10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
____________________________________________________________________________________________
 
FORM 10-Q
 ________________________________________________________
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 000-26058
_________________________________________________________________
 Kforce Inc.
(Exact name of registrant as specified in its charter)
_________________________________________________________________ 
FLORIDA
 
59-3264661
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
1001 EAST PALM AVENUE, TAMPA, FLORIDA
 
33605
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (813) 552-5000
 _______________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
 
 
 
 
 
 
Large accelerated filer
 
¨
  
Accelerated filer
 
x
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.):    Yes  ¨    No  x
The number of shares outstanding of the registrant’s common stock as of October 30, 2015 was 28,920,792.

 



Table of Contents

KFORCE INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
References in this document to “the Registrant,” “Kforce,” “the Company,” “we,” “the Firm,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context otherwise requires or indicates.
This report, particularly Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Part II. Item 1A. Risk Factors, and the documents we incorporate into this report contain certain statements that are, or may be deemed to be, forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements may include, but may not be limited to, projections of revenue, income, losses, cash flows, capital expenditures, future prospects, our beliefs regarding potential government actions, anticipated costs and benefits of proposed (or future) acquisitions, integration of acquisitions, transition of divestitures, plans for future operations, capabilities of business operations, effects of interest rate variations, our ability to obtain financing and favorable terms, financing needs or plans, plans relating to services of Kforce, estimates concerning the effects of litigation or other disputes, estimates concerning our ability to collect on our accounts receivable, expectations of the overall economic outlook, developments within the staffing sector including, but not limited to, the penetration rate (the percentage of temporary staffing to total employment) and growth in temporary staffing, a reduction in the supply of candidates for temporary employment or the Firm's ability to attract candidates, the success of the Firm in attracting and retaining revenue-generating headcount, estimates concerning goodwill impairment, as well as assumptions as to any of the foregoing and all statements that are not based on historical fact but rather reflect our current expectations concerning future results and events. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Risk Factors and MD&A sections. In addition, when used in this discussion, the terms “anticipate,” “assume,” “estimate,” “expect,” “intend,” “plan,” “believe,” “will,” “may,” “could,” “should” and variations thereof and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speak only as of the date of this report. Kforce undertakes no obligation to publicly publish the results of any adjustments to these forward-looking statements that may be made to reflect events on or after the date of this report or to reflect the occurrence of unexpected events.

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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.        Financial Statements.

KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Net service revenues
$
341,575

 
$
313,810

 
$
991,539

 
$
898,592

Direct costs of services
231,754

 
215,519

 
680,940

 
622,389

Gross profit
109,821

 
98,291

 
310,599

 
276,203

Selling, general and administrative expenses
84,167

 
82,090

 
249,714

 
234,218

Depreciation and amortization
2,579

 
2,642

 
7,402

 
7,391

Income from operations
23,075

 
13,559

 
53,483

 
34,594

Other expense, net
463

 
218

 
1,907

 
1,025

Income from continuing operations, before income taxes
22,612

 
13,341

 
51,576

 
33,569

Income tax expense
9,067

 
5,346

 
20,653

 
13,232

Income from continuing operations
13,545

 
7,995

 
30,923

 
20,337

Income from discontinued operations, net of income taxes

 
57,023

 

 
61,633

Net income
13,545

 
65,018

 
30,923

 
81,970

Other comprehensive income (loss):
 
 
 
 
 
 
 
Defined benefit pension and post-retirement plans, net of tax
1

 
(172
)
 
3

 
(205
)
Comprehensive income
$
13,546

 
$
64,846

 
$
30,926

 
$
81,765

Earnings per share – basic:
 
 
 
 
 
 
 
From continuing operations
$
0.49

 
$
0.26

 
$
1.10

 
$
0.63

From discontinued operations
$

 
$
1.81

 
$

 
$
1.91

Earnings per share – basic
$
0.49

 
$
2.07

 
$
1.10

 
$
2.54

Earnings per share – diluted:
 
 
 
 
 
 
 
From continuing operations
$
0.48

 
$
0.25

 
$
1.09

 
$
0.63

From discontinued operations
$

 
$
1.81

 
$

 
$
1.89

Earnings per share – diluted
$
0.48

 
$
2.06

 
$
1.09

 
$
2.52

 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
27,811

 
31,347

 
28,072

 
32,267

Weighted average shares outstanding – diluted
28,132

 
31,553

 
28,318

 
32,495

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.11

 
$
0.10

 
$
0.33

 
$
0.30

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


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Table of Contents

KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,246

 
$
1,238

Trade receivables, net of allowances of $2,796 and $2,040, respectively
216,078

 
204,710

Income tax refund receivable
2,214

 
3,311

Deferred tax assets, net
4,651

 
4,980

Prepaid expenses and other current assets
9,674

 
10,170

Total current assets
233,863

 
224,409

Fixed assets, net
37,863

 
35,330

Other assets, net
28,117

 
30,349

Deferred tax assets, net
22,310

 
22,855

Intangible assets, net
4,436

 
5,011

Goodwill
45,968

 
45,968

Total assets
$
372,557

 
$
363,922

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
38,932

 
$
38,104

Accrued payroll costs
63,839

 
52,208

Other current liabilities
669

 
986

Income taxes payable
5,606

 
2,885

Total current liabilities
109,046

 
94,183

Long-term debt – credit facility
80,893

 
93,333

Long-term debt – other
496

 
562

Other long-term liabilities
40,053

 
36,456

Total liabilities
230,488

 
224,534

Commitments and contingencies (see Note C)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par; 15,000 shares authorized, none issued and outstanding

 

Common stock, $0.01 par; 250,000 shares authorized, 70,535 and 70,029 issued, respectively
705

 
700

Additional paid-in capital
418,335

 
412,642

Accumulated other comprehensive loss
(368
)
 
(371
)
Retained earnings
146,633

 
125,378

Treasury stock, at cost; 41,620 and 40,616 shares, respectively
(423,236
)
 
(398,961
)
Total stockholders’ equity
142,069

 
139,388

Total liabilities and stockholders’ equity
$
372,557

 
$
363,922

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.



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Table of Contents

KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
 
 
Nine Months Ended September 30, 2015
Common stock – shares:
 
Shares at beginning of period
70,029

Issuance for stock-based compensation and dividends, net of forfeitures
474

Exercise of stock options
32

Shares at end of period
70,535

Common stock – par value:
 
Balance at beginning of period
$
700

Issuance for stock-based compensation and dividends, net of forfeitures
5

Exercise of stock options
0

Balance at end of period
$
705

Additional paid-in capital:
 
Balance at beginning of period
$
412,642

Issuance for stock-based compensation and dividends, net of forfeitures
401

Exercise of stock options
381

Income tax benefit from stock-based compensation
408

Stock-based compensation expense
4,261

Employee stock purchase plan
242

Balance at end of period
$
418,335

Accumulated other comprehensive (loss) income:
 
Balance at beginning of period
$
(371
)
Pension plans, net of tax
3

Balance at end of period
$
(368
)
Retained earnings:
 
Balance at beginning of period
$
125,378

Net income
30,923

Dividends, net of forfeitures ($0.33 per share)
(9,668
)
Balance at end of period
$
146,633

Treasury stock – shares:
 
Shares at beginning of period
40,616

Repurchases of common stock
1,024

Employee stock purchase plan
(20
)
Shares at end of period
41,620

Treasury stock – cost:
 
Balance at beginning of period
$
(398,961
)
Repurchases of common stock
(24,468
)
Employee stock purchase plan
193

Balance at end of period
$
(423,236
)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


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Table of Contents

KFORCE INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
Cash flows from operating activities:
 
 
 
Net income
$
30,923

 
$
81,970

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Gain on sale of discontinued operations

 
(64,619
)
Deferred income tax provision, net
874

 
1,428

Provision for bad debts on accounts receivable
1,861

 
1,080

Depreciation and amortization
7,411

 
7,541

Stock-based compensation expense
4,261

 
2,084

Pension and post-retirement benefit plans expense
1,395

 
990

Amortization of deferred financing costs
90

 
79

Excess tax benefit attributable to stock-based compensation
(408
)
 
(128
)
Loss on deferred compensation plan investments, net
192

 
195

Gain from Company-owned life insurance proceeds

 
(849
)
Contingent consideration liability remeasurement
524

 

