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Table of Contents

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 March 31, 2020
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
_________________________________________________________________
 https://cdn.kscope.io/5a0b9688a62c0b12cddd64c1d71e1554-kfrc-20200331_g1.jpg
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 May 4, 2020 was 21,921,984.



Table of Contents
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 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, 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, the impact of the COVID-19 pandemic on the global and U.S. macro-economic environments, and our business, customers, financial condition and results of operations, 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 - 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 March 31,
20202019
Revenue$335,208  $326,738  
Direct costs240,684  233,562  
Gross profit94,524  93,176  
Selling, general and administrative expenses79,216  79,813  
Depreciation and amortization1,393  1,650  
Income from operations13,915  11,713  
Other expense, net1,381  923  
Income from continuing operations, before income taxes12,534  10,790  
Income tax expense3,428  2,816  
Income from continuing operations9,106  7,974  
Income from discontinued operations, net of tax  18,881  
Net income9,106  26,855  
Other comprehensive loss:
Change in fair value of interest rate swaps, net of tax(1,121) (280) 
Comprehensive income$7,985  $26,575  
Earnings per share – basic:
Continuing operations$0.42  $0.33  
Discontinued operations  0.77  
Earnings per share – basic$0.42  $1.10  
Earnings per share – diluted:
Continuing operations$0.42  $0.32  
Discontinued operations  0.75  
Earnings per share – diluted$0.42  $1.07  
Weighted average shares outstanding – basic21,553  24,516  
Weighted average shares outstanding – diluted21,860  25,019  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

March 31, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$31,774  $19,831  
Trade receivables, net of allowances of $4,375 and $2,078, respectively
235,587  217,929  
Prepaid expenses and other current assets7,401  7,475  
Total current assets274,762  245,235  
Fixed assets, net29,462  29,975  
Other assets, net67,678  72,838  
Deferred tax assets, net8,546  8,037  
Goodwill25,040  25,040  
Total assets$405,488  $381,125  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities$37,125  $33,232  
Accrued payroll costs45,988  44,001  
Current portion of operating lease liabilities5,201  5,685  
Income taxes payable4,026  878  
Other current liabilities 954  1,168  
Total current liabilities93,294  84,964  
Long-term debt – credit facility100,000  65,000  
Other long-term liabilities58,795  63,898  
Total liabilities252,089  213,862  
Commitments and contingencies (Note M)
Stockholders’ equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding
    
Common stock, $0.01 par; 250,000 shares authorized, 72,198 and 72,202 issued, respectively
722  722  
Additional paid-in capital462,752  459,545  
Accumulated other comprehensive loss(2,647) (1,526) 
Retained earnings354,926  350,545  
Treasury stock, at cost; 49,958 and 49,277 shares, respectively
(662,354) (642,023) 
Total stockholders’ equity153,399  167,263  
Total liabilities and stockholders’ equity$405,488  $381,125  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
 
Common StockAdditional Paid-In CapitalAccumulated Other
Comprehensive Loss
Treasury StockTotal Stockholders’ Equity
SharesAmountRetained EarningsSharesAmount
Balance, December 31, 201972,202  $722  $459,545  $(1,526) $350,545  49,277  $(642,023) $167,263  
Net income—  —  —  —  9,106  —  —  9,106  
Adoption of new accounting standard (Note E), net of tax of $75
—  —  —  —  (214) —  —  (214) 
Issuance for stock-based compensation and dividends, net of forfeitures(4) —  218  —  (218) —  —    
Stock-based compensation expense—  —  2,896  —  —  —  —  2,896  
Employee stock purchase plan—  —  93  —  —  (4) 49  142  
Dividends ($0.20 per share)
—  —  —  —  (4,293) —  —  (4,293) 
Change in fair value of interest rate swaps, net of tax of $384
—  —  —  (1,121) —  —  —  (1,121) 
Repurchases of common stock—  —  —  —  —  685  (20,380) (20,380) 
Balance, March 31, 202072,198  $722  $462,752  $(2,647) $354,926  49,958  $(662,354) $153,399  

