KFORCE INC

Previous wording

The following is an executive summary of what Kforce believes are highlights as of and for the six months ended June 30, 2024, which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto.

Current wording

The following is an executive summary of what Kforce believes are highlights as of and for the nine months ended September 30, 2024, which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto.

Previous wording

•Revenue for the six months ended June 30, 2024 decreased 10.9% to $708.2 million from $795.2 million in the comparable period in 2023. Revenue decreased 9.3% and 25.6% for Technology and FA, respectively, primarily driven by the ongoing macroeconomic uncertainty.

Current wording

•Revenue for the nine months ended September 30, 2024 decreased 9.1% to $1.06 billion from $1.17 billion in the comparable period in 2023. Revenue decreased 7.6% and 23.9% for Technology and FA, respectively, primarily driven by the ongoing macroeconomic uncertainty.

Previous wording

•Flex revenue for the six months ended June 30, 2024 decreased 10.4% to $693.5 million from $774.0 million in the comparable period in 2023. Flex revenue decreased 9.0% for Technology and 25.3% for FA. These decreases were driven by a decrease in the number of consultants on assignment.

Current wording

•Flex revenue for the nine months ended September 30, 2024 decreased 8.7% (9.2% on a billing day basis) to $1.04 billion from $1.14 billion in the comparable period in 2023. Flex revenue decreased 7.2% (7.7% on a billing day basis) for Technology and 23.9% (24.3% on a billing day basis) for FA. These decreases were driven by a decrease in the number of consultants on assignment, although our 2024 sequential trends in Technology Flex revenue have shown stabilization.

Previous wording

•Gross profit margin for the six months ended June 30, 2024 decreased 80 basis points to 27.4% from 28.2% in the comparable period in 2023 as a result of a decline in Direct Hire mix and a decline in Flex gross profit margin.

Current wording

•Gross profit margin for the nine months ended September 30, 2024 decreased 40 basis points to 27.6% from 28.0% in the comparable period in 2023 as a result of a decline in the mix of Direct Hire revenue and Flex gross profit margins.

Previous wording

•Flex gross profit margin for the six months ended June 30, 2024 decreased 30 basis points to 25.9% from 26.2% in the comparable period in 2023.

Current wording

•Flex gross profit margin for the nine months ended September 30, 2024 decreased 10 basis points to 26.0% from 26.1% in the comparable period in 2023.

Previous wording

•Net income for the six months ended June 30, 2024 decreased 27.7% to $25.1 million, or $1.33 per share, from $34.8 million, or $1.77 per share, for the six months ended June 30, 2023.

Current wording

•Net income for the nine months ended September 30, 2024 decreased 13.2% to $39.4 million, or $2.08 per share, from $45.4 million, or $2.31 per share, for the nine months ended September 30, 2023.

Previous wording

•The Firm returned $24.5 million of capital to our shareholders in the form of open market repurchases totaling $10.3 million and quarterly dividends totaling $14.2 million during the six months ended June 30, 2024.

Current wording

•The Firm returned $41.6 million of capital to our shareholders in the form of open market repurchases totaling $20.3 million and quarterly dividends totaling $21.3 million during the nine months ended September 30, 2024.

Previous wording

•Cash provided by operating activities was $34.1 million during the six months ended June 30, 2024, as compared to $40.4 million for the six months ended June 30, 2023.

Current wording

•Cash provided by operating activities was $65.1 million during the nine months ended September 30, 2024, as compared to $69.1 million for the nine months ended September 30, 2023.

Previous wording

Kforce is a leading domestic provider of technology and finance and accounting talent solutions to innovative and industry-leading companies. As of June 30, 2024, Kforce employed over 1,700 associates and had approximately 8,100 consultants on assignment. Kforce serves clients across a diverse set of industries and organizations of all sizes, but we place a particular focus on serving Fortune 500 and other large companies.

Current wording

Kforce is a leading domestic provider of technology and finance and accounting talent solutions to innovative and industry-leading companies. As of September 30, 2024, Kforce employed over 1,700 associates and had approximately 7,900 consultants on assignment. Kforce serves clients across a diverse set of industries and organizations of all sizes, but we place a particular focus on serving Fortune 500 and other large companies.