Other
172

 
(186
)
(Increase) decrease in operating assets
 
 
 
Trade receivables, net
(13,229
)
 
(38,303
)
Income tax refund receivable
1,097

 
7,681

Prepaid expenses and other current assets
496

 
66

Other assets, net
(322
)
 
(42
)
Increase (decrease) in operating liabilities
 
 
 
Accounts payable and other current liabilities
1,872

 
4,854

Accrued payroll costs
12,067

 
6,674

Income taxes payable
3,129

 
(4,671
)
Other long-term liabilities
2,751

 
(2,135
)
Cash provided by operating activities
55,156

 
3,709

Cash flows from investing activities:
 
 
 
Proceeds from disposition of business

 
117,887

Capital expenditures
(7,731
)
 
(4,787
)
Proceeds from the disposition of assets held within the Rabbi Trust
445

 
2,330

Purchase of assets held within the Rabbi Trust
(481
)
 
(2,156
)
Proceeds from Company-owned life insurance

 
1,037

Other

 
1

Cash (used in) provided by investing activities
(7,767
)
 
114,312

Cash flows from financing activities:
 
 
 
Proceeds from bank line of credit
443,195

 
444,846

Payments on bank line of credit
(455,635
)
 
(494,778
)
Payments of capital expenditure financing
(956
)
 
(878
)
Short-term vendor financing
(630
)
 
146

Proceeds from exercise of stock options, net of shares tendered in payment of exercise
381

 
949

Excess tax benefit attributable to stock-based compensation
408

 
128

Payment of loan financing fees

 
(35
)
Repurchases of common stock
(24,883
)
 
(58,550
)
Cash dividend
(9,261
)
 
(9,607
)
Cash used in financing activities
(47,381
)
 
(117,779
)
Change in cash and cash equivalents
8

 
242

Cash and cash equivalents at beginning of period
1,238

 
875

Cash and cash equivalents at end of period
$
1,246

 
$
1,117

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


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Table of Contents

KFORCE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A - Summary of Significant Accounting Policies
Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 1 - “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of the 2014 Annual Report on Form 10-K.
Organization and Nature of Operations
Kforce Inc. and its subsidiaries (collectively, “Kforce”) provide professional staffing services and solutions to customers in the following segments: Technology (“Tech”), Finance and Accounting (“FA”), and Government Solutions (“GS”). Kforce provides flexible staffing services and solutions on both a temporary and full-time basis. Kforce operates through its corporate headquarters in Tampa, Florida and 63 field offices located throughout the United States. Additionally, one of our subsidiaries, Kforce Global Solutions, Inc. (“Global”), provides information technology outsourcing services internationally through an office in Manila, Philippines. Our international operations comprised less than 2% of net service revenues for both the three and nine months ended September 30, 2015 and 2014 and are included in our Tech segment.
Kforce serves clients from the Fortune 1000, the Federal Government, state and local governments, local and regional companies and small to mid-sized companies.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although Kforce believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2014 Annual Report on Form 10-K. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of our Unaudited Condensed Consolidated Balance Sheet as of September 30, 2015, our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and our Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2014 was derived from our audited Consolidated Balance Sheet as of December 31, 2014, as presented in our 2014 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified in the Unaudited Condensed Consolidated Statements of Cash Flows to conform to the current year presentation.
Our quarterly operating results are affected by the number of billing days in a quarter and the seasonality of our customers’ businesses. In addition, we experience an increase in direct costs of services and a corresponding decrease in gross profit in the first fiscal quarter of each year as a result of certain U.S. state and federal employment tax resets. Thus, the results of operations for any interim period are not necessarily indicative of, nor comparable to, the results of operations for a full year.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Kforce Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. References in this document to “the Registrant,” “Kforce,” “the Company,” “we,” “the Firm,” “our” or “us” refer to Kforce Inc. and its subsidiaries, except where the context indicates otherwise.

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Table of Contents

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most important of these estimates and assumptions relate to the following: allowance for doubtful accounts, fallouts and other accounts receivable reserves; accounting for goodwill and identifiable intangible assets; self-insured liabilities for workers’ compensation and health insurance; stock-based compensation; obligations for pension plans; accounting for income taxes and expected annual commission rates. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Health Insurance
Except for certain fully insured health insurance lines of coverage, Kforce retains the risk of loss for each health insurance plan participant up to $300 thousand in claims annually. Additionally, for all claim amounts exceeding $300 thousand, Kforce retains the risk of loss up to an aggregate annual loss of those claims of $450 thousand. For its partially self-insured lines of coverage, health insurance costs are accrued using estimates to approximate the liability for reported claims and incurred but not reported (“IBNR”) claims, which are primarily based upon an evaluation of historical claims experience, actuarially-determined completion factors and a qualitative review of our health insurance exposure including the extent of outstanding claims and expected changes in health insurance costs.
Earnings per Share
Basic earnings per share is computed as earnings divided by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding excludes unvested shares of restricted stock. Diluted earnings per common share is computed by dividing the earnings attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period plus the dilutive effect of stock options and other potentially dilutive securities such as unvested shares of restricted stock using the treasury stock method, except where the effect of including potential common shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
13,545

 
$
7,995

 
$
30,923

 
$
20,337

Income from discontinued operations, net of tax

 
57,023

 

 
61,633

Net income
$
13,545

 
$
65,018

 
$
30,923

 
$
81,970

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
27,811

 
31,347

 
28,072

 
32,267

Common stock equivalents
321

 
206

 
246

 
228

Weighted average shares outstanding – diluted
28,132

 
31,553

 
28,318

 
32,495

Earnings per share – basic:
 
 
 
 
 
 
 
From continuing operations
$
0.49

 
$
0.26

 
$
1.10

 
$
0.63

From discontinued operations

 
1.81

 

 
1.91

Earnings per share – basic
$
0.49

 
$
2.07

 
$
1.10

 
$
2.54

Earnings per share – diluted:
 
 
 
 
 
 
 
From continuing operations
$
0.48

 
$
0.25

 
$
1.09

 
$
0.63

From discontinued operations

 
1.81

 

 
1.89

Earnings per share – diluted
$
0.48

 
$
2.06

 
$
1.09

 
$
2.52

For both the three and nine months ended September 30, 2015 and 2014, there were inconsequential common stock equivalents excluded from the weighted average diluted commons shares based on the fact that their inclusion would have had an anti-dilutive effect on earnings per share.

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Table of Contents

Dividends
Kforce’s Board of Directors (“Board”) may, at its discretion, declare and pay dividends on the outstanding shares of Kforce’s common stock out of retained earnings, subject to statutory requirements. Dividends for any outstanding and unvested restricted stock as of the record date are awarded in the form of additional shares of forfeitable restricted stock, at the same rate as the cash dividend on common stock and based on the closing stock price on the record date. Such additional shares have the same vesting terms and conditions as the outstanding and unvested restricted stock. The following summarizes the dividends declared for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Dividends declared per share
$
0.11

 
$
0.10

 
$
0.33

 
$
0.30

On October 30, 2015, the Board declared an increase to the cash dividend bringing the upcoming quarterly dividend to $0.12 per share of common stock. Kforce currently expects to continue to declare and pay quarterly dividends of a similar amount. However, the declaration and payment of future dividends are discretionary and will be subject to determination by our Board each quarter following its review of, among other things, our financial performance and our legal ability to pay dividends.
New Accounting Standards
In April 2015, the FASB issued authoritative guidance regarding a customer's accounting for fees paid in a cloud computing arrangement. This guidance is to be applied for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and early adoption is permitted. Kforce elected not to adopt this standard early. Kforce does not anticipate a material impact to the consolidated financial statements upon adoption.
In April 2015, the FASB issued authoritative guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, similar to debt discounts. The guidance is to be applied for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, and early adoption is permitted. Kforce elected not to adopt this standard early. Kforce does not anticipate a material impact to the consolidated financial statements upon adoption.
In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers, which specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued authoritative guidance deferring the effective date of the new revenue standard by one year for all entities. The one year deferral results in the guidance being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and entities are not permitted to adopt the standard earlier than the original effective date. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We have not yet selected a transition method. We do not currently anticipate a material impact to the consolidated financial statements upon adoption; however, we do anticipate an increase in the level of disclosure around revenue.
Note B - Discontinued Operations
Effective August 3, 2014, Kforce sold to RCM Acquisition, Inc. (the “Purchaser”), under a Stock Purchase Agreement (the “SPA”) dated August 4, 2014, all of the issued and outstanding stock of Kforce Healthcare, Inc. (“KHI”), a wholly-owned subsidiary of Kforce Inc. and operator of the former Health Information Management (“HIM”) reporting segment, for a total cash purchase price of $119.0 million plus a post-closing working capital adjustment of $96 thousand.
In connection with the sale, Kforce entered into a Transition Services Agreement (the “TSA”) with the Purchaser to provide certain post-closing transitional services for a period not to exceed 12 months. Services provided by Kforce under the TSA ceased during the three months ended September 30, 2015. The fees for the services under the TSA were generally equivalent to Kforce’s cost.