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—  —  —  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 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  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended March 31,
20202019
Cash flows from operating activities:
Net income$9,106  $26,855  
Adjustments to reconcile net income to cash provided by operating activities:
Deferred income tax provision, net(126) (18,314) 
Provision for credit losses2,229  349  
Depreciation and amortization1,393  1,972  
Stock-based compensation expense2,896  2,620  
Defined benefit pension plan expense211  216  
Loss on deferred compensation plan investments, net39  89  
Loss on disposal or impairment of assets15  801  
Noncash lease expense 1,521  1,662  
Loss on equity method investment595    
Other87  973  
(Increase) decrease in operating assets
Trade receivables, net(20,176) (7,377) 
Other assets, net(452) (393) 
Increase (decrease) in operating liabilities
Accrued payroll costs2,129  380  
Other liabilities3,538  1,956  
Cash provided by operating activities3,005  11,789  
Cash flows from investing activities:
Capital expenditures(1,971) (1,496) 
Other  (1,000) 
Cash used in investing activities(1,971) (2,496) 
Cash flows from financing activities:
Proceeds from credit facility35,000  78,300  
Payments on credit facility  (67,600) 
Repurchases of common stock(19,470) (14,875) 
Cash dividend(4,293) (4,406) 
Payments on other financing arrangements(328) (540) 
Other  (25) 
Cash provided by (used in) financing activities10,909  (9,146) 
Change in cash and cash equivalents11,943  147  
Cash and cash equivalents, beginning of period19,831  112  
Cash and cash equivalents, end of period$31,774  $259  

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Three Months Ended March 31,
Supplemental Disclosure of Cash Flow Information20202019
Cash Paid During the Period For:
Income taxes$399  $184  
Operating lease liabilities1,987  1,836  
Interest, net541  627  
Non-Cash Investing and Financing Transactions:
ROU assets obtained from new operating leases$924  $817  
Unsettled repurchases of common stock910  369  
Employee stock purchase plan142  140  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 2019 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 2019 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, 2019 was derived from our audited Consolidated Balance Sheet as of December 31, 2019, as presented in our 2019 Annual Report on Form 10-K.
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, among others, 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 credit losses; variable consideration for revenue recognition; income taxes; self-insured liabilities for workers’ compensation and health insurance; obligations for the pension plan; and any asset impairments. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
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 months ended March 31, 2020 and 2019, 307 thousand and 503 thousand common stock equivalents were included in the diluted WASO, respectively. For the three months ended March 31, 2020 and 2019, there were 332 thousand and 3 thousand anti-dilutive common stock equivalents, respectively.

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New Accounting Standards
Recently Adopted Accounting Standards
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, a new impairment model, which measures expected credit losses based on relevant information, including historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for annual periods beginning after December 15, 2019. We adopted this standard using the modified retrospective approach as of January 1, 2020, as required. Refer to Note E - “Allowance for Credit Losses” additional accounting policy and transition disclosures related to our allowance for credit losses.
In March 2020, the FASB issued authoritative guidance, which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference LIBOR and are affected by reference rate reform if certain criteria are met. Entities may adopt the provisions of the new standard as of the beginning of the reporting period when the election is made between March 12, 2020 through December 31, 2022. We adopted this optional standard effective January 1, 2020 using the prospective method, and utilized the optional expedients for cash flow hedges to assume that a hedged forecasted transaction is probable of occurring and that the reference rate will not be replaced for the remainder of a hedging relationship.
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 we do not expect this standard to have a material effect on our consolidated financial statements.
Note B - Discontinued Operations
During 2019, management completed the sale 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. The results of operations for both KGS and TFX have been reported as discontinued operations in our consolidated financial statements for all prior periods presented.
The following table summarizes the line items of pretax profit of the GS segment for the three months ended March 31, 2019 (in thousands):
Revenue$26,426  
Direct costs19,015  
Gross profit7,411  
Selling, general and administrative expenses5,432  
Depreciation and amortization235  
Income from discontinued operations1,744  
Other expense, net864  
Income from discontinued operations, before income taxes880  
Income tax benefit (1)18,001  
Income from discontinued operations, net of tax$18,881  
(1) During the three months ended March 31, 2019, we entered into a definitive agreement to sell KGS and recorded an increase of $18.5 million to deferred tax assets since it became apparent that the temporary difference 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 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 when the divestiture was completed.

