KFRC US Equity☆

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. These risk factors are grouped by category, and are presented in order of their relative priority in each respective category.

Risks Related to Our Business

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 challenge 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 or terminate projects for which they utilize our services or reduce their use of consultants. In addition, an economic downturn or recession 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 and/or recessionary 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.

Significant declines in business or a loss of a significant client 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.

New business initiatives and strategic changes may divert management’s attention from normal business operations, which could have an adverse effect on our performance.

We expect to continue to make enhancements to our business and data intelligence as part of a multi-year effort to significantly upgrade our technology tools, including cloud-based platforms. We also expect to continue enhancing the quality of our revenue stream to focus on higher-value skill areas for our FA business, and investing in the growth of our managed teams and project solutions offerings. These improved capabilities are expected to help deliver exceptional service to our clients, consultants and candidates and improve the productivity of our associates and the scalability of our organization.

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 the expected return on the investment, experiencing difficulty in implementing initiatives, or diverting management’s attention from our other businesses. 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.

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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.

The staffing services market is highly competitive with limited barriers to entry. The competition among staffing and solutions firms is intense and we face significant competition in the markets we serve. We compete in national, regional and local markets with full-service and specialized temporary staffing and consulting companies. Additionally, the emergence and popularity of online staffing platforms as well as internal recruiting functions used by some clients as a low-cost alternative, may pose a competitive threat to our services. Some of our competitors possess substantially greater resources than we do and others may develop new and unique technologies, which may better position these competitors in certain markets. Accordingly, we may face increased competitive pricing pressures. We also face the risk that certain of our current and prospective clients will decide to provide similar services internally. Furthermore, many clients are retaining third parties to provide vendor management services, which may subject us to greater risks or lower margins.

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 given the scarcity of highly skilled consultants and candidates, 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 either in the workplaces of our clients or virtually. 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 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.

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 is that they may 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 the efforts, expertise and abilities of its leaders to drive the Firm’s strategic objectives and achieve future success. 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

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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.

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 customers, associates and consultants and their dependents. We are also continuously exposed to unauthorized attempts to compromise sensitive information from network or information technology used by our associates and consultants. Attacks on information technology systems continue to grow in frequency and sophistication. 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 security incidents, and, although we have not experienced a material data breach, we remain vulnerable to sophisticated techniques used to obtain unauthorized access, or cause system interruption, that change frequently and may not produce immediate signs of intrusion. As a result, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures. Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, misuse or theft of private or other sensitive information, or inadvertent acts by our associates or consultants, could result in the disclosure or misuse of confidential or proprietary information, and could adversely impact our systems, services, operations, financial results and reputation with clients and potential clients.

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.

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 our 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 location. Our corporate headquarters and data center are located in a hurricane-prone area. 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 certain third parties’ information technology processes on an annual basis. However, there can be no assurance that such parties will not experience cybersecurity incidents that could adversely affect our employees, consultants, customers and businesses, or that our audit or diligence processes will successfully deter or prevent such breach.

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.

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 changes 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.

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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, 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, provided a significant reduction in the corporate tax rate, but the current administration continues to scrutinize and could potentially modify key aspects of the tax code, which could materially affect our tax obligations and the 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.

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.

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 disparity among state and local laws that continues to accelerate, 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.

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

Kforce may be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the COVID-19 pandemic.

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 closures and/or initiatives to reduce costs or preserve cash, thereby decreasing demand for our services and/or adversely affecting our profitability and collectability of our accounts receivable.

The ultimate impact of COVID-19 on our operations and financial performance in future periods will depend on future COVID-19 related developments, including 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

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actions to prevent and manage disease spread, all of which continue to be uncertain. The outbreaks of diseases, including the ongoing COVID-19 pandemic, could negatively affect our business, financial position, results of operation, and/or cash flows in the future.

Increased scrutiny and changing expectations from stakeholders with respect to ESG practices and the impacts of climate change may result in additional costs or risks.

Companies across many industries are facing increasing scrutiny related to their ESG practices. Investor advocacy groups, certain institutional investors and other influential investors and regulators such as the SEC, among others, are increasingly focused on ESG practices and, in recent years, have placed increasing importance on the non-financial impacts of their investments. Furthermore, increased public awareness and concern regarding environmental risks, including global climate change, may result in increased public scrutiny of our business and our industry. If environmental laws or regulations, industry standards or client requirements are either changed or adopted and impose significant operational and compliance requirements on our operations, our business, results of operations, financial condition and competitive position could be negatively impacted. Additionally, uncharacteristic or significant weather conditions may increase in frequency or severity due to climate change and can affect travel and the ability of businesses to remain open, which could lead to decreased ability to offer our services and negatively affect our results of operations.

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.

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 terms 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.

Our business could be negatively affected as a result of actions of activist shareholders.

We may be subject, from time to time, to legal and business challenges in the operation of our company due to actions instituted by activist shareholders or others. Responding to such actions could be costly and time-consuming, may not align with our business strategies and could divert the attention of the Board and management from the pursuit of our business strategies. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the perception of a change in the direction of the business or other instability and may affect our relationships with vendors, customers, prospective and current employees and consultants, and others.

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.

Kforce may maintain levels of 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

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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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

As of December 31, 2022, we leased approximately 169,000 square feet of total office space in 34 offices located throughout the U.S. The lease terms range from two to eleven years, although a limited number of leases contain short-term renewal provisions that range from month-to-month to one year.

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 17 - "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 22, 2023, there were 145 holders of record.

Purchases of Equity Securities by the Issuer

In February 2023, the Board approved an increase in our stock repurchase authorization, bringing the total authorization from $41.3 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, 2022:

(1) Includes 4,944 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period October 1, 2022 to October 31, 2022.

(2) Includes 1,547 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2022 to November 30, 2022.

(3) Includes 130,627 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2022 to December 31, 2022.

ITEM 6. RESERVED.

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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.

EXECUTIVE SUMMARY

The following is an executive summary of what Kforce believes are highlights for 2022, 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, 2022, increased 7.9%, per billing day, to $1.7 billion in 2022 from $1.6 billion in 2021. Revenue per billing day increased 17.9% in our Technology business and decreased 33.9% in our FA business, which was impacted by the expected run-off in the COVID-19 project-related business and repositioning efforts.

•Flex revenue increased 7.6%, per billing day, to $1.65 billion in 2022 from $1.53 billion in 2021. Flex revenue increased 17.8%, per billing day, for Technology and decreased 37.8%, per billing day, for FA. Excluding revenues from the COVID-19 project-related business for both periods, our FA Flex business would have declined 16.7% in 2022 on a year-over-year, billing day basis primarily as a result of our repositioning efforts.

•While our growth rates slowed in the second half of 2022 given the macro-economic uncertainties, our Technology business carried momentum into the fourth quarter of 2022 as evidenced by 8% growth on a year-over-year billing day basis.