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In accordance with and defined within the SPA, Kforce was obligated to indemnify the Purchaser for certain losses, as defined, in excess of $1.19 million, although this deductible does not apply to certain specified losses. Kforce’s obligations under the indemnification provisions of the SPA, with the exception of certain items, ceased 12 months from the closing date and were limited to an aggregate of $8.925 million, although these time and monetary caps do not apply to certain specified losses. While it cannot be certain, Kforce believes any material exposure under the indemnification provisions is remote, particularly given that the 12 month time period for general indemnification claims has now passed and, as a result, Kforce has not recorded a liability as of September 30, 2015.
The total financial results of HIM have been presented as discontinued operations in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. The following summarizes the revenues and pretax profits of HIM for the three and nine months ended September 30, 2014 (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2014
Net service revenues
 
$
8,723

 
$
56,670

Income from discontinued operations, before income taxes
 
$
95,917

 
$
103,512

For the three and nine months ended September 30, 2014, the income from discontinued operations included a gain, net of transaction costs, on the sale of HIM of $94.3 million pretax, or $56.1 million after tax. The transaction costs primarily included legal fees, stock-based compensation related to the acceleration of restricted stock, commissions and transaction bonuses in the form of cash and common stock, which, in the aggregate, totaled $11.0 million. Stock-based compensation related to acceleration of restricted stock and transaction bonuses paid in stock in lieu of cash was $2.4 million for the three and nine months ended September 30, 2014.
Note C - Commitments and Contingencies
Litigation
We are involved in legal proceedings, claims, and administrative matters that arise in the ordinary course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our unaudited condensed consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, we have not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our unaudited condensed consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our unaudited condensed consolidated financial position, results of operations, or cash flows. Kforce maintains liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that Kforce insures against are workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, employment practices liability and fidelity losses. There can be no assurance that Kforce’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities.
Employment Agreements
Kforce has entered into employment agreements with certain executives that provide for minimum compensation, salary and continuation of certain benefits for a six-month to a three-year period after their employment ends under certain circumstances. Certain of the agreements also provide for a severance payment of one to three times annual salary and one-half to three times average annual bonus if such an agreement is terminated without good cause by Kforce or for good reason by the executive. These agreements contain certain post-employment restrictive covenants. Kforce’s liability at September 30, 2015 would be approximately $41.2 million if, following a change in control, all of the executives under contract were terminated without good cause by the employer or if the executives resigned for good reason and $19.2 million if, in the absence of a change in control, all of the executives under contract were terminated by Kforce without good cause or if the executives resigned for good reason.
Kforce has not recorded any liability related to the employment agreements as no events have occurred that would require payment under the agreements.

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Note D - Employee Benefit Plans
Foreign Pension Plan
Kforce maintains a foreign defined benefit pension plan (the “Foreign Pension Plan”) for eligible employees of the Philippine branch of Global that is required by Philippine labor laws. The Foreign Pension Plan defines retirement as those employees who have attained the age of 60 and have completed at least five years of credited service. Benefits payable under the Foreign Pension Plan equate to one-half month’s salary for each year of credited service. Benefits under the Foreign Pension Plan are paid out as a lump sum to eligible employees at retirement.
For the three and nine months ended September 30, 2015, net periodic benefit cost was $64 thousand and $196 thousand, respectively. For the three and nine months ended September 30, 2014, net periodic benefit cost was $68 thousand and $199 thousand, respectively. The net periodic benefit cost recognized for the three and nine months ended September 30, 2015 was based upon the actuarial valuation as of the beginning of the year, which utilized the assumptions noted in our 2014 Annual Report on Form 10-K.
As of September 30, 2015 and December 31, 2014, the projected benefit obligation associated with our Foreign Pension Plan was $1.8 million and $1.6 million, respectively, which is classified in other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. There is no requirement for Kforce to fund the Foreign Pension Plan and, as a result, no contributions were made to the Foreign Pension Plan during the nine months ended September 30, 2015. Kforce does not currently anticipate funding the Foreign Pension Plan during the year ending December 31, 2015.
Supplemental Executive Retirement Plan
Kforce maintains a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain executive officers. The primary goals of the SERP are to create an additional wealth accumulation opportunity, restore lost qualified pension benefits due to government limitations and retain our covered executive officers. The SERP is a non-qualified benefit plan and does not include elective deferrals of covered executive officers’ compensation.
Normal retirement age under the SERP is defined as age 65; however, certain conditions allow for early retirement as early as age 55 or upon a change in control. Vesting under the plan is defined as 100% upon a participant’s attainment of age 55 and 10 years of service and 0% prior to a participant’s attainment of age 55 and 10 years of service. Full vesting also occurs if a participant with five years or more of service is involuntarily terminated by Kforce without cause or upon death, disability or a change in control. The SERP will be funded entirely by Kforce, and benefits are taxable to the covered executive officer upon receipt and deductible by Kforce when paid. Benefits payable under the SERP upon the occurrence of a qualifying distribution event, as defined, are targeted at 45% of the covered executive officers’ average salary and bonus, as defined, from the three years in which the covered executive officer earned the highest salary and bonus during the last 10 years of employment, which is subject to adjustment for retirement prior to the normal retirement age and the participant’s vesting percentage. The benefits under the SERP are reduced for a participant that has not reached age 62 with 10 years of service or age 55 with 25 years of service with a percentage reduction up to the normal retirement age.
Benefits under the SERP are normally paid based on the lump sum present value but may be paid over the life of the covered executive officer or as a 10-year annuity, as elected by the covered executive officer upon commencement of participation in the SERP. None of the benefits earned pursuant to the SERP are attributable to services provided prior to the effective date of the plan. For purposes of the measurement of the benefit obligation, Kforce has assumed that all participants will elect to take the lump sum present value option, based on historical trends.
The following represents the components of net periodic benefit cost for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
330

 
$
291

 
$
990

 
$
873

Interest cost
96

 
74

 
288

 
221

Net periodic benefit cost
$
426

 
$
365

 
$
1,278

 
$
1,094

The net periodic benefit cost recognized for the three and nine months ended September 30, 2015 was based upon the actuarial valuation as of the beginning of the year, which utilized the assumptions noted in our 2014 Annual Report on Form 10-K.

