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 a disposal group held for sale and discontinued operations. Refer to Note B - “Assets Held For Sale and 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 important 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.
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, 2019 and 2018, there were 503 thousand and 290 thousand common stock equivalents included in the diluted WASO, respectively. For the three months ended March 31, 2019 and 2018, there were insignificant anti-dilutive common stock equivalents.
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.
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 using the prospective method effective January 1, 2019. 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 will be recorded within operating cash flows going forward. Capitalized costs will be 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 March 31, 2019, implementation costs capitalized were $0.2 million, and there was no accumulated amortization or amortization expense recorded during the three months ended March 31, 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 using the modified retrospective approach with no required cumulative adjustments as of January 1, 2019. 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 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.
In August 2018, the FASB issued authoritative guidance regarding changes to the disclosure requirements for fair value measurement. The amendments pertaining to changes in unrealized gains and losses, the weighted average and range of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The guidance is effective for fiscal periods beginning after December 15, 2019. The adoption of this guidance will modify our disclosures but is not expected to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued authoritative guidance on accounting for credit losses on financial instruments, including trade receivables. The 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 our disclosures.
Note B - Assets Held For Sale and 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 strategic 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®, our federal government product business. We evaluated the six criteria for classification of assets held for sale and determined that the GS segment was a disposal group held for sale as of March 31, 2019. We determined that the divestiture of the GS segment was a strategic shift that will have a major effect on operations and financial results of the Firm. Kforce will not have significant continuing involvement in the operations of the GS segment after its disposition. Therefore, the GS segment was reflected as held for sale on the consolidated balance sheets as of March 31, 2019 and December 31, 2018, and included in discontinued operations in the consolidated statements of operations for the three months ended March 31, 2019 and 2018.
The following table summarizes the line items of pretax profit for the GS segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
Revenue
|
$
|
26,426
|
|
$
|
28,852
|
Direct costs
|
19,015
|
|
21,201
|
Gross profit
|
7,411
|
|
7,651
|
Selling, general and administrative expenses
|
5,432
|
|
5,810
|
Depreciation and amortization
|
235
|
|
242
|
Income from discontinued operations
|
1,744
|
|
1,599
|
Other expense (income), net
|
864
|
|
(4)
|
Income from discontinued operations, before income taxes
|
880
|
|
1,603
|
Income tax (benefit) expense
|
(18,001)
|
|
413
|
Income from discontinued operations, net of tax
|
$
|
18,881
|
|
$
|
1,190
|
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; therefore, we were required to record an increase of $18.5 million to deferred tax assets since it became apparent that the temporary difference would reverse in the foreseeable future. The corresponding income tax benefit was included in Income from discontinued operations, net of tax in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.
The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale for the GS segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
ASSETS
|
|
|
|
Current assets held for sale:
|
|
|
|
Trade receivables
|
$
|
21,403
|
|
$
|
24,336
|
Prepaid expenses and other current assets
|
5,285
|
|
5,437
|
Total Current assets held for sale
|
$
|
26,688
|
|
$
|
29,773
|
Noncurrent assets held for sale:
|
|
|
|
Fixed assets, net
|
$
|
1,354
|
|
$
|
1,496
|
Other assets, net
|
1,559
|
|
293
|
Deferred tax assets, net
|
20,518
|
|
2,604
|
Intangible assets, net
|
2,866
|
|
2,952
|
Goodwill
|
20,928
|
|
20,928
|
Total Noncurrent assets held for sale (1)
|
$
|
47,225
|
|
$
|
28,273
|
LIABILITIES
|
|
|
|
Current liabilities held for sale:
|
|
|
|
Accounts payable and other accrued liabilities
|
$
|
11,727
|
|
$
|
6,064
|
Accrued payroll costs
|
5,192
|
|
5,878
|
Current portion of operating lease liabilities
|
682
|
|
—
|
Other current liabilities
|
8
|
|
16
|
Income taxes payable
|
—
|
|
305
|
Total Current liabilities held for sale
|
$
|
17,609
|
|
$
|
12,263
|
Noncurrent liabilities held for sale:
|
|
|
|
Other long-term liabilities
|
$
|
1,970
|
|
$
|
4,551
|
Total Noncurrent liabilities held for sale
|
$
|
1,970
|
|
$
|
4,551
|
(1) At March 31, 2019, Noncurrent assets held for sale in the Unaudited Condensed Consolidated Balance Sheets of $51.0 million also includes $3.8 million related to a long-lived asset unrelated to the GS segment.
