Kforce Inc (KFRC) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Kforce, Incorporated Second Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Michael Blackman, Chief Corporate Development Officer. Please go ahead, sir.

Thank you. Good afternoon and welcome to the Q2 Kforce conference call. Before we get started I would like to remind you that this call may contain statements that are forward looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties.

Actual results may differ materially because of factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements.

I would now like to turn this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. You can find additional information about Kforce on our 10Q, 10K and 8K filings with the SEC and we provide substantial disclosure on our release and our hope is that this will improve the dissemination of information about our performance and the quality of this call.

We're very pleased with our firm's performance for the second quarter 2010. The significant upturn that began in March and April translated into one of our best sequential growth performances in firm history. This is over a strong base given the firm did not experience significant revenue fall off over the past year.

Our Technology Flex results of 11.6% sequential growth were outstanding, with particular recognition to our West Region team. I'd also like to acknowledge our F&A Flex teams, which delivered 6.8% sequential growth, again lead by our West team.

Search also had an outstanding quarter with our search teams in all three regions performing exceptionally and delivering 25% sequential growth, overall an excellent quarter.

We've continued to see very strong activity levels in our Technology and F&A services as we move into Q3 and are focused on meeting delivery targets firm wide and particularly in the NRC.

There has been extensive discussion and analysis centered on the economy and labor markets and the weak job creation relative to historic recoveries. It appears that it may be different this time, as the uncertainty created by new healthcare and financial reform regulations and uncertainties surrounding future tax policy has resulted in a strategic shift toward the use of contract and flexible labor.

Since September of 2009, the temp penetration percentage of the total work force has increased from 1.33% to 1.6%. Temporary jobs rose 19.6% year-over-year in June, the largest gain on record and the sixth consecutive month of year-over-year gains.

Discussions with our clients confirm what the data suggests as they express a preference for flexibility and a desire to shift employment risks to staffing firms. It's too early to say with certainty that this trend will continue but we are encouraged about the prospects for accelerated growth should that occur.

Throughout the second quarter we continued our investment in our national recruiting center and strategic accounts teams and selectively added to our field delivery resources where appropriate. We are very pleased with our NRC teams as they surged to meet the significant increase in demand in both tech and F&A. We are also pleased that we were able to deliver exceptional earnings performance while continuing to invest for future accelerated growth.

We're continuing to see significant opportunities as our strategic accounts teams jells and the pipeline builds for future revenue growth. Our primary goal, however, remains to capture additional client share with our existing customers. We anticipate using cash flow for continued debt retirement, share repurchase and acquisitions that meet a very high hurdle.

We are continuing to see opportunities presented to us and recently observed that private valuations, particularly in tech have increased substantially. We are maintaining our discipline and standards, again, a great quarter with great results delivered by our great teams. We have diligently planned for this period with the goal of surpassing prior peak revenue and earnings earlier in the cycle.

I'll turn the call over to Bill Sanders, Kforce President, who will provide his comments and then Joe Liberatore, Kforce CFO, will then provide additional insights and operating trends and expectations and I will conclude. William.

Thank you, David, and thanks to all of you for your interest in Kforce. We are indeed very pleased with our second quarter performance and in particular the continued strength in our Tech Flex and permanent placement business as we continue to take advantage of a strengthening environment for professional staffing to deliver strong revenue and earnings growth.

Our second quarter revenues of $246.1 million, which grew 8.6% sequentially, and improving bill pay rate spreads across all our businesses further suggests the demand for our services continue to increase. Our diversified revenue stream is concentrated in some of the areas of greatest anticipated demand as the labor market for flexible and permanent professionals continues to strengthen.

We believe that Kforce is well positioned with great people and an operating platform that delivers exceptional results for both our clients and our shareholders. We are pleased to see that in a billing day basis our flex revenue trends improved sequentially each month in the quarter and for both May and June for perm.

In many respects our clients are accelerating a flexible staffing model at a much faster pace than we have historically experienced. Perm is also accelerating faster than historical economic cycles. We are pleased that we are prepared to provide our clients solutions to this surge in demand.

Our largest business unit, Technology Flex, which represents greater than half of total firm revenues, increased 11.6% sequentially and 17.1% year-over-year. Tech Flex revenues showed a consistent upward trend each month throughout the second quarter. Recent trends for Tech Flex are up from June levels and leading indicators continue to improve in July.

