KFORCE INC (KFRC) FY 2021 MD&A

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained in Item 8. Financial Statements and Supplementary Data of this report, as well as Item 1. Business of this report, for an overview of our operations and business environment.

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EXECUTIVE SUMMARY

The following is an executive summary of what Kforce believes are highlights for 2021, which should be considered in the context of the additional discussions herein and in conjunction with the consolidated financial statements and notes thereto.

•Revenue for the year ended December 31, 2021, increased 13.9%, per billing day, to $1.58 billion in 2021 from $1.40 billion in 2020. Revenue per billing day increased 22.3% in our Technology business and decreased 11.4% in our FA business.

•Flex revenue increased 13.1%, per billing day, to $1.53 billion in 2021 from $1.36 billion in 2020. Flex revenue increased 21.7%, per billing day, for Technology and decreased 14.0%, per billing day, for FA. During 2020, we secured contracts to support government-sponsored COVID-19 related initiatives that benefited our FA business with $71.0 million and $114.7 million in revenues for the years ended December 31, 2021 and 2020, respectively. Excluding revenues from the COVID-19 Business for both periods, our FA Flex business would have declined 1.5% in 2021 on a year-over-year, billing day basis.

•The momentum in our Technology business built as 2021 progressed with solid sequential growth each quarter in 2021, resulting in 32.0% growth in the fourth quarter of 2021 on a year-over-year billing day basis.

•Direct Hire revenue, per billing day, increased 49.3% to $49.8 million in 2021 from $33.6 million in 2020.

•Gross profit margin increased 60 basis points to 28.9% in 2021 due primarily to an increased mix of Direct Hire revenue. Flex gross profit margin was flat at 26.6% for both 2021 and 2020. Flex gross profit margin was flat for Technology and increased 30 basis points for FA.

•SG&A expenses as a percentage of revenue for the year ended December 31, 2021, decreased to 21.9% from 22.2% in 2020. The decrease is primarily related to leverage gained from our revenue growth, associate productivity improvements, lower real estate spend due to our reduced office footprint, a decline in our credit expense and a gain on the sale of our corporate headquarters.

•Net income for the year ended December 31, 2021, increased 34.2% to $75.2 million, or $3.54 per share, from $56.0 million, or $2.62 per share, in 2020.

•The Firm returned $74.5 million of capital to our shareholders in the form of open market repurchases totaling $54.4 million, or 0.9 million shares, and quarterly dividends totaling $20.1 million during the year ended December 31, 2021.

•We ended the year with $3.0 million of net debt as of December 31, 2021, compared to net cash of approximately $3.5 million as of December 31, 2020, given that we returned approximately 100% of our operating cash flows to our shareholders.

•Cash provided by operating activities was $72.9 million during the year ended December 31, 2021, compared to $109.2 million for 2020. This decrease is primarily due to the deferral of $38.6 million in payroll taxes as a result of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) in 2020, of which $19.3 million was paid in 2021.

RESULTS OF OPERATIONS

Certain discussions of the changes in our results of operations from the year ended December 31, 2020, as compared to the year ended December 31, 2019, have been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021.

In 2020, the U.S. and global macro-economic environments were severely impacted by the COVID-19 economic and health crisis. Certain sectors of the U.S. economy were more acutely impacted by this crisis, such as the hospitality, transportation, retail, entertainment, health services and manufacturing sectors. We generate revenue within each of these sectors of the U.S. economy although our top three industries are financial services, business services and telecommunications, which were not as acutely impacted by this crisis.

Despite certain adverse effects to our business due to the abrupt economic disruption from the COVID-19 economic and health crisis and related governmental rules and regulations, we delivered strong results in 2020 and again in 2021, especially in our Technology business, with a year-over-year decline of only approximately 1% in 2020 and solid growth of approximately 22% in 2021, both of which significantly exceeded the market expectation per SIA. As we expected, we were successful in significantly outpacing the decline in revenues from our COVID-19 Business (declined $43.7 million) with a higher-quality Technology revenue stream (up $224.3 million). While the business climate related to the COVID-19 economic and health crisis, along with related governmental legislation (including that which is aimed at stimulating the economy), is still extremely fluid, we are well-positioned to and expect to continue capturing additional market share in our Technology business and delivering strong operating results to our shareholders in 2022.

