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KFRC > SEC Filings for KFRC > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for KFORCE INC

Form 10-K for KFORCE INC


27-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 2013.

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 this annual report. The results presented in the accompanying Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 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.


Table of Contents

EXECUTIVE SUMMARY

The following is an executive summary of what Kforce believes are important 2013 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 6.4% to $1.15 billion in 2013 from $1.08 billion in 2012. Net service revenues increased 9.4% for Tech, 1.7% for FA, 1.5% for HIM, and 0.6% for GS.

Flex revenues increased 6.6% to $1.10 billion in 2013 from $1.03 billion in 2012.

Search revenues increased 2.5% to $48.9 million in 2013 from $47.7 million in 2012.

Quarterly sequential revenues grew for three consecutive quarters, driving Q4 revenue growth to 12.3% year over year.

Flex gross profit margin increased 10 basis points to 29.1% in 2013 from 29.0% in 2012. Flex gross profit margin increased 30 basis points for Tech and 270 basis points for GS and decreased 20 basis points for FA and 320 basis points for HIM year over year.

SG&A as a percentage of revenues for the year ended December 31, 2013 was 28.1% compared to 29.8% in 2012. This decrease was primarily a result of the acceleration of substantially all long-term incentive awards ("LTIs") on March 31, 2012, which resulted in the acceleration of $31.3 million of compensation expense and payroll taxes recorded in 2012. The reduction in SG&A was partially offset by the investment in revenue generator headcount in the fourth quarter of 2012 and throughout 2013 and the severance and termination-related charge and Compensation Committee approved bonuses of $7.1 million and $3.6 million, respectively, incurred during the fourth quarter of 2013 as a result of the Firm's organizational realignment plan.

Net income from continuing operations of $10.8 million for 2013 increased $46.5 million from a net loss from continuing operations of $35.7 million in 2012. The results for 2013 include an after-tax goodwill impairment charge of $9.3 million as well as the previously mentioned organizational realignment charges. The results for 2012 include an after-tax goodwill impairment charge of $44.5 million as well as the previously mentioned acceleration of LTIs during 2012.

Earnings per share from continuing operations for 2013 was $0.32 compared to a loss per share of $1.00 per share in 2012.

During 2013, Kforce repurchased 1.8 million shares of common stock on the open market at a total cost of approximately $27.3 million.

The Firm amended its Credit Facility in December 2013 to increase borrowing capacity by $35.0 million to $135.0 million.

The Firm initiated a quarterly dividend program and declared and paid a cash dividend of $0.10 per share in the fourth quarter of 2013 resulting in a payout in cash of $3.3 million.

The total amount outstanding under the Credit Facility increased $41.6 million to $62.6 million as of December 31, 2013 as compared to $21.0 million as of December 31, 2012.


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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 Results
        Description            Judgments and Uncertainties   Differ From Assumptions
Allowance for Doubtful
Accounts, Fallouts and Other
Accounts Receivable Reserves

See Note 1 - "Summary of       Kforce performs an ongoing    We have not made any
Significant Accounting         analysis of factors           material changes in the
Policies" to the Notes to      including recent write-off    accounting methodology
Consolidated Financial         and delinquency trends,       used to establish our
Statements, included in        changes in economic           allowance for doubtful
Item 8. Financial Statements   conditions, a specific        accounts, fallouts and
and Supplementary Data of      analysis of material          other accounts
this Annual Report on          accounts receivable           receivable reserves. As
Form 10-K, for a complete      balances that are past due,   of December 31, 2013 and
discussion of our policies     and concentration of          2012, the allowance was
related to determining our     accounts receivable among     1.1% and 1.4% as a
allowance for doubtful         clients, in establishing      percentage of gross
accounts, fallouts and other   its allowance for doubtful    accounts receivable,
accounts receivable            accounts.                     respectively.
reserves.
                               Kforce estimates its          We do not believe there
                               allowance for Search          is a reasonable
                               fallouts based on our         likelihood that there
                               historical experience with    will be a material
                               the actual occurrence of      change in the future
                               fallouts.                     estimates or assumptions
                                                             we use to calculate our
                               Kforce estimates its          allowance for doubtful
                               reserve for future revenue    accounts, fallouts and
                               adjustments (e.g. bill rate   other accounts
                               adjustments, time card        receivable reserves.
                               adjustments, early pay        However, if our
                               discounts) based on our       estimates regarding
                               historical experience.        estimated accounts
                                                             receivable losses are
                                                             inaccurate, we may be
                                                             exposed to losses or
                                                             gains that could be
                                                             material. A 10%
                                                             difference in actual
                                                             accounts receivable
                                                             losses reserved at
                                                             December 31, 2013, would
                                                             have impacted our net
                                                             income for 2013 by
                                                             approximately $0.1
                                                             million.