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The present value of the projected benefit obligation as of September 30, 2015 and December 31, 2014 was $11.5 million and $10.2 million, respectively, and is recorded in Other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. There is no requirement for Kforce to fund the SERP and, as a result, no contributions were made to the SERP during the nine months ended September 30, 2015. Kforce does not currently anticipate funding the SERP during the year ending December 31, 2015.
Supplemental Executive Retirement Health Plan
Kforce maintained a Supplemental Executive Retirement Health Plan (“SERHP”) to provide post-retirement health and welfare benefits to certain executives. The vesting and eligibility requirements mirrored that of the SERP, and no advance funding was required by Kforce or the participants. Consistent with the SERP, none of the benefits earned were attributable to services provided prior to the effective date of the plan.
During the nine months ended September 30, 2014, Kforce terminated the Company's SERHP and settled all future benefit obligations by making lump sum payments totaling approximately $3.9 million, which resulted in a net settlement loss of $0.7 million recorded in Selling, general and administrative expenses in the corresponding Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income. The termination effectively removed Kforce's related post-retirement benefit obligation.
The net periodic post-retirement benefit cost for the three and nine months ended September 30, 2014 was $0.9 million and $1.0 million, respectively.
As a result of the settlement with the remaining participants during September 2014, there was no accumulated post-retirement benefit obligation liability as of September 30, 2015 and December 31, 2014.
Note E - Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy and a framework which requires categorizing assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Level 1 inputs are unadjusted, quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. Level 3 inputs include unobservable inputs that are supported by little, infrequent, or no market activity and reflect management’s own assumptions about inputs used in pricing the asset or liability. The Company uses the following valuation techniques to measure fair value.
The underlying investments within Kforce's deferred compensation plan have included money market funds, which are held within the Rabbi Trust. These money market fund assets are measured on a recurring basis and are recorded at fair value based on each fund's quoted market value per share in an active market, which is considered a Level 1 input.
The carrying value of the outstanding borrowings under the credit facility approximates its fair value as it is based on a variable rate that changes based on market conditions. The inputs used to calculate the fair value of the credit facility are considered to be Level 2 inputs.
The contingent consideration liability, which is related to a non-significant acquisition of a business within our GS reporting segment in the fourth quarter of 2014, is measured on a recurring basis and is recorded at fair value, determined using the discounted cash flow method. The inputs used to calculate the fair value of the contingent consideration liability are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. An increase in future cash flows may result in a higher estimated fair value while a decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liability. The remeasurements to fair value are recorded in Other expense, net within the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. For the nine months ended September 30, 2015, $0.5 million was recognized in Other expense, net due to the remeasurement of our contingent consideration liability. The contingent consideration liability is recorded in Other long-term liabilities within the Unaudited Condensed Consolidated Balance Sheet.
Certain assets, in specific circumstances, are measured at fair value on a non-recurring basis utilizing Level 3 inputs such as goodwill, other intangible assets, and other long-lived assets. For these assets, measurement at fair value in periods subsequent to their initial recognition would be applicable if one or more of these assets were determined to be impaired.

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There were no transfers into or out of Level 1, 2 or 3 assets or liabilities during the nine months ended September 30, 2015. The estimated fair values on Kforce’s financial statements as of September 30, 2015 and December 31, 2014 were as follows (in thousands):
Assets/(Liabilities) Measured at Fair Value:
Asset/(Liability)
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
As of September 30, 2015
 
 
 
 
 
 
 
Recurring basis:
 
 
 
 
 
 
 
Contingent consideration liability
$
(1,001
)
 
$

 
$

 
$
(1,001
)
Money market funds
$
36

 
$
36

 
$

 
$

As of December 31, 2014
 
 
 
 
 
 
 
Recurring basis:
 
 
 
 
 
 
 
Contingent consideration liability
$
(477
)
 
$

 
$

 
$
(477
)
Note F - Stock Incentive Plans
On April 5, 2013, the shareholders approved the 2013 Stock Incentive Plan ("2013 Plan") and the aggregate number of shares of common stock that are subject to awards under the 2013 Plan, subject to adjustment upon a change in capitalization, is 4.0 million. On June 20, 2006, the shareholders approved the 2006 Stock Incentive Plan ("2006 Plan") and, as amended, the aggregate number of shares of common stock that are subject to awards under the 2006 Plan is 7.9 million.
The 2013 Plan and 2006 Plan allow for the issuance of stock options, stock appreciation rights, restricted stock and common stock, subject to share availability. Vesting of equity instruments is determined on a grant-by-grant basis. Options expire at the end of 10 years from the date of grant, and Kforce issues new shares upon exercise of options.
The 2013 Plan terminates on April 5, 2023 and the 2006 Plan terminates on April 28, 2016. The Incentive Stock Option Plan expired in 2005.
During the three months ended September 30, 2015 and 2014, Kforce recognized total stock-based compensation expense of $1.4 million and $3.1 million, respectively. During the nine months ended September 30, 2015 and 2014, Kforce recognized total stock-based compensation expense of $4.3 million and $4.5 million, respectively. During the three months ended September 30, 2015 and 2014, Kforce recognized stock-based compensation expense from continuing operations of $1.4 million and $0.7 million, respectively. During the nine months ended September 30, 2015 and 2014, Kforce recognized stock-based compensation expense from continuing operations of $4.3 million and $2.1 million, respectively.
Stock Options
The following table presents the activity under each of the stock incentive plans discussed above for the nine months ended September 30, 2015 (in thousands, except per share amounts):
 
Incentive
Stock
Option
Plan
 
2006
Plan
 
Total
 
Weighted
Average
Exercise
Price Per
Share
 
Total
Intrinsic
Value of
Options
Exercised
Outstanding and Exercisable as of December 31, 2014
22

 
35

 
57

 
$
11.69

 
 
Exercised
(22
)
 
(10
)
 
(32
)
 
$
11.78

 
$
359

Outstanding and Exercisable as of September 30, 2015

 
25

 
25

 
$
11.58

 
 
No compensation expense was recorded during the nine months ended September 30, 2015 or 2014 as a result of the grant date fair value having been fully amortized as of December 31, 2009.

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Restricted Stock
Kforce's annual restricted stock grants made to executives and management are generally based on the extent by which annual long-term incentive performance goals, which are established by Kforce’s Compensation Committee during the first quarter of the year of performance, have been met, as determined by the Compensation Committee. Additionally, Kforce, with the approval of the Compensation Committee, grants restricted stock in varying amounts as determined appropriate during the year to retain executives and management. Restricted stock granted during the nine months ended September 30, 2015 will vest over a period of between one to ten years, with equal vesting annually.
During the three months ended March 31, 2014, the Firm modified all awards containing a performance-acceleration feature that were granted during the three months ended December 31, 2013, as follows: (1) eliminated the performance-acceleration feature and (2) changed the time-based vesting term to five years, with equal vesting annually. The total number of restricted shares impacted by this modification was 268 thousand, excluding already forfeited shares, and the number of employees impacted was 87. The total incremental compensation cost resulting from the modification was $109 thousand, which will be amortized on a straight-line basis over the requisite service period of the modified awards.
Restricted stock contain the same voting rights as other common stock and are included in the number of shares of common stock issued and outstanding. Restricted stock contain the right to forfeitable dividends in the form of additional shares of restricted stock at the same rate as the cash dividend on common stock and containing the same vesting provisions as the underlying award. The following table presents the activity for the nine months ended September 30, 2015 (in thousands, except per share amounts):
 
Number of Restricted Stock
 
Weighted Average
Grant Date
Fair Value
 
Total Intrinsic
Value of Restricted
Stock Vested
Outstanding as of December 31, 2014
982

 
$
18.55

 

Granted
533

 
$
23.92

 

Forfeited/Canceled
(59
)
 
$
19.37

 


Vested
(145
)
 
$
18.08

 
$
3,484

Outstanding as of September 30, 2015
1,311

 
$
20.73

 

The fair market value of restricted stock is determined based on the closing stock price of Kforce’s common stock at the date of grant, and is amortized on a straight-line basis over the requisite service period. As of September 30, 2015, total unrecognized compensation expense related to restricted stock was $19.5 million, which will be recognized over a weighted average remaining period of 4.5 years.
Note G - Goodwill and Intangible Assets
The following table sets forth the activity in goodwill and other intangible assets during the nine months ended September 30, 2015 (in thousands):
 
Goodwill
 
Intangible Assets, Net
Balance as of December 31, 2014
$
45,968

 
$
5,011

Amortization of intangible assets

 
(575
)
Balance as of September 30, 2015
$
45,968

 
$
4,436

As of September 30, 2015 and December 31, 2014, Intangible assets, net in the accompanying Unaudited Condensed Consolidated Balance Sheets consisted of $2.2 million and $2.8 million, respectively, of definite-lived intangible assets including customer relationships, customer contracts, technology and other and $2.2 million of an indefinite-lived intangible asset including a trade name and trademark.

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As of September 30, 2015 and December 31, 2014, accumulated amortization for intangible assets was $26.4 million and $25.8 million, respectively. The following table presents the estimated amortization expense for intangibles over the next five years and thereafter (in thousands):
Remainder of 2015
$
192

2016
589

2017
341

2018
341

2019
330

Thereafter
402

Total
$
2,195

Note H - Reportable Segments
Kforce’s reportable segments are as follows: (1) Tech; (2) FA; and (3) GS. This determination is supported by, among other factors: the existence of individuals responsible for the operations of each segment and who also report directly to our chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to the Board and our CODM. Kforce also reports Flexible billings and Direct Hire (formerly referred to as "Search") fees separately by segment, which has been incorporated into the table below. The following table has been updated to reflect the disposition of HIM. As described in Note B – “Discontinued Operations,” all revenues and gross profit associated with the discontinued operations have been recorded within Income from discontinued operations, net of income taxes, in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.
Historically, and for the three and nine months ended September 30, 2015 and 2014, Kforce has generated only sales and gross profit information on a segment basis. Substantially all operations and long-lived assets are located in the United States. We do not report total assets or income from continuing operations separately by segment as our operations are largely combined.

