kfrc-20211231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________________________________________
FORM 10-K
_____________________________________________________________________________
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
OR
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-26058
_____________________________________________________________________________
Kforce Inc.
(Exact name of Registrant as specified in its charter)
_____________________________________________________________________________
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
_____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No☒
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☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes☒ 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
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growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth filer ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.): Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2021, was $1,236,049,664. For purposes of this determination, common stock held by each officer and director and by each person who owns 10% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant’s common stock as of February 23, 2022 was 21,371,829.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Parts Into WhichIncorporated
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KFORCE INC.
TABLE OF CONTENTS
PART I
Item 1. Business. 3
Item 1A. Risk Factors. 9
Item 1B. Unresolved Staff Comments. 15
Item 2. Properties. 15
Item 3. Legal Proceedings. 15
Item 4. Mine Safety Disclosures. 15
PART II
Item 6. [Reserved.] 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 8. Financial Statements and Supplementary Data. 27
Item 9A. Controls and Procedures. 51
Item 9B. Other Information. 52
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 52
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 52
Item 11. Executive Compensation. 52
Item 14. Principal Accounting Fees and Services. 52
PART IV
Item 15. Exhibits, Financial Statement Schedules. 52
SIGNATURES 57
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 Item 1. Business, Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 within the staffing sector including, but not limited to, the penetration rate (the percentage of temporary staffing to total employment) and growth rate in temporary staffing, a reduction in the supply of consultants and candidates or the Firm’s ability to attract such individuals, changes in client demand for our services and our ability to adapt to such changes, the entry of new competitors in the market, the ability of the Firm to maintain and attract clients in the face of changing economic or competitive conditions; our beliefs regarding the expected future benefits of our flexible working environment; the impact of the COVID-19 pandemic 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; 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,” “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
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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.
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PART I
ITEM 1. BUSINESS.
COMPANY OVERVIEW
Kforce Inc. and its subsidiaries (collectively, “Kforce”) is a leading domestic provider of technology and finance and accounting talent solutions to innovative and industry-leading companies. While Kforce was incorporated in 1994 and completed its initial public offering (IPO) in August 1995, we have been providing domestic staffing services through our predecessor companies since 1962.
We have driven significant, strategic change at Kforce over the last decade including, but not limited to, streamlining the focus of our business on providing technology talent solutions. This strategic shift was bold and transformative but well-founded in our belief as we exited the 2008 / 2009 financial crisis that technology was going to be the epicenter of business strategies. Since the financial crisis, we successfully divested a number of businesses that we didn’t believe aligned with our vision to become a technology-focused organization. Those divestitures included our clinical research business (sold in March 2012), our healthcare staffing business (sold in August 2014), the assets of a business based in Manila, Philippines (sold in September 2017), our federal government solutions business (sold in April 2019), and our federal government product business (sold in June 2019). Our Technology business now comprises nearly 85% of overall revenues with the remainder being our finance and accounting (“FA”) business.
As a result of the COVID-19 pandemic, our workforce has been working remotely since March 2020. We recognized early on in the COVID-19 pandemic that there was very likely to be a permanent shift in the workplace and, thus, initiated what we refer to as our Kforce Reimagined initiative in May 2020. While we elaborate more on this initiative in the “Business Strategies” section below, we began looking critically at our physical office footprint, which was approximately 51 offices (50 leased, 1 owned) geographically dispersed across the U.S. and roughly 0.4 million square feet of space. Our future flexible work environment has allowed us to reduce our current footprint to 36 leased offices. In May 2021, we sold our 128,000 square foot corporate headquarters and signed a lease for our new corporate headquarters, comprising roughly 22,000 square feet, in September 2021. Once we have transitioned our remaining offices to align with our “Office Occasional” strategy, this is expected to reduce our overall square footage to be at least 60% to 70% lower than our pre-pandemic footprint. Our corporate headquarters is in Tampa, Florida.
Kforce serves clients across many industries and organizations of all sizes, but with a particular focus on serving Fortune 1000 and other large companies. Our 10 largest clients represented approximately 25% of revenue for the year ended December 31, 2021.
Except as specifically noted, our discussions in this report exclude any activity related to the federal government divestitures noted above (which comprised our GS segment). Refer to Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion.
Our quarterly operating results can be affected by:
•the number of billing days in a particular quarter;
•the seasonality of our clients’ businesses;
•increased holidays and vacation days taken, which is usually highest in the fourth quarter of each calendar year; and
•increased costs as a result of certain annual U.S. state and federal employment tax resets that occur at the beginning of each calendar year, which negatively impacts our gross profit and overall profitability in the first fiscal quarter of each calendar year.
Our Technology and FA businesses represent our two operating segments.
Our Technology Business
We provide talent solutions by comprehensively understanding our clients’ requirements and matching their requirements with qualified candidates in highly skilled areas including, but not limited to, systems/applications architecture and development (mobility and/or web), data management and analytics, business and artificial intelligence, machine learning, project and program management, and network architecture and security.
One of our strategies over the last several years has been to invest in our managed teams and project solutions capabilities in order to provide a higher-value, differentiated offering to our clients. We believe Kforce has been successfully winning these more complex engagements due to the strong, long-standing partnerships we have built with our clients, our reputation for delivering quality services and our capability in identifying quality technology talent.
We provide our clients with qualified individuals (“consultants”), or teams of consultants on a temporary basis when the consultant's set of skills and experience is the right match for our clients. We refer to this as our Flex offering, which comprised roughly 98% of overall Technology revenues in 2021. We also identify qualified individuals (“candidates”) for permanent placement with our clients. We refer to this as our Direct Hire offering, which comprised approximately 2% of overall revenue in 2021.
We provide services to clients in a variety of industries with a diversified footprint in, among others, financial and business services, communications, insurance, retail and technology. No single industry represents more than approximately 16% of overall Technology revenues. In addition, no single client comprised more than 5% of overall Firm revenues.
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The September 2021 report published by Staffing Industry Analysts (“SIA”) stated that temporary technology staffing is expected to experience growth of 11% and 6%, respectively, in 2021 and 2022. Digital transformation, as a general trend, is driving organizations across all industries to increase their technology investments as competition and the speed of change intensifies. Nontraditional competitors are also entering new emerging technologies and markets. This development puts increased pressure on companies to invest in innovation and the evolution of their business models. We believe the secular drivers of technology spend is driving many companies to become increasingly dependent on the efficiencies provided by technology and the need for innovation to support business strategies and sustain relevancy in today’s rapidly changing marketplace. At the macro level, demand is also being driven by an ever-changing and complex regulatory and employment law environment, which increases the overall cost of employment for many companies. We believe that these factors, among others, are continuing to drive companies to look to temporary staffing and solutions providers, such as Kforce, to meet their human capital needs.
We believe the performance of our Technology business in 2021 was exceptional and was organically record-setting for us as revenues improved 22.3% on a year-over-year basis to $1.27 billion and in the third and fourth quarters of 2021 exceeded 30% growth on a year-over-year basis. This strong performance follows 2020 where our Technology business was only down 1.2% year-over-year in an extraordinarily challenging macro-environment given the negative impacts of the COVID-19 pandemic. The average bill rate in 2021 was approximately $81 per hour, which increased 2.9%, as compared to 2020. In the fourth quarter of 2021, our average bill rate improved 3.8% year-over-year. Our average assignment duration is approximately 10 months, which has steadily increased over the last several years. We continue to benefit from an improving bill rate environment and longer assignment durations, which we believe is related to the acute labor shortage, particularly the shortage of labor for highly-skilled positions. In addition to our capability to source highly qualified U.S. domestic technology talent, we believe an important differentiator in a candidate-constrained environment is our capability to source highly qualified foreign-born talent working domestically in the U.S. in higher-end technology roles. We maintain this capability on a centralized basis, which we believe allows us to operate consistently with a keen focus on ensuring compliance in this highly regulated space.
Our Flex and Direct Hire offerings improved 21.7% and 59.0%, respectively, on a year-over-year basis.
We are very pleased with our performance in our Technology business in 2021, which exceeded the SIA benchmark of growth by two times for 2021 and nearly three times in the second half of 2021. We believe our strategic position and momentum going into 2022 has positioned us well to continue delivering significantly above-market growth in 2022, in what we believe will be a continued strong demand environment for our services.
Our FA Business
The talent solutions we offer our clients in our FA business include consultants in traditional finance and accounting roles such as: financial, planning and analysis; business intelligence analysis; accounting; transactional accounting (e.g. payables, billing, cash applications, receivables); business and cost analysis; and taxation and treasury. We have also provided our clients with consultants in lower skilled areas such as: loan servicing and support; customer and call center support; data entry; and other administrative roles.
Over the last few years, we have been repositioning our FA business to focus on more highly skilled assignments that are less susceptible to technological change and automation and more closely aligned with our Technology business. We will continue to support certain clients by providing consultants in lower skilled roles where we have long-standing relationships and that are strategically important to our overall success. We believe we have made good progress in this transition as is evidenced by our overall average bill rate in FA, excluding the COVID-19 business (defined below), increasing approximately 10% in the fourth quarter of 2021 on a year-over-year basis.
We provide services to clients in a variety of industries with a diversified footprint in, among others, the financial services, business services, healthcare and manufacturing sectors. No single industry represents more than approximately 21% of overall FA revenues. In addition, no single client comprised more than 5% of overall Firm revenues. Revenue for our FA business decreased 11.4% to $306.0 million in 2021 on a year-over-year basis primarily due to a decrease in revenues from certain contracts we secured in the second quarter of 2020 to support government-sponsored COVID-19 related initiatives (the “COVID-19 Business”). These contracts contributed $71.0 million and $114.7 million in revenue in 2021 and 2020, respectively. Excluding the contribution of revenue from our COVID-19 Business, our FA business would have increased approximately 1% on a year-over-year basis. The average bill rate in FA in 2021, excluding the COVID-19 Business, was approximately $38 per hour, which increased 1.0% as compared to 2020. This increase is primarily a result of the mix of business towards more highly skilled assignments as a result of our repositioning efforts.
The September 2021 report published by SIA stated that finance and accounting temporary staffing is expected to experience growth of 16% and 7%, respectively, in 2021 and 2022.