Management considered the qualitative and quantitative factors for the goodwill associated with the GS reporting unit and determined that there was no indication that the carrying value was likely impaired. The GS reporting unit's goodwill balance of $20.9 million was reclassified to assets held for sale at March 31, 2019 and December 31, 2018.
The contingent consideration liability, related to the acquisition of TraumaFX® in 2014, of $1.1 million is included in Accounts payable and other accrued liabilities within Current liabilities held for sale as of March 31, 2019 and $0.2 million is included in Other long-term liabilities within Noncurrent liabilities held for sale as of December 31, 2018. This liability is remeasured at fair value on a recurring basis using the discounted cash flow method. The inputs used to calculate the fair value of the contingent consideration liability are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. An increase in future cash flows may result in a higher estimated fair value while a decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liability. For the three months ended March 31, 2019, approximately $0.9 million of expense was recognized due to the remeasurement of our contingent consideration liability. Remeasurements to fair value are recorded in Income from discontinued operations, net of tax within the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.
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. For the three months ended March 31, 2018, cash provided by operating activities and cash used in investing activities for discontinued operations were $0.5 million and $0.4 million, respectively.
Subsequent Event
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, subject to a post-closing working capital adjustment. We expect a gain on the sale, net of transaction costs, of approximately $72.0 million. The transaction costs are expected to total approximately $9.5 million and primarily include legal fees, commissions, transaction bonuses and accelerated stock-based compensation expense triggered by a change in control of KGS. The Firm does not expect to pay any income tax on this transaction due to it being structured as a stock sale and Kforce’s significant outside tax basis, which has been recognized as a deferred tax asset in accordance with GAAP as of March 31, 2019, as discussed above. The gain on the sale of KGS and the reversal of the related deferred tax asset and income tax benefit of $18.5 million will be recorded in discontinued operations during the three months ended June 30, 2019.
While the sale of KGS did not include TraumaFX®, management announced on March 1, 2019 that it is exploring strategic alternatives for TraumaFX® which includes, but is not limited to, a potential sale of the business. This process is continuing and there can be no assurance of any particular outcome. The conclusion of the process is expected to occur within the next year.
Note C - Reportable Segments
Kforce provides services through the following segments: Technology (“Tech”) and Finance and Accounting (“FA”). Historically, and for the three months ended March 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech
|
|
FA
|
|
|
|
Total
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
Revenue
|
$
|
255,643
|
|
$
|
71,095
|
|
|
|
$
|
326,738
|
Gross profit
|
$
|
68,822
|
|
$
|
24,354
|
|
|
|
$
|
93,176
|
Operating expenses and other expenses
|
|
|
|
|
|
|
82,386
|
Income from continuing operations, before income taxes
|
|
|
|
|
|
|
$
|
10,790
|
2018
|
|
|
|
|
|
|
|
Revenue
|
$
|
236,497
|
|
$
|
80,944
|
|
|
|
$
|
317,441
|
Gross profit
|
$
|
65,376
|
|
$
|
27,161
|
|
|
|
$
|
92,537
|
Operating expenses and other expenses
|
|
|
|
|
|
|
81,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before income taxes
|
|
|
|
|
|
|
$
|
10,645
|
Note D - Revenue
The following table provides information on revenue by segment and type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tech
|
|
FA
|
|
|
|
Total
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
Revenue by type:
|
|
|
|
|
|
|
|
Flex revenue
|
$
|
250,216
|
|
$
|
64,765
|
|
|
|
$
|
314,981
|
Direct Hire revenue
|
5,427
|
|
6,330
|
|
|
|
11,757
|
|
|
|
|
|
|
|
|
Total Revenue
|
$
|
255,643
|
|
$
|
71,095
|
|
|
|
$
|
326,738
|
2018
|
|
|
|
|
|
|
|
Revenue by type:
|
|
|
|
|
|
|
|
Flex revenue
|
$
|
231,496
|
|
$
|
74,550
|
|
|
|
$
|
306,046
|
Direct Hire revenue
|
5,001
|
|
6,394
|
|
|
|
11,395
|
|
|
|
|
|
|
|
|
Total Revenue
|
$
|
236,497
|
|
$
|
80,944
|
|
|
|
$
|
317,441
|