•Direct Hire revenue, per billing day, increased 16.7% to $58.3 million in 2022 from $49.8 million in 2021. Revenue in this more cyclically sensitive business was down 19.4% in the fourth quarter of 2022 on a year-over-year basis.

•Gross profit margin increased 40 basis points to 29.3% in 2022 from 28.9% in 2021, primarily as a result of an increased mix of Direct Hire revenue and increased margins in our FA business. Flex gross profit margin increased 20 basis points to 26.8% for 2022 from 26.6% in 2021. Flex gross profit margin was flat for Technology and increased 230 basis points for FA in 2022 over 2021.

•Selling, General and Administrative (“SG&A”) expenses as a percentage of revenue for the year ended December 31, 2022, increased to 22.2% from 21.9% in 2021. The increase is primarily driven by a provision for the note receivable from our joint venture recognized in the fourth quarter of 2022 and a gain on the sale of our corporate headquarters in 2021.

•Net income for the year ended December 31, 2022, increased to $75.4 million, or $3.68 per share, from $75.2 million, or $3.54 per share, in 2021. The impairment charge and provision for the note receivable from our joint venture negatively impacted earnings per share in 2022 by $0.57. Excluding this impact, earnings per share improved approximately 20% in 2022 on a year-over-year basis.

•The Firm returned $91.6 million of capital to our shareholders in the form of open market repurchases totaling $67.6 million, or 1.1 million shares, and quarterly dividends totaling $24.0 million during the year ended December 31, 2022. The total capital returned to shareholders in 2022 represented approximately 100% of operating cash flows.

•Net debt was $25.5 million as of December 31, 2022, as compared to $3.0 million as of December 31, 2021.

•Cash provided by operating activities was $90.8 million during the year ended December 31, 2022, as compared to $72.9 million for 2021. This increase is primarily driven by the strength in our accounts receivable portfolio and improved profitability levels, partially offset by payments for deferred payroll taxes as a result of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) of approximately $19 million and final payments under our terminated Supplemental Executive Retirement Plan (“SERP”) of approximately $20 million.

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RESULTS OF OPERATIONS

Certain discussions of the changes in our results of operations from the year ended December 31, 2021, as compared to the year ended December 31, 2020, have been omitted from this Form 10-K, and 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, 2021, filed with the SEC on February 25, 2022.

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 22.2 % 21.9 % 22.2 %

Depreciation and amortization 0.3 % 0.3 % 0.4 %

Income from operations 6.8 % 6.7 % 5.7 %

Income from operations, before income taxes 6.0 % 6.3 % 5.4 %

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

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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.

Flex revenue for our Technology business increased 17.8% per billing day, during the year ended December 31, 2022, as compared to the same period in 2021. The increase was driven principally by a combination of significant growth in the number of consultants on assignment and higher average bill rates. Given the inflationary pressures on wages and scarcity of highly-skilled technology consultants, we have continued to experience a meaningful acceleration in average bill rates, which increased 1.7% sequentially in the fourth quarter of 2022. We believe that the growth in consultants on assignment was fueled by strong secular drivers of demand, the strength of our client portfolio, our concentration in highly-skilled technology talent, and solid execution. While we may be susceptible to short-term disruption with specific clients or industry-specific dynamics as a result of the macro-economic environment, we believe that we are positioned well to achieve our long-term growth ambitions. We expect first quarter 2023 Technology Flex revenue to grow in the low to mid-single digits year-over year.

Our FA business experienced a decrease in Flex revenue of 37.8%, per billing day, during the year ended December 31, 2022, as compared to the same period in 2021, primarily driven by the expected run-off of the COVID-related project business. Excluding the COVID-related business in 2021, FA Flex revenues declined 16.7% in 2022, per billing day, primarily as a result of our repositioning effort towards more highly-skilled roles. We expect first quarter 2023 FA Flex revenue to be down in the mid 20% range year-over year.

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 increased 16.7% per billing day, during the year ended December 31, 2022, as compared to the same period in 2021, primarily driven by a significant increase in both placement fees and the number of placements. There has, however, been a moderation in the performance of this more cyclically sensitive business in the second half of 2022 given the macro-economic concerns. We expect Direct Hire revenue to decline in the first quarter of 2023 on a year-over-year basis by approximately 30%.

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.

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The following table presents the gross profit as a percentage of total revenue (“gross profit percentage”) for each segment and percentage change over the prior period for the years ended December 31:

Total gross profit percentage increased 40 basis points for the year ended December 31, 2022, as compared to the same period in 2021, primarily as a result of an increased mix of Direct Hire revenue and the expected run-off of the COVID-19 related business, which had a lower margin profile.

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 26.8 % 0.8 % 26.6 % — % 26.6 %

Our Flex gross profit percentage for the year ended December 31, 2022, as compared to the same period in 2021, increased 20 basis points. 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 typically carries a higher margin profile, has offset any spread compression in the remainder of our Technology business.

FA Flex gross profit margins increased 230 basis points for the year ended December 31, 2022, as compared to the same period in 2021, primarily due to the expected run-off of the lower margin COVID-19 related business and our repositioning efforts.

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

SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 84.1%, 85.4% and 83.0% of SG&A for the years ended December 31, 2022, 2021 and 2020, respectively. Commissions and 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 credit loss expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.

SG&A as a percentage of revenue increased 30 basis points for the year ended December 31, 2022, as compared to the same period in 2021, mostly driven by a $1.9 million reserve related to the note receivable issued to our joint venture and a $2.0 million gain on the sale of our previous corporate headquarters in 2021.

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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):

Other Expense, Net. Other expense, net was $14.4 million in 2022, $7.4 million in 2021 and $5.0 million in 2020. Other expense, net consists of our proportionate share of losses for our joint venture and interest expense related to outstanding borrowings under our credit facility.

During the years ended December 31, 2022, 2021 and 2020, we recognized $3.8 million, $2.5 million, and $1.7 million, respectively, related to our share of losses related to our equity method investment. During the year ended December 31, 2022, Other expense, net also includes an impairment charge of $13.7 million for our 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, for a more detailed discussion on the impairment of our equity method investment.

During the year ended December 31, 2022, Other expense, net also includes a $4.1 million gain recognized as a result of the termination of an interest rate swap agreement in May 2022. Refer to Note 14 - “Derivative Instrument and Hedging Activity” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data, for a complete discussion of the interest rate swap derivative instruments.

During the year ended December 31, 2021, Other expense, net includes $1.8 million expense related to the termination of our SERP in 2021. Refer to Note 12 - “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.

Income Tax Expense. Income tax expense as a percentage of income from operations, before income taxes (our “effective tax rate”) for the years ended December 31, 2022, 2021 and 2020 were 26.4%, 24.3% and 25.5%, respectively. The 2022 effective tax rate was unfavorably impacted by a lower work opportunity tax credit and a lower tax benefit from the vesting of restricted stock in 2022, as compared to 2021.

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.