Our Consultants
The vast majority of our consultants are directly employed by Kforce, including domestic and foreign workers sponsored by Kforce, with a smaller number being qualified independent contractors. As the employer of the vast majority of our consultants, Kforce is responsible for the employer’s share of applicable social security taxes (“FICA”), federal and state unemployment taxes, workers’ compensation insurance and other direct labor costs. The more pertinent health, welfare and retirement benefits include comprehensive health insurance, workers’ compensation benefits, and retirement plan options. A key ingredient to our overall success is to foster a positive experience for our consultants, which has a direct correlation to consultant retention and redeployment.
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We measure the quality of our service to and support of our consultants using staffing industry benchmarks and net promoter score (“NPS”) surveys conducted by a specialized, independent third-party provider. Our consultant and client NPS ratings are well above staffing industry averages and have reached World-Class level as defined by the independent third-party provider. Additionally, we continually seek direct feedback from our consultants, which helps us identify opportunities to refine our services.
In a recent study conducted by SIA, Kforce was ranked as the #1 most recognized brand by information technology consultants.
Industry Overview
We operate in a highly competitive environment. Within the professional staffing industry, it is made up of thousands of companies, most of which are small local firms providing limited service offerings to a relatively small local client base. A report published by SIA in 2021 indicated that, in the United States, Kforce is one of the largest publicly-traded specialty staffing firms, the sixth largest technology temporary staffing firm and the third largest finance and accounting temporary staffing firm.
From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, based on data published by the Bureau of Labor Statistics and SIA. In December 2021, the penetration rate (the percentage of temporary staffing to total employment) remained flat at 1.9% compared to 2020, while the unemployment rate, at 3.9%, was down from 6.7% in December 2020. In addition, the college-level unemployment rate, which we believe serves as a better proxy for professional employment and therefore aligns well with the consultant and candidate population that Kforce most typically serves, was 2.1% in December 2021, which represented a substantial decrease from December 2020. Further, we believe that the unemployment rate in the specialties we serve, especially in certain technology skill sets, is significantly lower than the published averages. We believe this speaks to the overall secular drivers of demand in technology, the critical nature of the technology initiatives being driven by our clients, as well as the challenges of finding an adequate supply of qualified talent.
According to the September 2021 SIA report, the technology temporary staffing industry and finance and accounting temporary staffing industry are expected to generate projected revenues of $35.9 billion and $9.0 billion, respectively, in 2022. Based on these projected revenues, our current market share is approximately 3%. Our business strategies are focused on expanding our share of the U.S. temporary staffing industry and investing in our capability to provide higher level IT services and solutions. We believe that the organic investments that we have made in our managed teams and project solutions capabilities over the last several years have expanded Kforce’s total addressable market. Published reports indicate that the addressable market in the technology solutions space is well in excess of $100 billion.
Business Strategies
Our primary objectives are driving long-term shareholder value by achieving above-market revenue growth, making prudent investments to enhance our efficiency and effectiveness within our operating model and significantly improving levels of operating profitability. We believe the following strategies will help us achieve our objectives.
Evolving our Managed Teams and Project Solutions Offerings. Our clients have increasingly been looking for firms such as Kforce to assume a greater level of responsibility in assisting them with their digital transformation efforts. We believe that the total addressable market in the higher-end IT services and solutions market is significantly larger than the traditional technology staff augmentation market. We believe that the use of firms such as Kforce, which can provide cost effective access to highly skilled talent to manage a team of consultants or oversee technology projects, is a significant driver for this increased demand. We are leveraging the longevity of our relationships, primarily with Fortune 1000 companies, and our understanding of existing client needs to provide talent beyond traditional staff augmentation into areas including resource and capacity management as well as managed services and solutions. As an example, for a large national property and casualty insurance provider, we built a unified customer experience, for both policy holders and agents, across all digital distribution and service channels. The outcome was to simultaneously increase customer acquisition and share of wallet, while driving renewal and retention rates in the current book of business. Our efforts resulted in both the desired outcome and the company winning the J.D. Powers award. Another example involves one of the nation’s largest retail-grocers with over 2,000 stores and 325,000 employees. We are providing strategic, digital and technology transformation services to support the streamlining of their full supply chain model with initial focus on supply chain analysis, data governance and mobile application development.
Further Improve the Quality of our Revenue Stream. In addition to the significant progress we have made in evolving our managed teams and project solutions offerings, we are also focused on further improving the quality of our revenue stream through the migration of our FA business towards more highly skilled assignments that are less susceptible to technological disruption. Historically, we have supported professional administrative roles such as customer service, data entry, and call center. We do not intend on focusing our efforts on these, among other types of roles, in 2022 and beyond unless there is a strategic client relationship or other strategic rationale.
Reimagining a More Flexible Work Environment. The results of multiple employee surveys conducted over the last 18 to almost 24 months indicate that our associates have embraced the ingenuity required to work remotely and have been successful in settling into new, productive routines. We continue to make substantial progress in our “Kforce Reimagined” initiative, which is an effort to position Kforce to provide a more flexible hybrid work environment for our associates that was initiated shortly after the onset of the COVID-19 pandemic. We are referring to this new era of Kforce’s work environment as “Office Occasional.” In this new era, our employees will have maximum flexibility and choice in designing their workdays. This approach is rooted in trust and is supported by integrated technology aligned with our evolved operating model. We will have a remote-first approach but encourage our employees to leverage physical office space, when desirable, for activities that are most efficiently done through in-person, active collaboration.
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In support of this strategic shift, following the sale of our corporate headquarters campus in May 2021, we signed a long-term lease for our future corporate headquarters in September 2021, which we anticipate occupying in the fourth quarter of 2022. The design of our new space will be modern, open and technology-enabled and will provide a flexible environment for our employees to work effectively, very similar to how we are approaching the design of our field offices.
We expect that the culmination of these efforts will position Kforce as a destination for top talent during a time where there is great disruption in the labor markets.
Improving the Productivity of our Talent. We believe that it is critical to provide our associates with high quality tools to effectively and efficiently perform their roles, better evaluate business opportunities and advance the value we bring to our clients and consultants. We continue to enhance our sales and delivery methodologies and processes in ways we believe will allow us to better evaluate and shape business opportunities with our clients as well as train our sales and delivery associates to follow our consistent and uniform methodology.
During 2021, we completed the rollout of the initial capabilities within our new talent relationship management (TRM) system, which we expect will better facilitate our delivery strategies and processes and significantly improve our capabilities. Going forward, we expect to continue to make enhancements to our business and data intelligence capabilities. These investments are part of a multi-year effort to significantly upgrade our technology tools, using cloud-based platforms, to equip our associates with improved capabilities to deliver exceptional service to our clients, consultants and candidates and improve the productivity of our associates and the scalability of our organization.
Critical to improving the performance of our associates is the development of a strong management team. A key pillar of our talent development strategy is to provide our leaders with access to the appropriate training and tools to lead their teams effectively. During 2021, we continued investing in an intensive leadership development curriculum. These activities will be ongoing and, we believe, will lead to enhanced leadership capabilities and, thus, higher retention levels of our associates.
During 2021, we engaged an independent third-party consulting firm to assist us in our assessment of our middle and back office capabilities. The results of the assessment work confirmed our belief that we have a tremendous opportunity to fundamentally transform how our back office supports the Firm. We will continue to make investments in this multi-year transformation effort in 2022.
Enhancing our Client Relationships. We strive to differentiate ourselves by working collaboratively with our clients to better understand their business challenges and help them attain their organizational objectives. This collaboration focuses on building a consultative partnership rather than a transactional client relationship, which increases the intimacy we have with our clients and improves our ability to offer higher value and a broader array of services and support to our clients. To accomplish this, we align our revenue-generating talent with clients based on their experience with markets, products, industries and in the case of a managed teams and solutions offering, expertise in the related technology or project.
We measure our success in building long-lasting relationships with our clients using staffing industry benchmarks and Net Promoter Score (“NPS”) surveys conducted by a specialized, independent third-party provider. Our client NPS ratings are among the highest in the industry and provide helpful insights from our clients on how to continue improving our relationships. We believe long-lasting relationships with our clients is a critical element in revenue growth.
Improving the Job Seeker Experience.Our consultants are a critical component of our business and essential in sustaining our client relationships. In 2021, we were able to utilize our talent community platform through WorkLLama, specifically its referral management capability, to provide us leverage in the timely sourcing of qualified candidates. We believe this seamlessly connects the candidate with the recruiter, which improves the job seeker’s experience and provides a better quality candidate. We are focused on effective and efficient processes and tools to find and attract prospective consultants, matching them to a client assignment and supporting them during their tenure with Kforce. Our success in this regard would be expected to positively influence the tenure and loyalty of our consultants and be their employer of choice, thus enabling us to deliver the highest quality talent to our clients.
We measure the quality of our service to and support of our consultants using staffing industry benchmarks and NPS surveys conducted by a specialized, independent third-party provider. Our consultant NPS ratings, similar to our client ratings, are among the highest in the industry. We continually seek direct feedback from our consultants, which helps us identify opportunities to refine our services.
Competition
We operate in a highly competitive and fragmented staffing industry comprised of large national and local staffing and solutions firms. The local firms are typically operator-owned, and each market generally has one or more significant competitors. Within our managed teams and project solutions offerings, we also face competition from global, national and regional accounting, consulting and advisory firms and national and regional strategic consulting and systems implementation firms. We believe that our boundaryless reach within the U.S., physical presence in larger markets, concentration of service offerings in areas of greatest demand (especially technology), national delivery teams, centralized delivery channels for foreign consultants, including those obtained via the H-1B visa program that optimizes distribution and strengthens compliance, longevity of our brand and reputation in the market, along with our dedicated compliance and regulatory infrastructure, all provide a competitive advantage.
Many clients utilize Managed Service Providers (“MSP”) or Vendor Management Organizations (“VMO”) for the management and procurement of our services. Generally, MSPs and VMOs standardize processes through the use of Vendor Management Systems (“VMS”), which are tools used to aggregate spend and measure supplier performance. VMSs are also offered through
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independent providers. Typically, MSPs, VMOs and/or VMS providers charge staffing firms administrative fees ranging from 1% to 4% of revenue. In addition, the aggregation of services by MSPs for their clients into a single program can result in significant buying power and, thus, pricing power. Therefore, the use of MSPs by our clients has, in certain instances, resulted in margin compression, but has also led to incremental client share through our client’s vendor consolidation efforts. Kforce does not currently provide MSP or VMO services directly to our clients; rather, our strategy has been to work with MSPs, VMOs and VMS providers that enable us to better extend our services to current and prospective clients.
