Kforce Inc (KFRC) 2002 Q4 法說會逐字稿

Good morning. My name is brandy, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Kforce Inc. fourth quarter earnings conference call. All lines are placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, press star, and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to Mr. Blackman, VP of Investor Relations. You may begin, sir.

Good morning. Welcome to the Kforce Q4 conference call. Certain statements made during this call relate to future results and events and are otherwise forward-looking in nature. Such statements are based on the company's current expectations. Actual results or events for the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the FCC. Additional discussion of these and other factors affecting the company's business and prospects are contained in the company's files with the S.E.C. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated herein. Such differences may be material. I would now like to turn the call over to Chief Operating and Financial Officer Bbill Sanders.

Thank you, Michael. I would like to say here, Michael is the best I.R. guy in the entire world. In front of the hundreds of thousands of people on this call I would like to wish him a happy 39TH birthday for the fifth year in a row.

Thank you very much.

Thanks to all of you for your interest in Kforce. I will discuss our financial result, provide performance indicators behind the fourth quarter results and provide guidance for the first quarter, and then Dave will provide you his comments. You can find additional information about Kforce in our 10Q and 10K filings with the S.E.C. Press releases and the aforementioned S.E.C. filings are also available on the web site, Kforce.com. The press release contains supplemental pages of key statistical data. This data should assist shareholders and analysts to understand the quality of the earnings stream and insight into future trends.

Revenues for the fourth quarter of $123.5 million, which represents a sequential decline of 4.2%. The decline was primarily the result of two less billing days and the impact of midweek holidays. On a billing day basis, flex revenues increased by 50 basis points with IP flex, SNA flex, non-nursing and pharmaceutical business lines showing a positive increase. The FNA flex and pharmaceutical business lines produced outright quarterly sequential increases in revenue. These encouraging results were offset by continued weakness in our nursing business and a continued decline in search across all business lines. Revenues continue to be under pressure because of the weak economic environment. Gross profits decreased 110 basis points to 31.4% in Q4 due primarily to continued search and weakness in the search business. Every quarter we do a volume rate analysis.

The analysis comparing Q4 to Q3 indicates the search gross profit decline of 2.2 million was comprised of a $2 million decline on volume and a $200,000 decline from rate. The entire $900,000 reduction in flex gross profits is related to volume. For our I.T. business unit, revenue declined sequentially 2.7% for the quarter. Gross billable hours and flex margin were flat sequentially. I.T. flex revenue per billing day increased sequentially by 1.5%. While search has continued its decline, flex may be near the bottom for I.T. Our SNA business unit performance was stronger than expected in the quarter. FNA flex was particularly strong growing 5.8% sequentially on a billing day basis. Considering the positive seasonal trend, we believe that FNA flex may hit bottom and should be stable to improving.

FA search is improving and should show some signs of stability in the first quarter. Lastly, as the health and life sciences business unit, which represents 31.7% of revenues. The growth prospects of this business unit in this HLS sector provide us with additional revenue growth opportunities and a diverse revenue stream. Pharmaceutical continues to be the star of the group with over 10% sequential growth on a billing day basis. Health care revenues were down 7.9% sequentially due to the anticipated declines in nursing. Non-nursing revenues grew 2.3% sequentially on a billing day basis. Scientific is traditionally affected by holiday shutdowns and had a 7.4% decline in revenues on a billing day basis.

We expect HLS to be stable to down slightly for the first quarter. We continue to focus on repositioning our nursing business to longer term contract assignments and placement of RN's and expect revenues to be weak through the first half of the year. We expect non-nursing and scientific revenues to be stable in the first quarter. Pharmaceutical continues to expand its market presence and should continue its strong growth in the first quarter. As evidence of the financial and operating leverage we have build through the cost cutting process and reorganization of our field and corporate platforms, we maintain SGNA at 31.7% and total operating expenses at 33.3% before non-ordinary charges for the quarter. The non-ordinary charges of $6.4 million include $2.million for the move to a new data center which was completed in the quarter and will save us $4.3 million annually over the next three years. The charges also include over $1.4 million in expense for management reorganization and additional non-cash charges for potential impairment and disposal of certain assets. We continue to make tweaks to improve productivity and leverage efficiency enhancements to reduce SGNA expenses.

