Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
_____________________________________________________________________________
 FORM 10-K
_____________________________________________________________________________

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 000-26058
_____________________________________________________________________________
 KFORCE INC.
(Exact name of Registrant as specified in its charter)
_____________________________________________________________________________ 
FLORIDA
 
59-3264661
State or other jurisdiction of incorporation or organization
 
IRS Employer Identification No.
1001 EAST PALM AVENUE, TAMPA, FLORIDA
 
33605
Address of principal executive offices
 
Zip Code
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 552-5000
_____________________________________________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $0.01 par value
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
_____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
x
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth filer
 
¨

 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.):    Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2017, was $456,834,762. For purposes of this determination, common stock held by each officer and director and by each person who owns 10% or more of the registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant’s common stock as of February 21, 2018 was 26,213,133.
DOCUMENTS INCORPORATED BY REFERENCE:
Document
  
Parts Into Which
Incorporated
Portions of Proxy Statement for the Annual Meeting of Shareholders scheduled to be held April 24, 2018 (“Proxy Statement”)
  
Part III
 



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KFORCE INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
Item 16.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
References in this document to “the Registrant,” “Kforce,” “the Company,” “we,” “the Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.
This report, particularly Item 1. Business, Item 1A. Risk Factors, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), and the documents we incorporate into this report contain certain statements that are, or may be deemed to be, forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements may include, but may not be limited to, projections of financial or operational performance, our beliefs regarding potential government actions or changes in laws and regulations, anticipated costs and benefits of proposed acquisitions, divestitures and investments, effects of interest rate variations, financing needs or plans, estimates concerning the effects of litigation or other disputes, estimates concerning our ability to collect on our trade accounts receivable, developments within the staffing sector including, but not limited to, the penetration rate (the percentage of temporary staffing to total employment) and growth in temporary staffing, a reduction in the supply of consultants and candidates or the Firm’s ability to attract such individuals, estimates concerning goodwill impairment, delays or termination or the failure to obtain awards, task orders or funding under contracts, changes in client demand for Firm services as well as assumptions as to any of the foregoing and all statements that are not based on historical fact but rather reflect our current expectations concerning future results and events. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, refer to the Risk Factors and MD&A sections. In addition, when used in this discussion, the terms “anticipate,” “assume,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “may,” “likely,” “could,” “should,” “future” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. Kforce undertakes no obligation to update any forward-looking statements.

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PART I
ITEM 1.     BUSINESS.
Company Overview
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional staffing services and solutions to clients through the following segments: Technology (“Tech”), Finance and Accounting (“FA”), and Government Solutions (“GS”). Kforce provides staffing services and solutions on both a temporary (“Flex”) and permanent (“Direct Hire”) basis. We operate through our corporate headquarters in Tampa, Florida and 59 field offices located throughout the U.S. Kforce was incorporated in 1994 but its predecessor companies have been providing staffing services since 1962. Kforce completed its Initial Public Offering in August 1995.
Kforce serves clients across many industries, geographies and our clients range in size from small to mid-sized companies to the largest companies in the Fortune 1000. We also provide services and solutions to the Federal Government as well as state and local governments, as a prime contractor and subcontractor. For perspective, our 10 largest clients represented approximately 25% of revenues and no single client accounted for more than 6% of revenues for the year ended December 31, 2017.
Substantially all of our revenues are derived from U.S. domestic operations. Kforce Global Solutions, Inc., (“Global”) a wholly-owned subsidiary located in the Philippines, has historically contributed approximately 1% of net service revenues and was included in our Tech segment. In September 2017, we completed the sale of Global’s assets. This sale did not meet the definition of discontinued operations.
Our periodic operating results can be affected by:
the number of billing days in a particular quarter,
seasonality in our clients’ businesses,
increased holidays and vacation days taken, which is usually highest in the fourth quarter of each calendar year, and
increased costs as a result of certain annual U.S. state and federal employment tax resets that occur at the beginning of each calendar year, which negatively impacts our gross profit and overall profitability in the first fiscal quarter of each calendar year.

The following charts depict the percentage of our total revenues for each of our segments for the years ended December 31, 2017, 2016 and 2015: 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12080114&doc=19http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12080114&doc=18http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12080114&doc=20
For additional segment financial data see Note 13 – “Reportable Segments” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report.

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Tech Segment
Our largest segment, Tech, provides both Flex and Direct Hire services to our clients, focusing primarily on areas of information technology such as systems/applications architecture and development, project management, enterprise data management, business intelligence, artificial intelligence, machine learning, network architecture and security. Within our Tech segment, we provide service to clients in a variety of industries with a strong footprint in the financial services, communications, insurance services and government sectors. Revenues for our Tech segment increased 2.7% to $907.5 million in 2017 with quarterly growth rates accelerating in the second half of 2017 on a year-over-year basis. The average bill rate for our Tech segment in the fourth quarter of 2017 (after the sale of Global’s assets was completed) was approximately $72 per hour. The September 2017 report published by Staffing Industry Analysts (“SIA”) stated that temporary technology staffing is expected to experience growth of 4% in 2018. We believe that the secular drivers of technology spend remain intact with many companies increasingly looking to technology investments to improve internal efficiencies, enhance their customer-facing applications in support of their business strategies and to sustain relevancy in the rapidly changing marketplace. At the macro level, demand is also being driven by an ever-changing and complex corporate regulatory and employment law environment, which increases the overall cost of employment for companies. These factors, among others, are continuing to drive companies to look to temporary staffing providers, such as Kforce, to meet their human capital needs.
An acute challenge within our Tech business is the scarcity of qualified consultants, especially in certain niche skillsets such as cybersecurity, business intelligence, and application developers with less common programming languages.
FA Segment
Our FA segment provides both Flex and Direct Hire services to our clients in areas such as general accounting, business analysis, accounts payable, accounts receivable, financial analysis and reporting, taxation, budget preparation and analysis, mortgage and loan processing, cost analysis, professional administration, outsourced functional support, credit and collections, audit services, and systems and controls analysis and documentation. Within our FA segment, we provide services to clients in a variety of industries with a strong footprint in the financial services, healthcare and government sectors. Revenues for our FA segment increased 2.5% to $346.1 million in 2017 though our growth rates in this segment decelerated in the second half of 2017 on a year-over-year basis as a result of certain client headwinds and large project ends. The average bill rate for our FA segment during 2017 was approximately $33 per hour. The September 2017 report published by SIA stated that finance and accounting temporary staffing is expected to experience growth of 5% in 2018.
While there are some new technical accounting standards and other factors that could result in some macro demand in FA temporary staffing providers, we believe that the relative limited demand stimuli present in the traditional areas of finance and accounting may temper future growth. However, we also believe there continues to be significant demand in outsourced functional support areas, which could result in larger volume opportunities for the Firm.
GS Segment
Our GS segment provides staffing services and solutions to the Federal Government as both a prime contractor and a subcontractor in the fields of information technology and finance and accounting. GS offers integrated business solutions to its clients in areas including but not limited to: information technology infrastructure transformation, healthcare informatics, data and knowledge management and analytics, research and development, audit readiness, financial management and accounting. This segment’s contracts are concentrated among clients, such as the U.S. Department of Veteran Affairs, and the types of services and support that have historically been less likely to be impacted by sequestration threats and budget constraints, though a prolonged government shutdown would be expected to negatively impact GS revenues. Revenues for our GS segment increased 5.7% to $104.3 million in 2017. Our GS segment also includes a product-based business specialized in manufacturing and delivering trauma-training manikins, which accounted for approximately 12% of total GS revenues in 2017. The majority of GS services are supplied to the Federal Government (or through a prime contractor to the Federal Government) through field offices located in the Washington, D.C. metropolitan area and San Antonio and Austin, Texas.
Our backlog represents only those contracts for which funding has been provided for U.S. government contracts and subcontracts, excluding renewal option years. Our backlog was $59.3 million as of December 31, 2017 as compared to $42.9 million as of December 31, 2016.

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Flex Revenues
Flex revenues have represented approximately 96% of total revenues over the last three fiscal years. We provide our clients with qualified individuals (“consultants”) on a temporary basis when it is determined that they have the appropriate skills and experience and are the right match for our clients. We utilize a diversified set of recruitment platforms to identify consultants including traditional job boards (both general and niche in nature), Kforce.com, social media sites and passive candidate marketing, where we identify individuals who are currently employed and not actively seeking another position. These consultants can either be directly employed by Kforce, qualified independent contractors or foreign nationals sponsored by Kforce. Our success is dependent upon our internal employees’ (“associates”) ability to: (1) acknowledge, understand and participate in creating solutions for our clients’ needs; (2) determine and understand the experience and capabilities of the consultants being recruited; and (3) ensure excellence in delivering and managing the client-consultant relationship. We believe proper execution by our associates and consultants directly impacts the longevity of the assignments, increases the likelihood of being able to generate repeat business with our clients and fosters a better experience for our consultants, which has a direct correlation to their redeployment.
To gauge our success in providing quality service and support to our clients and consultants, we monitor our client and consultant net promoter scores, which is conducted by an independent third-party provider.
Flex revenues are driven by the number of consultant assignments, total consultant hours billed and pre-established bill rates. Our Flex gross profit is determined by deducting consultant pay, benefits and other related costs from Flex revenues. Associate commissions, related taxes and other compensation and benefits, as well as field management compensation are included in selling, general and administrative expenses (“SG&A”), along with other customary costs such as administrative and corporate compensation. The Flex business model involves attempting to maximize the number of billable consultant hours and bill rates, while managing consultant pay rates and benefit costs, as well as compensation and benefits for our associates.
Direct Hire Revenues
Our Direct Hire business is a significantly smaller, yet an important, part of our business that involves locating qualified individuals (“candidates”) for permanent placement with our clients. We recruit candidates using methods that are consistent with Flex consultants. Candidate searches are generally performed on a contingency basis (as opposed to a retained search), therefore fees are only earned if the candidates are ultimately hired by our clients. The typical fee structure is based upon a percentage of the candidate’s annual compensation in their first year of employment, which is known or can be estimated at the time of placement. There are also occasions where consultants are initially assigned to a client on a temporary basis and are later converted to a permanent placement, for which we may also receive a conversion fee, which are also recognized as Direct Hire revenue.
Direct Hire revenues are driven by the number of candidates placed (or converted) and the associated placement fees and are recognized net of an allowance for “fallouts,” which occur when candidates do not complete the applicable contingency period (typically 90 days or less). There are no consultant payroll costs associated with Direct Hire placements, thus, all Direct Hire revenues increase gross profit by the full amount of the fee. Direct Hire associate commissions, compensation and benefits are included in SG&A.
Industry Overview
The specialty staffing industry is made up of thousands of companies, most of which are small local firms providing limited service offerings to a relatively small local client base. A report published by SIA in 2017 indicated that Kforce is one of the 10 largest publicly-traded specialty staffing firms in the U.S.