We invested in our National Recruiting Center in Q2 to support this business as demand continues to be very broad based. We continue to diversify our client base and are also seeing our largest clients request greater numbers of consultants per project. Both of these indictors are signs of a strengthening market. We expect Tech Flex to have continued growth in Q3 and for the foreseeable future with a sustained increase in IT spending providing a strong catalyst.

Our finance and accounting flex business, which now represents 16% of total revenues, also performed well in the quarter with revenues increasing 6.8% sequentially and 2.7% year-over-year. Much like our tech business, we are seeing broad-based growth across the entire bill rate spectrum. This business unit continues to be enabled by our strategic account strategy and our National Recruiting Center and we believe it is seeing the benefit of investments in leadership infrastructure that we have made over the past two years.

FA flex revenues showed an upward trend throughout the second quarter. Recent trends and performance indicators for FA flex are up in July and we therefore expect continued growth for this unit in Q3.

Our HLS business segment, which comprises 17% of total revenues, is made up of two businesses, clinical research and healthcare. During Q2, our clinical research business increased 2.4% sequentially and was flat year-over-year. Healthcare increased 4.4% sequentially and declined 1.7% year-over-year.

While the sequential increase in clinical research was driven primarily by a ramp up of a new project and a larger client, its dependence on these large projects can create fluctuations in quarterly revenues. In late Q2 we begin the wind down of a large project, which will negatively impact Q3 revenues. We therefore expect Q3 revenues for KCR to be slightly down.

Our healthcare revenue trends are promising and margins remain strong as hospital spend continues to improve, particularly in the project services and remote coding areas. We believe in the long-term demand for this profitable business and expect revenues to be up again in the third quarter.

Revenues for Kforce Government Solutions, our prime government contracting business unit, increased by 2.1% sequentially but decreased year-over-year by 8.6%. This business is concentrated in some of the better funded areas of both defense and Federal services such as healthcare, data integrity, finance and technology solutions and its long-term growth prospects remain strong.

In the near term we continue to see the expected impact of the challenging federal procurement environment and continue to be negatively impacted by the trend toward the government in sourcing positions previously filled by contractors. We remain focused on our key competencies and are making significant investments to improve our business development capability, which included bringing in a seasoned sales executive during Q2 to lead the function at KGS.

Margins improved in Q2 but continued to be under pressure due to governments' focus on cost reductions and fixed fee assignments on recompeted contracts.

As we look forward to Q3, we expect revenues to be flat to slightly down as we build our pipeline. We believe in the long-term prospect of this business and anticipate growth to resume in 2011.

Search revenues from direct placements at conversions increased 25% sequentially and 48.9% year-over-year driven by both rate and volume increases. We believe this growth reflects continued rebuilding at Kforce staff and our clients after significant reductions throughout the economic recession. This is the fourth consecutive quarter search revenues have increased.

Search revenues in July are trending upward or trending similarly to Q2 levels and leading indicators suggest continued strong demand. Because a significant portion of our search business is centered in the Northeast and therefore typically closed during the summer months, search may be flat in Q3.

The performance of our highly tenured sales associates continues to improve. As a result of continued improvement in our internal KPI and feedback from our clients, we increased the capacity in our field sales force and our National Recruiting Center. In addition, we made significant investments in our large volume strategic accounts team. Our KPI strengthened throughout the second quarter and into July at a faster rate than we have experienced in recent history. This is true in particular for job orders and placement in tech and FA flex.

Total sales headcount is 3% greater than last quarter or NRC and strategic account sales teams have increased in size by 19% sequentially and have almost doubled over the past year. We believe these investments position us well to attain higher peak revenues and earnings levels than we experienced in previous up cycles and we are well prepared as demand continues to strengthen.

As we consider the quality of our revenue stream defined by a diversified business footprint and 3000 clients in whom provide service at any point in time, we believe we are well positioned to maximize both market and client share. Our revenue growth in the quarter was well distributed amongst client segments. Our 25 largest clients represent 41% of revenues and demand remains strong in this segment.