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The following table presents certain items in our Consolidated Statements of Operations and Comprehensive Income as a percentage of revenue for the years ended:

Revenue. The following table presents revenue by type for each segment and percentage change from the prior period for the years ended December 31 (in thousands):

Our quarterly operating results are affected by the number of billing days in a quarter. The following table presents the year-over-year revenue growth rates, per billing day, for the last five quarters:

Flex Revenue. The key drivers of Flex revenue are the number of consultants on assignment, billable hours, the bill rate per hour and, to a limited extent, the amount of billable expenses incurred by Kforce.

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Flex revenue for our Technology business increased approximately 22%, per billing day, during the year ended December 31, 2021, as compared to the same period in 2020. The increase was driven principally by a higher number of consultants on assignment, which have improved consistently since June 2020 (our lowest point during the COVID-19 pandemic). This growth in consultants on assignment was primarily due to the strong secular drivers of demand, the strength of our client portfolio (that being comprised of primarily Fortune 1000 companies), our concentration in higher-end technology skills, and solid execution. We believe the secular drivers of demand in technology have only strengthened post-pandemic as companies continue to invest significantly in technology to improve their consumer’s experience, gain cost efficiencies and stay relevant in an increasingly competitive environment. Assuming a stable demand and macro environment, we expect growth in our Technology business in 2022 of at least 15%.

Our FA business experienced a decrease in Flex revenue, per billing day of 14.0% during the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by a $43.7 million decrease in the COVID-19 Business. Excluding this decline, FA Flex revenues declined 1.5% in 2021, per billing day, as a result of a strategic decision to focus our FA business towards more highly-skilled roles. Excluding the negative impact of the elimination of COVID-19 Business and runoff of FA business in lower skilled areas, we expect Flex revenue in our FA business to grow in the low to mid-single digit range in 2022.

The following table presents the key drivers for the change in Flex revenue by segment over the prior period (in thousands):

The following table presents total Flex hours billed by segment and the percentage change over the prior period for the years ended December 31 (in thousands):

Direct Hire Revenue. The key drivers of Direct Hire revenue are the number of placements and the associated placement fee. Direct Hire revenue also includes conversion revenue, which may occur when a consultant initially assigned to a client on a temporary basis is later converted to a permanent placement for a fee.

Direct Hire revenue increased 49.3%, per billing day, during the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by a significant increase in both the number of placements and fees, as the economic environment has strengthened and competition for talent has increased. We expect Direct Hire revenues to grow in 2022 in the mid to high single-digit range in 2022.

The following table presents the key drivers for the change in Direct Hire revenue over the prior period (in thousands):

The following table presents the total number of placements by segment and percentage change over the prior period for the years ended December 31:

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The following table presents the average fee per placement by segment and percentage change over the prior period for the years ended December 31:

Gross Profit. Gross profit is determined by deducting direct costs (primarily consultant compensation, payroll taxes, payroll-related insurance and certain fringe benefits, as well as independent contractor costs) from total revenue. In addition, there are no consultant payroll costs associated with Direct Hire placements; thus, all Direct Hire revenue increases gross profit by the full amount of the placement fee.

The following table presents the gross profit percentage (gross profit as a percentage of total revenue) for each segment and percentage change over the prior period for the years ended December 31:

Total gross profit percentage increased 60 basis points for the year ended December 31, 2021, as compared to the same period in 2020, primarily driven by an increased mix of Direct Hire revenue.

Flex gross profit percentage (Flex gross profit as a percentage of Flex revenue) provides management with helpful insight into the other drivers of total gross profit percentage driven by our Flex business such as changes in the spread between the consultants’ bill rate and pay rate.

The following table presents the Flex gross profit percentage for each segment and percentage change over the prior period for the years ended December 31:

Overall, our Flex gross profit percentage for the year ended December 31, 2021, as compared to the same period in 2020, was flat. We have seen good stability in our Technology Flex gross margins over the last several years as the benefit from higher growth in our managed teams and project solutions business, which carries a higher margin profile, has offset any spread compression in the remainder of our Technology business.

