Kforce Inc (KFRC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q3 2010 Kforce Incorporated earnings conference call.

At this time, all participants will be in a listen-only mode, but later we will conduct a question-and-answer session for which instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

Now, I would like to introduce your host for today, Michael Blackman, Chief Corporate Development Officer.

Thank you. Good afternoon and welcome to the Q3 Kforce conference call.

Before we get started, I would like to remind you that this call may contain certain 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 Turner's call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

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

Once again, we are very pleased with our firm's performance for the third quarter of 2010 with revenues exceeding in EPS at the top end of guidance. It is now clear that this recovery is different than past recoveries in staffing.

Historically, tepid GDP growth of 2% or less meant flat revenue performance and limited penetration. Since the beginning of the year, private-sector jobs have increased by 602,000 with 10 (technical difficulty) jobs accounting for [217 6600] of those net job adds, roughly 36% of the net job adds, despite temporary staffing accounting for only 1.6% of total payroll dollars. We believe this is evidence of a secular transition to a flexible workforce as our clients seek greater flexibility in an uncertain economic, regulatory and tax environment.

Kforce's results have been strong throughout the downturn and now into the recovery. Recent staffing industry data and our KPIs suggests continued strength in our staff (technical difficulty) business. During the third quarter, we adjusted field and NRC delivery to align better with the very high demand from our Strategic Accounts and field clients (technical difficulty) accounting and in particular technology.

The significant increase in demand that began in March and April has continued at levels we have not experienced in prior recoveries. On a sequential basis, flex revenue increased 5.7% in tech and 16.5% in F&A. Total firm revenue increased $31.2 million or 13.7% on a year-over-year basis.

Search also had another outstanding quarter with our search teams in all three regions performing exceptionally and delivering 7% sequential and 61% year-over-year growth, overall another excellent quarter for Kforce. We've continued to evaluate sales and delivery capacity against very high demand in what we believe will be seen as the beginning of a secular shift towards the use of flexible resources.

The backbone of our sales efforts is in our field sales force. We are balancing productive capacity against forecasted demand and adding to our team where appropriate. The balanced and widespread strong performance in nearly all of our geographical markets is encouraging and we believe will provide operating leverage throughout the recovery. Our Strategic

Accounts team is starting to gel and we are seeing opportunities for new clients, while our primary focus is further penetration in share in our current clients. Our NRC teams continue to perform very well as our associates mature and ramp to productivity. Strong cash flows allowed us to make progress on our debt retirement as we reduce borrowings post the acquisition of our building. We anticipate using cash flow for continued debt retirement, share repurchase and acquisitions that meet a very high hurdle.

While we are seeing many opportunities, we are maintaining our discipline and standards and we have not consummated a transaction since December 2008. We are finalizing our plans for 2011, the last year of our Triple Crown, and have made substantial progress on our next three-year plan. We believe we will exceed prior peak earnings earlier in the cycle and we are now very close to exceeding prior revenue peaks. Again, a great quarter with great results delivered by our great teams.

I will turn the call over to Bill Sanders, Kforce President, who will provide his comments. Joe Liberatore, Kforce CFO, will then provide additional insights on operating trends and expectations, and we will then entertain questions. Bill?

Thank you Dave. Thanks to all of you for your interest in Kforce.

We're very pleased with our third-quarter performance and the continued strong environment for professional staffing as clients appear to be looking increasingly to our services to meet their hiring needs.

In particular, our Technology and Finance and Accounting Flex business continued to show strong growth in the quarter. The continued growth in our permanent placement business contributed to overall revenue growth and profitability. Our firm is well positioned to take advantage of our clients' increasing desire for a more flexible workforce driven by an uncertain economic environment in what we believe may be a secular shift towards flexible staffing.

We achieved record revenues in the third quarter for total Firm Flex revenue was, Tech revenue and Tech Flex revenue. Our third-quarter revenues of $259.5 million grew 5.4% sequentially and 13.7% year-over-year. Additionally, our operational performance metrics continued to trend positively into the fourth quarter, further suggesting that demand for our services continues to increase.

Our diversified revenue stream is consternated in some of the areas of greatest anticipated demand. 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. Flex revenue trends improved sequentially each month of the quarter, and perm continued its growth trends in August and September after a typically slower July, which is always impacted by summer slowdowns in hiring.