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The accompanying Unaudited Condensed Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). For the three months ended March 31, 2019, cash provided by operating activities and cash used in investing activities for discontinued operations were $5.7 million and $0.1 million, respectively.
Note C - Reportable Segments
Kforce provides services through our Technology (“Tech”) and Finance and Accounting (“FA”) segments. Historically, and for the three months ended March 31, 2020 and 2019, 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 March 31,
2020
Revenue$266,784  $68,424  $335,208  
Gross profit$72,454  $22,070  $94,524  
Operating and other expenses81,990  
Income from continuing operations, before income taxes$12,534  
2019
Revenue$255,643  $71,095  $326,738  
Gross profit$68,822  $24,354  $93,176  
Operating and other expenses82,386  
Income from continuing operations, before income taxes$10,790  

Note D - Disaggregation of Revenue
The following table provides the disaggregation of revenue by segment and type (in thousands):
TechFATotal
Three Months Ended March 31,
2020
Revenue by type:
Flex revenue$262,569  $63,540  $326,109  
Direct Hire revenue4,215  4,884  9,099  
Total Revenue$266,784  $68,424  $335,208  
2019
Revenue by type:
Flex revenue$250,216  $64,765  $314,981  
Direct Hire revenue5,427  6,330  11,757  
Total Revenue$255,643  $71,095  $326,738  

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Note E - Allowance for Credit Losses
The allowance for credit losses on trade receivables is determined based on a number of factors such as recent and historical write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of receivables among clients and the current state of the U.S. economy. As part of our analysis, we apply credit loss rates to outstanding receivables by aging category. For certain clients, we perform a quarterly credit review, which considers the client’s credit rating and financial position as well as our total credit loss exposure. Trade receivables are written off after all reasonable collection efforts have been exhausted. Recoveries of trade receivables previously written off are recorded when received and are immaterial for the three months ended March 31, 2020.
The following table presents the activity within the allowance for credit losses on trade receivables for the three months ended March 31, 2020 (in thousands):
Allowance for credit losses, January 1, 2020 (1)$1,843  
Current period provision2,229  
Write-offs charged against the allowance, net of recoveries of amounts previously written off(182) 
Allowance for credit losses, March 31, 2020$3,890  
(1) As a result of the adoption of the new credit losses accounting standard, we recorded a cumulative effect adjustment to increase the allowance for credit losses of $0.3 million as of January 1, 2020.
The allowances on trade receivables presented in the Unaudited Condensed Consolidated Balance Sheets include $0.5 million at March 31, 2020 and December 31, 2019 for reserves unrelated to credit losses.
Management considered the ongoing COVID-19 economic and health crisis and its impact on our clients’ ability to pay outstanding receivables. We analyzed receivables concentrated within specific industries most significantly impacted, reviewed specific clients with credit ratings that were in a higher risk category and applied higher credit loss rates in order to estimate our potential credit loss exposure, which resulted in an increase to our allowance for credit losses during the three months ended March 31, 2020.
Note F - Other Assets, Net
Other assets, net consisted of the following (in thousands):
March 31, 2020December 31, 2019
Assets held in Rabbi Trust$30,843  $35,413  
Right-of-use assets for operating leases, net17,606  18,344  
Capitalized software, net (1)9,841  8,759  
Equity method investment (2)7,574  8,169  
Deferred loan costs, net766  855  
Other non-current assets1,048  1,298  
Total Other assets, net$67,678  $72,838  
(1) Accumulated amortization of capitalized software was $34.4 million and $34.2 million as of March 31, 2020 and December 31, 2019, respectively.
(2) In June 2019, Kforce entered into a joint venture resulting in a 50% noncontrolling interest in WorkLLama, LLC (“WorkLLama”), which is accounted for as an equity method investment. The loss on equity method investment was $0.6 million during the three months ended March 31, 2020. Refer to Note M - “Commitments and Contingencies” for more information on contingencies related to WorkLLama.

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Note G - Current Liabilities
The following table provides information on certain current liabilities (in thousands):
March 31, 2020December 31, 2019
Accounts payable and other accrued liabilities:
Accounts payable$23,918  $20,267  
Accrued liabilities13,207  12,965  
Total Accounts payable and other accrued liabilities$37,125  $33,232  
Accrued payroll costs:
Payroll and benefits$40,141  $38,035  
Health insurance liabilities3,976  3,907  
Payroll taxes870  992  
Workers’ compensation liabilities1,001  1,067  
Total Accrued payroll costs$45,988  $44,001  
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.
Note H - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
March 31, 2020December 31, 2019
Deferred compensation plan $24,044  $30,361  
Supplemental executive retirement plan18,290  18,080  
Operating lease liabilities14,235  14,627  
Interest rate swap derivative instruments1,684  179  
Other long-term liabilities542  651  
Total Other long-term liabilities$58,795  $63,898  