Table of Contents
                                                             Effect if Actual Results
        Description            Judgments and Uncertainties   Differ From Assumptions
Goodwill Impairment

We evaluate goodwill for       We determine the fair value   For our Tech and FA
impairment annually or more    of our reporting units        reporting units, Kforce
frequently whenever events     using widely accepted         assessed the qualitative
and circumstances indicate     valuation techniques,         factors of each
that the carrying value of     including discounted cash     reporting unit to
the goodwill may not be        flow, guideline transaction   determine if it was more
recoverable. See Note 6 -      method and guideline          likely than not that the
"Goodwill and Other            company method. These types   fair value of the
Intangible Assets" to the      of analyses contain           reporting unit was less
Notes to Consolidated          uncertainties because they    than its carrying
Financial Statements,          require management to make    amount, including
included in Item 8.            significant assumptions and   goodwill. Based upon the
Financial Statements and       judgments including: (i) an   qualitative assessments,
Supplementary Data of this     appropriate rate to           it was determined that
Annual Report on Form 10-K     discount the expected         it was not more likely
for a complete discussion of   future cash flows, (ii) the   than not that the fair
the valuation methodologies    inherent risk in achieving    value of the reporting
employed.                      forecasted operating          units were less than the
                               results, (iii) long-term      carrying values.
During the fourth quarter of   growth rates, (iv)
2013, Kforce management made   expectations for future       For our HIM and GS
a strategic business           economic cycles, (v) market   reporting units,
decision with regard to the    comparable companies and      however, a quantitative
GS segment, which is           appropriate adjustments       step one impairment
ultimately expected to have    thereto and (vi) market       assessment was performed
a negative impact on           multiples.                    as of December 31, 2013.
near-term growth prospects                                   For the HIM reporting
and result in a moderate       It is our policy to conduct   unit, the step one
reduction in revenues and      impairment testing based on   analysis resulted in the
profitability over the next    our current business          fair value exceeding the
few years. As a result of      strategy in light of          carrying value of
the strategic decision, we     present industry and          invested capital by
believe there was a            economic conditions, as       $19.3 million, or 156%.
triggering event during the    well as future                Due to the reductions in
fourth quarter. In             expectations.                 the forecasted revenues
connection with our annual                                   for the GS reporting
assessment of goodwill                                       unit, the step one
impairment as of                                             analysis indicated
December 31, we performed a                                  potential impairment as
step one and step two                                        the carrying value of
analysis, which ultimately                                   invested capital
resulted in an impairment                                    exceeded the fair value.
charge of $14.5 million in
our GS reporting unit.                                       As a result of the
                                                             potential impairment
The carrying value of                                        indication for the GS
goodwill as of December 31,                                  reporting unit, a step
2013 by reporting unit was                                   two analysis was
$17.0 million, $8.0 million,                                 performed, resulting in
$4.9 million and $19.0                                       a pre-tax impairment
million for our Tech, FA,                                    charge of $14.5 million
HIM and GS reporting units,                                  for the year ended
respectively.                                                December 31, 2013.

                                                             A deterioration in the
                                                             assumptions discussed in
                                                             Note 6 - "Goodwill and
                                                             Intangible Assets" to
                                                             the Notes to the
                                                             Consolidated Financial
                                                             Statements included in
                                                             Item 8. Financial
                                                             Statements and
                                                             Supplementary Data of
                                                             this Annual Report on
                                                             Form 10-K, could result
                                                             in an additional
                                                             impairment charge.


Table of Contents
                                                             Effect if Actual Results
        Description            Judgments and 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 methodologies
workers' compensation          management is required to     used to establish our
claims. However, we obtain     make assumptions and to       self-insured liabilities
third-party insurance          apply judgment to estimate    during the past three
coverage to limit our          the ultimate total cost to    fiscal years.
exposure to these claims.      settle reported claims and
                               claims incurred but not       We do not believe there
When estimating our            reported as of the balance    is a reasonable
self-insured liabilities, we   sheet date.                   likelihood that there
consider a number of                                         will be a material
factors, including                                           change in the estimates
historical claims                                            or assumptions we use to
experience, plan structure,                                  calculate our
internal claims management                                   self-insured
activities, demographic                                      liabilities. However, if
factors and severity                                         actual results are not
factors. Periodically,                                       consistent with our
management reviews its                                       estimates or
assumptions to determine the                                 assumptions, we may be
adequacy of our self-insured                                 exposed to losses or
liabilities.                                                 gains that could be
                                                             material.
Our liabilities for health
insurance and workers'                                       A 10% change in our
compensation claims as of                                    self-insured liabilities
December 31, 2013 were $3.0                                  related to health
million and $1.7 million,                                    insurance and workers'
respectively.                                                compensation as of
                                                             December 31, 2013 would
                                                             have impacted our net
                                                             income for 2013 by
                                                             approximately $0.3
                                                             million.

