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KFRC > SEC Filings for KFRC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for KFORCE INC

Form 10-Q for KFORCE INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Kforce Inc., our operations, and our present business environment. This MD&A should be read in conjunction with "Item 1. Financial Statements" of this Report on Form 10-Q.

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

Executive Summary - an executive summary of our results of operations for the nine months ended September 30, 2012.

Critical Accounting Estimates - a discussion of the accounting estimates that are most critical to aid in fully understanding and evaluating our reported financial results and that require management's most difficult, subjective or complex judgments.

New Accounting Standards - a discussion of recently issued accounting standards and their potential impact on our consolidated financial statements.

Results of Operations - an analysis of Kforce's unaudited condensed consolidated results of operations for each of the nine months ended September 30, 2012 and 2011, which have been presented in its unaudited condensed consolidated financial statements. In order to assist the reader in understanding our business as a whole, certain metrics are presented for each of our segments.

Liquidity and Capital Resources - an analysis of cash flows, off-balance sheet arrangements, stock repurchases and the impact of changes in interest rates on our business.

On March 31, 2012, Kforce sold all of the issued and outstanding stock of KCR. See Note B - "Discontinued Operations" to the Unaudited Condensed Consolidated Financial Statements for a more detailed discussion. The results presented in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2012 and 2011 include activity relating to KCR as discontinued operations. Except as specifically noted, our discussions below exclude any activity related to KCR, which is addressed separately in the discussion of income from discontinued operations, net of income taxes.

EXECUTIVE SUMMARY

The following is an executive summary of what Kforce believes are important results as of and for the nine months ended September 30, 2012, which should be considered in the context of the additional discussions herein and in conjunction with its unaudited condensed consolidated financial statements. We believe such highlights are as follows:

Net service revenues for the nine months ended September 30, 2012 increased 9.0% to $812.6 million from $745.4 million in the comparable period in 2011.

Flex revenues for the nine months ended September 30, 2012 increased 9.0% to $776.1 million from $712.0 million in the comparable period in 2011. Year-over-year Flex revenue growth rates have decelerated on a billing day basis throughout 2012.

Search revenues for the nine months ended September 30, 2012 increased 9.7% to $36.6 million from $33.4 million in the comparable period in 2011.

Flex gross profit margin for the three months ended September 30, 2012 increased 40 basis points to 29.6% from 29.2% in the comparable period in 2011. Sequentially, Flex gross profit margin increased 30 basis points primarily as a result of an improvement it the spread between our bill and pay rates primarily in our Tech segment and a decrease in statutory payroll taxes.

Selling, general and administrative ("SG&A") expenses as a percentage of revenues for the nine months ended September 30, 2012 increased to 30.8% from 27.3% in the comparable period in 2011. This increase was primarily a result of the acceleration of substantially all of the outstanding and unvested RS, PARS and ALTI awards on March 31, 2012, which resulted in the acceleration of $31.3 million of compensation expense and payroll taxes recorded during the three months ended March 31, 2012.

Net loss from continuing operations of $41.6 million for the nine months ended September 30, 2012 declined $55.6 million from net income from continuing operations of $14.0 million in the comparable period in 2011. The results for the nine months ended September 30, 2012, include an after-tax goodwill impairment charge of $42.0 million.

Loss per share from continuing operations for the nine months ended September 30, 2012 was $1.16 compared to earnings per share of $0.35 in the comparable period in 2011, which was primarily driven by the acceleration of substantially all of the outstanding and unvested RS, PARS and ALTI awards on March 31, 2012 and the goodwill impairment charge referred to above.

There were no outstanding borrowings under the Credit Facility as of September 30, 2012 as compared to $49.5 million on December 31, 2011.


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CRITICAL ACCOUNTING ESTIMATES

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenues, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Please refer to Note 1 - "Summary of Significant Accounting Policies" to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2011 for a more detailed discussion of our significant accounting policies and critical accounting estimates.

NEW ACCOUNTING STANDARDS

See the "New Accounting Standards" section within Note A, Summary of Significant Accounting Policies, of the Notes to the Unaudited Condensed Consolidated Financial Statements for a more detailed discussion.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2012 and 2011

Net service revenues for the three and nine months ended September 30, 2012 were $270.2 million and $812.6 million, respectively, which represents an increase of 3.5% and 9.0%, respectively, over the comparable periods in 2011. These increases were primarily due to our Tech (which represents approximately 63% of our total net service revenues) and FA segments (which represents approximately 22% of our net service revenues), which had year-over-year increases in net service revenues for the three months ended September 30, 2012 of 3.1% and 8.2%, respectively, and 9.7% and 10.4%, respectively, for the nine months ended September 30, 2012, respectively. For the three and nine months ended September 30, 2012, net service revenues for HIM increased 4.5% and 14.9%, respectively, while our GS segment declined 5.0% and 2.8%, respectively, in net service revenues over the comparable periods in 2011. For the three and nine months ended September 30, 2012, Search revenues increased 6.6% and 9.7%, respectively, over the comparable periods in 2011.