Note I - Employee Benefit Plans
Supplemental Executive Retirement Plan
Kforce maintains a Supplemental Executive Retirement Plan (“SERP”) for the benefit of two executives. The SERP is a non-qualified benefit plan and does not include elective deferrals of covered executive officers’ compensation.
The following table presents the components of net periodic benefit cost (in thousands):
Three Months Ended March 31,
20202019
Service cost$86  $65  
Interest cost125  151  
Net periodic benefit cost$211  $216  
The service cost is recorded in SG&A and the interest cost is recorded in Other expense, net in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

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The projected benefit obligation as of March 31, 2020 and December 31, 2019 was $18.3 million and $18.1 million, respectively, and is recorded in Other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. There is no requirement for Kforce to fund the SERP and, as a result, no contributions were made to the SERP during the three months ended March 31, 2020. Kforce does not currently anticipate funding the SERP during the year ended December 31, 2020.
Note J - Stock Incentive Plans
On April 28, 2020, Kforce shareholders approved the 2020 Stock Incentive Plan (the “2020 Plan”). The 2020 Plan allows for the issuance of stock options, stock appreciation rights (“SAR”), stock awards (including restricted stock awards (“RSAs”) and restricted stock units (“RSUs”)) and other stock-based awards. The aggregate number of shares reserved under the 2020 Plan is approximately 3.6 million shares. Grants of an option or SAR reduce the reserve by one share, while a stock award reduces the reserve by 2.72 shares. The 2020 Plan terminates on April 28, 2030.
Restricted stock (including RSAs and RSUs) are granted to directors, executives and management either for awards related to Kforce’s annual long-term incentive program or as part of a compensation package in order to retain directors, executives and management.
The following table presents the restricted stock activity for the three months ended March 31, 2020 (in thousands, except per share amounts):
Number of 
Restricted Stock
Weighted-Average
Grant Date
Fair Value
Total Intrinsic
Value of Restricted
Stock Vested
Outstanding at December 31, 20191,180  $29.51  
Granted7  $29.60  
Forfeited(12) $22.62  
Vested(8) $22.15  $279  
Outstanding at March 31, 20201,167  $29.63  
As of March 31, 2020, total unrecognized stock-based compensation expense related to restricted stock was $29.0 million, which will be recognized over a weighted-average remaining period of 3.3 years. During the three months ended March 31, 2020 and 2019, stock-based compensation expense from continuing operations was $2.9 million and $2.5 million, respectively.
Note K - Derivative Instruments and Hedging Activity
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A (“Swap A”). Swap A was effective on May 31, 2017 and matures on April 29, 2022. Swap A has a fixed interest rate of 1.81% and a notional amount of $65.0 million at March 31, 2020, which decreases to $25.0 million in May 2020.
On March 12, 2020, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. (“Swap B”). Swap B was effective on March 17, 2020 and matures on May 30, 2025. Swap B has a fixed interest rate of 0.61% and a notional amount of $35.0 million at March 31, 2020, which increases to $75.0 million and $100.0 million in May 2020 and May 2022, respectively, and subsequently decreases to $75.0 million and $40.0 million in May 2023 and May 2024, respectively. The increases in the notional amount of Swap B correspond to the decreases in the notional amount for Swap A.
The Firm uses interest rate swaps as an interest rate risk management tool to mitigate the potential impact of rising interest rates on variable rate debt. The fixed interest rate for each swap, plus the applicable interest margin under our credit facility, is included in interest expense and recorded in Other expense, net in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. Both Swap A and B have been designated as cash flow hedges and were effective at March 31, 2020. The change in the fair value of the swaps is recorded as a component of other comprehensive income in the consolidated financial statements.