In many respects, our clients are accelerating a flexible staffing model at a faster pace than we have historically experienced. We are well-prepared to provide our clients solutions to surges in demand.

Our largest business unit, Technology Flex, which represents 53% of total Firm revenues, increased 5.7% sequentially and 19.6% year-over-year. Tech Flex revenue showed a continued upward trend through the third quarter. Our operating model, which leverages the flexibility and scale of our national recruiting center to meet demand across the country, has contributed to strong growth in our Strategic Accounts, which has been one of the key drivers to our success in Tech Flex.

However, the growth in Tech has been very broad-based, with all client segments showing strong growth trends. October trends for Tech Flex are up from September levels and performance indicators are improving. We expect Tech Flex to have continued growth on a billing day basis in Q4 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 17% of our total revenues, performed extremely well in the quarter with revenues increasing 16.5% sequentially and 18.1% year-over-year. Much like our tech business, we are seeing broad-based growth across the entire bill rate spectrum. This business continues to benefit from the investments and leadership that we've made over the past two years in synergies between our Strategic Accounts strategy and national recruiting center capabilities.

Of particular note was the strength in the lower bill rate mortgage, refinancing and foreclosure space, which now constitutes approximately 20% of our F&A business and grew greater than 30% sequentially. This business, which originated with the acquisition of the OnStaff division of Hall Kinion in 2004, benefits from a dedicated team in the national recruiting center to successfully service this lower-margin business at a lower cost than a traditional F&A staffing model, and we are especially prepared to meet surge opportunities presented by financial service companies with processing needs. This is a great example of how the NRC has provided Kforce with a competitive advantage for addressing surge demand opportunities in a timely and cost-effective manner. We expect the demand for these types of services to continue for the foreseeable future, and we expect to continue to take market share in this space. We also believe our NRC provides flexibility to take advantage of surge opportunities across all of our businesses and geographies in the future.

As I indicated, FA Flex revenue showed an upward trend throughout the third quarter. Recent trends and performance indicators for FA Flex are up in October and we therefore expect continued growth on a billing day basis for this unit in Q4.

Our HLS business segment, which comprises 16% of total revenues, is comprised of our clinical research and health information management businesses. During Q3, revenues in our clinical research business decreased 4.6% sequentially and 1% year-over-year. HIM revenues increased 7.1% sequentially and 7.3% year-over-year. As anticipated, the sequential decline in clinical research was driven primarily by a large project end. We anticipate Q4 revenue for clinical research to decline as a result of the full quarter impact of the project end, as well as Q4 seasonal billing day impacts, which significantly impacts KCR since its major clients close their operations over the holidays.

However, we believe that revenue growth could resume its historically growth pattern in 2011. Our HIM revenues trends continue to be promising and margins remain strong as hospital spend continues to improve, particularly in the project services and remote coding areas. This business has rebounded nicely over the past two quarters, as it continues to evolve its business model to better embrace the technological changes in this space. We believe in the long-term demand for this profitable business and expect revenues to be up again in the fourth quarter.

Revenues for Kforce Government Solution, our (inaudible) government contracting business, decreased by 3.3% sequentially and 10.2% year-over-year. This profitable business unit continues to see the impact of the challenging federal procurement environment and continues to be negatively impacted by the trend toward the government insourcing positions previously held by contractors.

We remain focused on our key competencies and consistent with our philosophy during difficult periods. Our talented KGS management team is taking the opportunity to make investments to improve our business development capability and our operating processes so we are fully prepared to take advantage of the government spending cycle.

As we look ahead to Q4, we expect revenues to decline largely as a result of the reduction in billing days, which impact this business similarly to our clinical research business. We continue to believe in the long-term prospects of this business unit.

Perm revenues from direct placements and conversions increased 7% sequentially and 61.2% year-over-year. We believe this growth reflects continued rebuilding of core staff at our clients after significant reductions throughout the economic recession. This is the fourth consecutive quarter perm revenues have increased. Over the last several years, we have aligned our perm business more closely with our flex business to more efficiently meet customer needs as well as reduce the overall cost that must be invested in establishing and maintaining the perm workforce.