FA Flex gross profit margins increased 30 basis points for the year ended December 31, 2021, as compared to the same period in 2020, primarily due to a lower mix of lower margin COVID-19 Business and spread improvements due to the repositioning of this business in higher skilled areas. These benefits more than offset higher healthcare costs.

We expect spreads to be relatively stable in our Technology business and for spreads in our FA business to benefit further from the elimination of revenues from the COVID-19 Business and the repositioning efforts in 2022.

The following table presents the key drivers for the change in Flex gross profit by segment over the prior period (in thousands):

Kforce continues to focus on effective pricing and optimizing the spread between bill rates and pay rates. We believe this will serve over time to obtain the optimal volume, rate, effort and duration of assignment, while ultimately maximizing the benefit for our clients, our consultants and Kforce.

SG&A Expenses. Total compensation, commissions, payroll taxes and benefit costs as a percentage of SG&A represented 85.4%, 83.0% and 83.1% of SG&A for the years ended December 31, 2021, 2020 and 2019, respectively. Commissions and

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other bonus incentives for our revenue-generating talent are variable costs driven primarily by revenue and gross profit levels, and associate performance.

The following table presents certain components of SG&A as a percentage of total revenue for the years ended December 31 (in thousands):

(1) Includes items such as bad debt expense, lease expense, professional fees, travel, telephone, computer and certain other expenses.

SG&A as a percentage of revenue decreased 30 basis points in 2021, as compared to 2020 due to (a) leverage gained from our revenue growth, (b) the recognition of a $2.0 million gain from the sale of our corporate headquarters in 2021, (c) declines in credit expense in 2021 due to a lower estimated risk of default resulting from the strength in the quality of our accounts receivable portfolio, and (d) reductions in lease and office expenses. These benefits were partially offset by higher performance-based compensation given the strength in our 2021 financial performance and the accrual of a tentative legal settlement of $3.3 million.

The Firm continues to focus on improving the productivity of our associates and generating increased operating leverage as revenues grow.

Depreciation and Amortization. The following table presents depreciation and amortization expense and percentage change over the prior period by major category for the years ended December 31 (in thousands):

The decrease in depreciation primarily results from the completion of the sale of our corporate headquarters in May 2021.

Other Expense, Net. Other expense, net was $7.4 million in 2021, $5.0 million in 2020 and $3.4 million in 2019. Other expense, net consists primarily of (a) our proportionate share of the loss from WorkLLama, LLC (WorkLLama), (b) an expense related to the termination of our SERP in 2021 and (c) interest expense related to outstanding borrowings under our credit facility.

During the years ended December 31, 2021 and 2020, we recognized $2.5 million and $1.7 million, respectively, related to our share of losses from WorkLLama and an expense of $1.8 million in 2021 related to the termination of our SERP. Refer to Note 13 - “Employee Benefit Plans” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the termination of our SERP.

Although the impact of the COVID-19 economic and health crisis remains highly uncertain, it could have a material adverse effect on the fair value of our equity method investment in WorkLLama. If the fair value falls below the book value of the equity method investment, we would be required to evaluate whether an other-than-temporary impairment has occurred. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion on our equity method investment.

Income Tax Expense. Income tax expense as a percentage of income from continuing operations, before income taxes (our “effective tax rate” for continuing operations) for the years ended December 31, 2021, 2020 and 2019 were 24.3%, 25.5% and 23.6%, respectively.

Income from Discontinued Operations, Net of Tax. During 2019, we completed the sale of the GS segment, which consisted of KGS and TraumaFX® Solutions, Inc. (“TFX”), our federal government product business. Kforce does not have significant continuing involvement in the operations of KGS or TFX after the sale and reported the GS segment as discontinued operations in the consolidated statements of operations for all years presented. Refer to Note 2 - “Discontinued Operations” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a more detailed discussion.