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Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional temporary workers in the U.S. and, conversely, an economic slowdown results in a contraction in demand for additional temporary workers in the U.S. From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continued to be positive during 2017, based on data published by the Bureau of Labor Statistics (“BLS”) and SIA. The penetration rate (the percentage of temporary staffing to total employment) remained at a record high of 2.1% in December 2017. The unemployment rate was 4.1% as of December 2017 and a total non-farm payroll of approximately 148,000 jobs were added in December 2017. Additionally, the college-level unemployment rate, which we believe serves as a reasonable proxy for professional employment and, as such, is a good data point for the consultant and candidate population that Kforce most typically serves, was at 2.1% in December 2017. Further, we believe that the unemployment rate in the specialties we serve, especially in certain technology skill sets, is lower than the published averages, which we believe speaks to the demand environment in which we are operating. Management believes that the overall tepid growth experienced in the U.S. economy during this recovery (despite recent acceleration in GDP growth), the recent change in administration, and the increasing costs and government regulation of employment may be driving a secular shift to an increased use of temporary staff as a percentage of the total workforce as employers may be reluctant to increase permanent hiring. If the penetration rate of temporary staffing grows in the coming months and years, we believe our Flex revenues can continue to grow even in a relatively modest growth macro-economic environment. Kforce remains optimistic about the growth prospects of the temporary staffing industry, the penetration rate, and in particular, our revenue portfolio; however, the economic environment includes uncertainty and volatility and therefore no reliable predictions can be made about the general economy, the staffing industry as a whole, specialty staffing in particular or our future performance.
According to a U.S. Staffing Industry Forecast published by SIA in September 2017, the technology temporary staffing industry and finance and accounting temporary staffing industry are expected to generate projected revenues of $30.9 billion and $8.4 billion, respectively, in 2018 and based on these projected revenues, our market share is approximately 3% and 4%, respectively. Our business strategies are sharply focused around expanding our share of the U.S. temporary staffing industry and further penetrating our existing clients’ human capital needs.
Business Strategies
Our primary objective is to drive long-term shareholder value by achieving above-market revenue growth, making prudent investments to enhance our operating model in terms of efficiency and effectiveness and generating significantly improved levels of operating profitability. We believe the following strategies will help us achieve our objectives.
Improving Productivity of our Talent. We continue to focus on providing our associates with the necessary tools to be more effective and efficient in performing their roles, to better evaluate business opportunities and to allow us to elevate the value we bring to our clients and consultants. In the fourth quarter of 2016, we made a significant investment to enhance our sales methodologies and processes to allow us to better evaluate and shape business opportunities with our clients as well as train our sales associates on this consistent and uniform methodology. Since making this investment, we have been focused on conducting appropriate activities to seek to ensure sustainment of this methodology. We are also implementing new and upgrading existing technologies that we expect should allow us to serve our clients, consultants and candidates more effectively and efficiently and improve the productivity and scalability of our organization. To that end, in the third quarter of 2017, we completed the deployment of our new client relationship management system, which has the elements of our sales methodology embedded within the application.
We have been investing in other areas of technological change including new time and expense applications for our consultants and associates, as well as continued enhancements to our business and data intelligence capabilities. Beginning in 2018, we expect to invest in a new talent relationship management system to leverage our delivery strategies and processes. These investments are part of a multi-year effort to replace and upgrade our technology tools to equip our associates with improved capabilities to deliver exceptional service to our clients, consultants and candidates and improve the productivity of our associates.
Enhancing our Client Relationships. We strive to differentiate ourselves by working collaboratively with our clients to understand their business challenges and help them attain their organizational objectives. This collaboration focuses on building a consultative partnership rather than a transactional client relationship; thus, increasing the intimacy with our clients and improving our ability to offer higher value and a broader array of services and support to our clients. In order to accomplish this, we align our revenue-generating talent with the appropriate clients based on their experience with markets, products and industries.
We measure our success in building long-lasting relationships with our clients using staffing industry benchmarks and surveys conducted by a specialized, independent third-party provider. Our client ratings compare very favorably against staffing industry averages and give us helpful insights directly from our clients on how to continue improving our relationships. We believe long-lasting relationships with our clients is a critical element to our ability to grow revenues.

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Improving the Job Seeker Experience. Our consultants are a critical component to our business and essential in sustaining our client relationships. We are focused on effective and efficient processes and tools to find and attract prospective consultants, matching them to a client assignment and supporting them during their tenure with Kforce. Our success in this regard would be expected to positively influence the tenure and loyalty of our consultants and be their “Employer of Choice,” thus enabling us to deliver the highest quality talent to our clients.
We measure the quality of our service to and support of our consultants using staffing industry benchmarks and surveys conducted by a specialized, independent third-party provider. Our consultant ratings, similar to our client ratings, compare very favorably against staffing industry averages and give us helpful insights directly from our consultants on where and how we can continue improving our service during the various phases of our relationship.
Competition
We operate in a highly competitive and fragmented staffing industry comprised of large national and local staffing firms in each of our reporting segments. The local firms are typically operator-owned, and each market generally has one or more significant competitors. We also face competition from national and regional accounting, consulting and advisory firms that offer both solutions and staffing services. However, we believe that our U.S. geographic presence, concentration of service offerings in areas of greatest demand (especially technology), national delivery teams, delivery channels for foreign consultants, longevity of our brand and reputation in the market, along with our dedicated compliance and regulatory infrastructure all provide a competitive advantage.
Many clients utilize Managed Service Providers (“MSP”) or Vendor Management Organizations (“VMO”) for the management and procurement of staffing services. Generally, MSPs and VMOs are organizations that standardize processes through the use of Vendor Management Systems (“VMS”), which are tools used to aggregate spend and measure supplier performance. VMSs can also be provided through independent providers. Typically, MSPs, VMOs and/or VMS providers charge staffing firms administrative fees of 1% to 4% of total service revenues. In addition, the aggregation of services by MSPs for their clients into a single program can result in significant buying power and, thus, pricing power. Therefore, the use of MSPs by our clients has, in certain instances, resulted in margin compression. Kforce does not currently provide MSP or VMO services directly to its clients; rather our strategy has been to work with MSPs, VMOs and VMS providers that enable us to best extend our services to current and prospective clients.
We believe that the principal elements of competition in our industry are quality and availability of associates, candidates and consultants, level of service, effective monitoring of job performance, scope of geographic service and compliance orientation. We also compete for availability of quality, high skilled consultants and candidates, which is especially important to our Tech Flex business. In order to attract consultants and candidates, we place emphasis upon our ability to provide competitive compensation and benefits, quality and varied assignments, scheduling flexibility, and permanent placement opportunities, all of which are important to Kforce being the “Employer of Choice.” Because individuals pursue other employment opportunities on a regular basis, it is important that we respond to market conditions affecting these individuals, and focus on our consultant relationship objectives. Additionally, in certain markets, we have experienced significant pricing pressure as a result of our competitors’ pricing strategies. Although we believe we compete favorably with respect to these factors, we expect competition and pricing pressure to continue, which may result in us not being able to effectively compete or choosing to not participate in certain business that does not meet our profitability standard.
Regulatory Environment
Staffing firms are generally subject to one or more of the following types of government regulations: (1) regulation of the employer/employee relationship, such as wage and hour regulations, tax withholding and reporting, immigration regulations, social security and other retirement, anti-discrimination, employee benefits and workers’ compensation regulations; (2) registration, licensing, recordkeeping and reporting requirements; (3) worker classification regulations and (4) substantive limitations on their operations.
In providing staffing and solution services to the Federal Government, we must comply with complex laws and regulations relating to the formation, administration and performance of Federal Government contracts. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may impose additional costs on our business.
Because we operate in a complex regulatory environment, one of our top priorities is compliance. For more discussion of the potential impact that the regulatory environment could have on Kforce’s financial results, refer to Item 1A. Risk Factors.

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Operating Employees and Personnel
As of December 31, 2017, Kforce employed nearly 2,600 associates and had more than 12,000 consultants on assignment providing flexible staffing services and solutions to our clients. Approximately 91% of the consultants are employed directly by Kforce; the other 9% consists of qualified independent contractors. As the employer, Kforce is responsible for the employer’s share of applicable social security taxes (“FICA”), federal and state unemployment taxes, workers’ compensation insurance, and other direct labor costs relating to our employees. We offer access to various health, life and disability insurance programs and other benefits for our employees. We have no collective bargaining agreements covering any of our employees, have never experienced any material labor disruption, and are unaware of any current efforts or plans to organize any of our employees.
Insurance
Kforce maintains a number of insurance policies including general commercial, automobile and employers’ liability with excess liability coverage for each. We also maintain workers’ compensation, fidelity, fiduciary, directors and officers, cybersecurity, professional liability, excess health insurance and employment practices liability policies. These policies provide coverage subject to their terms, conditions, limits of liability, and deductibles, for certain liabilities that may arise from Kforce’s operations. There can be no assurance that any of the above policies will be adequate for our needs or that we will maintain all such policies in the future.
Availability of Reports and Other Information
We make available, free of charge, through the Investor Relations page on our website, and by requests addressed to Michael Blackman, Chief Corporate Development Officer, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically submit such materials to the SEC. Our corporate website address is http://www.kforce.com. The information contained on our website, or on other websites linked to our website, is not part of this document. The SEC also provides reports, proxy and information statements on its website, free of charge, and other information regarding issuers, such as us, that file electronically with the SEC. The SEC’s website is http://www.sec.gov. Information provided on the SEC’s website is not part of this report.
ITEM 1A.     RISK FACTORS.
Kforce faces significant employment-related legal risk.
Kforce employs people internally and in the workplaces of our clients. An inherent risk of such activity includes 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 cases 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 which may be significant, discontinuation of client relationships or other material adverse effects on our business. To reduce our exposure, we maintain policies, procedures and guidelines to promote compliance with laws, rules, regulations and best practices applicable to our business. Even claims without merit could cause us to incur significant expense or reputational harm. We also maintain insurance coverage for professional malpractice liability, fidelity, employment practices liability, and general liability in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage may not cover all potential claims against us, may require us to meet a deductible or may not continue to be available to us at a reasonable cost. In this regard, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility. U.S. Courts in recent years have been receiving large numbers of wage and hour class action claims alleging misclassification of overtime-eligible workers and/or failure to pay overtime-eligible workers for all hours worked.

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Kforce may be exposed to unforeseeable negative acts by our personnel that could have a material adverse effect on our business.
An inherent risk of employing people internally and in the workplace of other businesses is that many of these individuals have access to client 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; cybersecurity breaches affecting our clients and/or us; or other acts. These risks are particularly significant in our government business. Such acts may result in negative publicity or other material adverse effects on our business. In addition, these occurrences 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 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.
The U.S. professional staffing industry in which we operate is significantly affected by fluctuations in general economic and employment conditions.
Demand for staffing services is significantly affected by the general level of economic activity and employment in the U.S. Based upon previous economic cycles experienced by Kforce, we believe that times of sustained economic recovery generally stimulate demand for additional U.S. temporary workers and, conversely, an economic slowdown results in a contraction in demand for additional U.S. temporary workers. Even without uncertainty and volatility, it is difficult for us to forecast future demand for our services due to the inherent difficulties in forecasting the strength of economic cycles, and the short-term nature of many of our agreements. As economic activity slows, companies may defer projects for which they utilize our services or reduce their use of temporary employees before laying off permanent employees. In addition, an economic downturn could result in a reduction in the temporary staffing penetration rate, 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 in the U.S. or global impact on the U.S. could have a material adverse effect on our business, financial condition, and results of operations.
Kforce may be adversely affected by government regulation of the staffing 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 materially adversely affect Kforce’s 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.
Reclassification of our independent contractors by tax or regulatory authorities could materially and adversely affect our business model and 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 a substantial tax or other liabilities to us.