Q4 was -- Q4 has started relatively strong. Though our revenues are very difficult to predict, we expect perm revenues to continue to be relatively stable in Q4.

We are most happy with the productivity of our (inaudible) salesforce. They are the lifeblood of our firm. We continue to retain our tenured associates and now have the most tenured field team in our history. Performance of our sales teams continued to improve as reflected in the 13.7% increase in revenue and 15.4% increase in gross profit year-over-year.

In addition, we believe there are additional significant performance and leverage opportunities in both our Strategic Accounts team and national recruiting center which we expect to be significant contributors to our future success.

As we consider the quality of our revenue stream, defined by a diversified business footprint and 3000-plus clients to whom we provide service at any point in time, we believe we are very well positioned to maximize both market and client share. Our 25 largest clients represent 38% of revenues and demand remains strong in this segment.

We are performing well as we enter the final stretch of the second race in our three-year strategic plan, which we are calling the race for the Triple Crown, and we are on track to meet our goals and win the race. Our service offerings, particularly tech and FA, position us for revenue growth as we move further through this economic recovery. The strategic enhancements we've made to our sales and delivery platforms provide us significant flexibility and operating leverage and our long-standing focus on performance management and team culture positions us well to compete in this marketplace.

Additionally, the strong performance of our permanent business continued to complement our revenue footprint. Our immediate plans are 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 to over the $1 billion mark in revenues and beyond.

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

The Firm continued its strong performance in the third quarter, exceeding the high end of guidance for revenue and coming in at the high end of guidance for earnings per share. Revenues for the quarter of $259.5 million increased 5.4% sequentially and 13.7% year-over-year. Quarterly revenues for Flex reached an all-time high of $249 million and increased 5.4% sequentially and 12.3% year-over-year. Search revenues of $10.6 million increased 7% sequentially and are up 61.2% year-over-year.

We continue to see momentum early in the fourth quarter as revenue trends are up from September levels and key indicators continue to trend positively. For the first three weeks of October, Tech Flex is up 19.8% year-over-year, Finance and Accounting Flex is up 26.9% year-over-year, and HLS is up 3.5% year-over-year. Search revenues are up 53.5% year-over-year for the first four weeks of Q4 2010.

We caution that it's difficult to draw conclusions for Q4 based upon this limited data.

A combination of the increased revenue and gross margins, coupled with SG&A leverage, resulted in an increase in net income of $6.4 million and earnings per share of $0.16 in Q3 2010. These results represent sequential increases of 25.3% and 23.1% respectively. Year-over-year net income and earnings per share increased 183.6% and 166.7% from $2.3 million and $0.06 in Q3 2009.

Our overall gross profit percentage of 32.2% increased 30 basis points sequentially and 50 basis points year-over-year as the result of the increase in search revenue as a percentage of total revenue and a sequential increase in Flex margins.

Our Flex gross profit percentage of 29.3% in Q3 2010 increased 30 basis points sequentially and decreased 40 basis points year-over-year. Overall bill rates and pay rate spreads remained under pressure and were relatively flat from Q2 to Q3, largely as a result of declines and HLS margins.

On a business segment basis, Tech Flex and F&A Flex margins increased sequentially 50 and 120 basis points respectively and are now 60 basis points and 10 basis points higher than a year ago. Historical results suggest margins will continue to expand as demand increases and the war for talent heats up in this candidate-constrained environment for highly skilled workers. However, Flex margins in the fourth quarter could be negatively impacted as much as 100 basis points by holidays and paid time off, and are expected to decline sequentially. 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 areas such as our National Recruiting Center and Strategic Accounts, which we believe will be critical to sustain growth. We believe our centralized National Recruiting Center provides the Firm with a competitive advantage and has been a key contributor to our success.

Additionally, as revenues increase, we continue to see operating leverage from technology investments made during the past seven years. Operating expenses were 28% of revenue in Q3 2010, which decreased 20 basis points from Q2 2010 and decreased 180 basis points from 29.8% in Q3 2009.

The majority of our cost structure is variable. Compensation related expense, which is highly correlated to gross profit, comprises over 75% of our operating expenses.

