
| | | | | | | |
| Interest rate swap derivative instrument | $ | (1,774) | | | $ | — | | | $ | (1,774) | | | $ | — | |
Note ML - Commitments and Contingencies
Employment Agreements
Kforce has employment agreements with certain executives that provide for minimum compensation, salary and continuation of certain post-employment benefits for a six-month to a three-year period after their employment ends under certain circumstances. Certain of the agreements also provide for a severance payment ranging from one to three times annual salary and one-half to three times average annual bonus if such an agreement is terminated without good cause by Kforce or for good reason by the executive subject to certain post-employment restrictive covenants. At September 30, 2021,2022, our liability would be approximately $45.0$38.2 million if, following a change in control, all of the executives under contract were terminated without cause by the employer or if the executives resigned for good reason and $17.3$13.7 million if, in the absence of a change in control, all of the executives under contract were terminated by Kforce without cause or if the executives resigned for good reason.
Litigation and Loss Contingencies
On August 30, 2021, Kforce Inc. was served with a complaint brought in the U.S. District Court, Southern District of California. Darryn Lewis, et. al. v. Kforce Inc., Case No.: 3:21-cv-01375-AJB-JLB. On behalf of himself and all others similarly situated, the Plaintiff brings a one-count class action complaint for alleged violations of the Fair Labor Standards Act (“FLSA”), and specifically, failure to pay overtime wages. The FLSA class is purported to include commissioned employees who work or have worked for Kforce, nationwide, in the past three (3) years. Plaintiff alleges that Kforce failed to maintain a policy that compensates its employees for all hours worked, and specifically alleges that Kforce misclassified employeesExcept as exempt from overtime, failed to pay hourly aggrieved employees for all overtime hours worked, including off-the-clock work performed during meal periods, failed to pay all overtime and double-time wages earned at the correct regular rate because Kforce allegedly failed to include commission and other non-discretionary performance-based pay in the regular rate of pay. Plaintiff and class members seek the amounts of unpaid wages allegedly owed to them, liquidated damages, attorneys’ fees and costs, prejudgment interest, and other legal and equitable relief. The parties have engaged in attempts to resolve the matter. We believe that this matter is unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On March 19, 2021, a complaint was filed against Kforce Inc. in United States District Court, Central District of California, and served on March 25, 2021. Jessica Cook, et. al. v. Kforce Inc., case no. 2:21-cv-02453. On behalf of herself and all others similarly situated, the plaintiff purports to bring a collective action challenging the exempt classification of a select class of recruiters. Plaintiff alleges that due to the misclassification of the recruiter class Kforce violated the Fair Labor Standards Act by failing to pay overtime and failing to make, keep, and preserve records with respect to each employee sufficient to determine their wages. The class action is brought pursuant to California state law, on behalf of the same class of California recruiters, and alleges: (i) classification and overtime violations under California law; (ii) untimely payment of wages; (iii) legally deficient wage statements; (iv) violations of meal and rest period requirements; and (v) violation of California's Unfair Competition Law. Plaintiff, on behalf of herself and the class and/or collective, seeks damages in the amount of unpaid overtime compensation, double time pay as applicable (for the California class), liquidated damages, attorney’s fees, interest, and other relief. The parties agreed to dismiss the action without prejudice through a joint stipulation and have engaged in discussions to resolve. If the parties are unable to resolve, it is expected that Plaintiff will re-file her class and collective action claims. At this stage in the litigation, it is not feasible to predict the outcome of this matter or reasonably estimate a range of loss, should a loss occur, from this proceeding.
On December 24, 2020, a complaint was filed and on January 5, 2021, the complaint was served against Kforce Inc., et al. in Superior Court of the State of California, Los Angeles County. Sydney Elliott-Brand, et. al. v. Kforce Inc., et al., Case No.: 20STCV49193. On behalf of herself and a putative class of current and former commissioned employees employed by Defendants, the plaintiff purports to bring a collective action for alleged violations of the California Labor Code, §201, et seq., Industrial Welfare Commission (“IWC”) Wage Orders, and the California Business and Professions Code, §17200, et. seq, based upon the defendants’ alleged failure to: (i) pay minimum and overtime wages; (ii) timely pay all earned wages; (iii) provide meal periods and rest breaks; (iv) reimburse business expenses; (v) provide accurate itemized wage statements; and (vi) timely pay wages and vacation pay upon separation of employment; as well as associated unfair competition. The plaintiff seeks payment to recover minimum, regular, and/or overtime wages for all hours worked as required by law, meal period premiums, rest period premiums, unpaid business expenses, reasonable attorneys’ fees, cost of suit and interest, statutory penalties and liquidated damages, and also seeks an order requiring Defendants to restore and disgorge all funds acquired by means of unfair competition under the California Business and Professions Code. The parties have engaged in attempts to resolve the matter. We believe that this matter is unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On November 18, 2020, Kforce Inc., et al. was served with a complaint brought in the Superior Court of the State of California, San Diego County. Bernardo Buchsbaum, et al. v. Kforce Inc., et al., Case No.: 37-2020-00030994-CU-OE-CTL. The former employee purports to bring a representative action on his own behalf and on behalf of other current and former California aggrieved employees pursuant to the Private Attorneys General Act (“PAGA”) alleging violations of the California Labor Code (“Labor Code”). The purported Labor Code violations include the failure to: (i) pay all earned wages, including minimum wages and overtime wages; (ii) provide and pay proper wages for meal and rest periods; (iii) reimburse all reasonable and necessary business expenses; (iv) provide accurate itemized wage statements; and (v) provide unused vacation wages upon termination. The plaintiff seeks civil penalties, interest, attorney’s fees and costs under the Labor Code. On January 21, 2021, the Plaintiff served an amended complaint to add Kforce Flexible Solutions as a party and narrow the scope of alleged aggrieved employees to “internal” commissioned employees. The parties have engaged in attempts to resolve the matter. We believe that this matter is unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On October 13, 2020, Kforce Inc. was served with a complaint brought in the U.S. District Court, Eastern District of Pennsylvania. Hope Gofton and Adam Kimbrel, et al. v. Kforce Inc., Case No.: 2:20-cv-04886 on behalf of themselves and other similarly situated current and former employees. The plaintiffs purport to bring a collective action for alleged violations of the Fair Labor Standards Act, 29 U.S.C. § 201, et seq., and a class action for alleged violations of the Pennsylvania Minimum Wage Act, 43 P.S. §§ 333.101, et seq., based upon the defendant’s purported failure to pay federal and state overtime wages. The plaintiffs allege that the defendant improperly classified as exempt the plaintiffs and other putative collective and class members, and allegedly failed to pay overtime wages. The plaintiffs seek payment of unpaid overtime wages, liquidated damages, interest, attorney’s fees, costs and other relief deemed equitable by the Court. The Court entered a Final Approval Order on September 30, 2021 approving the settlement and dismissing the action without prejudice. Case will convert to dismissal with prejudice sixty days after the deadline to fully fund the settlement account. This matter did not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
Therestated below, there have been no material developments with regard to the following legal proceedings previously disclosed in our 20202021 Annual Report on Form 10-K or in our most recentForm 10-Q filing:for the quarter ending June 30, 2022.
•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.:Number: RG19047269. The former employee purports to bring a representative action on her own behalf and on behalf of other allegedly aggrieved employees pursuant to California Private Attorneys General Act of 2004, California Labor Code Section 2968, et seq. (“PAGA”) alleging violations of the California Labor Code, §201, et seq. (“Labor Code”). The plaintiff seeks civil penalties, interest, attorneys’ fees, and costs under the Labor Code for alleged failure to: provide and pay for work performed during meal and rest periods; properly calculate and pay all earned minimum and overtime wages; provide compliant wage statements; timely pay wages during employment and upon termination; and reimburse business expenses. 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. We intend to continue to vigorously defend the claims.
•On February 19,November 18, 2020, Kforce Inc., et al. was served with a complaint brought in the Superior Court of the State of California, San Diego County, which was subsequently amended on January 21, 2021, to add Kforce Flexible Solutions as a first amendedparty. Bernardo Buchsbaum, et al. v. Kforce Inc., et al., Case Number: 37-2020-00030994-CU-OE-CTL. The former employee purports to bring a representative action on his own behalf and on behalf of other allegedly aggrieved employees pursuant to PAGA alleging violations of the Labor Code. The plaintiff seeks civil penalties, interest, attorney’s fees, and costs under the Labor Code for alleged failure to: properly calculate and pay all earned minimum and overtime wages; provide and pay for work performed during meal and rest periods; reimburse business expenses; provide compliant wage statements; and provide unused vacation wages upon termination. The parties reached a preliminary settlement agreement to resolve this matter along with Elliott-Brand, et al. v. Kforce Inc., et al., and the Court granted preliminary approval on September 21, 2022. The settlement agreement is subject to final approval by the Court. Plaintiff Buchsbaum has been added as a plaintiff to the Elliott-Brand lawsuit, and this lawsuit will be dismissed after the Court’s final approval of the settlement. We believe that this matter is unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On December 11, 2020, a complaint was filed against Kforce and its client, Verity Health System of California (Verity) in the Superior Court of California, County of Los Angeles.Angeles, which was subsequently amended on February 19, 2021. Ramona Webb v. Kforce Flexible Solutions, LLC, et.et al. case no., Case Number: 20STCV47529. Former consultant Ramona Webb has sued both Kforce and Verity alleging certain individual claims in addition to a PAGA claim based on alleged violations of various provisions of the Labor Code. With respect to the PAGA claim, Plaintiff seeks to recover on her behalf, on behalf of the State of California, and on behalf of all allegedly aggrieved employees, the civil penalties provided by PAGA, attorney’s fees and costs. 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. We intend to continue to vigorously defend the claims.
