UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
________________________________________________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20222023
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-26058
Kforce Inc.
Exact name of registrant as specified in its charter
_______________________________________________________________ | | | | | | | | |
Florida | | 59-3264661 |
State or other jurisdiction of incorporation or organization | | IRS Employer Identification No. |
| | | | | | | | |
1001 East Palm Avenue,1150 Assembly Drive, Suite 500, Tampa, Florida | | 3360533607 |
Address of principal executive offices | | Zip Code |
Registrant’s telephone number, including area code: (813) 552-5000
_______________________________________________________
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 per share | KFRC | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act: | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | x | | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.): Yes ☐ No x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The number of shares outstanding of the registrant’s common stock as of July 29, 202228, 2023 was 21,176,046.20,120,748.
KFORCE INC.
TABLE OF CONTENTS | | | | | | | | |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
References in this document to the “Registrant,” “Kforce,” the “Company,” “we,” the “Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.
This report, particularly Part I, Item 2,2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), and Part II, Item 1A,1A. Risk Factors, and the documents we incorporate into this report contain certain statements that are, or may be deemed to be, forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements may include, but may not be limited to: expectations of financial or operational performance; developments withinperformance, including our expectations regarding the staffing sector including, but not limitedfuture changes in revenue of each segment of our business; the impact of the economic environment on our business; our tighter discretionary spend control; the Firm’s commitment to return significant capital to its shareholders; our ability to meet capital expenditure and working capital requirements of our operations; the penetration rate (the percentage of temporary staffingintent and ability to total employment)declare and pay quarterly dividends; growth raterates in temporary staffing,staffing; a reductionconstraint in the supply of consultants and candidates or the Firm’s ability to attract such individuals, the impact of our joint venture's inability to achieve its financial objectives or changes in valuation assumptions,individuals; changes in client demand for our services and our ability to adapt to such changes, the entry of new competitors in the market,changes; the ability of the Firm to maintain and attract clients in the face of changing economic or competitive conditions; expected incurrence of stock-based compensation; the impact of the Inflation Reduction Act of 2022 on our stock repurchases and financial condition; our beliefs regarding the expected future benefits of our flexible working environment; the impact of the COVID-19 pandemic, inflationary pressures, rising interest rates and/or supply constraints on the global and U.S. macro-economic environments, and our business, customers, financial condition and results of operations; our ability to maintain compliance with our credit facility's covenants; our beliefs regarding potential government actions or changes in laws and regulations, including those related to the COVID-19 pandemic;regulations; anticipated costs and benefits of acquisitions, divestitures, joint ventures and other investments; effects of interest rate variations; financing needs or plans; expected funding or payment of employee benefits; estimates concerning the effects of litigation or other disputes; the occurrence of unanticipated expenses; as well as assumptions as to any of the foregoing and all statements that are not based on historical fact but rather reflect our current expectations concerning future results and events. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, refer to the Risk Factors and MD&A sections. In addition, when used in this discussion, the terms “anticipate,” “assume,” “estimate,” “expect,” “intend,” “plan,” “in our view,” “believe,” “will,” “may,” “likely,” “could,” “should,” “future” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. Kforce undertakes no obligation to update any forward-looking statements.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Revenue | Revenue | $ | 436,516 | | | $ | 403,614 | | | $ | 853,483 | | | $ | 766,839 | | Revenue | $ | 389,190 | | | $ | 436,516 | | | $ | 795,187 | | | $ | 853,483 | |
Direct costs | Direct costs | 305,444 | | | 284,683 | | | 598,525 | | | 549,226 | | Direct costs | 278,924 | | | 305,444 | | | 570,945 | | | 598,525 | |
Gross profit | Gross profit | 131,072 | | | 118,931 | | | 254,958 | | | 217,613 | | Gross profit | 110,266 | | | 131,072 | | | 224,242 | | | 254,958 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 96,147 | | | 84,616 | | | 191,196 | | | 162,645 | | Selling, general and administrative expenses | 82,993 | | | 96,147 | | | 172,332 | | | 191,196 | |
Depreciation and amortization | Depreciation and amortization | 1,076 | | | 1,192 | | | 2,169 | | | 2,394 | | Depreciation and amortization | 1,340 | | | 1,076 | | | 2,574 | | | 2,169 | |
Income from operations | Income from operations | 33,849 | | | 33,123 | | | 61,593 | | | 52,574 | | Income from operations | 25,933 | | | 33,849 | | | 49,336 | | | 61,593 | |
Other (income) expense, net | (2,672) | | | 3,112 | | | (1,239) | | | 4,397 | | |
Other expense (income), net | | Other expense (income), net | 313 | | | (2,672) | | | 1,358 | | | (1,239) | |
Income from operations, before income taxes | Income from operations, before income taxes | 36,521 | | | 30,011 | | | 62,832 | | | 48,177 | | Income from operations, before income taxes | 25,620 | | | 36,521 | | | 47,978 | | | 62,832 | |
Income tax expense | Income tax expense | 9,605 | | | 8,823 | | | 16,735 | | | 13,728 | | Income tax expense | 7,046 | | | 9,605 | | | 13,194 | | | 16,735 | |
| Net income | Net income | 26,916 | | | 21,188 | | | 46,097 | | | 34,449 | | Net income | 18,574 | | | 26,916 | | | 34,784 | | | 46,097 | |
Other comprehensive income, net of tax: | Other comprehensive income, net of tax: | | Other comprehensive income, net of tax: | |
Defined benefit pension plans | — | | | 3,056 | | | — | | | 3,103 | | |
Change in fair value of interest rate swaps | Change in fair value of interest rate swaps | (2,917) | | | 10 | | | (615) | | | 949 | | Change in fair value of interest rate swaps | — | | | (2,917) | | | — | | | (615) | |
Comprehensive income | Comprehensive income | $ | 23,999 | | | $ | 24,254 | | | $ | 45,482 | | | $ | 38,501 | | Comprehensive income | $ | 18,574 | | | $ | 23,999 | | | $ | 34,784 | | | $ | 45,482 | |
| | Earnings per share – basic | Earnings per share – basic | $ | 1.33 | | | $ | 1.02 | | | $ | 2.27 | | | $ | 1.66 | | Earnings per share – basic | $ | 0.96 | | | $ | 1.33 | | | $ | 1.79 | | | $ | 2.27 | |
| Earnings per share – diluted | Earnings per share – diluted | $ | 1.30 | | | $ | 1.00 | | | $ | 2.22 | | | $ | 1.61 | | Earnings per share – diluted | $ | 0.95 | | | $ | 1.30 | | | $ | 1.77 | | | $ | 2.22 | |
| Weighted average shares outstanding – basic | Weighted average shares outstanding – basic | 20,283 | | | 20,673 | | | 20,300 | | | 20,802 | | Weighted average shares outstanding – basic | 19,341 | | | 20,283 | | | 19,398 | | | 20,300 | |
Weighted average shares outstanding – diluted | Weighted average shares outstanding – diluted | 20,718 | | | 21,282 | | | 20,725 | | | 21,331 | | Weighted average shares outstanding – diluted | 19,611 | | | 20,718 | | | 19,638 | | | 20,725 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)THOUSANDS EXCEPT PER SHARE AMOUNTS)
| | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 29,974 | | | $ | 96,989 | | Cash and cash equivalents | $ | 147 | | | $ | 121 | |
Trade receivables, net of allowances of $1,931 and $2,342, respectively | 285,355 | | | 265,322 | | |
Trade receivables, net of allowances of $1,579 and $1,575, respectively | | Trade receivables, net of allowances of $1,579 and $1,575, respectively | 249,895 | | | 269,496 | |
Income tax refund receivable | Income tax refund receivable | 372 | | | 3,010 | | Income tax refund receivable | 669 | | | 35 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 10,592 | | | 6,790 | | Prepaid expenses and other current assets | 8,743 | | | 8,108 | |
Total current assets | Total current assets | 326,293 | | | 372,111 | | Total current assets | 259,454 | | | 277,760 | |
Fixed assets, net | Fixed assets, net | 6,566 | | | 5,964 | | Fixed assets, net | 10,160 | | | 8,647 | |
Other assets, net | Other assets, net | 82,687 | | | 92,629 | | Other assets, net | 70,636 | | | 75,771 | |
Deferred tax assets, net | Deferred tax assets, net | 1,466 | | | 7,657 | | Deferred tax assets, net | 2,780 | | | 4,786 | |
Goodwill | Goodwill | 25,040 | | | 25,040 | | Goodwill | 25,040 | | | 25,040 | |
Total assets | Total assets | $ | 442,052 | | | $ | 503,401 | | Total assets | $ | 368,070 | | | $ | 392,004 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable and other accrued liabilities | Accounts payable and other accrued liabilities | $ | 94,616 | | | $ | 81,408 | | Accounts payable and other accrued liabilities | $ | 60,247 | | | $ | 72,792 | |
Accrued payroll costs | Accrued payroll costs | 88,454 | | | 71,424 | | Accrued payroll costs | 39,414 | | | 48,369 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 4,897 | | | 6,338 | | Current portion of operating lease liabilities | 3,581 | | | 4,576 | |
Income taxes payable | Income taxes payable | 1,520 | | | 1,239 | | Income taxes payable | 999 | | | 5,696 | |
Other current liabilities | 29 | | | 22 | | |
| Total current liabilities | Total current liabilities | 189,516 | | | 160,431 | | Total current liabilities | 104,241 | | | 131,433 | |
Long-term debt – credit facility | Long-term debt – credit facility | — | | | 100,000 | | Long-term debt – credit facility | 24,600 | | | 25,600 | |
| Other long-term liabilities | Other long-term liabilities | 42,003 | | | 54,564 | | Other long-term liabilities | 51,611 | | | 52,773 | |
Total liabilities | Total liabilities | 231,519 | | | 314,995 | | Total liabilities | 180,452 | | | 209,806 | |
Commitments and contingencies (Note L) | Commitments and contingencies (Note L) | 0 | | 0 | Commitments and contingencies (Note L) | |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding | — | | | — | | |
Common stock, $0.01 par; 250,000 shares authorized, 73,007 and 72,997 issued, respectively | 730 | | | 730 | | |
Preferred stock, $0.01 par value; 15,000 shares authorized, none issued and outstanding | | Preferred stock, $0.01 par value; 15,000 shares authorized, none issued and outstanding | — | | | — | |
Common stock, $0.01 par value; 250,000 shares authorized, 73,279 and 73,242 issued, respectively | | Common stock, $0.01 par value; 250,000 shares authorized, 73,279 and 73,242 issued, respectively | 732 | | | 732 | |
Additional paid-in capital | Additional paid-in capital | 497,927 | | | 488,036 | | Additional paid-in capital | 517,422 | | | 507,734 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 6 | | | 621 | | Accumulated other comprehensive income | — | | | 6 | |
Retained earnings | Retained earnings | 475,890 | | | 442,596 | | Retained earnings | 512,937 | | | 492,764 | |
Treasury stock, at cost; 51,794 and 51,493 shares, respectively | (764,020) | | | (743,577) | | |
Treasury stock, at cost; 53,163 and 52,744 shares, respectively | | Treasury stock, at cost; 53,163 and 52,744 shares, respectively | (843,473) | | | (819,038) | |
Total stockholders’ equity | Total stockholders’ equity | 210,533 | | | 188,406 | | Total stockholders’ equity | 187,618 | | | 182,198 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 442,052 | | | $ | 503,401 | | Total liabilities and stockholders’ equity | $ | 368,070 | | | $ | 392,004 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | Retained Earnings | | Shares | | Amount | | | Shares | | Amount | | Retained Earnings | | Shares | | Amount | |
Balance, December 31, 2021 | 72,997 | | | $ | 730 | | | $ | 488,036 | | | $ | 621 | | | $ | 442,596 | | | 51,492 | | | $ | (743,577) | | | $ | 188,406 | | |
Balance, December 31, 2022 | | Balance, December 31, 2022 | 73,242 | | | $ | 732 | | | $ | 507,734 | | | $ | 6 | | | $ | 492,764 | | | 52,744 | | | $ | (819,038) | | | $ | 182,198 | |
Net income | Net income | — | | | — | | | — | | | — | | | 19,181 | | | — | | | — | | | 19,181 | | Net income | — | | | — | | | — | | | — | | | 16,210 | | | — | | | — | | | 16,210 | |
Issuance for stock-based compensation and dividends, net of forfeitures | Issuance for stock-based compensation and dividends, net of forfeitures | (1) | | | — | | | 319 | | | — | | | (318) | | | — | | | — | | | 1 | | Issuance for stock-based compensation and dividends, net of forfeitures | 5 | | | — | | | 340 | | | — | | | (341) | | | — | | | — | | | (1) | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 4,437 | | | — | | | — | | | — | | | — | | | 4,437 | | Stock-based compensation expense | — | | | — | | | 4,326 | | | — | | | — | | | — | | | — | | | 4,326 | |
