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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
____________________________________________________________________________________________
 
FORM 10-Q
 ________________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
_________________________________________________________________
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13036875&doc=11
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: (813552-5000
 _______________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 per shareKFRCNASDAQ
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 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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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 number of shares outstanding of the registrant’s common stock as of July 29, 2019 was 24,255,086.




KFORCE INC.
TABLE OF CONTENTS
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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 Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Part II. Item 1A. Risk Factors, 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, funding of employee benefit plans, estimates concerning the effects of litigation or other disputes, the occurrence of unanticipated expenses, 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 rate in temporary staffing, a reduction in the supply of consultants and candidates or the Firm’s ability to attract such individuals, changes in client demand for our services and our ability to adapt to such changes, the entry of new competitors in the market, the ability of the Firm to maintain and attract clients in the face of changing economic or competitive conditions, 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.
2


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Revenue$338,861 $329,535 $665,599 $646,976 
Direct costs237,835 229,315 471,397 454,247 
Gross profit101,026 100,220 194,202 192,729 
Selling, general and administrative expenses78,017 76,901 157,830 155,698 
Depreciation and amortization1,542 1,692 3,192 3,443 
Income from operations21,467 21,627 33,180 33,588 
Other expense, net403 1,258 1,326 2,602 
Income from continuing operations, before income taxes21,064 20,369 31,854 30,986 
Income tax expense4,988 5,196 7,804 7,856 
Income from continuing operations16,076 15,173 24,050 23,130 
Income from discontinued operations, net of tax58,783 1,099 77,664 2,317 
Net income74,859 16,272 101,714 25,447 
Other comprehensive (loss) income:
Change in fair value of interest rate swap, net of tax(478)180 (758)697 
Comprehensive income$74,381 $16,452 $100,956 $26,144 
Earnings per share – basic:
Continuing operations$0.67 $0.61 $0.99 $0.94 
Discontinued operations2.46 0.05 3.21 0.09 
Earnings per share – basic$3.13 $0.66 $4.20 $1.03 
Earnings per share – diluted:
Continuing operations$0.66 $0.60 $0.97 $0.92 
Discontinued operations2.40 0.05 3.14 0.09 
Earnings per share – diluted$3.06 $0.65 $4.11 $1.01 
Weighted average shares outstanding – basic23,901 24,705 24,207 24,744 
Weighted average shares outstanding – diluted24,458 25,178 24,745 25,142 
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3


KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

June 30, 2019December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents$65,047 $112 
Trade receivables, net of allowances of $3,039 and $2,800, respectively
225,810 210,559 
Income tax refund receivable218 319 
Prepaid expenses and other current assets8,692 7,699 
Current assets held for sale  29,773 
Total current assets299,767 248,462 
Fixed assets, net29,095 34,322 
Other assets, net66,045 36,664 
Deferred tax assets, net6,238 7,147 
Goodwill25,040 25,040 
Noncurrent assets held for sale 28,273 
Total assets$426,185 $379,908 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities$35,855 $32,542 
Accrued payroll costs41,008 39,384 
Current portion of operating lease liabilities5,931 — 
Other current liabilities 1,405 1,616 
Income taxes payable5,611 4,553 
Current liabilities held for sale 12,263 
Total current liabilities89,810 90,358 
Long-term debt – credit facility65,000 71,800 
Long-term debt – other909 1,359 
Other long-term liabilities55,610 43,509 
Noncurrent liabilities held for sale 4,551 
Total liabilities211,329 211,577 
Commitments and contingencies (Note E)
Stockholders’ equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
  
Common stock, $0.01 par; 250,000 share authorized, 71,865 and 71,856 issued and outstanding, respectively
719 719 
Additional paid-in capital454,071 447,337 
Accumulated other comprehensive income706 1,296 
Retained earnings329,760 237,308 
Treasury stock, at cost; 47,293 and 45,822 shares, respectively
(570,400)(518,329)
Total stockholders’ equity214,856 168,331 
Total liabilities and stockholders’ equity$426,185 $379,908 
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4


KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
 
Common StockAdditional Paid-In CapitalAccumulated Other
Comprehensive Income (Loss)
Treasury StockTotal Stockholders’ Equity
SharesAmountRetained EarningsSharesAmount
Balance, December 31, 201871,856 $719 $447,337 $1,296 $237,308 45,822 $(518,329)$168,331 
Net income— — — — 26,855 — — 26,855 
Reclassification of stranded tax effects (Note A)— — — 168 (168)— —  
Issuance for stock-based compensation and dividends, net of forfeitures4 — 233 — (233)— —  
Stock-based compensation expense— — 2,620 — — — — 2,620 
Employee stock purchase plan— — 86 — — (5)54 140 
Dividends ($0.18 per share)
— — — — (4,406)— — (4,406)
Change in fair value of interest rate swap, net of tax benefit of $95
— — — (280)— — — (280)
Repurchases of common stock— — — — — 432 (14,688)(14,688)
Balance, March 31, 201971,860 719 450,276 1,184 259,356 46,249 (532,963)178,572 
Net income— — — — 74,859 — — 74,859 
Issuance for stock-based compensation and dividends, net of forfeitures5 — 177 — (177)— —  
Stock-based compensation expense— — 3,524 — — — — 3,524 
Employee stock purchase plan— — 94 — — (4)49 143 
Dividends ($0.18 per share)
— — — — (4,278)— — (4,278)
Change in fair value of interest rate swap, net of tax benefit of $162
— — — (478)— — — (478)
Repurchases of common stock— — — — — 1,048 (37,486)(37,486)
Balance, June 30, 201971,865 $719 $454,071 $706 $329,760 47,293 $(570,400)$214,856 
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5


KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)

Common StockAdditional Paid-In CapitalAccumulated Other
Comprehensive Income (Loss)
Treasury StockTotal Stockholders’ Equity
SharesAmountRetained EarningsSharesAmount
Balance, December 31, 201771,494 $715 $437,394 $100 $195,143 45,167 $(499,075)$134,277 
Net income— — — — 9,175 — — 9,175 
Cumulative effect of revenue recognition accounting standard, net of tax of $63
— — — — (179)— — (179)
Issuance for stock-based compensation and dividends, net of forfeitures63 1 166 — (167)— —  
Exercise of stock options5 — 46 — — 1 (46) 
Stock-based compensation expense— — 2,260 — — — — 2,260 
Employee stock purchase plan— — 71 — — (6)61 132 
Dividends ($0.12 per share)
— — — — (2,973)— — (2,973)
Change in fair value of interest rate swap, net of tax of $176
— — — 517 — — — 517 
Repurchases of common stock— — — — — 319 (8,715)(8,715)
Balance, March 31, 201871,562 716 439,937 617 200,999 45,481 (507,775)134,494 
Net income— — — — 16,272 — — 16,272 
Issuance for stock-based compensation and dividends, net of forfeitures34 — 158 — (158)— —  
Stock-based compensation expense— — 2,292 — — — — 2,292 
Employee stock purchase plan— — 73 — — (5)56 129 
Dividends ($0.12 per share)
— — — — (2,970)— — (2,970)
Change in fair value of interest rate swap, net of tax of $61
— — — 180 — — — 180 
Repurchases of common stock— — — — — 3 (91)(91)
Balance, June 30, 201871,596 $716 $442,460 $797 $214,143 45,479 $(507,810)$150,306 
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6


KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended June 30,
20192018
Cash flows from operating activities:
Net income$101,714 $25,447 
Adjustments to reconcile net income to cash provided by operating activities:
Gain on sale of discontinued operations(80,004) 
Deferred income tax provision, net1,735 (498)
Provision for bad debts797 961 
Depreciation and amortization3,623 4,172 
Stock-based compensation expense5,050 4,552 
Defined benefit pension plan expense431 910 
(Gain) loss on deferred compensation plan investments, net(10)248 
Loss on disposal or impairment of property and equipment970 22 
Contingent consideration liability remeasurement459  
Noncash lease expense 3,187 — 
Other177 178 
(Increase) decrease in operating assets
Trade receivables, net(12,829)(14,179)
Income tax refund receivable101 6,170 
Prepaid expenses and other current assets(1,321)(1,904)
Other assets, net(2,049)101 
Increase (decrease) in operating liabilities
Accounts payable and other accrued liabilities2,333 3,841 
Accrued payroll costs1,298 2,403 
Income taxes payable753 5,387 
Other long-term liabilities(4,085)448 
Cash provided by operating activities22,330 38,259 
Cash flows from investing activities:
Capital expenditures(4,184)(3,116)
Equity method investment(7,500) 
Net proceeds from the sale of assets held for sale122,696  
Cash provided by (used in) investing activities111,012 (3,116)
Cash flows from financing activities:
Proceeds from credit facility80,100 334,600 
Payments on credit facility(86,900)(350,523)
Payments on other financing arrangements(875)(1,054)
Repurchases of common stock(51,546)(12,129)
Cash dividends(8,684)(5,943)
Payment of contingent consideration liability(477) 
Other(25) 
Cash used in financing activities(68,407)(35,049)
Change in cash and cash equivalents64,935 94 
Cash and cash equivalents, beginning of period112 379 
Cash and cash equivalents, end of period$65,047 $473 
7