A key benefit to the 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 and 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 revenue can grow significantly without having to add significant headcount, though we will continue to selectively 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 decreased to 3% in Q3 as compared to 4.6% in Q2 and write offs continue to be very small. Our Accounts Receivable reserves are currently $5.5 million, and we believe sufficient to account for the current risks in the portfolio.

The Firm's cash flow continues to be strong. EBITDA was $15.7 million, or $0.39 per share in Q3, as compared to $13.7 million or $0.34 per share in Q2. Year-over-year EBITDA increased 36.1% from $11.5 million in Q3 2009. Bank debt as of today of $20 million is down from $38 million at the end of Q2 2010 due to a combination of strong cash flow and the timing of certain payments, and was up from $12.8 million at the end of Q3 2009.

Borrowing availability under our credit facility, which expires in November 2011, is currently $77.7 million. Capital expenditures in Q3 were $3.3 million and remain only a small portion of our cash flow. But we continue to enhance our technology platform with selective investments that we believe will enhance the capability of our sales associates. Excluding the Firm's corporate headquarters acquisition, we expect capital expenditures to be less than $10 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 authorizations.

With respect to guidance, the fourth quarter has 61 billing days versus 64 billing days in the third quarter of 2010. We expect revenues may be in the $253 million to $259 million range, which represents between 2.3% and 4.7% growth on a billing day basis. Earnings per share may be between $0.14 and $0.16. Our effective tax rate in Q4 is expected to be approximately 38.6% with approximately 40.4 million weighted average diluted shares outstanding. This guidance contemplates the continued strengthening in our business, driven by continued growth in tech and F&A Flex adjusted for the billing day impact, as well as sequential margin compression resulting from the holidays and paid time off. Our guidance does not consider the effect for any acceleration of equity incentives or for the Firm's response to regulatory, legal or tax law changes.

We are very pleased with third-quarter results. We continue to invest in our business and take advantage of the increased demand for professional staffing. I believe we are well positioned to achieve a high level of performance by delivering exceptional service for our customers through speed and quality. We have a high quality revenue stream and balance sheet, as well as the strongest management team in the Firm's history and a highly tenured associate population. We expect to capitalize on the capacity that exists in our associate base to increase leverage and accelerate earnings, which will position the Firm to obtain prior peak earnings earlier in the cycle.

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

(Operator Instructions). Kevin McVeigh, Macquarie.

Great. Thanks. Great job, just continued really good execution overall. I wonder if you could -- Dave, if you have any sense of early indication on 2011 budget [sheds], specifically within IT. And if you could help us understand. Obviously the Tech Flex and Flex overall has been really, really strong but just the strength in perm seems really, really intriguing, particularly at this point in the cycle. So if you could talk about those things, that would be great.

I'll comment on Tech Flex budgets. Basically, I'll just say I think it's probably a little early. The indications are that tech is continuing to be strong as we go into Q4. Last year, we saw an acceleration in November and December which resulted in a much lower fall off than we typically experience in December. So as we look at this year, we will be monitoring it to see if that trend continues.

We have several client trips coming up over the next few weeks. Myself, Michael, Joe and several of our senior team will be out meeting with clients and our investors at some of the conferences. So during that time, we will certainly be asking about 2011 budgets. But at this point, we don't see any indication of a tail off, but it's too early to say how much of a fall off we will see in our normal year-end.

As far as Perm is concerned, we are delighted with how we have done. We still believe that most of the hiring today is a reflection of the deep cuts and adjustments in staff levels. So we don't believe it's the beginning of the great Perm cycle. If we look back historically at our prior peaks, I would say that certainly we are far away from where we have been previously. So as far as we are concerned right now, we are very pleased about how Perm is doing, we're proud of our team, but we're not ready yet to declare the beginning of a great Perm cycle. Thanks.

Mark Marcon, Robert W. Baird.

I'd like to add my congratulations. I was wondering if you could talk a little bit more about what you're seeing on the F&A side. That was a pretty impressive sequential jump. Was it due to any individual projects coming on, or really big client demand in one particular area? Or how would you describe that? It looks like you're outperforming the other players in the space.