On April 1, 2019, Kforce completed the sale of all of the issued and outstanding stock of Kforce Government Holdings, Inc., including its wholly-owned subsidiary, KGS, to ManTech International Corporation for a cash purchase price of $115.0 million. Our gain on the sale of KGS, net of transaction costs, was $72.3 million. Total transaction costs were $9.6 million, which primarily includes legal and broker fees, transaction bonuses and accelerated stock-based compensation expense for KGS management triggered by a change in control of KGS.

On June 7, 2019, Kforce completed the sale of all of the issued and outstanding stock of TFX to an unaffiliated third party for a cash purchase price of $18.4 million less a post-closing working capital adjustment of $0.7 million. Our gain on the sale of TFX,

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net of transaction costs, was $7.0 million. Total transaction costs were $2.2 million, which primarily includes legal and broker fees and transaction bonuses. Due to the sale of TFX, we finalized the settlement of a contingent consideration liability related to the acquisition of TFX in 2014 and paid $0.6 million during the year ended December 31, 2020.

The effective tax rates for discontinued operations, including the gain on sale of discontinued operations, for the year ended December 31, 2019, was 4.4%. There was no activity relating to discontinued operations in 2021 or 2020. The GS effective tax rate for 2019 was low because of the minimal income tax obligation for the sale of KGS due to the efficient tax structure of the transaction.

Non-GAAP Financial Measures

Free Cash Flow. “Free Cash Flow”, a non-GAAP financial measure, is defined by Kforce as net cash provided by operating activities determined in accordance with GAAP, less capital expenditures. Management believes this provides an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and is useful information to investors as it provides a measure of the amount of cash generated from the business that can be used for strategic opportunities including investing in our business, repurchasing common stock, paying dividends or making acquisitions. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. Therefore, we believe it is important to view free cash flow as a complement to, but not as a replacement for, our Consolidated Statements of Cash Flows. Free cash flows include results from discontinued operations for the year ended December 31, 2019.

The following table presents Free Cash Flow (in thousands):

Adjusted EBITDA. “Adjusted EBITDA”, a non-GAAP financial measure, is defined by Kforce as net income before income from discontinued operations, net of tax, depreciation and amortization, gain on sale of corporate headquarters, stock-based compensation expense, interest expense, net, income tax expense, legal settlement expense, SERP termination expense and loss from equity method investment. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Items excluded from Adjusted EBITDA 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. Adjusted EBITDA is a key measure used by management to assess our operations including our ability to generate cash flows and our ability to repay our debt obligations. Management believes it is useful information to investors as it provides a good metric of our core profitability in comparing our performance to our competitors, as well as our performance over different time periods. The measure should not be considered in isolation or as an alternative to net income, cash flows or other financial statement information presented in the consolidated financial statements as indicators of financial performance or liquidity. The measure is not determined in accordance with GAAP and is susceptible to varying calculations, and as presented, may not be comparable to similarly titled measures of other companies.

In addition, although we excluded amortization of stock-based compensation expense because it is a non-cash expense, we expect to continue to incur stock-based compensation in the future and the associated stock issued may result in an increase in our outstanding shares of stock, which may result in the dilution of our shareholder ownership interest. We suggest that you evaluate these items and the potential risks of excluding such items when analyzing our financial position.

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The following table presents Adjusted EBITDA and includes a reconciliation of Adjusted EBITDA to net income (in thousands):

Adjusted EBITDA, for the year ended December 31, 2019, was negatively impacted by $2.0 million of severance and other costs due to actions taken as a result of the KGS divestiture.

LIQUIDITY AND CAPITAL RESOURCES

To meet our capital and liquidity requirements, we primarily rely on operating cash flow, as well as borrowings under our credit facility. At December 31, 2021 and 2020, we had $97.0 million and $103.5 million, respectively, in cash and cash equivalents, which consisted primarily of government money market funds. At December 31, 2021, Kforce had $211.7 million in working capital compared to $230.7 million at December 31, 2020.

Cash Flows

Our business has historically generated a significant amount of operating cash flows, which allows us to balance deploying available capital towards: (i) investing in our infrastructure to allow sustainable growth via capital expenditures; (ii) our dividend and share repurchase programs; and (iii) maintaining sufficient liquidity to complete acquisitions or other strategic investments.