On December 24, 2020, a complaint was filed against Kforce Inc., et al. in Superior Court of the State of California, Los Angeles County. Sydney Elliott-Brand, et al. v. Kforce Inc., et al., Case Number: 20STCV49193. On January 7, 2022, the lawsuit was amended to add Bernardo Buchsbaum and Josie Meister as plaintiffs and to add claims under PAGA and the Fair Labor Standards Act, 29 U.S.C. §§ 201, et seq. On behalf of themselves and a putative class and collective of talent recruiters and allegedly aggrieved employees in California and nationwide, the plaintiffs purport to bring a class action for alleged violations of the Labor Code, Industrial Welfare Commission Wage Orders, and the California Business and Professions Code, §17200, et seq., a collective action for alleged violations of FLSA, and a PAGA action for alleged violations of the Labor Code. The plaintiffs seek payment to recover unpaid wages and benefits, interest, attorneys’ fees, costs and expenses, penalties, and liquidated damages for alleged failure to: properly calculate and pay all earned minimum and overtime wages; provide meal and rest periods or provide compensation in lieu thereof; provide accurate itemized wage statements; reimburse for all business expenses; pay wages due upon separation; and pay for all hours worked over forty hours in one or more workweeks. Plaintiffs also seek an order requiring defendants to restore and disgorge all funds acquired by means of unfair competition under the California Business and Professions Code. The parties reached an agreement to resolve this matter along with Lewis, et al. v. Kforce Inc. and Buchsbaum, et al. v. Kforce Inc., et al., which was preliminarily approved by the Court on September 21, 2022, and we have set reserves accordingly. The settlement agreement is subject to final approval by the Court. We believe that this matter is unlikely to have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On January 6, 2022, a complaint was filed against Kforce Inc. in the Superior Court of the State of California for the County of Los Angeles and was served on January 21, 2022. Jessica Cook and Brianna Pratt, et al. v. Kforce Inc., Case Number: 22STCV00602. On behalf of themselves and others similarly situated, plaintiffs purport to bring a class action alleging violations of Labor Code and the California Business and Professional Code and challenging the exempt classification of a select class of recruiters. Plaintiffs and class members seek damages for all earned wages, statutory penalties, injunctive relief, attorney’s fees, and interest for alleged failure to: properly classify certain recruiters as nonexempt from overtime; timely pay all wages earned, including overtime premium pay; provide
accurate wage statements; provide meal and rest periods; and comply with California's Unfair Competition Law. Kforce anticipated this action would be filed as a result of failed early resolution attempts in the previously disclosed Jessica Cook v. Kforce, et al. lawsuit. 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. We intend to vigorously defend the claims.
On January 6, 2022, a complaint was filed against Kforce Inc. in the United States District Court for the Middle District of Florida and was served on February 4, 2022. Sam Whiteman, et al. v. Kforce Inc., Case Number: 8:22-cv-00056. On behalf of himself and all others similarly situated, the plaintiff brings a one-count collective action complaint for alleged violations of the FLSA by failing to pay overtime wages. Plaintiff, on behalf of himself and the putative collective, seeks to recover unpaid wages, liquidated damages, attorneys’ fees and costs, and prejudgment interest for alleged failure to properly classify specified recruiters as nonexempt from overtime and properly compensate for all hours worked over 40 hours in one or more workweeks. 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. We intend to vigorously defend the claims.
We are also involved in other legal proceedings, claims, and administrative matters from time to time, and may also be exposed to loss contingencies, that arise in the ordinary course of business. We have made accruals with respect to certain of these matters, where appropriate, whichthat are reflected in our unaudited condensed consolidated financial statements.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 outcomes and any amounts accrued are inherently uncertain,outcome of the matters cannot be determined, we currently do not expect that these matters,proceedings and claims, individually or in the aggregate, will have a material effect on our financial position.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.
Equity Method Investment
In June 2019, we entered into a joint venture whereby Kforce obtained a 50% noncontrolling interest in WorkLLama. We determined, based on the corporate structure and governance, that WorkLLama is a variable interest entity and not subject to consolidation, as we are not the primary beneficiary of WorkLLama because we do not have the power to direct the activities that most significantly impact WorkLLama’s economic performance. As a result, WorkLLama is accounted for as an equity method investment.
Under the joint venture operating agreement for WorkLLama, Kforce iswas originally obligated to make additional cash contributions which aresubsequent to the initial contribution, contingent on WorkLLama's achievement of certain operational and financial milestones. OurUnder the operating agreement, our maximum potential capital contributions arewere $22.5 million. The original operatingAlthough the operational and financial milestones established in the joint venture operating agreement were not achieved, in part, due towe contributed the impactsfull $22.5 million as of the COVID-19 pandemic on WorkLLama’s business. We have continued to provide capital contributions to the joint venture due to our belief in the long-term value of the joint venture.September 30, 2022. We contributed $7.0$0.5 million and $4.0$9.0 million of capital during the nine months ended September 30, 20212022 and the year ended December 31, 2020,2021, respectively. Refer
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 the fair value of the investment occurs. Management’s estimate of the fair value of an investment is based on the income approach and market approach. Like most developing business enterprises, WorkLLama was impacted by the COVID-19 pandemic over the last two years. Additionally, in 2021, WorkLLama also strategically repositioned its business to Note F - “Other Assets, Net”focus its platform on providing its clients with an ability to directly source and engage talent. While WorkLLama is seeing demand for more detailsits platform, it was taking longer than expected to achieve its original financial expectations. Given this, Kforce management determined that an indicator of impairment had occurred in the second quarter of 2022. Thus, we performed an impairment test as of June 30, 2022, utilizing the market and income approaches. For the income approach, we utilized estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilized 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. The fair value determined in our impairment test is highly sensitive to changes in key assumptions, including but not limited to the discount rate that is applied to the financial projections. As a result of the impairment test, we concluded that the carrying value of the equity method investment was not impaired. At June 30, 2022, the fair value of the equity investment, determined in our impairment test, exceeded the carrying value by less than ten percent.
We have not identified any indicators that an other than temporary impairment has occurred in the three months ended September 30, 2022 that would require further analysis. We will continue to monitor potential indicators in future quarters that may have a bearing on WorkLLama.the recoverability of the carrying value of our investment.
Lease commitments
We lease office space and certain equipment under operating leases that expire between 20212022 and 2033. The terms of the leases provide for rental payments on a graduated scale, options to renew the leases (one to five years), landlord incentives or allowances, and periods of free rent.
During the three monthsyear ended September 30,December 31, 2021, we entered into a lease agreement for office space in Tampa, Florida, that will become our new corporate headquarters. This new lease for office space is intended to replace our current headquarters, also in Tampa, Florida, the lease for which expires November 2022. Lease payments will be required beginning July 1, 2023. During October 2022, we began occupying the facility, which also signified the start of the accounting lease commencement date for financial reporting purposes. The new lease has not yet commenced, but will requirerequires aggregate future lease payments of approximately $10.9 million over the entire lease term, which includes annual upward adjustments, and has a non-cancelablenon-cancellable lease term of 129 months, excluding renewal options. The new lease also provides for the Company to receive an allowance, from the Landlord, of $1.6 million to be used toward costs to design, engineer, install, supply and to construct improvements that will become part of the building, all of which must be approved by the landlord and the Company. The landlord will designate a general contractor and oversee all construction improvements. The future lease payments and the allowance are not yet recorded on our condensed consolidated balance sheets. Lease payments will be required beginning July 1, 2023, however, we expect the accounting lease commencement date for this initial portion of the lease for financial reporting purposes to begin at the start of the fourth quarter of 2022.
Note N - Subsequent Events
Credit Facility
On October 20, 2021, the Firm entered into an amended and restated 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, BMO Harris Bank, N.A., as documentation agent, and the lenders referred to therein (the “Credit Facility”). Under the Credit Facility, the Firm will have a maximum borrowing capacity of $200.0 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”). The maturity date of the Credit Facility is October 20, 2026.
Revolving credit loans under the Credit Facility will bear 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 bear 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 0.125% to 0.500% and the Applicable Margin for LIBOR Rate loans ranges from 1.125% to 1.50%. The Amendment included customary provisions relating to the transition from LIBOR as the benchmark interest rate under the Credit Agreement, including providing for a Benchmark Replacement option (as defined in the Credit Agreement) to replace LIBOR. 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 0.30%.
The Firm will continually be 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 3.50 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 in excess of $25.0 million over the last four quarters could be limited if (a) the total leverage ratio is greater than 3.00 to 1.00 and (b) the Firm’s availability, inclusive of unrestricted cash, is less than $25.0 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are highlights as of and for the nine months ended September 30, 2021,2022, which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto.
•Revenue for the nine months ended September 30, 2021,2022, increased 12.1%9.8%, on a billing day basis, to $1,169.6$1,291.1 million from $1,043.7$1,169.6 million in the comparable period in 2020.2021. Revenue increased 18.5%21.7% for TechTechnology and decreased 7.2%35.8% for FA.FA, on a billing day basis. The decrease in FA is primarily a result of the planned decrease in COVID-19 related business and repositioning efforts. There was a minimal amount of COVID-19 related business in the first nine months of 2022 compared to $66.3 million in the first nine months of 2021.