We believe that the principal elements of competition in our industry are differentiated offerings, reputation, ability of consultants to work on assignments with innovative and leading companies, the availability and quality of associates, consultants and candidates, level of service, effective monitoring of job performance, scope of geographic service, types of service offerings and compliance orientation. To attract consultants and candidates, we emphasize our ability to provide competitive compensation and benefits, quality and varied assignments, scheduling flexibility and permanent placement opportunities, all of which are important to Kforce being the employer of choice. Because individuals pursue other employment opportunities on a regular basis, it is important that we respond to market conditions affecting these individuals and focus on our consultant relationship objectives. Additionally, in certain markets, from time to time we have experienced significant pricing pressure as a result of our competitors’ pricing strategies, which may result in us not being able to effectively compete or choosing to not participate in certain business that does not meet our profitability standard.
Regulatory Environment
Staffing and solutions firms are generally subject to one or more of the following types of government regulations: (1) regulation of the employer/employee relationship, such as wage and hour regulations, tax withholding and reporting, immigration/H-1B visa regulations, social security and other retirement, anti-discrimination, employee benefits and workers’ compensation regulations; (2) registration, licensing, recordkeeping and reporting requirements; and (3) worker classification regulations.
Because we operate in a complex regulatory environment, one of our top priorities is compliance. For more discussion of the potential impact that the regulatory environment could have on Kforce’s financial results, refer to Item 1A. Risk Factors.
Insurance
Kforce maintains a number of insurance policies including general liability, automobile liability, workers’ compensation and employers’ liability, liability for certain foreign exposure, umbrella and excess liability, property, crime, fiduciary, directors and officers, employment practices liability, cybersecurity, professional liability and excess health insurance coverage. These policies provide coverage subject to their terms, conditions, limits of liability and deductibles, for certain liabilities that may arise from Kforce’s operations. There can be no assurance that any of the above policies will be adequate for our needs or that we will maintain all such policies in the future.
Human Capital Management and Environmental, Social and Governance (“ESG”) Matters
Core Values
At the heart of Kforce, as an organization, is a deep understanding of and unwavering commitment to our core values. As we drive toward one shared vision, we refreshed our core values during 2021, to embody our unique perspectives, our dedication to doing what’s right and creating positive social change. Our Core Values are:
•INTEGRITY: Act with intention. Keep promises. Take responsibility.
•EXCELLENCE: Embrace competition. Succeed together. Go for the win.
•COMPASSION: Respect others. Nurture relationships. Spread kindness.
•UNITY: Encourage collaboration. Support each other. Pursue a shared vision.
•ADAPTABILITY: Champion innovation. Stay curious. Consider the uncommon.
•COURAGE: Dare to fail. Speak openly. Dream big.
•FUN: Be yourself. Laugh often. Enjoy the journey.
Commitment to Values and Ethics through Governance
Along with our core values, we act in accordance with our Code of Business Conduct and Ethics (“Code of Conduct”), which sets forth expectations and guidance for associates to make appropriate decisions. Our Code of Conduct covers topics such as anti-corruption, discrimination, harassment, privacy, appropriate use of company assets, protecting confidential information and reporting violations. Our associates receive training on our Code of Conduct and must acknowledge their understanding and certify compliance annually. The Code of Conduct reflects our commitment to operating in a fair, honest, responsible and ethical manner and also provides direction for reporting complaints in the event of alleged violations of our policies (including through an anonymous hotline). Our executive officers and leaders maintain “open door” policies and any form of retaliation is strictly prohibited. We take all reports of suspected violations and unethical behavior seriously and take appropriate actions to immediately address such situations.
Employees and Personnel
As of December 31, 2021, Kforce employed approximately 2,000 associates, including roughly 1,300 supporting the revenue-generating aspects of our business and approximately 700 supporting the revenue-enabling aspects. We also had approximately 11,000 consultants on assignment with our clients with more than 80% of these consultants employed directly by Kforce. As the employer, Kforce is responsible for the employer’s share of applicable social security taxes (“FICA”), federal and state unemployment taxes, workers’ compensation insurance and other direct labor costs relating to our employees. The more pertinent health, welfare and retirement benefits provided to employees and consultants employed directly by us include:
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comprehensive health insurance, workers’ compensation benefits and retirement plan options. Additionally for our associates and certain consultants, we provide paid leave. We have no collective bargaining agreements covering any of our employees, have never experienced any material labor disruption, and are unaware of any current efforts or plans of our employees to organize.
Health and Well-Being
The success of our business is fundamentally connected to the well-being of our employees and consultants. Accordingly, we are committed to their health, safety and wellness. We provide our employees and consultants and their families with access to a variety of flexible and convenient health and wellness programs. Some of these programs are part of our thoughtful and comprehensive response to the COVID-19 pandemic as well as those that support the physical and mental health of our employees by providing tools and resources that each employee can use to improve or maintain their health. The measures that we have undertaken include: requiring our associates to work remotely since March 2020; maintaining regular communications from our executives regarding impacts of the COVID-19 pandemic; enhancing our health and wellness offerings to include a digital self-care platform to help our associates with any mental health concerns; investing in technologies and tools to improve the effectiveness of our associates while working remotely; and improving our associate outreach efforts to detect and try to address any challenges or needs of our associates.
We believe that our future “Office Occasional” work environment has provided our associates maximum flexibility and choice in designing their workdays; thus, additionally contributing to their health and well-being. Consistent with our management philosophy at Kforce, this was anything but a top-down initiative. Rather, this was driven by our associates and has proven to be successful because we empowered our team with a strong voice by conducting continuous pulse checks, surveys, town hall sessions and other collaborative voice of the associate avenues. Our future work environment is rooted in trust and is supported by integrated technology aligned with our evolved operating model.
Talent Management and Leadership Development
Wherever possible, we strive to identify, train and develop talent from within to help ensure that we maintain a consistent operating model, proactive planning, and employee engagement. A core objective is to sustain our current leadership development activities through further advanced training and comprehensive certification for new leaders. Given our goal is to be a destination employer for top talent, we are also focused on efficiently onboarding new associates into our Firm. We are leaning heavily into remote leadership tools and techniques as well as concepts centered on making lasting connections based on trust, compassion and empathy. This approach has yielded an understanding that the Kforce culture and leaders will put safety, wellness and family first.
Among our key initiatives has been our:
•Leadership Development Program, led by an independent third-party specialist, which is aimed at building the skills necessary to nurture strong relationships, maintain accountability and enhance productivity among all leadership categories in the Firm;
•Engagement with an independent organizational psychologist to facilitate 360 degree assessments for our executive leadership team;
•Several multi-day leadership conferences supported by Kforce leaders and supplemented by online tools and resource libraries; and
•Inclusive leadership training.
Our talent management activities also include, but are not limited to, conducting the following activities:
•Periodic performance appraisals to promote engaging and productive communications between leaders and their team members about performance, career progression and advancement opportunities;
•Calibration sessions during the performance appraisal process to help ensure consistency in assigning appraisal ratings;
•Comprehensive internal talent pipeline (performance/potential) to assess opportunities for our talent across the Firm and for succession planning purposes; and
•Goal setting and development discussions using a consistent template to ensure our leaders and associates are aligned on career and development goals, as well as opportunities for growth and improvement.
Kforce has continued to conduct check-in surveys during the pandemic to monitor wellness and enablement of our associate population. To take that even further, we will be investing more comprehensively into the full employee experience as our office occasional work environment continues to take shape. We have purchased software to run employee lifecycle surveying throughout the Kforce employee experience. A key objective will be to use employee data and sentiment to proactively address engagement indicators.
Upcoming activities include, but are not limited to:
•Full-scale employee engagement dashboard;
•Automated exit surveys;
•Lifecycle (stay) interviews;
•Employee engagement surveys; and
•Pulse surveying, as needed.
Information gathered from these upcoming activities will be useful to Kforce management, and to the extent relevant to our Board of Directors’ oversight responsibilities, in developing future goals and objectives pertaining to our talent management strategies.
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Diversity, Equity and Inclusion Program
Kforce’s diversity, equity and inclusion (“DE&I”) program has the mission of leveraging our core values and culture in further promoting an authentic culture of diversity, equity and inclusion at Kforce.
In 2021, Kforce advanced its objectives around building an increasingly robust pipeline of diverse candidates, enhancing our supplier diversity practices, and instituting training programs to meet the mission and objectives of our DE&I program. An objective in 2022 is to launch internal “listening sessions,” which will be completed by an external expert to collect and analyze details on associates’ sentiment regarding inclusion and belonging. Information gathered during this process will greatly influence our programming decisions moving forward.
Our other DE&I activities also include, but are not limited to, the following:
•Reviewing third-party analysis of internal demographics, progression and pay-equity practices and studies;
•The creation of an internal DE&I Council;
•Initiating a program to improve pipeline by leveraging geo-base tracking, digital canvasing, job board aggregators and niche partnerships with diverse organizations;
•Publishing an internal DE&I Resource Center (Website);
•Consistently conducting ongoing cultural celebrations; and
•Execution of an ongoing DE&I learning journey for our associates that includes programs such as emotional intelligence and unconscious bias modules.
Our commitment to DE&I goes beyond our partnerships and our Firm. From speaking engagements to career fairs to the charities we support, we actively participate in communities nationwide with a goal of doing our part in building a better tomorrow for the workforce today.
Environmental
As a domestic talent solutions provider, Kforce does not produce or manufacture any products or materials and therefore our direct impact on the environment is relatively small. In addition, we are in the early stages of considering what risks and opportunities climate change may present to our business more broadly.
Notwithstanding our relatively nominal direct environmental impact, we are dedicated to promoting internal operational sustainability initiatives and keeping our ecological footprint to a minimum. As such, we were able to take advantage of more impactful opportunities using actions implemented during the COVID-19 pandemic. Since March 2020, all of our employees have been working remotely. In addition, the “office occasional” work environment that we have defined for Kforce requires significantly less square footage and less commuting than our pre-pandemic work environment, resulting in a reduced carbon footprint. As noted previously, we have already reduced the number of physical offices from 51 (leased and owned) pre-pandemic to 36 leased offices currently. The reduction in the number of our offices and migration of our offices to our office occasional environment is expected to reduce our overall square footage to be at least 60% to 70% lower than pre-pandemic levels. These actions, which we expect to continue even after the pandemic has subsided, have dramatically reduced the environmental impact of employees’ commutes and the consumption of energy; thereby, decreasing our carbon footprint. We have also been able to reduce certain business travel by using virtual and collaborative tools whenever possible, further limiting our ecological impact. Kforce is committed to enhancing its environmental protection measures and continuing to promote an eco-friendly culture both internally and in the communities it serves.