Flex gross profit margin increased 40 basis points to 29.6% for the three months ended September 30, 2012 as compared to 29.2% for the comparable period in 2011, and increased 30 basis points to 28.7% for the nine months ended September 30, 2012 as compared to 28.4% for the comparable period in 2011. These increases in flex gross profit margins were primarily driven by an increase in the spread between bill rates and pay rates. Flex gross profit margin increased sequentially 30 basis points for the three months ended September 30, 2012 primarily as a result of an improvement in the spread between our bill and pay rates primarily in our Tech segment and a decrease in statutory payroll taxes. SG&A expenses as a percentage of net service revenues were 26.0% and 30.8% for the three and nine months ended September 30, 2012, respectively, as compared to 27.3% for both the three and nine months ended September 30, 2011. The increase in SG&A expenses as a percentage of net service revenues during the nine months ended September 30, 2012 was primarily the result of the acceleration of substantially all of the outstanding and unvested PARS, RS and ALTI awards on March 31, 2012, which resulted in the recognition of incremental compensation expense during the three months ended March 31, 2012 of $31.3 million, including payroll taxes.

Additionally, during the nine months ended September 30, 2012, Kforce recorded an estimated goodwill impairment charge in the amount of $65.3 million related to our GS reporting unit (although no further impairment occurred during the three months ended September 30, 2012). The goodwill impairment charge was the result of the unexpected adverse effect of the unexpected significant delays in the start-up of already executed and funded projects which we believe are due to acute shortages of acquisition and contracting personnel within certain Federal Government agencies, uncertainty of funding levels of various Federal Government programs and agencies and the increasingly uncertain macro-economic and political environment. All of these largely unanticipated factors have had an adverse effect on GS operations and forecasted cash flows, its enterprise value as well as overall equity values in the GS sector.


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From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continue to improve during 2012 on a sequential basis based on data published by the Bureau of Labor Statistics ("BLS"). The penetration rate (the percentage of temporary staffing to total employment) remained flat at 1.9% in September 2012 as compared to June 2012. Economic forecasters estimate that the penetration rate could surpass the prior peak of 2.03% reached in April 2000. While non-farm payroll expanded by 114,000 jobs in September 2012 and has remained positive for 24 consecutive months through September 2012, we believe the macro-employment picture continues to be relatively weak with the unemployment rate at 7.8% as of September 2012. If the penetration rate of temporary staffing continues to experience growth in the coming years, we believe that our Flex revenues can grow even in a relatively modest growth macro-economic environment. Management remains cautiously optimistic about the growth prospects of the temporary staffing industry, the penetration rate and in particular our revenue portfolio.

Over the last few years, we have undertaken several significant initiatives including: (i) further developing and optimizing our National Recruiting Center ("NRC") and Strategic Accounts teams in support of our field operations;
(ii) restructuring both our back office and field operations under our Shared Services program, which focuses on process improvement, centralization, technology infrastructure and outsourcing; (iii) upgrading our corporate systems (primarily our front-end systems) with a focus on job order prioritization and
(iv) making other technology investments designed to increase the performance of our corporate and field associates. We believe that these investments have increased our operating efficiency, enabling us to be more responsive to our clients and have provided a better operating platform to support our expected future growth. We believe our field operations model, which allows us to deliver our service offerings in a disciplined and consistent manner across all geographies and business lines, as well as our highly centralized back office operations, are competitive advantages and keys to our future growth and profitability. We also believe that our diversified portfolio of service offerings, which are primarily in the U.S., will also be a key contributor to our long-term financial stability.

Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30:

                                                  Three Months  Ended             Nine Months  Ended
                                                     September 30,                  September 30,
                                                  2012            2011           2012            2011
Net Service Revenues by Segment:
Tech                                                 63.1 %         63.4 %          62.5 %         62.1 %
FA                                                   21.7           20.8            22.1           21.9
HIM                                                   6.7            6.7             7.1            6.7
GS                                                    8.5            9.1             8.3            9.3

Net service revenues                                100.0 %        100.0 %         100.0 %        100.0 %

Revenue by Time:
Flex                                                 95.4 %         95.6 %          95.5 %         95.5 %
Search                                                4.6            4.4             4.5            4.5

Net service revenues                                100.0 %        100.0 %         100.0 %        100.0 %