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The following table presents Free Cash Flow (in thousands):

YEARS ENDED DECEMBER 31,

Note receivable issued to our joint venture (6,750) — —

Cash proceeds received from Company-owned life insurance 1,077 — —

Net proceeds from the sale of assets held for sale — 23,742 3,548

Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, is defined by Kforce as net income before depreciation and amortization, stock-based compensation expense, interest expense, net, income tax expense, loss from equity method investment, gain from Swap termination, reserve associated with the note receivable issued to our joint venture, impairment of equity method investment, gain on the sale of the corporate headquarters, legal settlement expense and SERP termination expense. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations and management believes it provides a good metric of our core profitability in comparing our performance to our competitors, as well as our performance over different time periods. Consequently, management believes it is useful information to investors. The measure should not be considered in isolation or as an alternative to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is thus susceptible to varying calculations. Also, Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

In addition, although we excluded amortization of stock-based compensation expense because it is a non-cash expense, we expect to continue to incur stock-based compensation in the future and the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our shareholder ownership interest. We suggest that you evaluate these items and the potential risks of excluding such items when analyzing our financial position.

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The following table presents Adjusted EBITDA and includes a reconciliation of net income to Adjusted EBITDA (in thousands):

YEARS ENDED DECEMBER 31,

Gain from termination of interest rate swap (4,059) — —

Reserve associated with note receivable issued to our joint venture 1,925 — —

Impairment of equity method investment 13,684 — —

Gain on sale of corporate headquarters — (2,051) —

Legal settlement expense — 3,350 —

SERP termination expense — 1,821 —

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, 2022 and 2021, we had $0.1 million and $97.0 million, respectively, in cash and cash equivalents, which consisted primarily of government money market funds. At December 31, 2022, Kforce had $146.3 million in working capital compared to $211.7 million at December 31, 2021.

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 for potential 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,

Operating Activities

Cash provided by operating activities was $90.8 million during the year ended December 31, 2022, as compared to $72.9 million during the year ended December 31, 2021. 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. Cash provided by operating activities during the year ended December 31, 2022, includes the payment of $20.0 million for amounts owed to two participants under the terminated SERP and the payment of approximately $19.3 million in deferred payroll taxes as a result of the application of the CARES Act. The year-over-year increase in cash provided by operating activities was primarily driven by strong collections of accounts receivable, improved profitability levels, proceeds from the termination of our interest rate swap, and continued management of working capital. This is partially offset by payments for deferred payroll taxes under the CARES Act.

Investing Activities

Cash used in investing activities was $14.3 million during the year ended December 31, 2022, and primarily consisted of cash used for capital expenditures of $8.1 million and the issuance of secured promissory notes to our joint venture totaling $6.8 million. Cash provided by investing activities of $8.3 million during the year ended December 31, 2021 primarily included $23.7 million in net proceeds from the sale of our corporate headquarters, partially offset by cash used for capital expenditures and capital contributions to our joint venture. We expect to continue selectively investing in our infrastructure, primarily focusing on implementing new and upgrading existing technologies that we expect will help deliver exceptional service to our clients, consultants, and candidates and improve productivity of our associates and the scalability of our organization.

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Financing Activities

Cash used in financing activities was $173.4 million during the year ended December 31, 2022, as compared to $87.7 million during the year ended December 31, 2021. The change was primarily driven by $74.4 million of net payments on our credit facility, which includes payments of $112.6 million and draw downs of $38.2 million, as well as an overall increase in repurchases of common stock and dividend payments.

The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):

Total cash flow impact of common stock repurchases $ 74,913 $ 66,210 $ 35,613

Cash paid in current year for settlement of prior year repurchases $ 181 $ — $ —

During the years ended December 31, 2022, 2021 and 2020, Kforce declared and paid dividends of $24.0 million ($1.20 per share), $20.1 million ($0.98 per share) and $16.8 million ($0.80 per share), respectively.

On February 3, 2023, Kforce’s Board approved a 20% annual increase to the Company's dividend from $1.20 per share to $1.44 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 13 - “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, 2022, $25.6 million was outstanding and $173.1 million, subject to certain covenants, was available.

In April 2017 and March 2020, Kforce entered into two forward-starting interest rate swap agreements to mitigate the risk of rising interest rates. As of December 31, 2022, the Firm did not have any outstanding interest rate swap derivative instruments. Refer to Note 14 - “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 our interest rate swaps.

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 $

On February 3, 2023, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million. As of December 31, 2022, $41.3 million remained available for further repurchases under the Board-authorized common stock repurchase program.

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, 2022, our outstanding debt balance was $25.6 million. Total payments, however, are inherently uncertain as the Interest rates related to this outstanding balance are variable and the outstanding borrowings that will occur over the remaining term of the credit facility is unknown. Refer to Note 13 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data for further detail of our credit facility.

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•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, 2022, the amount of our obligation under these plans was $40.5 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 a covered employee retires, terminates, or schedules a distribution.

•Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2022, the value of our non-cancellable unconditional purchase obligations was $21.9 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, 2022, our liability would be approximately $40.3 million for terminations related to a change in control and $17.3 million related to terminations in the absence of cause. Refer to Note 17 - “Commitments and Contingencies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data 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, 2022, the value of our obligations under operating leases was $22.8 million. Refer to Note 11 - “Operating Leases” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data for additional information regarding our lease obligations and the timing of expected future payments, including a five-year maturity schedule.

Off-Balance Sheet Arrangements

Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2022, Kforce had letters of credit outstanding for operating lease and insurance coverage deposits totaling $1.3 million.

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 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

We entered into a joint venture with WorkLLama in June 2019 and contributed $22.5 million in equity capital from inception through December 31, 2022.

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 the investment is generally based on the income approach and/or market approach or another acceptable fair value method. For the income approach, we utilize estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilized market multiples of revenue and earnings derived from comparable publicly-traded companies. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples.

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For the year ended December 31, 2022, we recognized an impairment charge of $13.7 million, which was recorded in Other Expense, net, on the accompanying Consolidated Statements of Operations and Comprehensive Income.

Refer to Note 1 – “Summary of Significant Accounting Policies” and Note 15 - “Fair Value Measurements” 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 and our impairment analysis.

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, 2022, would have impacted our net income by approximately $0.1 million in 2022.

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 2022.

Refer to Note 6 – “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, 2022.

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 8 – “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.

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, 2022, would have impacted our net income by approximately $0.3 million in 2022.

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.

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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, 2022, we had $25.6 million outstanding under our credit facility. A hypothetical 10% increase in interest rates in effect at December 31, 2022 would increase Kforce’s annual interest expense by less than $0.2 million. Refer to Note 13 - “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.

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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 (the "Company") as of December 31, 2022 and 2021, 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, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 Inc. entered into a joint venture whereby Kforce Inc. 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 considered a critical accounting estimate and changes in the assumptions used could have a significant impact on either the fair value, the amount of any impairment charge, or both. An

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other-than-temporary impairment related to the equity method investment of $13.7 million was recorded in other expense, net, in the statement of operations and comprehensive income for the year December 31, 2022, resulting in a complete write off of the investment.