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The following table sets forth the activity in the accumulated derivative instrument activity (in thousands):
Three Months Ended March 31,
20202019
Accumulated derivative instrument (loss) gain, beginning of period$(179) $900  
Net change associated with current period hedging transactions(1,505) (375) 
Accumulated derivative instrument (loss) gain, end of period$(1,684) $525  

Note L - Fair Value Measurements
Our interest rate swaps are measured at fair value using readily observable inputs, which are considered to be Level 2 inputs and are recorded in Other long-term liabilities within the accompanying Unaudited Condensed Consolidated Balance Sheets. Refer to Note K - “Derivative Instruments and Hedging Activity” for a complete discussion of our interest rate swaps.
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the three months ended March 31, 2020. The following table sets forth by level, within the fair value hierarchy, estimated fair values on a recurring basis (in thousands):
Asset/(Liability) Measured at Fair Value:Asset/(Liability)Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs 
(Level 2)
Significant
Unobservable
Inputs 
(Level 3)
At March 31, 2020
Interest rate swap derivative instruments$(1,684) $  $(1,684) $  
At December 31, 2019
Interest rate swap derivative instrument$(179) $  $(179) $  

Note M - 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 March 31, 2020, our liability would be approximately $39.7 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 $16.8 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.
Litigation
There have been no material developments with regard to any of the legal proceedings previously disclosed in our 2019 Annual Report on Form 10-K.
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.
Equity Method Investment
Under the joint venture operating agreement for WorkLLama, Kforce is obligated to make additional cash contributions, which are contingent on WorkLLama's achievement of certain operational and financial milestones. Our maximum potential capital contributions were $22.5 million and we contributed $9.0 million during the year ended December 31, 2019. There is uncertainty as to the attainment of the milestones given the joint venture is in the early stages and at March 31, 2020, there are no contingent contributions recorded. Refer to Note F - “Other Assets, Net” for more details on WorkLLama.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are highlights as of and for the three months ended March 31, 2020, which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto.
Revenue for the three months ended March 31, 2020 increased 2.6% (1.0% on a billing day basis) to $335.2 million from $326.7 million in the comparable period in 2019. We began to experience negative impacts to our operating trends as a result of the COVID-19 economic and health crisis in March 2020, most notably within FA Flex and Direct Hire.
Flex revenue for the three months ended March 31, 2020 increased 3.5% (1.9% on a billing day basis) to $326.1 million from $315.0 million in the comparable period in 2019. Flex revenue increased 4.9% (3.3% on a billing day basis) for Tech and decreased 1.9% (3.4% on a billing day basis) for FA.
Direct Hire revenue for the three months ended March 31, 2020 decreased 22.6% to $9.1 million from $11.8 million in the comparable period in 2019.
Flex gross profit margin for the three months ended March 31, 2020 increased 40 basis points to 26.2% from 25.8% in the comparable period in 2019 as a result of a more favorable payroll tax environment in the first quarter of 2020. For the three months ended March 31, 2020, Flex gross profit increased 70 basis points for Tech and decreased 80 basis points for FA.
SG&A as a percentage of revenue for the three months ended March 31, 2020 decreased to 23.6% from 24.4% in the comparable period in 2019 as a result of improved associate productivity, reduced annual performance-based compensation expectations given the COVID-19 economic and health crisis and reduced discretionary spend such as travel and other office-related expenses.
Income from continuing operations for the three months ended March 31, 2020 increased 14.2% to $9.1 million, or $0.42 per share, from $8.0 million, or $0.32 per share, in the comparable period in 2019. The increase in diluted EPS was partially driven by significant open market common stock repurchases in 2019.
In March 2020, Kforce entered into a forward-starting interest rate swap agreement with a fixed interest rate of 0.61% (which is added to the applicable margin under our credit facility), resulting in an increase in the notional amount of our interest rate swaps of $35.0 million, for a total of $100.0 million. We executed this swap in order take advantage of historically low interest rates and reduce liquidity risk as we navigate the COVID-19 economic and health crisis.
The Firm returned $24.6 million of capital to our shareholders with a quarterly dividend of $4.3 million ($0.20 per share) and open market common stock repurchases of $20.3 million during the three months ended March 31, 2020. In March 2020, the Board approved an increase in our stock repurchase authorization to an aggregate of $100.0 million.
Cash provided by operating activities was $3.0 million during the three months ended March 31, 2020 compared to $11.8 million for the three months ended March 31, 2019. Our operating cash flows were negatively impacted over the last few weeks of March 2020 as a result of certain clients delaying payment of outstanding receivable balances to preserve cash flow at the beginning of the COVID-19 economic and health crisis.