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 March 31, 2019, our liability would be approximately $32.8 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 $14.3 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
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. 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. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Note F - Other Assets, Net
Other assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Assets held in Rabbi Trust
|
$
|
32,593
|
|
$
|
29,134
|
Right-of-use assets for operating leases, net
|
15,289
|
|
—
|
Capitalized software, net
|
5,477
|
|
4,828
|
Deferred loan costs, net
|
1,120
|
|
1,182
|
Interest rate swap derivative instrument
|
525
|
|
900
|
Other non-current assets
|
1,425
|
|
620
|
Total Other assets, net
|
$
|
56,429
|
|
$
|
36,664
|
Note G - Current Liabilities
The following table provides information on certain current liabilities balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Accounts payable and other accrued liabilities:
|
|
|
|
Accounts payable
|
$
|
20,571
|
|
$
|
18,793
|
Accrued liabilities
|
11,580
|
|
13,749
|
Total Accounts payable and other accrued liabilities
|
$
|
32,151
|
|
$
|
32,542
|
Accrued payroll costs:
|
|
|
|
Payroll and benefits
|
$
|
34,525
|
|
$
|
34,768
|
Health insurance liabilities
|
3,873
|
|
2,680
|
Payroll taxes
|
898
|
|
920
|
Workers’ compensation liabilities
|
1,015
|
|
1,016
|
Total Accrued payroll costs
|
$
|
40,311
|
|
$
|
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.
Note H - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Deferred compensation plan
|
$
|
27,343
|
|
$
|
25,672
|
Supplemental executive retirement plan
|
15,250
|
|
15,035
|
Operating lease liabilities
|
11,452
|
|
—
|
Other long-term liabilities
|
1,294
|
|
2,802
|
Total Other long-term liabilities
|
$
|
55,339
|
|
$
|
43,509
|
Note I - Leases
We determine if a contract or arrangement meets the definition of a lease at inception. Kforce leases property for our field offices as well as certain office equipment. We adopted the new lease standard using the optional transition method in the period of adoption as of January 1, 2019, without retrospective application to comparative periods. We recorded approximately $17.6 million of right-of-use (“ROU”) assets and $21.0 million of lease liabilities on our consolidated balance sheet on January 1, 2019 related to operating leases. The difference between the ROU assets and lease liabilities balances relates to the lease incentive liabilities as of December 31, 2018 in accordance with the previous lease accounting guidance. We determined that no cumulative effect adjustment to retained earnings was necessary upon adoption. ROU assets for operating leases are recorded within Other assets, net and operating lease liabilities are recorded within Other current liabilities if expected to be recognized in less than one year and Other long-term liabilities, if over one year, in the Unaudited Condensed Consolidated Balance Sheet. Operating lease additions are disclosed as a non-cash transaction in Note N - "Supplemental Cash Flow Information" and the amortization of the ROU assets is reflected as Noncash lease expense within operating activities in the Unaudited Condensed Consolidated Statement of Cash Flows. We elected the package of practical expedients and did not reassess our prior conclusions regarding lease identification, lease classification and initial direct costs. We did not elect the hindsight practical expedient.
Finance leases are not significant to our operations as of and for the three months ended March 31, 2019.
Operating Leases
We elected not to separate lease and non-lease components when determining the consideration in the contract. ROU assets and lease liabilities are recognized based on the present value of the lease payments over the lease term at the commencement date. If there is no rate implicit in the lease, we use our incremental borrowing rate in the present value calculation, which is based on our collateralized borrowing rate and determined based on the terms of our leases and the economic environment in which they exist. Our weighted-average discount rate was 4.00% on March 31, 2019. Our lease agreements do not contain any material residual value guarantees or restrictive covenants.
Our lease terms typically range from
three
to
five
years with one or more options to renew with similar terms. The exercise of renewal options is at our sole discretion and is included in the lease term if we are reasonably certain that the renewal option will be exercised. Our weighted-average remaining lease term was 3.5 years on March 31, 2019.