Previous wording

Our results continue to be negatively impacted by the ongoing macroeconomic uncertainty though we have recently experienced stability (albeit at lower levels) in our Technology business. There are also significant geopolitical concerns including, but not limited to, U.S. political uncertainties (including the upcoming presidential election), ongoing global supply chain issues, and the conflicts between Ukraine-Russia and Israel-Hamas (and more recently Israel-Iran), and any escalations thereof. While it has largely been anticipated that the U.S. economy would fall into a recession given the aggressive interest rate increases since March 2022 by the Federal Reserve to combat significant inflation, among other indicators, U.S. real gross domestic product (“GDP”) growth continues to be positive. Recent economic data regarding jobless claims and the unemployment rate have pointed, however, to a softening U.S. economy in 2024 as compared to 2023.

Current wording

Our results continue to be negatively impacted by the ongoing macroeconomic uncertainty though we have recently experienced stability (albeit at lower levels) in our Technology business. There are continuing significant geopolitical concerns including, but not limited to, U.S. political uncertainties (including the upcoming presidential election), tensions in the Middle East, and ongoing global supply chain issues. While it has largely been anticipated that the U.S. economy would fall into a recession given the aggressive interest rate increases since March 2022 by the Federal Reserve to combat significant inflation, the Federal Reserve reduced rates by 50 basis points in September and has signaled the possibility of further rate reductions. The rate reductions have strengthened expectations for a soft landing in the U.S.

Previous wording

Based on data published by the U.S. Bureau of Labor Statistics and Staffing Industry Analysts (“SIA”), temporary employment figures and trends are important indicators of staffing demand from an economic standpoint. The national U.S. unemployment rate increased to 4.1% in June 2024 compared to 3.7% in December 2023. In the latest U.S. staffing industry forecast published by SIA in April 2024, the technology temporary staffing industry and finance and accounting temporary staffing industry are both estimated to decline 3% in 2024. For 2025, technology temporary staffing is estimated to grow 5%, and finance and accounting temporary staffing is expected to remain flat year over year.

Current wording

Based on data published by the U.S. Bureau of Labor Statistics and Staffing Industry Analysts (“SIA”), temporary employment figures and trends are important indicators of staffing demand from an economic standpoint. The national U.S. unemployment rate increased to 4.1% in September 2024 as compared to 3.7% in December 2023. In the latest U.S. staffing industry forecast published by SIA in September 2024, the technology temporary staffing industry and finance and accounting temporary staffing industry are estimated to decline 7% and 9% in 2024, respectively.

Previous wording

Operating Results - Three and Six Months Ended June 30, 2024 and 2023

Current wording

Operating Results - Three and Nine Months Ended September 30, 2024 and 2023

Previous wording

Technology Flex revenue decreased during the three and six months ended June 30, 2024 by 6.4% and 9.0%, respectively, as compared to the same periods in 2023, primarily driven by a decrease in the number of consultants on assignment. Sequentially, Technology Flex revenue improved 1.7% in the second quarter primarily as a result of the assignment growth experienced in the month of March 2024. After experiencing a degree of natural assignment ends in early April 2024, the number of consultants on assignment in our Technology business for the remainder of the second quarter was fairly stable. In the third quarter, we expect revenue in our Technology Flex business to decline slightly on a sequential basis and decrease in the mid single digits year-over-year.

Current wording

Technology Flex revenue decreased during the three and nine months ended September 30, 2024 by 3.6% (5.1% on a billing day basis) and 7.2%, respectively, as compared to the same periods in 2023, primarily driven by a decrease in the number of consultants on assignment. Technology Flex revenue decreased 0.6% for the three months ended September 30, 2024 on a sequential basis. In the fourth quarter, we expect revenue in our Technology Flex business to remain stable to slightly up sequentially on a billing day basis and decline in the mid-single digits year over year on a billing day basis.

Previous wording

Our FA segment experienced a decrease in Flex revenue of 23.1% and 25.3% during the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, primarily driven by a decrease in the number of consultants on assignment as a result of our repositioning efforts and the uncertainty in the macro environment. Our average bill rates improved by 1.0% and 3.7% for the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023. In the third quarter, we expect FA Flex revenue to decrease in the mid single digits sequentially and in the mid 20% range year-over-year.