ITEM 1A. RISK FACTORS.
Our business, financial condition, results of operations and cash flows are subject to, and could be materially adversely affected by, various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual results to vary materially from recent results or our anticipated future results. We present these risk factors grouped by category, and the risks factors contained in each respective category are presented in order of their relative priority to us.
Risks Related to the COVID-19 Economic and Health Crisis
The COVID-19 economic and health crisis may have a material adverse effect on our business and financial results.
The COVID-19 economic and health crisis (including all of its variants) has impacted and may continue to impact many of our clients’ business operations due to reduced demand in their businesses, which in some cases was caused by government-mandated or voluntary closures, or due to initiatives to reduce costs or preserve cash, thereby decreasing demand for our services and/or adversely affecting our profitability or our ability to timely collect our accounts receivable.
More specifically, we have experienced and may experience in the future, among other impacts, a reduction or elimination of consultants on previous projects and assignments, selective reduction in bill rates, extended payment terms and temporary furloughs for consultants. We have also experienced and may experience in the future a decrease in our leading indicators, such as job orders for assignments and direct hire placements due to hiring freezes. Additionally, our employees, consultants and independent contractors may be, and have been, impacted by the occurrence of these types of events, or we may face difficulties complying with regulations temporarily modified to account for virtual or remote work by these individuals, or difficulties in sourcing or onboarding these individuals, including slowdowns in critical processes such as interviewing, I-9 verification, background checks, or other compliance processes, which could impair our ability to serve our clients or respond timely to their needs, or could expose us to compliance risk and/or penalties. The occurrence of these types of events has resulted in, and may result in further, worker absences, lower billable hours, travel restrictions on our employees or other disruptions to our business. The potential adverse effects on our operations could result in an event of default under our credit
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facility covenants, which might require us to seek alternative sources of financing, which may not be available on as favorable of terms or at all.
The COVID-19 economic and health crisis continues to be fluid and uncertain, and the ultimate impact of COVID-19 on our operations and financial performance in future periods, remains uncertain and will depend on future COVID-19 related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infections or potential new variants, the effectiveness of COVID-19 vaccines and the impacts of implementation of any vaccine mandates, and related government actions to prevent and manage disease spread, all of which continue to be uncertain and cannot be predicted. As a result, we cannot forecast the full impact of COVID-19, but it could materially affect our business, financial position, results of operation, and/or cash flows in the future.
Risks Related to Our Business
New business strategies and initiatives may have an adverse effect on our business.
We expect to further enhance the quality of our revenue stream by migrating our FA business to focus on higher-value skill areas and investing in the growth of our managed teams and project solutions offerings. New business strategies and initiatives, such as these, can be distracting to our management team and associates and can also be disruptive to our operations. New business initiatives could also involve significant unanticipated challenges and risks including not advancing our business strategy, not realizing our expected return on investment, experiencing difficulty in implementing initiatives, or diverting management’s attention from our other businesses. These events could cause material harm to our business, operating results or financial condition.
Kforce may not be able to recruit and retain qualified consultants and candidates.
Kforce depends upon the abilities of its staff to attract and retain consultants and candidates, particularly in technology disciplines, who possess the skills and experience necessary to meet the requirements of our clients. We must continually evaluate and upgrade our methods of attracting qualified consultants and candidates to keep pace with changing client needs and emerging technologies. We expect significant competition for individuals with proven technical or professional skills to continue or increase for the foreseeable future. The supply of available consultants and candidates has been constrained during this economic recovery, especially in our Technology business. If qualified individuals are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material adverse effect on our business.
Kforce faces significant employment-related legal risk.
Kforce employs people primarily in the workplaces of our clients (except during the pandemic, our consultants have been mostly remote). Inherent risks in our business include possible claims of or relating to: discrimination and harassment; wrongful termination; violations of employment rights related to employment screening or privacy issues; misclassification of workers as employees or independent contractors; violations of wage and hour requirements and other labor laws; employment of illegal aliens; criminal activity; torts; breach of contract; failure to protect confidential personal information; intentional criminal misconduct; misuse or misappropriation of client intellectual property; employee benefits; or other claims. In some situations, as a practical matter, we may not be in control of the work environment. Additionally, in some circumstances, we are contractually obligated to indemnify our clients against such risks. Such claims may result in negative publicity, injunctive relief, criminal investigations and/or charges, civil litigation, payment by Kforce of defense costs, monetary damages or fines that may be significant, discontinuation of client relationships or other material adverse effects on our business. To reduce our exposure, we maintain policies, procedures and guidelines to promote compliance with laws, rules, regulations and best practices applicable to our business. Even claims without merit could cause us to incur significant expense or reputational harm. We also maintain insurance coverage for professional malpractice liability, fidelity, employment practices liability and general liability in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage may not cover all potential claims against us, may require us to meet a deductible or may not continue to be available to us at a reasonable cost. In this regard, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility. U.S. courts in recent years have been receiving large numbers of wage and hour class action claims alleging misclassification of overtime-eligible workers and/or failure to pay overtime-eligible workers for all hours worked. We are a defendant in purported class actions asserting such claims.
Declines in business or a loss of our major client accounts could have a material adverse effect on our revenues and financial results.
Part of our business strategy includes enhancing our service offerings and relationships with larger consumers of our services, which is intended to provide relative durability to our revenue stream during adverse economic environments and enable us to more profitably grow our revenues. However, it also creates the potential for concentrating a significant portion of our revenues among our largest clients and exposes us to increased risks arising from decreases in the volume of business from, the pricing of business with, or the possible loss of business with these clients. Organizational changes occurring within those clients, or a deterioration of their financial condition or business prospects, or a change in their business strategies could reduce their need for our services and result in a significant decrease in the revenues we derive from those clients, which could have a material adverse effect on our financial results.
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Kforce may be exposed to unforeseeable negative acts by our personnel that could have a material adverse effect on our business.
An inherent risk of employing people internally, in the workplace of other businesses, and/or remotely from home is that many of these individuals have access or may gain access to information systems and confidential information. The risks of such activity include possible acts of errors and omissions; intentional misconduct; release, misuse or misappropriation of client intellectual property, confidential information, personally identifiable information, funds, or other property; data privacy or cybersecurity breaches affecting our clients and/or us; or other acts. Misconduct by our employees could include intentional or unintentional failures to comply with federal government regulations, engaging in unauthorized activities, or improper use of our clients’ sensitive or classified information, potentially in collusion with third parties, which could result in regulatory or criminal sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and precautions to prevent and detect any such misconduct may not be effective in controlling such risks or losses, which could have a material adverse effect on our business.
In addition, any such misconduct may give rise to litigation, which could be time-consuming and expensive. To reduce our exposure, we maintain policies, procedures and insurance coverage for types and amounts we believe are appropriate in light of the aforementioned potential exposures. There can be no assurance that the corporate policies and practices we have in place to help reduce our exposure to these risks will be effective or that we will not experience losses as a result of these risks. In addition, our insurance coverage may not cover all potential claims against us, may require us to meet a deductible or may not continue to be available to us at a reasonable cost.
Kforce’s success depends upon retaining the services of its management team and key operating employees.
Kforce is highly dependent on its management team and expects that continued success will depend largely upon their efforts, expertise and abilities. The loss of the services of any key executive for any reason could have a material adverse effect on Kforce. To attract and retain executives and other key employees (particularly management, client servicing, and consultant and candidate recruiting employees) in a competitive marketplace, we must provide a competitive compensation package, including a mix of cash-based and equity-based compensation. Kforce expends significant resources in the recruiting and training of its employees, as the pool of available applicants for these positions is limited. The loss or any sustained attrition of our key operating employees could have a material adverse effect on our business, including our ability to establish and maintain client, consultant and candidate, professional and technical relationships.
Kforce’s current market share may decrease as a result of limited barriers to entry for new competitors and discontinuation of clients looking to outside providers to support their talent needs.
Due to limited barriers to entry for new competitors, the competition among staffing and solutions firms is intense and we face significant competition in the markets we serve. Kforce competes for potential clients with large national and local staffing firms and national and regional advisory firms that offer both solutions and staffing services. Some of our clients increasingly rely upon internal recruiting functions. Some of our competitors possess substantially greater resources than we do and others may develop new and unique technologies. From time to time, we experience significant pressure from our clients to reduce price levels due to competition. During these periods, we may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fulfill our clients’ needs. We also face the risk that certain of our current and prospective clients will decide to provide similar services internally, particularly if regulatory burdens are reduced. Additionally, many clients are retaining third parties to provide vendor management services, which may subject us to greater risks or lower margins.
Impairment charges related to our joint venture investment could materially and adversely affect Kforce, including our results of operations in the period for which the charge occurs.
We periodically evaluate the recoverability of the carrying value of our joint venture investment. Management’sestimate of the fair value of an investment is based on the income approach and/or market approach. For the income approach, we utilize estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilize 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. These key assumptions are subjective in nature and could differ materially from actual results. To the extent that the carrying value of the asset exceeds the estimated undiscounted cash flows, an impairment loss is recognized equal to the excess of carrying value over fair value. Any future impairment could materially and adversely affect us, including our results of operations in the period in which the charge is taken.
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Risk Related to Cybersecurity and Technology
Cybersecurity risks and cyber incidents could adversely affect our business and disrupt operations.
In the ordinary course of our business, we collect and retain personal information of our associates and consultants and their dependents, and our customers. We are also regularly subjected to cyberattacks and the number and sophistication of such cyberattacks continue to increase. Cyberattacks or other breaches of network or information technology used by our associates and consultants, as well as risks associated with compliance on data privacy, could adversely impact our systems, services, operations, financial results and reputation with clients and potential clients. These attacks include, but are not limited to, attempts to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. While we have policies, procedures and systems in place to detect, prevent and deter cyberattacks or other breaches of our networks, and, although we have not experienced a data breach, techniques used to obtain unauthorized access or cause system interruption change frequently and may not immediately produce signs of intrusion. As a result, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures.
The possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens and compliance risk. We may be required to incur significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future breaches of our systems or information. Our information technology may not provide sufficient protection, and as a result we may lose significant information about us, our employees or clients. Other results of these incidents could include, but are not limited to, increased cybersecurity protection costs, litigation, regulatory penalties, monetary damages and reputational damage adversely affecting client or investor confidence.
Our failure to keep pace with technological change in our industry could potentially place us at a competitive disadvantage.