Due to our recent operating losses, we have established an evaluation reserve on our entire deferred tax assets. The result is a 20.3 million dollar non-cash charge reflected in income tax expense of the fourth quarter. We currently have federal net operating loss carry-forwards of $39 million and state carry-forwards exceeding $62 million. As a result of establishing the valuation reserve, we anticipate only nominal income tax expense for both book and tax reporting purpose purposes, until the $24 million valuation reserve for financial reporting, and the $39 million NOL carry-forwards for tax reporting or realized.

During the quarter, we also finalized our appraisal of goodwill as required by statement number 142 and recorded an impairment charge of $33.8 million and the I.T. and H.R. reporting units. This non-cash charge reflected in the change in accounting principle line on the income statement. Our GAAP loss, EPS of $1.45 includes all non-ordinary charges, the goodwill impairment charge and the income tax valuation reserve charge. Pro forma EPS was a loss of 16 cents excluding the goodwill impairment and income tax valuation and a loss of 4 cents, excluding the non-ordinary charges. The actions taken in the quarter and resulting non-ordinary charges and reserves have contributed to our objective of improving an already strong balance sheet. Our bad debt reserves to gross receivables remain strong at 8.5%, with a receivable write-offs -- write-ons exceeding write-offs for the year. Our DSO of 38.5 days is up from 35.1 days as of the end of Q3 but still, well below the 43.2 days as of Q4 2001, and continues to be among the best in our industry.

Capital expenditure expenditures are only 1/10th of 2001 levels and for the years, we have reduced our core head count 26% while maintaining flat revenue. This results in a growth in productivity of over 25%. We also are pleased to report that the quarter -- that during the quarter, we completed a new $100 million credit facility with a (inaudible) indicate of banks led by Banc of America, which includes PNC, Fleet, and CIT. The new facility provides a substantial improvement in pricing and flexibility to make acquisitions and repurchase stock. Free cash flow for the quarter was a negative 3.7 million primarily as a result of the cost to change data center, but was a positive 14.3 million for the year.

A cash position allowed us to repurchase $1,467,000 Kforce share for $5.7 million during the fourth quarter. Since 1999, we have repurchased almost 19.2 million shares for $104 million, resulting in an improved capital structure. We have approximately $10.5 million left under current board authorization, and $25 million a year under our new debt agreement. After taking these actions, we believe we are positioned for improved performance in 2003. While still maintaining a core capacity in our sales force to participate once a recovery is under way. We have lowered the break-even revenue point and will continue to do so as conditions warrant. However, we are emphasizing future revenue production over cost reductions as the key to optimal profitability.

So, economic times are uncertain we believe that the first quarter 2003 revenues should increase over the fourth quarter . Revenue may be in the $123 million to $128 million range. With revenue in this range, we anticipate EPS to be between negative 3 cents to a positive 1 cent. A consensus estimate for 2003 of 6 cents per share doesn't consider that there will be nominal income tax expense for the year as previously discussed. Assuming no major shock to the economy from geo political events and a modest ramp in economic activity, the EPS of 6 cents with nominal taxes results in an EPS of 10 cents and is in a range that we believe is achievable. In summary, we are pleased with our financial and operating position. We are well-positioned for continued stable revenue levels and for the early stages of a recovery. I now turn it over to the C.E.O. Dave Dunkel.