We identified the other-than-temporary impairment assessment and related impairment for the Company's equity method investment in WorkLLama as a critical audit matter. A high degree of subjective auditor judgment and an increased extent of effort was required throughout the audit to evaluate management's assessment related to the financial condition and near-term prospects of the investee, including the Company's intent to the hold the investment until recovery. Consideration of management’s assessment to determine fair value included evaluating factors that a market participant would use to measure fair value in consideration of the circumstances.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the other-than-temporary impairment assessment and associated impairment of the Company’s equity method investment in WorkLLama included the following, among others:

•We performed risk assessment procedures which included procedures to understand and assess the reasonableness of WorkLLama projections and involved a fair value specialist to assist in evaluating the fair value assumptions.

•We tested the operating effectiveness of the controls over the Company's process to evaluate if other-than-temporary impairment indicators exist for its equity method investment in WorkLLama, as well as to evaluate the considerations used to determine the fair value of the investment.

•We evaluated the reasonableness of management's assessment related to the Company's intent to the hold the investment until recovery.

•We evaluated the valuation techniques and relevant inputs to determine the fair value of the investee. This included involvement of our fair value specialists to evaluate the appropriateness of the methodology used in consideration of the circumstances and the sufficiency of data and the relevant observable inputs available to measure fair value.

/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,

Other comprehensive (loss) income:

Defined benefit pension plans, net of tax — 3,103 (1,706)

Change in fair value of interest rate swap, net of tax (615) 1,941 (1,191)

Earnings per share:

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, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31,

ASSETS

Current assets:

Income tax refund receivable 35 3,010

Prepaid expenses and other current assets 8,108 6,790

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and other accrued liabilities $ 72,792 $ 81,408

Current portion of operating lease liabilities 4,576 6,338

Commitments and Contingencies (Note 17)

Stockholders’ equity:

Accumulated other comprehensive income 6 621

Total liabilities and stockholders’ equity $ 392,004 $ 503,401

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

Adoption of new accounting standard, net of tax of $75 — — — — (214) — — (214)

Stock-based compensation expense — — 11,595 — — — — 11,595

Defined benefit pension plan, no tax benefit — — — (1,706) — — — (1,706)

Stock-based compensation expense — — 13,999 — — — — 13,999

Defined benefit pension plan, no tax benefit — — — 3,103 — — — 3,103

Stock-based compensation expense — — 17,655 — — — — 17,655

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:

Reserve related to note receivable 1,925 — —

Impairment of equity method investment 13,684 — —

Loss (gain) on disposal or impairment of assets 191 (1,929) 1,822

Defined benefit pension plans expense — 2,157 842

(Increase) decrease in operating assets

Increase (decrease) in operating liabilities

Payment of benefit under terminated pension plan (19,965) — —

Cash flows from investing activities:

Note receivable issued to our joint venture (6,750) — —

Cash proceeds received from Company-owned life insurance 1,077 — —

Net proceeds from the sale of assets held for sale — 23,742 3,548

Cash (used in) provided by investing activities (14,282) 8,301 (6,927)

Cash flows from financing activities:

Payments on credit facility (112,600) — —

Payments on other financing arrangements (51) (1,366) (1,177)

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 2022 2021 2020

Cash paid during the year for:

Non-Cash Financing and Investing Transactions:

ROU assets obtained from operating leases $ 9,997 $ 5,098 $ 5,695

Unsettled repurchases of common stock 974 181 —

The accompanying notes are an integral part of these consolidated financial statements.

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KFORCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) and the rules of the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation

The consolidated financial statements include the accounts of Kforce Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “Kforce,” the "Company,” “we,” the "Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context indicates otherwise.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical of these estimates and assumptions relate to the following: allowance for credit losses; income taxes; self-insured liabilities for workers’ compensation and health insurance; obligations for the pension plan; and the impairment of goodwill, other long-lived assets and the equity method investment. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Revenue Recognition

All of our revenue and trade receivables are generated from contracts with customers and our revenues are derived from U.S. domestic operations.

Revenue is recognized when control of the promised services is transferred to our customers at an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities.

For substantially all of our revenue transactions, we have determined that the gross reporting of revenues as a principal, versus net as an agent, is the appropriate accounting treatment because Kforce: (i) is primarily responsible for fulfilling the promise to provide the specified service to the customer; (ii) has discretion in selecting and assigning the temporary workers to particular jobs and establishing the bill rate; and (iii) bears the risk and rewards of the transaction, including credit risk if the customer fails to pay for services performed.

Flex Revenue

Substantially all of our Flex revenue is recognized over time as temporary staffing services and managed solutions are provided by our consultants at the contractually established bill rates, net of applicable variable consideration, such as customer rebates and discounts. Reimbursements of travel and out-of-pocket expenses ("billable expenses") are also recorded within Flex revenue when incurred and the equivalent amount of expense is recorded in Direct costs in the Consolidated Statements of Operations and Comprehensive Income. We recognize revenue in the amount of consideration to which we have the right to invoice when it corresponds directly to the services transferred to the customer satisfied over time. A relatively insignificant portion of our Flex revenue is outcome-based, as specified in our contractual arrangements with our clients. These arrangements are managed principally on a time and materials basis, but do involve an element of financial risk and is monitored by the Company.

Direct Hire Revenue

Direct Hire revenue is recognized at the agreed upon rate at the point in time when the performance obligation is considered complete. Our policy requires the following criteria to be met in order for the performance obligation to be considered complete: (i) the candidate accepted the position; (ii) the candidate resigned from their current employer; and (iii) the agreed upon start date falls within the following month. Because the client has accepted the candidate and can direct the use of and obtains the significant risk and rewards of the placement, we consider this point as the transfer of control to our client.

Variable Consideration

Transaction prices for Flex revenue include variable consideration. Management evaluates the facts and circumstances of each contract to estimate the variable consideration using the most likely amount method which utilizes management’s expectation of the volume of services to be provided over the applicable period.

Direct Hire revenue is recorded net of a fallout reserve. Direct Hire fallouts occur when a candidate does not remain employed with the client through the respective contingency period (typically 90 days or less). Management uses the expected value method to estimate the fallout reserve based on a combination of past experience and current trends.

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Payment Terms

Our payment terms and conditions vary by arrangement. The vast majority of our terms are typically less than 90 days, however, we have extended our payment terms beyond 90 days for certain of our customers. Generally, the timing between the satisfaction of the performance obligation and the payment is not significant and we do not currently have any significant financing components.

Unsatisfied Performance Obligations

We do not disclose the value of unsatisfied performance obligations for contracts if either the original expected length is one year or less or if revenue is recognized at the amount to which we have the right to invoice for services performed.

Contract Balances

We record accounts receivable when our right to consideration becomes unconditional and services have been performed. Other than our trade receivable balance, we do not have any material contract assets as of December 31, 2022 and 2021.