Employee stock purchase plan | Employee stock purchase plan | — | | | — | | | 193 | | | — | | | — | | | (3) | | | 49 | | | 242 | | Employee stock purchase plan | — | | | — | | | 172 | | | — | | | — | | | (5) | | | 73 | | | 245 | |
Dividends ($0.30 per share) | — | | | — | | | — | | | — | | | (6,094) | | | — | | | — | | | (6,094) | | |
| Change in fair value of interest rate swaps, net of tax benefit of $780 | — | | | — | | | — | | | 2,302 | | | — | | | — | | | — | | | 2,302 | | |
Dividends ($0.36 per share) | | Dividends ($0.36 per share) | — | | | — | | | — | | | — | | | (7,003) | | | — | | | — | | | (7,003) | |
Repurchases of common stock | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 147 | | | (10,270) | | | (10,270) | | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 181 | | | (10,244) | | | (10,244) | |
Balance, March 31, 2022 | 72,996 | | | $ | 730 | | | $ | 492,985 | | | $ | 2,923 | | | $ | 455,365 | | | 51,636 | | | $ | (753,798) | | | $ | 198,205 | | |
Other | | Other | — | | | — | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | 73,247 | | | 732 | | | 512,572 | | | $ | — | | | 501,630 | | | 52,920 | | | (829,209) | | | 185,725 | |
Net income | Net income | — | | | — | | | — | | | — | | | 26,916 | | | — | | | — | | | 26,916 | | Net income | — | | | — | | | — | | | — | | | 18,574 | | | — | | | — | | | 18,574 | |
Issuance for stock-based compensation and dividends, net of forfeitures | Issuance for stock-based compensation and dividends, net of forfeitures | 11 | | | 298 | | | — | | | (298) | | | — | | | — | | | — | | Issuance for stock-based compensation and dividends, net of forfeitures | 32 | | | — | | | 322 | | | — | | | (322) | | | — | | | — | | | — | |
Stock-based compensation expense | Stock-based compensation expense | — | | | — | | | 4,410 | | | — | | | — | | | — | | | — | | | 4,410 | | Stock-based compensation expense | — | | | — | | | 4,309 | | | — | | | — | | | — | | | — | | | 4,309 | |
Employee stock purchase plan | Employee stock purchase plan | — | | | — | | | 234 | | | — | | | — | | | (4) | | | 61 | | | 295 | | Employee stock purchase plan | — | | | — | | | 219 | | | — | | | — | | | (5) | | | 77 | | | 296 | |
Dividends ($0.30 per share) | — | | | — | | | — | | | — | | | (6,093) | | | — | | | — | | | (6,093) | | |
| Change in fair value of interest rate swaps, net of tax expense of $989 | — | | | — | | | — | | | (2,917) | | | — | | | — | | | — | | | (2,917) | | |
Dividends ($0.36 per share) | | Dividends ($0.36 per share) | — | | | — | | | — | | | — | | | (6,945) | | | — | | | — | | | (6,945) | |
Repurchases of common stock | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 162 | | | (10,283) | | | (10,283) | | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 248 | | | (14,341) | | | (14,341) | |
Balance, June 30, 2022 | 73,007 | | | 730 | | | 497,927 | | | 6 | | | 475,890 | | | 51,794 | | | (764,020) | | | 210,533 | | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | 73,279 | | | $ | 732 | | | $ | 517,422 | | | $ | — | | | $ | 512,937 | | | 53,163 | | | $ | (843,473) | | | $ | 187,618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive (Loss) Income | | | | Treasury Stock | | Total Stockholders’ Equity |
| Shares | | Amount | | | | Retained Earnings | | Shares | | Amount | |
Balance, December 31, 2020 | 72,600 | | | $ | 726 | | | $ | 472,378 | | | $ | (4,423) | | | $ | 388,645 | | | 50,427 | | | $ | (677,391) | | | $ | 179,935 | |
Net income | — | | | — | | | — | | | — | | | 13,261 | | | — | | | — | | | 13,261 | |
Issuance for stock-based compensation and dividends, net of forfeitures | 15 | | | — | | | 271 | | | — | | | (271) | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 3,403 | | | — | | | — | | | — | | | — | | | 3,403 | |
Employee stock purchase plan | — | | | — | | | 113 | | | — | | | — | | | (4) | | | 57 | | | 170 | |
Dividends ($0.23 per share) | — | | | — | | | — | | | — | | | (4,786) | | | — | | | — | | | (4,786) | |
Defined benefit pension plan, no tax benefit | | | | | | | 47 | | | | | | | | | 47 | |
Change in fair value of interest rate swap, net of tax benefit of $319 | — | | | — | | | — | | | 939 | | | — | | | — | | | — | | | 939 | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 317 | | | (16,313) | | | (16,313) | |
Balance, March 31, 2021 | 72,615 | | | $ | 726 | | | $ | 476,165 | | | $ | (3,437) | | | $ | 396,849 | | | 50,740 | | | $ | (693,647) | | | $ | 176,656 | |
Net income | — | | | — | | | — | | | — | | | 21,188 | | | — | | | — | | | 21,188 | |
Issuance for stock-based compensation and dividends, net of forfeitures | 40 | | | 1 | | | 274 | | | — | | | (273) | | | — | | | — | | | 2 | |
Stock-based compensation expense | — | | | — | | | 3,532 | | | — | | | — | | | — | | | — | | | 3,532 | |
Employee stock purchase plan | — | | | — | | | 143 | | | — | | | — | | | (4) | | | 52 | | | 195 | |
Dividends ($0.23 per share) | — | | | — | | | — | | | — | | | (4,746) | | | — | | | — | | | (4,746) | |
Defined benefit pension plan, net of tax provision of $283 | | | | | | | 3,056 | | | | | | | | | 3,056 | |
Change in fair value of interest rate swap, net of tax benefit of $3 | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 225 | | | (13,614) | | | (13,614) | |
Balance, June 30, 2021 | 72,655 | | | 727 | | | 480,114 | | | (371) | | | 413,018 | | | 50,961 | | | (707,209) | | | 186,279 | |
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| Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | | | Treasury Stock | | Total Stockholders’ Equity |
| Shares | | Amount | | | | Retained Earnings | | Shares | | Amount | |
Balance, December 31, 2021 | 72,997 | | | $ | 730 | | | $ | 488,036 | | | $ | 621 | | | $ | 442,596 | | | 51,492 | | | $ | (743,577) | | | $ | 188,406 | |
Net income | — | | | — | | | — | | | — | | | 19,181 | | | — | | | — | | | 19,181 | |
Issuance for stock-based compensation and dividends, net of forfeitures | (1) | | | — | | | 319 | | | — | | | (318) | | | — | | | — | | | 1 | |
Stock-based compensation expense | — | | | — | | | 4,437 | | | — | | | — | | | — | | | — | | | 4,437 | |
Employee stock purchase plan | — | | | — | | | 193 | | | — | | | — | | | (3) | | | 49 | | | 242 | |
Dividends ($0.30 per share) | — | | | — | | | — | | | — | | | (6,094) | | | — | | | — | | | (6,094) | |
Change in fair value of interest rate swap, net of tax benefit of $780 | — | | | — | | | — | | | 2,302 | | | — | | | — | | | — | | | 2,302 | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 147 | | | (10,270) | | | (10,270) | |
Balance, March 31, 2022 | 72,996 | | | 730 | | | 492,985 | | | 2,923 | | | 455,365 | | | 51,636 | | | (753,798) | | | 198,205 | |
Net income | — | | | — | | | — | | | — | | | 26,916 | | | — | | | — | | | 26,916 | |
Issuance for stock-based compensation and dividends, net of forfeitures | 11 | | | — | | | 298 | | | — | | | (298) | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 4,410 | | | — | | | — | | | — | | | — | | | 4,410 | |
Employee stock purchase plan | — | | | — | | | 234 | | | — | | | — | | | (4) | | | 61 | | | 295 | |
Dividends ($0.30 per share) | — | | | — | | | — | | | — | | | (6,093) | | | — | | | — | | | (6,093) | |
Change in fair value of interest rate swaps, net of tax expense of $989 | — | | | — | | | — | | | (2,917) | | | — | | | — | | | — | | | (2,917) | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 162 | | | (10,283) | | | (10,283) | |
Balance, June 30, 2022 | 73,007 | | | $ | 730 | | | $ | 497,927 | | | $ | 6 | | | $ | 475,890 | | | 51,794 | | | $ | (764,020) | | | $ | 210,533 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash flows from operating activities: | Cash flows from operating activities: | | Cash flows from operating activities: | |
Net income | Net income | $ | 46,097 | | | $ | 34,449 | | Net income | $ | 34,784 | | | $ | 46,097 | |
Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | | Adjustments to reconcile net income to cash provided by operating activities: | |
Deferred income tax provision, net | Deferred income tax provision, net | 6,191 | | | 899 | | Deferred income tax provision, net | 2,006 | | | 6,191 | |
Provision for credit losses | Provision for credit losses | (172) | | | (181) | | Provision for credit losses | 454 | | | (172) | |
Depreciation and amortization | Depreciation and amortization | 2,169 | | | 2,394 | | Depreciation and amortization | 2,574 | | | 2,169 | |
Stock-based compensation expense | Stock-based compensation expense | 8,848 | | | 6,936 | | Stock-based compensation expense | 8,635 | | | 8,848 | |
Defined benefit pension plan expense | — | | | 2,157 | | |
| Loss (Gain) on disposal or impairment of assets | 170 | | | (1,987) | | |
Noncash lease expense | Noncash lease expense | 2,950 | | | 2,443 | | Noncash lease expense | 1,803 | | | 2,950 | |
| Loss on equity method investment | Loss on equity method investment | 1,840 | | | 1,022 | | Loss on equity method investment | 750 | | | 1,840 | |
Other | Other | 361 | | | 445 | | Other | 368 | | | 531 | |
Increase in operating assets | | |
(Increase) decrease in operating assets | | (Increase) decrease in operating assets | |
Trade receivables, net | Trade receivables, net | (19,862) | | | (38,365) | | Trade receivables, net | 19,148 | | | (19,862) | |
Other assets | Other assets | (3,637) | | | (4,890) | | Other assets | 2,461 | | | (3,637) | |
Increase in operating liabilities | | |
Increase (decrease) in operating liabilities | | Increase (decrease) in operating liabilities | |
Accrued payroll costs | Accrued payroll costs | 17,566 | | | 17,002 | | Accrued payroll costs | (8,414) | | | 17,566 | |
| Other liabilities | Other liabilities | 8,239 | | | 14,250 | | Other liabilities | (24,138) | | | 8,239 | |
Cash provided by operating activities | Cash provided by operating activities | 70,760 | | | 36,574 | | Cash provided by operating activities | 40,431 | | | 70,760 | |
Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
Capital expenditures | Capital expenditures | (3,458) | | | (2,919) | | Capital expenditures | (4,950) | | | (3,458) | |
Contributions to WorkLLama, joint venture | (500) | | | (4,500) | | |
| Note receivable issued to WorkLLama, joint venture | (2,000) | | | — | | |
Net proceeds from the sale of assets | — | | | 23,742 | | |
Cash (used in) provided by investing activities | (5,958) | | | 16,323 | | |
Proceeds from the sale of our joint venture interest | | Proceeds from the sale of our joint venture interest | 5,059 | | | — | |
Equity method investment | | Equity method investment | — | | | (500) | |
Note receivable issued to our joint venture | | Note receivable issued to our joint venture | (750) | | | (2,000) | |
Other | | Other | (193) | | | — | |
Cash used in investing activities | | Cash used in investing activities | (834) | | | (5,958) | |
Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from credit facility | | Proceeds from credit facility | 342,500 | | | — | |
Payments on credit facility | Payments on credit facility | (100,000) | | | — | | Payments on credit facility | (343,500) | | | (100,000) | |
| Repurchases of common stock | Repurchases of common stock | (19,600) | | | (29,371) | | Repurchases of common stock | (24,614) | | | (19,600) | |
Cash dividends | Cash dividends | (12,187) | | | (9,532) | | Cash dividends | (13,947) | | | (12,187) | |
Payments on other financing arrangements | (30) | | | (201) | | |
Other | | Other | (10) | | | (30) | |
| Cash used in financing activities | Cash used in financing activities | (131,817) | | | (39,104) | | Cash used in financing activities | (39,571) | | | (131,817) | |
Change in cash and cash equivalents | Change in cash and cash equivalents | (67,015) | | | 13,793 | | Change in cash and cash equivalents | 26 | | | (67,015) | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 96,989 | | | 103,486 | | Cash and cash equivalents, beginning of period | 121 | | | 96,989 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 29,974 | | | $ | 117,279 | | Cash and cash equivalents, end of period | $ | 147 | | | $ | 29,974 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
Supplemental Disclosure of Cash Flow Information | Supplemental Disclosure of Cash Flow Information | 2022 | | 2021 | Supplemental Disclosure of Cash Flow Information | 2023 | | 2022 |
Cash Paid During the Period For: | Cash Paid During the Period For: | | Cash Paid During the Period For: | |
Income taxes | Income taxes | $ | 7,437 | | | $ | 10,500 | | Income taxes | $ | 16,547 | | | $ | 7,437 | |
Operating lease liabilities | Operating lease liabilities | 3,622 | | | 3,564 | | Operating lease liabilities | 2,541 | | | 3,622 | |
Interest, net | Interest, net | 892 | | | 1,280 | | Interest, net | 233 | | | 892 | |
Non-Cash Investing and Financing Transactions: | Non-Cash Investing and Financing Transactions: | | | Non-Cash Investing and Financing Transactions: | | |
ROU assets obtained from operating leases | ROU assets obtained from operating leases | $ | 406 | | | $ | 3,852 | | ROU assets obtained from operating leases | $ | 773 | | | $ | 406 | |
Employee stock purchase plan | Employee stock purchase plan | 537 | | | 365 | | Employee stock purchase plan | 541 | | | 537 | |
| Unsettled repurchases of common stock | Unsettled repurchases of common stock | 952 | | | — | | Unsettled repurchases of common stock | 726 | | | 952 | |
| |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
KFORCE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
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 20212022 Annual Report on Form 10-K.