We elected the short term practical expedient for any leases with an initial term of 12 months or less and did not recognize ROU assets or lease liabilities for those leases.
Certain of our operating leases require variable payments of property taxes, insurance and common area maintenance, in addition to base rent. Variable lease costs, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred.
The following table presents operating lease expense included in selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Lease Cost
|
|
|
March 31, 2019
|
Operating lease expense
|
|
|
$
|
1,768
|
Variable lease costs
|
|
|
382
|
Short term lease expense
|
|
|
180
|
Sublease income
|
|
|
(106)
|
Total operating lease expense
|
|
|
$
|
2,224
|
The following table presents the maturities of operating lease liabilities as of March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2019
|
|
$
|
4,725
|
|
|
|
|
2020
|
|
5,855
|
|
|
|
|
2021
|
|
3,431
|
|
|
|
|
2022
|
|
1,832
|
|
|
|
|
2023
|
|
1,590
|
|
|
|
|
2024
|
|
740
|
|
|
|
|
Thereafter
|
|
459
|
|
|
|
|
Total maturities of operating lease liabilities
|
|
18,632
|
|
|
|
|
Less: Interest
|
|
1,319
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
17,313
|
|
|
|
|
The following table presents the expected future contractual operating lease obligations as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
6,994
|
|
|
|
|
2020
|
|
6,177
|
|
|
|
|
2021
|
|
3,731
|
|
|
|
|
2022
|
|
2,142
|
|
|
|
|
2023
|
|
1,745
|
|
|
|
|
Thereafter
|
|
1,199
|
|
|
|
|
Total future contractual operating lease obligations
|
|
$
|
21,988
|
|
|
|
|
Note J - Employee Benefit Plans
Supplemental Executive Retirement Plan
Kforce maintains a Supplemental Executive Retirement Plan (“SERP”) for the benefit of certain executive officers. The primary goals of the SERP are to create an additional wealth accumulation opportunity, restore lost qualified pension benefits due to government limitations and retain our covered executive officers. 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,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Service cost
|
$
|
65
|
|
$
|
338
|
|
|
|
|
Interest cost
|
151
|
|
117
|
|
|
|
|
Net periodic benefit cost
|
$
|
216
|
|
$
|
455
|
|
|
|
|
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.
The projected benefit obligation as of March 31, 2019 and December 31, 2018 was $15.3 million and $15.0 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, 2019. Kforce does not currently anticipate funding the SERP during the year ended December 31, 2019.
Note K - Stock Incentive Plans
On April 23, 2019, the Kforce shareholders approved the 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan allows for the issuance of stock options, stock appreciation rights, stock awards (including restricted stock awards (“RSAs”) and restricted stock units (“RSUs”)) and other stock-based awards. The aggregate number of shares of common stock that are subject to awards under the 2019 Plan is approximately 2.8 million shares. The 2019 Plan terminates on April 23, 2029. Prior to the effective date of the 2019 Plan, the Company granted stock awards to eligible participants under our 2017 Stock Incentive Plan, 2016 Stock Incentive Plan and 2013 Stock Incentive Plan (collectively the “Prior Plans”). As of the effective date of the 2019 Plan, no additional awards may be granted pursuant to the Prior Plans; however, awards outstanding as of the effective date will continue to vest in accordance with the terms of the Prior Plans.
During the three months ended March 31, 2019 and 2018, stock-based compensation expense from continuing operations was $2.5 million and $2.2 million, respectively.
Restricted Stock
Restricted stock (including RSAs and RSUs) are granted to executives and management either: for awards related to Kforce’s annual long-term incentive (“LTI”) compensation program or as part of a compensation package in order to retain directors, executives and management. The LTI award amounts are generally based on total shareholder return performance goals. Restricted stock granted during the three months ended March 31, 2019 will vest over a period of ten years, with equal vesting annually.