We record a contract liability when we receive consideration from a customer prior to transferring services to the customer. We recognize the contract liability as revenue after we have transferred control of the goods or services to the customer. Contract liabilities are recorded within Accounts payable and other accrued liabilities if expected to be recognized in less than one year and Other long-term liabilities, if over one year, in the Consolidated Balance Sheets. We do not have any material contract liabilities as of December 31, 2022 and 2021.

Cost of Services

Direct costs are composed of all related costs of employment for consultants, including compensation, payroll taxes, certain fringe benefits and subcontractor costs. Direct costs exclude depreciation and amortization expense, which is presented on a separate line in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Associate and field management compensation, payroll taxes and fringe benefits are included in SG&A along with other customary costs such as administrative and corporate costs.

Commissions

Our associates make placements and earn commissions as a percentage of revenue or gross profit pursuant to a commission plan. The amount of associate commissions paid increases as volume increases. Commissions are accrued at an amount equal to the percent of total expected commissions payable to total revenue or gross profit for the commission-plan period, as applicable. We generally expense sales commissions and any other incremental costs of obtaining a contract as incurred because the amortization period is typically less than one year.

Stock-Based Compensation

Stock-based compensation is measured using the grant-date fair value of the award of equity instruments. The expense is recognized over the requisite service period and forfeitures are recognized as incurred and is reflected in SG&A in the accompanying Consolidated Statements of Operations and Comprehensive Income. Excess tax benefits or deficiencies of deductions attributable to employees’ vesting of restricted stock are reflected in Income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Income Taxes

Income taxes are recorded using the asset and liability approach for deferred tax assets and liabilities and the expected future tax consequences of differences between carrying amounts and the tax basis of assets and liabilities. A valuation allowance is recorded unless it is more likely than not that the deferred tax asset can be utilized to offset future taxes.

Management evaluates tax positions taken or expected to be taken in our tax returns and records a liability (including interest and penalties) for uncertain tax positions. We recognize tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. The Company recognizes interest and penalties related to uncertain tax positions in Income tax expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Cash and Cash Equivalents

All highly liquid investments with original maturity dates of three months or less at the time of purchase are classified as cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value because of the short-term nature of these instruments. Our cash equivalents are held in government money market funds and at times may exceed federally insured limits.

Trade Receivables and Related Reserves

Trade receivables are recorded net of allowance for credit losses. The allowance for credit losses is determined using the application of a current expected credit loss model, which measures expected credit losses based on relevant information, including historical experience, current conditions and reasonable and supportable forecasts. Trade receivables are written off after all reasonable collection efforts have been exhausted. Trade accounts receivable reserves as a percentage of gross trade receivables was less than 1% at both December 31, 2022 and 2021.

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Fixed Assets

Fixed assets are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the expected terms of the related leases. Upon sale or disposition of our fixed assets, the cost and accumulated depreciation are removed and any resulting gain or loss, net of proceeds, is reflected within SG&A in the Consolidated Statements of Operations and Comprehensive Income.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If an analysis indicates the carrying amount of these long-lived assets exceeds the fair value, an impairment loss is recognized to reduce the carrying amount to its fair market value, as determined based on the present value of projected future cash flows.

Goodwill

Management has determined that the reporting units for the goodwill analysis is consistent with our reporting segments. We evaluate goodwill for impairment either through a qualitative or quantitative approach annually, or more frequently if an event occurs or circumstances change that indicate the carrying value of a reporting unit may not be recoverable. If we perform a quantitative assessment that indicates the carrying amount of a reporting unit exceeds its fair market value, an impairment loss is recognized to reduce the carrying amount to its fair market value. Kforce determines the fair market value of each reporting unit based on a weighting of the present value of projected future cash flows (the “income approach”) and the use of comparative market approaches (“market approach”). Factors requiring significant judgment include, among others, the assumptions related to discount rates, forecasted operating results, long-term growth rates, the determination of comparable companies and market multiples. Changes in economic and operating conditions or changes in Kforce’s business strategies that occur after the annual impairment analysis may impact these assumptions and result in a future goodwill impairment charge, which could be material to our consolidated financial statements.

Equity Method Investment and Note Receivable

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. Under the equity method, our carrying value included equity capital contributions, adjusted for our proportionate share of earnings or losses. During the years ended December 31, 2022 and 2021, we contributed $0.5 million and $9.0 million of equity capital contributions to our joint venture, respectively. We recorded a loss related to our equity method investment of $3.8 million and $2.5 million during the years ended December 31, 2022 and 2021, respectively.

During the year ended December 31, 2022, Kforce executed a series of promissory notes (the “Note Receivable”) to our joint venture for up to $7.5 million, with 7% annual interest, and principal and accrued interest payable due in a lump sum in June 2025, which is secured by all of the assets of the joint venture. The amount funded to our joint venture under the Note Receivable was $6.8 million as of December 31, 2022. There have been no payments received on the Note Receivable during the year ended December 31, 2022.

In December 2022, WorkLLama executed a letter of intent (“LOI”) with an independent third party whereby the third party would acquire WorkLLama and settle the outstanding debt, or a portion thereof, owed by WorkLLama to Kforce.

Based on the financial terms of the LOI and the seniority of the Note Receivable taking precedence, management determined that the equity method investment had an other than temporary impairment as of December 31, 2022, and we recognized an impairment loss of the full balance of the equity method investment of $13.7 million, which was recorded in Other Expense, net in the Consolidated Statements of Operations and Comprehensive Income. The balance of the equity method investment is nil and $17.0 million at December 31, 2022 and 2021, respectively, and was included in Other assets, net in the Consolidated Balance Sheet at December 31, 2021. Refer to Note 15 - “Fair Value Measurements” for more details on the impairment analysis of our equity method investment.

In addition, based on the proceeds expected upon the sale of our joint venture, as well as the associated legal, transaction and other costs, we assessed the collectability of the Note Receivable and recorded a credit loss on the Note Receivable of $1.9 million, which was recorded in SG&A in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2022. The balance of the Note Receivable, net was $4.8 million and was included in Other assets, net in the Consolidated Balance Sheet at December 31, 2022.

On February 23, 2023, Kforce sold it’s 50% noncontrolling interest in WorkLLama to an unaffiliated third party. The net proceeds from this transaction settle the outstanding balance of the Note Receivable owed by WorkLLama to Kforce. Any gain as a result of this transaction is expected to be immaterial. Kforce will not have continuing involvement in the operations of WorkLLama other than as a customer of WorkLLama’s SaaS talent community platform.

Operating Leases

Kforce leases property for our field offices and corporate headquarters as well as certain office equipment, which limits our exposure to risks related to ownership. We determine if a contract or arrangement meets the definition of a lease at inception. We elected not to separate lease and non-lease components when determining the consideration in the contract. Right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of the lease payments over the lease term at the commencement date. If there is no rate implicit in the lease, we use our incremental borrowing rate in the present value

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calculation, which is based on our collateralized borrowing rate and determined based on the terms of our leases and the economic environment in which they exist. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.