Six Months Ended June 30,
20192018
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period For:
Income taxes (1)$8,447 $4,343 
Operating lease liabilities4,025 — 
Interest, net788 2,199 
Non-Cash Financing and Investing Transactions:
Contingent contribution for equity method investment$1,500 $ 
ROU assets obtained from new operating leases1,355 — 
Unsettled repurchases of common stock1,183  
Employee stock purchase plan283 261 
Equipment acquired under finance leases192 424 
Shares tendered in payment of exercise price of stock options 46 
(1) During the six months ended June 30, 2018, cash provided by operating activities includes the receipt of an income tax refund in the amount of $6.8 million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8


KFORCE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 1 - “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of the 2018 Annual Report on Form 10-K.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnotes normally required by GAAP for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although Kforce believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2018 Annual Report on Form 10-K. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2018 was derived from our audited Consolidated Balance Sheet as of December 31, 2018, as presented in our 2018 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform with the current period presentation for amounts related to discontinued operations. Refer to Note B - “Discontinued Operations” for further information.
Our quarterly operating results are affected by the number of billing days in a particular quarter, the seasonality of our clients’ businesses and increased holiday and vacation days taken. In addition, we typically experience an increase in costs in the first quarter of each fiscal year as a result of certain U.S. state and federal employment tax resets, which negatively impacts our gross profit and overall profitability. The results of operations for any interim period may be impacted by these factors and are not necessarily indicative of, nor comparable to, the results of operations for a full year.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Kforce Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “Kforce,” the “Company,” “we,” the “Firm,” “management,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context indicates otherwise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical of these estimates and assumptions relate to the following: allowance for doubtful accounts; income taxes; self-insured liabilities for workers’ compensation and health insurance; obligations for the pension plan and goodwill and any related impairment. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Cash and Cash Equivalents
All highly liquid investments with original maturity dates of three months or less at the time of purchase are classified as cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value because of the short-term nature of these instruments. Our cash equivalents are held in government money market funds and at times may exceed federally insured limits.

9


Equity Method Investment
In June 2019, we entered into a joint venture whereby Kforce has a 50% ownership in WorkLLama, LLC ("WorkLLama"). WorkLLama has and continues to develop the technology for a SaaS platform focused on consultant engagement and referral technologies; we believe our involvement in this joint venture will enhance our opportunities to efficiently and effectively identify and place consultants on assignment. Our non-controlling interest in WorkLLama, a variable interest entity, is accounted for as an equity method investment. Under the equity method, the carrying value is at cost and adjusted for our proportionate share of earnings or losses.
Under the joint venture operating agreement for WorkLLama, Kforce is obligated to make additional future cash contributions that are contingent upon WorkLLama's achievement of certain operational and financial milestones, which are centered around the market acceptance of their technologies and success with Kforce's internal objectives. While there is uncertainty as to the attainment of these milestones given the joint venture is in the early stages of its evolution, we believe that $1.5 million of the maximum $15.0 million future contingent contributions is probable and, thus, have recorded this amount in Accounts payable and other accrued liabilities at June 30, 2019. At June 30, 2019, the balance of the investment in WorkLLama of $9.0 million was included in Other assets, net, which includes our initial cash contribution of $7.5 million and the $1.5 million probable contingent contribution.
Health Insurance
Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss for each health insurance plan participant up to $500 thousand in claims annually. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and incurred but not reported claims, which are primarily based upon an evaluation of historical claims experience, actuarially-determined completion factors and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.
Earnings per Share
Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding (“WASO”) during the period. WASO excludes unvested shares of restricted stock. Diluted earnings per share is computed by dividing net income by diluted WASO. Diluted WASO includes the dilutive effect of potentially dilutive securities such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
For the three and six months ended June 30, 2019, 557 thousand and 538 thousand common stock equivalents were included in the diluted WASO, respectively. For the three and six months ended June 30, 2018, 473 thousand and 398 thousand common stock equivalents were included in the diluted WASO, respectively. For the three and six months ended June 30, 2019 and 2018, there were insignificant anti-dilutive common stock equivalents.