•Flex revenue for the nine months ended September 30, 2021,2022 increased 11.9%9.1%, on a billing day basis, to $1,134.4$1,244.5 million from $1,019.2$1,134.4 million in the comparable period in 2020.2021. Flex revenue increased 18.7%21.3% and decreased 9.1%, on a billing day basis40.1% for TechTechnology and FA, respectively, on a year-over-year basis.
•Flex revenue in our Technology business increased 28.9% on a year-over-year basis in the three months ended September 30, 2021.
•Revenue from contracts we secured to support government-sponsored COVID-19 related initiatives (the “COVID-19 Business”) was $7.5 million and $51.1 million for the three months ended September 30, 2021 and 2020, respectively.billing day basis..
•Direct Hire revenue for the nine months ended September 30, 2021,2022 increased 44.0%32.4% to $35.2$46.6 million from $24.4$35.2 million in the comparable period in 2020.2021.
•Gross profit margin for the nine months ended September 30, 2021,2022, increased 5080 basis points to 28.8%. 29.6%, compared to the same period in 2021 primarily as a result of a higher mix of Direct Hire business and improved Flex gross profit margins.
•Flex gross profit margin for the nine months ended September 30, 2021 and 2020, was flat at 26.6%. Tech2022, increased 30 basis points to 26.9%, compared to September 30, 2021. Technology Flex margins decreasedgross profit margin increased 10 basis points due primarilyfor the nine months ended September 30, 2022, as compared to spread compression as a result of business mix.the same period in 2021. FA Flex gross profit margin increased 130 and 30280 basis points for the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periodsperiod in 2020, due2021. The increase for the nine months ended September 30, 2022 was primarily attributable to a decrease in the amount of lower margin COVID-19 related business in 2021.and the repositioning of the business.
•SG&A expenses as a percentage of revenue for the nine months ended September 30, 2021, decreased2022, increased to 21.5%22.1% from 22.6%21.5% in the comparable period in 2020 primarily2021 due to leverage gained from our revenue growth, associate productivity improvements, lower spending in areas such as travel and lease expenses, a decline in our credit expense and a gain on the sale of our corporate headquarters.
•Other income and expense, net, for the nine months ended September 30, 2021, increased 56.0% to $5.8 million from $3.7 millionheadquarters that occurred in the comparable periodsecond quarter of 2021, which offset SG&A expenses and resulted in 2020, primarily due to the recognition of unamortized losses related toa gain, higher performance-based compensation given the termination of the SERP on April 30, 2021.strength in our performance, and other investments in our business.
•Income from continuing operations for the nine months ended September 30, 2021,2022, increased 44.7%25.2% to $68.4 million, or $3.31 per share, from $54.6 million, or $2.57 per share, from $37.8 million, or $1.77 per share, in the comparable period in 2020.2021.
•The Firm returned $59.3$60.8 million of capital to our shareholders in the form of open market repurchases totaling $44.5$42.6 million and quarterly dividends totaling $14.8$18.2 million during the nine months ending September 30, 2021.2022.
•Cash provided by operating activities was $59.9$78.1 million during the nine months ended September 30, 2021,2022, as compared to $93.9$59.9 million for the nine months ended September 30, 2020.2021.
•Cash and cash equivalents net of outstanding borrowings under our credit facility, was $15.6$5.1 million as of September 30, 2021.2022.
RESULTS OF OPERATIONS
Business Overview
Kforce provides professional staffing servicesis a leading domestic provider of technology and finance and accounting talent solutions to our clients on both a temporary (“Flex”)innovative and permanent (“Direct Hire”) basis through our Techindustry-leading clients. Our Technology and FA businesses represent our two operating segments. Our corporate headquarters is in Tampa, Florida and we have field offices located throughout the United States (U.S.).Florida. As of September 30, 2021,2022, Kforce employed approximately 2,0002,100 associates, including approximately 1,3001,400 supporting the revenue-generating aspects of our business and approximately 700 supporting the revenue-enabling aspects. We also had approximately 11,00010,100 consultants on assignment providing flexible staffing services and solutions to our clients, the vast majority of which are also employees of Kforce..clients. Kforce serves clients across many industries and geographies as well as organizations of all sizes, with a particular focus on Fortune 1000 and other large companies. We believe that our 100% domestic U.S. focus, concentration on technology staffing andtalent solutions (representing nearly 85%90% of overall revenues) and client portfolio comprised of world-class companies have been key contributors to our continued strong performance in 2020 and 2021 and will be key drivers to our future success.
In December 2020 and early 2021, the U.S. Food and Drug Administration authorized the distribution and administration of certain COVID-19 vaccines in the U.S. While the level of vaccinations and potential variants of COVID-19 along with the potential impact of regulations surrounding the COVID-19 vaccines are difficult to predict and could negatively impact our business, growth in our business has meaningfully accelerated since the low point in June 2020. From an economic standpoint, total and temporary employment figures and trends have historically been important indicators of staffing demand. Based on information published by the Bureau of Labor Statistics and Staffing Industry Analysts (“SIA”), these figures and trends have been trending positively since the end of the third quarter of 2020. In addition,, the penetration rate (the percentage of temporary staffing to total employment) remained stable at 1.8% and theThe national unemployment rate decreased againfell to 4.8% in3.5% at the end of September 2021, down from 5.9% in June 2021. As another indicator that the market is strengthening, in2022. In the latest U.S. staffing industry forecast published by SIA in September 2021,2022, the domestic technology temporary staffing industry isand finance and accounting temporary staffing industry are estimated to grow 11%16% and 12%, respectively, in 2022, and 8% and 7%, respectively, in 2023.
The macro environment certainly became cloudier in the third quarter ended September 30, 2022, with persistently elevated levels of inflation, rapidly rising interest rates, which, among other reasons, is impacting prospects for global and domestic economic growth. While trends in the third quarter were below levels experienced in 2021 (up fromand the previous expectationfirst half of 9%), and 6% (consistent with the previous expectation) in 2022.
We have delivered strong results, especially in our Technology business, with year-over-year growth of 29.6% significantly exceeding the market expectation per SIA. Sequentially, we were successful in effectively replacing the expected lower revenues from our COVID-19 Business (down $27.2 million sequentially) with higher-quality Technology revenue (up $26.5 million sequentially). While the business climate related to this economic and health crisis, along with related governmental legislation (including that which is aimed at stimulating the economy) is still extremely fluid, we believe that we are very well positioned to continue capturing additional market share in our Technology business and delivering strong operating results to our shareholders.
The results of multiple employee surveys conducted over the last eighteen months indicate that our associates have embraced the ingenuity required to work remotely and have been successful in settling into new, productive routines. We continue to make great progress in our “Kforce Reimagined” initiative that was initiated shortly after the onset of the pandemic, which is an effort to position Kforce to provide a more flexible hybrid work environment for our associates. We are referring to this new era of Kforce’s work environment as “Office Occasional” whereby our people will have maximum flexibility and choice in designing their workdays that is rooted in trust and supported by integrated technology aligned with our evolved operating model. We will have a remote first approach but encourage our people to leverage physical office spaces, when desirable, for activities best done through in-person, active collaboration such as training, team building, client and candidate interactions. We announced in September that we signed a lease for our future corporate headquarters, which we anticipate occupying in the fourth quarter of 2022. This new space will be modern, open and technology enabled to provide a flexible environment for our people to work effectively, very similarly to how we approaching the design of our field offices.
During 2021, we engaged an independent third-party consulting firm to assist us in our assessment of our middle and back office capabilities. We believe that the culmination of these and other efforts, on which we have made significant progress, will provide a differentiated employee experience, in the case of our Kforce Reimagined effort, and significant contributions to improving productivity and profitability in both cases.
