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| KFRC > SEC Filings for KFRC > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
This section is intended to help the reader understand Kforce, our operations, and our present business environment. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8. Financial Statements and Supplementary Data of this report as well as Item 1. Business of this report for an overview of our operations and business environment.
This overview summarizes the MD&A, which includes the following sections:
• Executive Summary - an executive summary of our results of operations for 2012.
• Critical Accounting Estimates - a discussion of the accounting estimates that are most critical to 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 consolidated results of operations for the three years presented in its 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 contractual obligations and commitments 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 2 - "Discontinued Operations" to the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for a more detailed discussion. The results presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010 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 2012 highlights, which should be considered in the context of the additional discussions herein and in conjunction with the Consolidated Financial Statements and notes thereto. We believe such highlights are as follows:
• Net service revenues increased 7.7% to $1.08 billion in 2012 from $1.00 billion in 2011. Net service revenues increased 8.3% for Tech, 8.6% for FA, and 12.1% for HIM while GS decreased 1.1%.
• Flex revenues increased 7.7% to $1.03 billion in 2012 from $961.2 million in 2011.
• Search revenues increased 9.6% to $47.7 million in 2012 from $43.5 million in 2011.
• Flex gross profit margin increased 50 basis points to 29.0% in 2012 from 28.5% in 2011, primarily as a result of an increase in the spread between our bill and pay rates. This increase was partially offset by increases in statutory payroll costs, particularly relating to unemployment taxes. Flex gross profit margins increased 30 basis points for Tech, 120 basis points for FA and 70 basis points for GS and HIM remained flat.
• SG&A as a percentage of revenues for the year ended December 31, 2012 was 29.8% compared to 27.3% 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 $35.7 million for 2012 declined $54.8 million from net income from continuing operations of $19.1 million in 2011. The results for 2012 include an after-tax goodwill impairment charge of $44.5 million as well as the previously mentioned acceleration of substantially all of the outstanding and unvested RS, PARS and ALTI awards.
• Loss per share from continuing operations for 2012 was $1.00 compared to earnings per share of $0.49 per share 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.
• During 2012, Kforce repurchased 3.4 million shares of common stock at a total cost of approximately $44.4 million.
• The Firm declared and paid a special cash dividend of $1.00 per share in the fourth quarter of 2012 resulting in a payout in cash of $35.2 million.
CRITICAL ACCOUNTING ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). In connection with the preparation of our Consolidated Financial Statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our Consolidated Financial Statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 - "Summary of Significant Accounting Policies" to the Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Allowance for Doubtful
Accounts, Fallouts and Other
Accounts Receivable Reserves
See Note 1 - "Summary of Kforce performs an We have not made any
Significant Accounting ongoing analysis of material changes in the
Policies" to the Notes to factors including recent accounting methodology
Consolidated Financial write-off and delinquency used to establish our
Statements, included in trends, changes in allowance for doubtful
Item 8. Financial Statements economic conditions, a accounts, fallouts and
and Supplementary Data of specific analysis of other accounts
this Annual Report on material accounts receivable reserves. As
Form 10-K, for a complete receivable balances that of December 31, 2012
discussion of our policies are past due, and and 2011, the allowance
related to determining our concentration of accounts was 1.4% as a
allowance for doubtful receivable among clients, percentage of gross
accounts, fallouts and other in establishing its accounts receivable.
accounts receivable allowance for doubtful
reserves. accounts. We do not believe there
is a reasonable
Kforce estimates its likelihood that there
allowance for Search will be a material
fallouts based on our change in the future
historical experience estimates or
with the actual assumptions we use to
occurrence of fallouts. calculate our allowance
for doubtful accounts.
Kforce estimates its However, if our
reserve for future estimates regarding
revenue adjustments (e.g. estimated accounts
bill rate adjustments, receivable losses are
time card adjustments, inaccurate, we may be
early pay discounts) exposed to losses or
based on our historical gains that could be
experience. material. A 10%
difference in actual
accounts receivable
losses reserved at
December 31, 2012,
would have impacted our
net income for 2012 by
approximately $0.2
million.
Although we do not
believe that there is a
reasonable likelihood
that there will be a
material change in the
actual occurrence of
fallouts, a 10%
difference in our
actual fallout
experience reserved at
December 31, 2012,
would have impacted our
net income for 2012 by
less than $0.1 million.