ROU assets for operating leases, net of amortization, are recorded within Other assets, net and operating lease liabilities are recorded within current liabilities if expected to be recognized in less than one year and in Other long-term liabilities, if over one year, in the Consolidated Balance Sheets. Operating lease additions are non-cash transactions and the amortization of the ROU assets is reflected as Noncash lease expense within operating activities in the Consolidated Statement of Cash Flows.

Our lease terms range from two to eleven years with a limited number of leases contain short-term renewal provisions that range from month-to-month to one year and some containing options to renew or terminate.

We elected the short-term practical expedient for leases with an initial term of 12 months or less and do not recognize ROU assets or lease liabilities for these short-term leases.

In addition to base rent, certain of our operating leases require variable payments of property taxes, insurance and common area maintenance. These variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred.

Capitalized Software

Kforce purchases, develops and implements software to enhance the performance of our technology infrastructure. Direct internal costs, such as payroll and payroll-related costs, and external costs incurred during the development stage are capitalized and classified as capitalized software. Capitalized software development costs and the associated accumulated amortization are included in Other assets, net in the accompanying Consolidated Balance Sheets. Amortization expense is computed using the straight-line method over the estimated useful lives of the software, which range from one to ten years. Amortization expense of capitalized software during the years ended December 31, 2022, 2021 and 2020 was $1.8 million, $1.7 million and $1.1 million, respectively.

Health Insurance

Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss for each health insurance plan participant up to $600 thousand in claims annually. Additionally, for all claim amounts exceeding $600 thousand, Kforce retains the risk of loss up to an annual aggregate loss of those claims of $200 thousand. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and incurred but not reported claims, which are primarily based upon an evaluation of historical claims experience, actuarially-determined completion factors and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.

Legal Costs

Legal costs incurred in connection with loss contingencies are expensed as incurred.

Earnings per Share

Basic earnings per share is computed as net income divided by the weighted-average number of common shares outstanding (“WASO”) during the period. WASO excludes unvested shares of restricted stock. Diluted earnings per share is computed by dividing net income by diluted WASO. Diluted WASO includes the dilutive effect of unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.

For the years ended December 31, 2022, 2021 and 2020, there were 449 thousand, 633 thousand and 412 thousand common stock equivalents, respectively, included in the diluted WASO. For the years ended December 31, 2022, 2021 and 2020, there were 292 thousand, 9 thousand and 249 thousand, respectively, of anti-dilutive common stock equivalents.

Treasury Stock

The Board may authorize share repurchases of our common stock. Shares repurchased under Board authorizations are held in treasury for general corporate purposes. Treasury shares are accounted for under the cost method and reported as a reduction of stockholders’ equity in the accompanying consolidated financial statements.

Derivative Instrument

Our interest rate swap derivative instruments were designated as cash flow hedges and recorded at fair value on the Consolidated Balance Sheets. The effective portion of the gain or loss on the derivative instruments are recorded as a component of Accumulated other comprehensive income, net of tax, and reclassified into earnings when the hedged items affect earnings and into the line item of the hedged item. Any ineffective portion of the gain or loss is recognized immediately into Other expense, net on the Consolidated Statements of Operations and Comprehensive Income. Cash flows from the derivative instrument are classified in the Consolidated Statements of Cash Flows in the same category as the hedged item. As of December 31, 2022, the Firm did not have any outstanding interest rate swap derivative instruments.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

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The fair value hierarchy uses a framework which requires categorizing assets and liabilities into one of three levels based on the inputs used in valuing the asset or liability.

Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Certain assets, in specific circumstances, are measured at fair value on a non-recurring basis utilizing Level 3 inputs such as goodwill, other long-lived assets and the equity method investment. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets were determined to be impaired.

The carrying values of cash and cash equivalents, trade receivables, other current assets and accounts payable and other accrued liabilities approximate fair value because of the short-term nature of these instruments.

New Accounting Standards

Recently Issued Accounting Standards Not Yet Adopted

In March 2020, the FASB issued guidance for reference rate reform, which provided temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. We adopted this guidance effective January 1, 2020. The FASB has since issued subsequent updates to the initial guidance. In December 2022, the FASB issued subsequent guidance for reference rate reform, which extends the final sunset date from December 31, 2022 to December 31, 2024. We are currently evaluating the potential impact of adopting this standard, but do not expect it to have a material impact on our consolidated financial statements.

2. Reportable Segments

Kforce’s reportable segments are Technology and FA. Historically, and for the year ended December 31, 2022, Kforce has generated only sales and gross profit information on a segment basis. We do not report total assets or income from continuing operations separately by segment as our operations are largely combined.

The following table provides information concerning the operations of our segments for the years ended December 31 (in thousands):

Technology FA Total

Operating and other expenses 398,665

Income from operations, before income taxes $ 102,442

Operating and other expenses 357,597

Income from operations, before income taxes $ 99,267

Operating and other expenses 321,012

Income from operations, before income taxes $ 75,212

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3. Disaggregation of Revenue

The following table provides information about disaggregated revenue by segment and revenue type for the years ended December 31 (in thousands):

Technology FA Total

4. Allowance for Credit Losses

The allowance for credit losses on trade receivables is determined by estimating and recognizing lifetime expected losses, rather than incurred losses, which results in the earlier recognition of credit losses even if the expected risk of credit loss is remote. As part of our analysis, we apply credit loss rates to outstanding receivables by aging category. For certain clients, we perform a quarterly credit review, which considers the client’s credit rating and financial position as well as our total credit loss exposure. Trade receivables are written off after all reasonable collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received and are immaterial for the year ended December 31, 2022.

The following table presents the activity within the allowance for credit losses on trade receivables for the years ended December 31, 2022 and 2021 (in thousands):

Allowance for credit losses, January 1, 2021 $ 2,757

Current period provision 11

Allowance for credit losses, December 31, 2021 1,729

Current period provision (126)

Allowance for credit losses, December 31, 2022 $ 1,006

The allowances on trade receivables presented in the Consolidated Balance Sheets include $0.6 million for reserves unrelated to credit losses at December 31, 2022 and 2021.

5. Fixed Assets, Net

The following table presents major classifications of fixed assets and related useful lives (in thousands, except useful lives):

DECEMBER 31,

Depreciation expense was $2.7 million, $2.8 million and $4.1 million during the years ended December 31, 2022, 2021 and 2020, respectively.