We are performing well as we have reached the halfway point of our three-year strategic plan, which we are calling the race for the Triple Crown and are on track to meet our goals. We have established a cost effective delivery model in our National Recruiting Center and our strategic account strategy has enabled us to evolve our revenue footprint to take advantage of our nationwide geographic presence and take customer share, as large volume clients continue to consolidate vendor lists.

Additionally, the strong performance of our search business continues to complement our revenue footprint. We believe our clients are looking increasingly to our staffing solutions as a cost effective way to acquire talent.

Our immediate plans are to continue to have a relentless focus on retaining our great people and to improve client satisfaction while driving continued profitable revenue growth that will lead us back over the $1 billion mark in revenues and beyond.

I'll now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore. Joe?

Thank you, Bill. The firm performed well during the second quarter of 2010 coming in at the high end of guidance for revenue and earnings per share. Revenues for the quarter up $246.1 million increased 8.6% sequentially and year-over-year growth turned positive with an 8.9% increase.

Quarterly revenues for Flex of $236.3 million increased 8% sequentially and 7.7% year-over-year. Search revenues of $9.9 million increased by 25% sequentially and are up 48.9% year-over-year.

Revenue trends for the beginning of the third quarter of 2010 are up from June levels and key indicators continue to trend positively. For the first three weeks of July, Tech flex is up 20.9% year-over-year, finance and accounting flex is up 12.3% year-over-year and HLS is down 3.3% year-over-year. Search revenues are up 75.7% year-over-year for the first four weeks of Q3 2010. We caution that it's difficult to draw conclusions for Q3 based upon this limited data.

Net income of $5.1 million and earnings per share of $0.13 in Q2 2010 increased sequentially 90% and 85.7% respectively. These increases are largely the result of the increase in revenue coupled with the increase in gross margins.

Year-over-year net income and earnings per share increased 31.7% and 30% from $3.9 million and $0.10 in Q2, 2009. Our overall gross profit percentage of 31.9% increased 180 basis points sequentially and 20 basis points year-over-year as a result of an increase in search revenues as a percentage of total revenue and an increase in flex margins. Our flex gross profit percentage of 29% in Q2, 2010 increased 150 basis points sequentially due to an expansion in bill rates and pay rates spreads, as well as the 60 basis point decrease in payroll tax expense as compared to Q1.

Flex margins improved as we experienced sequential bill-pay spread expansion in all of our business units. Of particular note is the improvement in Tech flex margins, which are now 20 bases higher than a year ago reflective of the strong demand in this business. This flex margin expansion appears to have begun slightly earlier than in prior cycles and consistent with the strengthening demand. Consistent with historical results, we believe our focus in this area will allow us to continue to expand margin as demand increases, even as the war for talent heats up in this candidate constrained environment for highly skilled workers.

We believe our centralized National Recruiting Center provides the firm with a competitive advantage in this area and it's been a key contributor to our success in managing margins. The firm continues to diligently manage operating expenses and in particular discretionary expenses so that we may balance our profitability goals with continued investments in such areas as our National Recruiting Center and strategic accounts, which we believe will be critical to sustain growth.

Operating expenses were 28.2% of revenue in Q2, 2010, which was flat with Q1, 2010 and a decrease of 60 basis points from 28.8% in Q2, 2009. The majority of our cost structure is variable and compensation related expense, which is highly correlated to gross profits, comprises over 75% of our operating expenses.

A key benefit to investments in our National Recruiting Center and strategic accounts group is to improve the performance of our field sales associates thereby reducing the cost of expensive turnover in the need for significant hiring as demand increases. As this performance improves we anticipate more productive delivery of our services that should improve operating leverage. We believe revenues can grow significantly without having to add significant sales headcount though we will continue to invest in adding sales capacity as demand strengthens.

Our accounts receivable portfolio continues to perform very well. The percentage of receivables aged over 60 days increased only slightly to 4.6% in Q2 as compared to 4.2% in Q1 and write-offs continue to be nominal. Our accounts receivable reserves are currently $6.2 million and we believe sufficient to account for the current risk in our portfolio.

EBITDA, an indication of the firm's strong cash flow, was $13.7 million or $0.34 per share in Q2 as compared to $8.6 million or $0.21 per share in Q1. Year-over-year EBITDA increased 22.9% from $11.2 million in Q2, 2009. Bank debt as of today of $37 million is up from $19.2 million at the end of Q1, 2010 and up from $24.9 million at the end of Q2, 2009.