Gross profit                                         32.9 %         32.4 %          31.9 %         31.6 %
Selling, general and administrative
expenses                                             26.0 %         27.3 %          30.8 %         27.3 %
Goodwill impairment                                    -              -              8.0 %           -
Depreciation and amortization                         1.0 %          1.2 %           1.0 %          1.3 %
Income (loss) from continuing operations
before income taxes                                   5.7 %          3.8 %          (8.0 )%         2.9 %
Income (loss) from continuing operations              3.4 %          2.4 %          (5.1 )%         1.9 %


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The following table details net service revenues for Flex and Search by segment and changes from the prior period for the three and nine months ended September 30:

                                          Three Months Ended September 30,                   Nine Months Ended September 30,
                                                       Increase                                          Increase
(in $000's)                           2012            (Decrease)          2011            2012          (Decrease)          2011
Tech
Flex                               $   165,342                3.2 %     $ 160,285     $    491,780              9.4 %     $ 449,695
Search                                   5,235                0.8 %         5,191           16,191             20.0 %        13,495

Total Tech                         $   170,577                3.1 %     $ 165,476     $    507,971              9.7 %     $ 463,190

FA
Flex                               $    51,661                7.5 %     $  48,046     $    159,861             11.5 %     $ 143,433
Search                                   7,068               13.1 %         6,251           19,991              2.7 %        19,470

Total FA                           $    58,729                8.2 %     $  54,297     $    179,852             10.4 %     $ 162,903

HIM
Flex                               $    18,089                5.1 %     $  17,208     $     57,185             15.0 %     $  49,736
Search                                      68              (58.0 )%          162              401              1.0 %           397

Total HIM                          $    18,157                4.5 %     $  17,370     $     57,586             14.9 %     $  50,133

GS
Flex                               $    22,698               (5.0 )%    $  23,881     $     67,231             (2.8 )%    $  69,180
Search                                      -                  -               -                -                -               -

Total GS                           $    22,698               (5.0 )%    $  23,881     $     67,231             (2.8 )%    $  69,180

Total Flex                         $   257,790                3.4 %     $ 249,420     $    776,057              9.0 %     $ 712,044
Total Search                            12,371                6.6 %        11,604           36,583              9.7 %        33,362

Total Revenues                     $   270,161                3.5 %     $ 261,024     $    812,640              9.0 %     $ 745,406

Flex Revenues. The primary drivers of Flex revenues are the number of consultant hours worked, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce. Our quarterly operating results are affected by the number of billing days in a quarter and the seasonality of our clients' businesses. For the three months ended September 30, 2012 and 2011, there were 63 and 64 billing days, respectively.

Flex revenues for our largest segment, Tech, have been strong compared to previous economic recoveries, which we believe is primarily a result of candidate skill sets that are in demand, our great people and our operating model as well as overall macro-economic and political uncertainties which make Flex staffing increasingly attractive. We believe that our operating model allows us to deliver our service offerings in a disciplined and consistent manner across all geographies and business lines resulting in an increase in Tech Flex revenues of 3.2% and 9.4% for the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011. This operating model includes our NRC, which we believe has been highly effective in increasing the quality and speed of delivery of services to our clients, particularly our Strategic Accounts. Year-over-year growth rates in Tech have decelerated each quarter during 2012, which we believe reflects the uncertain economic outlook. We also believe that a higher rate of conversions of our flex consultants to permanent employees of our clients is impacting our year-over-year growth rates. Despite this, we believe the demand for Tech going into 2013 continues to be positive. As such, we anticipate continuing to selectively invest in the headcount necessary to capture this demand. Additionally, within our Tech segment, we expect to see continued growth for the remainder of 2012 both sequentially on a billing day basis and as compared to 2011.

Our FA segment experienced an increase in Flex revenues of 7.5% and 11.5% during the three and nine months ended September 30, 2012, respectively, compared to same periods in 2011. According to a Staffing Industry Analysts report, the overall finance and accounting segment is expected to experience a deceleration of growth to 8% in 2012 from 10% in 2011. Consistent with Tech, we believe that the success of our FA segment has been enabled by our NRC, which has been particularly effective in meeting the demand of our Strategic Accounts. Year-over-year growth rates in Tech have decelerated each quarter during 2012, which we believe reflects the uncertain economic outlook. We believe the demand for Tech going into 2013 continues to be good. As such, we anticipate continuing to selectively invest in the headcount necessary to capture this demand. Additionally, within our FA segment, we expect to see continued growth for the remainder of 2012 on a sequential billing day basis.