Basis of Presentation
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 20212022 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, 2021,2022, was derived from our audited Consolidated Balance Sheet as of December 31, 2021,2022, as presented in our 20212022 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 relative to the remainder of the 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.
Principles of Consolidation
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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical of these estimates and assumptions relate to the following: allowance for credit losses; income taxes; self-insured liabilities for health insurance; and the impairment of goodwill and other long-lived assets and the equity method investment.assets. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates. In 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.
Health Insurance
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$280 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.
Earnings per Share
Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding (“WASO”) during the period. WASO excludes unvested shares of restricted stock. Diluted earnings per share is computed by dividing net income by diluted WASO. Diluted WASO includes the dilutive effect of potentially dilutive securities, such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
For the three and six months ended June 30, 2023, 270 thousand and 240 thousand common stock equivalents were included in the diluted WASO, respectively. For the three and six months ended June 30, 2022, 435 thousand and 425 thousand common stock equivalents were included in the diluted WASO, respectively. For the three and six months ended June 30, 2021, 6092023, there were 201 thousand and 529235 thousand anti-dilutive common stock equivalents, were included in the diluted WASO, respectively. For the three and six months ended June 30, 2022, there were 168 thousand and 304 thousand anti-dilutive common stock equivalents, respectively.
Equity Method Investment and Note Receivable
In June 2019, we entered into a joint venture whereby Kforce obtained a 50% noncontrolling interest in WorkLLama, which was accounted for as an equity method investment. As of December 31, 2022, the equity method investment was fully impaired. During the three months ended June 30, 2023 and 2022, we recorded a loss related to our equity method investment of nil and $1.0 million, respectively. We recorded a loss related to our equity method investment of $0.8 million and $1.8 million during the six months ended June 30, 2023 and 2022, respectively.
During the year ended December 31, 2022, Kforce executed a series of promissory notes (the “Note Receivable”) to our joint venture for a total of $6.8 million and recorded a credit loss of $1.9 million, resulting in a balance of $4.8 million at December 31, 2022. There were no payments received on the Note Receivable during the year ended December 31, 2022.
On February 23, 2023, Kforce received $6.0 million in exchange for the sale of our 50% noncontrolling interest in WorkLLama to an unaffiliated third party and in full settlement of the outstanding balance of the Note Receivable. These proceeds, net of customary transaction costs, amounted to $5.1 million and is presented in the investing section of the Unaudited Condensed Consolidated Statements of Cash Flows.
Excise Tax
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into Federal law. The IRA provides for, among other things, a new U.S. Federal 1% nondeductible excise tax on certain repurchases of stock by publicly-traded U.S. domestic corporations occurring after December 31, 2022. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased. For purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain stock issuances against the fair market value of stock repurchases during the same taxable year, with certain exceptions. For the three and six months ended June 30, 2021, there2023, we recorded $0.1 million and $0.2 million in excise tax related to the IRA, which was an insignificant amount of anti-dilutive commonincluded in Treasury stock equivalents.in the unaudited condensed consolidated financial statements.
New Accounting Standards
Recently Adopted Accounting Standards
In March 2020, the FASB issued guidance for reference rate reform, which provided temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The FASB has since issued subsequent updates to the initial guidance in December 2022, which extends the final sunset date for reference rate reform from December 31, 2022 to December 31, 2024. We adopted accounting standards
There were no new accounting standards adopted during the twenty-six weeks ended June 26, 2022 that had anthis standard as of January 1, 2023, and it did not have a material impact on our financial statements.
Recently Issued Accounting Standards Not Yet Adopted
There are no accounting standards which have not yet been adopted that are expected to have a significant impact on ourconsolidated financial statements and related disclosures.
Note B - Reportable Segments
Kforce provides services through our Technology and Finance and Accounting (“FA”) segments. Historically, and for the three and six months ended June 30, 2022,2023, we have reported sales and gross profit information on a segment basis. Total assets, liabilities and operating expenses are not reported separately by segment as our operations are largely combined.
The following table provides information on the operations of our segments (in thousands): | | | Technology | | FA | | Total | | Technology | | FA | | Total |
Three Months Ended June 30, | Three Months Ended June 30, | | Three Months Ended June 30, | |
2022 | | |
2023 | | 2023 | |
Revenue | Revenue | $ | 384,595 | | | $ | 51,921 | | | $ | 436,516 | | Revenue | $ | 352,025 | | | $ | 37,165 | | | $ | 389,190 | |
Gross profit | Gross profit | $ | 109,917 | | | $ | 21,155 | | | $ | 131,072 | | Gross profit | $ | 95,485 | | | $ | 14,781 | | | $ | 110,266 | |
Operating and other expenses | Operating and other expenses | | $ | 94,551 | | Operating and other expenses | | $ | 84,646 | |
Income from operations, before income taxes | Income from operations, before income taxes | | $ | 36,521 | | Income from operations, before income taxes | | $ | 25,620 | |
2021 | | |
2022 | | 2022 | |
Revenue | Revenue | $ | 310,728 | | | $ | 92,886 | | | $ | 403,614 | | Revenue | $ | 384,595 | | | $ | 51,921 | | | $ | 436,516 | |
Gross profit | Gross profit | $ | 88,235 | | | $ | 30,696 | | | $ | 118,931 | | Gross profit | $ | 109,917 | | | $ | 21,155 | | | $ | 131,072 | |
Operating and other expenses | Operating and other expenses | | $ | 88,920 | | Operating and other expenses | | $ | 94,551 | |
Income from operations, before income taxes | Income from operations, before income taxes | | $ | 30,011 | | Income from operations, before income taxes | | $ | 36,521 | |
| Six Months Ended June 30, | Six Months Ended June 30, | | Six Months Ended June 30, | |
2023 | | 2023 | |
Revenue | | Revenue | $ | 716,869 | | | $ | 78,318 | | | $ | 795,187 | |
Gross profit | | Gross profit | $ | 193,896 | | | $ | 30,346 | | | $ | 224,242 | |
Operating and other expenses | | Operating and other expenses | | $ | 176,264 | |
Income from operations, before income taxes | | Income from operations, before income taxes | | $ | 47,978 | |
2022 | 2022 | | 2022 | |
Revenue | Revenue | $ | 744,500 | | | $ | 108,983 | | | $ | 853,483 | | Revenue | $ | 744,500 | | | $ | 108,983 | | | $ | 853,483 | |
Gross profit | Gross profit | $ | 212,367 | | | $ | 42,591 | | | $ | 254,958 | | Gross profit | $ | 212,367 | | | $ | 42,591 | | | $ | 254,958 | |
Operating and other expenses | Operating and other expenses | | $ | 192,126 | | Operating and other expenses | | $ | 192,126 | |
Income from operations, before income taxes | Income from operations, before income taxes | | $ | 62,832 | | Income from operations, before income taxes | | $ | 62,832 | |
2021 | | |
Revenue | $ | 590,288 | | | $ | 176,551 | | | $ | 766,839 | | |
Gross profit | $ | 162,515 | | | $ | 55,098 | | | $ | 217,613 | | |
Operating and other expenses | | $ | 169,436 | | |
Income from operations, before income taxes | | $ | 48,177 | | |
Note C - Disaggregation of Revenue
The following table provides the disaggregation of revenue by segment and type (in thousands): | | | Technology | | FA | | Total | | Technology | | FA | | Total |
Three Months Ended June 30, | Three Months Ended June 30, | | Three Months Ended June 30, | |
2023 | | 2023 | |
Revenue by type: | | Revenue by type: | |
Flex revenue | | Flex revenue | $ | 346,326 | | | $ | 32,144 | | | $ | 378,470 | |
Direct Hire revenue | | Direct Hire revenue | 5,699 | | | 5,021 | | | 10,720 | |
Total Revenue | | Total Revenue | $ | 352,025 | | | $ | 37,165 | | | $ | 389,190 | |
2022 | 2022 | | 2022 | |
Revenue by type: | Revenue by type: | | Revenue by type: | |
Flex revenue | Flex revenue | $ | 375,507 | | | $ | 44,193 | | | $ | 419,700 | | Flex revenue | $ | 375,507 | | | $ | 44,193 | | | $ | 419,700 | |
Direct Hire revenue | Direct Hire revenue | 9,088 | | | 7,728 | | | 16,816 | | Direct Hire revenue | 9,088 | | | 7,728 | | | 16,816 | |
Total Revenue | Total Revenue | $ | 384,595 | | | $ | 51,921 | | | $ | 436,516 | | Total Revenue | $ | 384,595 | | | $ | 51,921 | | | $ | 436,516 | |
2021 | | |
Six Months Ended June 30, | | Six Months Ended June 30, | |
2023 | | 2023 | |
Revenue by type: | Revenue by type: | | Revenue by type: | |
Flex revenue | Flex revenue | $ | 304,645 | | | $ | 86,717 | | | $ | 391,362 | | Flex revenue | $ | 705,850 | | | $ | 68,152 | | | $ | 774,002 | |
Direct Hire revenue | Direct Hire revenue | 6,083 | | | 6,169 | | | 12,252 | | Direct Hire revenue | 11,019 | | | 10,166 | | | 21,185 | |
Total Revenue | Total Revenue | $ | 310,728 | | | $ | 92,886 | | | $ | 403,614 | | Total Revenue | $ | 716,869 | | | $ | 78,318 | | | $ | 795,187 | |
Six Months Ended June 30, | | |
2022 | 2022 | | 2022 | |
Revenue by type: | Revenue by type: | | Revenue by type: | |
Flex revenue | Flex revenue | $ | 727,223 | | | $ | 94,343 | | | $ | 821,566 | | Flex revenue | $ | 727,223 | | | $ | 94,343 | | | $ | 821,566 | |
Direct Hire revenue | Direct Hire revenue | 17,277 | | | 14,640 | | | 31,917 | | Direct Hire revenue | 17,277 | | | 14,640 | | | 31,917 | |
Total Revenue | Total Revenue | $ | 744,500 | | | $ | 108,983 | | | $ | 853,483 | | Total Revenue | $ | 744,500 | | | $ | 108,983 | | | $ | 853,483 | |
2021 | | |
Revenue by type: | | |
Flex revenue | $ | 579,429 | | | $ | 165,780 | | | $ | 745,209 | | |
Direct Hire revenue | 10,859 | | | 10,771 | | | 21,630 | | |
Total Revenue | $ | 590,288 | | | $ | 176,551 | | | $ | 766,839 | | |
Note D - Allowance for Credit Losses
The allowance for credit losses on trade receivables is determined based on a numberby estimating and recognizing lifetime expected losses, rather than incurred losses, which results in the earlier recognition of factors such as recent and historical write-off and delinquency trends, a specific analysiscredit losses even if the expected risk of significant receivable balances that are past due, the concentration of trade receivables among clients and the current state of the U.S. economy.credit loss is remote. 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 six months ended June 30, 2022.2023.