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6. Income Taxes

The provision for income taxes consists of the following (in thousands):

YEARS ENDED DECEMBER 31,

Current tax expense:

The provision for income taxes shown above varied from the statutory federal income tax rate for those periods as follows:

YEARS ENDED DECEMBER 31,

State income taxes, net of Federal tax effect 5.4 5.0 5.3

Non-deductible compensation and meals and entertainment 2.5 2.2 1.4

Tax benefit from restricted stock vesting (1.0) (2.6) (1.5)

The 2022 effective tax rate was unfavorably impacted by a lower Work Opportunity Tax Credit (“WOTC”) and a lower tax benefit from the vesting of restricted stock in 2022, as compared with 2021. The 2021 effective rate was favorably impacted by a higher WOTC and a greater tax benefit from the vesting of restricted stock in 2021, as compared with 2020. These were offset by greater non-deductible compensation to certain executive officers pursuant to IRS Code Section 162(m).

Deferred tax assets and liabilities are composed of the following (in thousands):

DECEMBER 31,

Deferred tax assets:

Accounts receivable reserves $ 901 $ 604

Deferred compensation obligation 6,521 5,702

Stock-based compensation 902 715

Pension and post-retirement benefit plans — 2,929

Deferred payroll taxes — 4,965

Deferred tax liabilities:

ROU assets for operating leases (4,397) (3,965)

Partnership basis difference 46 (2,966)

Valuation allowance — —

Total Deferred tax assets, net $ 4,786 $ 7,657

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In evaluating the realizability of Kforce’s deferred tax assets, management assesses whether it is more likely than not that some portion, or all, of the deferred tax assets, will be realized. Management considers, among other things, the ability to generate future taxable income (including reversals of deferred tax liabilities) during the periods in which the related temporary differences will become deductible.

Kforce is periodically subject to IRS audits, as well as state and other local income tax audits for various tax years. Although Kforce has not experienced any material liabilities in the past due to income tax audits, Kforce can make no assurances concerning any future income tax audits.

Kforce and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, Kforce is no longer subject to federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2019.

7. Other Assets, Net

Other assets, net consisted of the following (in thousands):

DECEMBER 31,

Note Receivable, net (3) 4,825 —

Equity method investment (1) — 17,008

(1) In December 2022, management determined there was an other than temporary impairment related to the equity method investment. Refer to Note 1 - “Summary of Significant Accounting Policies” for more information on our equity method investment.

(2) Accumulated amortization of capitalized software was $36.6 million and $35.5 million as of December 31, 2022 and 2021, respectively.

(3) During the year ended December 31, 2022, Kforce executed the Note Receivable with our joint venture that amounted to $6.75 million. For the year ended December 31, 2022, we recorded a reserve of $1.9 million on the Note Receivable. Refer to Note 1 - “Summary of Significant Accounting Policies” for more details on the Note Receivable issued to our joint venture.

8. Goodwill

The following table presents the gross amount and accumulated impairment losses for each of our reporting units as of December 31, 2022, 2021 and 2020 (in thousands):

Technology FA Total

There was no impairment expense related to goodwill for each of the years ended December 31, 2022, 2021 and 2020.

Management performed its annual impairment assessment of the carrying value of goodwill as of December 31, 2022 and 2021. For each of our reporting units, we assessed 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 units was less than its carrying amount. Based on the qualitative assessments, management determined that it was not more likely than not that the fair values of the reporting units were less than the carrying values at December 31, 2022 and 2021. A deterioration in any of the assumptions could result in an impairment charge in the future.

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9. Current Liabilities

The following table provides information on certain current liabilities (in thousands):

DECEMBER 31,

Total Accounts payable and other accrued liabilities $ 72,792 $ 81,408

Workers’ compensation liabilities 749 746

Our accounts payable balance includes vendor and third party payables. Our accrued liabilities balance includes the current portion of our deferred compensation plans liability, contract liabilities from contracts with customers (such as customer rebates) and other accrued liabilities. Our accrued liabilities as of December 31, 2021, included $20 million of aggregate benefit obligation owed to two participants under the Supplemental Executive Retirement Plan (“SERP”). The SERP was terminated on April 30, 2021, and the Company paid the SERP benefits obligation in full during the year ended December 31, 2022.

Our payroll taxes as of December 31, 2021, included approximately $19.3 million in deferred payroll taxes as a result of the application of the CARES Act, and were paid in full during the year ended December 31, 2022.

10. Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):

DECEMBER 31,

Other long-term liabilities 3 22

Total Other long-term liabilities $ 52,773 $ 54,564

11. Operating Leases

The following table presents weighted-average terms for our operating leases:

DECEMBER 31,

Weighted-average discount rate 2.6 % 3.0 %

Weighted-average remaining lease term 6.8 years 3.9 years

The following table presents operating lease expense included in SG&A (in thousands):

DECEMBER 31,

Sublease income (205) (87)

Total operating lease expense $ 8,654 $ 8,553

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The following table presents the maturities of operating lease liabilities as of December 31, 2022 (in thousands):

Total maturities of operating lease liabilities 22,770

Less: imputed interest 1,814

Total operating lease liabilities $ 20,956

Our corporate headquarters lease in Tampa, Florida, requires aggregate future lease payments of approximately $10.9 million over the entire lease term, which includes annual escalation adjustments, and has a non-cancellable lease term of 129 months, excluding renewal options. As part of the executed lease, we received a leasehold improvement allowance of $1.6 million for the design, engineering, installation, supply and construction of the improvements. Lease payments begin on July 1, 2023, however, the lease accounting commencement date began in the fourth quarter of 2022 when we occupied the facility.

12. Employee Benefit Plans

401(k) Savings Plans

The Firm maintains various qualified defined contribution 401(k) retirement savings plans for eligible employees. Assets of these plans are held in trust for the sole benefit of employees and/or their beneficiaries. Employer matching contributions are discretionary and are funded annually as approved by the Board. Kforce accrued matching 401(k) contributions for continuing operations of $2.1 million and $1.9 million as of December 31, 2022 and 2021, respectively.

Employee Stock Purchase Plan

Kforce’s employee stock purchase plan allows all eligible employees to enroll each quarter to purchase Kforce’s common stock at a 5% discount from its market price on the last day of the quarter. Kforce issued 17 thousand, 15 thousand, and 19 thousand shares of common stock at an average purchase price of $63.37, $51.10 and $29.43 per share during the years ended December 31, 2022, 2021 and 2020, respectively. All shares purchased under the employee stock purchase plan were settled using Kforce’s treasury stock.

Deferred Compensation Plans

The Firm maintains various non-qualified deferred compensation plans, pursuant to which eligible management and highly compensated key employees, as defined by IRS regulations, may elect to defer all or part of their compensation to later years. These amounts are classified in Accounts payable and other accrued liabilities if payable within the next year or in Other long-term liabilities if payable after the next year, upon retirement or termination of employment, in the accompanying Consolidated Balance Sheets. At December 31, 2022 and 2021, amounts related to the deferred compensation plans included in Accounts payable and other accrued liabilities were $4.1 million and $4.1 million, respectively, and $36.4 million and $42.6 million was included in Other long-term liabilities at December 31, 2022 and 2021, respectively, in the Consolidated Balance Sheets. For the years ended December 31, 2022, 2021 and 2020, we recognized compensation expense for the plans of $0.5 million, $1.1 million and $1.0 million, respectively.