Operating Results - Three and Nine Months Ended September 30, 20212022 and 20202021
The following table presents certain items in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as a percentage of revenue: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, | | September 30, | | September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue by segment: | Revenue by segment: | | Revenue by segment: | |
| Tech | 83.7 | % | | 71.2 | % | | 79.3 | % | | 75.0 | % | |
| Technology | | Technology | 89.2 | % | | 83.7 | % | | 87.9 | % | | 79.3 | % |
| FA | FA | 16.3 | | | 28.8 | | | 20.7 | | | 25.0 | | FA | 10.8 | | | 16.3 | | | 12.1 | | | 20.7 | |
| Total Revenue | Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Revenue by type: | Revenue by type: | | Revenue by type: | |
| Flex | Flex | 96.6 | % | | 97.6 | % | | 97.0 | % | | 97.7 | % | Flex | 96.7 | % | | 96.6 | % | | 96.4 | % | | 97.0 | % |
| Direct Hire | Direct Hire | 3.4 | | | 2.4 | | | 3.0 | | | 2.3 | | Direct Hire | 3.3 | | | 3.4 | | | 3.6 | | | 3.0 | |
| Total Revenue | Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Gross profit | Gross profit | 29.6 | % | | 28.4 | % | | 28.8 | % | | 28.3 | % | Gross profit | 29.0 | % | | 29.6 | % | | 29.6 | % | | 28.8 | % |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 22.1 | % | | 20.8 | % | | 21.5 | % | | 22.6 | % | Selling, general and administrative expenses | 21.6 | % | | 22.1 | % | | 22.1 | % | | 21.5 | % |
| Depreciation and amortization | Depreciation and amortization | 0.3 | % | | 0.4 | % | | 0.3 | % | | 0.4 | % | Depreciation and amortization | 0.2 | % | | 0.3 | % | | 0.2 | % | | 0.3 | % |
| Income from operations | Income from operations | 7.3 | % | | 7.3 | % | | 7.0 | % | | 5.4 | % | Income from operations | 7.2 | % | | 7.3 | % | | 7.2 | % | | 7.0 | % |
| Income from operations, before income taxes | Income from operations, before income taxes | 6.9 | % | | 7.1 | % | | 6.5 | % | | 5.0 | % | Income from operations, before income taxes | 6.9 | % | | 6.9 | % | | 7.2 | % | | 6.5 | % |
| | Net income | Net income | 5.0 | % | | 5.1 | % | | 4.7 | % | | 3.6 | % | Net income | 5.1 | % | | 5.0 | % | | 5.3 | % | | 4.7 | % |
Revenue. The following table presents revenue by type for each segment and the percentage change from the prior period (in thousands): | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 | | 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Tech | | |
| Technology | | Technology | |
| Flex revenue | Flex revenue | $ | 330,170 | | | 28.9 | % | | $ | 256,118 | | | $ | 909,599 | | | 18.0 | % | | $ | 770,635 | | Flex revenue | $ | 382,072 | | | 15.7 | % | | $ | 330,170 | | | $ | 1,109,294 | | | 22.0 | % | | $ | 909,599 | |
| Direct Hire revenue | Direct Hire revenue | 7,060 | | | 70.8 | % | | 4,133 | | | 17,919 | | | 47.5 | % | | 12,150 | | Direct Hire revenue | 8,424 | | | 19.3 | % | | 7,060 | | | 25,702 | | | 43.4 | % | | 17,919 | |
| Total Tech revenue | $ | 337,230 | | | 29.6 | % | | $ | 260,251 | | | $ | 927,518 | | | 18.5 | % | | $ | 782,785 | | |
| Total Technology revenue | | Total Technology revenue | $ | 390,496 | | | 15.8 | % | | $ | 337,230 | | | $ | 1,134,996 | | | 22.4 | % | | $ | 927,518 | |
| FA | FA | | FA | |
| Flex revenue | Flex revenue | $ | 59,003 | | | (41.3) | % | | $ | 100,569 | | | $ | 224,783 | | | (9.6) | % | | $ | 248,578 | | Flex revenue | $ | 40,896 | | | (30.7) | % | | $ | 59,003 | | | $ | 135,239 | | | (39.8) | % | | $ | 224,783 | |
| Direct Hire revenue | Direct Hire revenue | 6,492 | | | 41.0 | % | | 4,604 | | | 17,263 | | | 40.5 | % | | 12,289 | | Direct Hire revenue | 6,228 | | | (4.1) | % | | 6,492 | | | 20,868 | | | 20.9 | % | | 17,263 | |
| Total FA revenue | Total FA revenue | $ | 65,495 | | | (37.7) | % | | $ | 105,173 | | | $ | 242,046 | | | (7.2) | % | | $ | 260,867 | | Total FA revenue | $ | 47,124 | | | (28.0) | % | | $ | 65,495 | | | $ | 156,107 | | | (35.5) | % | | $ | 242,046 | |
| | Total Flex revenue | Total Flex revenue | $ | 389,173 | | | 9.1 | % | | $ | 356,687 | | | $ | 1,134,382 | | | 11.3 | % | | $ | 1,019,213 | | Total Flex revenue | $ | 422,968 | | | 8.7 | % | | $ | 389,173 | | | $ | 1,244,533 | | | 9.7 | % | | $ | 1,134,382 | |
| Total Direct Hire revenue | Total Direct Hire revenue | 13,552 | | | 55.1 | % | | 8,737 | | | 35,182 | | | 44.0 | % | | 24,439 | | Total Direct Hire revenue | 14,652 | | | 8.1 | % | | 13,552 | | | 46,570 | | | 32.4 | % | | 35,182 | |
| Total Revenue | Total Revenue | $ | 402,725 | | | 10.2 | % | | $ | 365,424 | | | $ | 1,169,564 | | | 12.1 | % | | $ | 1,043,652 | | Total Revenue | $ | 437,620 | | | 8.7 | % | | $ | 402,725 | | | $ | 1,291,103 | | | 10.4 | % | | $ | 1,169,564 | |
Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year revenue growth rates, on a billing day basis, for the last five quarters: | | | Year-Over-Year Revenue Growth Rates | | Year-Over-Year Flex Revenue Growth Rates |
| | (Per Billing Day) | | (Per Billing Day) |
| | Q3 2021 | | Q2 2021 | | Q1 2021 | | Q4 2020 | | Q3 2020 | | Q3 2022 | | Q2 2022 | | Q1 2022 | | Q4 2021 | | Q3 2021 |
| Billing Days | Billing Days | | 64 | | 64 | | 63 | | 62 | | 64 | Billing Days | | 64 | | 64 | | 64 | | 61 | | 64 |
| Technology | Technology | | 28.9 | % | | 20.9 | % | | 6.3 | % | | 0.8 | % | | (4.2) | % | Technology | | 15.7 | % | | 23.3 | % | | 26.0 | % | | 31.0 | % | | 28.9 | % |
| FA | FA | | (41.3) | % | | 2.7 | % | | 26.4 | % | | 26.0 | % | | 51.6 | % | FA | | (30.7) | % | | (49.0) | % | | (37.6) | % | | (28.9) | % | | (41.3) | % |
| Total Flex | Total Flex | | 9.1 | % | | 16.3 | % | | 10.2 | % | | 5.9 | % | | 6.9 | % | Total Flex | | 8.7 | % | | 7.2 | % | | 11.8 | % | | 16.6 | % | | 9.1 | % |
Flex Revenue. The key drivers of Flex revenue are the number of consultants on assignment, billable hours, the bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.
Flex revenue for TechTechnology increased 28.9%15.7% and 18.7%21.3%, on a billing day basis, during the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periodperiods in 2020. Flex revenue2021, which was driven by a combination of significant growth in our Tech business improved 8.4%the number of consultants on assignment and higher average bill rates. Given the inflationary pressures on wages and scarcity of highly skilled technology consultants, we have continued to experience a meaningful acceleration in average bill rates, which increased 1.4% sequentially inand 8.3% year-over-year during the third quarter of 2021. The sequential2022. We believe that the growth in consultants on assignment was fueled by strong secular drivers of demand, the strength of our client portfolio, our concentration in highly-skilled technology talent, and year-over-yearsolid execution. We expect revenue growth that we experienced in our Technology business in the third quarter of 2021 was driven principally by a higher number of consultants on assignment, which have improved consistently since June 2020 (the low point in the pandemic). Given the acceleration we are continuing to experience in our Technology business, we expect our year-over-year growth rate in the fourth quarter to be stable with third quarter levels offin the high single digits on a more difficult year-over-year comparison. We believe the secular drivers of demand in technology have only strengthened as companies continueyear-over-year basis and to invest significantly in technology to improve their consumer’s experience, gain cost efficiencies and stay relevant in an increasingly competitive environment.grow on a sequential basis.
Our FA segment experienced a decrease in Flex revenue of 9.6%30.7% and 40.1%, on a billing day basis, during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021, primarily driven by the intended fall off in our COVID-19 related business and repositioning efforts. Excluding the decline in COVID-19 related business, FA Flex revenues declined approximately 20.6% and 14.7% in the quarter and year to date periods ending September 30, 2022, respectively, compared to the same periods in 2021, which was driven by the repositioning of our FA business towards more high-skilled roles. We have seen indicators of success in this repositioning as our average bill rates improved approximately 6.2% sequentially and 28.5% year-over-year in the third quarter of 2022 compared to the same period in 2020, primarily driven by a decrease2021. We expect Flex revenue in our FA business to increase in the COVID-19 Business. FA Flex experienced a decrease to Flex revenue of 41.3% during the three months ended September 30, 2021 as compared to the same periodlow single digits sequentially in 2020, as we experienced a sharp decline in the portion of business related to COVID-19, which was anticipated. As we move into the fourth quarter of 2021, we expect overall revenues in the FA businessprimarily due to decline on a year-over-year basis due primarily to the COVID-19 Business, which largely ended early in the third quarter of 2021. We continue to migrate our FA business towards more highly-skilled roles that are less susceptible to technological change and automation; we have seen good progress in this transition.