10


New Accounting Standards
Recently Adopted Accounting Standards
In August 2018, the FASB issued authoritative guidance regarding a customer's accounting for implementation costs incurred for a cloud computing arrangement that is a service contract. The amendment aligns the requirements for capitalizing these implementation costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, and defer these costs over the non-cancelable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised. This amendment also requires entities to present cash flows, capitalized costs and amortization expense in the same financial statement line items as the service costs incurred for such arrangements. The guidance is effective for fiscal periods beginning after December 15, 2019 with retrospective application or prospective to all implementation costs incurred after the date of adoption. We early adopted this standard effective January 1, 2019, using the prospective method. Our hosting arrangements that are service contracts relate to technology solutions applicable to our business. Historically, these implementation costs were recorded as capital expenditures within investing cash flows and the capitalized costs were included in Other assets, net in the consolidated balance sheets. Due to the adoption of this standard and effective January 1, 2019, these implementation costs are recorded within operating cash flows. Capitalized costs are recorded in Prepaids and other current assets if expected to be recognized within one year and Other assets, net, if over one year, in the Unaudited Condensed Consolidated Balance Sheets. As of June 30, 2019, implementation costs capitalized were $0.2 million, with no accumulated amortization or amortization expense recorded during the three and six months ended June 30, 2019.
In February 2018, the FASB issued authoritative guidance regarding the reclassification of certain stranded tax effects from accumulated other comprehensive income to retained earnings as a result of the change in tax rates related to the Tax Cuts and Jobs Act. The guidance is effective for fiscal periods beginning after December 15, 2018. We elected to adopt this optional standard and reclassified approximately $168 thousand from accumulated other comprehensive income to retained earnings on January 1, 2019 using the period of adoption method.
In August 2017, the FASB issued authoritative guidance targeting improvements to accounting for hedging activities, which expands and clarifies hedge accounting for nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements, and simplifies the requirements for assessing effectiveness in a hedging relationship. The guidance is effective for annual periods beginning after December 15, 2018. We adopted this standard as of January 1, 2019 using the modified retrospective approach with no cumulative adjustment required. Additionally, we adopted the presentation and disclosure requirements using the prospective method as required. Refer to Note L - “Derivative Instrument and Hedging Activity” for the additional disclosures of the Firm’s derivative instrument.
In February 2016, the FASB issued authoritative guidance regarding the accounting for leases, and has since issued subsequent updates to the initial guidance. The amended guidance requires the recognition of assets and liabilities for operating leases. The guidance is effective for annual periods beginning after December 15, 2018. We adopted this standard using the optional transition method as of January 1, 2019, without retrospective application to comparative periods. Refer to Note I - "Leases" for additional accounting policy and transition disclosures related to our operating leases.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued authoritative guidance regarding changes to the disclosure requirement for defined benefit plans including additions and deletions to certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The guidance is effective for fiscal periods beginning after December 15, 2020 with the retrospective method required for all periods presented. The adoption of this guidance will modify our disclosures but is not expected to have a material effect on our consolidated financial statements.