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Our collection, use and retention of personally identifiable information of our associates and consultants create risks that may harm our business.
In the ordinary course of our business, we collect and retain personal information of our associates and consultants and their dependents including, without limitation, full names, social security numbers, addresses, birth dates, and payroll-related information. We use commercially available information security technologies to protect such information in digital format. We also use security and business controls to limit access to such information and continually monitor our systems for potential breaches. However, as our reliance on technology has increased so have the risks posed to our systems, both internal and those managed by third party service providers. It is possible that the controls in place will not be able to prevent the improper disclosure of personally identifiable information of our associates and consultants in the event of a computer virus, system breach or cyber-attack, particularly in light of the increasing sophistication of perpetrators. Employees or third parties (including third parties with substantially greater resources than our own; for example, foreign governments) may be able to circumvent our security measures and acquire or misuse such information, resulting in breaches of privacy, errors in the storage, use or transmission of such information, and an interruption to our operations. Privacy breaches may require notification and other remedies, which can be costly, and which may have other serious adverse consequences for our business, including regulatory penalties and fines, claims for breach of contract, claims for damages, adverse publicity, reduced demand for our services by clients and/or consultants, harm to our reputation, and regulatory oversight by state or federal agencies.
The possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens. 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.
Kforce may be adversely affected by immigration restrictions and reform.
Our Tech segment 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 political developments and levels of economic activity. Current and future restrictions on the availability of such visas could restrain our ability to employ the skilled professionals we need to meet our clients’ needs, which could have a material adverse effect on our business. The U.S. Citizenship and Immigration Service (“USCIS”) continues to closely scrutinize companies seeking to sponsor, renew or transfer H-1B status, including Kforce and Kforce’s subcontractors and has issued internal guidance to its field offices that appears to narrow the eligibility criteria for H-1B status in the context of staffing services. In addition to USCIS restrictions, certain aspects of the H-1B program are also subject to regulation and review by the U.S. Department of Labor and U.S. Department of State, 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.
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 technical, professional, and cleared government services individuals, who possess the skills and experience necessary to meet the staffing 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 for the foreseeable future. The supply of available consultants and candidates has been constrained during this economic recovery, especially in our Tech segment. 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.

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Kforce’s success depends upon retaining the services of its management team and key operating employees.
Kforce is highly dependent on its management team and expects that continued success will depend largely upon their efforts, expertise and abilities. The loss of the services of any key executive for any reason could have a material adverse effect upon Kforce. Success also depends upon our ability to identify, develop, incentivize and retain qualified operating employees; particularly management, client servicing, and consultant and candidate recruiting employees. 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 of some of our key operating employees could have a material adverse effect on our business, including our ability to establish and maintain client, consultant and candidate, professional and technical relationships.
Kforce maintains debt which 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 $300.0 million, subject to certain limitations. Borrowings under the credit facility are secured by substantially all of the tangible and intangible assets of the Firm, excluding the Firm’s corporate headquarters and certain other designated executed collateral.
Adverse changes in credit markets, including increases in interest rates, could increase our cost of borrowing and/or make it more difficult to refinance our existing indebtedness, if necessary. We have reduced our exposure to rising interest rates by entering into an interest rate hedging arrangement, although this and other arrangements may result in us incurring higher interest expenses than we would have otherwise incurred. If interest rates increase in the absence of such arrangements though, we would need to dedicate more of our cash flow from operations to service our debt.
Kforce is subject to certain affirmative and negative covenants under our credit facility. Our failure to comply with such restrictive covenants could result in an event of default, which, if not cured or waived, could result in Kforce being required to repay the outstanding balance before the due date. If this occurs, we may not be able to repay our debt or we may be forced to refinance on terms not acceptable to us, which could have a material adverse effect on our results of operations and financial condition.
Declines in business or a loss of our major client accounts could have a material adverse effect on our revenues and financial results.
Part of our business strategy includes enhancing our service offerings and relationships with large consumers of temporary staffing, which is intended to enable us to profitably grow our revenues with these clients. 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, could reduce their need for our services and result in a significant decrease in the revenues we derive from those clients and could have a material adverse effect on our financial results.
Kforce’s temporary staffing business could be adversely impacted by health care reform.
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “PPACA”) imposes mandates on individuals and employers, requiring most individuals to have health insurance. The PPACA assesses penalties on large employers that do not offer health insurance meeting certain coverage, value, or affordability standards to all full-time employees as defined under the PPACA. Because the regulations governing the PPACA’s employer mandate are subject to interpretation, it is possible that Kforce may incur liability in the form of penalties, fines, or damages if the health plans we offer are subsequently found not to meet minimum essential coverage, affordability or minimum value standards, or if our method for determining eligibility for coverage is found inadequate or our clients seek indemnification for health care claims resulting from consultants working on client assignments. The cost of any such penalties, fines or damages could have a material adverse effect on Kforce’s financial and operating results.

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New business initiatives and strategic changes may divert management’s attention from normal business operations, which could adversely affect our performance.
New business initiatives and strategic changes in the composition of our business mix can be a diversion to our management’s attention from other business concerns and disruptive to our operations, causing our business and results of operations to suffer materially. Acquisitions and new business initiatives could involve significant unanticipated challenges and risks, including that they may not advance our business strategy, we may not realize our anticipated return on our investment, we may lose key personnel, we may retain unforeseen liabilities, we may experience difficulty in implementing initiatives or integrating acquired operations, or management's attention may be diverted from our other businesses. These events could cause material harm to our business, operating results, or financial condition.
We are exposed to intangible asset risk which could result in future impairment.
We regularly review our intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. We test goodwill and indefinite-lived intangible assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying value of the intangible assets may not be recoverable, include: macroeconomic conditions; industry and market considerations; increases in labor or other costs that have a negative effect on earnings and cash flows; negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; and other relevant entity-specific events, such as changes in key personnel, strategy, or clients, and sustained decreases in share price. We may be required to record a charge in our financial statements, which could be material, during the period in which we determine an impairment of our acquired intangible assets has occurred, negatively impacting our financial results.
Delays in collecting our trade accounts receivable could adversely affect our business.
We generate a significant amount of trade accounts receivable from our clients. Delays in payments owed to us could have a material adverse effect on our financial condition and cash flows generated by our business. Factors that could cause a delay include business failures, turmoil in the financial and credit markets, sluggish or recessionary U.S. economic conditions, our exposure to clients in high-risk sectors such as the financial services industry, declines in the credit worthiness of our clients, extension in payment terms with our clients and declines in the business of our clients.
Kforce depends on the proper functioning of its information systems.
Kforce is dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of Kforce’s daily operations, most significantly, in the identification and matching of staffing resources to client assignments and in the client billing and consultant or vendor payment functions. Kforce’s information systems may not perform as anticipated 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, and similar events. Our corporate headquarters and data center are located in a hurricane-prone area though we have disaster recovery systems for some key information systems, such as billing and payroll, but not for all such key systems. Failure or interruption of our critical information systems may require significant additional capital and management resources to resolve, causing a material adverse effect on our business. Additionally, many of our information technology systems and networks are cloud-based or managed by third parties, whose future performance and reliability we cannot control. The risk of a cyberattack or security breach on a third party carries the same risks to Kforce as those associated with our internal systems.  We seek to reduce these risks by performing vendor due diligence procedures prior to engaging with any third party vendor who will have access to sensitive data. Additionally, we require audits of the relevant third parties’ information technology processes on an annual basis. However, there can be no assurance that such parties will not experience cybersecurity breaches which could adversely affect our employees, customers and businesses or that our audit or diligence processes will successfully deter or prevent such breach.

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Cybersecurity risks and cyber incidents could adversely affect our business and disrupt operations.
Cyber attacks or other breaches of network or information technology used by our associates and consultants, as well as risks associated with compliance on data privacy could have an adverse effect on our systems, services, operations and financial results. These attacks include, but are not limited to, gaining 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 cyber attacks or other breaches of our networks, techniques used to obtain unauthorized access or cause system interruption change frequently and may not immediately produce signs of intrusion. As a result, we may be unable to anticipate these incidents or techniques, timely discover them, or implement adequate preventative measures. 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.
Significant increases in wages or payroll-related costs could adversely affect Kforce’s business.
Significant increases in wages or the effective rates of any payroll-related costs could have a material adverse effect on Kforce. 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 adversely impact 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 recently enacted Tax Cuts and Jobs Act (“TCJA”) requires significant interpretation and application of the new law. As additional regulatory guidance is issued and we continue to analyze the application of the new law, we may be required to refine our estimates, which could materially affect our tax obligations and effective tax rate. Although Kforce attempts to comply with all taxing authority regulations, adverse findings or assessments made by taxing authorities as the result of an audit could have a material adverse effect on Kforce.
Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors and fraud, or in making all material information known in a timely manner to management.
Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Kforce have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations, misstatements due to error or fraud may occur and not be detected.
Our business is dependent upon maintaining our reputation, our relationships, and our performance.
The reputation and relationships that we have established and currently maintain with our clients are important to maintaining existing business and identifying new business. If our reputation or relationships were damaged, it could have a material adverse effect on our operations. In addition, if our performance does not meet our clients’ expectations, our revenues and operating results could be materially harmed.

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Agreements may be terminated by clients and consultants at will and the termination of a significant number of such agreements could adversely affect our revenues.
Our agreements do not provide for exclusive use of our services, and clients are free to place orders with our competitors. Each consultant’s relationship with us is terminable at will. If clients terminate a significant number of our agreements and we are unable to generate new contracts, or a significant number of our consultants cease performing services for us and we are unable to find suitable replacements, the growth of our business could be adversely affected and our revenues and results of operations could be harmed.
Our failure to keep pace with technological change in our industry will potentially place us at a competitive disadvantage.
Our future success may depend 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 which support candidate searching and matching, hiring and tracking, order management, billing, and client data analytics. Our success may depend on our ability to keep pace with rapid technological changes in the development and implementation of these services. If our systems become outdated, or if our investments in technology fail to provide the expected results, then we may be unable to maintain our technological capabilities relative to our competitors and our business could be negatively affected.
Kforce’s current market share may decrease as a result of limited barriers to entry for new competitors and discontinuation of clients outsourcing their staffing needs.
We face significant competition in the markets we serve, and there are limited barriers to entry for new competitors. The competition among staffing services firms is intense. Kforce competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search firms, and other providers of staffing services. Some of our competitors possess substantially greater resources than we do. From time to time, we experience significant pressure from our clients to reduce price levels. During these periods, we may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fulfill our clients’ needs. We also face the risk that certain of our current and prospective clients will decide to provide similar services internally, particularly if regulatory burdens are reduced.
Vendor management services are considered a competitor and increasing use by our clients could affect our relationships.
Increasingly, many clients and potential clients are retaining third parties to provide vendor management services. The third party, or vendor management company, is responsible for retaining companies that will provide temporary information technology personnel to the client. This results in Kforce contracting with such third parties and not directly with the end customer. This change can weaken Kforce’s relationship with its clients, which may make it more difficult to maintain and expand our business with existing customers. In addition, the agreements with vendor management companies are frequently structured as subcontracting agreements, with the vendor management company entering into a services agreement directly with the end customer. As a result, in the event of a bankruptcy of a vendor management company, Kforce’s ability to collect its outstanding receivables and continue to provide services could be adversely affected.
Provisions in Kforce’s articles and bylaws and under Florida law may have certain anti-takeover effects.
Kforce’s articles of incorporation and bylaws and Florida law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. In particular, our articles of incorporation provide for a staggered Board of Directors (“Board”) and permit the removal of directors only for cause. Additionally, the Board may issue up to 15 million shares of preferred stock, and fix the rights and preferences thereof, without a further vote of the shareholders. In addition, certain of our officers and managers have employment agreements containing certain provisions that call for substantial payments to be made to such employees in certain circumstances after a change in control. Certain 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 have a negative effect on the market price of our common stock.
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, or other developments affecting us, our clients, or our competitors; some of which may be unrelated to our performance.