The following table presents the key drivers for the change in Flex revenue by segment over the prior period (in thousands): | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, 2021 vs. September 30, 2020 | | September 30, 2021 vs. September 30, 2020 | | September 30, 2022 vs. September 30, 2021 | | September 30, 2022 vs. September 30, 2021 |
| | Tech | | FA | | Tech | | FA | | Technology | | FA | | Technology | | FA |
| Key Drivers - Increase (Decrease) | Key Drivers - Increase (Decrease) | | Key Drivers - Increase (Decrease) | |
| Volume - hours billed | Volume - hours billed | $ | 65,590 | | | $ | (51,695) | | | $ | 115,482 | | | $ | (30,581) | | Volume - hours billed | $ | 22,544 | | | $ | (27,183) | | | $ | 120,752 | | | $ | (121,766) | |
| Bill rate | Bill rate | 7,665 | | | 10,134 | | | 22,967 | | | 6,981 | | Bill rate | 29,270 | | | 9,064 | | | 77,569 | | | 32,198 | |
| Billable expenses | Billable expenses | 797 | | | (5) | | | 515 | | | (195) | | Billable expenses | 88 | | | 12 | | | 1,374 | | | 24 | |
| Total change in Flex revenue | Total change in Flex revenue | $ | 74,052 | | | $ | (41,566) | | | $ | 138,964 | | | $ | (23,795) | | Total change in Flex revenue | $ | 51,902 | | | $ | (18,107) | | | $ | 199,695 | | | $ | (89,544) | |
The following table presents total Flex hours billed by segment and percentage change over the prior period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 |
| Tech | 4,031 | | | 25.7 | % | | 3,207 | | | 11,226 | | | 15.0 | % | | 9,759 | |
| FA | 1,515 | | | (51.4) | % | | 3,118 | | | 6,339 | | | (12.3) | % | | 7,229 | |
| Total Flex hours billed | 5,546 | | | (12.3) | % | | 6,325 | | | 17,565 | | | 3.4 | % | | 16,988 | |
For the three and nine months ended September 30, 2021, FA Flex hours billed included 209 and 2,134 thousand hours, respectively, from the COVID-19 Business. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Technology | 4,308 | | | 6.9 | % | | 4,031 | | | 12,722 | | | 13.3 | % | | 11,226 | |
| FA | 816 | | | (46.1) | % | | 1,515 | | | 2,904 | | | (54.2) | % | | 6,339 | |
| Total Flex hours billed | 5,124 | | | (7.6) | % | | 5,546 | | | 15,626 | | | (11.0) | % | | 17,565 | |
Direct Hire Revenue. The key drivers of Direct Hire revenue are the number of placements and the associated placement fee. Direct Hire revenue also includes conversion revenue, which may occur when a consultant initially assigned to a client on a temporary basis is later converted to a permanent placement for a fee.
Direct Hire revenue increased 55.1%8.1% and 44.0%32.4% during the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periodsperiod in 2020.2021. The increase during the third quarterthree month period was primarily driven by higher placement fees. The increase during the nine month period was primarily driven by a significant increase in both the number of placements and placement fees, asthough there has been a moderation in the economic environment has improved and competition for talent has increased. As we look toperformance of this more cyclically sensitive business in the fourth quarter, we expect Direct Hire revenues may seasonally decline sequentially.second half of 2022 given macro-economic concerns.
The following table presents the key drivers for the change in Direct Hire revenue by segment over the prior period (in thousands): | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, 2021 vs. September 30, 2020 | | September 30, 2021 vs. September 30, 2020 | | September 30, 2022 vs. September 30, 2021 | | September 30, 2022 vs. September 30, 2021 |
| | Tech | | FA | | Tech | | FA | | Technology | | FA | | Technology | | FA |
| Key Drivers - Increase (Decrease) | Key Drivers - Increase (Decrease) | | Key Drivers - Increase (Decrease) | |
| Volume - number of placements | Volume - number of placements | $ | 1,676 | | | $ | 1,236 | | | $ | 3,724 | | | $ | 3,141 | | Volume - number of placements | $ | 1,254 | | | $ | (976) | | | $ | 5,777 | | | $ | 1,680 | |
| Placement fee | Placement fee | 1,251 | | | 652 | | | 2,045 | | | 1,833 | | Placement fee | 110 | | | 712 | | | 2,006 | | | 1,925 | |
| Total change in Direct Hire revenue | Total change in Direct Hire revenue | $ | 2,927 | | | $ | 1,888 | | | $ | 5,769 | | | $ | 4,974 | | Total change in Direct Hire revenue | $ | 1,364 | | | $ | (264) | | | $ | 7,783 | | | $ | 3,605 | |
The following table presents the total number of placements by segment and percentage change over the prior period: | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 | | 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Tech | 290 | | | 40.8 | % | | 206 | | | 831 | | | 30.7 | % | | 636 | | |
| Technology | | Technology | 341 | | | 17.6 | % | | 290 | | | 1,098 | | | 32.1 | % | | 831 | |
| FA | FA | 401 | | | 26.9 | % | | 316 | | | 1,094 | | | 25.6 | % | | 871 | | FA | 341 | | | (15.0) | % | | 401 | | | 1,201 | | | 9.8 | % | | 1,094 | |
| Total number of placements | Total number of placements | 691 | | | 32.4 | % | | 522 | | | 1,925 | | | 27.7 | % | | 1,507 | | Total number of placements | 682 | | | (1.3) | % | | 691 | | | 2,299 | | | 19.4 | % | | 1,925 | |
The following table presents the average placement fee by segment and percentage change over the prior period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 |
| Tech | $ | 24,360 | | | 21.5 | % | | $ | 20,045 | | | $ | 21,576 | | | 12.9 | % | | $ | 19,114 | |
| FA | 16,181 | | | 11.2 | % | | 14,557 | | | $ | 15,780 | | | 11.9 | % | | $ | 14,104 | |
| Total average placement fee | $ | 19,611 | | | 17.3 | % | | $ | 16,722 | | | $ | 18,282 | | | 12.7 | % | | $ | 16,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Technology | $ | 24,683 | | | 1.3 | % | | $ | 24,360 | | | $ | 23,403 | | | 8.5 | % | | $ | 21,576 | |
| FA | 18,269 | | | 12.9 | % | | 16,181 | | | 17,384 | | | 10.2 | % | | 15,780 | |
| Total average placement fee | $ | 21,478 | | | 9.5 | % | | $ | 19,611 | | | $ | 20,260 | | | 10.8 | % | | $ | 18,282 | |
Gross Profit. Gross profit is calculated by deducting direct costs (primarily consultant compensation, payroll taxes, payroll-related insurance and certain fringe benefits, as well as independent contractorthird party compliance costs) from total revenue. There are no consultant payroll costs associated with Direct Hire placements, thusaccordingly all Direct Hire revenue increases gross profit by the full amount of the placement fee.
The following table presents the gross profit percentage (gross profit as a percentage of total revenue) by segment and percentage change over the prior period: | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 | | 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Tech | 28.4 | % | | 2.5 | % | | 27.7 | % | | 27.9 | % | | 0.7 | % | | 27.7 | % | |
| Technology | | Technology | 27.6 | % | | (2.8) | % | | 28.4 | % | | 28.2 | % | | 1.1 | % | | 27.9 | % |
| FA | FA | 35.6 | % | | 17.5 | % | | 30.3 | % | | 32.4 | % | | 6.9 | % | | 30.3 | % | FA | 40.1 | % | | 12.6 | % | | 35.6 | % | | 39.4 | % | | 21.6 | % | | 32.4 | % |
| Total gross profit percentage | Total gross profit percentage | 29.6 | % | | 4.2 | % | | 28.4 | % | | 28.8 | % | | 1.8 | % | | 28.3 | % | Total gross profit percentage | 29.0 | % | | (2.2) | % | | 29.6 | % | | 29.6 | % | | 2.8 | % | | 28.8 | % |
The total gross profit percentage for the three months ended September 30, 2021, increased 1202022, decreased 60 basis points as compared to the same period in 20202021, primarily due to higher utilization of paid time off by our consultants and slight spread compression in our Technology Flex business. Total gross profit percentage for the nine months ended September 30, 2022 increased 80 basis points as compared to the same period in 2021, primarily as a result of an increased mix of Direct Hire revenuesrevenue and Flex margin increases resulting from higher bill pay spreads. The total gross profit percentage for the nine months ended September 30, 2021, as compared torun off of the same period in 2020, increased 50 basis points due primarily to an increased mix of Direct Hire revenues.COVID-19 related business.
Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue) provides management with helpful insightinsights 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, changes in payroll tax rates or benefits costs, as well as the impact of billable expenses, which provide no profit margin.
The following table presents the Flex gross profit percentage by segment and percentage change over the prior period: | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 | | 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Tech | 26.9 | % | | 1.5 | % | | 26.5 | % | | 26.4 | % | | (0.4) | % | | 26.5 | % | |
| Technology | | Technology | 26.0 | % | | (3.3) | % | | 26.9 | % | | 26.5 | % | | 0.4 | % | | 26.4 | % |
| FA | FA | 28.5 | % | | 4.8 | % | | 27.2 | % | | 27.2 | % | | 1.1 | % | | 26.9 | % | FA | 30.9 | % | | 8.4 | % | | 28.5 | % | | 30.0 | % | | 10.3 | % | | 27.2 | % |
| Total Flex gross profit percentage | Total Flex gross profit percentage | 27.2 | % | | 1.9 | % | | 26.7 | % | | 26.6 | % | | — | % | | 26.6 | % | Total Flex gross profit percentage | 26.5 | % | | (2.6) | % | | 27.2 | % | | 26.9 | % | | 1.1 | % | | 26.6 | % |
Overall, our Flex gross profit percentage increased 50decreased 70 basis points for the three months ended September 30, 20212022, and was flatincreased 30 basis points for the nine months ended September 30, 2021,2022, as compared to the same periods in 2020.2021. The notable fluctuationschanges within our segments were as follows:.
•Flex margins in our TechTechnology business increased 40decreased 90 basis points for the three months ended September 30, 20212022 and decreasedincreased 10 basis points for the nine months ended September 30, 2021, respectively,2022, as compared to the same periods in 2020.2021. The increasedecrease for the three month periodmonths ended September 30, 2022 was primarily due to spread improvementexpected higher utilization of paid time off by our consultants and slight compression in spreads, which was slightly offset by lower healthcare costs.payroll taxes.