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Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Goodwill Impairment
We evaluate goodwill for We determine the fair For our Tech, FA and
impairment annually or more value of our reporting HIM reporting units,
frequently whenever events units using widely Kforce assessed the
and circumstances indicate accepted valuation qualitative factors of
that the carrying value of techniques, including each reporting unit to
the goodwill may not be discounted cash flow, determine if it was
recoverable. See Note 6 - guideline transaction more likely than not
"Goodwill and Other method and guideline that the fair value of
Intangible Assets" to the company method. These the reporting unit was
Notes to Consolidated types of analyses contain less than its carrying
Financial Statements, uncertainties because amount, including
included in Item 8. they require management goodwill. Based upon
Financial Statements and to make significant the qualitative
Supplementary Data of this assumptions and judgments assessments, it was
Annual Report on Form 10-K including: (i) an determined that it was
for a complete discussion of appropriate rate to not more likely than
the valuation methodologies discount the expected not that the fair value
employed. future cash flows, (ii) of the reporting units
the inherent risk in were less than the
During the three months achieving forecasted carrying values and,
ended June 30, 2012 and operating results, (iii) thus, no further
September 30, 2012, we long-term growth rates, testing was determined
determined it was necessary (iv) expectations for necessary.
to perform an interim future economic cycles,
goodwill impairment analysis (v) market comparable For our GS reporting
on our GS reporting unit. companies and appropriate unit, however, a
There was no impairment adjustments thereto and quantitative step-one
indicated for the three (vi) market multiples. impairment assessment
months ended September 30, was performed as of
2012. However, we recorded It is our policy to December 31, 2012
an estimated impairment conduct impairment resulting in the fair
charge during the three testing based on our value of the GS
months ended June 30, 2012 current business strategy reporting unit
of $65.3 million. Based on in light of present exceeding the carrying
the completion of the second industry and economic value of invested
step of the analysis using conditions, as well as capital by $11.7
the methodologies described future expectations. million, or 18.0%.
in Note 6 - "Goodwill and Increasing risk
Other Intangible Assets," we surrounding federal
recorded an increase of $3.9 deficits and
million thus resulting in an sequestration, in
aggregate goodwill addition to those
impairment charge of $69.2 considered in our 2012
million. As of December 31, assumptions, may
2012, we completed our indicate future
annual assessment of impairment in the GS
goodwill impairment using reporting unit, which
the methodology described could be material.
therein and no impairment
losses were recognized for Based on the results, a
any of Kforce's reporting step-two analysis was
units. not required and no
impairment was noted in
The carrying value of the GS reporting unit
goodwill as of December 31, as of December 31,
2012 by reporting unit was 2012.
$17.0 million, $8.0 million,
$4.9 million and $33.5
million for our Tech, FA,
HIM and GS reporting units,
respectively.
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Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Self-Insured Liabilities
We are self-insured for Our self-insured We have not made any
certain losses related to liabilities contain material changes in the
health insurance and uncertainties because accounting
workers' compensation management is required to methodologies used to
claims. However, we obtain make assumptions and to establish our
third-party insurance apply judgment to self-insured
coverage to limit our estimate the ultimate liabilities during the
exposure to these claims. total cost to settle past three fiscal
reported claims and years.
When estimating our claims incurred but not
self-insured liabilities, we reported as of the We do not believe there
consider a number of balance sheet date. is a reasonable
factors, including likelihood that there
historical claims will be a material
experience, plan structure, change in the estimates
internal claims management or assumptions we use
activities, demographic to calculate our
factors and severity self-insured
factors. Periodically, liabilities. However,
management reviews its if actual results are
assumptions to determine the not consistent with our
adequacy of our self-insured estimates or
liabilities. assumptions, we may be
exposed to losses or
Our liabilities for health gains that could be
insurance and workers' material.
compensation claims as of
December 31, 2012 were $3.1 A 10% change in our
million and $1.5 million, self-insured
respectively. liabilities related to
health insurance and
workers' compensation
as of December 31, 2012
would have impacted our
net income for 2012 by
approximately $0.5
million.
Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Stock-Based Compensation
We have stock-based RS and PARS require We do not believe there
compensation programs, which management to make is a reasonable
include options, stock assumptions regarding the likelihood that there
appreciation rights (SARs) likelihood of achieving will be a material
and unvested share awards market conditions during change in the future
and an employee stock the vesting period, which estimates or
purchase plan. See Note 1 - are inherently difficult assumptions we use to
"Summary of Significant to estimate but are determine stock-based
Accounting Policies," Note modeled using a Monte compensation expense.
12 - "Employee Benefit Carlo simulation model, However, if actual
Plans," and Note 14 - "Stock as well as employee results are not
Incentive Plans" to the turnover rates. consistent with our
Notes to Consolidated estimates or
Financial Statements, assumptions, we may be
included in Item 8. exposed to changes in
Financial Statements and stock-based
Supplementary Data of this compensation expense
Annual Report on Form 10-K that could be material
for a complete discussion of or the stock-based
our stock-based compensation compensation expense
programs. reported in our
financial statements
We have not granted any may not be
stock options or SARs over representative of the
the last three years. We actual economic cost of
determine the fair market the stock-based
value of our RS and PARS compensation.
based on the closing stock
price of Kforce's common A 10% change in
stock on the date of grant. unrecognized
We also utilize a lattice stock-based
model to determine the compensation expense
derived service period for would have had an
our PARS, which contain a insignificant impact on
market condition. our net income for
2012.
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Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Defined Benefit Pension Plan
- U.S.
We have a defined benefit When estimating the We do not believe there
pension plan that benefits obligation for our is a reasonable
certain named executive pension and likelihood that there
officers, the Supplemental postretirement benefit will be a material
Executive Retirement Plan plans, management is change in the estimates
("SERP") and a defined required to make certain or assumptions we use
benefit postretirement assumptions and to apply to calculate our
health plan, the judgment with respect to obligation. However, if
Supplemental Executive determining an actual results are not
Retirement Health Plan appropriate discount consistent with our
("SERHP"). See Note 12 - rate, bonus percentage estimates or
"Employee Benefit Plans" to assumptions, expected assumptions, we may be
the Notes to Consolidated health care and premium exposed to losses or
Financial Statements cost trends, gains that could be
included in Item 8. applicability of health material.
Financial Statements and care regulations and
Supplementary Data of this expected future A 10% change in the
Annual Report on Form 10-K compensation increases discount rate used to
for a complete discussion of for the participants in measure the net
the terms of these plans. the plans, as they apply periodic pension cost
to our plans. for the SERP and SERHP
Neither the SERP or SERHP during 2012 would have
were funded as of had an insignificant
December 31, 2012 or 2011. impact on our net
income for 2012.
Effect if Actual
Judgments and Results
Description Uncertainties Differ From Assumptions
Accounting for Income Taxes
See Note 4 - "Income Taxes" Our consolidated We do not believe that
to the Notes to Consolidated effective income tax rate there is a reasonable
Financial Statements, is influenced by tax likelihood that there
included in Item 8. planning opportunities will be a material
Financial Statements and available to us in the change in our liability
Supplementary Data of this various jurisdictions in for uncertain income
Annual Report on Form 10-K which we conduct tax positions or our
for a complete discussion of business. Significant effective income tax
the components of Kforce's judgment is required in rate. However, if
income tax expense as well determining our effective actual results are not
as the temporary differences tax rate and in consistent with our
that exist as of evaluating our tax estimates or
December 31, 2012. positions, including assumptions, we may be
those that may be exposed to losses that
uncertain. could be material.
Kforce recorded a
Kforce is also required valuation allowance of
to exercise judgment with $0.1 million as of
respect to the December 31, 2012
realization of our net related primarily to
deferred tax state net operating
assets. Management losses.
evaluates all positive
and negative evidence and A 0.50% change in our
exercises judgment effective income tax
regarding past and future rate from continuing
events to determine if it operations would have
is more likely than not impacted our net income
that all or some portion for 2012 by
of the deferred tax approximately $0.3
assets may not be million.
realized. If appropriate,
a valuation allowance is
recorded against deferred
tax assets to offset
future tax benefits that
may not be realized.
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NEW ACCOUNTING STANDARDS
In December 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance regarding the presentation of netting assets and liabilities as a single amount in the statement of financial position to address the difference between GAAP and international financial reporting standards ("IFRS"). This guidance is to be applied for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Kforce does not expect the adoption of this guidance to have a material impact on its future consolidated financial statements.
. . .
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