RESULTS OF OPERATIONS
Business Overview
Kforce provides professional staffing services and solutions to our clients on both a temporary (“Flex”) and permanent (“Direct Hire”) basis through our Tech and FA segments. We operate through our corporate headquarters in Tampa, Florida with 50 field offices located throughout the United States. As of March 31, 2020, Kforce employed over 2,200 associates and we had over 10,000 consultants on assignment. Kforce serves clients across many industries and geographies as well as organizations of all sizes, with a particular focus on Fortune 1000 and other large companies. We believe that our portfolio of service offerings is a key contributor to our long-term financial stability.
During 2020, the U.S. and global macro-economic environments have been severely impacted by the COVID-19 economic and health crisis. Certain data we follow that is published by the Bureau of Labor Statistics and Staffing Industry Analysts (“SIA”) such as the penetration rate (the percentage of temporary staffing to total employment) and unemployment rate, which were 1.9% and 4.4%, respectively, in March 2020, is expected to change materially in the near-term as this crisis unfolds. Through the week ending April 25, 2020, the U.S. Department of Labor reported 3.8 million additional claims for unemployment bringing the total over a six-week period to more than 30 million.
Certain sectors of the U.S. economy have been more acutely impacted by the COVID-19 economic and health crisis, such as the hospitality, transportation, retail, entertainment, health services and manufacturing sectors, though very few sectors appear to be immune. Kforce generates revenue within each of these sectors of the U.S. economy although the composition of our revenue by sector is, by intent, diversified. Our top three industries served include financial services, business services and telecommunications.
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Towards the end of the first quarter and into the second quarter, the U.S. economy increasingly began to feel the negative impacts of the COVID-19 economic and health crisis. Accordingly, we have been working with our clients to assist them in navigating these turbulent waters. These discussions for certain clients resulted in the reduction or elimination of consultants on previous projects and assignments, reducing bill rates, granting extended payment terms, and/or temporary furloughs for consultants, among other impacts. We have also experienced a decrease in our leading indicators, such as job orders, new assignment demand and direct hire placements. This crisis continues to be extremely fluid and there is significant uncertainty as to the extent of the potential negative impact on our business, clients, consultants and candidates. Thus, it is increasingly difficult to predict our near-term operating results.
Although we have seen some impact to our business from this abrupt and unprecedented economic disruption, we believe our strategic decisions to focus our offerings in the domestic technology and professional staffing and solutions market, limit the concentration of Direct Hire revenue (now less than 3% of total revenue) and maintain a strong balance sheet provides us great confidence moving forward. In addition, we have made investments in recent years to implement new and upgrade existing technologies that we believe have increased our operating efficiencies and enabled us to be more responsive to our consultants and clients. Most of these technologies can be securely accessed remotely, which put us in a good position to seamlessly transition to a full work remote posture in March 2020.
Our client relationships and capability to source and deliver resources at scale significantly contributed to us securing several large opportunities to assist the U.S. economy during this crisis in areas such as customer service, loan processing and administration. While this work is anticipated to be temporary in nature, we expect it will partially offset some of the negative impacts over the near-term in our business.
Operating Results - Three Ended March 31, 2020 and 2019
The following table presents certain items in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as a percentage of revenue:
Three Months Ended
March 31,
20202019
Revenue by segment:
Tech79.6 %78.2 %
FA20.4  21.8  
Total Revenue100.0 %100.0 %
Revenue by type:
Flex97.3 %96.4 %
Direct Hire2.7  3.6  
Total Revenue100.0 %100.0 %
Gross profit28.2 %28.5 %
Selling, general and administrative expenses23.6 %24.4 %
Depreciation and amortization0.4 %0.5 %
Income from operations4.2 %3.6 %
Income from continuing operations, before income taxes3.7 %3.3 %
Income from continuing operations2.7 %2.4 %
Income from discontinued operations, net of tax— %5.8 %
Net income2.7 %8.2 %
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Revenue. The following table presents revenue by type for each segment and the percentage change from the prior period (in thousands):
Three Months Ended March 31,
2020Increase
(Decrease)
2019
Tech
Flex revenue$262,569  4.9 %$250,216  
Direct Hire revenue4,215  (22.3)%5,427  
Total Tech revenue$266,784  4.4 %$255,643  
FA
Flex revenue$63,540  (1.9)%$64,765  
Direct Hire revenue4,884  (22.8)%6,330  
Total FA revenue$68,424