•FA Flex gross profit marginmargins increased 130 and 30240 basis points for the three months ended September 30, 2022 and increased 280 basis points for the nine months ended September 30, 2021, respectively,2022, as compared to the same periods in 2020.2021. The increases for each period were primarily due to a
lower mixincrease in both periods was primarily due to the intended falloff of lower margin COVID-19 Businessrelated business and spread improvements due to theour repositioning of this business in higher skilled areas.efforts as well as lower healthcare and payroll costs.
The following table presents the key drivers for the change in Flex gross profit by segment over the prior period (in thousands): | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| | September 30, 2021 vs. September 30, 2020 | | September 30, 2021 vs. September 30, 2020 | | September 30, 2022 vs. September 30, 2021 | | September 30, 2022 vs. September 30, 2021 |
| | Tech | | FA | | Tech | | FA | | Technology | | FA | | Technology | | FA |
| Key Drivers - Increase (Decrease) | Key Drivers - Increase (Decrease) | | Key Drivers - Increase (Decrease) | |
| Revenue impact | Revenue impact | $ | 19,612 | | | $ | (11,289) | | | $ | 36,869 | | | $ | (6,401) | | Revenue impact | $ | 13,971 | | | $ | (5,168) | | | $ | 52,806 | | | $ | (24,366) | |
| Profitability impact | Profitability impact | 1,435 | | | 813 | | | (795) | | | 698 | | Profitability impact | (3,476) | | | 979 | | | 1,122 | | | 3,801 | |
| Total change in Flex gross profit | Total change in Flex gross profit | $ | 21,047 | | | $ | (10,476) | | | $ | 36,074 | | | $ | (5,703) | | Total change in Flex gross profit | $ | 10,495 | | | $ | (4,189) | | | $ | 53,928 | | | $ | (20,565) | |
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 84.9%85.3% and 86.0%85.1% for the three and nine months ended September 30, 2021, respectively, as2022, compared to 83.3%84.9% and 82.1%86.0% for the comparable periods in 2020.2021. Commissions and bonus incentives are variable costs driven primarily by revenue and gross profit levels. Therefore, as those levels change, these expenses would also generally be anticipated to change.
The following table presents components of SG&A expenses, and expressed as a percentage of revenue (in thousands): | | | 2021 | | % of Revenue | | 2020 | | % of Revenue | | 2022 | | % of Revenue | | 2021 | | % of Revenue |
| Three Months Ended September 30, | Three Months Ended September 30, | | Three Months Ended September 30, | |
| Compensation, commissions, payroll taxes and benefits costs | Compensation, commissions, payroll taxes and benefits costs | $ | 75,537 | | | 18.8 | % | | $ | 63,162 | | | 17.3 | % | Compensation, commissions, payroll taxes and benefits costs | $ | 80,425 | | | 18.4 | % | | $ | 75,537 | | | 18.8 | % |
| Other (1) | Other (1) | 13,435 | | | 3.3 | % | | 12,690 | | | 3.5 | % | Other (1) | 13,881 | | | 3.2 | % | | 13,435 | | | 3.3 | % |
| Total SG&A | Total SG&A | $ | 88,972 | | | 22.1 | % | | $ | 75,852 | | | 20.8 | % | Total SG&A | $ | 94,306 | | | 21.6 | % | | $ | 88,972 | | | 22.1 | % |
| Nine Months Ended September 30, | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| Compensation, commissions, payroll taxes and benefits costs | Compensation, commissions, payroll taxes and benefits costs | $ | 216,324 | | | 18.5 | % | | $ | 193,534 | | | 18.5 | % | Compensation, commissions, payroll taxes and benefits costs | $ | 243,017 | | | 18.8 | % | | $ | 216,324 | | | 18.5 | % |
| Other (1) | Other (1) | 35,293 | | | 3.0 | % | | 42,080 | | | 4.1 | % | Other (1) | 42,485 | | | 3.3 | % | | 35,293 | | | 3.0 | % |
| Total SG&A | Total SG&A | $ | 251,617 | | | 21.5 | % | | $ | 235,614 | | | 22.6 | % | Total SG&A | $ | 285,502 | | | 22.1 | % | | $ | 251,617 | | | 21.5 | % |
(1) Includes credit expense, lease expense, professional fees, travel, telephone, computer, and certain other expenses, which includes a gain on the sale of the corporate headquarters facility during the nine months ended September 30, 2021.expenses.
SG&A as a percentage of revenue increased 130decreased 60 basis points for the three months ended September 30, 20212022, and decreased 110increased 60 basis points for the nine months ended September 30, 2021, respectively, as2022, compared to the same periods in 2020.2021, respectively. The increase fordecrease in the three month period ended September 30, 2021,was mostly driven by lower performance based compensation costs as a result of the lower Flex gross margins in the third quarter and lower professional fees. The increase in the nine month period was primarily related todriven by (a) higher performance-basedperformance based compensation given the strength in our revenue growth. The decrease for the nine months ended September 30, 2021 is primarily related to the recognition ofcosts, (b) a $2.0 million gain fromon the sale of our corporate headquarters declines in credit expense due to larger reservesthat occurred in the firstsecond quarter of 2020 at the onset of the pandemic given inherent risk, leverage from2021; and (c) other investments in our revenue growth, and continued improvements in associate productivity.business.
The Firm continues to focus on generating increased operating leverage through continued solid revenue growth, improved productivity of our associates, structural reductions in operating costs and continuing to exercise solid expense discipline. We are also continuing to make investments in our business, even with some moderation in our revenue growth in the second half of 2022, with a particular focus on improving our back-office productivity.
Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category (in thousands): | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | Increase
(Decrease) | | 2020 | | 2021 | | Increase
(Decrease) | | 2020 | | 2022 | | Increase
(Decrease) | | 2021 | | 2022 | | Increase
(Decrease) | | 2021 |
| Fixed asset depreciation (includes finance leases) | Fixed asset depreciation (includes finance leases) | $ | 609 | | | (36.4) | % | | $ | 957 | | | $ | 2,164 | | | (33.7) | % | | $ | 3,265 | | Fixed asset depreciation (includes finance leases) | $ | 597 | | | (2.0) | % | | $ | 609 | | | $ | 1,902 | | | (12.1) | % | | $ | 2,164 | |
| Capitalized software amortization | Capitalized software amortization | 417 | | | 18.8 | % | | 351 | | | 1,256 | | | 53.9 | % | | 816 | | Capitalized software amortization | 448 | | | 7.4 | % | | 417 | | | 1,312 | | | 4.5 | % | | 1,256 | |
| Total Depreciation and amortization | Total Depreciation and amortization | $ | 1,026 | | | (21.6) | % | | $ | 1,308 | | | $ | 3,420 | | | (16.2) | % | | $ | 4,081 | | Total Depreciation and amortization | $ | 1,045 | | | 1.9 | % | | $ | 1,026 | | | $ | 3,214 | | | (6.0) | % | | $ | 3,420 | |
Other Expense (Income), Net. Other expense (income), net for the three and nine months ended September 30, 2022, was expense of $0.9 million and income of $0.3 million, respectively. Other (income) expense, net for the three and nine months ended September 30, 2021 was expense of $1.4 million and $5.8 million, respectively. Other expense, net for the three and nine months ended September 30, 2020 was $0.9 million and $3.7 million, respectively. Other expense, netThis line item primarily includes interest expense related to outstanding borrowings under our credit facility, which is partially offset by the interest income on cash held in government money market funds.funds, and our proportionate share of the loss from WorkLLama.
During the nine months ended September 30, 2022, Other expense (income), net also includes $4.1 million related to a gain recognized as a result of the termination of Swap B.
During the three and nine months ended September 30, 2022, our proportionate share of the loss from WorkLLama, our equity method investment, was $0.9 million and $2.7 million, respectively, and during the three and nine months ended September 30, 2021, $0.7 million and $1.7 million, respectively. In addition, during the nine month ended September 30, 2021, Other (income) expense, net also includesincluded an expense of $1.8 million related to the termination of our SERP. Refer to Note I - “Employee Benefit Plans” in the Unaudited Condensed Consolidated Financial Statements, included in this report on Form 10-Q, for a complete discussion of the termination of our SERP.
During the three and nine months ended September 30, 2021, Other expense, net also includes our proportionate share of the loss from WorkLLama, our equity method investment, of $0.7 million and $1.7 million.
Income Tax Expense. Income tax expense as a percentage of income from continuing operations, before income taxes (our “effective tax rate” from continuing operations) for the nine months ended September 30, 2022 and 2021 was 26.7% and 2020 was 28.1% and 27.8%, respectively.
Non-GAAP Financial Measures
Free Cash Flow. “Free Cash Flow,” a non-GAAP financial measure, is defined by Kforce as net cash provided by operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic opportunities including investing in our business, making acquisitions, repurchasing common stock or paying dividends. Free Cash Flow is limited, however, because 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 (but not a replacement of) our Unaudited Condensed Consolidated Statements of Cash Flows.