Thank you, Bill. The staffing environment remains stable but challenging. We have yet to see a sustained upward momentum that will represent a trend. With that said, we are confident about our pro prospects. With less than 1% market share, the opportunity for growth by delivering the right match through exceptional customer service remains compelling. We are amplifying our attack on the market determined sustained effort to earn more of the existing customers' business in addition to securing new customers. We are not and will not simply wait for a better market. Much can be done, and there is much to do to drive revenue growth. Customer segmentation penetration continues to be a priority. We believe that we can succeed in this environment.

We have a strong management team that is committed to winning, and our culture demands execution and accountability. Bill Sanders has rapidly assimilated his new operating responsibilities and has raised the bar again on expectation for execution and results. We have aligned our operating team to maximize the focus and leverage our best talent. Historically, we have used our HLS business unit as an incubator for new business concepts that upon reaching critical mass are aligned under dedicated management. In 2003, we have aligned your nursing business unit under the dedicated leadership of one of our founders and skill operator, Howard Sutter. Howard will lead to change the mix of business with a major focus on hospital customer, versus long term care, RN's and contract versus straight per dime.

This effort is in progress. During the fourth quarter, the first of the international nurses were assigned on contracts. This initiative will continue throughout the balance of 2003. HLS represents a third of our total business, and nursing represents a third of HLS. Our business model changes may take up to the first half of this year to complete. Search continues to decline, and now represents approximately 5% of our business. We will invest in this business when conditions warrant. I.T. appears to have stabilized, with customer spending targeted at high return projects with short durations. FNA also appears to have stabilized and appears to be improving and it also has seasonality going for it. The customers remain cautious overall in maintaining a high level of flexibility.

We believe that the depth and duration of this downturn will act as a catalyst for future flex growth in that flex is a percentage of the workforce will increase. One of our primary concerns is our sales force. We have significantly ramped up training efforts across all product lines to improve performance. Our focus is on execution and accountability. We are making progress towards our goal of a high performance culture. At this point, would like to take this opportunity to again thank our management team, and our field and corporate associates for their hard work and commitment during these challenging times. We are excited about our prospects for 2003. At this time, I'd like to open up the call to questions, brandy.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question is from Andrew Steinman.

Good morning. Could you just review your --sort of what you are seeing in pricing on your staffing business, and what your pricing philosophy at sort of this part of the demand curve?

Andrew, we have an entire process that we go through calculators for every transaction that we work. Certainly, this is a difficult time, particularly larger clients put pressure -- pricing pressure upon us, and we have a theory of pricing to resistance. We have -- as you can see, we have looking at our gross margin percentage, it hasn't declined that much, in fact, over the last two quarter, it's relatively flat and down 50 basis points for the year. We're pretty happy with the way our associates have been able to work the program and keep pricing bill rate and pay rate in line.

Right. And cross-decks of a pricing recovery, do you think that anything that is sort of in place now that's going to keep pricing down for an extended period of time, or do you think pricing follows volume?

Andrew, this is Dave. I wouldn't say there's anything at this point that would suggest that pricing is going to recover. I mean, it's a supply and demand environment. Clearly, there hasn't been any substantial uptake in demands. We expect overall a relatively stable pricing environment, and as bill indicated, we're very, very focused on maintaining our margins, and aligning bill and pay rates.

Thanks for the comments.

Thank you.

Your next question is from Mark Allen.

Hey. Good morning, guys. Nice job in a tough environment.

Thank you, Mark.

This is a question on the I.T. side. I guess as you think about the business and the leading indicators, you look at customer dialogue, RFP activity, et cetera. You know, based on all of that, maybe just ask kind of what is your best guess of when you think things start to pick up, and maybe just a little bit of color on the leading indicators.