This is Bill. It was very broad-based. Of course, we moved our mortgage related foreclosure business from 18% to 20% of our overall F&A model, so we had some staffing in bunches in that particular area. But I would say to you it's very broad-based. The skill sets are the skill sets that you hear about all the time from accounting specialists to Accounts Receivable people, controllers, auditors, tax people, so it's broad-based. There's nothing really to single out, other than we are -- we did see the mortgage related activity grow 30% over the quarter.

This is Joe. The other thing that I would reference is it is very balanced across different industries as well. So it's not just all concentrated just in the mortgage industry. It's in the banking credit unions, as well as the mortgage industry, as well as an in insurance, as well as some of the securities and brokerage areas. So it's pretty balanced across those type of industries.

It sounds like you're basically saying that, as we look out towards the fourth quarter, we should see revenue per billing day continue to increase, which would suggest that you are continuing to see more and more new orders come in in that area.

This is Joe. I would say, as I mentioned in some of my earlier comments, some of our early indicators on the quarter are very positive. It's a pretty big number that F&A was up on the first three Flex weeks of the quarter, so we hope that will continue through the quarter.

The gross margins are pretty strong. You mentioned there is an excessive -- or a greater share that's coming from the mortgage side, which typically would be viewed as being lower margin, and yet your margins are up year-over-year and sequentially. Could you talk a little bit about that?

I would say, from a margin standpoint, which is really the spread from the [Pate] bill, while that business is a little bit lower bill rate from an absolute margin standpoint, on a percentage basis it is somewhat constant, albeit the dollars are a little bit less.

That's terrific. Can you talk a little bit more about just do you feel like you're gaining share in that area as well, or do you think F&A in general is starting to pick up?

I think F&A in general is picking up a little bit. I think we are also gaining market share through our Strategic Accounts group, and so I think all of that is a positive. So yes, we are gaining both marketshare and client share, and we are -- different clients. So we are pleased with what the team is doing, and as I said, in some clients especially when it comes to this [mortgage] financing is staffing in bunches where it's 100 or 200 or 300 people at time.

Great. Thanks. I'm going to jump off and come back on.

Paul Ginocchio, Deutsche Bank.

Thanks for taking my question. You talked a little bit about field sales reorder in the NRC. Is that just a continuation of the optimization of NRC, or is there something specific that happened in the quarter?

This is Bill. Nothing particularly happened in the quarter in the NRC. We've build that up dramatically, doubled the staff through the first two quarters of the year. We think we have it at the optimum size for the current demand that our clients are asking of us, so we really didn't grow that. In fact, it was down slightly quarter-over-quarter. Very pleased with the NRC and how it's coming together. But certainly when you ramp something so quickly, there's a lot of existing capacity in that group. We expect that to really work well with our tenured staff in the field. So you put those two together, and that's very dynamic for our firm.

If I could follow up with SG&A Q-on-Q. With revenues sort of flattish Q-on-Q because of the fewer billing days, would we expect the same for SG&A? Thanks.

Yes, from SG&A standpoint, obviously when we look at guidance and we contemplate some of the margin compressions that's taking place, that would actually imply that SG&A, we would have to get a little bit of that SG&A leverage in Q4 to deliver the EPS numbers that I put out.

Thank you.

Kelly Flynn, Credit Suisse.

My question relates to the fourth-quarter guidance. It looks like, on a year-over-year growth basis, you're forecasting kind of a plateauing, or even a slight deceleration in year-over-year growth versus Q3. So I want to dig into that. First of all, on the billing days, I think you said there were 61 in the fourth quarter. I just want to double check. Is that the same year-over-year?

Yes, that would be the same on a year-over-year basis. I think -- did you mean from a sequential revenue standpoint? That, on an absolute basis, that would be correct. The top end of guidance would be flat on an absolute basis (multiple speakers)

Sorry. I was talking year-over-year. So it's sort of in like the 13-ish% year-over-year growth ranges. What you're forecasting for the fourth quarter should be the same roughly as the growth rate in the third quarter?

I thought you were talking about absolute number basis, and that's why I was a little bit confused. That would be correct on a growth rate year-over-year, pretty much in the same type of ballparks.

So I just want to clarify. I think you said -- I think, Joe, you said, in talking about the early quarter trends, that the year-over-year growth for both tech and Accounting and Finance was higher so far in the quarter than in the third quarter. Is that right? I'm talking year-over-year growth.