The following table presents Free Cash Flow (in thousands): | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2021 | | 2020 | | | 2022 | | 2021 | |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 59,943 | | | $ | 93,871 | | | Net cash provided by operating activities | $ | 78,063 | | | $ | 59,943 | | |
| Capital expenditures | Capital expenditures | (5,026) | | | (5,296) | | | Capital expenditures | (4,656) | | | (5,026) | | |
| Free cash flow | Free cash flow | 54,917 | | | 88,575 | | | Free cash flow | 73,407 | | | 54,917 | | |
| Change in debt | — | | | 35,000 | | | |
| Payments on credit facility | | Payments on credit facility | (100,000) | | | — | | |
| Repurchases of common stock | Repurchases of common stock | (44,407) | | | (29,623) | | | Repurchases of common stock | (42,103) | | | (44,407) | | |
| Cash dividends | Cash dividends | (14,836) | | | (12,619) | | | Cash dividends | (18,164) | | | (14,836) | | |
| Equity method investment | (7,000) | | | (2,500) | | | |
| Contributions to WorkLLama joint venture | | Contributions to WorkLLama joint venture | (500) | | | (7,000) | | |
| Net proceeds from the sale of assets | Net proceeds from the sale of assets | 23,742 | | | — | | | Net proceeds from the sale of assets | — | | | 23,742 | | |
| | Note receivable issued to WorkLLama joint venture | | Note receivable issued to WorkLLama joint venture | (4,500) | | | — | | |
| Other | Other | (271) | | | 2,609 | | | Other | (40) | | | (271) | | |
| Change in cash and cash equivalents | Change in cash and cash equivalents | $ | 12,145 | | | $ | 81,442 | | | Change in cash and cash equivalents | $ | (91,900) | | | $ | 12,145 | | |
Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, is defined by Kforce as net income before depreciation and amortization, stock-based compensation expense, interest expense, net, income from termination of Swap B, gain on the sale of the corporate headquarters, SERP termination expense, income tax expense and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations and management believes 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. Consequently, management believes it is useful information to investors. The measure should not be considered in isolation or as an alternative to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is thus susceptible to varying calculations. Also, Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.
In addition, although we excluded amortization of stock-based compensation expense because it is a non-cash expense, we expect to continue to incur stock-based compensation in the future and the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our shareholder ownership interest. We suggest that you evaluate these items and the potential risks of excluding such items when analyzing our financial position.
The following table presents a reconciliation of Adjusted EBITDA to net income (in thousands): | | | 2021 | | 2020 | | 2022 | | 2021 |
| Three Months Ended September 30, | Three Months Ended September 30, | | Three Months Ended September 30, | |
| Net income | Net income | $ | 20,168 | | | $ | 18,763 | | Net income | $ | 22,262 | | | $ | 20,168 | |
| Depreciation and amortization | Depreciation and amortization | 1,026 | | | 1,308 | | Depreciation and amortization | 1,045 | | | 1,026 | |
| | Stock-based compensation expense | Stock-based compensation expense | 3,512 | | | 2,908 | | Stock-based compensation expense | 4,445 | | | 3,512 | |
| Interest expense, net | Interest expense, net | 750 | | | 849 | | Interest expense, net | 9 | | | 750 | |
| | Income tax expense | Income tax expense | 7,650 | | | 7,017 | | Income tax expense | 8,151 | | | 7,650 | |
| | | Loss from equity method investment | Loss from equity method investment | 687 | | | 103 | | Loss from equity method investment | 896 | | | 687 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 33,793 | | | $ | 30,948 | | Adjusted EBITDA | $ | 36,808 | | | $ | 33,793 | |
| | Nine Months Ended September 30, | Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| Net income | Net income | $ | 54,617 | | | $ | 37,754 | | Net income | $ | 68,359 | | | $ | 54,617 | |
| Depreciation and amortization | Depreciation and amortization | 3,420 | | | 4,081 | | Depreciation and amortization | 3,214 | | | 3,420 | |
| Gain on sale of corporate headquarters | Gain on sale of corporate headquarters | (2,051) | | | — | | Gain on sale of corporate headquarters | — | | | (2,051) | |
| Stock-based compensation expense | Stock-based compensation expense | 10,447 | | | 8,707 | | Stock-based compensation expense | 13,293 | | | 10,447 | |
| Interest expense, net | Interest expense, net | 2,312 | | | 2,533 | | Interest expense, net | 988 | | | 2,312 | |
| Gain from swap termination | | Gain from swap termination | 4,059 | | | — | |
| Income tax expense | Income tax expense | 21,378 | | | 14,568 | | Income tax expense | 24,886 | | | 21,378 | |
| SERP termination expense | SERP termination expense | 1,821 | | | — | | SERP termination expense | — | | | 1,821 | |
| Loss from equity method investment | Loss from equity method investment | 1,709 | | | 1,237 | | Loss from equity method investment | 2,737 | | | 1,709 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 93,653 | | | $ | 68,880 | | Adjusted EBITDA | $ | 117,536 | | | $ | 93,653 | |
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on our operating cash flows and, if necessary, borrowings under our credit facility. At September 30, 20212022 and December 31, 2020,2021, we had $115.6$5.1 million and $103.5$97.0 million in cash and cash equivalents, respectively, which consisted primarily of government money market funds. At both September 30, 20212022 and December 31, 2020,2021, we had $0 and $100.0 million outstanding under our credit facility, andfacility. At September 30, 2022, we had $198.7 million availableof borrowing availability under our credit facility. The amounts
In May 2022, we terminated Swap B in connection with the payment of all outstanding borrowings under our credit facility, were hedged by interest rate swaps, as discussed below. In addition, onwhich was $100.0 million at the time of repayment.
Effective April 19,30, 2021, we completedKforce’s Board of Directors irrevocably terminated the sale of our corporate headquartersSERP. The benefits owed to an independent third party. We received net proceeds of $23.7 million and recorded a gain on the sale of $2.0 million, which is included in SG&A expenses. In conjunction withtwo participants under the sale, we entered into an agreement to lease backSERP at the building for a period of 18 months.
In September 2021, Kforce entered into a lease agreement (the “Lease Agreement”) for our new corporate headquarters in Tampa, Florida. The lease term is 129 months, the lease commencement date is October 1, 2022 and the rent commencement date is nine (9) months following the lease commencement date. The minimum base rent over the lease term is $10.9 million, which includes annual escalations. The Lease Agreement also provides for the Company to receive an allowance, from the Landlord, of approximately $1.6 million to be used towards costs to design, engineer, install, supply and to construct improvements that will become partend of the building. The future lease payments andsecond quarter of 2022 was $20.0 million in the allowance are not yet recorded on our condensed consolidated balance sheets.aggregate, which represented the fair value at the date of termination. These benefits were fully paid in July 2022.
Cash Flows
We are principally focused on achieving an appropriate balance of cash flow across several areas of opportunity such as: generating positive cash flow from operating activities;activities, investing in our infrastructurebusiness to allow sustainablesustain our growth via capital expenditures;and meet our profitability objectives, returning capital to our shareholders through our quarterly dividends and common stock repurchase program; maintaining appropriate leverage under our credit facility;program, and selectively pursuing acquisition opportunities; and maintaining sufficient liquidity for operations.opportunities.
Cash provided by operating activities was $59.9$78.1 million during the nine months ended September 30, 2021,2022, as compared to $93.9$59.9 million provided during the nine months ended September 30, 2020.2021. 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 compensation. Cash used in operating activities during the nine month period ended September 30, 2022 includes the payment of $20.0 million for amounts owed to two participants under the terminated SERP noted above. The decreaseyear-over-year increase in cash provided by operating activities was primarily driven by profitable revenue growth, proceeds from the termination of Swap B, and continued management of working capital.
Cash used in our accounts receivable portfolioinvesting activities during the nine months ended September 30, 2022 was $9.7 million and primarily consisted of cash used for capital expenditures of $4.7 million and the paymentissuance of payroll taxes deferred in 2020 related to the CARES ACT, offset in part by profitable revenue growth.
notes receivable from WorkLLama for $4.5 million. Cash provided by investing activities during the nine months ended September 30, 2021, was $11.7 million and cash used in investing activities during the nine months ended September 30, 2020 was $4.2 million. Cash provided by investing activities during the nine months ended September 30, 2021 includesincluded $23.7 million in net proceeds from the sale of our corporate headquarters, offset in part by cash used for capital expenditures and payments for capital invested incash contributed to WorkLLama. We expect to continue selectively investing in our infrastructure, primarily focusing on implementing new and upgrading existing technologies that will provide the most benefit.
Cash used in financing activities was $160.3 million during the nine months ended September 30, 2022, compared to $59.5 million during the nine months ended September 30, 2021, as compared to $8.2 million used during the nine months ended September 30, 2020.2021. The change was primarily driven by the $35.0repayment of $100.0 million draw downoutstanding on our credit facility during the nine months ended September 30, 2020 and an increase in dividend payments, offset in part by a decrease in the repurchases of common stock during the nine month period of 2021 compared to 2020.stock.