The following table presents a summary of our net cash flows from operating, investing and financing activities (in thousands):

Our Consolidated Statements of Cash Flows are presented on a combined basis (continuing operations and discontinued operations). As previously discussed, the GS segment was sold and has been reflected as a discontinued operation for 2019.

The following table provides information for the total operating and investing cash flows for the GS segment (in thousands):

Operating Activities

Cash provided by operating activities was $72.9 million during the year ended December 31, 2021, as compared to $109.2 million during the year ended December 31, 2020. 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 associate and consultant compensation. The decrease was primarily driven by growth in our accounts receivable portfolio and the $19.0 million payment of payroll taxes in 2021 out of the $39 million that was deferred in 2020 related to the CARES ACT. This decline was partially offset by profitable revenue growth.

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Investing Activities

Cash provided by investing activities was $8.3 million during the year ended December 31, 2021, as compared to cash used in investing activities of $6.9 million during the year ended December 31, 2020. The aggregate year-over-year change of $15.2 million is due to $23.7 million in net proceeds from the sale of our corporate headquarters, which was partially offset by the receipt of proceeds from the sale of assets held within the Rabbi Trust of $3.5 million in 2020 and a $5 million increase in capital contributed to WorkLLama. We expect to continue selectively investing in our infrastructure, primarily focusing on implementing new and upgrading existing technologies that will provide the most benefit.

Financing Activities

Cash used in financing activities was $87.7 million during the year ended December 31, 2021, as compared to $18.6 million during the year ended December 31, 2020. The change was primarily driven by the $35.0 million draw down on our credit facility during the year ended December 31, 2020, and an increase in the repurchases of common stock and quarterly dividends during the year ended December 31, 2021 compared to 2020.

The following table presents the cash flow impact of the common stock repurchase activity for the years ended December 31 (in thousands):

During the years ended December 31, 2021, 2020 and 2019, Kforce declared and paid dividends of $20.1 million ($0.98 per share), $16.8 million ($0.80 per share) and $16.6 million ($0.72 per share), respectively.

On February 4, 2022, Kforce’s Board approved a 15% increase to the Company's quarterly dividend from $0.26 per share to $0.30 per share. The declaration, payment and amount of future dividends are discretionary and will be subject to determination by Kforce’s Board each quarter following its review of, among other things, the Firm’s current and expected financial performance as well as the ability to pay dividends under applicable law.

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, a material 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. 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 potential acquisitions and additional stock repurchases.

Credit Facility

On October 20, 2021, the Firm entered into an amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, as lead arranger and bookrunner, Bank of America, N.A., as syndication agent, BMO Harris Bank, N.A., as documentation agent, and the lenders referred to therein (the “Amended and Restated Credit Facility”). Under the Amended and Restated Credit Facility, the Firm has a maximum borrowing capacity of $200.0 million, which may, subject to certain conditions and the participation of the lenders, be increased up to an aggregate additional amount of $150.0 million. The maturity date of the Amended and Restated Credit Facility is October 20, 2026. Refer to Note 14 - “Credit Facility” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our Credit Facility. As of December 31, 2021, $100.0 million was outstanding and $98.7 million, subject to certain covenants, was available.

In April 2017 and March 2020, Kforce entered into two forward-starting interest rate swap agreements (the “Swaps”) to mitigate the risk of rising interest rates and the Swaps have been designated as a cash flow hedges. Refer to Note 15 - “Derivative Instrument and Hedging Activity” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the Swaps. As of December 31, 2021 and 2020, the fair value of the Swaps was an asset of $0.8 million and liability of $1.8 million, respectively.

Stock Repurchases

The following table presents the open market repurchase activity under the Board-authorized common stock repurchase program for the years ended December 31 (in thousands):

As of December 31, 2021, $30.1 million remained available for further repurchases under the Board-authorized common stock repurchase program. On February 4, 2022, the Board approved an increase in our stock repurchase authorization, bringing the total authorization to $100.0 million.