Our future success is likely to depend in part on our ability to successfully keep pace with technological changes and advances occurring across our industry. Our business is reliant on a variety of systems and technologies, including those that support consultant and candidate searching and matching, hiring and tracking, order management, billing and client data analytics. Our success depends in part on our ability to keep pace with rapid technological changes in the development and implementation of these services. If our systems become outdated, or if our investments in technology fail to provide the expected results, then we may be unable to maintain our technological capabilities relative to our competitors and our business could be negatively affected.
Kforce depends on the proper functioning of its information systems.
Kforce is dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of Kforce’s daily operations, perhaps most significantly, in the identification and matching of resources to client assignments and in the client billing and consultant or vendor payment functions. Kforce’s information systems may not perform as expected and are vulnerable to damage or interruption including natural disasters, fire or casualty, theft, technical failures, terrorist acts, cybersecurity breaches, power outages, telecommunications failures, physical or software intrusions, computer viruses, employee errors or other events. While many of our systems are cloud-based, certain of our systems are still on premise. Our corporate headquarters and data center are located in a hurricane-prone area. Although we have disaster recovery systems for most key information systems, this makes us reliant on third-party providers for the restoration of these systems. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, which could have a material adverse effect on our business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyberattack or security breach on a third party carries the same risks to Kforce as those associated with our internal systems. We seek to reduce these risks by performing vendor due diligence procedures prior to engaging with any third-party vendor who will have access to sensitive data. Additionally, we require audits of the relevant third parties’ information technology processes on an annual basis. However, there can be no assurance that such parties will not experience cybersecurity breaches that could adversely affect our employees, customers and businesses or that our audit or diligence processes will successfully deter or prevent such breach.
Risks Related to Legal, Compliance and Regulatory Matters
Kforce may be adversely affected by immigration restrictions and reform.
Our Technology business utilizes a significant number of foreign nationals employed by us on work visas, primarily under the H-1B visa classification. The H-1B visa classification that enables U.S. employers to hire qualified foreign nationals is subject to legislative and administrative changes, as well as changes in the application of standards and enforcement. Immigration laws and regulations can be significantly affected by the recent change in administration, other political developments and levels of economic activity. Current and future restrictions on the availability of such visas could restrain our ability to employ the skilled professionals we need to meet our clients’ needs, which could have a material adverse effect on our business. The U.S. Citizenship and Immigration Service (“USCIS”) continues to closely scrutinize companies seeking to sponsor, renew or transfer H-1B status, including Kforce and Kforce’s subcontractors and has issued internal guidance to its field offices that appears to narrow the eligibility criteria for H-1B status in the context of staffing services. In addition to USCIS restrictions, certain aspects of the H-1B program are also subject to regulation and review by the U.S. Department of Labor and U.S. Department of State,
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which have recently increased enforcement activities in the program. Vigorous enforcement and/or legislative or executive action relating to immigration could adversely affect our ability to recruit or retain foreign national consultants, and consequently, reduce our supply of skilled consultants and candidates and subject us to fines, penalties and sanctions, or result in increased labor and compliance costs.
Reclassification of our independent contractors by tax or regulatory authorities could have a material adverse effect on our business model and/or could require us to pay significant retroactive wages, taxes and penalties.
We utilize individuals to provide services in connection with our business as qualified third-party independent contractors rather than our direct employees. Heightened state and federal scrutiny of independent contractor relationships could adversely affect us given that we utilize independent contractors to perform our services. An adverse determination related to the independent contractor status of these subcontracted personnel could result in substantial taxes or other liabilities to us, which could result in a material adverse effect upon our business.
Significant increases in wages or payroll-related costs could have a material adverse effect on our financial results.
Kforce is required to pay a number of federal, state and local payroll and related costs or provide certain benefits such as paid time off, sick leave, unemployment taxes, workers’ compensation and insurance premiums and claims, FICA and Medicare, among others, related to our employees. Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel. We may not be able to increase the fees charged to our clients in a timely manner or in a sufficient amount to cover these potential cost increases.
Adverse results in tax audits or interpretations of tax laws could have an adverse impact on our business.
Kforce is subject to periodic federal, state and local tax audits for various tax years. We also need to comply with new, evolving or revised tax laws and regulations. The Tax Cuts and Jobs Act, enacted in December 2017, continues to require interpretation; in addition, the new administration has indicated it intends to modify key aspects of the tax code, which could materially affect our tax obligations and effective tax rate. Although Kforce attempts to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on Kforce.
Risks Related to Our Indebtedness and Financing
Kforce maintains debt that exposes us to interest rate risk and contains restrictive covenants that could trigger prepayment of obligations or additional costs.
We have a credit facility consisting of a revolving line of credit of up to $200.0 million, subject to certain limitations. Borrowings under the credit facility are secured by substantially all of the tangible and intangible assets of the Firm, and certain other designated collateral.
Adverse changes in credit markets, including increases in interest rates, could increase our cost of borrowing and/or make it more difficult to refinance our existing indebtedness, if necessary. We have reduced our exposure to rising interest rates by entering into an interest rate hedging arrangement, although this and other arrangements may result in us incurring higher interest expenses than we would have otherwise incurred. If interest rates increase in the absence of such arrangements though, we would need to dedicate more of our cash flow from operations to service our debt.
Kforce is subject to certain affirmative and negative covenants under our credit facility. Our failure to comply with such restrictive covenants could result in an event of default, which, if not cured or waived, could result in Kforce being required to repay the outstanding balance before the due date. If this occurs, we may not be able to repay our debt or we may be forced to refinance on terms not acceptable to us, which could have a material adverse effect on our operating results and financial condition.
Risks Related to Our Industry
The U.S. professional staffing and solutions industry in which we operate is significantly affected by fluctuations in general economic and employment conditions.
Demand for our services, generally speaking, can be significantly affected by the general level of economic activity and employment in the U.S. Even in a strong demand environment, without significant uncertainty and volatility, it is difficult for us to forecast future demand for our services due to the inherent difficulties in forecasting the strength of economic cycles, availability of consultants and candidates and the short-term nature of many of our agreements. As economic activity slows, companies may defer projects for which they utilize our services or reduce their use of consultants before laying off permanent employees. In addition, an economic downturn could result in an increase in the unemployment rate and a deceleration of growth in the segments in which we and our clients operate. We may also experience more competitive pricing pressures during periods of economic downturn. Any substantial economic downturn, including an environment with significant inflationary pressures, in the U.S. or global impact on the U.S. could have a material adverse effect on our business, financial condition and operating results.
Kforce may be adversely affected by government regulation of our business and of the workplace.
Our business is subject to regulation and licensing in many states. There can be no assurance that we will be able to continue to obtain all necessary licenses or approvals or that the cost of compliance will not prove to be material. If we fail to comply, such failure could have a material adverse effect on our financial results.
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A large part of our business entails employing individuals on a temporary basis and placing such individuals in clients’ workplaces. Increased government regulation of the workplace or of the employer/employee relationship could have a material adverse effect on Kforce. For example, changes to government regulations, including changes to statutory hourly wage and overtime regulations, could adversely affect the Firm’s results of operations by increasing its costs. Due to the substantial number of state and local jurisdictions in which we operate and the widening disparity among state and local laws (a trend which appears to be accelerating), there also is a risk that we may be unaware of, or unable to adequately monitor, actual or proposed changes in, or the interpretation of, the laws or governmental regulations of such states and localities. Any delay in our compliance with changes in such laws or governmental regulations could result in potential fines, penalties, or other sanctions for non-compliance.
Risks Related to Certain Governance Issues
Provisions in Kforce’s articles and bylaws and Florida law may have certain anti-takeover effects.
Kforce’s articles of incorporation and bylaws and Florida law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. In particular, our articles of incorporation provide for a staggered Board of Directors (“Board”) and permit the removal of directors only for cause. Additionally, the Board may issue up to 15 million shares of preferred stock, and fix the rights and preferences thereof, without a further vote of the shareholders. In addition, certain of our officers and managers have employment agreements containing certain provisions that call for substantial payments to be made to such employees in certain circumstances after a change in control. Some or all of these provisions may discourage a future acquisition of Kforce, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Moreover, the existence of these provisions could negatively impact the market price of our common stock.
Risk Related to Government Contracts
Significant loss or suspension of our facility security clearances with the federal government could lead to a reduction in our revenues, cash flows and operating results.
We act as a subcontractor to the U.S. federal government and many of its agencies. Some government subcontracts require us to maintain facility security clearances and require some of our employees to maintain individual security clearances. If our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, a government agency client may terminate the subcontract or decide not to renew it upon its expiration. In addition, a security breach by us could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government clients.
General Risk Factors
New business initiatives and strategic changes may divert management’s attention from normal business operations, which could have an adverse effect on our performance.
New business initiatives and strategic changes in the composition of our business mix can be a diversion to our management’s attention from other business concerns and could be disruptive to our operations, which could cause our business and results of operations to suffer materially. Acquisitions and new business initiatives could involve significant unanticipated challenges and risks, including that: they may not advance our business strategy; we may not realize our anticipated return on our investment; we may lose key personnel; we may incur and/or retain unforeseen liabilities; we may experience difficulty in implementing initiatives or integrating acquired operations; and management's attention may be diverted from our other businesses. These events could have a material adverse effect on our business, operating results or financial condition.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. If our management is unable to certify the effectiveness of our internal controls, including those over our third-party vendors, our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal controls over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could cause our stock price to decline.
Kforce’s stock price may be volatile.
The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, the staffing industry, a decrease in our outstanding shares or other developments affecting us, our clients, or our competitors; some of which may be unrelated to our performance.
In addition, the stock market in general, especially NASDAQ, along with market prices for staffing companies, has experienced historical volatility that has often been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results.
Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above the prices they pay. The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses, or as compensation for our key employees.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
As of December 31, 2021, we lease approximately 290,000 square feet of total office space in 36 offices located throughout the U.S., with remaining lease terms ranging from two to ten years, although a limited number of leases contain short-term renewal provisions that range from month-to-month to one year. During the three months ended September 30, 2021, we entered into a lease agreement for approximately 22,000 square feet of office space in Tampa, Florida, which will become our new corporate headquarters. This new lease for office space is intended to replace our current headquarters, also in Tampa, Florida, which we have sold and leased back from the new owners, the lease for which expires in November 2022. The new lease has not yet commenced but we expect to occupy the new office space in the fourth quarter of 2022.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in legal proceedings, claims and administrative matters that arise in the ordinary course of business. We do not believe that any of our current such proceedings, claims or matters are material. For further information regarding legal proceedings, refer to Note 18 - "Commitments and Contingencies" in the Notes to Consolidated Financial Statements in the section entitled "Litigation," included in Item 8. Financial Statements and Supplementary Data of this report, which is incorporated into this Item 3 by reference.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Holders of Common Stock
Our common stock trades on the NASDAQ using the ticker symbol “KFRC”. As of February 23, 2022, there were 149 holders of record.