That's the first three weeks of Q4 in comparison to the first three weeks of Q4. So typically what happens, if the quarter start out stronger in Q4 and then you start to get post-Thanksgiving things start to slow down and you start to get a little bit of a tailing off effect going on, so yes we have started out the quarter very strong, but especially when we have government and HLS, that when you bring that into the mix, they start to drag those things down.

Yes, that's kind of what I was getting at. First of all, did you give the early quarter trends for TGS? What is that? (multiple speakers)

Those businesses are much more difficult to kind of give week-over-week comparison like they are in more the Tech Flex and F&A business because they're very project based. So when you look at those short period of times to do year-over-year comparisons, it can be very misleading in one direction or the other. But however, I will mention we are not seeing anything that's alarming us in either of those businesses.

Okay. I guess what I'm getting at, it seems like if it weren't for those two businesses, health and KGS, you'd be forecasting a continued acceleration in year-over-year growth. Is that fair?

Very fair statement. This goes back to really what I think we share on a regular basis. We're very comfortable with the four legs of the stool that we have our businesses within, no different than during the recessionary times. KGS and HLS were the stellar performers that allowed us to hold onto more of our field performers in tech and F&A during recession and vice versa. Now, we are in a situation where we are virtually in what I would consider a government recession when it comes to the contracting business, no different than a commercial recession.

This is Dave. I also want to remind you that, on a bill day basis and then also because of holidays and paid time off, KGS and HLS are impacted much more significantly than a traditional staffing business. The government will typically take the last week of the year off, and in our KCR business the last two weeks of the year. So, those two are more significantly impacted than the traditional staffing business.

Okay, but that's sort of a sequential phenomenon than a year-over-year. Is that fair?

Depending on whether you look at where they were last year, and then the decline throughout the year, primarily as a result of the government insourcing, so the comps become a little more difficult.

Then just one more, sorry to beat a dead horse. On the health business, can you go back to what you were saying about clinical research and kind of -- I guess the question is what's going to disappear in the fourth quarter that was in there in the third quarter from a revenue perspective?

In the fourth quarter, KCR, our Clinical Research group, they're large customers. They closed down the last week and sometimes last two weeks of the year. And so that sequentially has adverse affect on our firm.

I'd also point out that, adding to what you were talking about earlier, the pharmaceutical industry is second behind the government in the most layoffs of any business segment in the United States this year. So, when you really look at that, you will see that.

I think the last piece I would tell you about is we had a major project in, in the third quarter, and we will get the full effect of that in the fourth quarter. However, I would tell you that I'm real pleased that KCR is beginning to spread its wings more from major accounts and they are working with a number of smaller accounts to diversify that revenue stream. So we're working on that, but that is certainly the case for this quarter.

Great. Thanks for taking all those. Appreciate it.

Tobey Sommer, SunTrust.

I was wondering if you could comment on the sequential growth in your recruiter head count, because I seem to remember that was a pretty decent figure, maybe 2%, 3% in the second quarter. I'm wondering what kind of additions you made in the third.

This is Bill. Now, we talk about revenue responsible activities of our people, so we include our NRC as part of our field recruiter base. So when you look at that as a total, and even if you split it apart, it's about the same, which is it's flat to down very little in the third quarter of the year.

Okay. Were there any other expenses in the third quarter? Because at least, by my calculation, the incremental margin was a little bit lower than in the second quarter. Was there anything else that may kind of have thrown off the proportion of incremental revenue that flowed down to operating income?

This is Joe. In any given quarter, we have things going in both directions. We had a couple of things that were favorable in the quarter as we did our workers come true-up as well as some of the things we were experiencing from a credit standpoint in terms of our bad debt reserve. Also, as we referenced in our 10-K and 10-Q, we had a suit in California; that's a pending legal matter. I've been advised not to discuss that matter in great detail, but I will share with you we don't expect that to have any material impact to the Firm, so nothing major going one direction or the other.

That make sense. Over time, what kind of incremental margin range should we expect do you think in this kind of top line growth environment?