11


In June 2016, the FASB issued authoritative guidance on accounting for credit losses on financial instruments, including trade receivables, and has since issued subsequent updates to the initial guidance. The amended guidance requires the application of a current expected credit loss model, which measures credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual periods beginning after December 15, 2019. The guidance requires adoption using a modified retrospective approach. We are currently evaluating the potential impact on our consolidated financial statements, especially with respect to our disclosures.
Note B - Discontinued Operations
During the three months ended March 31, 2019, management committed to a plan to divest of our Government Solutions ("GS") segment as a result of the Firm's decision to focus solely on the commercial technical and professional staffing services and solutions space. The GS segment consisted of Kforce Government Solutions, Inc. (“KGS”), our federal government solutions business, and TraumaFX® Solutions, Inc. ("TFX"), our federal government product business.
On April 1, 2019, Kforce completed the sale of all the issued and outstanding stock of Kforce Government Holdings, Inc., including its wholly-owned subsidiary KGS, to ManTech International Corporation for a cash purchase price of $115.0 million. The gain on the sale of KGS, net of transaction costs, was $72.3 million. Total transaction costs were $9.6 million, which primarily includes legal and broker fees, transaction bonuses and accelerated stock-based compensation expense triggered by a change in control of KGS.
On June 7, 2019, Kforce completed the sale of all the issued and outstanding stock of TFX to an unaffiliated third party for a cash purchase price of $18.4 million, subject to a post-closing working capital adjustment. Our gain on the sale of TFX, net of transaction costs, was $7.7 million and total transaction costs were $2.2 million, which primarily includes legal and broker fees and transaction bonuses. Due to the sale of TFX, we finalized the settlement of a contingent consideration liability related to the acquisition of TFX in 2014 and paid $0.6 million during the three months ended June 30, 2019.
Since the dispositions, Kforce has no significant continuing involvement in the operations of KGS and TFX.
The results of operations for both KGS and TFX have been reported as discontinued operations in our consolidated financial statements prior to their disposition. The following table summarizes the line items of pretax profit for the GS segment (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2019201820192018
Revenue$1,311 $29,089 $27,737 $57,941 
Direct costs479 21,826 19,494 42,999 
Gross profit832 7,263 8,243 14,942 
Selling, general and administrative expenses1,424 5,534 6,842 11,329 
Depreciation and amortization58 245 307 501 
(Loss) income from discontinued operations(650)1,484 1,094 3,112 
Gain on sale of discontinued operations80,004  80,004  
Other income (expense), net428 (11)(436)(8)
Income from discontinued operations, before income taxes79,782 1,473 80,662 3,104 
Income tax expense20,999 374 2,998 787 
Income from discontinued operations, net of tax$58,783 $1,099 $77,664 $2,317 

12


There was no income tax obligation for the sale of KGS due to an effective tax structure and Kforce’s significant outside tax basis. Historically, Kforce was not required to record a deferred tax asset for the excess of the outside tax basis in the equity of KGS over the amount of the inside basis in the assets of KGS used for external reporting under GAAP, as it was not apparent that this deferred tax asset would be realized. During the three months ended March 31, 2019, we entered into a definitive agreement to sell the stock of KGS and recorded $18.5 million to deferred tax assets and income tax benefit since it became apparent that the temporary difference would reverse in the foreseeable future. This deferred tax asset of $18.5 million was utilized and recorded as income tax expense during the three months ended June 30, 2019.
The following table summarizes the assets and liabilities held for sale for the GS segment as of December 31, 2018 (in thousands):
ASSETSDecember 31, 2018
Current assets held for sale:
Trade receivables $24,336 
Prepaid expenses and other current assets5,437 
Total Current assets held for sale$29,773 
Noncurrent assets held for sale:
Fixed assets, net$1,496 
Other assets, net293 
Deferred tax assets, net2,604 
Intangible assets2,952 
Goodwill20,928 
Total Noncurrent assets held for sale$28,273 
LIABILITIES
Current liabilities held for sale:
Accounts payable and other accrued liabilities$6,064 
Accrued payroll costs5,878 
Other current liabilities 16 
Income taxes payable305 
Total Current liabilities held for sale $12,263 
Noncurrent liabilities held for sale:
Other long-term liabilities$4,551 
Total Noncurrent liabilities held for sale$4,551 
The accompanying Unaudited Condensed Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). For the six months ended June 30, 2019, cash provided by operating activities and cash provided by investing activities for discontinued operations were $5.1 million and $118.9 million, respectively. For the six months ended June 30, 2018, cash used in operating activities and cash used in investing activities for discontinued operations were $2.7 million and $0.8 million, respectively.