This increase resulted from the acquisition of the firm's corporate headquarters in May 2010 for $28.5 million partially offset by the strong cash flows, which were used to pay down debt. We believe the building purchase provides an excellent return on investment with pre-tax savings of approximately $1.5 million annually and doesn't compromise our ability to make acquisitions or repurchase stock.

Borrowing availability under a credit facility, which expires in November 2011, is currently $55.9 million. Capital expenditures in Q2 were $31.3 million inclusive of the building purchase. Excluding the firm's corporate headquarters acquisition, we expect capital expenditures to be between $7 million and $9 million for the year. The firm made no significant repurchases of stock during the quarter and has $71.2 million available for future stock repurchases under the current Board of Directors' authorization.

Now to guidance for the third quarter, we expect revenues may be in the $252 million to $258 million range. Earnings per share may be between $0.14 and $0.16. Our effective tax rate in Q3 is expected to be approximately 38% with approximately 40.5 million weighted average diluted shares outstanding.

This guidance contemplates the strengthening in our business driven by continued growth in tech and F&A Flex somewhat offset by the full quarter impact of the 3.2% headcount growth mainly within the NRC and strategic accounts. Achievement of the low end of guidance would result in sequential total firm revenue growth of 2.4% and the high end assumes 4.8% growth. The third quarter of 2010 has 64 billing days, which is the same as the second quarter.

We're very pleased with second quarter results. We continue to invest in our business to take advantage of the increased demand for professional staffing and believe we are well positioned to achieve a high level of performance. We have a quality revenue stream and balance sheet as well as the strongest management team and most tenured associate population in our history and we expect to capitalize on the capacity that exists in our current employee base to increase leverage and accelerate earnings, which will position the firm to obtain higher peak earnings earlier in the cycle.

Elizabeth, we'd like to now open the call up for questions.

(Operator Instructions). Our first question today comes from Kevin McVeigh with Macquarie.

Hey, guys, great job on the quarter. Hey, Dave, there's been a lot of talk obviously about the secular shift in temporary help and it's been pretty consistent across the board and I know we're not economists but the thing I am struggling with is, given the growth you had, it seems like you're going to be able to continue grow even if we get a slower GDP trajectory over the next couple of quarters. Is that feasible, kind of given the trends you're seeing in the business now, particularly given that GDP hasn't been as robust as past cycles?

Boy I sure hope you're right and you're right we're now economists. It's interesting having just finished 30 years here, so I'm fortunately again starting at 12 and being only 42 today.

Happy birthday.

Thank you. Actually we've seen a lot over the last several cycles. I would say to you that this one is unlike anything that I've seen in the past for exactly the reasons stated and that is that even without significant GDP growth we are seeing robust demand, if you will, for flex and for search. We've also seen earlier search recovery and a more robust flex recovery. All of those things would suggest that the theory on the secular trends are accurate. We've actually talked to our clients. We've asked them and it would appear at this point that that is in fact the case.

As I mentioned in my opening remarks, that the healthcare reform, the financial reforms, the uncertainty with regards to tax, spend of tax packages, there's a desire on the part of our clients and many in the market to keep flexibility. And, as far as we're concerned, if you look at Europe and you look at other markets and other economies that deal with highly regulated economies that tend to shift more employment risk to staffing firms, that would suggest that there's still a lot of room to go, so that's the hypothesis that we're operating under and that's where we're going.

Kevin, I would also just give you a little bit of color because I went back and looked at some of our trends last time around in comparison to this time, realizing unemployment is much higher at this point in the recovery than where we were at this point last time around. I mean the [tax flex] gains that we're experiencing really a year from the trough at this point last time was 8.4%. This cycle we're at 17.1% growth from that point and it also in F&A our recovery last time around began about three quarters after the trough and this cycle began about two quarters after the trough and likewise search being up 48.9% year-over-year really from the trough. In the current cycle it's much stronger in comparison to what we experienced last time where we almost had really a double dip in search.

No that's helpful and the other thing I wonder if you have any thought trend, obviously see if you look at your growth relative to industry, I mean you're clearly outperforming the industry by a fair amount. Is that a function of the tenure of the sales force? Is it a mix, kind of small to medium versus larger clients? Is there anything that you can kind of attribute to just the tremendous out performance?