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In addition, the stock market in general, especially The NASDAQ Global Select Market (“NASDAQ”) tier, along with market prices for staffing companies, has experienced 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.
RISKS RELATED TO OUR GOVERNMENT BUSINESS
Our GS segment is substantially dedicated to contracting with and serving U.S. Federal Government agencies (the “Government Business”). In addition, Kforce supplies services to the Federal Government which poses additional risks to those mentioned previously. Federal contractors, including Kforce, face a number of risks, including but not limited to the following:
Our failure to comply with complex federal procurement laws and regulations could cause us to lose business, incur additional costs, and subject us to a variety of penalties, including suspension and debarment from contracting with the Federal Government.
We must comply with complex laws and regulations relating to the formation, administration, and performance of Federal Government contracts. These laws and regulations create compliance risk, affect how we do business with our federal agency clients, and may impose added costs on our business. If a government review, audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines, and suspension or debarment from contracting with Federal Government agencies.
The Federal Government also may reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that could be costly to satisfy or that could impact our ability to obtain new contracts. A failure to comply with all applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with Federal Government agencies; each of which could lead to a material reduction in our revenues, cash flows and operating results.
Unfavorable government audit results could force us to refund previously recognized revenues and could subject us to a variety of penalties and sanctions.
Federal agencies can audit and review our performance on contracts, pricing practices, cost structure, incurred cost submissions and compliance with applicable laws, regulations, and standards. An audit of our work, including an audit of work performed by companies Kforce has acquired or may acquire, or subcontractors we have hired or may hire, could force us to refund previously recognized revenues.
If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with Federal Government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true.
We are dependent upon the ability of government agencies to administratively manage our contracts.
After we are awarded a contract and the contract is funded by the Federal Government, we are still dependent upon the ability of the relevant agency to administratively manage our contract. We can be adversely impacted by delays in the start-up of already awarded and funded projects, including delays due to shortages of acquisition and contracting personnel within the Federal Government agencies.

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Changes in the spending policies or budget priorities of the Federal Government including the failure by Congress to approve budgets, raise the U.S. debt ceiling or avoid sequestration on a timely basis for the federal agencies we support could delay, reduce or stop federal spending and cause us to lose revenue or impair our intangible assets.
Changes in Federal Government fiscal or spending policies could materially adversely affect our Government Business; in particular, our business could be materially adversely affected by decreases in Federal Government spending. In addition, on an annual basis, Congress must approve and the President must sign the appropriation bills that govern spending by each of the federal agencies we support. If Congress is unable to agree on budget priorities and is unable to appropriate funds or pass the annual budget on a timely basis, or a government shutdown were to occur (as happened recently but of a sufficiently short duration to not cause significant harm to our business), there may be delays, reductions or cessations of funding for our services and solutions. In addition, from time to time it has been necessary for Congress to raise the U.S. debt ceiling in order to allow for borrowing necessary to fund government operations. If that becomes necessary again and Congress fails to raise the debt ceiling on a timely basis, there may be delays, reductions or cessations of funding for our services and solutions. Furthermore, legislatively mandated cuts in federal programs, known as sequestration, could result in delays, reductions or cessation of funding for our services and solutions.
Competition is intense in the Government Business.
There is often intense competition to win federal agency contracts. The competitive bidding process entails substantial costs and management time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Even when a contract is awarded to us, we may encounter significant expenses, delays, contract modifications, or bid protests from competitors. If we are unable to successfully compete for new business or win competitions to maintain existing business, our operations could be materially adversely affected. Many of our competitors are larger and have greater resources, larger client bases, and greater brand recognition than we do. Our larger competitors also may be able to provide clients with different or greater capabilities or benefits than we can provide.
Loss of our General Services Administration (“GSA”) Schedules or other contracting vehicles could impair our ability to win new business.
GSA Schedules constitute a significant percentage of revenues from our federal agency clients. If we were to lose one or more of these Schedules or other contracting vehicles, we could lose revenues and our operating results could be materially adversely affected. These Schedules or contracts typically have an initial term with multiple options that may be exercised by our government agency clients to extend the contract for successive periods of one or more years. We can provide no assurance that our clients will exercise these options.
Our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business.
Some government contracts 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 contract or decide not to renew it upon its expiration.
Our employees may engage in misconduct or other improper activities, which could harm our business.
Like all government contractors, we are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by our employees could include intentional or unintentional failures to comply with Federal Government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records. Employee misconduct could also involve the improper use of our clients’ sensitive or classified information, which could result in regulatory sanctions against us and serious harm to our reputation. It is not always possible to deter employee misconduct, and precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could materially adversely affect our business.
Security breaches in sensitive government information systems could result in the loss of our clients and cause negative publicity.
Many of the systems we develop, install, and maintain involve managing and protecting information used in intelligence, national security, and other sensitive or classified government functions. A security breach in one of these systems 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. We could incur losses from such a security breach that could exceed the policy limits under our insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of our systems could materially reduce our revenues.

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We are the prime contractor on many of our contracts and if our subcontractors fail to appropriately perform their obligations, our performance and our ability to win future contracts could be harmed.
For many of our contracts where we are the prime contractor, we involve subcontractors, which we rely on to perform a portion of the services that we must provide to our clients. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed or client concerns about the subcontractor’s performance. In addition, the contracting parties on which we rely may be affected by changes in the economic environment and constraints on available financing to meet their performance requirements or provide needed supplies on a timely basis. A failure by one or more of those contracting parties to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis may affect our ability to perform our obligations.
We are the subcontractor on many of our contracts and if we, or the applicable prime contractors, fail to appropriately perform our and their obligations, our financial condition may be harmed.
For many of our contracts, we are a subcontractor, and we therefore rely on the applicable prime contractor to secure contracts when they are put up for bid for a renewal or a new contract.  There is a risk that the applicable prime contractor is unable to secure such bids for a number of reasons, including the prime contractor’s quality and timeliness of services, financial condition, and relationships with the Federal Government.  In addition, there are risks that we are unable to provide such subcontractor services with the quality and timeliness demanded by the prime contractor or the ultimate end-client.  Any failure by the applicable prime contractor to secure contracts or by us to perform adequately could materially adversely affect our business.
ITEM 1B.     UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.     PROPERTIES.
We own our corporate headquarters in Tampa, Florida, which is approximately 128,000 square feet of space. In addition, as of December 31, 2017, we leased approximately 334,000 square feet of total office space in 59 field offices located throughout the U.S., with lease terms ranging from three to five-years although a limited number of leases contain short-term renewal provisions that range from month-to-month to one year.
Although additional field offices may be established based on the requirements of our operations, we believe that our facilities are adequate for our current needs, and we do not expect to materially expand or contract our facilities in the foreseeable future.
ITEM 3.     LEGAL PROCEEDINGS.
We are involved in legal proceedings, claims, and administrative matters that arise in the ordinary course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our financial position, results of operations, or cash flows. Kforce maintains liability insurance in amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that Kforce insures against are workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, cyber liability, employment practices liability and fidelity losses. There can be no assurance that Kforce’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities. Accordingly, we disclose matters below for which a material loss is reasonably possible.

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On August 25, 2016, Kforce Flexible Solutions LLC (along with co-defendant BMO Harris Bank) was served with a complaint brought in the Northern District of Illinois, U.S. District Court, Eastern District of Illinois; Shepard v. BMO Harris Bank N.A. et al., Case No.: 1:16-cv-08288. The plaintiff purports to bring claims on her own behalf and on behalf of a putative class of telephone-dedicated workers for alleged violations of the Fair Labor Standards Act, the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Act based upon the defendants’ purported failure to pay her and other class members all earned regular and overtime pay for all time worked. More specifically, the plaintiff alleges that class employees were required to perform unpaid work before and after the start and end times of their shifts. She seeks unpaid back regular and overtime wages, liquidated damages, statutory penalties, and attorney fees and costs. On February 15, 2018, the judge granted final approval of the parties’ agreed resolution and the case will be dismissed following implementation of the parties’ settlement. This matter was resolved without any material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
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.
Market Information
Our common stock trades on the NASDAQ using the ticker symbol “KFRC”. The following table sets forth, for the periods indicated, the high and low intra-day sales price of our common stock, as reported on the NASDAQ. These prices represent inter-dealer quotations without retail markups, markdowns or commissions, and may not represent actual transactions.
 
Three Months Ended
 
March 31,
 
June 30,
 
September 30,
 
December 31,
2017
 
 
 
 
 
 
 
High
$
26.95

 
$
24.30

 
$
20.65

 
$
26.75

Low
$
21.28

 
$
17.45

 
$
16.75

 
$
19.10

2016
 
 
 
 
 
 
 
High
$
25.00

 
$
20.40

 
$
20.55

 
$
24.25

Low
$
14.87

 
$
15.78

 
$
16.22

 
$
15.95

From January 1, 2018 through February 21, 2018, the high and low intra-day sales price of our common stock was $28.94 and $23.80, respectively. On February 21, 2018, the last reported sale price of our common stock on the NASDAQ was $28.20 per share.
Holders of Common Stock
As of February 21, 2018, there were approximately 158 holders of record.
Dividends
Kforce’s Board may, at its discretion, declare and pay dividends on the outstanding shares of Kforce’s common stock out of retained earnings, subject to statutory requirements. Dividends for any outstanding and unvested restricted stock as of the record date are awarded in the form of additional shares of forfeitable restricted stock, at the same rate as the cash dividend on common stock and based on the closing stock price on the record date. Such additional shares have the same vesting terms and conditions as the outstanding and unvested restricted stock.
During the years ended December 31, 2017 and 2016, Kforce declared and paid a dividend of $0.12 in each quarter for all outstanding shares of common stock. Kforce currently expects to continue to declare and pay quarterly dividends of a similar amount. However, 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 and our legal ability to pay dividends. There can be no assurances that dividends will be paid in the future.