Purchases of Equity Securities by the Issuer
In March 2020, the Board approved an increase in our stock repurchase authorization bringing the then-available authorization to $100.0 million. In February 2022, the Board approved another increase in our stock repurchase authorization bringing the available authorization from $30.1 million to $100.0 million. Purchases of common stock under the Plan are subject to certain price, market, volume and timing constraints, which are specified in the plan. The following table presents information with respect to our repurchases of Kforce common stock during the three months ended December 31, 2021:
(1) Includes 4,914 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period October 1, 2021 to October 31, 2021.
(2) Includes 1,741 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2021 to November 30, 2021.
(3) Includes 143,474 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2021 to December 31, 2021.
ITEM 6. RESERVED.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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.
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EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are highlights for 2021, which should be considered in the context of the additional discussions herein and in conjunction with the consolidated financial statements and notes thereto.
•Revenue for the year ended December 31, 2021, increased 13.9%, per billing day, to $1.58 billion in 2021 from $1.40 billion in 2020. Revenue per billing day increased 22.3% in our Technology business and decreased 11.4% in our FA business.
•Flex revenue increased 13.1%, per billing day, to $1.53 billion in 2021 from $1.36 billion in 2020. Flex revenue increased 21.7%, per billing day, for Technology and decreased 14.0%, per billing day, for FA. During 2020, we secured contracts to support government-sponsored COVID-19 related initiatives that benefited our FA business with $71.0 million and $114.7 million in revenues for the years ended December 31, 2021 and 2020, respectively. Excluding revenues from the COVID-19 Business for both periods, our FA Flex business would have declined 1.5% in 2021 on a year-over-year, billing day basis.
•The momentum in our Technology business built as 2021 progressed with solid sequential growth each quarter in 2021, resulting in 32.0% growth in the fourth quarter of 2021 on a year-over-year billing day basis.
•Direct Hire revenue, per billing day, increased 49.3% to $49.8 million in 2021 from $33.6 million in 2020.
•Gross profit margin increased 60 basis points to 28.9% in 2021 due primarily to an increased mix of Direct Hire revenue. Flex gross profit margin was flat at 26.6% for both 2021 and 2020. Flex gross profit margin was flat for Technology and increased 30 basis points for FA.
•SG&A expenses as a percentage of revenue for the year ended December 31, 2021, decreased to 21.9% from 22.2% in 2020. The decrease is primarily related to leverage gained from our revenue growth, associate productivity improvements, lower real estate spend due to our reduced office footprint, a decline in our credit expense and a gain on the sale of our corporate headquarters.
•Net income for the year ended December 31, 2021, increased 34.2% to $75.2 million, or $3.54 per share, from $56.0 million, or $2.62 per share, in 2020.
•The Firm returned $74.5 million of capital to our shareholders in the form of open market repurchases totaling $54.4 million, or 0.9 million shares, and quarterly dividends totaling $20.1 million during the year ended December 31, 2021.
•We ended the year with $3.0 million of net debt as of December 31, 2021, compared to net cash of approximately $3.5 million as of December 31, 2020, given that we returned approximately 100% of our operating cash flows to our shareholders.
•Cash provided by operating activities was $72.9 million during the year ended December 31, 2021, compared to $109.2 million for 2020. This decrease is primarily due to the deferral of $38.6 million in payroll taxes as a result of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) in 2020, of which $19.3 million was paid in 2021.
RESULTS OF OPERATIONS
Certain discussions of the changes in our results of operations from the year ended December 31, 2020, as compared to the year ended December 31, 2019, have been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021.
In 2020, the U.S. and global macro-economic environments were severely impacted by the COVID-19 economic and health crisis. Certain sectors of the U.S. economy were more acutely impacted by this crisis, such as the hospitality, transportation, retail, entertainment, health services and manufacturing sectors. We generate revenue within each of these sectors of the U.S. economy although our top three industries are financial services, business services and telecommunications, which were not as acutely impacted by this crisis.
Despite certain adverse effects to our business due to the abrupt economic disruption from the COVID-19 economic and health crisis and related governmental rules and regulations, we delivered strong results in 2020 and again in 2021, especially in our Technology business, with a year-over-year decline of only approximately 1% in 2020 and solid growth of approximately 22% in 2021, both of which significantly exceeded the market expectation per SIA. As we expected, we were successful in significantly outpacing the decline in revenues from our COVID-19 Business (declined $43.7 million) with a higher-quality Technology revenue stream (up $224.3 million). While the business climate related to the COVID-19 economic and health crisis, along with related governmental legislation (including that which is aimed at stimulating the economy), is still extremely fluid, we are well-positioned to and expect to continue capturing additional market share in our Technology business and delivering strong operating results to our shareholders in 2022.
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The following table presents certain items in our Consolidated Statements of Operations and Comprehensive Income as a percentage of revenue for the years ended:
DECEMBER 31,
Revenue by segment:
Revenue by type:
Selling, general and administrative expenses 21.9 % 22.2 % 23.3 %
Depreciation and amortization 0.3 % 0.4 % 0.4 %
Income from operations 6.7 % 5.7 % 5.6 %
Income from continuing operations, before income taxes 6.3 % 5.4 % 5.3 %
Income from continuing operations 4.8 % 4.0 % 4.0 %
Income from discontinued operations, net of tax — % — % 5.7 %
Revenue. The following table presents revenue by type for each segment and percentage change from the prior period for the years ended December 31 (in thousands):
Technology
FA
Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year revenue growth rates, per billing day, for the last five quarters:
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
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.
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Flex revenue for our Technology business increased approximately 22%, per billing day, during the year ended December 31, 2021, as compared to the same period in 2020. The increase was driven principally by a higher number of consultants on assignment, which have improved consistently since June 2020 (our lowest point during the COVID-19 pandemic). This growth in consultants on assignment was primarily due to the strong secular drivers of demand, the strength of our client portfolio (that being comprised of primarily Fortune 1000 companies), our concentration in higher-end technology skills, and solid execution. We believe the secular drivers of demand in technology have only strengthened post-pandemic as companies continue to invest significantly in technology to improve their consumer’s experience, gain cost efficiencies and stay relevant in an increasingly competitive environment. Assuming a stable demand and macro environment, we expect growth in our Technology business in 2022 of at least 15%.
Our FA business experienced a decrease in Flex revenue, per billing day of 14.0% during the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by a $43.7 million decrease in the COVID-19 Business. Excluding this decline, FA Flex revenues declined 1.5% in 2021, per billing day, as a result of a strategic decision to focus our FA business towards more highly-skilled roles. Excluding the negative impact of the elimination of COVID-19 Business and runoff of FA business in lower skilled areas, we expect Flex revenue in our FA business to grow in the low to mid-single digit range in 2022.
The following table presents the key drivers for the change in Flex revenue by segment over the prior period (in thousands):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
Key Drivers - Increase (Decrease) Technology FA Technology FA
The following table presents total Flex hours billed by segment and the percentage change over the prior period for the years ended December 31 (in thousands):
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 49.3%, per billing day, during the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by a significant increase in both the number of placements and fees, as the economic environment has strengthened and competition for talent has increased. We expect Direct Hire revenues to grow in 2022 in the mid to high single-digit range in 2022.
The following table presents the key drivers for the change in Direct Hire revenue over the prior period (in thousands):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
Key Drivers - Increase (Decrease) Technology FA Technology FA
The following table presents the total number of placements by segment and percentage change over the prior period for the years ended December 31:
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The following table presents the average fee per placement by segment and percentage change over the prior period for the years ended December 31:
Gross Profit. Gross profit is determined by deducting direct costs (primarily consultant compensation, payroll taxes, payroll-related insurance and certain fringe benefits, as well as independent contractor costs) from total revenue. In addition, there are no consultant payroll costs associated with Direct Hire placements; thus, 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) for each segment and percentage change over the prior period for the years ended December 31:
Total gross profit percentage increased 60 basis points for the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by an increased mix of Direct Hire revenue.
Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue) provides management with helpful insight 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.
The following table presents the Flex gross profit percentage for each segment and percentage change over the prior period for the years ended December 31:
Total Flex gross profit percentage 26.6 % — % 26.6 % (0.4) % 26.7 %
Overall, our Flex gross profit percentage for the year ended December 31, 2021, as compared to the same period in 2020, was flat. We have seen good stability in our Technology Flex gross margins over the last several years as the benefit from higher growth in our managed teams and project solutions business, which carries a higher margin profile, has offset any spread compression in the remainder of our Technology business.
FA Flex gross profit margins increased 30 basis points for the year ended December 31, 2021, as compared to the same period in 2020, primarily due to a lower mix of lower margin COVID-19 Business and spread improvements due to the repositioning of this business in higher skilled areas. These benefits more than offset higher healthcare costs.
We expect spreads to be relatively stable in our Technology business and for spreads in our FA business to benefit further from the elimination of revenues from the COVID-19 Business and the repositioning efforts in 2022.
The following table presents the key drivers for the change in Flex gross profit by segment over the prior period (in thousands):
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
Key Drivers - Increase (Decrease) Technology FA Technology FA
Kforce continues to focus on effective pricing and optimizing the spread between bill rates and pay rates. We believe this will serve over time to obtain the optimal volume, rate, effort and duration of assignment, while ultimately maximizing the benefit for our clients, our consultants and Kforce.
SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 85.4%, 83.0% and 83.1% of SG&A for the years ended December 31, 2021, 2020 and 2019, respectively. Commissions and
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other bonus incentives for our revenue-generating talent are variable costs driven primarily by revenue and gross profit levels, and associate performance.
The following table presents certain components of SG&A as a percentage of total revenue for the years ended December 31 (in thousands):
(1) Includes items such as bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.
SG&A as a percentage of revenue decreased 30 basis points in 2021, as compared to 2020 due to (a) leverage gained from our revenue growth, (b) the recognition of a $2.0 million gain from the sale of our corporate headquarters in 2021, (c) declines in credit expense in 2021 due to a lower estimated risk of default resulting from the strength in the quality of our accounts receivable portfolio, and (d) reductions in lease and office expenses. These benefits were partially offset by higher performance-based compensation given the strength in our 2021 financial performance and the accrual of a tentative legal settlement of $3.3 million.