Yes I would say that it's a lot of it. It's a tenured leadership team, management team, as Joe said, tenured sales force. I think the strategy, some of the things that we've been working on we've been at it for 10 plus years. The NRC, as I mentioned the last call, really it was an outgrowth of our interactive strategy in the late '90s, early 2000 and it's evolved culturally and under Bill's leadership and the President's leadership the level of trust that exists between the field and the corporate resources is really what makes that work.

So I think all of those pieces coming together, I think the maturation of our strategic accounts teams, we have not yet really even seen the contribution. We've tripled that staff basically over the last 18 months and we've only seen a nominal contribution from the new folks that have joined our team and we expect as we go into '011 that we'll start to see even more contribution from them. So that's why we've been increasing the headcount in both of those groups so I would really attribute it to the culture and the people in the Firm that have really come together and the level of trust that exists so -- and I really take hats off to Bill and Joe and our leadership team because they make it happen.

Great thanks. I'll get back in the queue. Thanks.

Paul Ginocchio, Deutsche Bank.

On the SG&A line there was quite a big sequential increase and I know that you're investing in strategic accounts and your NRC. Just you talked about a lot of extra excess capacity a few quarters ago or maybe even last quarter, just wonder where you are in the capacity and how you think about managing that capacity as you move through this part of the cycle. Thanks.

Paul, I am assuming you're talking dollars, not percentage.

Correct.

Yes the dollars, the majority of that is wrapped up in compensation on some of the investments we talked about on the 3.2% increase in headcount, as well as what's taking place because of the accelerated performance in Q2. All of our field based management comp structures are very performance based based upon revenue and profitability growth, so when we have an exceptional quarter like this that drives a lot more compensation into management's hands as well.

And on the capacity has it changed at all over the -- are you trying to keep the excess capacity at the same level or are you trying to compress it as we move through? How should I think about that?

Yes I would say based upon some of the activities here over the course of the last year with the significant expansion within NRC and strategic accounts specifically, and then some of the growth that we're experiencing especially in some of the better performing units such as tech flex where we've been adding people as well. Capacity in the field is still about the same, which means we have about 25% capacity off of where we were in the early part of 2008 but with the additions in NRC as well as strategic accounts, that's just added that much more capacity into our overall sales force.

Great. If I could sneak one more in on the gross margin, what do you think is driving it? It just seems like again the bill pay rate spreads widening sooner than you -- than we would have thought. Is there any, particularly in tech flex, is there any scarcity of labor that we should be thinking about that's driving that or is it something else?

Yes I'd say it was broad based across all of our service lines in terms of there's the margin expansion that we saw. The demand is absolutely tightening or I should say supply is tightening up and we haven't really, even to this point we haven't seen a significant movement in terms of bill rate expansion, so a lot of this has been pricing discipline internally.

Great thank you.

Kelly Flynn, Credit Suisse.

I'm sorry I think I might be asking you to repeat something you said on the call but you covered a lot. Can you go over the month-to-month trends again and year-over-year revenue growth by month in the quarter and then early in the third quarter? And then also if you could kind of comment on what we should be thinking about in terms of the year-over-year growth in the third quarter for perm versus flex? I mean, given the strength in perm I guess I am just unclear on how sustainable that is.

Yes, Kelly, it's Joe. Related to sequential -- the first question you had I think was really what I would consider like intra-quarter revenue trends. What we experienced during Q2 so circle is down in April. It was up in May and it was up in June and then it was slightly down in July.

But I'm talking about the year-over-year growth like by month, so it was eightish percent for the quarter. What was it by month?

Yes I don't have those. I don't have the percentages by month. I can give you directionally but we historically haven't quoted what percentages are by month because you have billing day dynamics that come into play so we look at it more on a billing day basis and directionally what's happening on a year-over-year basis and then we quote where the quarter is on a year-over-year but we don't do it. We don't break it out by month.

Okay I guess just broadly I am just trying to get an idea of, you know, obviously the year-over-year growth accelerated a lot in the second quarter versus the first and if that acceleration I guess accelerated throughout the quarter and continued into the third quarter or did you see any slowdown at all in any month?