Mark, this is Dave. You know, I think that one of the things that I would caution against is to not extrapolate the expectations of cap-ex spending by some of the equipment vendors as an indication of staffing demand. What we have seen is clearly there's a focus on ROI, but most of these projects today are projects that are high return, short duration in nature. They're necessary projects. Some of these things just can't be deferred. So, even in a flat cap ex environment, we think that's still a substantial amount of business. From a general sense, I would say that in an informal discussions and formal discussions with clients, there's no question that the backlog of projects is substantial. So, it's not a desire to not do the projects. In fact, it's just a matter of funding. So, we think the long term prospects for I.T. are good, and that when the logjam breaks, if you will, that we could possibly even see a fairly substantial uptake. Overall, I would just say that I.T. confident long term, short term -- guarded primarily because of the funding of some of these projects, but I.T. is very much the heart of the company and the heart of productivity in our economy.

A follow-up if I may. This would be a question for Dave regarding vendor consolidation trends and just I guess, you know, kind of bottom line, do you feel like in some of the larger users of I.T. contract services, do you feel like you're picking up a share of their wallet, so to speak. I guess it's a question on color on that?

There's no question vendor consolidation is happening. One of the things that we have tried to do, number one, is we think in the end service wins. Share of customers is going to be a primary consideration. So, our number one focus is really to deliver exceptional service. The other thing that we're very conscious of is to leverage the multiple product lines. The ability to package up our HLS businesses with FNA and I.T. and go in and provide a much more significant face for the customers is an important consideration. While it hasn't worked in all cases, it has certainly worked in some where we have leveraged one relationship to another. So, I would say overall, the consolidation has resulted in some wins for us and some losses for us. But overall, we're holding our own to gaining slightly.

Thanks. Good luck, guys. Thank you.

Thank you, Mark.

Your next question is from John Mahoney.

Good afternoon, guys. How are you doing?

Hi, John.

Hi, John.

As mentioned in the press release, I guess it's on page --second page, that pro forma earnings would have been a loss of 4 cents. Can you walk us -- how would I adjust these SGNA and gross profit lines to come to that? And what would be the tax rate that I would use? I guess it also is in the "other income" line and fees and stuff.

Yeah. Let me walk you through it. First, of course, you would take out the goodwill impairment. Then you take out the valuation reserve. Then there's two components, there's $5.4 million in SGNA, and that's related to the $2.8 million on the computer expenses $1.4 million in compensation with severance costs, and then another $1.1 million of basically for -- from asset write-downs, and then in other income expense is $1 million for some write-off of some assets. That's a total of $6.4 million. You add all of those up. That's how you get to 4 cents. We used a tax rate with --wasn't it 42.8?

Yeah. 42.8.

What are the assumptions for tax in the first quarter to get to that range that you have given?

Well, as I mentioned, because we established that tax reserve, there will be no taxes. So, very limited, nominal taxes from some states that base their tax rate on gross receipts or something like that. So, basically, there's almost no tax expense. Because we're going to be near break-even for the first quarter I would have zero tax benefit or expense. Earnings before taxes will fall to the bottom line. Which will be the case for the entire year until we utilize the $24 million valuation reserve.

Okay. So, throughout the year -- but that's not -- I mean, I --shouldn't we use a normalized tax rate to get a better picture?

Depends on who you want -- on what you want to see. If you want to see what the actual EPS for the year for GAAP purposes and for cash purposes, $39 million tax NOL carry-forward will be paying no taxes until you use up that $39 million. And for book purposes, we have a reserve of $24 million. We'll have to realize that reserve before we will be recording any income tax expense on GAAP books.

You want us to use that so we see the correct GAAP. So, I guess, you would argue that we should use the 4 cent loss for the quarter, which is excluding everything, or the GAAP loss of $1.45?

For this -- for the fourth quarter.

I'm just saying that you want it both ways?

No, I don't. There's no tax benefit in the fourth quarter.

You want us to only look at GAAP going forward, but look at the adjusted results for the fourth quarter?

No. I'm not suggesting what you need to look at. I'm just -- I was just calculated it for you. You asked how I would get to 4 cents. You get to choose. I just showed you what the tax rate would have been. At the fourth quarter if we would have done it that way.

Okay. I'm sorry. Thank you very much.

Yes.

Your next question is from Rick Dote.