Current wording

Our FA segment experienced a decrease in Flex revenue of 20.7% (21.9% on a billing day basis) and 23.9% during the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, primarily driven by a decrease in the number of consultants on assignment. Our average bill rates improved by 2.7% and 3.4% for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. In the fourth quarter, we expect FA Flex revenue to decline in the low single digits sequentially on a billing day basis and in the mid 20% range year over year on a billing day basis.

Previous wording

Direct Hire revenue decreased 29.7% and 30.6% during the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, which was primarily driven by a decrease in placements.

Current wording

Direct Hire revenue decreased 16.4% and 26.4% during the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, which was primarily driven by a decrease in placements, partially offset by an increase in placement fee.

Previous wording

The total gross profit percentage for the three and six months ended June 30, 2024 decreased 50 and 80 basis points, respectively, as compared to the same periods in 2023. The decrease for the three months ended June 30, 2024 was primarily driven by a decline in the mix of Direct Hire revenue and FA Flex gross profit margins. The decrease for the six months ended June 30, 2024 was primarily due to a decline in the mix of Direct Hire revenue and Technology Flex gross profit margins.

Current wording

The total gross profit percentage for the three months ended September 30, 2024 increased 20 basis points as compared to the same period in 2023 and was primarily driven by an increase in Technology Flex gross profit margins, which more than offset the lower mix of Direct Hire revenue. The total gross profit percentage for the nine months ended September 30, 2024 decreased 40 basis points as compared to the same period in 2023 and was primarily due to a decline in the mix of Direct Hire revenue and Flex gross profit margins.

Previous wording

•Technology Flex gross profit margins remained flat and decreased 30 basis points for the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023. For the three months ended June 30, 2024, the impact from a tighter pricing environment was offset by lower healthcare costs. The decrease for the six months ended was primarily due to a tighter pricing environment, partially offset by lower healthcare costs. We expect Technology Flex gross profit margins for the third quarter of 2024 to remain fairly stable sequentially.

Current wording

•Technology Flex gross profit margins increased 60 basis points and remained flat for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023. For the three months ended September 30, 2024, the increase was primarily driven by improvement in the spread between bill and pay rates and lower healthcare costs. For the nine months ended September 30, 2024, the impact from a tighter pricing environment was offset by lower healthcare costs. In the fourth quarter, we expect Technology Flex gross profit margins to decline sequentially due to the typical season impact of increases in vacation days taken by our consultants.

Previous wording

•FA Flex gross profit margins decreased 70 and 20 basis points for the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023, primarily driven by changes in our client portfolio mix, partially offset by lower healthcare costs. We expect FA Flex gross profit margins for the third quarter of 2024 to remain stable sequentially.

Current wording

•FA Flex gross profit margins decreased 110 and 50 basis points for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, primarily driven by a tighter pricing environment and a greater mix of lower margin projects, which was partially offset by lower healthcare costs. In the fourth quarter, we expect FA Flex gross profit margins to decline slightly due to seasonality.

Previous wording

SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A expenses represented 84.2% and 84.0% for the three and six months ended June 30, 2024, respectively, as compared to 85.6% and 85.1% for the comparable periods in 2023, respectively. Commissions and bonus incentives are variable costs driven primarily by revenue and gross profit levels. Therefore, as those levels change, these expenses would also generally be anticipated to change.

Current wording

SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A expenses represented 84.5% and 84.2% for the three and nine months ended September 30, 2024, respectively, as compared to 83.8% and 84.6% for the comparable periods in 2023, respectively. Commissions and bonus incentives are variable costs driven primarily by revenue and gross profit levels. Therefore, as those levels change, SG&A expenses would also generally be anticipated to change.

Previous wording

For compensation and related expenses, we continue to experience a degree of SG&A deleverage as we aim to retain our most productive and tenured associates to strategically position our Firm for an improved demand environment in the future, despite the larger declines experienced in revenue and gross profit. We are also investing in the enterprise priorities that we believe put our Firm in the best position to achieve our longer-term financial objectives.

Current wording

For the nine months ended September 30, 2024, the impact of the aforementioned items were offset by the degree of SG&A deleverage for our compensation and related expenses as we aim to retain our most productive and tenured associates for an improved demand environment in the future. We are also investing in the enterprise priorities that we believe put our Firm in the best position to achieve our longer-term financial objectives.