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Table of Contents

Purchases of Equity Securities by the Issuer
The following table presents information with respect to our repurchases of Kforce common stock during the three months ended December 31, 2017:
Period
Total Number of
Shares Purchased
(1)(2)
 
Average Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
October 1, 2017 to October 31, 2017
155,279

 
$
20.24

 
155,279

 
$
46,148,526

November 1, 2017 to November 30, 2017
19,997

 
$
24.12

 
12,364

 
$
45,862,824

December 1, 2017 to December 31, 2017
379,730

 
$
25.83

 
283,662

 
$
38,480,203

Total
555,006

 
$
24.20

 
451,305

 
$
38,480,203

 
(1)
Includes 7,633 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period November 1, 2017 to November 30, 2017.
(2)
Includes 96,068 shares of stock received upon vesting of restricted stock to satisfy tax withholding requirements for the period December 1, 2017 to December 31, 2017.
ITEM 6.     SELECTED FINANCIAL DATA.
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the information within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
 
Years Ended December 31,
 
2017 (1)
 
2016 (2)
 
2015
 
2014 (3)
 
2013 (3)(4)(5)
 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net service revenues
$
1,357,940

 
$
1,319,706

 
$
1,319,238

 
$
1,217,331

 
$
1,073,728

Gross profit
408,056

 
408,499

 
414,114

 
374,581

 
344,376

Selling, general and administrative expenses
331,172

 
340,742

 
330,034

 
314,966

 
307,339

Goodwill impairment

 

 

 

 
14,510

Depreciation and amortization
8,255

 
8,701

 
9,831

 
9,894

 
9,846

Other expense, net
4,535

 
3,101

 
2,577

 
1,764

 
1,752

Income from continuing operations, before income taxes
64,094

 
55,955

 
71,672

 
47,957

 
10,929

Income tax expense
30,809

 
23,182

 
28,848

 
18,559

 
5,635

Income from continuing operations
33,285

 
32,773

 
42,824

 
29,398

 
5,294

Income from discontinued operations, net of tax

 

 

 
61,517

 
5,493

Net income
$
33,285

 
$
32,773

 
$
42,824

 
$
90,915

 
$
10,787

Earnings per share – basic, continuing operations
$
1.32

 
$
1.26

 
$
1.53

 
$
0.94

 
$
0.16

Earnings per share – diluted, continuing operations
$
1.30

 
$
1.25

 
$
1.52

 
$
0.93

 
$
0.16

Earnings per share – basic
$
1.32

 
$
1.26

 
$
1.53

 
$
2.89

 
$
0.32

Earnings per share – diluted
$
1.30

 
$
1.25

 
$
1.52

 
$
2.87

 
$
0.32

Weighted average shares outstanding – basic
25,222

 
26,099

 
27,910

 
31,475

 
33,511

Weighted average shares outstanding – diluted
25,586

 
26,274

 
28,190

 
31,691

 
33,643

Dividends declared per share
$
0.48

 
$
0.48

 
$
0.45

 
$
0.41

 
$
0.10


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As of December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(IN THOUSANDS)
Working capital
$
161,726

 
$
135,353

 
$
122,270

 
$
125,246

 
$
108,251

Total assets
$
384,304

 
$
365,421

 
$
351,822

 
$
363,922

 
$
347,768

Total outstanding borrowings on credit facility
$
116,523

 
$
111,547

 
$
80,472

 
$
93,333

 
$
62,642

Total long-term liabilities
$
166,308

 
$
160,332

 
$
124,449

 
$
130,351

 
$
100,562

Stockholders’ equity
$
134,277

 
$
121,736

 
$
139,627

 
$
139,388

 
$
157,233

 
(1)
The TCJA was enacted in December 2017, which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% beginning in 2018. As a result, we revalued our net deferred income tax assets and recorded $5.4 million of additional income tax expense during the year ended December 31, 2017.
(2)
During 2016, Kforce incurred approximately $6.0 million in severance costs associated with realignment activities focused on further streamlining our organization which were recorded in SG&A.
(3)
During 2014, Kforce disposed of Kforce Healthcare, Inc. (“KHI”), a wholly-owned subsidiary of Kforce Inc. The results of operations for KHI have been presented as discontinued operations for the years ended December 31, 2014 and 2013.
(4)
Kforce recognized a $14.5 million goodwill impairment charge related to the GS reporting unit during 2013. The tax benefit associated with this impairment charge was $5.2 million resulting in an after-tax impairment charge of $9.3 million.
(5)
During 2013, Kforce commenced a plan to streamline its structure through an organizational realignment and incurred severance and termination-related expenses of $7.1 million which were recorded within SG&A. In connection with the realignment and succession planning, the Kforce’s Compensation Committee approved discretionary bonuses of $3.6 million paid to a broad group of senior management during the fourth quarter of 2013.

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.
This overview summarizes the MD&A, which includes the following sections:
Executive Summary An executive summary of our results of operations for 2017.
Results of Operations – An analysis of Kforce’s consolidated results of operations for the three years presented in the consolidated financial statements. In order to assist the reader in understanding our business as a whole, certain metrics are presented for each of our segments.
Liquidity and Capital Resources – An analysis of cash flows, credit facility, off-balance sheet arrangements, stock repurchases, contractual obligations and commitments.
Critical Accounting Estimates – A discussion of the accounting estimates that are most critical to aid in fully understanding and evaluating our reported financial results and that require management’s most difficult, subjective or complex judgments.
New Accounting Standards – A discussion of recently issued accounting standards and the potential impact on our consolidated financial statements.


21

Table of Contents

EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are highlights for 2017, which should be considered in the context of the additional discussions herein and in conjunction with the consolidated financial statements and notes thereto.
Net service revenues increased 2.9% to $1.36 billion in 2017 from $1.32 billion in 2016. Net service revenues increased 2.7% for Tech, 2.5% for FA and 5.7% for GS.
Flex revenues increased 3.2% to $1.31 billion in 2017 from $1.27 billion in 2016. Flex revenues increased 2.8%, 3.6% and 5.7% for Tech, FA and GS, respectively. Quarterly year-over-year growth rates in Tech Flex, our largest segment, accelerated in the second half of 2017.
Direct Hire revenues decreased 5.4% to $47.7 million in 2017 from $50.4 million in 2016.
Flex gross profit margin decreased 70 basis points to 27.5% in 2017 from 28.2% in 2016. Flex gross profit margin decreased 60 basis points for Tech, 90 basis points for FA and 150 basis points for GS. These margin decreases were primarily a result of compression in the spread between our bill rates and pay rates, higher health insurance costs and the impact of Hurricanes Harvey and Irma. In the second half of 2017, we made progress in partially mitigating the spread compression we experienced in the first half of 2017 through increased pricing discipline and other operational programs.
SG&A expenses as a percentage of revenues for the year ended December 31, 2017 decreased to 24.4% from 25.8% in 2016. The 140 basis point decrease was driven primarily by $6.0 million in severance costs recognized in 2016 related to realignment activities, improving associate productivity levels in 2017 and overall continued discipline in areas such as travel and office related expenses. These benefits were partially offset by an increase in information technology investments.
Additionally, during 2017, Kforce completed the sale of Global’s assets and recorded a $3.3 million gain within SG&A. Prior to the sale, Global generated approximately $2.5 million in Tech Flex revenue per quarter.
Net income for the year ended December 31, 2017 increased 1.6% to $33.3 million from $32.8 million in 2016 and diluted earnings per share for the year ended December 31, 2017 increased to $1.30 from $1.25 per share in 2016, primarily driven by the SG&A items described above.
During 2017, Kforce repurchased 526 thousand shares of common stock on the open market at a total cost of approximately $12.2 million.
The Firm declared and paid dividends totaling $0.48 per share during the year ended December 31, 2017, resulting in a total cash payout of $12.1 million.
The Firm entered into a new credit facility on May 25, 2017, which, among other things, increased our borrowing capacity by $130.0 million to $300.0 million. The total amount outstanding under the credit facility increased $5.0 million to $116.5 million as of December 31, 2017 as compared to $111.5 million as of December 31, 2016. This increase was primarily driven by lower than anticipated operating cash flows as a result of an increase in accounts receivable due to our revenue growth, timing of collections and certain clients extending payment terms.
The Firm entered into a forward-starting interest rate swap agreement on April 21, 2017 to mitigate the risk of rising interest rates. The notional amount of the interest rate swap (the “Swap”) is $65.0 million for the first three years and decreases to $25.0 million for years four and five. The fair value of our Swap as of December 31, 2017 was a $0.5 million asset.



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Table of Contents

RESULTS OF OPERATIONS
In 2017, we continued to make progress on our strategic initiatives including:
Implementing new and upgrading existing technologies that we believe will allow us to more effectively and efficiently serve our clients, consultants and candidates and improve the productivity of our people and scalability of our organization. We completed the deployment of our new customer relationship management system during 2017 and made significant progress towards the implementation of other technology initiatives related to our consultant time and expense management process, associate expense reimbursement, business and data intelligence applications among other areas, which we expect to benefit us in 2018 and beyond. We also laid the foundation during 2017 for future technology initiatives.
Continuing to align our revenue-generating talent to the markets, products, industries and clients that we believe present Kforce with the greatest opportunity for profitable revenue growth. During 2017, we further optimized the alignment of our revenue-generating and revenue-enabling organizations to enhance our efficiency and effectiveness in serving our clients, consultants and candidates. We also conducted sustainment activities related to our enhanced sales methodology that was rolled out in the fourth quarter of 2016.
During the third quarter of 2017, our results of operation were adversely impacted by Hurricanes Harvey and Irma and, more importantly, the devastation felt by our associates, clients and consultants was significant. We made the decision to prioritize the care and safety of our core associates and consultants by continuing to compensate them while our clients were closed and provided additional support for those with more critical needs. We also more broadly supported the recovery efforts with a pledge of $1.0 million in charitable contributions to support these efforts. The combined impact to our earnings per share was $0.04 during 2017.
Net Service Revenues. The following table presents certain items in our Consolidated Statements of Operations and Comprehensive Income as a percentage of net service revenues for the years ended:
 
December 31,
 
2017
 
2016
 
2015
Revenues by segment:
 
 
 
 
 
Tech
66.8
%
 
66.9
%
 
67.9
%
FA
25.5

 
25.6

 
24.7

GS
7.7

 
7.5

 
7.4

Net service revenues
100.0
%
 
100.0
%
 
100.0
%
Revenues by type:
 
 
 
 
 
Flex
96.5
%
 
96.2
%
 
95.9
%
Direct Hire
3.5

 
3.8

 
4.1

Net service revenues
100.0
%
 
100.0
%
 
100.0
%
Gross profit
30.0
%
 
31.0
%
 
31.4
%
Selling, general and administrative expenses
24.4
%
 
25.8
%
 
25.0
%
Depreciation and amortization
0.6
%
 
0.7
%
 
0.7
%
Income from operations
5.1
%
 
4.5
%
 
5.6
%
Income before income taxes
4.7
%
 
4.2
%
 
5.4
%
Net income
2.5
%
 
2.5
%
 
3.2
%

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Table of Contents

The following table presents net service revenues for Flex and Direct Hire by segment and percentage change from the prior period for the years ended December 31 (in thousands):
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech revenues
 
 
 
 
 
 
 
 
 
Flex revenues
$
887,675

 
2.8
 %
 
$
863,434

 
(1.2
)%
 
$
873,609

Direct Hire revenues
19,836

 
(1.0
)%
 
20,043

 
(10.3
)%
 
22,333

Total Tech revenues
$
907,511

 
2.7
 %
 
$
883,477

 
(1.4
)%
 
$
895,942

FA revenues
 
 
 
 
 
 
 
 
 
Flex revenues
$
318,294

 
3.6
 %
 
$
307,245

 
4.4
 %
 
$
294,186

Direct Hire revenues
27,841

 
(8.3
)%
 
30,356

 
(4.4
)%
 
31,738

Total FA revenues
$
346,135

 
2.5
 %
 
$
337,601

 
3.6
 %
 
$
325,924

GS revenues
 
 
 
 
 
 
 
 
 
Flex revenues
$
104,294

 
5.7
 %
 
$
98,628

 
1.3
 %
 
$
97,372

Total GS revenues
$
104,294

 
5.7
 %
 
$
98,628

 
1.3
 %
 
$
97,372

 
 
 
 
 
 
 
 
 
 
Total Flex revenues
$
1,310,263

 
3.2
 %
 
$
1,269,307

 
0.3
 %
 
$
1,265,167

Total Direct Hire revenues
47,677

 
(5.4
)%
 
50,399

 
(6.8
)%
 
54,071

Total Net service revenues
$
1,357,940

 
2.9
 %
 
$
1,319,706

 
 %
 
$
1,319,238


Certain quarterly revenue trends are referred to in discussing annual comparisons. Our quarterly operating results are affected by the number of billing days in a quarter. The following 2017 quarterly information is presented for informational purposes only (in thousands, except Billing Days).
 