Yes well that was I in my opening comments I guess is what you're asking where I stated tech flex for July for the first three weeks was up 20.9% year-over-year. Finance and accounting was up 12.3% year-over-year. HLS was down 3.3% year-over-year, so that gives you a feel directionally of where we were heading and the fact in both F&A and in tech those are accelerations over what we experienced on a year-over-year on a billing day basis for Q2 year-over-year comps.

Okay great.

And likewise search was up 75.7% year-over-year based upon the first four weeks of July, which is an acceleration also on the year-over-year basis.

Okay great and then yes what about for the third quarter? I mean, I think what you said about search sort of speaks to this but should we be modeling an acceleration in search in the third quarter?

What Bill had stated in his opening comments is we have high concentration of our search business in the northeast. The northeast is typically impacted by the Cape Cod phenomena so you typically you have a little bit of slowing in the summer months so we had pretty much guided that search potentially could be flat on a quarter-over-quarter basis.

So year-over-year are sequentially flat?

That's sequentially.

Right okay.

Year-over-year it would be growth on a year-over-year basis.

Okay got it. And then likewise you made some comments about KCR and KGS, some of the I guess sort of timing issues influencing trends there. Were you talk -- when you talked about KCR revenue being down are you talking about sequentially or year-over-year?

Sequentially.

Okay and the same thing is for KGS?

KGS would be down sequentially and year-over-year, potentially, potentially.

Okay thanks a lot.

Mark Marcon, R. W. Baird.

I wanted to add my congratulations. It's a terrific performance. I was wondering if I could -- can you talk a little bit about on the tech flex side clearly terrific performance there. You also mentioned the west. Can you talk a little bit about what you're seeing in terms of share gains? It seems like your NRC is giving you the potential of fill positions faster and, as a result, you're getting the sense that you can take more share, which is why you're adding to your national account team. Do I -- am I sensing that correctly?

Yes you are sensing that correctly. One, the west was an out performer. There's no doubt about it. That's a very strong group out there led by Jeffrey Neal and we're very proud of the west and the work that they have done. And we continue to expect great things from them.

Great. Can you talk a little bit about where you're adding to your strength in terms of national accounts, in terms of what sort of verticals, what areas are you going after?

It's primarily geographic. We are looking for the very best people in those individual markets whether they're within Kforce or outside of Kforce and we are placing those because they integrate very closely with the field offices. They're an integral part of the sales efforts in those particular offices, so it's much more oriented towards geographic presence because we would like those strategic account executives to be very close to our clients.

So and which geographies would you be adding?

All geographies. Again, we tripled in size over the last 18 months and so it's in all of our large markets where we have great sales teams.

Right and what sort of excess capacity would you say you have now in tech?

In tech, I don't know that we could break down the capacity by associate. Joe said 25% generally speaking and when you talk about strategic accounts you have about 90% capacity because that's a longer sales cycle dealing with those large customers, large volume customers, although we are very pleased that while we target specific clients, that group has already brought in 12 proposals recently and three that we believe we should hear about this quarter, so it has begun. I think it will ramp up quite quickly in 2011 and that is primarily tech, although that team sells all of our products through all of our markets.

Great then what I was referring to was just if we take a look at your recruiters and account managers and back office combined as it related to IT services because we heard the 25% excess capacity at this point but I was just trying to narrow it down in terms of the areas that you're seeing the strongest growth, particularly tech.

Yes, Mark, when we're talking about expansion of NRC, as I think Bill said in some of his comments, I mean we've been adding to that team to drive additional delivery capability and a lot of that has been in tech because it's been one of the highest demand products and it came out over the recovery fastest so that percentage that I gave you is pretty proportional because that's how we continually are rebalancing our work force internally and where the additions are taking place.

But we really protect. We really search because the demand has increased dramatically and particularly as the strategic accounts grow, 60% of delivery on the strategic accounts comes from the NRC. So when you combine the power of our investments in strategic account executives and the NRC delivering on that, that teaming effect between those two along with the local office, I mean we have -- we blow through 25% capacity. We have much more capacity because of the flexibility in the way we surge to satisfy our clients' needs.

Great and then if you see that KPI's continued increase at the rate that they've been increasing should we assume that there will be additional capacity increases on a propositional basis to what we've seen going into the second quarter?