Hi, Rick.

Good morning. I have a number of questions. Just in Q1, what is the assumed billing days? Is it back to 64, or -

No. It's going to be 62. You have New Year's Day. You have president's day, and you have some for M.L.K., Martin Luther king day. That's -- that's approximately will be the same the way we calculate it.

From a revenue standpoint on the guidance, it is comparable in billing days to Q4 and not Q3?

That would be correct.

I know we have been thinking that at -- at least I have, that search can't possibly get any worse than where it is. Can we say that yet? At what point can we not count on search going down $2 million a quarter?

Rick, this is Dave. You know, we have obviously seen search decline now where it's only 5% of our total revenues. You know, it can go all the way to 0. We don't think it will. But then again, we certainly wouldn't have thought it would have gotten to this place, either. As Bill mentioned earlier, we have seen stability in FNA search, which we would hope would now represent a baseline. I.T. search is really all over the board. You know, one week it's great, the next week it's not. We would not look for search to decline materially from here. We're hoping that we are building a baseline going forward. As I mentioned earlier, we will invest in it, because we believe that search is an important part of our product mix for our clients, but we're not going to do that until we see some sustained demand.

Okay. When you say FNA search, has --it's stable, you're talking about going forward because it was actually down 20, 25% in the quarter, right?

Yes. It's -- we're talking about now in a comparable basis. We have a system that we use which KPI's, key performance indicators, and actual result to day in this quarter, and KPI suggests stable to improving.

Okay. The next question is more for, I think, Bill, and the SGNA run rate. Is it fair to say that that 6.4 million that you referred to, that was in fact in that SGNA number of $44.5 this quarter?

Well, I -- all except for $1 million of it. That's correct. 5.4 is in the number.

A good run rate is -- if I do the math quickly, 39, which is slightly down from Q3 of last year.

That is correct.

Okay. But you're still looking --you're not sitting still on the expense side given where we are?

That is correct. We continue to work that. That is true, Rick.

Okay. The share count at the end of the quarter, if you have that --not the average over the quarter but the actual year-end share count.

Yes. It's 30.3 million.

Okay. On the 10.5 left on the buy-backs that authorized, are there any constraint constraints on that per the bank agreement, or you're okay to go on that?

Well, the bank agreement allows us to repurchase $25 million a year. So, there's no restriction. In fact, it's greater than the board authorization. The board has authorized -- what did I say? I think 10.1 or .2 is left. 10.5.

Right. That's in dollars, right?

That's in dollars, yes.

One last thing on the -- I saw on one of your tables that you have -- you had a receivable allowance. It looked like a reversal of a reserve. Was that -- am I reading that right?

In the receivable allowance, in the third quarter there was a slight reduction, so you have to take the difference that the allowance, what runs through the allowance is net write-off, net write-ons and the expense. So, depending upon the write-offs for the third quarter, which there were some, there wasn't the negative expense, but -- in total, there was -- the allowance went up $31,000.

All right.

In that particular quarter.

Actually, I'm referring to the fourth quarter, that $447,000.

Okay.

Is that a decrease in the allowance for receivable reserve?

Yes.

Okay.

Receivables went down from $75 million to $69 million. Actually, our reserve exceeds our 60-plus day delinquent receivables, all of them.

Okay.

so, that -- we're happy with the reserve.

It's a formula-driven thing adjusted quarterly for -

yes.

Okay.

For long term and current activities so that we can extrapolate to future inherent losses in the portfolio.

Okay. All right. That's what I have for now, thanks.

Thank you, Rick.

gain, if would you like to ask a question, please press star, then the number 1rx on your telephone keypad tilt. -- keypad at this time. At this time, there are no further questions.

Okay. I'd like to thank all of you for your interest in Kforce and we look forward to speaking to you again at the end of the first quarter. Thank you very much.

Thank you for participating in today's Kforce, Inc., fourth quarter earnings conference call. This concludes today's teleconference.