Previous wording

We continue to prioritize investments in our strategic initiatives, including our integrated strategy, nearshore and offshore delivery capabilities and the implementation of Workday as part of our back-office transformation program. We are continuing to exercise tight discretionary spend control and take appropriate actions to generate cost efficiencies.

Current wording

We continue to prioritize investments in our strategic initiatives, including our integrated strategy, nearshore and offshore delivery capabilities and the implementation of Workday as part of our back-office transformation program. We are also continuing to exercise tight discretionary spend control and take appropriate actions to mitigate the impact of lower revenue and gross profit levels on our profitability.

Previous wording

Other Expense, Net. Other expense, net for the three months ended June 30, 2024 and 2023 was $0.5 million and $0.3 million, respectively. Other expense, net for the six months ended June 30, 2024 and 2023 was $1.2 million and $1.4 million, respectively. Other expense, net primarily includes interest expense related to outstanding borrowings under our Amended and Restated Credit Facility.

Current wording

Other Expense, Net. Other expense, net for the three months ended September 30, 2024 and 2023 was $0.4 million and $0.2 million, respectively. Other expense, net for the nine months ended September 30, 2024 and 2023 was $1.6 million and $1.5 million, respectively. Other expense, net primarily includes interest expense related to outstanding borrowings under our Amended and Restated Credit Facility.

Previous wording

During the three and six months ended June 30, 2023, this balance also included our proportionate share of losses related to our equity method investment of nil and $0.8 million, respectively. In February 2023, Kforce sold its 50% noncontrolling interest in our joint venture to an unaffiliated third party.

Current wording

During the three and nine months ended September 30, 2023, this balance also included our proportionate share of losses related to our equity method investment of nil and $0.8 million, respectively. In February 2023, Kforce sold its 50% noncontrolling interest in our joint venture to an unaffiliated third party.

Previous wording

Income Tax Expense. Income tax expense as a percentage of income from operations, before income taxes (our “effective tax rate”) for the six months ended June 30, 2024 and 2023 was 26.6% and 27.5%, respectively. The primary driver for the decrease relates to the proceeds from company-owned life insurance received during the three months ended June 30, 2024.

Current wording

Income Tax Expense. Income tax expense as a percentage of income from operations, before income taxes (our “effective tax rate”) for the nine months ended September 30, 2024 and 2023 was 25.1% and 28.9%, respectively. The primary driver for the decrease relates to a reduction in nondeductible executive compensation, the receipt of non-taxable proceeds from company-owned life insurance, and the recognition of research and development tax credits.

Previous wording

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 and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations 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 unaudited condensed 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.

Current wording

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, organizational realignment activities, legal settlement expense and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations 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 unaudited condensed 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.

Previous wording

To meet our capital and liquidity requirements, we primarily rely on our operating cash flows and borrowings under our credit facility. At June 30, 2024 and December 31, 2023, we had $36.7 million and $41.6 million outstanding under our Amended and Restated Credit Facility, respectively, and the borrowing availability was $162.3 million and $157.2 million, respectively, subject to certain covenants. At June 30, 2024, Kforce had $136.3 million in working capital compared to $141.5 million at December 31, 2023.

Current wording

To meet our capital and liquidity requirements, we primarily rely on our operating cash flows and borrowings under our credit facility. At September 30, 2024 and December 31, 2023, we had $26.9 million and $41.6 million outstanding under our Amended and Restated Credit Facility, respectively, and the borrowing availability was $172.1 million and $157.2 million, respectively, subject to certain covenants. At September 30, 2024, Kforce had $123.4 million in working capital compared to $141.5 million at December 31, 2023.

Previous wording

Cash provided by operating activities was $34.1 million during the six months ended June 30, 2024, as compared to $40.4 million during the six months ended June 30, 2023. Our largest source of operating cash flows is the collection of trade receivables, and our largest use of operating cash flows is the payment of our associate and consultant compensation. The year-over-year decrease in cash provided by operating activities was primarily driven bylower profitability levels and collections on trade receivables.

Current wording

Cash provided by operating activities was $65.1 million during the nine months ended September 30, 2024, as compared to $69.1 million during the nine months ended September 30, 2023. Our largest source of operating cash flows is the collection of trade receivables, and our largest use of operating cash flows is the payment of our associate and consultant compensation. The year-over-year decrease in cash provided by operating activities was primarily driven by lower profitability levels and collections on trade receivables, partially offset by the timing of payments.