Kforce maintains a Rabbi Trust and holds life insurance policies on certain individuals to assist in the funding of the deferred compensation liability. If necessary, employee distributions are funded through proceeds from the sale of assets held within the Rabbi Trust. The balance of the assets held within the Rabbi Trust, including the cash surrender value of the Company-owned life insurance policies, was $32.0 million and $41.6 million as of December 31, 2022 and 2021, respectively, and is recorded in Other assets, net in the accompanying Consolidated Balance Sheets. As of December 31, 2022, the life insurance policies had a net death benefit of $168.3 million.

Supplemental Executive Retirement Plan

Prior to April 30, 2021, Kforce maintained the SERP, which benefited two executives. The SERP was a non-qualified benefit plan and did not include elective deferrals of covered executive officers’ compensation. The related net periodic benefit costs were comprised of service cost and interest cost. The service cost amounted to $199 thousand and $345 thousand for the years ended December 31, 2021 and 2020, respectively, and were recorded in SG&A. The interest cost amounted to $138 thousand and $497 thousand for the years ended December 31, 2021 and 2020, respectively, and were recorded in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Effective April 30, 2021, Kforce’s Board of Directors irrevocably terminated the SERP. As a result of the termination of the SERP, Kforce recognized a net loss of $1.8 million for the year ended December 31, 2021, which was recorded in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.

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The SERP benefits owed to the two participants at December 31, 2021 was approximately $20.0 million in the aggregate, which represented the fair value at the date of termination, and was recorded in Accounts payable and accrued liabilities in the Consolidated Balance Sheet. During the year ended December 31, 2022, the Company paid the SERP benefit obligation in full.

13. 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 “Commitment”). The maturity date of the Amended and Restated Credit Facility is October 20, 2026.

Revolving credit loans under the Amended and Restated Credit Facility bears interest at a rate equal to (a) the Base Rate (as described below) plus the Applicable Margin (as described below) or (b) the LIBOR Rate plus the Applicable Margin. Swingline loans under the Amended and Restated Credit Facility bears interest at a rate equal to the Base Rate plus the Applicable Margin. The Base Rate is the highest of: (i) the Wells Fargo Bank, National Association prime rate, (ii) the federal funds rate plus 0.50% or (iii) one-month LIBOR plus 1.00%, and the LIBOR Rate is reserve-adjusted LIBOR for the applicable interest period, but not less than zero. The Applicable Margin is based on the Firm’s total leverage ratio. The Applicable Margin for Base Rate loans ranges from 0.125% to 0.500% and the Applicable Margin for LIBOR Rate loans ranges from 1.125% to 1.50%. The Amended and Restated Credit Facility includes customary provisions relating to the transition from LIBOR as the benchmark interest rate under the Credit Agreement, including providing for a Benchmark Replacement option (as defined in the Credit Agreement) to replace LIBOR. The Firm will pay a quarterly non-refundable commitment fee equal to the Applicable Margin on the average daily unused portion of the Commitment (swingline loans do not constitute usage for this purpose). The Applicable Margin for the commitment fee is based on the Firm’s total leverage ratio and ranges between 0.20% and 0.30%.

The Firm is subject to certain affirmative and negative financial covenants including (but not limited to) the maintenance of a fixed charge coverage ratio of no less than 1.25 to 1.00 and the maintenance of a total leverage ratio of no greater than 3.50 to 1.00. The numerator in the fixed charge coverage ratio is defined pursuant to the Amended and Restated Credit Facility as earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense and other permitted items pursuant to our Credit Facility (defined as “Consolidated EBITDA”), less cash paid for capital expenditures, income taxes and dividends. The denominator is defined as Kforce’s fixed charges such as interest expense and principal payments paid or payable on outstanding debt other than borrowings under the Amended and Restated Credit Facility. The total leverage ratio is defined pursuant to the Amended and Restated Credit Facility as total indebtedness divided by Consolidated EBITDA. Our ability to make distributions or repurchases of equity securities could be limited if an event of default has occurred. Furthermore, our ability to repurchase equity securities in excess of $25.0 million over the last four quarters could be limited if (a) the total leverage ratio is greater than 3.00 to 1.00 and (b) the Firm’s availability, inclusive of unrestricted cash, is less than $25.0 million. As of December 31, 2022, we are in compliance with all of our financial covenants contained in the Amended and Restated Credit Facility.

As of December 31, 2022 and 2021, $25.6 million and $100.0 million was outstanding on the Amended and Restated Credit Facility, respectively. Kforce had $1.3 million of outstanding letters of credit at December 31, 2022 and 2021, which pursuant to the Amended and Restated Credit Facility, reduces the availability.

14. Derivative Instrument and Hedging Activity

As of December 31, 2022, the Firm did not have any outstanding interest rate swap derivative instruments.

On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A (“Swap A”). Swap A was effective on May 31, 2017 and matured on April 29, 2022. Other information related to Swap A is as follows: Notional amount - $25.0 million; and Fixed interest rate - 1.81%.

On March 12, 2020, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A (“Swap B”, together with Swap A, the "Swaps"). Swap B was effective on March 17, 2020. Other information related to Swap B is as follows: Scheduled maturity date - May 30, 2025; Fixed interest rate - 0.61%; and Notional amount - $100.0 million.

The Firm used 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 plus the applicable interest margin under our credit facility, was included in interest expense and recorded in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.

In May 2022, the Firm terminated Swap B in anticipation of paying the outstanding amount on the Amended and Restated Credit Facility, which was $100.0 million. At the termination of Swap B, the amount recorded in Accumulated other comprehensive income was recognized. We received proceeds of $4.1 million, which represented the gain and fair value of Swap B at the time of termination, and is included in Other expense, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Both Swaps A and B were designated as cash flow hedges. The change in the fair value of the Swaps was previously recorded as a component of Accumulated other comprehensive income in the consolidated financial statements.

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The following table sets forth the activity in the accumulated derivative instrument activity (in thousands):

December 31,

Accumulated derivative instrument gain (loss), beginning of year $ 823 $ (1,774)

Net change associated with current period hedging transactions (823) $ 2,597

Accumulated derivative instrument gain, end of year $ — $ 823

15. Fair Value Measurements

Recurring Fair Values - Interest Rate Swap Derivative Instruments

Our interest rate swaps were previously measured at fair value using readily observable inputs, which are considered to be Level 2 inputs, on a recurring basis and were recorded in Other long-term liabilities within the accompanying Consolidated Balance Sheets. In April 2022, Swap A matured and in May 2022, we terminated Swap B. Refer to Note 14 - “Derivative Instrument and Hedging Activity” for a complete discussion of the interest rate swap derivative instruments.

The fair value of the interest rate swap derivative instruments at December 31, 2021was an asset of $823 thousand and was classified as a Level 2 instrument. At December 31, 2022, Kforce had no interest rate swap derivative instruments outstanding.

Nonrecurring Fair Values - Equity Method Investment