RSAs contain the same voting rights as other common stock as well as the right to forfeitable dividends in the form of additional RSAs at the same rate as the cash dividend on common stock and containing the same vesting provisions as the underlying award. RSUs contain no voting rights, but have the right to forfeitable dividend equivalents in the form of additional RSUs at the same rate as the cash dividend on common stock and the same vesting provisions as the underlying award. The distribution of shares of common stock for each RSU, pursuant to the terms of the Kforce Inc. Director’s Restricted Stock Unit Deferral Plan, can be deferred to a date later than the vesting date if an appropriate election is made. In the event of such deferral, vested RSUs have the right to dividend equivalents.
The following table presents the restricted stock activity for the three months ended March 31, 2019 (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, 2018
|
1,320
|
|
$
|
24.94
|
|
|
Granted
|
12
|
|
$
|
30.72
|
|
|
Forfeited
|
(8)
|
|
$
|
24.63
|
|
|
Vested
|
(8)
|
|
$
|
20.15
|
|
$
|
308
|
Outstanding at March 31, 2019
|
1,316
|
|
$
|
25.02
|
|
|
The weighted-average grant date fair value at December 31, 2018 has been updated in the table above to correct an immaterial reporting error in our 2018 Annual Report on Form 10-K.
As of March 31, 2019, total unrecognized stock-based compensation expense related to restricted stock was $26.9 million, which will be recognized over a weighted-average remaining period of 3.8 years.
Note L - Derivative Instrument and Hedging Activity
Kforce is exposed to interest rate risk as a result of our corporate borrowing activities. The Firm uses an interest rate swap derivative as a risk management tool to mitigate the potential impact of rising interest rates on our variable rate debt.
On April 21, 2017, Kforce entered into a forward-starting interest rate swap agreement with Wells Fargo Bank, N.A. (the “Swap”). The Swap was effective May 31, 2017 and matures April 29, 2022. 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 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.
The Swap has been designated as a cash flow hedge and was effective as of March 31, 2019. The change in the fair value of the Swap was recorded as a component of Accumulated other comprehensive income in the Unaudited Condensed Consolidated Balance Sheets.
The following table sets forth the activity in the accumulated derivative instrument gain for the three months ended March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated derivative instrument gain, beginning of period
|
$
|
900
|
|
|
Net change associated with current period hedging transactions
|
(375)
|
|
|
|
|
|
|
Accumulated derivative instrument gain, end of period
|
$
|
525
|
|
|
Note M - Fair Value Measurements
Kforce’s interest rate swap is measured at fair value using readily observable inputs, such as the LIBOR interest rate, which are considered to be Level 2 inputs. The Swap is recorded in Other assets, net within the accompanying Unaudited Condensed Consolidated Balance Sheets. Refer to Note L - “Derivative Instrument and Hedging Activity” for a complete discussion of the Firm’s derivative instrument.
Certain assets, in specific circumstances, are measured at fair value on a non-recurring basis utilizing Level 3 inputs such as goodwill and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets were determined to be impaired.
The following table sets forth by level, within the fair value hierarchy, estimated fair values on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/(Liabilities) 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, 2019
|
|
|
|
|
|
|
|
Recurring basis:
|
|
|
|
|
|
|
|
Interest rate swap derivative instrument
|
$
|
525
|
|
$
|
—
|
|
$
|
525
|
|
$
|
—
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
|
|
|
|
|
|
Recurring basis:
|
|
|
|
|
|
|
|
Interest rate swap derivative instrument
|
$
|
900
|
|
$
|
—
|
|
$
|
900
|
|
$
|
—
|
|
|
|
|
|
|
|
|
There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the three months ended March 31, 2019.
Note N - Supplemental Cash Flow Information
The following table provides information regarding supplemental cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
Cash Paid During the Period For:
|
|
|
|
Income taxes
|
$
|
184
|
|
$
|
89
|
Interest, net
|
627
|
|
1,343
|
Operating lease liabilities
|
1,836
|
|
—
|
Non-Cash Financing and Investing Transactions:
|
|
|
|
ROU assets obtained from new operating leases
|
$
|
817
|
|
$
|
—
|
Unsettled repurchases of common stock
|
369
|
|
—
|
Employee stock purchase plan
|
140
|
|
132
|
|
|
|
|
Shares tendered in payment of exercise price of stock options
|
—
|
|
46
|
During the three months ended March 31, 2018, cash provided by operating activities included the receipt of an income tax refund in the amount of $6.8 million.