The following table presents the activity within the allowance for credit losses on trade receivables for the six months ended June 30, 20222023 (in thousands):
| | | | | |
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| |
Allowance for credit losses, January 1, 20222023 | $ | 1,7291,006 | |
Current period provision (credit) | (172)454 | |
Write-offs charged against the allowance, net of recoveries of amounts previously written off | (201)(402) | |
| |
Allowance for credit losses, June 30, 20222023 | $ | 1,3561,058 | |
The allowances on trade receivables presented in the Unaudited Condensed Consolidated Balance Sheets include $0.6$0.5 million and $0.6 million at June 30, 20222023 and December 31, 2021,2022, respectively, for reserves unrelated to credit losses.
Note E - Other Assets, NetNet
Other assets, net consisted of the following (in thousands): | | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
Assets held in Rabbi Trust | Assets held in Rabbi Trust | $ | 31,874 | | | $ | 41,607 | | Assets held in Rabbi Trust | $ | 36,664 | | | $ | 31,976 | |
Right-of-use assets for operating leases, net | Right-of-use assets for operating leases, net | 11,889 | | | 15,395 | | Right-of-use assets for operating leases, net | 12,998 | | | 17,102 | |
Capitalized software, net (1) | Capitalized software, net (1) | 15,572 | | | 14,666 | | Capitalized software, net (1) | 15,415 | | | 16,149 | |
Equity method investment (2) | 15,668 | | | 17,008 | | |
Deferred loan costs, net | Deferred loan costs, net | 998 | | | 1,115 | | Deferred loan costs, net | 769 | | | 881 | |
Interest rate swap derivative instruments | — | | | 823 | | |
Other non-current assets (3) | 6,686 | | | 2,015 | | |
Notes receivable, net (2) | | Notes receivable, net (2) | — | | | 4,825 | |
Other non-current assets | | Other non-current assets | 4,790 | | | 4,838 | |
Total Other assets, net | Total Other assets, net | $ | 82,687 | | | $ | 92,629 | | Total Other assets, net | $ | 70,636 | | | $ | 75,771 | |
(1) Accumulated amortization of capitalized software was $35.9$37.4 million and $35.5$36.6 million as of June 30, 20222023 and December 31, 2021,2022, 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 $1.0 million and $1.8 million for the three months and six months ended June 30, 2022, respectively. In addition, Kforce contributed $0.5 million and $9.0 million of capital during the six months ended June 30, 2022 and the year ended December 31, 2021, respectively. Refer to Note LA - “Commitments and Contingencies”“Summary of Significant Accounting Policies” for more informationdetails on contingencies related to WorkLLama.the sale of our joint venture and the settlement of the Note Receivable.
(3)I Balance at June 30, 2022 Includes a promissory note receivable issued to WorkLLama for $2.0 million.
Note F - Current Liabilities
The following table provides information on certain current liabilities (in thousands): | | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
Accounts payable and other accrued liabilities: | Accounts payable and other accrued liabilities: | | Accounts payable and other accrued liabilities: | |
Accounts payable | Accounts payable | $ | 56,537 | | | $ | 40,241 | | Accounts payable | $ | 46,296 | | | $ | 49,600 | |
Accrued liabilities | Accrued liabilities | 38,079 | | | 41,167 | | Accrued liabilities | 13,951 | | | 23,192 | |
Total Accounts payable and other accrued liabilities | Total Accounts payable and other accrued liabilities | $ | 94,616 | | | $ | 81,408 | | Total Accounts payable and other accrued liabilities | $ | 60,247 | | | $ | 72,792 | |
Accrued payroll costs: | Accrued payroll costs: | | Accrued payroll costs: | |
Payroll and benefits | Payroll and benefits | $ | 56,226 | | | $ | 43,738 | | Payroll and benefits | $ | 32,940 | | | $ | 41,506 | |
Payroll taxes | Payroll taxes | 27,126 | | | 22,466 | | Payroll taxes | 2,175 | | | 2,633 | |
Health insurance liabilities | Health insurance liabilities | 4,309 | | | 4,474 | | Health insurance liabilities | 3,835 | | | 3,481 | |
Workers’ compensation liabilities | Workers’ compensation liabilities | 793 | | | 746 | | Workers’ compensation liabilities | 464 | | | 749 | |
Total Accrued payroll costs | Total Accrued payroll costs | $ | 88,454 | | | $ | 71,424 | | Total Accrued payroll costs | $ | 39,414 | | | $ | 48,369 | |
Our accounts payable balance includes vendor and third partythird-party payables. Our accrued liabilities balance includes the current portion of our deferred compensation plans liability, contract liabilities from contracts with customers (such as customer rebates), and other accrued liabilities 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 2 participants under the SERP, as of June 30, 2022 and December 31, 2021, was $20.0 million in the aggregate, and were fully paid in July 2022, relieving us of any future obligation related to the SERP.
Our payroll taxes as of June 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.liabilities.
Note G - Credit Facility
On October 20, 2021, the Firm entered into an amended and restated credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), 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,June 2023, Kforce entered into the Firm repaidFirst Amendment to the outstanding balance of $100.0 million in connectionAmended and Restated Credit Facility (the “First Amendment”), by and among Wells Fargo, as administrative agent, and the lenders and financial institutions from time to time party thereto, to replace the LIBOR-based benchmark interest rates 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. Secured Overnight Financing Rate benchmark interest rates (“SOFR Rate”).
As of June 30, 20222023 and December 31, 2021, $02022, $24.6 million and $100.0$25.6 million was outstanding under the Amended and Restated Credit Facility, respectively. As of June 30, 2023, we were in compliance with all of our financial covenants contained in the Amended and Restated Credit Facility.
Note H - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands): | | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
Deferred compensation plan | Deferred compensation plan | $ | 33,030 | | | $ | 42,623 | | Deferred compensation plan | $ | 40,493 | | | $ | 36,390 | |
Operating lease liabilities | Operating lease liabilities | 8,959 | | | 11,919 | | Operating lease liabilities | 11,089 | | | 16,380 | |
Other long-term liabilities | Other long-term liabilities | 14 | | | 22 | | Other long-term liabilities | 29 | | | 3 | |
Total Other long-term liabilities | Total Other long-term liabilities | $ | 42,003 | | | $ | 54,564 | | Total Other long-term liabilities | $ | 51,611 | | | $ | 52,773 | |
Note I - Stock Incentive PlansStock-based Compensation
On April 22, 2021,20, 2023, Kforce’s shareholders approved the 20212023 Stock Incentive Plan (the “2021“2023 Plan”). The 20212023 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 20212023 Plan is approximately 3.93.2 million. Grants of an option or SAR reduce the reserve by 1one share, while a restricted stock award reduces the reserve by 2.72 shares. The 20212023 Plan terminates on April 22, 2031.20, 2033.
Restricted stock (including RSAs and RSUs) is 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
The following table presents the restricted stock granted duringactivity for the six months ended June 30, 2022 will vest2023 (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | |
| Number of Restricted Stock | | Weighted-Average Grant Date Fair Value | | Total Intrinsic Value of Restricted Stock Vested |
Outstanding at December 31, 2022 | 911 | | | $ | 54.42 | | | |
Granted | 49 | | | $ | 55.96 | | | |
Forfeited | (13) | | | $ | 62.45 | | | |
Vested | (33) | | | $ | 44.81 | | | $ | 1,922 | |
Outstanding at June 30, 2023 | 914 | | | $ | 54.74 | | | |
As of June 30, 2023, total unrecognized stock-based compensation expense related to restricted stock was $38.3 million, which is expected to be recognized over a weighted-average remaining period of one to ten years, with vesting occurring in equal annual installments.4.1 years.
During the three and six months ended June 30, 2023, stock-based compensation expense was $4.3 million and $8.6 million, respectively. During the three and six months ended June 30, 2022, stock-based compensation expense was $4.4 million and $8.8 million, respectively. During the three and six months ended June 30, 2021, stock-basedStock-based compensation expense was $3.5 millionis included in Selling, general and $6.9 million, respectively.administrative expenses (“SG&A”) in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.
The following table presents the restricted stock activity for the six months ended June 30, 2022 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Number of Restricted Stock | | Weighted-Average Grant Date Fair Value | | Total Intrinsic Value of Restricted Stock Vested |
Outstanding at December 31, 2021 | 1,083 | | | $ | 48.86 | | | |
Granted | 31 | | | $ | 63.93 | | | |
Forfeited | (21) | | | $ | 44.46 | | | |
Vested | (40) | | | $ | 47.15 | | | $ | 2,628 | |
Outstanding at June 30, 2022 | 1,053 | | | $ | 49.70 | | | |
As of June 30, 2022, total unrecognized stock-based compensation expense related to restricted stock was $42.0 million, which will be recognized over a weighted-average remaining period of 4.3 years.
Note J - Derivative InstrumentsInstrument and Hedging Activity
As of June 30, 2022, theThe Firm did not have any outstanding derivative instruments. On April 21, 2017, Kforce entered into a forward-starting interest ratemaintained two swap agreement with Wells Fargo Bank, N.A (“Swap A”).instruments, Swap A was effective on May 31, 2017 and matured on April 29, 2022. Other information related to Swap A is as follows: Notional amount - $25.0 million; and Fixed interest rate - 1.81%.
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. Other information related to Swap B iswhich were designated as follows: Scheduled maturity date - May 30, 2025; Fixed interest rate - 0.61%;cash flow hedges and Notional amount - $100.0 million.
The Firmwere used the Swaps as an interest rate risk management tooltools to mitigate the potential impact of rising interest rates on variable rate debt. The fixed interest rate for each Swap, plus the applicable interest margin under our credit facility,Amended and Restated Credit Facility, was included in interest expense and recorded in Other (income) expense, net in the accompanying Unaudited Condensed Consolidated Financial Statements of Operations and Comprehensive Income.
In Swap A matured on April 29, 2022 and Swap B was terminated in May 2022. As of June 30, 2023 and 2022, the Firm terminated Swap B in anticipationdid not have any outstanding derivative instruments.
Both Swap A and B were designated as cash flow hedges. The change in the fair value of the Swaps was 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): | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
Accumulated derivative instrument gain (loss), beginning of period | $ | 823 | | | $ | (1,774) | | | |
Net change associated with current period hedging transactions (1) | (823) | | | 1,271 | | | |
| | | | | |
Accumulated derivative instrument gain (loss), end of period | $ | — | | | $ | (503) | | | |
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 | | |
Accumulated derivative instrument gain, beginning of period | $ | — | | | $ | 823 | | | |
Net change associated with current period hedging transactions | — | | | (823) | | | |
| | | | | |
Accumulated derivative instrument gain, end of period | $ | — | | | $ | — | | | |
(1) The accumulated derivative instrument activity as of the end the six month period ending June 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 K - Fair Value Measurements
Our interest rate swaps were previously measured at fair value using readily observable inputs, which are considered to be Level 2 inputs and were recorded in Other long-term liabilities within the accompanying Unaudited Condensed Consolidated Balance Sheets.inputs. In April 2022, Swap A matured and in May 2022, we terminated Swap B. Refer to Note J - “Derivative InstrumentsInstrument and Hedging Activity” for a complete discussion of ourthe interest rate swaps.swap derivative instruments.