Where we are is -- I believe I've referenced this before in terms of our tenured workforce -- that the bulk at this point in time is our fixed infrastructure. We're very comfortable with where our fixed infrastructure, so it's got to come through performance management. We're very confident that we are doing all the right things and we're starting to see some of that leverage from the NRC in our overall sales population. Our number of two-plus tenured associates continues to grow as well as performance of those individuals continues to grow. This all goes back to -- based upon Q3 data, for example, our most productive group, this population may on average produce 50% more than our other less than two-year population, so there's a lot of leverage there. Everything that we have built and invested is to continue to drive performance management.

We have, based upon our calculations, we still have 25% in field capacity from where we were at prior peaks. Then when you look at the NRC, we are doubling that over the course of the last year, the very, very less-tenured population there, so our expectations are to get a lot of leverage from those investments as well.

My other questions have been answered. I'll end with one. You mentioned, I think, in terms of your guidance that it doesn't include any acceleration of equity incentives or something like that? I can't remember that language in prior calls. Is there any other color you could offer there? Is there something that could be accelerated here at some point?

As I think we are all well aware, there's a lot of unknowns right now in terms of what's going to take place between now and the end of the year from a number of aspects. So, we're constantly evaluating what the impacts to the Firm are going to be, and make decisions accordingly.

I certainly can build on that a little bit. As you know, we try to incentivize management only by performance and part of that performance is based on stock price. So we issue, instead of stock options, we issue often performance-based restricted stock. So those pars have to reach a certain stock price, which is 50% higher than when pars were granted. So basically the next tranche, when the stock price gets into the $18.90 plus. that's when we hit the next tranche. So if we were to hit that, that would result in a larger expense number. So, we're just trying to make sure that we don't have to go out and do a press release and say EPS is down because stock was up so much. We think this aligns management and our shareholders very well, so that's the number -- $18.90s.

Thank you very much.

Mark Marcon, Robert W. Baird.

I'll just go back to KGS. How should we think about that for next year in terms of what you're hearing?

That's a very good question.

How are you planning for it, given that there's all of those uncertainties out there?

We are trying to stay very light-footed, I guess, but I would say certainly most competitors in this space are being impacted by contract protests, low funding for the new projects, continuing resolutions, uptick in insourcing. They have all this kind of activity going on. At the same time, our KGS unit has a record amount of contract bids outstanding, has a very solid $170 million total backlog, so we have a lot of things going for us.

At the same time, we want to do better. So as we normally do in these difficult times, we have a philosophy that we really rebuild for when and how we can do better. So I think, as we mentioned in our last call, we've hired a new person in charge of our business development efforts. He's building a very strong A-Team around him as well as all the other activities we focused on that particular group. I would say, if we guessed -- and I am going to tell you it's just somewhat of an informed guess, but it's a guess -- I would look at the -- that certainly depends on what happens in this election and we look at the latter half of next year to see it start to really move if that's what it is going to move.

This is Joe. I would also add the pipeline continues to build. It is a very profitable business at the levels it is, and it is providing us a lot of opportunity, no different than when our core businesses go through recessionary times, to really work on the business and enhance the overall operating model, some of what Bill had mentioned in his open comments. We're very confident with the team that's in place and the things we are doing, so we're doing everything that's in our power.

Can you talk a little bit more about the capacity that you have on the IT side? You've already surpassed prior-peak revenue there. Margins continue to look good. Can you talk about how much capacity you have there, how you think that's going to unfold next year?

Yes. From a capacity standpoint, I would say, in all of our populations, it's pretty balanced. The numbers that I put out there, you can pretty much apply those to most of our operating units because we are always balancing and rebalancing our headcount. So, that's the best that I could answer on that question specific to IT.

[If] there's no big step-up in terms of investment that you need to make, we should continue to see continued leverage on the SG&A there despite the fact that you are already past peak.

That would be correct.

I'm showing no further questions in the queue at the moment. I'd like to turn the conference back to your host.

Thank you very much. We appreciate your interest and your support for Kforce. Once again, we want to take the opportunity to congratulate our team for performing very well and for really going out and winning on the field. So thanks to each and every member of our field and corporate teams, and also again to our consultants and our clients for allowing us the privilege of serving you. So we appreciate it very much. We hope you all enjoy your Thanksgiving and Christmas holidays, and we look forward to speaking with you next year. Thank you.

Ladies and gentlemen, this does conclude your conference. You may now disconnect. Have a great day.

Good job.