The following table presents the cash flow impact of the common stock repurchase activity (in thousands): | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Open market repurchases | Open market repurchases | | $ | 43,973 | | | $ | 29,386 | | Open market repurchases | | $ | 41,572 | | | $ | 43,973 | |
| Repurchase of shares related to tax withholding requirements for vesting of restricted stock | Repurchase of shares related to tax withholding requirements for vesting of restricted stock | | 434 | | | 237 | | Repurchase of shares related to tax withholding requirements for vesting of restricted stock | | 531 | | | 434 | |
| Total cash flow impact of common stock repurchases | Total cash flow impact of common stock repurchases | | $ | 44,407 | | | $ | 29,623 | | Total cash flow impact of common stock repurchases | | $ | 42,103 | | | $ | 44,407 | |
| |
During the nine months ended September 30, 20212022 and 2020,2021, Kforce declared and paid quarterly dividends of $18.2 million ($0.90 per share) and $14.8 million ($0.72 per share) and $12.6 million ($0.60 per share), respectively, which represents a 20% increase25% increase.on a per share basis. While the Board has declared and paid a quarterly dividend since initiation in the per share payment. The declaration, paymentfourth quarter of 2013, and amount ofintends to in the foreseeable future, dividends are discretionary and will be subject to determination by our 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 adversely affect operating results and liquidity, as well as the ability of our lenders to fund borrowings. Actual results could also differ materially from these indicated as a result of a number of factors, including the use of currently available resources for capital expenditures, investments, additional common stock repurchases or dividends.
Credit Facility
On May 25, 2017, the Firm entered into a credit agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank of America, N.A., as syndication agent, Regions Bank and BMO Harris Bank, N.A., as co-documentation agents, and the lenders referred to therein (the “Credit Facility”). The maturity date of the Credit Facility is May 25, 2022. Borrowings under the Credit Facility are secured by substantially all of the tangible and intangible assets of the Firm, excluding the Firm’s corporate headquarters (which was sold in the second quarter of 2021) and certain other designated collateral. Accordingly, as of September 30, 2021, $100.0 million was outstanding and is classified as a long-term liability within our balance sheet. In addition, as of September 30, 2021, $198.7 million was available on our Credit Facility, subject to certain covenants, and as of December 31, 2020, $100.0 million was outstanding. As of September 30, 2021, we are in compliance with our credit facility covenants as described in the 2020 Annual Report on Form 10-K and currently expect that we will be able to maintain compliance with these covenants.
Credit Facility
On October 20, 2021, the Firm entered into an amended and restated 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, BMO Harris Bank, N.A., as documentation agent, and the lenders referred to therein (the “the Amended“Amended and Restated Credit Facility”). Under the Amended and Restated Credit Facility, the Firm will havehas a maximum borrowing capacity of $200.0 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 maturity date of the Amended and Restated Credit Facility is October 20, 2025. Refer2026. As noted above, the Firm paid the credit facility’s outstanding balance of $100.0 million resulting in an outstanding balance of $0 as of September 30, 2022, thereby resulting in $198.7 million, subject to Note N - “ Subsequent Events”certain covenants, of availability under the credit facility. As of September 30, 2022, we are in compliance with our credit facility covenants as described in the Unaudited Condensed Consolidated Financial Statements, included in this report2021 Annual Report on Form 10-Q, for a more complete discussion of the new credit agreement.10-K and currently expect that we will be able to maintain compliance with these covenants.
Prior to June 30, 2022, Kforce has two forward-startingmaintained interest rate swap agreements, which have beenwere designated as cash flow hedges, to mitigate the risk of rising interest rates. In May 2022, Kforce terminated Swap B. Refer to Note KJ - “Derivative Instruments and Hedging Activity” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in this report on Form 10-Q, for a complete discussion of our interest rate swaps. At September 30, 2021 and December 31, 2020, the fair value of our interest rate swaps were a liability of $0.3 million and $1.8 million, respectively.
Stock Repurchases
In March 2020,February 2022, the Board approved an increase in our stock repurchase authorization, to an aggregatebringing the total ofauthorization to $100.0 million. During the nine months ended September 30, 2021,2022, Kforce repurchased approximately 0.8 million684,000 shares of common stock on the open market at a total cost of approximately $44.5$42.6 million and $40.0$66.3 million remained available for further repurchases under the Board-authorized common stock repurchase program at September 30, 2021.2022.
Contractual Obligations and Commitments
Other than the changes described elsewhere in this Quarterly Report, there have been no material changes during the period covered by this report on Form 10-Q to our contractual obligations previously disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20202021 Annual Report on Form 10-K.10-K
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our unaudited condensed 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 unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our unaudited condensed 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.
ReferEquity Method Investment
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama. Our noncontrolling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity method, our carrying value is at cost and adjusted for our proportionate share of earnings or losses. There are no basis differences between our carrying value and the underlying equity in net assets that would result in adjustments to our proportionate share of earnings or losses.
We 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 the fair value of the investment occurs. Management’s estimate of the fair value of an investment is based on the income approach and market approach. Like many developing business enterprises, WorkLLama was impacted by the COVID-19 pandemic over the last two years. Additionally, in 2021, WorkLLama also strategically repositioned its business to focus its platform on providing its clients with an ability to directly source and engage talent. While WorkLLama is seeing demand for its platform, it has taken longer than expected to achieve its financial expectations. Given this, Kforce management determined that an indicator of impairment had occurred in the second quarter of 2022. Thus, we performed an impairment test as of June 30, 2022, utilizing the market and income approaches. For the income approach, we utilized estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilized 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. The fair value determined in our impairment test is highly sensitive to changes in key assumptions, including but not limited to the discount rate that is applied to the financial projections. As a result of the impairment test, we concluded that the carrying value of the equity method investment was not impaired. However, if the joint venture is unable to achieve its financial projections or if there is a change in the assumptions used to value our interest in the joint venture, then it
is reasonably possible that the carrying value of the equity investment may need to be written down to the fair value resulting in an impairment charge in a future quarter. As of June 30, 2022, the fair value of the equity investment, determined in our impairment test, exceeded the carrying value by less than ten percent.
We have not identified any indicators that an other than temporary impairment has occurred in the three months ended September 30, 2022 that would require further analysis. We will continue to monitor potential indicators in future quarters that may have a bearing on the recoverability of the carrying value of our investment.
For a more detailed discussion of our accounting policies and critical accounting estimates, refer to Note A – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in our 20202021 Annual Report on Form 10-K for a more detailed discussion of our significant accounting policies and critical accounting estimates.10-K.
NEWNEW ACCOUNTING STANDARDS
Refer to Note A - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report for a discussion of new accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK.
With respect to our quantitative and qualitative disclosures about market risk, there have been no material changes to the information included in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021,2022, we carried out an evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act (the “Evaluation”) 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 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 forms; and (2) accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our CEO and CFO, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes have occurred.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in legal proceedings, claims and administrative matters that arise in the ordinary course of business. For further information regarding legal proceedings, refer to Note ML - "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements in the section entitled "Litigation and Loss Contingencies," included in Item 1. Financial Statements of this report. While the ultimate outcome of these legal proceedings cannot be determined, we currently do not expect that these matters, individually or in the aggregate, will have a material effect on our financial position.
ITEM 1A. RISK FACTORS.
There have been no material changes in the risk factors previously disclosed in our 20202021 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Purchases of Equity Securities by the Issuer
In February 2022, the Board approved an increase in our stock repurchase authorization increasing the available authorization from $23.6 million to $100.0 million. Purchases of common stock under the Plan are subject to certain price, market, volume and timing constraints, which are specified in the plan. The following table presents information with respect to our repurchases of Kforce common stock during the three months ended September 30, 2021:2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased
(1) | | 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 |
| July 1, 2021 to July 31, 2021 | 94,958 | | | $ | 61.43 | | | 94,958 | | | $ | 49,115,641 | |
| August 1, 2021 to August 31, 2021 | 57,656 | | | $ | 58.65 | | | 56,514 | | | $ | 45,803,109 | |
| September 1, 2021 to September 30, 2021 | 96,204 | | | $ | 60.14 | | | 96,204 | | | $ | 40,017,182 | |
| Total | 248,818 | | | $ | 60.29 | | | 247,676 | | | $ | 40,017,182 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased
(1) | | 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 |
| July 1, 2022 to July 31, 2022 | 69,574 | | | $ | 62.49 | | | 69,574 | | | $ | 84,438,951 | |
| August 1, 2022 to August 31, 2022 | 128,530 | | | $ | 57.70 | | | 127,368 | | | $ | 77,089,873 | |
| September 1, 2022 to September 30, 2022 | 184,162 | | | $ | 58.73 | | | 184,162 | | | $ | 66,273,639 | |
| Total | 382,266 | | | $ | 59.07 | | | 381,104 | | | $ | 66,273,639 | |
(1) Includes 1,1421,162 shares received upon vesting of restricted stock to satisfy tax withholding requirements for the period August 1, 20212022 to August 31, 2021.2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS. | | | | | | | | |
| Exhibit Number | 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. | |
| 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 material from this Quarterly Report on Form 10-Q of Kforce Inc. for the period ended September 30, 2021,2022, formatted in XBRL Part I, Item 1 of this Form 10-Q formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income; (ii) Unaudited Condensed Consolidated Balance Sheets; (iii) Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity; (iv) Unaudited Condensed Consolidated Statements of Cash Flows; and (v) related notes to these financial statements. | |
| 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 embedded within the Inline XBRL document. | |
SIGNATURES
Pursuant to the requirements 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. |
| | | | |
| Date: | November 3, 20212, 2022 | By: | | /s/ DAVID M. KELLY |
| | | | David M. Kelly |
| | | | Executive Vice President, Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | |
| Date: | November 3, 20212, 2022 | By: | | /s/ JEFFREY B. HACKMAN |
| | | | Jeffrey B. Hackman |
| | | | Senior Vice President, Finance and Accounting |
| | | | (Principal Accounting Officer) |