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the six months ended June 30, 2022. The fair value of the interest rate swap derivative instrument asset at December 31, 2021 was $823 thousand and was classified as a Level 2 instrument.2023.
Note L - Commitments and Contingencies
Employment Agreements
Kforce has employment agreements with certain executives that provide for certain post-employment benefits under certain circumstances. At June 30, 2022,2023, our liability would be approximately $38.2$40.3 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 $13.7$17.4 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
Except as stated below, there have been no material developments with regard to theWe are involved in legal proceedings, previously disclosedclaims, and administrative matters that arise in the ordinary course of business, and we have made accruals with respect to certain of these matters, where appropriate, that are reflected in our 2021 Annual Report on Form 10-Kconsolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable, or the amount of loss cannot be reasonably estimated. The outcome of any litigation is inherently uncertain, but we do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our Form 10-Q forconsolidated financial statements; however, if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to additional liabilities that could have a material adverse effect on our financial position, results of operations or cash flows. Kforce maintains liability insurance that insures us against workers’ compensation, personal and 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 quarter ending March 31, 2022.limits of coverage will be sufficient to fully cover all liabilities.
OnAs previously reported, 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 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 the 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.
OnAs previously reported, 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, which was subsequently amended on January 21, 2021, to add Kforce Flexible Solutions as a party. Bernardo Buchsbaum, et al. v. Kforce Inc., et al., Case Number: 37-2020-00030994-CU-OE-CTL. The former employee purports to bringCourt entered 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 Lewis, et al. v. Kforce Inc., which is subject to 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’swritten order granting final approval of the settlement. We believe that thisparties’ settlement agreement in March 2023, and the case has been dismissed. This matter is unlikely todid not 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
As previously reported, on February 19, 2021. Ramona Webb v. Kforce Flexible Solutions, LLC, et al., 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 andThe Court entered 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 violationswritten order granting final approval of the Labor Code, Industrial Welfare Commission Wage Orders,parties’ settlement agreement in March 2023, 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 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 a preliminary agreement to resolve this matter along with Lewis, et al. v. Kforce Inc. and Buchsbaum, et al. v. Kforce Inc., et al., which is subject to approval by the Court, and we have set reserves accordingly. We believe that this matter is unlikely toconsidered closed. This matter did not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
On August 30, 2021, Kforce Inc. was served withAs previously reported, on December 11, 2020, a complaint broughtwas filed against Kforce and its client, Verity Health System of California (“Verity”) in the U.S. DistrictSuperior Court Southern District of California. Darryn Lewis, et al.California, County of Los Angeles, which was subsequently amended on February 19, 2021. Ramona Webb v. Kforce Inc.Flexible Solutions, LLC, et al., Case Number: 3:21-cv-01375-AJB-JLB. On behalf of himself20STCV47529. The Court dismissed the representative PAGA action in May 2023, and others similarly situated, the plaintiff brings a one-count class action complaint for alleged violations of the FLSA, and specifically, failure to pay overtime wages to a putative class of commissioned employees who work or have worked for Kforce, nationwide, in the past three (3) years. Plaintiff and class members seek the amounts of unpaid wages and benefits allegedly owed to them, liquidated damages, compensatory damages, economic and/or special damages, attorneys’ fees and costs, interest, and other legal and equitable relief for alleged failure to: maintain a policy that compensatesAmerican Arbitration Association closed its employees for all hours worked; properly classify employees as nonexempt from overtime; and pay overtime pay for all hours worked over forty in one or more workweeks. The parties reached a settlement agreement to resolve the matter. On June 15, 2022, the Court entered an Order granting the parties’ joint motion to dismiss Plaintiff’sfile on Webb’s individual claims with prejudice and his putative collective claims without prejudice.in June 2023. This matter did not result inhave 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 involved in 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, that are reflected in our consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable, or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our financial position, results of operations or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our financial position, results of operations or cash flows. Kforce maintains liability insurance in amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that Kforce insures against are workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, cyber liability, employment practices liability and fidelity losses. There can be no assurance that Kforce’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities.
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 was originally obligated to make additional cash contributions subsequent to the initial contribution, contingent on WorkLLama's achievement of certain operational and financial milestones. Under the operating agreement, our maximum potential capital contributions were $22.5 million. Although the operational and financial milestones were not achieved, we contributed the full $22.5 million as of June 30, 2022. We contributed $0.5 million and $9.0 million of capital during the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.
\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 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 a triggering event had occurred. 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.
Lease commitments
We lease office space and certain equipment under operating leases that expire between 2022 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 year ended 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, 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.
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 six months ended June 30, 2022,2023, 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 six months ended June 30, 2022, increased 10.4%2023 decreased 6.8% to $853.5$795.2 million from $766.8$853.5 million in the comparable period in 2021.2022. Revenue increased 25.1%decreased 3.7% and 28.1% for Technology and decreased 38.8% for FA, as arespectively, primarily driven by the impact of the macro environment on our business and the result of the planned decrease in COVID-19 related business andour repositioning efforts. There was a minimal amount of COVID-19 related business in the first six months of 2022 and there was $58.8 million in the first six months of 2021.efforts for FA.
•Flex revenue for the six months ended June 30, 2022 increased 9.4%2023 decreased 5.8% to $821.6$774.0 million from $745.2$821.6 million in the comparable period in 2021.2022. Flex revenue increased 24.5%decreased 2.9% and decreased 43.5%27.8% for Technology and FA, respectively.
•Direct Hire revenue for the six months ended June 30, 2022 increased 47.6%2023 decreased 33.6% to $31.9$21.2 million from $21.6$31.9 million in the comparable period in 2021.2022.
•Gross profit margin for the six months ended June 30, 2022, increased 1502023 decreased 170 basis points to 29.9%28.2%, compared to the same period in 2021 primarilyJune 30, 2022, as a result of a higherdecline in the mix of Direct Hire businessrevenue and improvedTechnology Flex gross profit margins.
•Flex gross profit margin for the six months ended June 30, 2022, increased 802023 decreased 90 basis points to 27.1%26.2%, compared to June 30, 2021. Technology Flex gross profit margin increased 60 basis points2022, primarily due primarily to lower payroll taxes and lowera tighter pricing environment, higher healthcare costs, partially offset by slightly lower spreads. FA Flex gross profit margin increased290 basis points for the six months ended June 30, 2022, respectively, as compared to the same period in 2021. The increase for the six months ended June 30, 2022 was mostly attributable to a decrease in COVID-19 relatedand business and the repositioning of the business.mix changes within our client portfolio.
•SG&A expenses as a percentage of revenue for the six months ended June 30, 2022, increased2023 decreased to 22.4%21.7% from 21.2%22.4% in the comparable period in 2021 due to the sale of our corporate headquarters that occurred in the second quarter of 2021, which resulted in the recognition2022 primarily as a result of a gain, higherdecrease in performance-based compensation given the strength in our performance, and other investments in our business.lower revenues.
•Income from operationsNet income for the six months ended June 30, 2022, increased 33.8%2023 decreased 24.5% to $34.8 million, or $1.77 per share, from $46.1 million, or $2.22 per share, from $34.4 million, or $1.61for the six months ended June 30, 2022. The termination of our interest rate swaps in the three months ended June 30, 2022 resulted in a benefit to earnings per share in the comparable period in 2021.of $0.14.
•The Firm returned $32.3$38.0 million of capital to our shareholders in the form of open market repurchases totaling $20.1$24.0 million and quarterly dividends totaling $12.2$14.0 million during the six months endingended June 30, 2022.2023.
•Cash provided by operating activities was $70.8$40.4 million during the six months ended June 30, 2022,2023, as compared to $36.6$70.8 million for the six months ended June 30, 2021.
•Cash and cash equivalents was $30.0 million as of June 30, 2022.
RESULTS OF OPERATIONS
Business Overview
Kforce is a leading domestic provider of technology and finance and accounting talent solutions to innovative and industry-leading clients. Our Technology and FA businesses represent our two operating segments.companies. Our corporate headquarters is in Tampa, Florida. As of June 30, 2022,2023, Kforce employed approximately 2,1002,000 associates including approximately 1,400 supporting the revenue-generating aspects of our business and approximately 700 supporting the revenue-enabling aspects. We also had approximately 10,3009,000 consultants on assignment providing flexible staffing services and solutions to our clients. Kforce serves clients across manya diverse set of industries and geographies as well as organizations of all sizes, withbut we place a particular focus on serving Fortune 1000500 companies and other large companies. We believe thatconsumers of our 100% domestic U.S. focus, concentration on technology talent solutions (representing nearly 88% of overall revenues) and client portfolio comprised of world-class companies have been key contributors to our continued strong performance and will be key drivers to our future success.services.
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. The national unemployment rate was 3.6%, for at the fourth month in a row. In the latest U.S. staffing industry forecast published by SIA in May 2022, the technology temporary staffing industry and finance and accounting temporary staffing industry are estimatedend of June 2023 compared to grow 12% and 8%, respectively, in 2022, and 6% and 5%, respectively, in 2023.3.5% at December 2022.