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The following table provides information concerning the operations of our segments for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Technology
 
Finance and
Accounting
 
Government
Solutions
 
Total
Three Months Ended September 30,
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
Net service revenues:
 
 
 
 
 
 
 
Flexible billings
$
226,381

 
$
76,707

 
$
24,351

 
$
327,439

Direct Hire fees
5,732

 
8,404

 

 
14,136

Total net service revenues
$
232,113

 
$
85,111

 
$
24,351

 
$
341,575

Gross profit
$
69,128

 
$
31,710

 
$
8,983

 
$
109,821

Operating expenses
 
 
 
 
 
 
87,209

Income from continuing operations, before income taxes
 
 
 
 
 
 
$
22,612

2014
 
 
 
 
 
 
 
Net service revenues:
 
 
 
 
 
 
 
Flexible billings
$
212,269

 
$
64,254

 
$
24,787

 
$
301,310

Direct Hire fees
5,374

 
7,126

 

 
12,500

Total net service revenues
$
217,643

 
$
71,380

 
$
24,787

 
$
313,810

Gross profit
$
63,591

 
$
26,425

 
$
8,275

 
$
98,291

Operating expenses
 
 
 
 
 
 
84,950

Income from continuing operations, before income taxes
 
 
 
 
 
 
$
13,341

Nine Months Ended September 30,
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
Net service revenues:
 
 
 
 
 
 
 
Flexible billings
$
660,692

 
$
215,674

 
$
74,515

 
$
950,881

Direct Hire fees
17,224

 
23,434

 

 
40,658

Total net service revenues
$
677,916

 
$
239,108

 
$
74,515

 
$
991,539

Gross profit
$
197,982

 
$
87,229

 
$
25,388

 
$
310,599

Operating expenses
 
 
 
 
 
 
259,023

Income from continuing operations, before income taxes
 
 
 
 
 
 
$
51,576

2014
 
 
 
 
 
 
 
Net service revenues:
 
 
 
 
 
 
 
Flexible billings
$
610,897

 
$
181,411

 
$
71,504

 
$
863,812

Direct Hire fees
14,418

 
20,362

 

 
34,780

Total net service revenues
$
625,315

 
$
201,773

 
$
71,504

 
$
898,592

Gross profit
$
180,210

 
$
73,793

 
$
22,200

 
$
276,203

Operating expenses
 
 
 
 
 
 
242,634

Income from continuing operations, before income taxes
 
 
 
 
 
 
$
33,569


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Note I - Other Long-Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Deferred compensation plan
$
22,541

 
$
22,425

Supplemental executive retirement plan
11,476

 
10,197

Other
6,036

 
3,834

 
$
40,053

 
$
36,456

Note J - Supplemental Cash Flow Information
Supplemental cash flow information is as follows for the nine months ended September 30, 2015 and 2014 (in thousands):
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash paid during the period for:
 
 
 
Income taxes, net
$
15,592

 
$
12,608

Interest, net
$
1,234

 
$
637

Non-Cash Transaction Information:
 
 
 
Employee stock purchase plan
$
435

 
$
550

Equipment acquired under capital leases
$
553

 
$
130

Unsettled repurchases of common stock
$
1,011

 
$
1,937

Shares tendered in payment of the exercise price of stock options
$

 
$
84


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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Kforce Inc., our operations, and our present business environment. This MD&A should be read in conjunction with Item 1. Financial Statements of this report on Form 10-Q.
This overview summarizes the MD&A, which includes the following sections:
Executive Summary – an executive summary of our results of operations for the nine months ended September 30, 2015.
Critical Accounting Estimates – a discussion of the accounting estimates that are most critical to aid in fully understanding and evaluating our reported financial results and that require management’s most difficult, subjective or complex judgments.
Results of Operations – an analysis of Kforce’s unaudited condensed consolidated results of operations for the three and nine months ended September 30, 2015 and 2014, which have been presented in its unaudited condensed consolidated financial statements. In order to assist the reader in understanding our business as a whole, certain metrics are presented for each of our segments.
Liquidity and Capital Resources – an analysis of cash flows, off-balance sheet arrangements, stock repurchases, contractual obligations and commitments and the impact of changes in interest rates on our business.
Effective August 3, 2014, Kforce divested its HIM segment through a sale of all of the issued and outstanding stock of KHI. See Note B – “Discontinued Operations” to the unaudited condensed consolidated financial statements for a more detailed discussion. The results presented in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 include activity relating to HIM as discontinued operations. Except as specifically noted, our discussions below exclude any activity related to HIM, which is addressed separately in the discussion of income from discontinued operations, net of income taxes.

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EXECUTIVE SUMMARY
The following is an executive summary of what Kforce believes are highlights as of and for the nine months ended September 30, 2015, which should be considered in the context of the additional discussions herein and in conjunction with the unaudited condensed consolidated financial statements and notes thereto.
Net service revenues for the nine months ended September 30, 2015 increased 10.3% to $991.5 million from $898.6 million in the comparable period in 2014.
Flex revenues for the nine months ended September 30, 2015 increased 10.1% to $950.9 million from $863.8 million in the comparable period in 2014.
Direct Hire revenues for the nine months ended September 30, 2015 increased 16.9% to $40.7 million from $34.8 million in the comparable period in 2014.
Flex gross profit margin for the nine months ended September 30, 2015 increased 50 basis points to 28.4% from 27.9% in the comparable period in 2014. Flex gross profit margin increased 30 basis points for Tech, 10 basis points for FA and 310 basis points for GS.
Selling, general and administrative ("SG&A") expenses as a percentage of revenues for the nine months ended September 30, 2015 decreased to 25.2% from 26.0% in the comparable period in 2014.
Income from continuing operations of $30.9 million for the nine months ended September 30, 2015 increased $10.6 million compared with income from continuing operations of $20.3 million in the comparable period in 2014.
Net income of $30.9 million for the nine months ended September 30, 2015 decreased $51.1 million from net income of $82.0 million in the comparable period in 2014 due primarily to the gain on sale of HIM recorded in the third quarter of 2014.
Diluted earnings per share from continuing operations for the nine months ended September 30, 2015 increased to $1.09 from $0.63 per share in the comparable period in 2014.
During the nine months ended September 30, 2015, Kforce repurchased 983 thousand shares of common stock on the open market at a total cost of approximately $23.5 million.
The Firm declared and paid three quarterly dividends of $0.11 per share during the nine months ended September 30, 2015, resulting in a payout in cash of $9.3 million in total.
The total amount outstanding under our credit facility decreased $12.4 million to $80.9 million as of September 30, 2015 as compared to $93.3 million as of December 31, 2014.