Three Months Ended
 
December 31
 
September 30
 
June 30
 
March 31
 
Revenues
 
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
 
Revenues
 
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
 
Revenues
 
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
 
Revenues
 
Year-Over-Year Revenue Growth Rates
(Per Billing Day)
Flex revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tech
$
223,897

 
5.4
 %
 
$
224,148

 
3.3
 %
 
$
222,744

 
1.5
 %
 
$
216,886

 
2.7
 %
FA
79,098

 
0.3
 %
 
78,209

 
4.1
 %
 
80,038

 
4.3
 %
 
80,949

 
7.5
 %
GS
29,421

 
25.7
 %
 
26,547

 
0.6
 %
 
23,674

 
(6.4
)%
 
24,652

 
6.6
 %
Total Flex revenues
$
332,416

 
5.6
 %
 
$
328,904

 
3.3
 %
 
$
326,456

 
1.6
 %
 
$
322,487

 
4.2
 %
Direct Hire revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tech
$
3,919

 
(10.3
)%
 
$
5,133

 
1.3
 %
 
$
5,625

 
9.3
 %
 
$
5,159

 
(4.1
)%
FA
6,251

 
(9.6
)%
 
7,016

 
(9.0
)%
 
8,228

 
(2.4
)%
 
6,346

 
(11.7
)%
Total Direct Hire revenues
$
10,170

 
(9.9
)%
 
$
12,149

 
(4.9
)%
 
$
13,853

 
2.1
 %
 
$
11,505

 
(8.4
)%
Revenue by segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tech
$
227,816

 
5.1
 %
 
$
229,281

 
3.3
 %
 
$
228,369

 
1.7
 %
 
$
222,045

 
2.5
 %
FA
85,349

 
(0.5
)%
 
85,225

 
2.9
 %
 
88,266

 
3.6
 %
 
87,295

 
5.8
 %
GS
29,421

 
25.7
 %
 
26,547

 
0.6
 %
 
23,674

 
(6.4
)%
 
24,652

 
6.6
 %
Total Net service revenues
$
342,586

 
5.1
 %
 
$
341,053

 
3.0
 %
 
$
340,309

 
1.6
 %
 
$
333,992

 
3.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Billing Days
 
 
61

 
 
 
63

 
 
 
64

 
 
 
64



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Table of Contents

Flex Revenues. The key drivers of Flex revenues are the number of consultants on assignment, number of billable hours, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.
Flex revenues for our largest segment, Tech, increased 2.8% during the year ended December 31, 2017, as compared to 2016 and decreased 1.2% in 2016 from 2015. Our 2017 increase was driven by an acceleration of quarterly year-over-year growth rates in the second half of 2017, which we believe is a result of our strategic portfolio alignment efforts as well as the investments we have made in an effort to improve the productivity and effectiveness of our revenue-generating talent. We have been focused on diversifying our portfolio to grow revenues with other Fortune 500 companies outside of our top 25 largest clients; much of the revenue growth that we experienced in the second half of 2017 was a result of these efforts. Our belief in the strength in the demand environment within Tech Flex has not changed; thus, we expected continued growth in 2018 in this segment.
Our FA segment experienced an increase in Flex revenues of 3.6% during the year ended December 31, 2017, as compared to 2016 and increased 4.4% in 2016 from 2015. Over the last several years, we have seen greater opportunities from larger volume projects in centralized and partially outsourced functional areas such as benefits and enrollment support and other service and administrative functions as clients continue to evaluate their strategies for meeting their human capital needs. We expect our FA segment to grow on a year-over-year basis in 2018.
Our GS segment experienced an increase in Flex revenues of 5.7% during the year ended December 31, 2017, as compared to 2016 and increased 1.3% in 2016 from 2015. Our GS segment was awarded two prime contract wins in the third quarter of 2017 under the T4 Next Generation contract vehicle with the U.S. Department of Veterans Affairs totaling nearly $100 million. Revenues for GS grew approximately 25% on a year-over-year basis in the fourth quarter of 2017 primarily as a result of these prime contract wins. Our GS segment’s largest contract is being recompeted by the prime contractor in the first quarter of 2018. Provided GS is successful at retaining this contract, we expect our GS segment should grow in the low double digits on a year-over-year basis in 2018.
The following table presents the key drivers for the change in Flex revenues for our Tech and FA segments over the prior period for the years ended December 31 (in thousands):
 
2017
 
2016
 
Tech
 
FA
 
Tech
 
FA
Key Drivers
 
 
 
 
 
 
 
Volume (hours billed)
$
9,710

 
$
3,915

 
$
(10,115
)
 
$
15,198

Bill rate
14,563

 
7,053

 
896

 
(2,055
)
Billable expenses
(32
)
 
81

 
(956
)
 
(84
)
Total change in Flex revenues
$
24,241

 
$
11,049

 
$
(10,175
)
 
$
13,059

The following table presents total Flex hours billed for our Tech and FA segments and percentage change over the prior period for the years ended December 31 (in thousands):
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech
12,878

 
1.1
%
 
12,735

 
(1.2
)%
 
12,885

FA
9,595

 
1.3
%
 
9,474

 
5.2
 %
 
9,008

Total Flex hours billed
22,473

 
1.2
%
 
22,209

 
1.4
 %
 
21,893

As the GS segment primarily provides integrated business solutions as compared to staffing services, Flex hours are not presented above.
Direct Hire Revenues. The key drivers of Direct Hire revenues are the number of placements and the associated placement fee. Direct Hire revenues also include conversion revenues, which can occur when consultants initially assigned to a client on a temporary basis are later converted to a permanent placement for a fee. Our GS segment does not make permanent placements.
Direct Hire revenues decreased 5.4% during the year ended December 31, 2017 as compared to 2016 and decreased 6.8% in 2016 from 2015. The decrease for 2017 as compared to 2016 and 2016 as compared to 2015 is primarily the result of a shift in management’s strategy to make selective investments only where capacity needs exist.

25

Table of Contents

The following table presents the key drivers for the change in Direct Hire revenues over the prior period for the years ended December 31 (in thousands):
 
2017
 
2016
Key Drivers
 
 
 
Volume (number of placements)
$
(3,084
)
 
$
(2,476
)
Placement fee
362

 
(1,196
)
Total change in Direct Hire revenues
$
(2,722
)
 
$
(3,672
)
The following table presents the total number of placements for our Tech and FA segments and percentage change over the prior period for the years ended December 31:
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech
1,139

 
(4.4
)%
 
1,191

 
(14.6
)%
 
1,395

FA
2,355

 
(7.0
)%
 
2,531

 
1.0
 %
 
2,505

Total number of placements
3,494

 
(6.1
)%
 
3,722

 
(4.6
)%
 
3,900

The following table presents the average fee per placement for our Tech and FA segments and percentage change over the prior period for the years ended December 31:
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech
$
17,410

 
3.4
 %
 
$
16,836

 
5.1
 %
 
$
16,014

FA
$
11,826

 
(1.4
)%
 
$
11,994

 
(5.3
)%
 
$
12,668

Total average placement fee
$
13,646

 
0.8
 %
 
$
13,543

 
(2.3
)%
 
$
13,864

Gross Profit. Gross profit is determined by deducting the direct cost of services (primarily consultant compensation, payroll taxes, payroll-related insurance and certain fringe benefits, as well as subcontractor costs) from total revenues. In addition, there are no consultant payroll costs associated with Direct Hire placements, thus, all Direct Hire revenues increase gross profit by the full amount of the placement fee.
The following table presents the gross profit percentage (gross profit as a percentage of total revenues) for each segment and percentage change over the prior period for the years ended December 31:
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech
28.3
%
 
(2.4
)%
 
29.0
%
 
(0.7
)%
 
29.2
%
FA
34.2
%
 
(4.2
)%
 
35.7
%
 
(2.2
)%
 
36.5
%
GS
31.1
%
 
(4.6
)%
 
32.6
%
 
(5.0
)%
 
34.3
%
Total gross profit percentage
30.0
%
 
(3.2
)%
 
31.0
%
 
(1.3
)%
 
31.4
%
The change in total gross profit percentage for 2017 as compared to 2016 and 2016 as compared to 2015 is primarily the result of a lower mix of Direct Hire revenues to total revenues as well as declines in our Flex gross profit.
Our Flex gross profit percentage (Flex gross profit as a percentage of Flex revenues) 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 for Flex. As noted above, our GS segment does not make permanent placements; as a result, its Flex gross profit percentage is the same as its gross profit percentage.

26

Table of Contents

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:
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Tech
26.7
%
 
(2.2
)%
 
27.3
%
 
(0.4
)%
 
27.4
%
FA
28.5
%
 
(3.1
)%
 
29.4
%
 
(1.0
)%
 
29.7
%
GS
31.1
%
 
(4.6
)%
 
32.6
%
 
(5.0
)%
 
34.3
%
Total Flex gross profit percentage
27.5
%
 
(2.5
)%
 
28.2
%
 
(1.1
)%
 
28.5
%
The decrease in Flex gross profit percentage of 70 basis points in 2017 from 2016 was due primarily to compression in the spread between our consultants’ bill rates and pay rates and higher health insurance and other benefit costs, and the impact of Hurricanes Harvey and Irma. Kforce continues to focus on optimizing the spread between bill rates and pay rates by providing our associates with training and other defined programs to drive improvement in the effectiveness of our pricing strategy for our staffing services. The pricing environment for our services continues to be competitive and the scarcity of talent, especially in our Tech segment, continues to be a challenge. Thus, we expect that we may encounter wage inflation, especially in the skill sets of greatest demand, and will likely face spread compression as we work with our clients to increase our bill rates. With that said, many of our clients also lack pricing power in the conduct of their businesses; therefore, spreads on a longer-term basis may continue to be under pressure. As a result, our continued efforts toward pricing discipline and diligence will be important in mitigating this impact.
The decrease in Flex gross profit percentage of 30 basis points in 2016 from 2015 was due primarily to lower realized margins for our GS segment on some of its recompete wins and a lower mix of higher margin business. Furthermore, during 2016, we experienced an increase in the revenue concentration within our large client portfolio in Tech Flex, which resulted in a reduction in the Flex gross profit percentage, and spread compression within certain of these clients that have, in many cases, narrowed their number of vendor partners and are leveraging volume-based rebates in exchange for this increased concentration of business.
The following table presents the key drivers for the change in Flex gross profit over the prior period for the years ended December 31 (in thousands):
 
2017
 
2016
Key Drivers
 
 
 
Volume (hours billed)
$
11,708

 
$
1,178

Bill rate
(9,429
)
 
(3,121
)
Total change in Flex gross profit
$
2,279

 
$
(1,943
)
SG&A Expenses. For the years ended December 31, 2017, 2016 and 2015, total compensation, commissions, payroll taxes, and benefit costs represented 84.8%, 84.0%, and 84.2% of SG&A, respectively. Commissions, certain revenue-generating bonuses and related payroll taxes and benefit costs are variable costs driven primarily by revenue and gross profit levels, and associate performance. Therefore, as gross profit levels change, these expenses would also generally be anticipated to change, but remain relatively consistent as a percentage of revenues.
The following table presents certain components of SG&A as a percentage of total revenues for the years ended December 31 (in thousands):
 
2017
 
% of
Revenues
 
2016
 
% of
Revenues
 
2015
 
% of
Revenues
Compensation, commissions, payroll taxes and benefits costs
$
280,721

 
20.7
%
 
$
286,261

 
21.7
%
 
$
277,825

 
21.1
%
Other (1)
50,451

 
3.7
%
 
54,481

 
4.1
%
 
52,209

 
3.9
%
Total SG&A
$
331,172

 
24.4
%
 
$
340,742

 
25.8
%
 
$
330,034

 
25.0
%
(1) Includes items such as bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.


