Kforce: Streamlining Businesses

Aug. 5.14 | About: Kforce, Inc. (KFRC)

Summary

Kforce sold their HIM practice for about 5 times EBITDA.

After-tax proceeds will be applied to debt consolidation, then share buybacks, and maybe acquisitions.

Sell-off post conference call seemed overdone.

This quarter's report from Kforce (NASDAQ:KFRC) seems to reinforce the company's message that they're focusing on the business and that their long-term plan for improving alignment of the operations is bearing fruit. Furthermore, management continues to project confidence in the growing appeal of the staffing model as an industry in growth.

Normally, my quarterly analysis comes after I have had the chance to review the 10-Q or K, but I'm pushing it out a bit sooner because today's price movements seemed overdone on the down-side.

The Sale of HIM

The company realized proceeds after tax of about $70 million from the sale of the HIM business unit. According to the conference call transcript, management felt that the business would require significant future investment which they believed would be better managed by the acquirer. I based my valuation metrics on last year's 10-K. HIM had an estimated gross profit of $24.5 million (FLEX), so the $119 million price tag is 4.8 times of earnings. In addition to having sizeable funds for reducing debt, this sale leaves KFRC with funds to acquire additional shares via repurchases. Although they mentioned potential acquisitions, I'm not sure that the team really wanted to pursue those, especially given the recent emphasis on streamlining and focus - nothing like an acquisition to mess up those plans! In my opinion, the sale of HIM seems a bit cheap, but not out of the ordinary range of 5-8 times earnings.

Although the HIM business unit delivered decent Gross Profit (31.9% for Flex revenues in 2013), the other units have continued to record moderate growth in Gross Margin, as well as on the top line. Furthermore, the EBITDA for Q2 improved from $.41 to $.65 per share - and the gain was from better profits as well as reduced share count due to 1 million shares repurchased in the quarter. SGA was essentially static for the quarter (down slightly due to tax-related seasonality).

Forecast

The transcript of the earnings call indicated that the projections for revenue growth are intact, and that the operating margins will continue to improve, or at least stay static. There was also mention that the KFRC team viewed the transaction as improving "simplicity" and that they will be reimbursed for some transition expenses related to the sale, so one might assume this implies a further reduction in SGA could be forthcoming along with operating growth.

There were several instances in the Q and A where the sale was referred to as accretive, but I believe this was not an accountancy-related term, unless management was implying that they would be purchasing a boat-load of the outstanding shares and keeping debt at $50-60 million.

Share Performance

The market spoke pretty soundly on its view of the quarterly results (down $1.50), and I believe there may be some overreaction to hit the sell button. Despite my stated hesitancy on the shares (I think they're expensive relative to the dividend), the 10% dip in valuation appeared to be more abrupt than warranted.

Disclosure: The author is long KFRC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.