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CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our unaudited condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our unaudited condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Please refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in our 2014 Annual Report on Form 10-K for a more detailed discussion of our significant accounting policies and critical accounting estimates.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2015 and 2014
Net service revenues for the three and nine months ended September 30, 2015 were $341.6 million and $991.5 million, respectively, which represents an increase of 8.8% and 10.3%, respectively, over the comparable periods in 2014. The increase was composed of increases of 6.6% and 8.4% in our Tech segment (which represents 68.4% of total net service revenues for the nine months ended September 30, 2015), 19.2% and 18.5% in our FA segment (which represents 24.1% of total net service revenues for the nine months ended September 30, 2015) and a decrease of 1.8% and an increase of 4.2% in our GS segment (which represents 7.5% of total net service revenues for the nine months ended September 30, 2015) for the three and nine months ended September 30, 2015, over the comparable periods in 2014. Flex revenues increased 8.7% and 10.1% for the three and nine months ended September 30, 2015, over the comparable periods in 2014. Direct Hire revenues increased 13.1% and 16.9% for the three and nine months ended September 30, 2015, over the comparable periods in 2014.
Flex gross profit margin increased 70 basis points to 29.2% for the three months ended September 30, 2015, as compared to 28.5% for the comparable period in 2014, and increased 50 basis points to 28.4% for the nine months ended September 30, 2015, as compared to 27.9% for the comparable period in 2014. The increases are due primarily to an increase in the spread between our bill rates and pay rates in our Tech and FA segments, improved profitability from our GS segment, a reduction in benefit costs and a more favorable payroll tax environment as compared to 2014. SG&A expenses as a percentage of net service revenues were 24.6% and 25.2% for the three and nine months ended September 30, 2015, respectively, as compared to 26.2% and 26.0% for the comparable periods in 2014. The decrease in SG&A expenses as a percentage of net service revenues was driven by a decrease in compensation, commission, payroll taxes and benefit related costs. Kforce expects to continue to manage its SG&A costs diligently.
From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which continued to be positive during 2015, based on data published by the Bureau of Labor Statistics (“BLS”) and Staffing Industry Analysts (“SIA”). The unemployment rate was at 5.1% as of September 2015, and non-farm payroll expanded by approximately 501 thousand jobs in the period July through September 2015. The college-level unemployment rate, which we believe serves as a proxy for professional employment and is more closely aligned with the Firm’s business strategy and candidate profile, was at 2.5% in September 2015. Kforce believes that uncertainty in the overall U.S. economic outlook related to the political landscape and geo-political risk as well as the expanding regulatory requirements, including those around employee classification, will continue to fuel growth in temporary staffing. The penetration rate (the percentage of temporary staffing to total employment) in September 2015 remained near record levels at 2.04%. Given the near record levels of the penetration rate, we believe that our Flex revenues can grow significantly even in a relatively modest growth macro-economic environment. Kforce remains optimistic about the growth prospects of the temporary staffing industry, the penetration rate, and in particular, our revenue portfolio.

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Over the last few years, we have undertaken several significant initiatives including: (1) executing a realignment plan to streamline our leadership and revenue-enabling personnel in an effort to better align a higher percentage of roles closer to the customer; (2) increasing our focus on consultant care processes and communications to redeploy our consultants in a timely fashion; (3) increasing revenue-generating headcount to capitalize on targeted growth opportunities; (4) further optimizing our NRC team in support of our field operations; (5) upgrading our corporate systems; (6) focusing on process improvements and (7) divesting of HIM, which we considered a non-core business. We believe our realigned field operations and revenue-enabling operations models provide a competitive advantage for us and are keys to our future growth and profitability. We also believe that our portfolio of service offerings, which are almost exclusively in the U.S. and are focused in key areas of expected growth in Tech and FA, are also a key contributor to our long-term financial stability. We believe the divestiture of HIM provides us the opportunity to further dedicate our resources to exclusively providing technology and finance and accounting talent in the commercial and government markets through our staffing organization and Kforce Government Solutions Inc., our government solutions provider.
Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net Service Revenues by Segment:
 
 
 
 
 
 
 
Tech
68.0
%
 
69.4
%
 
68.4
%
 
69.6
%
FA
24.9

 
22.7

 
24.1

 
22.5

GS
7.1

 
7.9

 
7.5

 
7.9

Net service revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Revenues by Type:
 
 
 
 
 
 
 
Flex
95.9
%
 
96.0
%
 
95.9
%
 
96.1
%
Direct Hire
4.1

 
4.0

 
4.1

 
3.9

Net service revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Gross profit
32.2
%
 
31.3
%
 
31.3
%
 
30.7
%
Selling, general and administrative expenses
24.6
%
 
26.2
%
 
25.2
%
 
26.0
%
Depreciation and amortization
0.8
%
 
0.8
%
 
0.7
%
 
0.8
%
Income from continuing operations, before income taxes
6.6
%
 
4.3
%
 
5.2
%
 
3.7
%
Income from continuing operations
4.0
%
 
2.5
%
 
3.1
%
 
2.3
%
Net income
4.0
%
 
20.7
%
 
3.1
%
 
9.1
%

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The following table details net service revenues for Flex and Direct Hire by segment and changes from the prior period for the three and nine months ended September 30 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
 
 
 
 
 
 
 
 
 
 
 
Flex
$
226,381

 
6.6
 %
 
$
212,269

 
$
660,692

 
8.2
%
 
$
610,897

Direct Hire
5,732

 
6.7
 %
 
5,374

 
17,224

 
19.5
%
 
14,418

Total Tech
$
232,113

 
6.6
 %
 
$
217,643

 
$
677,916

 
8.4
%
 
$
625,315

FA
 
 
 
 
 
 
 
 
 
 
 
Flex
$
76,707

 
19.4
 %
 
$
64,254

 
$
215,674

 
18.9
%
 
$
181,411

Direct Hire
8,404

 
17.9
 %
 
7,126

 
23,434

 
15.1
%
 
20,362

Total FA
$
85,111

 
19.2
 %
 
$
71,380

 
$
239,108

 
18.5
%
 
$
201,773

GS
 
 
 
 
 
 
 
 
 
 
 
Flex
$
24,351

 
(1.8
)%
 
$
24,787

 
$
74,515

 
4.2
%
 
$
71,504

Total GS
$
24,351

 
(1.8
)%
 
$
24,787

 
$
74,515

 
4.2
%
 
$
71,504

 
 
 
 
 
 
 
 
 
 
 
 
Total Flex
$
327,439

 
8.7
 %
 
$
301,310

 
$
950,881

 
10.1
%
 
$
863,812

Total Direct Hire
14,136

 
13.1
 %
 
12,500

 
40,658

 
16.9
%
 
34,780

Total Net Service Revenues
$
341,575

 
8.8
 %
 
$
313,810

 
$
991,539

 
10.3
%
 
$
898,592


Flex Revenues. The primary drivers of Flex revenues are the number of consultant hours worked, the consultant bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce. Our quarterly operating results are affected by the number of billing days in a quarter and the seasonality of our clients’ businesses. For the three months ended September 30, 2015 and 2014, there were 64 billing days each.
Flex revenues for our largest segment, Tech, experienced growth during the three and nine months ended September 30, 2015 of 6.6% and 8.2% as compared to the same periods in 2014. The year-over-year growth rate in the third quarter of 2015 of 6.6% decelerated from 9.6% in the second quarter of 2015, which we believe is primarily attributable to declines in a few of our largest clients due to merger and acquisition activities and other client-specific business disruptions. A September 2015 report published by SIA provided an expectation that temporary technology staffing could experience growth of 6% for 2015 and an additional 6% in 2016, which we believe is due to the continuing use of temporary staffing as a solution during uncertain economic cycles, the increasing cost of employment driving the systemic use of temporary staffing, particularly in project-based work such as technology, and the increasing pace of change in areas like mobility, data security and others are increasing the demand for Tech talent. SIA also acknowledges that notable skill shortages in certain technology skill sets will continue, which we believe will result in strong future growth in our Tech segment. The Firm believes it is well-positioned to take advantage of this growth as a result of the expected increase in productivity, which normally comes with tenure, of the revenue-generating headcount added in the last few years. We are also expecting to accelerate the hiring of Tech Flex sales associates over the next several quarters to capture the market demand that exists in this space. We expect our Tech Flex revenues to increase on a year-over-year basis in the fourth quarter of 2015 though the rate of growth may further decelerate compared to the 6.6% for the third quarter of 2015.
Our FA segment experienced an increase of 19.4% and 18.9% in Flex revenues during the three and nine months ended September 30, 2015, as compared to the same periods in 2014. In its September 2015 update, SIA provided an expectation that finance and accounting staffing could experience growth of 10% in 2015 and an additional 6% in 2016. The Firm believes it is well-positioned to take advantage of this growth as a result of the expected increase in productivity, which normally comes with tenure, of the revenue-generating headcount added in the last few years. We expect our year-over-year growth in FA for the fourth quarter of 2015 to decelerate compared to the third quarter of 2015 though remain at high levels.
Our GS segment experienced a decrease of 1.8% and an increase of 4.2% in Flex revenues during the three and nine months ended September 30, 2015, as compared to the same periods in 2014. There remains continued uncertainty within this segment due to an increase in competition and the lowest price technically acceptable government procurement environment. We expect near-term revenues to be fairly stable.