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SG&A as a percentage of net service revenues decreased 140 basis points in 2017 compared to 2016, which was driven primarily by $6.0 million in severance costs recognized in 2016 related to realignment activities, improving associate productivity levels in 2017, and overall continued discipline in areas of travel and office related expenses. These benefits were partially offset by an increase in information technology investments. Additionally, during 2017, Kforce recorded a $3.3 million gain on the sale of Global’s assets.
SG&A as a percentage of net service revenues increased 80 basis points in 2016 compared to 2015. This was primarily a result of the factors mentioned above as well as targeted investments in information technology and our revenue-generating talent, which negatively impacted SG&A as a percentage of revenue for 2016.
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):
 
2017
 
Increase
(Decrease)
 
2016
 
Increase
(Decrease)
 
2015
Fixed asset depreciation (1)
$
6,939

 
4.2
 %
 
$
6,660

 
(1.2
)%
 
$
6,738

Capitalized software amortization
971

 
(32.9
)%
 
1,448

 
(37.5
)%
 
2,318

Intangible asset amortization
345

 
(41.8
)%
 
593

 
(23.5
)%
 
775

Total Depreciation and amortization
$
8,255

 
(5.1
)%
 
$
8,701

 
(11.5
)%
 
$
9,831

(1)
Includes amortization of capital leases.
Other Expense, Net. Other expense, net was $4.5 million in 2017, $3.1 million in 2016, and $2.6 million in 2015, and consists primarily of interest expense related to outstanding borrowings under our credit facility.
Income Tax Expense. Income tax expense as a percentage of income before income taxes (our “effective tax rate”) for the year ended December 31, 2017, was 48.1%. Our effective tax rate for 2017 was unfavorably impacted due to the revaluation of our net deferred tax assets as a result of the TCJA. Excluding the impact of this revaluation, our effective tax rate would have been 39.7%. For the year ended December 31, 2016, our effective tax rate was 41.4%, which was unfavorably impacted by certain one-time non-cash adjustments. For the year ended December 31, 2015, our effective tax rate was 40.3%, which was unfavorably impacted by a change in the overall mix of income in the various state jurisdictions and the increase in particular uncertain tax positions.
We expect that our effective tax rate will be in the range of 25.5% to 27.5% for 2018 as a result of the TCJA.
Non-GAAP Financial Measures
Free Cash Flow. “Free Cash Flow”, a non-GAAP financial measure, is defined by Kforce as net cash provided by (used in) 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, making acquisitions, repurchasing common stock or paying dividends. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures.

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Therefore, we believe it is important to view free cash flow as a complement to our Consolidated Statements of Cash Flows. The following table presents Free Cash Flow (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Net income
 
$
33,285

 
$
32,773

 
$
42,824

Non-cash provisions and other
 
29,134

 
21,093

 
22,153

Changes in operating assets/liabilities
 
(33,080
)
 
(14,043
)
 
5,754

Net cash provided by operating activities
 
29,339

 
39,823

 
70,731

Capital expenditures
 
(5,846
)
 
(12,420
)
 
(8,328
)
Free cash flow
 
23,493

 
27,403

 
62,403

Change in debt
 
4,976

 
31,075

 
(12,861
)
Repurchases of common stock
 
(14,622
)
 
(46,013
)
 
(38,471
)
Cash dividend
 
(12,144
)
 
(12,447
)
 
(12,545
)
Other
 
(2,806
)
 
(33
)
 
1,733

Change in cash and cash equivalents
 
$
(1,103
)
 
$
(15
)
 
$
259

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 and income tax 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. Management believes it is useful information to investors as it provides a good metric of our core profitability in comparing our performance to our competitors, as well as our performance over different time periods. The measure should not be considered in isolation or as an alternative to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is susceptible to varying calculations, and as presented, may not be comparable to similarly titled measures of other companies.
In addition, although we excluded amortization of stock-based compensation expense (which we expect to continue to incur in the future) because it is a non-cash expense, 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.
The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Net income
$
33,285

 
$
32,773

 
$
42,824

Depreciation and amortization
8,508

 
8,796

 
9,831

Stock-based compensation expense
7,600

 
6,705

 
5,819

Interest expense, net
5,039

 
3,050

 
2,342

Income tax expense
30,809

 
23,182

 
28,848

Adjusted EBITDA
$
85,241

 
$
74,506

 
$
89,664


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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, 2017, Kforce had $161.7 million in working capital compared to $135.4 million at December 31, 2016.
Cash Flows
The accompanying Consolidated Statements of Cash Flows for each of the years ended December 31, 2017, 2016 and 2015 in Item 8. Financial Statements and Supplementary Data provide a more detailed description of our cash flows. Currently, Kforce is principally focused on achieving the appropriate balance in the following areas of cash flow: (1) generating positive cash flow from operating activities; (2) returning capital to our shareholders through our quarterly dividends and common stock repurchase program; (3) sustaining leverage under our credit facility; (4) investing in our infrastructure to allow sustainable growth via capital expenditures; and (5) maintaining sufficient availability under our credit facility for the possibility of completing an acquisition or other strategic investments.
As a result of the TCJA, we expect to generate an additional $10.0 million in operating cash in 2018 related to the decrease in our effective tax rate. 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.
The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
29,339

 
$
39,823

 
$
70,731

Investing activities
(4,846
)
 
(12,420
)
 
(8,364
)
Financing activities
(25,596
)
 
(27,418
)
 
(62,108
)
Net (decrease) increase in cash and cash equivalents
$
(1,103
)
 
$
(15
)
 
$
259

Operating Activities
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 populations’ compensation. When comparing cash flows from operating activities, the decrease in cash provided by operating activities during the year ended December 31, 2017, as compared to 2016 is primarily due to an increase in accounts receivable, which was driven by the revenue growth in our business, the timing of collections and continued pressure from certain larger clients for extended payment terms. The decrease in cash provided by operating activities during the year ended December 31, 2016 as compared to 2015 is primarily a result of lower earnings as well as the delayed timing in collections of accounts receivable.
Investing Activities
Capital expenditures for the years ended December 31, 2017, 2016 and 2015, which exclude equipment acquired under capital leases, were $5.8 million, $12.4 million and $8.3 million, respectively. We expect to continue selectively investing in our infrastructure in order to support the expected future profitable growth in our business. We believe that we have sufficient cash and availability under the credit facility to pursue new business acquisitions or make any expected necessary capital expenditures in the foreseeable future. In addition, we continually review our portfolio of businesses and their operations in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses and further invest in, fully divest and/or sell parts of our current businesses.
During the year ended December 31, 2017, Kforce completed the sale of Global’s assets and received an initial $1.0 million in cash proceeds.


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Financing Activities
The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):
 
2017
 
2016
 
2015
Open market repurchases
$
12,276

 
$
44,109

 
$
37,125

Repurchase of shares related to tax withholding requirements for vesting of restricted stock
2,346

 
1,904

 
1,346

Total cash flow impact of common stock repurchases
$
14,622

 
$
46,013

 
$
38,471

 
 
 
 
 
 
Cash paid in current year for settlement of prior year repurchases
$
935

 
$
1,012

 
$
1,425

During the years ended December 31, 2017, 2016 and 2015, Kforce declared and paid dividends of $12.1 million ($0.48 per share), $12.4 million ($0.48 per share), and $12.5 million ($0.45 per share), respectively. 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 and its legal ability to pay dividends.
Credit Facility
On May 25, 2017, the Firm entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., as syndication agent, Regions Bank and BMO Harris Bank, N.A., as co-documentation agents, Wells Fargo Securities, LLC, as lead arranger and bookrunner, and the lenders referred to in the credit facility. Our new credit facility includes a maximum borrowing capacity of $300.0 million which, subject to certain conditions and participation of the lenders, may be increased up to an aggregate additional amount of $150.0 million in the form of revolving credit loans, swingline loans, and letters of credit. Letters of credit and swingline loans under the credit facility are subject to sublimits of $10.0 million. As of December 31, 2017, $116.5 million was outstanding and $180.3 million was available, subject to the covenants described below and as of December 31, 2016, $111.5 million was outstanding under the previous credit facility, which was paid off using the Firm’s initial draw under the new credit facility.
The Firm will continually be subject to certain affirmative and negative 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 3.25 to 1.00. The numerator in the fixed charge coverage ratio is defined pursuant to the 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 (disclosed 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 credit facility. The total leverage ratio is defined pursuant to the 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 could be limited if (a) the total leverage ratio is greater than 2.75 to 1.00 and (b) the Firm’s availability, under the credit facility plus unrestricted cash and cash equivalents, is less than $25.0 million. At December 31, 2017, Kforce was not limited in making distributions and executing repurchases of its equity securities. See Note 8 - “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.
Off-Balance Sheet Arrangements
Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2017, Kforce had letters of credit outstanding for workers’ compensation and other insurance coverage totaling $2.9 million, and for facility lease deposits totaling $0.3 million. Aside from certain obligations more fully described in the Contractual Obligations and Commitments section below, we do not have any additional off-balance sheet arrangements that have had, or are expected to have, a material effect on our consolidated financial statements.