The Firm continues to focus on improving the productivity of our associates and generating increased operating leverage as revenues grow.
Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category for the years ended December 31 (in thousands):
The decrease in depreciation primarily results from the completion of the sale of our corporate headquarters in May 2021.
Other Expense, Net. Other expense, net was $7.4 million in 2021, $5.0 million in 2020 and $3.4 million in 2019. Other expense, net consists primarily of (a) our proportionate share of the loss from WorkLLama, LLC (WorkLLama), (b) an expense related to the termination of our SERP in 2021 and (c) interest expense related to outstanding borrowings under our credit facility.
During the years ended December 31, 2021 and 2020, we recognized $2.5 million and $1.7 million, respectively, related to our share of losses from WorkLLama and an expense of $1.8 million in 2021 related to the termination of our SERP. Refer to Note 13 - “Employee Benefit Plans” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the termination of our SERP.
Although the impact of the COVID-19 economic and health crisis remains highly uncertain, it could have a material adverse effect on the fair value of our equity method investment in WorkLLama. If the fair value falls below the book value of the equity method investment, we would be required to evaluate whether an other-than-temporary impairment has occurred. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion on our equity method investment.
Income Tax Expense. Income tax expense as a percentage of income from continuing operations, before income taxes (our “effective tax rate” for continuing operations) for the years ended December 31, 2021, 2020 and 2019 were 24.3%, 25.5% and 23.6%, respectively.
Income from Discontinued Operations, Net of Tax. During 2019, we completed the sale of the GS segment, which consisted of KGS and TraumaFX® Solutions, Inc. (“TFX”), our federal government product business. Kforce does not have significant continuing involvement in the operations of KGS or TFX after the sale and reported the GS segment as discontinued operations in the consolidated statements of operations for all years presented. Refer to Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion.
On April 1, 2019, Kforce completed the sale of all of the issued and outstanding stock of Kforce Government Holdings, Inc., including its wholly-owned subsidiary, KGS, to ManTech International Corporation for a cash purchase price of $115.0 million. Our gain on the sale of KGS, net of transaction costs, was $72.3 million. Total transaction costs were $9.6 million, which primarily includes legal and broker fees, transaction bonuses and accelerated stock-based compensation expense for KGS management triggered by a change in control of KGS.
On June 7, 2019, Kforce completed the sale of all of the issued and outstanding stock of TFX to an unaffiliated third party for a cash purchase price of $18.4 million less a post-closing working capital adjustment of $0.7 million. Our gain on the sale of TFX,
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net of transaction costs, was $7.0 million. Total transaction costs were $2.2 million, which primarily includes legal and broker fees and transaction bonuses. Due to the sale of TFX, we finalized the settlement of a contingent consideration liability related to the acquisition of TFX in 2014 and paid $0.6 million during the year ended December 31, 2020.
The effective tax rates for discontinued operations, including the gain on sale of discontinued operations, for the year ended December 31, 2019, was 4.4%. There was no activity relating to discontinued operations in 2021 or 2020. The GS effective tax rate for 2019 was low because of the minimal income tax obligation for the sale of KGS due to the efficient tax structure of the transaction.
Non-GAAP Financial Measures
Free Cash Flow.“Free Cash Flow”, a non-GAAP financial measure, is defined by Kforce as net cash provided by operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic opportunities including investing in our business, repurchasing common stock, paying dividends or making acquisitions. Free cash flow has limitations due to the fact that 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 as a replacement for, our Consolidated Statements of Cash Flows. Free cash flows include results from discontinued operations for the year ended December 31, 2019.
The following table presents Free Cash Flow (in thousands):
YEARS ENDED DECEMBER 31,
Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, is defined by Kforce as net income before income from discontinued operations, net of tax, depreciation and amortization, gain on sale of corporate headquarters, stock-based compensation expense, interest expense, net, income tax expense, legal settlement expense, SERP termination expense and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations. Management believes it is useful information to investors as 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. 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 susceptible to varying calculations, and 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.
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The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):
YEARS ENDED DECEMBER 31,
Income from discontinued operations, net of tax — — 76,296
Gain on sale of corporate headquarters (2,051) — —
Legal settlement expense 3,350 — —
SERP termination expense 1,821 — —
Adjusted EBITDA, for the year ended December 31, 2019, was negatively impacted by $2.0 million of severance and other costs due to actions taken as a result of the KGS divestiture.
LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our credit facility. At December 31, 2021 and 2020, we had $97.0 million and $103.5 million, respectively, in cash and cash equivalents, which consisted primarily of government money market funds. At December 31, 2021, Kforce had $211.7 million in working capital compared to $230.7 million at December 31, 2020.
Cash Flows
Our business has historically generated a significant amount of operating cash flows, which allows us to balance deploying available capital towards: (i) investing in our infrastructure to allow sustainable growth via capital expenditures; (ii) our dividend and share repurchase programs; and (iii) maintaining sufficient liquidity to complete acquisitions or other strategic investments.
The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):
YEARS ENDED DECEMBER 31,
Our Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). As previously discussed, the GS segment was sold and has been reflected as a discontinued operation for 2019.
The following table provides information for the total operating and investing cash flows for the GS segment (in thousands):
YEARS ENDED DECEMBER 31,
GS Operating Activities $ — $ — $ 4,547
GS Investing Activities $ — $ — $ 117,798
Operating Activities
Cash provided by operating activities was $72.9 million during the year ended December 31, 2021, as compared to $109.2 million during the year ended December 31, 2020. 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 decrease was primarily driven by growth in our accounts receivable portfolio and the $19.0 million payment of payroll taxes in 2021 out of the $39 million that was deferred in 2020 related to the CARES ACT. This decline was partially offset by profitable revenue growth.
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Investing Activities
Cash provided by investing activities was $8.3 million during the year ended December 31, 2021, as compared to cash used in investing activities of $6.9 million during the year ended December 31, 2020. The aggregate year-over-year change of $15.2 million is due to $23.7 million in net proceeds from the sale of our corporate headquarters, which was partially offset by the receipt of proceeds from the sale of assets held within the Rabbi Trust of $3.5 million in 2020 and a $5 million increase in capital contributed to WorkLLama. We expect to continue selectively investing in our infrastructure, primarily focusing on implementing new and upgrading existing technologies that will provide the most benefit.
Financing Activities
Cash used in financing activities was $87.7 million during the year ended December 31, 2021, as compared to $18.6 million during the year ended December 31, 2020. The change was primarily driven by the $35.0 million draw down on our credit facility during the year ended December 31, 2020, and an increase in the repurchases of common stock and quarterly dividends during the year ended December 31, 2021 compared to 2020.
The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):
Cash paid in current year for settlement of prior year repurchases $ — $ — $ 556
During the years ended December 31, 2021, 2020 and 2019, Kforce declared and paid dividends of $20.1 million ($0.98 per share), $16.8 million ($0.80 per share) and $16.6 million ($0.72 per share), respectively.
On February 4, 2022, Kforce’s Board approved a 15% increase to the Company's quarterly dividend from $0.26 per share to $0.30 per share. The declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board each quarter following its review of, among other things, the Firm’s current and expected financial performance as well as the ability to pay dividends under applicable law.
We believe that existing cash and cash equivalents, cash flow from operations and available borrowings under our credit facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months. However, a material deterioration in the economic environment or market conditions, among other things, could negatively impact operating results and liquidity, as well as the ability of our lenders to fund borrowings. Actual results could also differ materially from those indicated as a result of a number of factors, including the use of currently available resources for potential acquisitions and additional stock repurchases.
Credit Facility
On October 20, 2021, the Firm entered into an amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank of America, N.A., as syndication agent, BMO Harris Bank, N.A., as documentation agent, and the lenders referred to therein (the “Amended and Restated Credit Facility”). Under the Amended and Restated Credit Facility, the Firm has a maximum borrowing capacity of $200.0 million, which may, subject to certain conditions and the participation of the lenders, be increased up to an aggregate additional amount of $150.0 million. The maturity date of the Amended and Restated Credit Facility is October 20, 2026. Refer to Note 14 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our Credit Facility. As of December 31, 2021, $100.0 million was outstanding and $98.7 million, subject to certain covenants, was available.
In April 2017 and March 2020, Kforce entered into two forward-starting interest rate swap agreements (the “Swaps”) to mitigate the risk of rising interest rates and the Swaps have been designated as a cash flow hedges. Refer to Note 15 - “Derivative Instrument and Hedging Activity” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the Swaps. As of December 31, 2021 and 2020, the fair value of the Swaps was an asset of $0.8 million and liability of $1.8 million, respectively.
Stock Repurchases
The following table presents the open market repurchase activity under the Board-authorized common stock repurchase program for the years ended December 31 (in thousands):
Shares $ Shares $
As of December 31, 2021, $30.1 million remained available for further repurchases under the Board-authorized common stock repurchase program. On February 4, 2022, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million.
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Contractual Obligations
In addition to our discussion and analysis surrounding our liquidity and capital resources, consideration should also be given to significant contractual obligations:
•Our credit facility matures October 20, 2026 and, as of December 31, 2021, our outstanding debt balance was $100.0 million. Our interest rate as of December 31, 2021 was used to forecast the expected future interest rate payments. These payments, which are estimated to be $4.9 million, are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility. See Note 14, “Credit Facility” within our consolidated financial statements for further detail of our debt.
•We maintain various non-qualified deferred compensation plans pursuant to which eligible management and highly-compensated key employees may elect to defer all or part of their compensation to later years. As of December 31, 2021, the value of our obligation under these plans was $42.6 million. These amounts are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, as appropriate, and are payable based upon the elections of the plan participants (e.g., retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time.
•Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2021, the value of our non-cancellable unconditional purchase obligations was $19.0 million.
•We have employment agreements with certain executives that provide for minimum compensation, salary and continuation of certain benefits for a six-month to a three-year period after their employment ends under certain circumstances. At December 31, 2021, our liability would be approximately $36.9 million for terminations related to a change in control and $13.0 million related to terminations in the absence of good cause. See Note 18 ‘” Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information regarding our commitments related to employment agreements.
•We lease certain facilities and other properties under non-cancellable operating lease arrangements that expire at various dates through 2033. As of December 31, 2021, the value of our obligations under operating leases was $19.4 million. See Note 12, “Leases,” within our consolidated financial statements for further detail of our obligations and the timing of expected future payments, including a five-year maturity schedule.