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The following table details total Flex hours for our Tech and FA segments and percentage changes over the prior period for the three and nine months ended September 30 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
3,332

 
9.2
%
 
3,050

 
9,726

 
9.7
%
 
8,867

FA
2,350

 
18.7
%
 
1,980

 
6,564

 
17.6
%
 
5,584

Total hours
5,682

 
13.0
%
 
5,030

 
16,290

 
12.7
%
 
14,451

As the GS segment primarily provides solutions-based services as compared to staffing services, Flex hours are not presented above.
The increase in Flex revenues for Tech for the three months ended September 30, 2015, compared to the same period in 2014, was $14.1 million, composed of a $19.4 million increase in volume, a $4.8 million decrease in bill rate and a $0.5 million decrease in billable expenses. The increase in Flex revenues for Tech for the nine months ended September 30, 2015, compared to the same period in 2014, was $49.8 million, composed of a $58.8 million increase in volume, an $8.9 million decrease in bill rate and a $0.1 million decrease in billable expenses. The increase in Flex revenues for FA for the three months ended September 30, 2015, compared to the same period in 2014, was $12.5 million, composed of a $12.0 million increase in volume and a $0.5 million increase in bill rate. The increase in Flex revenues for FA for the nine months ended September 30, 2015, compared to the same period in 2014, was $34.3 million, composed of a $31.8 million increase in volume and a $2.5 million increase in bill rate.
Billable expenses, which are included as a component of net services revenues, are primarily attributable to project-based work. The following table details total Flex billable expenses for each segment and percentage changes over the prior period for the three and nine months ended September 30 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
$
1,263

 
(29.0
)%
 
$
1,778

 
$
4,388

 
(2.1
)%
 
$
4,480

FA
71

 
(22.8
)%
 
92

 
212

 
(12.0
)%
 
241

GS
76

 
35.7
 %
 
56

 
302

 
(6.5
)%
 
323

Total billable expenses
$
1,410

 
(26.8
)%
 
$
1,926

 
$
4,902

 
(2.8
)%
 
$
5,044

Direct Hire Fees. The primary drivers of Direct Hire fees are the number of placements and the average placement fee. Direct Hire fees also include conversion revenues (conversions occur when consultants initially assigned to a client on a temporary basis are later converted to a permanent placement). Our GS segment does not make permanent placements.
Direct Hire revenues increased 13.1% and 16.9% during the three and nine months ended September 30, 2015, as compared to the same periods in 2014.
Total placements for each segment and percentage changes over the prior period were as follows for the three and nine months ended September 30:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
353

 
9.6
%
 
322

 
1,072

 
20.7
%
 
888

FA
656

 
21.7
%
 
539

 
1,834

 
7.6
%
 
1,704

Total placements
1,009

 
17.2
%
 
861

 
2,906

 
12.1
%
 
2,592


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The average fee per placement for each segment and percentage changes over the prior period were as follows for the three and nine months ended September 30:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
$
16,247

 
(2.7
)%
 
$
16,704

 
$
16,072

 
(1.0
)%
 
$
16,242

FA
12,815

 
(3.1
)%
 
13,219

 
12,780

 
6.9
 %
 
11,951

Total average placement fee
$
14,015

 
(3.5
)%
 
$
14,522

 
$
13,994

 
4.3
 %
 
$
13,421

The increase in Direct Hire revenues for the three months ended September 30, 2015, compared to the same period in 2014, was $1.6 million, composed of a $2.1 million increase in volume and a $0.5 million decrease in rate. The increase in Direct Hire revenues for the nine months ended September 30, 2015, compared to the same period in 2014, was $5.9 million, composed of a $4.2 million increase in volume and a $1.7 million increase in rate.
Gross Profit. Gross profit on Flex billings is determined by deducting the direct cost of services (primarily flexible personnel payroll wages, payroll taxes, payroll-related insurance and certain fringe benefits, as well as subcontractor costs) from net Flex service revenues. In addition, consistent with industry practices, gross profit dollars from Direct Hire fees are equal to revenues, because there are generally no direct costs associated with such revenues.
The gross profit percentage for each segment and percentage changes over the prior period were as follows for the three and nine months ended September 30:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
29.8
%
 
2.1
%
 
29.2
%
 
29.2
%
 
1.4
 %
 
28.8
%
FA
37.3
%
 
0.8
%
 
37.0
%
 
36.5
%
 
(0.3
)%
 
36.6
%
GS
36.9
%
 
10.5
%
 
33.4
%
 
34.1
%
 
10.0
 %
 
31.0
%
Total gross profit percentage
32.2
%
 
2.9
%
 
31.3
%
 
31.3
%
 
2.0
 %
 
30.7
%
Kforce also monitors the gross profit percentage as a percentage of Flex revenues, which is referred to as the Flex gross profit percentage. This provides management with helpful insight into the other drivers of total gross profit percentage such as changes in volume evidenced by changes in hours billed for Flex and changes in the spread between the bill rate and pay rate for Flex.
The following table presents, for each segment, the Flex gross profit percentage and percentage change over the prior period for the three and nine months ended September 30:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Tech
28.0
%
 
2.2
%
 
27.4
%
 
27.4
%
 
1.1
%
 
27.1
%
FA
30.4
%
 
1.3
%
 
30.0
%
 
29.6
%
 
0.3
%
 
29.5
%
GS
36.9
%
 
10.5
%
 
33.4
%
 
34.1
%
 
10.0
%
 
31.0
%
Total Flex gross profit percentage
29.2
%
 
2.5
%
 
28.5
%
 
28.4
%
 
1.8
%
 
27.9
%
The increase in Flex gross profit for the three months ended September 30, 2015, compared to the same period in 2014, was $9.9 million, composed of a $7.5 million increase in volume and a $2.4 million increase in rate. The increase in Flex gross profit for the nine months ended September 30, 2015, compared to the same period in 2014, was $28.5 million, composed of a $24.3 million increase in volume and a $4.2 million increase in rate.

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Table of Contents

During the three and nine months ended September 30, 2015, Flex gross profit percentage increased 70 basis points and 50 basis points as compared to the same periods in 2014, respectively. These increases were due primarily to an increase in the spread between our bill rates and pay rates in our Tech and FA segments, improved profitability from our GS segment, a reduction in benefit costs and a more favorable payroll tax environment as compared to 2014. A continued focus for Kforce is optimizing the spread between bill rates and pay rates by providing our associates with tools, economic knowledge and defined programs to drive improvement in the effectiveness of our pricing strategy around the staffing services we provide. We believe this strategy will serve to balance the desire for optimal volume, rate, effort and duration of assignment, while ultimately maximizing the benefit for our clients, our consultants and Kforce.
SG&A Expenses. For the three and nine months ended September 30, 2015, total commissions, compensation, payroll taxes, and benefit costs as a percentage of SG&A represented 84.5% and 84.0%, respectively, as compared to 85.5% and 85.3% for the comparable period in 2014. Commissions, certain revenue-generating bonuses and related payroll taxes and benefit costs are variable costs driven primarily by revenue and gross profit levels, and associate performance. Therefore, as gross profit levels change, these expenses would also generally be anticipated to change, but remain relatively consistent as a percentage of revenues.
The following table presents these components of SG&A along with an “other” caption, which includes bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses, as an absolute amount and as a percentage of total net service revenues for the three and nine months ended September 30 (in thousands):
 
2015
 
% of
Revenues
 
2014
 
% of
Revenues
Three Months Ended September 30,
 
 
 
 
 
 
 
Compensation, commissions, payroll taxes and benefits costs
$
71,145

 
20.8
%
 
$
70,175

 
22.4
%
Other
13,022

 
3.8
%
 
11,915

 
3.8
%
Total SG&A
$
84,167

 
24.6
%
 
$
82,090

 
26.2
%
Nine Months Ended September 30,
 
 
 
 
 
 
 
Compensation, commissions, payroll taxes and benefits costs
$
209,837

 
21.2
%
 
$
199,795

 
22.2
%
Other
39,877

 
4.0
%
 
34,423

 
3.8
%
Total SG&A
$
249,714

 
25.2
%
 
$
234,218

 
26.0
%
SG&A as a percentage of net service revenues decreased 160 and 80 basis points for the three and nine months ended September 30, 2015 as compared to the same period in 2014. These decreases were primarily attributable to the following:
For the three and nine months ended September 30, 2015, compensation, commissions, payroll taxes and benefits costs decreased 1.6% and 1.0%, respectively, of net service revenues, which was primarily a result of a reduction in salaries and wages, benefits costs and a decrease in commissions driven by improvements in associate productivity.