                                                             Effect if Actual Results
        Description            Judgments and Uncertainties   Differ From Assumptions
Stock-Based Compensation

We have stock-based            Restricted stock which        We do not believe there
compensation programs, which   contain a market vesting      is a reasonable
include options, stock         condition require             likelihood that there
appreciation rights ("SARs")   management to make            will be a material
and unvested share awards      assumptions regarding the     change in the future
and an employee stock          likelihood of achieving       estimates or assumptions
purchase plan. See Note 1 -    market conditions during      we use to determine
"Summary of Significant        the vesting period, which     stock-based compensation
Accounting Policies," Note     are inherently difficult to   expense. However, if
12 - "Employee Benefit         estimate but are modeled      actual results are not
Plans," and Note 14 - "Stock   using a Monte Carlo           consistent with our
Incentive Plans" to the        simulation model. The stock   estimates or
Notes to Consolidated          compensation expense          assumptions, we may be
Financial Statements,          recorded is impacted by our   exposed to changes in
included in Item 8.            estimated forfeiture rates,   stock-based compensation
Financial Statements and       which are based on            expense that could be
Supplementary Data of this     historical employee           material or the
Annual Report on Form 10-K     turnover.                     stock-based compensation
for a complete discussion of                                 expense reported in our
our stock-based compensation                                 financial statements may
programs.                                                    not be representative of
                                                             the actual economic cost
We have not granted any                                      of the stock-based
stock options or SARs over                                   compensation.
the last three years. We
determine the fair market                                    A 10% change in
value of our restricted                                      unrecognized stock-based
stock based on the closing                                   compensation expense
stock price of Kforce's                                      would have impacted our
common stock on the date of                                  net income by $0.5
grant. We utilize a Monte                                    million for 2013.
Carlo model to determine the
derived service period for
any restricted stock which
contain a market vesting
condition.


Table of Contents
                                                             Effect if Actual Results
        Description            Judgments and 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 pension    is a reasonable
certain named executive        and postretirement benefit    likelihood that there
officers, the Supplemental     plans, management is          will be a material
Executive Retirement Plan      required to make certain      change in the estimates
("SERP") and a defined         assumptions and to apply      or assumptions we use to
benefit postretirement         judgment with respect to      calculate our
health plan, the               determining an appropriate    obligation. However, if
Supplemental Executive         discount rate, bonus          actual results are not
Retirement Health Plan         percentage assumptions,       consistent with our
("SERHP"). See Note 12 -       expected health care and      estimates or
"Employee Benefit Plans" to    premium cost trends,          assumptions, we may be
the Notes to Consolidated      applicability of health       exposed to losses or
Financial Statements           care regulations and          gains that could be
included in Item 8.            expected future               material.
Financial Statements and       compensation increases for
Supplementary Data of this     the participants in the       A 10% change in the
Annual Report on Form 10-K     plans, as they apply to our   discount rate used to
for a complete discussion of   plans.                        measure the net periodic
the terms of these plans.                                    pension cost for the
                                                             SERP and SERHP during
Neither the SERP or SERHP                                    2013 would have had an
were funded as of                                            insignificant impact on
December 31, 2013 or 2012.                                   our net income for 2013.

                                                             Effect if Actual Results
        Description            Judgments and Uncertainties   Differ From Assumptions
Accounting for Income Taxes

See Note 4 - "Income Taxes"    Our consolidated effective    We do not believe that
to the Notes to Consolidated   income tax rate is            there is a reasonable
Financial Statements,          influenced by tax planning    likelihood that there
included in Item 8.            opportunities available to    will be a material
Financial Statements and       us in the various             change in our liability
Supplementary Data of this     jurisdictions in which we     for uncertain income tax
Annual Report on Form 10-K     conduct business.             positions or our
for a complete discussion of   Significant judgment is       effective income tax
the components of Kforce's     required in determining our   rate. However, if actual
income tax expense as well     effective tax rate and in     results are not
as the temporary differences   evaluating our tax            consistent with our
that exist as of               positions, including those    estimates or
December 31, 2013.             that may be uncertain.        assumptions, we may be
                                                             exposed to losses that
                               Kforce is also required to    could be material.
                               exercise judgment with        Kforce recorded a
                               respect to the realization    valuation allowance of
                               of our net deferred tax       $0.1 million as of
                               assets. Management            December 31, 2013
                               evaluates all positive and    related primarily to
                               negative evidence and         state net operating
                               exercises judgment            losses.
                               regarding past and future
                               events to determine if it     A 0.50% change in our
                               is more likely than not       effective income tax
                               that all or some portion of   rate from continuing
                               the deferred tax assets may   operations would have
                               not be realized. If           impacted our net income
                               appropriate, a valuation      for 2013 by
                               allowance is recorded         approximately $0.1
                               against deferred tax assets   million.
                               to offset future tax
                               benefits that may not be
                               realized.


Table of Contents

NEW ACCOUNTING STANDARDS

In July 2013, the FASB issued authoritative guidance regarding presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is to be applied for annual reporting periods beginning on or after December 15, 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.

RESULTS OF OPERATIONS

Net service revenues for the years ended December 31, 2013, 2012 and 2011 were $1.15 billion, $1.08 billion and $1.00 billion, respectively, which represents an increase of 6.4% from 2012 to 2013 and 7.7% from 2011 to 2012. The increase . . .

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