•In September 2021, we entered into a lease agreement for office space in Tampa, Florida, which will become our new corporate headquarters. The new lease has not yet commenced, but will require aggregate future lease payments of approximately $10.9 million over the entire lease term, which includes annual upward adjustments, and has a non-cancellable lease term of 129 months, excluding renewal options. The new lease also provides for a tenant-improvement allowance from the landlord, of $1.6 million to be used towards costs to design, engineer, install, supply and to construct improvements. See Note 12, “Leases,” within our consolidated financial statements for further detail of our obligations and the timing of expected future payments.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2021, Kforce had letters of credit outstanding for operating lease and insurance coverage deposits totaling $1.3 million.
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama, a newly formed LLC that is accounted for as an equity method investment. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, which discusses a contingent obligation related to this equity method investment.
These off-balance sheet arrangements do not have a material impact on our liquidity or capital resources. These off-balance sheet arrangements do not provide financing, liquidity, market or credit risk support.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are discussed in Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report. Our consolidated financial statements are prepared in accordance with 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, 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. 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
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estimates about the effect of matters that are inherently uncertain. We have not made any material changes in our accounting methodologies used in prior years.
Equity Method Investment
Initial Investment
In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama, which is accounted for as an equity method investment.
Impairment Assessment
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 fair value of an investment is based on the income approach and/or market approach. For the income approach, we utilize estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilize 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. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.
Refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our equity method investment.
Allowance for Credit Losses
Management performs an ongoing analysis of factors in establishing its allowance for doubtful accounts including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of accounts receivable among clients and higher-risk sectors, and the current state of the U.S. economy. A 10% change in accounts reserved, at December 31, 2021, would have impacted our net income by approximately $0.2 million in 2021.
Accounting for Income Taxes
Our effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we conduct business. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions, including those that may be uncertain.
We are also required to exercise judgment with respect to the realization of our net deferred tax assets. Management evaluates positive and negative evidence and exercises judgment regarding past and future events to determine if it is more likely than not that all or some portion of the deferred tax assets may not be realized. If appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. A 0.5% change in our effective tax rate would have impacted our net income by approximately $0.5 million in 2021.
Refer to Note 7 – “Income Taxes” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the components of our income tax expense, as well as the temporary differences that exist as of December 31, 2021.
Goodwill Impairment
Goodwill is tested at the reporting unit level which is generally an operating segment, or one level below the operating segment level, where a business operates and for which discrete financial information is available and reviewed by segment management. We evaluate goodwill for impairment annually or more frequently whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. We monitor the existence of potential impairment indicators throughout the year. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.
When performing a quantitative assessment, we determine the fair value of our reporting units using widely accepted valuation techniques, including the discounted cash flow, guideline transaction and guideline company methods. 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. When performing a qualitative assessment, we assess qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the reporting unit was less than its carrying amount.
Refer to Note 9 – “Goodwill” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the valuation methodologies employed.
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Self-Insured Liabilities
We are self-insured for certain losses related to health insurance claims that are below insurable limits. However, we obtain third-party insurance coverage to limit our exposure to claims in excess of insurable limits. When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, plan structure, internal claims management activities, demographic factors and severity factors. Periodically, management reviews its assumptions to determine the adequacy of our self-insured liabilities.
Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate total cost to settle reported claims and claims incurred but not reported (“IBNR”) as of the balance sheet date. A 10% change in our self-insured liabilities related to health insurance, as of December 31, 2021, would have impacted our net income by approximately $0.5 million in 2021.
NEW ACCOUNTING STANDARDS
Refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a discussion of new accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In addition to the inherent operational risks, Kforce is exposed to certain market risks, primarily related to changes in interest rates.
As of December 31, 2021, we had $100.0 million outstanding under our credit facility. Refer to Note 14 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for further details on our Credit Facility. A hypothetical 10% increase in interest rates on variable debt in effect at December 31, 2021 would have had no effect on our annual interest expense because we had no variable debt at December 31, 2021.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. (“Swap A”) to mitigate the risk of rising interest rates on the Firm’s financial statements. Swap A was effective on May 31, 2017 and matures on April 29, 2022. Swap A has a fixed interest rate of 1.81%, which we add to our interest rate margin to determine the fixed rate that the Firm will pay to the counterparty during the term of Swap A based on the notional amount of Swap A. The notional amount of Swap A through maturity is $25.0 million.
On March 12, 2020, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank N.A. (“Swap B”). Swap B was effective on March 17, 2020 and matures on May 30, 2025. Swap B has a fixed interest rate of 0.61% and a notional amount of $75.0 million and increases to $100.0 million in May 2022, and subsequently decreases to $75.0 million and $40.0 million in May 2023 and May 2024, respectively. The increases in the notional amount of Swap B correspond to the decreases in the notional amount of Swap A.
The Firm uses the Swaps as an interest rate risk management tool to mitigate the potential impact of rising interest rates on variable rate debt. The fixed interest rate for each Swap (which will remain throughout the remainder of the hedging arrangement), plus the applicable interest margin under our credit facility, is included in interest expense and recorded in Other expense, net in the accompanying Consolidated Financial Statements of Operations and Comprehensive Income. Both Swap A and Swap B have been designated as cash flow hedges and were effective as of December 31, 2021. The change in the fair value of the Swaps are recorded as a component of Accumulated other comprehensive income (loss) in the unaudited consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Kforce Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kforce, Inc. and subsidiaries ("Kforce") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Equity Method Investment – Refer to Note 1 to the Consolidated Financial Statements
Critical Audit Matter Description
In June 2019, Kforce entered into a joint venture whereby Kforce has a 50% noncontrolling ownership in WorkLLama, LLC ("WorkLLama"). The noncontrolling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity method, the investment carrying value is recorded at cost and adjusted for the proportionate share of earnings or losses. Management reviews 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 would be recognized in the event that an other-than-temporary decline in fair value of an investment occurs. Management’s estimate of fair value of an investment is based on the income approach and/or market approach, which requires management to make significant estimates and assumptions related to the discount rate and forecasted operating results for WorkLLama. Changes in these assumptions could have a significant impact on either the fair value, the amount of any impairment charge, or both. The balance of the investment in WorkLLama of $17.0 million was included in Other assets, net in the Consolidated Balance Sheet at December 31, 2021.
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We identified management’s quantitative impairment analysis for the equity method investment in WorkLLama as a critical audit matter because of the significant amount of judgment required to estimate the fair value of WorkLLama. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions regarding cash flow projections, including the need to involve fair value specialists, when performing audit procedures to evaluate assumptions related to the selection of the weighted-average cost of capital.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rate and forecasted operating results used by management to estimate the fair value of WorkLLama included the following, among others:
•We tested the effectiveness of controls over management’s impairment evaluation, including those over management’s review of forecasts of future revenue and management’s review of their specialist’s fair value analysis.
•Due to the lack of operating history available for the equity method investment, we evaluated the reasonableness of management’s forecasts as follows:
◦Obtained an understanding of and performed audit procedures over management’s forecasting process, including the sources of information used, the underlying significant assumptions, and sensitivity to changes in these significant assumptions.
◦Compared the forecast to (1) internal communications to management and Board of Directors, (2) current year operating results, and (3) peer companies as well as information included in analyst and industry reports for the Company.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and assumptions used to determine the fair value of WorkLLama, such as the weighted-average cost of capital, by:
◦Testing the underlying source information and mathematical accuracy of the calculations.
◦Developing a range of independent estimates and comparing those to the assumptions used by management.
◦For the weighted-average cost of capital, we compared the amount used by management to the amounts associated with other companies with a similar risk profile, and
◦Evaluating the interaction between the weighted-average cost of capital and the forecasts to understand and sensitize management’s assumptions regarding risk inherent in the forecast.
/s/ Deloitte & Touche LLP
Tampa, Florida
We have served as the Company’s auditor since 2000.
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KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
Income from discontinued operations, net of tax — — 76,296
Other comprehensive (loss) income:
Defined benefit pension plans, net of tax 3,103 (1,706) (2,183)
Change in fair value of interest rate swap, net of tax 1,941 (1,191) (807)
Earnings per share - basic:
Discontinued operations — — 3.29
Earnings per share – basic $ 3.65 $ 2.67 $ 5.64
Earnings per share - diluted:
Discontinued operations — — 3.21
Earnings per share – diluted $ 3.54 $ 2.62 $ 5.50
The accompanying notes are an integral part of these consolidated financial statements.
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KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
ASSETS
Current assets:
Income tax refund receivable 3,010 44
Prepaid expenses and other current assets 6,790 6,989
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 81,408 $ 35,533
Current portion of operating lease liabilities 6,338 5,520
Other current liabilities 22 300
Commitments and contingencies (Note 18)
Stockholders’ equity:
Accumulated other comprehensive income (loss) 621 (4,423)
Total liabilities and stockholders’ equity $ 503,401 $ 479,049
The accompanying notes are an integral part of these consolidated financial statements.
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KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
Shares Amount Shares Amount
Reclassification of stranded tax effects (Note 1) — — — 168 (168) — — —
Stock-based compensation expense — — 11,007 — — — — 11,007
Defined benefit pension plan, no tax benefit — — — (2,183) — — — (2,183)
Stock-based compensation expense — — 11,595 — — — — 11,595
Defined benefit pension plan, no tax benefit — — — (1,706) — — — (1,706)
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Shares Amount Shares Amount
Stock-based compensation expense — — 13,999 — — — — 13,999
Defined benefit pension plan, no tax benefit — — — 3,103 — — — 3,103
The accompanying notes are an integral part of these consolidated financial statements.
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KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
Cash flows from operating activities:
Adjustments to reconcile net income to cash provided by operating activities:
Gain on sale of assets held for sale — — (79,318)
Deferred income tax provision, net 2,425 (2,298) (49)
Defined benefit pension plans expense 2,157 842 862
(Increase) decrease in operating assets
Increase (decrease) in operating liabilities
Cash flows from investing activities:
Cash flows from financing activities:
Payments on credit facility — — (86,900)
Payments of loan financing fees (1,058) — —
The accompanying notes are an integral part of these consolidated financial statements.
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YEARS ENDED DECEMBER 31,
Supplemental Disclosure of Cash Flow Information 2021 2020 2019
Cash paid during the year for:
Non-Cash Financing and Investing Transactions:
ROU assets obtained from operating leases $ 5,098 $ 5,695 $ 9205