Previous wording

Cash used in investing activities during the six months ended June 30, 2024 was $3.8 million and primarily consisted of cash used for capital expenditures of $5.0 million and premiums paid on company-owned life insurance policies of $1.2 million, partially offset by proceeds from company-owned life insurance of $2.4 million.

Current wording

Cash used in investing activities during the nine months ended September 30, 2024 was $7.9 million and primarily consisted of cash used for capital expenditures of $8.5 million and premiums paid on company-owned life insurance of $1.8 million, partially offset by proceeds from company-owned life insurance of $2.4 million.

Previous wording

Cash provided by investing activities was $0.8 million during the six months ended June 30, 2023, and primarily consisted of the proceeds from the sale of our joint venture interest of $5.1 million, partially offset by cash used for capital expenditures of $5.0 million.

Current wording

Cash used in investing activities during the nine months ended September 30, 2023 was $2.5 million and primarily consisted of cash used for capital expenditures of $6.1 million, partially offset by the proceeds from the sale of our joint venture interest of $5.1 million.

Previous wording

Cash used in financing activities was $30.4 million during the six months ended June 30, 2024, compared to $39.6 million during the six months ended June 30, 2023. The decrease in cash used in financing activities was primarily driven by a decrease in repurchases of common stock.

Current wording

Cash used in financing activities was $57.2 million during the nine months ended September 30, 2024, compared to $66.5 million during the nine months ended September 30, 2023. The decrease in cash used in financing activities was primarily driven by a decrease in repurchases of common stock, partially offset by net payments on our Credit Facility.

Previous wording

During the six months ended June 30, 2024 and 2023, Kforce declared and paid quarterly dividends of $14.2 million ($0.76 per share) and $13.9 million ($0.72 per share), respectively, which represents a 6% increase on a per share basis. While the Firm’s Board of Directors (the “Board”) has declared and paid quarterly dividends since the fourth quarter of 2014, and intends to in the foreseeable future, dividends will be subject to determination by our 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.

Current wording

During the nine months ended September 30, 2024 and 2023, Kforce declared and paid quarterly dividends of $21.3 million ($1.14 per share) and $20.9 million ($1.08 per share), respectively, which represents a 6% increase on a per share basis. While the Firm’s Board of Directors (the “Board”) has declared and paid quarterly dividends since the fourth quarter of 2014, and intends to in the foreseeable future, dividends will be subject to determination by our 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.

Previous wording

On October 20, 2021, the Firm entered into the Amended and Restated Credit Facility, which has a maximum borrowing capacity of $200.0 million, and subject to certain conditions and the participation of the lenders, may be increased up to an aggregate additional amount of $150.0 million. As of June 30, 2024, $36.7 million was outstanding and $162.3 million was available on our Amended and Restated Credit Facility, and as of December 31, 2023, $41.6 million was outstanding. As of June 30, 2024, we were in compliance with all of our financial covenants contained in the Amended and Restated Credit Facility as described in our 2023 Annual Report on Form 10-K, and we currently expect that we will be able to maintain compliance with these covenants.

Current wording

On October 20, 2021, the Firm entered into the Amended and Restated Credit Facility, which has a maximum borrowing capacity of $200.0 million, and subject to certain conditions and the participation of the lenders, may be increased up to an aggregate additional amount of $150.0 million. As of September 30, 2024, $26.9 million was outstanding and $172.1 million was available on our Amended and Restated Credit Facility, and as of December 31, 2023, $41.6 million was outstanding. As of September 30, 2024, we were in compliance with all of our financial covenants contained in the Amended and Restated Credit Facility as described in our 2023 Annual Report on Form 10-K, and we currently expect that we will be able to maintain compliance with these covenants.

Previous wording

In February 2024, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million. During the six months ended June 30, 2024, Kforce repurchased approximately 163 thousand shares of common stock on the open market at a total cost of approximately $10.3 million, and $89.7 million remained available for further repurchases under the Board-authorized common stock repurchase program at June 30, 2024.

Current wording

In February 2024, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million. During the nine months ended September 30, 2024, Kforce repurchased approximately 324 thousand shares of common stock on the open market at a total cost of approximately $20.3 million, and $79.7 million remained available for further repurchases under the Board-authorized common stock repurchase program at September 30, 2024.