Operating Results - Three and Six Months Ended June 30, 20222023 and 20212022
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 | | Six Months Ended | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Revenue by segment: | Revenue by segment: | | Revenue by segment: | |
Technology | Technology | 88.1 | % | | 77.0 | % | | 87.2 | % | | 77.0 | % | Technology | 90.5 | % | | 88.1 | % | | 90.2 | % | | 87.2 | % |
FA | FA | 11.9 | | | 23.0 | | | 12.8 | | | 23.0 | | FA | 9.5 | | | 11.9 | | | 9.8 | | | 12.8 | |
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 | 96.1 | % | | 97.0 | % | | 96.3 | % | | 97.2 | % | Flex | 97.2 | % | | 96.1 | % | | 97.3 | % | | 96.3 | % |
Direct Hire | Direct Hire | 3.9 | | | 3.0 | | | 3.7 | | | 2.8 | | Direct Hire | 2.8 | | | 3.9 | | | 2.7 | | | 3.7 | |
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 | 30.0 | % | | 29.5 | % | | 29.9 | % | | 28.4 | % | Gross profit | 28.3 | % | | 30.0 | % | | 28.2 | % | | 29.9 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | 22.0 | % | | 21.0 | % | | 22.4 | % | | 21.2 | % | Selling, general and administrative expenses | 21.3 | % | | 22.0 | % | | 21.7 | % | | 22.4 | % |
Depreciation and amortization | Depreciation and amortization | 0.2 | % | | 0.3 | % | | 0.3 | % | | 0.3 | % | Depreciation and amortization | 0.3 | % | | 0.2 | % | | 0.3 | % | | 0.3 | % |
Income from operations | Income from operations | 7.8 | % | | 8.2 | % | | 7.2 | % | | 6.9 | % | Income from operations | 6.7 | % | | 7.8 | % | | 6.2 | % | | 7.2 | % |
Income from operations, before income taxes | Income from operations, before income taxes | 8.4 | % | | 7.4 | % | | 7.4 | % | | 6.3 | % | Income from operations, before income taxes | 6.6 | % | | 8.4 | % | | 6.0 | % | | 7.4 | % |
| Net income | Net income | 6.2 | % | | 5.2 | % | | 5.4 | % | | 4.5 | % | Net income | 4.8 | % | | 6.2 | % | | 4.4 | % | | 5.4 | % |
Revenue. The following table presents revenue by type for each segment and the percentage change from the prior period (in thousands): | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 | | 2023 | | Increase (Decrease) | | 2022 | | 2023 | | Increase (Decrease) | | 2022 |
Technology | Technology | | Technology | |
Flex revenue | Flex revenue | $ | 375,507 | | | 23.3 | % | | $ | 304,645 | | | $ | 727,223 | | | 25.5 | % | | $ | 579,429 | | Flex revenue | $ | 346,326 | | | (7.8) | % | | $ | 375,507 | | | $ | 705,850 | | | (2.9) | % | | $ | 727,223 | |
Direct Hire revenue | Direct Hire revenue | 9,088 | | | 49.4 | % | | 6,083 | | | 17,277 | | | 59.1 | % | | 10,859 | | Direct Hire revenue | 5,699 | | | (37.3) | % | | 9,088 | | | 11,019 | | | (36.2) | % | | 17,277 | |
Total Technology revenue | Total Technology revenue | $ | 384,595 | | | 23.8 | % | | $ | 310,728 | | | $ | 744,500 | | | 26.1 | % | | $ | 590,288 | | Total Technology revenue | $ | 352,025 | | | (8.5) | % | | $ | 384,595 | | | $ | 716,869 | | | (3.7) | % | | $ | 744,500 | |
FA | FA | | FA | |
Flex revenue | Flex revenue | $ | 44,193 | | | (49.0) | % | | $ | 86,717 | | | $ | 94,343 | | | (43.1) | % | | $ | 165,780 | | Flex revenue | $ | 32,144 | | | (27.3) | % | | $ | 44,193 | | | $ | 68,152 | | | (27.8) | % | | $ | 94,343 | |
Direct Hire revenue | Direct Hire revenue | 7,728 | | | 25.3 | % | | 6,169 | | | 14,640 | | | 35.9 | % | | 10,771 | | Direct Hire revenue | 5,021 | | | (35.0) | % | | 7,728 | | | 10,166 | | | (30.6) | % | | 14,640 | |
Total FA revenue | Total FA revenue | $ | 51,921 | | | (44.1) | % | | $ | 92,886 | | | $ | 108,983 | | | (38.3) | % | | $ | 176,551 | | Total FA revenue | $ | 37,165 | | | (28.4) | % | | $ | 51,921 | | | $ | 78,318 | | | (28.1) | % | | $ | 108,983 | |
| Total Flex revenue | Total Flex revenue | $ | 419,700 | | | 7.2 | % | | $ | 391,362 | | | $ | 821,566 | | | 10.2 | % | | $ | 745,209 | | Total Flex revenue | $ | 378,470 | | | (9.8) | % | | $ | 419,700 | | | $ | 774,002 | | | (5.8) | % | | $ | 821,566 | |
Total Direct Hire revenue | Total Direct Hire revenue | 16,816 | | | 37.3 | % | | 12,252 | | | 31,917 | | | 47.6 | % | | 21,630 | | Total Direct Hire revenue | 10,720 | | | (36.3) | % | | 16,816 | | | 21,185 | | | (33.6) | % | | 31,917 | |
Total Revenue | Total Revenue | $ | 436,516 | | | 8.2 | % | | $ | 403,614 | | | $ | 853,483 | | | 11.3 | % | | $ | 766,839 | | Total Revenue | $ | 389,190 | | | (10.8) | % | | $ | 436,516 | | | $ | 795,187 | | | (6.8) | % | | $ | 853,483 | |
Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year changes in revenue, growth rates, on a billing day basis, for the last five quarters: | | | Year-Over-Year Revenue Growth Rates | | Changes in Year-Over-Year Flex Revenue |
| | (Per Billing Day) | | (Per Billing Day) |
| | Q2 2022 | | Q1 2022 | | Q4 2021 | | Q3 2021 | | Q2 2021 | | Q2 2023 | | Q1 2023 | | Q4 2022 | | Q3 2022 | | Q2 2022 |
Billing Days | Billing Days | | 64 | | 64 | | 61 | | 64 | | 64 | Billing Days | | 64 | | 64 | | 61 | | 64 | | 64 |
Technology | Technology | | 23.3 | % | | 26.0 | % | | 31.0 | % | | 28.9 | % | | 20.9 | % | Technology | | (7.8) | % | | 2.2 | % | | 8.5 | % | | 15.7 | % | | 23.3 | % |
FA | FA | | (49.0) | % | | (37.6) | % | | (28.9) | % | | (41.3) | % | | 2.7 | % | FA | | (27.3) | % | | (28.2) | % | | (28.8) | % | | (30.7) | % | | (49.0) | % |
Total Flex | Total Flex | | 7.2 | % | | 11.8 | % | | 16.6 | % | | 9.1 | % | | 16.3 | % | Total Flex | | (9.8) | % | | (1.6) | % | | 3.1 | % | | 8.7 | % | | 7.2 | % |
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.Kforce and billable to our clients.
Flex revenue forin our Technology increased 23.3% and 24.5%business decreased during the three and six months ended June 30, 2022,2023 by 7.8% and 2.9%, respectively, as compared to the same periods in 2021, which was driven by2022, primarily due to a combination of significant growthdecrease in the number of consultants on assignment, andwhich was partially offset by higher average bill rates. GivenWe continued to experience a softening in the inflationary pressures on wages and scarcity of highly skilled technology consultants, we experienced a meaningful acceleration in average bill rates, which increased 2.4% sequentially and 8.1% year-over-year during the second quarter of 2022. Notable is that we experienced this acceleration in average bill rates while maintaining stable Flex gross margins. We believe that the growth in consultants on assignment was fueled by strong secular drivers of demand the strength of our client portfolio (primarily Fortune 1000 companies), our concentration in higher-end technology skills, and solid execution. Despite some moderate slowing in our activity levelsenvironment in the second quarter as our clients continue to exercise restraint in initiating new technology initiatives and selectively pruning resources on existing programs against the backdrop of the current macroeconomic environment. Our average bill rates remained strong and increased 3.5% and 4.7% for the three and six months ended June 30, 2023, respectively, as compared to the historically high demand we were experiencingsame periods in 2021 and early 2022, activity levels continue to outpace pre-pandemic levels.2022. We expect revenue growth in our Technology Flex business in the third quarter to bedecline sequentially in the mid-teen rangemid-single digits and expect declines in the low double digits as we face more difficult comparisons on a year-over-yearyear-over-year basis.
Our FA segment experienced a decrease in Flex revenue of 49.0%27.3% and 43.5%27.8% during the three and six months ended June 30, 2022,2023, respectively, as compared to the same periods in 2021,2022, primarily driven by the anticipated fall off in our COVID-19 related business and the repositioning of the business. Excluding the decline in COVID-19 related business, FA Flex revenues declined nearly 15% and 13% in the quarter and year to date periods ending June 30, 2022, respectively, compared to the same periods in 2021, which was driven by the repositioningefforts of our FA business towards more high-skilled roles.roles and the continued uncertainty in the macroeconomic environment. We have seencontinue to see indicators of success in this repositioning as our average bill rates improved approximately 8.1% sequentially and 33.1%continued to improve by 5.4% sequentially. In the third quarter, we expect the year-over-year decline in theFA Flex revenue to approximate second quarter of 2022 compared to the same period in 2021. We expect the Flex revenue in our FA business to decline in the low double-digits sequentially in the third quarter.
The following table presents the key drivers for the change in Flex revenue by segment over the prior period (in thousands): | | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2022 vs. June 30, 2021 | | June 30, 2022 vs. June 30, 2021 | | June 30, 2023 vs. June 30, 2022 | | June 30, 2023 vs. June 30, 2022 |
| | Technology | | FA | | Technology | | FA | | Technology | | FA | | Technology | | FA |
Key Drivers - Increase (Decrease) | Key Drivers - Increase (Decrease) | | Key Drivers - Increase (Decrease) | |
Volume - hours billed | Volume - hours billed | $ | 42,330 | | | $ | (53,490) | | | $ | 97,888 | | | $ | (94,021) | | Volume - hours billed | $ | (40,334) | | | $ | (14,342) | | | $ | (47,611) | | | $ | (31,918) | |
Bill rate | Bill rate | 27,874 | | | 10,978 | | | 48,620 | | | 22,572 | | Bill rate | 11,708 | | | 2,291 | | | 27,287 | | | 5,733 | |
Billable expenses | Billable expenses | 658 | | | (12) | | | 1,286 | | | 12 | | Billable expenses | (555) | | | 2 | | | (1,049) | | | (6) | |
Total change in Flex revenue | Total change in Flex revenue | $ | 70,862 | | | $ | (42,524) | | | $ | 147,794 | | | $ | (71,437) | | Total change in Flex revenue | $ | (29,181) | | | $ | (12,049) | | | $ | (21,373) | | | $ | (26,191) | |
The following table presents total Flex hours billed by segment and percentage change over the prior period (in thousands):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 | | 2023 | | Increase (Decrease) | | 2022 | | 2023 | | Increase (Decrease) | | 2022 |
Technology | Technology | 4,292 | | | 14.0 | % | | 3,766 | | | 8,414 | | | 17.0 | % | | 7,194 | | Technology | 3,829 | | | (10.8) | % | | 4,292 | | | 7,861 | | | (6.6) | % | | 8,414 | |
FA | FA | 938 | | | (61.7) | % | | 2,449 | | | 2,088 | | | (56.7) | % | | 4,825 | | FA | 633 | | | (32.5) | % | | 938 | | | 1,381 | | | (33.9) | % | | 2,088 | |
Total Flex hours billed | Total Flex hours billed | 5,230 | | | (15.8) | % | | 6,215 | | | 10,502 | | | (12.6) | % | | 12,019 | | Total Flex hours billed | 4,462 | | | (14.7) | % | | 5,230 | | | 9,242 | | | (12.0) | % | | 10,502 | |
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 37.3%decreased 36.3% and 47.6%33.6% during the three and six months ended June 30, 2022,2023, respectively, as compared to the same periodperiods in 2021. The increase during these periods2022, which was primarily driven by a significant increasedecrease in bothplacements stemming from the number of placements and fees, asuncertainties in the economic environment has improved and competition for talent has increased.
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 | | Six Months Ended |
| June 30, 2022 vs. June 30, 2021 | | June 30, 2022 vs. June 30, 2021 |
| Technology | | FA | | Technology | | FA |
Key Drivers - Increase (Decrease) | | | | | | | |
Volume - number of placements | $ | 1,480 | | | $ | 496 | | | $ | 4,343 | | | $ | 2,593 | |
Placement fee | 1,525 | | | 1,063 | | | 2,075 | | | 1,276 | |
Total change in Direct Hire revenue | $ | 3,005 | | | $ | 1,559 | | | $ | 6,418 | | | $ | 3,869 | |
The following table presents the total number of placements by segment and percentage change over the prior period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 |
Technology | 369 | | | 24.2 | % | | 297 | | | 757 | | | 39.9 | % | | 541 | |
FA | 431 | | | 8.3 | % | | 398 | | | 860 | | | 24.1 | % | | 693 | |
Total number of placements | 800 | | | 15.1 | % | | 695 | | | 1,617 | | | 31.0 | % | | 1,234 | |
The following table presents the average placement fee by segment and percentage change over the prior period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 |
Technology | $ | 24,654 | | | 20.2 | % | | $ | 20,517 | | | $ | 22,826 | | | 13.7 | % | | $ | 20,084 | |
FA | 17,946 | | | 15.9 | % | | 15,478 | | | $ | 17,033 | | | 9.6 | % | | $ | 15,548 | |
Total average placement fee | $ | 21,040 | | | 19.4 | % | | $ | 17,628 | | | $ | 19,746 | | | 12.6 | % | | $ | 17,537 | |
macroeconomic environment.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 third partythird-party compliance costs) from total revenue. There are no consultant payroll costs associated with Direct Hire placements,placements; accordingly, 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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 | | 2023 | | Increase (Decrease) | | 2022 | | 2023 | | Increase (Decrease) | | 2022 |
Technology | Technology | 28.6 | % | | 0.7 | % | | 28.4 | % | | 28.5 | % | | 3.6 | % | | 27.5 | % | Technology | 27.1 | % | | (5.2) | % | | 28.6 | % | | 27.0 | % | | (5.3) | % | | 28.5 | % |
FA | FA | 40.7 | % | | 23.3 | % | | 33.0 | % | | 39.1 | % | | 25.3 | % | | 31.2 | % | FA | 39.8 | % | | (2.2) | % | | 40.7 | % | | 38.7 | % | | (1.0) | % | | 39.1 | % |
Total gross profit percentage | Total gross profit percentage | 30.0 | % | | 1.7 | % | | 29.5 | % | | 29.9 | % | | 5.3 | % | | 28.4 | % | Total gross profit percentage | 28.3 | % | | (5.7) | % | | 30.0 | % | | 28.2 | % | | (5.7) | % | | 29.9 | % |
The total gross profit percentage for each of the three and six months ended June 30, 2022, increased 50 and 1502023 decreased 170 basis points respectively, as compared to the same periodperiods in 2021,2022, primarily asdue to a result of an increaseddecline in the mix of Direct Hire revenue.revenue and lower Technology Flex gross profit margins.
Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue) provides management with helpful insights 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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 | | 2023 | | Increase (Decrease) | | 2022 | | 2023 | | Increase (Decrease) | | 2022 |
Technology | Technology | 26.9 | % | | (0.4) | % | | 27.0 | % | | 26.8 | % | | 2.3 | % | | 26.2 | % | Technology | 25.9 | % | | (3.7) | % | | 26.9 | % | | 25.9 | % | | (3.4) | % | | 26.8 | % |
FA | FA | 30.4 | % | | 7.4 | % | | 28.3 | % | | 29.6 | % | | 10.9 | % | | 26.7 | % | FA | 30.4 | % | | — | % | | 30.4 | % | | 29.6 | % | | — | % | | 29.6 | % |
Total Flex gross profit percentage | Total Flex gross profit percentage | 27.2 | % | | (0.4) | % | | 27.3 | % | | 27.1 | % | | 3.0 | % | | 26.3 | % | Total Flex gross profit percentage | 26.3 | % | | (3.3) | % | | 27.2 | % | | 26.2 | % | | (3.3) | % | | 27.1 | % |
Overall, ourOur Flex gross profit percentage decreased 1090 basis points for each of the three and six months ended June 30, 2023 as compared to same periods in 2022.
•Technology Flex gross profit margin decreased 100 and 90 basis points for the three months ended June 30, 2022, and increased 80 basis points for the six months ended June 30, 2022,2023, respectively, as compared to the same periods in 2021. The notable2022, primarily due to a tighter pricing environment, higher healthcare costs and business mix changes within our segments were as follows:
•client portfolio. We expect Technology Flex gross profit margins in our Technology business decreased 10 basis points for the three months ended June 30, 2022 and increased 60 basis points for the six months ended June 30, 2022, as comparedthird quarter to the same periods in 2021. The increase for the six months ended June 30, 2022 was primarily due to lower payroll taxes and benefit costs.be stable with second quarter levels.
•FA Flex gross profit margins increased210 basis pointswere flat for the three months ended June 30, 2022 and increased 290 basis points for the six months ended June 30, 2022,2023 as compared to the same periods in 2021. The increase in both periods was primarily due to the falloff2022.
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 | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2022 vs. June 30, 2021 | | June 30, 2022 vs. June 30, 2021 | | June 30, 2023 vs. June 30, 2022 | | June 30, 2023 vs. June 30, 2022 |
| | Technology | | FA | | Technology | | FA | | Technology | | FA | | Technology | | FA |
Key Drivers - Increase (Decrease) | Key Drivers - Increase (Decrease) | | Key Drivers - Increase (Decrease) | |
Revenue impact | Revenue impact | $ | 19,109 | | | $ | (12,028) | | | $ | 38,683 | | | $ | (19,101) | | Revenue impact | $ | (7,836) | | | $ | (3,661) | | | $ | (5,735) | | | $ | (7,759) | |
Profitability impact | Profitability impact | (432) | | | 928 | | | 4,751 | | | 2,725 | | Profitability impact | (3,207) | | | (6) | | | (6,478) | | | (12) | |
Total change in Flex gross profit | Total change in Flex gross profit | $ | 18,677 | | | $ | (11,100) | | | $ | 43,434 | | | $ | (16,376) | | Total change in Flex gross profit | $ | (11,043) | | | $ | (3,667) | | | $ | (12,213) | | | $ | (7,771) | |
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 85.7%85.6% and 85.0%85.1% for the three and six months ended June 30, 2022,2023, respectively, as compared to 87.4%85.7% and 86.6%85.0% for the comparable periods in 2021.2022, respectively. 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): | | | 2022 | | % of Revenue | | 2021 | | % of Revenue | | 2023 | | % of Revenue | | 2022 | | % of Revenue |
Three Months Ended June 30, | Three Months Ended June 30, | | Three Months Ended June 30, | |
Compensation, commissions, payroll taxes and benefits costs | Compensation, commissions, payroll taxes and benefits costs | $ | 82,368 | | | 18.9 | % | | $ | 73,914 | | | 18.3 | % | Compensation, commissions, payroll taxes and benefits costs | $ | 71,004 | | | 18.2 | % | | $ | 82,368 | | | 18.9 | % |
Other (1) | Other (1) | 13,779 | | | 3.2 | % | | 10,702 | | | 2.7 | % | Other (1) | 11,989 | | | 3.1 | % | | 13,779 | | | 3.2 | % |
Total SG&A | Total SG&A | $ | 96,147 | | | 22.0 | % | | $ | 84,616 | | | 21.0 | % | Total SG&A | $ | 82,993 | | | 21.3 | % | | $ | 96,147 | | | 22.0 | % |
Six Months Ended June 30, | Six Months Ended June 30, | | Six Months Ended June 30, | |
Compensation, commissions, payroll taxes and benefits costs | Compensation, commissions, payroll taxes and benefits costs | $ | 162,592 | | | 19.1 | % | | $ | 140,788 | | | 18.4 | % | Compensation, commissions, payroll taxes and benefits costs | $ | 146,619 | | | 18.4 | % | | $ | 162,592 | | | 19.1 | % |
Other (1) | Other (1) | 28,604 | | | 3.4 | % | | 21,857 | | | 2.9 | % | Other (1) | 25,713 | | | 3.2 | % | | 28,604 | | | 3.4 | % |
Total SG&A | Total SG&A | $ | 191,196 | | | 22.4 | % | | $ | 162,645 | | | 21.2 | % | Total SG&A | $ | 172,332 | | | 21.7 | % | | $ | 191,196 | | | 22.4 | % |
(1) Includes credit loss expense, lease expense, professional fees, travel, telephone, computer, and certain other expenses.
SG&A as a percentage of revenue increased 100 and 120decreased 70 basis points for each of the three and six months ended June 30, 2022, respectively,2023, as compared to the same periodperiods in 2021. The increase in both periods was2022, primarily due to (a) a gain on the sale of our corporate headquarters that occurreddecrease in the second quarter of 2021, (b) higher performance-based compensation given lower overall revenue and gross profit levels, and lower professional fees.
Despite the strengthuncertainties in our performance, and (c) otherthe macroeconomic environment, we are continuing to prioritize investments in our business.
The Firm continuesstrategic initiatives, including our integrated strategy and multi-year efforts to focus ontransform our back office, but are exercising tighter discretionary spend control, taking certain actions to align our costs with the lower revenue levels and generating increased operating leverage through solid revenue growth, improved productivity of our associates, structural reductions in operating costs and continuing to exercise solid expense discipline.other cost efficiencies, where appropriate.
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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | Increase (Decrease) | | 2021 | | 2022 | | Increase (Decrease) | | 2021 | | 2023 | | Increase (Decrease) | | 2022 | | 2023 | | Increase (Decrease) | | 2022 |
Fixed asset depreciation (includes finance leases) | Fixed asset depreciation (includes finance leases) | $ | 628 | | | (15.7) | % | | $ | 745 | | | $ | 1,305 | | | (16.0) | % | | $ | 1,554 | | Fixed asset depreciation (includes finance leases) | $ | 884 | | | 40.8 | % | | $ | 628 | | | $ | 1,518 | | | 16.3 | % | | $ | 1,305 | |
Capitalized software amortization | Capitalized software amortization | 448 | | | 0.2 | % | | 447 | | | 864 | | | 2.9 | % | | 840 | | Capitalized software amortization | 456 | | | 1.8 | % | | 448 | | | 1,056 | | | 22.2 | % | | 864 | |
Total Depreciation and amortization | Total Depreciation and amortization | $ | 1,076 | | | (9.7) | % | | $ | 1,192 | | | $ | 2,169 | | | (9.4) | % | | $ | 2,394 | | Total Depreciation and amortization | $ | 1,340 | | | 24.5 | % | | $ | 1,076 | | | $ | 2,574 | | | 18.7 | % | | $ | 2,169 | |
Other (Income) Expense (Income), Net.Other (income) expense, net for the three and six months ended June 30, 2023 was $0.3 million and $1.4 million, respectively. Other income, net for the three and six months ended June 30, 2022 was income of $2.7 million and 1.2 million, respectively. Other (income) expense, net for the three and six months ended June 30, 2021 was expense of $3.1 million and $4.4$1.2 million, respectively. This 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,Amended and Restated Credit Facility and our proportionate share of losses related to our equity method investment prior to the loss from WorkLLama.sale of our noncontrolling interest in WorkLLama in February 2023, as discussed below.
During the three and six months ended June 30, 2022, Other (income) expense, net also includes $4.1 million2023, our proportionate share of losses related to a gain recognized as a result of the termination of Swap B.
our equity method investment was nil and $0.8 million, respectively. During the three and six months ended June 30, 2022, our proportionate share of the loss from WorkLLama,losses related to our equity method investment was $1.0 million and $1.8 million, respectively, and duringrespectively. On February 23, 2023, Kforce sold its 50% noncontrolling interest in WorkLLama to an unaffiliated third party. Refer to Note A - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this report, for more details.
During the three and six months ended June 30, 2021, $0.5 million and $1.0 million, respectively. In addition, during the three and six month ended June 30, 2021,2022, Other expense (income),income, net also included an expenseincludes a $4.1 million gain recognized as a result of $1.8 million related to the termination of our SERP.an interest rate swap agreement in May 2022. Refer to Note J - “Derivative Instrument and Hedging Activity” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data, for a complete discussion of the interest rate swap derivative instruments.
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 six months ended June 30, 2023 and 2022 was 27.5% and 2021 was 26.6% and 28.5%, respectively. The primary differences between the U.S. statutory rate and our effective tax rate are related to state taxes and other nondeductible items such as Internal Revenue Code Section 162(m).