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Table of Contents

Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage changes over the prior period by major asset class for the three and nine months ended September 30 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Increase
(Decrease)
 
2014
 
2015
 
Increase
(Decrease)
 
2014
Fixed asset depreciation
$
1,812

 
2.7
 %
 
$
1,764

 
$
5,027

 
6.8
 %
 
$
4,705

Capitalized software amortization
576

 
(20.0
)%
 
720

 
1,800

 
(18.6
)%
 
2,211

Intangible asset amortization
191

 
20.9
 %
 
158

 
575

 
21.1
 %
 
475

Total depreciation and amortization
$
2,579

 
(2.4
)%
 
$
2,642

 
$
7,402

 
0.1
 %
 
$
7,391

Other Expense, Net. Other expense, net was $0.5 million and $1.9 million for the three and nine months ended September 30, 2015 which consisted primarily of interest expense related to outstanding borrowings under our credit facility and $0.5 million due to the remeasurement of our contingent consideration liability for the nine months ended September 30, 2015. Other expense, net was $0.2 million and $1.0 million for the three and nine months ended September 30, 2014 which consisted primarily of interest expense related to outstanding borrowings under our credit facility.
Income Tax Expense. Income tax expense as a percentage of income from continuing operations before income taxes (our “effective rate”) for the nine months ended September 30, 2015 and 2014 was 40.0% and 39.4%, respectively. There were no individual items during the nine months ended September 30, 2015 or 2014 that had a material impact on Kforce’s effective rate.
Income from Discontinued Operations, Net of Income Taxes. Discontinued operations include the consolidated income and expenses of HIM. During the three months ended September 30, 2014, Kforce completed the sale of HIM resulting in a pre-tax gain of $94.3 million. Included in the determination of the pre-tax gain is approximately $4.9 million of goodwill for HIM and transaction expenses totaling approximately $11.0 million, which primarily included legal fees, stock-based compensation related to the acceleration of restricted stock due to change in control provisions, commissions and transaction bonuses. Income tax expense as a percentage of income from discontinued operations, before income taxes, for the nine months ended September 30, 2014 was 40.5%.

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Table of Contents

Adjusted EBITDA and Adjusted EBITDA Per Share. "Adjusted EBITDA", a non-GAAP financial measure, is defined by Kforce as net income before income from discontinued operations, net of income taxes, non-cash impairment charges, interest, income taxes, depreciation and amortization and stock-based compensation expense. "Adjusted EBITDA Per Share" is Adjusted EBITDA divided by the number of diluted weighted average shares outstanding. Adjusted EBITDA and Adjusted EBITDA Per Share should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA and Adjusted EBITDA Per Share are significant components in understanding and assessing our past and future financial performance, and this presentation should not be construed as an inference by us that our future results will be unaffected by those items excluded from Adjusted EBITDA and Adjusted EBITDA Per Share. Adjusted EBITDA and Adjusted EBITDA Per Share are key measures used by management to evaluate our operations, including our ability to generate cash flows and, consequently, management believes they are useful information to investors. The measures should not be considered in isolation or as alternatives to net income, cash flows or other financial statement information presented in the unaudited condensed consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is thus susceptible to varying calculations. Also, Adjusted EBITDA and Adjusted EBITDA Per Share, as presented, may not be comparable to similarly titled measures of other companies.
Some of the items that are excluded also impacted certain balance sheet assets, resulting in all or a portion of an asset being written off without a corresponding recovery of cash, that may have previously been spent with respect to the asset. In addition, although we excluded amortization of stock-based compensation expense (which we expect to continue to incur in the future) because it is a non-cash expense, the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our stockholder ownership interest. We encourage you to evaluate these items and the potential risks of excluding such items when analyzing our financial position.
The following table presents Adjusted EBITDA and Adjusted EBITDA Per Share results and includes a reconciliation of Adjusted EBITDA to net income and Adjusted Earnings Per Share to earnings per share for the three and nine months ended September 30 (in thousands, except per share amounts):
 
2015
 
Per Share
 
2014
 
Per Share
Three Months Ended September 30,
 
 
 
 
 
 
 
Net income
$
13,545

 
$
0.48

 
$
65,018

 
$
2.06

Income from discontinued operations, net of income taxes

 

 
57,023

 
1.81

Income from continuing operations
$
13,545

 
$
0.48

 
$
7,995

 
$
0.25

Depreciation and amortization
2,579

 
0.09

 
2,642

 
0.08

Stock-based compensation expense
1,348

 
0.05

 
671

 
0.02

Interest expense and other
458

 
0.02

 
258

 
0.01

Income tax expense
9,067

 
0.32

 
5,346

 
0.18

Adjusted EBITDA
$
26,997

 
$
0.96

 
$
16,912

 
$
0.54

Weighted average shares outstanding - basic
27,811

 
 
 
31,347

 
 
Weighted average shares outstanding - diluted
28,132

 
 
 
31,553

 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Net income
$
30,923

 
$
1.09

 
$
81,970

 
$
2.52

Income from discontinued operations, net of income taxes

 

 
61,633

 
1.89

Income from continuing operations
$
30,923

 
$
1.09

 
$
20,337

 
$
0.63

Depreciation and amortization
7,402

 
0.26

 
7,391

 
0.23

Stock-based compensation expense
4,261

 
0.15

 
2,025

 
0.06

Interest expense and other
1,486

 
0.06

 
1,038

 
0.02

Income tax expense
20,653

 
0.73

 
13,232

 
0.41

Adjusted EBITDA
$
64,725

 
$
2.29

 
$
44,023

 
$
1.35

Weighted average shares outstanding - basic
28,072

 
 
 
32,267

 
 
Weighted average shares outstanding - diluted
28,318

 
 
 
32,495

 
 


27

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our existing credit facility. At September 30, 2015, Kforce had $124.8 million in working capital compared to $130.2 million at December 31, 2014. Kforce’s current ratio (current assets divided by current liabilities) was 2.1 at September 30, 2015 and 2.4 at December 31, 2014.
The accompanying Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 provide a more detailed description of our cash flows. Currently, Kforce is principally focused on achieving the appropriate balance in the following areas of cash flow: (1) achieving positive cash flow from operating activities; (2) returning capital to our shareholders through our dividend and common stock repurchase programs; (3) maintaining an appropriate outstanding balance on our credit facility; (4) investing in our infrastructure to allow sustainable growth via capital expenditures; and (5) making strategic acquisitions.
We believe that existing cash and cash equivalents, cash flow from operations, and available borrowings under our credit facility will be adequate to meet the capital expenditure and working capital requirements of our operations for at least the next 12 months. However, significant deterioration in the economic environment or market conditions, among other things, could negatively impact operating results and liquidity, as well as the ability of our lenders to fund borrowings. There is no assurance that: (1) our lenders will be able to fund our borrowings or (2) if operations were to deteriorate and additional financing were to become necessary, we would be able to obtain financing in amounts sufficient to meet operating requirements or at terms which are satisfactory and which would allow us to remain competitive.
Actual results could also differ materially from those indicated as a result of a number of factors, including the use of currently available resources for possible acquisitions and possible additional stock repurchases.
The following table presents a summary of our net cash flows from operating, investing and financing activities for the nine months ended September 30, 2015 and 2014 (in thousands):
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash provided by (used in):
 
 
 
Operating activities
$
55,156

 
$
3,709

Investing activities
(7,767
)
 
114,312

Financing activities
(47,381
)
 
(117,779
)
Net increase in cash and cash equivalents
$
8

 
$
242

Discontinued Operations
As was previously discussed, Kforce divested of HIM effective August 3, 2014. The accompanying Unaudited Condensed Consolidated Statements of Cash Flows have been presented on a combined basis (continuing operations and discontinued operations) for the nine months ended September 30, 2014. Cash flows provided by discontinued operations for all prior periods were provided by operating activities and were not material to the capital resources of Kforce. In addition, the absence of cash flows from discontinued operations is not expected to have a significant effect on the future liquidity, financial position, or capital resources of Kforce.
Operating Activities
The significant variations in cash provided by operating activities and net income are principally related to adjustments to net income for certain non-cash charges such as depreciation and amortization expense, and stock-based compensation expense. These adjustments are more fully detailed in our Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014. Our largest source of operating cash flows is the collection of trade receivables and our largest use of operating cash flows is the payment of our employee and consultant populations’ compensation, which includes base salary, commissions and bonuses. When comparing cash flows from operating activities the increase in cash provided by operating activities during the nine months ended September 30, 2015 as compared to the same period in