Well, there's always some ramp up but I would tell you as the teams, particularly the NRC, all of these groups continue to mature and the integration processes continue to be refined, that I would think that we have made a significant part of the investment that is necessary for what we would see in the next year to 18 months unless things really take off beyond our original planning and expectations.

Great and then--

So basically the answer is no there will not be a growth in expense at the same trend line as growth in revenues.

Great and then can we talk about the -- about F&A? I mean, over there it sounds like you must be gaining share in a material way because we haven't seen F&A pick up at some of the other players to the same extent that we've seen with you. Can you give a little commentary in terms of where you're seeing that growth come from?

Well it's very broad based growth across our entire bill rate spectrum so it's, in fact, when you look at it it's certainly lower level, mortgage specialists and the mid tier and the higher levels. It is I believe the only area that we had bill rate increases, so it is very broad based. The job orders are coming through from everywhere, accounts receivable, accounts payable, tax, accounting expertise, CPAs, GAAP, SEC, risk management, internal audit.

It is growing after all of that as well as a very strong NRC going not only after the local markets but white space in areas that we are not in, so it's we have a strong team with some strong leadership we put in place. That's a leadership in the last two years so we are pleased and, of course, we expect our strategic accounts executives to continue to sell that as well so if it's better than the rest of the industry it's primarily because of execution of the entire team.

Great and the last question and I'll jump back in the queue; can you talk about the impact on SG&A and D&A in terms of buying the corporate headquarters?

Yes well related to SG&A I think I said that in my opening comments. I mean, we anticipate about $1.5 million positive impact on an annualized basis.

I guess what I was wondering is did you see any of that, Joe, the second quarter?

Pretty nominal in Q2 because we had some expense associated with it, Mark, though now pretty nominal in Q2.

And that lease expense obviously comes out of SG&A and the depreciation goes down in depreciation and amortization, so it has a little bit of a financial engineered effect as well.

Got it thank you.

(Operator Instructions). Tobey Sommer, SunTrust Robinson Humphrey.

I had a question about flex trends in July. If I just do some math on the segment detail that you gave I net out at about kind of 14% year-over-year growth. Is that about right for the first few weeks of July?

For tech flex?

No if I kind of net out the impact on a consolidated basis of all flex.

I don't have the consolidated numbers so I'd hesitate.

Yes I just wanted to get a sense for your commentary that the Company is going to be able to achieve prior peak margins earlier in the cycle. Is it relative to the time that lapses in the cycle or are you trying to make a comment relative to sort of revenue levels or run rates or something like that? If you could provide a little bit more color that would be great.

I'd say the way that we're categorizing that is we believe we'll be able to exceed peak quarterly revenues, which we peaked at $265 million in the last cycle, and quarterly EBITDA percentage, which we peaked out at 9.2% and we will accomplish both of those earlier in the cycle. Last cycle it took us 20 quarters from trough to reach those levels, which would equate to approximately Q3 2014 if you were to take the trough of this cycle. At this point in the cycle we're tracking about eight quarters ahead of that. In fact, on an EBITDA percentage we're probably we recaptured almost 61% of where we were peak last time.

And that also, Tobey, had scientific and nursing in there, which are discontinued to us but of course we replaced that so it is based on kind of time lapsing and relative to the last cycle.

Okay is, given some of your headcount additions, do you think it's possible that you may kind of pass the revenue level but not quite be at the EBITDA level because those people are ramping up or something like that because I am just thinking your guidance for the third quarter is very healthy but not that far away from a 265 quarterly run rate.

There's a lead and lag effect and it takes time for these folks to ramp and, as we look forward one of the considerations is looking at particularly at the strategic accounts investments. We want to make sure that we have the capacity to deliver on that and also respond to current demand so it doesn't walk in lock step but I wouldn't tell you that you would expect that revenues will run ahead of our EBITDA performance by any number of quarters. I think that they'll probably be relatively close. But, again, it's going to be throttle based on demand. If we see a huge spike in demand, we're certainly not going to walk away from it. We're going to go after it because dollars are still better than percents.

Yes exactly because those two things are not going to sync up precisely like they did last cycle. Last cycle it was a very different makeup because when we hit peak revenues we were at also peak margins so our flex margins were very high percentage because of where we were in the cycle when we hit peak revenues as well as our mixture of our percentage of search business was very different when we hit 265, so I wasn't by any means implying that 265 equates to 9.2%. What we're stating is we will hit each of those metrics earlier in the cycle.