Non-GAAP Financial Measures
Free Cash Flow.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, paying dividends or paying dividends.making acquisitions. 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): | | | | | | | | | | | | |
| Six Months Ended June 30, | |
| 2023 | | 2022 | |
Net cash provided by operating activities | $ | 40,431 | | | $ | 70,760 | | |
Capital expenditures | (4,950) | | | (3,458) | | |
Free cash flow | 35,481 | | | 67,302 | | |
Change in debt | (1,000) | | | (100,000) | | |
Repurchases of common stock | (24,614) | | | (19,600) | | |
Cash dividends | (13,947) | | | (12,187) | | |
Proceeds from the sale of our joint venture interest | 5,059 | | | — | | |
| | | | |
Equity method investment | — | | | (500) | | |
Note receivable issued to our joint venture | (750) | | | (2,000) | | |
Other | (203) | | | (30) | | |
Change in cash and cash equivalents | $ | 26 | | | $ | (67,015) | | |
The following table presents Free Cash Flow (in thousands): | | | | | | | | | | | | |
| Six Months Ended June 30, | |
| 2022 | | 2021 | |
Net cash provided by operating activities | $ | 70,760 | | | $ | 36,574 | | |
Capital expenditures | (3,458) | | | (2,919) | | |
Free cash flow | 67,302 | | | 33,655 | | |
Payments on credit facility | (100,000) | | | — | | |
Repurchases of common stock | (19,600) | | | (29,371) | | |
Cash dividends | (12,187) | | | (9,532) | | |
Contributions to WorkLLama, joint venture | (500) | | | (4,500) | | |
Net proceeds from the sale of assets | — | | | 23,742 | | |
Note receivable issued to WorkLLama, joint venture | (2,000) | | | — | | |
Other | (30) | | | (201) | | |
Change in cash and cash equivalents | $ | (67,015) | | | $ | 13,793 | | |
Adjusted EBITDA. “Adjusted EBITDA”,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.investment, gain from swap termination, and certain other items as specified in the table below. 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 net income to Adjusted EBITDA to net income (in thousands): | | | 2022 | | 2021 | | 2023 | | 2022 |
Three Months Ended June 30, | Three Months Ended June 30, | | Three Months Ended June 30, | |
Net income | Net income | $ | 26,916 | | | $ | 21,188 | | Net income | $ | 18,574 | | | $ | 26,916 | |
Depreciation and amortization | Depreciation and amortization | 1,076 | | | 1,192 | | Depreciation and amortization | 1,340 | | | 1,076 | |
Gain on sale of corporate headquarters | — | | | (2,051) | | |
Stock-based compensation expense | Stock-based compensation expense | 4,410 | | | 3,532 | | Stock-based compensation expense | 4,309 | | | 4,410 | |
Interest expense, net | Interest expense, net | 371 | | | 765 | | Interest expense, net | 313 | | | 371 | |
Income tax expense | | Income tax expense | 7,046 | | | 9,605 | |
Loss from equity method investment | | Loss from equity method investment | — | | | 1,015 | |
Gain from swap termination | Gain from swap termination | (4,059) | | | — | | Gain from swap termination | — | | | (4,059) | |
Income tax expense | 9,605 | | | 8,823 | | |
| SERP termination expense | — | | | 1,821 | | |
Loss from equity method investment | 1,015 | | | 531 | | |
Adjusted EBITDA | Adjusted EBITDA | $ | 39,334 | | | $ | 35,801 | | Adjusted EBITDA | $ | 31,582 | | | $ | 39,334 | |
Six Months Ended June 30, | Six Months Ended June 30, | | Six Months Ended June 30, | |
Net income | Net income | $ | 46,097 | | | $ | 34,449 | | Net income | $ | 34,784 | | | $ | 46,097 | |
Depreciation and amortization | Depreciation and amortization | 2,169 | | | 2,394 | | Depreciation and amortization | 2,574 | | | 2,169 | |
Gain on sale of corporate headquarters | — | | | (2,051) | | |
Stock-based compensation expense | Stock-based compensation expense | 8,848 | | | 6,935 | | Stock-based compensation expense | 8,635 | | | 8,848 | |
Interest expense, net | Interest expense, net | 979 | | | 1,562 | | Interest expense, net | 608 | | | 979 | |
Income tax expense | | Income tax expense | 13,194 | | | 16,735 | |
Loss from equity method investment | | Loss from equity method investment | 750 | | | 1,840 | |
Gain from swap termination | Gain from swap termination | (4,059) | | | — | | Gain from swap termination | — | | | (4,059) | |
Income tax expense | 16,735 | | | 13,728 | | |
SERP termination expense | — | | | 1,821 | | |
Loss from equity method investment | 1,840 | | | 1,022 | | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 72,609 | | | $ | 59,860 | | Adjusted EBITDA | $ | 60,545 | | | $ | 72,609 | |
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 June 30, 20222023 and December 31, 2021,2022, we had $30.0$24.6 million and $97.0 million in cash and cash equivalents, respectively, which consisted primarily of government money market funds. At June 30, 2022 and December 31, 2021, we had $0 and $100$25.6 million outstanding under our credit facility. At June 30, 2022, we had $198.6 million ofAmended and Restated Credit Facility, respectively, and the borrowing availability under our credit facility.
In May 2022, we terminated Swap B in connection with the payment of all outstanding borrowings under our credit facility, which was $100.0$174.2 million at the time of repayment.
Effective April 30, 2021, Kforce’s Board of Directors irrevocably terminated the SERP. The benefits owedand $173.1 million, respectively, subject to the two participants under the SERP as of June 30, 2022, was $20.0 million in the aggregate, which represented the fair value at the date of termination, and is recorded in Note F - Current Liabilities of Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1. Financial Statements of this report. These benefits were fully paid in July 2022.certain covenants.
Cash Flows
We are principally focused on generating positive cash flowflows from operating activities, investing in our business to sustain our long-term growth and meet our profitability objectives, and returning capital to our shareholders through our quarterly dividends and common stock repurchase program, and selectively pursuing acquisition opportunities.program.
Cash provided by operating activities was $40.4 million during the six months ended June 30, 2023, as compared to $70.8 million during the six months ended June 30, 2022, as compared to $36.6 million provided during the six months ended June 30, 2021.2022. 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. The year-over-year increasedecrease in cash provided by operating activities was primarily driven by profitable revenue growth, proceeds fromlower profitability levels and the terminationtiming of Swap B, and continued management of working capital.payments.
Cash used in investing activities during the six months ended June 30, 20222023 was $0.8 million and June 30, 2021primarily consisted of the proceeds from the sale of our joint venture interest of $5.1 million, partially offset by cash used for capital expenditures of $5.0 million. Cash used in investing activities was $6.0 million and $16.3 million, respectively,during the six months ended June 30, 2022, and primarily consisted of cash used for capital expenditures and contributions to WorkLLama. The year over year decrease is mostly attributable to the inclusion of $23.7our joint venture.
Cash used in financing activities was $39.6 million in net proceeds from the sale of our corporate headquarters induring the six months ended June 30, 2021.
Cash used in financing activities was2023, compared to $131.8 million during the six months ended June 30, 2022, compared to $39.1 million used during the six months ended June 30, 2021.2022. The change was primarily driven by the repayment of $100.0 million outstanding on our credit facilityAmended and an increase in dividend payments, offset in part by an increaseRestated Credit Facility in the repurchases of common stock.prior period.
The following table presents the cash flow impact of the common stock repurchase activity (in thousands): | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Open market repurchases | Open market repurchases | | $ | 19,136 | | | $ | 29,591 | | Open market repurchases | | $ | 24,252 | | | $ | 19,136 | |
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 | | 464 | | | 336 | | Repurchase of shares related to tax withholding requirements for vesting of restricted stock | | 362 | | | 464 | |
Total cash flow impact of common stock repurchases | Total cash flow impact of common stock repurchases | | $ | 19,600 | | | $ | 29,927 | | Total cash flow impact of common stock repurchases | | $ | 24,614 | | | $ | 19,600 | |
Cash paid in current year for settlement of prior year repurchases | | Cash paid in current year for settlement of prior year repurchases | | $ | 974 | | | $ | 181 | |
| |
During the six months ended June 30, 20222023 and 2021,2022, Kforce declared and paid quarterly dividends of $13.9 million ($0.72 per share) and $12.2 million ($0.60 per share) and $9.5 million ($0.46 per share), respectively, which represents a 30% increase.20% increase on a per share basis. While the Board has declared and paid a quarterly dividenddividends since initiation in the fourth quarter of 2013,2014, and intends to in the foreseeable future, dividends 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, operating cash flow from operationsflows and available borrowings under our credit facilityAmended and Restated Credit Facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months.months and give us the flexibility to continue returning significant capital to our shareholders. 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 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 Firmwhich has a maximum borrowing capacity of $200.0 million, which may,and subject to certain conditions and the participation of the lenders, may be increased up to an aggregate additional amount of $150.0 million. The maturity dateAs of June 30, 2023, $24.6 million was outstanding and $174.2 million was available on our Amended and Restated Credit Facility, and as of December 31, 2022, $25.6 million was outstanding. As of June 30, 2023, we were in compliance with all of our financial covenants contained in the Amended and Restated Credit Facility is October 20, 2026. 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 June 30, 2022, thereby resulting in $198.6 million, subject to certain covenants, of availability under the credit facility. As of June 30, 2022, we are in compliance with our credit facility covenants as described in the 20212022 Annual Report on Form 10-K, and currently expect that we will be able to maintain compliance with these covenants.
PriorIn June 2023, Kforce entered into the First Amendment to June 30, 2022,the Amended and Restated Credit Agreement, among Wells Fargo, as administrative agent, and the lenders and financial institutions from time to time party thereto, to replace the LIBOR-based benchmark interest rates with the SOFR Rate. Refer to Note G - “Credit Facility” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in this report, for a complete discussion of our Amended and Restated Credit Facility.
In April 2017 and March 2020, Kforce maintainedentered into two forward-starting interest rate swap agreements which were designated as cash flow hedges, to mitigate the risk of rising interest rates. In MayAs of June 30, 2023 and 2022, Kforce terminated Swap B.the Firm did not have any outstanding interest rate swap derivative instruments. Refer to Note J - “Derivative InstrumentsInstrument 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.
Stock Repurchases
In February 2022,2023, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million. During the six months ended June 30, 2022,2023, Kforce repurchased approximately 303,000422 thousand shares of common stock on the open market at a total cost of approximately $20.1$24.0 million and $88.8$84.9 million remained available for further repurchases under the Board-authorized common stock repurchase program at June 30, 2022.2023.
As a result of the newly enacted IRA, the Company recorded a 1% nondeductible excise tax on certain repurchases of stock, net of issuances. The IRA is not expected to have a material impact on our cash flows, results of operations or financial position. Refer to Note A - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in Item 1 of this report, for a complete discussion of the new excise tax related to the IRA.
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 7,7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20212022 Annual Report on Form 10-K10-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.
Equity 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 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 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 a triggering event had occurred. 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.
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 2021 Annual Report on Form 10-K.
NEW 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.
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,7A. “Quantitative and Qualitative Disclosures About Market Risk” in our 2022 Annual Report on Form 10-K for the fiscal year ended December 31, 2021.10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of June 30, 2022,2023, 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, issection contains 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 L - "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 20212022 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 PlanBoard authorized stock repurchase plan (the “Plan”) are subject to certain price, market, volume and timing constraints, which are specified in the plan.Plan. The following table presents information with respect to our repurchases of Kforce common stock during the three months ended June 30, 2022:2023: | | | | | | | | | | | | | | | | | | | | | | | |
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 |
April 1, 2022 to April 30,2022 | — | | | $ | — | | | — | | | $ | 98,787,598 | |
May 1, 2022 to May 31, 2022 | 4,009 | | | $ | 70.40 | | | — | | | $ | 98,787,598 | |
June 1, 2022 to June 30, 2022 | 158,783 | | | $ | 62.98 | | | 158,783 | | | $ | 88,786,772 | |
Total | 162,792 | | | $ | 63.17 | | | 158,783 | | | $ | 88,786,772 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | 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 (2)(3) |
April 1, 2023 to April 30, 2023 | — | | | $ | — | | | — | | | $ | 98,844,888 | |
May 1, 2023 to May 31, 2023 | 170,798 | | | $ | 55.82 | | | 166,885 | | | $ | 89,532,622 | |
June 1, 2023 to June 30, 2023 | 77,163 | | | $ | 60.66 | | | 77,163 | | | $ | 84,852,288 | |
Total | 247,961 | | | $ | 57.32 | | | 244,048 | | | $ | 84,852,288 | |
(1) Includes 4,0093,913 shares received upon vesting of restricted stock to satisfy tax withholding requirements for the period May 1, 20222023 to May 31, 2023.
(2) The IRA imposed a 1% nondeductible excise tax on the net value of certain open market stock repurchases made after December 31, 2022. All dollar amounts presented exclude such excise tax, as applicable. Refer to Note A - “Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements, included in this report, for a complete discussion of the new excise tax related to the IRA.
(3) In February 2023, the Board approved an increase in our stock repurchase authorization increasing the available authorization to $100.0 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.Insider Trading Arrangements
During the three months ended June 30, 2023, none of the Company’s officers or directors adopted or terminated any contract, instruction, or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K.
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. |
| First Amendment to the Amended and Restated Credit Facility, dated June 8, 2023, by and among Kforce Inc., Wells Fargo Bank, National Association and the lenders and financial institutions from time to time party thereto. |
| |
| 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 June 30, 2022,2023, 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: | August 3, 20222, 2023 | By: | | /s/ DAVID M. KELLY |
| | | | David M. Kelly |
| | | | Executive Vice President, Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | |
Date: | August 3, 20222, 2023 | By: | | /s/ JEFFREY B. HACKMAN |
| | | | Jeffrey B. Hackman |
| | | | Senior Vice President, Finance and Accounting |
| | | | (Principal Accounting Officer) |