13


Note C - Reportable Segments
Kforce provides services through our Technology (“Tech”) and Finance and Accounting (“FA”) segments. Historically, and for the three and six months ended June 30, 2019 and 2018, we have reported sales and gross profit information on a segment basis. Total assets, liabilities and operating expenses are not reported separately by segment as our operations are largely combined.
The following table provides information on the operations of our segments (in thousands):
TechFATotal
Three Months Ended June 30,
2019
Revenue$265,305 $73,556 $338,861 
Gross profit$74,172 $26,854 $101,026 
Operating expenses and other expenses79,962 
Income from continuing operations, before income taxes$21,064 
2018
Revenue$249,763 $79,772 $329,535 
Gross profit$71,830 $28,390 $100,220 
Operating expenses and other expenses79,851 
Income from continuing operations, before income taxes$20,369 
Six Months Ended June 30,
2019
Revenue$520,948 $144,651 $665,599 
Gross profit$142,995 $51,207 $194,202 
Operating expenses and other expenses162,348 
Income from continuing operations, before income taxes$31,854 
2018
Revenue$486,260 $160,716 $646,976 
Gross profit$137,178 $55,551 $192,729 
Operating expenses and other expenses161,743 
Income from continuing operations, before income taxes$30,986 

14


Note D - Disaggregation of Revenue
The following table provides the disaggregation of revenue by segment and type (in thousands):
TechFATotal
Three Months Ended June 30,
2019
Revenue by type:
Flex revenue$259,707 $65,647 $325,354 
Direct Hire revenue5,598 7,909 13,507 
Total Revenue$265,305 $73,556 $338,861 
2018
Revenue by type:
Flex revenue$244,509 $72,490 $316,999 
Direct Hire revenue5,254 7,282 12,536 
Total Revenue$249,763 $79,772 $329,535 
Six Months Ended June 30,
2019
Revenue by type:
Flex revenue$509,923 $130,412 $640,335 
Direct Hire revenue11,025 14,239 25,264 
Total Revenue$520,948 $144,651 $665,599 
2018
Revenue by type:
Flex revenue$476,005 $147,040 $623,045 
Direct Hire revenue10,255 13,676 23,931 
Total Revenue$486,260 $160,716 $646,976 


Note E - Commitments and Contingencies
Employment Agreements
Kforce has employment agreements with certain executives that provide for minimum compensation, salary and continuation of certain benefits for a six-month to a three-year period after their employment ends under certain circumstances. Certain of the agreements also provide for a severance payment ranging from one to three times annual salary and one-half to three times average annual bonus if such an agreement is terminated without good cause by Kforce or for good reason by the executive subject to certain post-employment restrictive covenants. At June 30, 2019, our liability would be approximately $32.4 million if, following a change in control, all of the executives under contract were terminated without good cause by the employer or if the executives resigned for good reason and $14.8 million if, in the absence of a change in control, all of the executives under contract were terminated by Kforce without good cause or if the executives resigned for good reason.

15


Litigation
We are involved in legal proceedings, claims and administrative matters that arise in the ordinary course of business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our unaudited condensed consolidated financial statements but are not, individually or in the aggregate, considered material. Legal costs incurred in connection with loss contingencies are expensed as incurred. 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.
Note F - Other Assets, Net
Other assets, net consisted of the following (in thousands):
June 30, 2019December 31, 2018
Assets held in Rabbi Trust$33,703 $29,134 
Right-of-use assets for operating leases, net14,887 — 
Equity method investment9,000  
Capitalized software, net6,309 4,828 
Deferred loan costs, net1,032 1,182 
Interest rate swap derivative instrument 900 
Other non-current assets1,114 620 
Total Other assets, net$66,045 $36,664 

Note G - Current Liabilities
The following table provides information on certain current liabilities (in thousands):
June 30, 2019December 31, 2018
Accounts payable and other accrued liabilities:
Accounts payable$20,515 $18,793 
Accrued liabilities15,340 13,749 
Total Accounts payable and other accrued liabilities$35,855 $32,542 
Accrued payroll costs:
Payroll and benefits$35,052 $34,768 
Health insurance liabilities3,864 2,680 
Payroll taxes1,075 920 
Workers’ compensation liabilities1,017 1,016 
Total Accrued payroll costs$41,008 $39,384 
Our accounts payable balance includes vendor and independent contractor payables. Our accrued liabilities balance includes the current portion of the deferred compensation plans liability, contract liabilities from contracts with customers (such as rebates) and other accrued liabilities.
16


Note H - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):