Right thank you very much. And then I had just a couple of housekeeping questions. How many billing days do you have in the fourth quarter?

61 billing days.

61 okay and, Joe, what's your expectation for a full-year tax rate?

Yes a little bit over 38% for the full year.

Okay and then one last -- do you have an operating cash flow number for the quarter?

For Q2?

Yes and if you don't I can get it off line.

I'll get it for you.

Thank you very much.

[John Haley], North Coast Research.

Wanted to talk a little bit about the government business. For a couple of quarters you've been talking about the pipeline building there and the last quarter a little bit optimistic about activity in the second half of the year and it appears like it might be dragged out a little bit. I was hoping to get your thoughts on the activity you're seeing there, maybe your expectations for 2011 and maybe how you're seeing maybe deals finally be awarded.

John, this is Bill. Yes shame on me. I was optimistic, more optimistic than I should have been last quarter and so I'll whine a little bit. Yes there are headwinds out there for us. The in sourcing we protest. The small business focus so award delays, budget freezes, we under estimated the headwinds that we were running into so, as we have done with the rest of the firm over the years, when we run into that type of activity, first we make sure that we can see that all of our people are being maximized in their productivity and then we work very hard to build a strong business development group. So basically the way I look at it is we are preparing our firm to be ready for game day and so the next one or two quarters as we continue to grow very dramatically and our -- on the proficiency of our business development team.

In fact, this year in some of the things that we can measure I'm proud of the team. They have won a little over 66% of their RFPs. They've captured 82% of the prime work that they have done. They have a total backlog of $160 million so some things are there that we are turning the headwinds into trailing winds but at the same time there is still going to be a difficult period this next six months before we roll into 2011. I will say we are very pleased with that management team and the work that they are doing and we're very pleased with KGS and we stand behind them and we look forward to them turning things around. It's a little bit, as you look at it, a part of a very diversified high quality revenue stream and they have produced greatly in the past and they will in the future.

Joe, this is Dave. We're entering into a period with the government that has probably not been anything that we've experienced or anyone else has experienced in the past so, as a result, as with any other market condition we're adjusting. As we looked at it and made our plans and assumptions based on activity to some degree we drew on past performance. Unfortunately we've seen a number of things that we expected to happen didn't happen. We've talked about some of the procurement issues and getting the contracts let out. We've seen in sourcing. We've seen other things but, as Bill said, we're not going to whine about it. We're going to adjust and that's what we're doing and our team is adjusting now and they will win in 2011. That's the way they want to go.

Sounds encouraging so thank you. Question on the call side of things. When you think about top line growth in a more normalized environment or maybe just better proxy and maybe gross profit dollar growth in a normalized environment, could you help us think about how we should expect SG&A to grow relative to maybe GP dollars from a longer-term target?

Yes well, SG&A -- SG&A percentage if our model executes the way that we've been evolving models over the course of the last ten years, based on where we are from our belief on a capacity standpoint, actually SG&A percentage will start to come down as the population continues to mature because we started to get all that productivity out of all those individuals.

So maybe you could give us some thoughts on maybe where maybe tenure is in terms of the recruiters today maybe compared to where it was two or three years ago or maybe 10 years of sales people compared to maybe in the past?

Yes sure. I mean, well we have the most tenured population that we've ever had in the history of the Firm and that would be in my 22 years or Dave's now slightly over 30 years.

70 years.

But no over 50% of our population has been with us for greater than four years now and I mean I've said this on some of the past calls. Our people that have been here over four years are -- they're over two times as productive as people that have been here two years. So we get a lot of leverage out of those individuals in terms of their contribution.

Okay that's helpful. Thank you.

And with no questions remaining, I'd like to turn the call back over to Mr. Dunkel for any additional or closing comments.

Thank you, Elizabeth. Again, we just want to thank everyone for your interest and support for Kforce and, once again, congratulations to our team. They've just done a fantastic job and we're very proud of them. So for our field teams, our corporate teams, our consultants and our clients, once again we always thank you for the opportunity and the privilege of serving you. So we thank you and we'll look forward to speaking with you again in the third quarter. Good evening.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.