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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):
 
2017
 
2016 (1)
 
Shares
$
 
Shares
$
Open market repurchases
526

$
12,239

 
2,291

$
44,032

(1)
On July 29, 2016, our Board approved an increase in our stock repurchase authorization bringing the then available authorization to $75.0 million.
As of December 31, 2017 and 2016, $38.5 million and $50.7 million, respectively, remained available for further repurchases under the Board-authorized common stock repurchase program.
Contractual Obligations and Commitments
The following table presents our expected future contractual obligations as of December 31, 2017 (in thousands):
 
 
Payments due by period
 
 
Total
 
Less than
1 year
 
1-3 Years
 
3-5 Years
 
More than
5 years
Credit facility (1)
 
$
116,523

 
$

 
$

 
$
116,523

 
$

Interest payable – credit facility (2)
 
14,808

 
3,089

 
6,405

 
5,314

 

Operating lease obligations
 
25,928

 
9,338

 
12,420

 
2,723

 
1,447

Capital lease obligations
 
1,958

 
1,359

 
594

 
5

 

Purchase obligations (3)
 
14,543

 
8,624

 
5,919

 

 

Notes payable (4)
 
3,077

 
934

 
1,919

 
224

 

Interest payable - notes payable (4)
 
26

 
13

 
13

 

 

Liability for unrecognized tax positions (5)
 

 

 

 

 

Deferred compensation plans liability (6)
 
31,446

 
2,579

 
2,615

 
2,592

 
23,660

Supplemental Executive Retirement Plan (7)
 
17,070

 

 

 
12,788

 
4,282

Total
 
$
225,379

 
$
25,936

 
$
29,885

 
$
140,169

 
$
29,389

(1)
Our credit facility matures May 25, 2022.
(2)
Kforce’s weighted average interest rate as of December 31, 2017 was utilized to forecast the expected future interest rate payments. These payments are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility.
(3)
Purchase obligations include agreements to purchase goods and services that are enforceable, legally binding, and specify all significant terms.
(4)
Our notes payable as of December 31, 2017 are included in the accompanying Consolidated Balance Sheets and classified in Other current liabilities if payable within the next year or in Long-term debt - other if payable after the next year. The interest rate on the notes range from 2.58% to 2.80% and expire between November 2020 and October 2021.
(5)
Kforce’s liability for unrecognized tax positions as of December 31, 2017 was $1.1 million. This balance has been excluded from the table above due to the significant uncertainty with respect to the timing and amount of settlement, if any.
(6)
Kforce maintains 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. These amounts are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, as appropriate, and are payable based upon the elections of the plan participants (e.g. retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time.
(7)
There is no funding requirement associated with our Supplemental Executive Retirement Plan (“SERP”) and, as a result, no contributions have been made through the year ended December 31, 2017. Kforce does not currently anticipate funding our SERP during 2018. Kforce has included the total undiscounted projected benefit payments, as determined at December 31, 2017, in the table above.

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Kforce has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“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.
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. 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.
Description
  
Judgments and Uncertainties
  
Effect if Actual Results
Differ From Assumptions
Allowance for Doubtful Accounts, Fallouts and Other Accounts Receivable Reserves
See Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our policies related to determining our allowance for doubtful accounts, fallouts and other accounts receivable reserves.
  
Kforce performs an ongoing analysis of factors 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, in establishing its allowance for doubtful accounts.
 
Kforce estimates its allowance for Direct Hire fallouts based on our historical experience with the actual occurrence of fallouts.
 
Kforce estimates its reserve for future revenue adjustments (e.g. bill rate adjustments, time card adjustments, early pay discounts) based on our historical experience.
  
We have not made any material changes in the accounting methodology used to establish our allowance for doubtful accounts, fallouts and other accounts receivable reserves.
 
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our allowance for doubtful accounts, fallouts and other accounts receivable reserves. However, if our estimates regarding estimated accounts receivable losses are inaccurate, we may be exposed to losses or gains that could be material.

A 10% change in accounts receivable reserved at December 31, 2017, would have impacted our net income for 2017 by approximately $0.1 million.

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Description
  
Judgments and Uncertainties
  
Effect if Actual Results
Differ From Assumptions
Accounting for Income Taxes
See Note 3 – “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 Kforce’s income tax expense, as well as the temporary differences that exist as of December 31, 2017.
  
Our consolidated 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.
 
Kforce is also required to exercise judgment with respect to the realization of our net deferred tax assets. Management evaluates all 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.
  
We do not believe that there is a reasonable likelihood that there will be a material change in our effective tax rate for 2017 or our liability for uncertain income tax positions.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses that could be material. Kforce recorded a valuation allowance of approximately $1.7 million as of December 31, 2017 related primarily to a foreign tax credit that we expect may not be realizable.
 
A 0.50% change in our effective income tax rate would have impacted our net income for 2017 by approximately $0.3 million.
Self-Insured Liabilities
We are self-insured for certain losses related to health insurance and workers’ compensation 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 liabilities for health insurance and workers’ compensation claims as of December 31, 2017 were $2.6 million and $1.2 million, respectively.
  
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.
  
We have not made any material changes in the accounting methodologies used to establish our self-insured liabilities.
 
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 
A 10% change in our self-insured liabilities related to health insurance and workers’ compensation as of December 31, 2017 would have impacted our net income for 2017 by approximately $0.2 million.

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Table of Contents

Description
  
Judgments and Uncertainties
  
Effect if Actual Results
Differ From Assumptions
Defined Benefit Pension Plans
We have a defined benefit pension plan that benefits certain named executive officers, the SERP. See Note 7– “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 terms of this plan.
 
The SERP was not funded as of December 31, 2017 or 2016.
  
When estimating the obligation for our pension benefit plan, management is required to make certain assumptions and to apply judgment with respect to determining an appropriate discount rate, bonus percentage assumptions and expected effect of future compensation increases for the participants in the plan.
  
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our obligation. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
 
A 10% change in the discount rate used to measure the net periodic pension cost for the SERP during 2017 would have had an insignificant impact on our net income for 2017.
Goodwill Impairment
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. See Note 4 – “Goodwill and Other Intangible Assets 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.

The carrying value of goodwill as of December 31, 2017 by reporting unit was approximately $17.0 million, $8.0 million and $20.9 million for our Tech, FA and GS reporting units, respectively.
  
We determine the fair value of our reporting units (Tech, FA and GS) using widely accepted valuation techniques, including the discounted cash flow, guideline transaction method and guideline company method. 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.

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.
  
Kforce performed a quantitative assessment for each of our reporting units (Tech, FA and GS) as of December 31, 2017. We compared the carrying value of each reporting unit to the respective estimated fair value as of December 31, 2017 and determined that the fair value significantly exceeded carrying value for each of our reporting units. As a result, no goodwill impairment charges were recognized during the year ended December 31, 2017.

Although the valuation of the business supported its carrying value in 2017, a deterioration in any of the assumptions could result in an impairment charge in the future.
NEW ACCOUNTING STANDARDS
See Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report for a discussion of new accounting standards.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In addition to the risks inherent in its operations, Kforce is exposed to certain market risks, primarily changes in interest rates.
As of December 31, 2017, we had $116.5 million outstanding under our credit facility. See Note 8 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for further details on our credit facility. A hypothetical 10% increase in interest rates on variable debt in effect at December 31, 2017 would have an increase to annual interest expense of less than $0.4 million.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. to mitigate the risk of rising interest rates on the Firm’s financial statements. The Swap rate is 1.81%, which is added to our interest rate margin to determine the fixed rate that the Firm will pay to the counterparty during the term of the Swap based on the notional amount of the Swap. The effective date of the Swap is May 31, 2017 and the maturity date is April 29, 2022. The notional amount of the Swap is $65.0 million for the first three years and decreases to $25.0 million for years four and five.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Kforce Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kforce Inc. and subsidiaries (“Kforce”) as of December 31, 2017 and 2016, 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, 2017, 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 Kforce’s internal control over financial reporting as of December 31, 2017, 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 Kforce as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Kforce maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
Kforce’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 Kforce’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 Kforce 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.
 
/s/ Deloitte & Touche LLP
 
Tampa, Florida
February 23, 2018

We have served as Kforce’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,
 
2017
 
2016
 
2015
Net service revenues
$
1,357,940

 
$
1,319,706

 
$
1,319,238

Direct costs of services
949,884

 
911,207

 
905,124

Gross profit
408,056

 
408,499

 
414,114

Selling, general and administrative expenses
331,172

 
340,742

 
330,034

Depreciation and amortization
8,255

 
8,701

 
9,831

Income from operations
68,629

 
59,056

 
74,249

Other expense, net
4,535

 
3,101

 
2,577

Income before income taxes
64,094

 
55,955

 
71,672

Income tax expense
30,809

 
23,182

 
28,848

Net income
33,285

 
32,773

 
42,824

Other comprehensive (loss) income:
 
 
 
 
 
Defined benefit pension plans, net of tax
(373
)
 
(134
)
 
689

Change in fair value of interest rate swap, net of tax
289

 

 

Comprehensive income
$
33,201

 
$
32,639

 
$
43,513

 
 
 
 
 
 
Earnings per share – basic
$
1.32

 
$
1.26

 
$
1.53

Earnings per share – diluted
$
1.30

 
$
1.25

 
$
1.52

 
 
 
 
 
 
Weighted average shares outstanding – basic
25,222

 
26,099

 
27,910

Weighted average shares outstanding – diluted
25,586

 
26,274

 
28,190

 
 
 
 
 
 
Dividends declared per share
$
0.48

 
$
0.48

 
$
0.45

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


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Table of Contents

KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
 
 
DECEMBER 31,
 
2017
 
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
379

 
$
1,482

Trade receivables, net of allowances of $2,333 and $2,066, respectively
225,865

 
206,361

Income tax refund receivable
7,116

 
172

Prepaid expenses and other current assets
12,085

 
10,691

Total current assets
245,445

 
218,706

Fixed assets, net
39,680

 
43,145

Other assets, net
38,598

 
30,511

Deferred tax assets, net
11,316

 
23,449

Intangible assets, net
3,297

 
3,642

Goodwill
45,968

 
45,968

Total assets
$
384,304

 
$
365,421

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
34,873

 
$
37,230

Accrued payroll costs
46,886

 
44,137

Other current liabilities
1,960

 
1,765

Income taxes payable

 
221

Total current liabilities
83,719

 
83,353

Long-term debt – credit facility
116,523

 
111,547

Long-term debt – other
2,597

 
3,984

Other long-term liabilities
47,188

 
44,801

Total liabilities
250,027

 
243,685

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding

 

Common stock, $0.01 par; 250,000 shares authorized, 71,494 and 71,268 issued, respectively
715

 
713

Additional paid-in capital
437,394

 
428,212

Accumulated other comprehensive income
100

 
184

Retained earnings
195,143

 
174,967

Treasury stock, at cost; 45,167 and 44,469 shares, respectively
(499,075
)
 
(482,340
)
Total stockholders’ equity
134,277

 
121,736

Total liabilities and stockholders’ equity
$
384,304

 
$
365,421

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


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Table of Contents

KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
 
 
YEARS ENDED DECEMBER 31,
 
2017
 
2016
 
2015
Common stock – shares:
 
 
 
 
 
Shares at beginning of year
71,268

 
70,558

 
70,029

Issuance for stock-based compensation and dividends, net of forfeitures
221

 
695

 
497

Exercise of stock options
5

 
15

 
32

Shares at end of year
71,494

 
71,268

 
70,558

Common stock – par value:
 
 
 
 
 
Balance at beginning of year
$
713

 
$
705

 
$
700

Issuance for stock-based compensation and dividends, net of forfeitures
2

 
8

 
5

Exercise of stock options

 

 

Balance at end of year
$
715

 
$
713

 
$
705

Additional paid-in capital:
 
 
 
 
 
Balance at beginning of year
$
428,212

 
$
420,276

 
$
412,642

Cumulative effect upon adoption of new accounting standard (Note 1)
769

 

 

Issuance for stock-based compensation and dividends, net of forfeitures
494

 
447

 
556

Exercise of stock options
72

 
172

 
381

Income tax benefit from stock-based compensation

 
307