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Net service revenues for HIM increased 4.5% and 14.9% for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. While net service revenues for HIM had been experiencing accelerating growth through the second quarter of 2012 as hospital census and spending continued to increase, net service revenues declined on a sequential basis in the third quarter due primarily to the completion of a few large projects at the end of the second quarter of 2012. The declines in revenues associated with the completion of the large projects have been partially offset by revenues generated from requirements and deadlines related to International Statistical Classification of Diseases and Related Health Problems, 10th edition ("ICD-10") conversion and electronic health records implementation. On February 16, 2012, the Department of Health and Human Services ("DHHS") announced that the Federal Government will delay the implementation date for the ICD-10 diagnostic and procedural coding system for an unspecified period of time. However, on August 24, 2012, the DHHS published a required implementation date of October 1, 2014 for compliance with ICD-10, which is expected to assist in the growth of net service revenues during 2013. We expect to see continued growth in 2012 within our HIM segment both sequentially and as compared to 2011.

Our GS segment experienced a decrease of 5.0% and 2.8% in net service revenues for the three and nine months ended September 30, 2012, respectively, as compared to the comparable periods in 2011. We believe this decline is primarily a result of the unexpected significant delays in the start-up of already executed and funded projects which we believe are due to acute shortages of acquisition and contracting personnel within certain Federal Government agencies, uncertainty of funding levels of various Federal Government programs and agencies and the increasingly uncertain macro-economic and political environment. When combined with the repositioning of our GS segment, continued shift in customer focus and our expected increased revenues over the second half of 2012 as compared to 2011, we believe our net service revenues will be flat overall for 2012 as compared to 2011. Management remains cautiously optimistic as it cannot predict the outcome of the widening federal deficits and past, current and future efforts to reduce federal spending through sequestration and whether these efforts will materially impact the budgets of federal agencies that are clients of our GS segment; however, we continue to believe in the long-term prospects of our GS segment and believe this unit has strong growth prospects going forward.

The following table details total Flex hours for each segment and percentage changes over the prior period for the three and nine months ended September 30:

                                          Three Months Ended September 30,                  Nine Months Ended September 30,
                                                        Increase                                          Increase
(in 000's)                             2012            (Decrease)          2011          2012            (Decrease)         2011
Tech                                      2,520                0.0 %        2,520           7,511                4.4 %       7,196
FA                                        1,545                9.9          1,406           4,745               12.6         4,214
HIM                                         263                0.0            263             852               10.2           773

Total hours                               4,328                3.3 %        4,189          13,108                7.6 %      12,183

The changes in billable expenses, which are included as a component of net services revenues, are primarily attributable to increases or decreases in project work. The following table details total Flex billable expenses for each segment and percentage changes over the prior period for the three and nine months ended September 30:

                                         Three Months Ended September 30,               Nine Months Ended September 30,
                                                      Increase                                        Increase
(in $000's)                            2012          (Decrease)         2011          2012           (Decrease)        2011
Tech                                $    1,949              49.8 %     $ 1,301     $     5,637              74.7 %    $ 3,226
FA                                         136             (23.6 )         178             417             (18.1 )        509
HIM                                      1,524               1.7         1,498           4,902              11.2        4,407
GS                                         141             (32.9 )         210             398             (42.8 )        696

Total billable expenses             $    3,750              17.7 %     $ 3,187     $    11,354              28.5 %    $ 8,838


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Search Fees. The primary drivers of Search fees are the number of placements and the average placement fee. Search fees also include conversion revenues (conversions occur when consultants initially assigned to a client on a temporary basis are later converted to a permanent placement). Our GS segment does not make permanent placements.

Search revenues increased 6.6% and 9.7% for the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011 and decreased 6.3% sequentially as compared to the three months ended June 30, 2012. We believe the increase over the prior year reflects clients who are continuing to selectively rebuild staff after significant reductions during the most recent economic recession. While Search revenue is difficult to predict, we expect this trend may stabilize in the near term on a sequential basis.

Total placements for each segment and percentage changes over the prior period were as follows for the three and nine months ended September 30:

                                       Three Months Ended September 30,               Nine Months Ended September 30,
                                                   Increase                                        Increase
                                     2012         (Decrease)           2011         2012          (Decrease)        2011
Tech                                    337              (4.8 )%         354          1,028              10.2 %        933
FA                                      513               2.8            499          1,546              (0.3 )      1,550
HIM                                       6             (71.4 )           21             36             (18.2 )         44

Total placements                        856              (2.1 )%         874          2,610               3.3 %      2,527

The average placement fee for each segment and percentage changes over the prior period were as follows for the three and nine months ended September 30:

                                          Three Months Ended September 30,                 Nine Months Ended September 30,
                                                        Increase                                         Increase
. . .
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