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Contractual Obligations

In addition to our discussion and analysis surrounding our liquidity and capital resources, consideration should also be given to significant contractual obligations:

•Our credit facility matures October 20, 2026 and, as of December 31, 2021, our outstanding debt balance was $100.0 million. Our interest rate as of December 31, 2021 was used to forecast the expected future interest rate payments. These payments, which are estimated to be $4.9 million, are inherently uncertain due to fluctuations in interest rates and outstanding borrowings that will occur over the remaining term of the credit facility. See Note 14, “Credit Facility” within our consolidated financial statements for further detail of our debt.

•We maintain various non-qualified deferred compensation plans pursuant to which eligible management and highly-compensated key employees may elect to defer all or part of their compensation to later years. As of December 31, 2021, the value of our obligation under these plans was $42.6 million. These amounts are included in the accompanying Consolidated Balance Sheets and classified as Accounts payable and other accrued liabilities and Other long-term liabilities, as appropriate, and are payable based upon the elections of the plan participants (e.g., retirement, termination of employment, change-in-control). Amounts payable upon the retirement or termination of employment may become payable during the next five years if covered employees schedule a distribution, retire or terminate during that time.

•Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2021, the value of our non-cancellable unconditional purchase obligations was $19.0 million.

•We have 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. At December 31, 2021, our liability would be approximately $36.9 million for terminations related to a change in control and $13.0 million related to terminations in the absence of good cause. See Note 18 ‘” Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information regarding our commitments related to employment agreements.

•We lease certain facilities and other properties under non-cancellable operating lease arrangements that expire at various dates through 2033. As of December 31, 2021, the value of our obligations under operating leases was $19.4 million. See Note 12, “Leases,” within our consolidated financial statements for further detail of our obligations and the timing of expected future payments, including a five-year maturity schedule.

•In September 2021, we entered into a lease agreement for office space in Tampa, Florida, which will become our new corporate headquarters. The new lease has not yet commenced, but will require aggregate future lease payments of approximately $10.9 million over the entire lease term, which includes annual upward adjustments, and has a non-cancellable lease term of 129 months, excluding renewal options. The new lease also provides for a tenant-improvement allowance from the landlord, of $1.6 million to be used towards costs to design, engineer, install, supply and to construct improvements. See Note 12, “Leases,” within our consolidated financial statements for further detail of our obligations and the timing of expected future payments.

Off-Balance Sheet Arrangements

Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2021, Kforce had letters of credit outstanding for operating lease and insurance coverage deposits totaling $1.3 million.

In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama, a newly formed LLC that is accounted for as an equity method investment. Refer to Note 1 - “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, which discusses a contingent obligation related to this equity method investment.

These off-balance sheet arrangements do not have a material impact on our liquidity or capital resources. These off-balance sheet arrangements do not provide financing, liquidity, market or credit risk support.

CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are discussed in Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report. Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our 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, revenues, 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 consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our 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. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make

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estimates about the effect of matters that are inherently uncertain. We have not made any material changes in our accounting methodologies used in prior years.

Equity Method Investment

Initial Investment

In June 2019, we entered into a joint venture whereby Kforce has a 50% noncontrolling interest in WorkLLama, which is accounted for as an equity method investment.

Impairment Assessment

We review the equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recognized in the event that an other-than-temporary decline in the fair value of the investment occurs. Management’s estimate of fair value of an investment is based on the income approach and/or market approach. For the income approach, we utilize estimated discounted future cash flows expected to be generated by WorkLLama. For the market approach, we utilize market multiples of revenue and earnings derived from comparable publicly-traded companies. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples. Changes in key assumptions about the financial condition of an investee or actual conditions that differ from estimates could result in an impairment charge.

Refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of our equity method investment.

Allowance for Credit Losses

Management performs an ongoing analysis of factors in establishing its allowance for doubtful accounts including recent write-off and delinquency trends, a specific analysis of significant receivable balances that are past due, the concentration of accounts receivable among clients and higher-risk sectors, and the current state of the U.S. economy. A 10% change in accounts reserved, at December 31, 2021, would have impacted our net income by approximately $0.2 million in 2021.

Accounting for Income Taxes

Our effective income tax rate is influenced by tax planning opportunities available to us in the various jurisdictions in which we conduct business. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions, including those that may be uncertain.

We are also required to exercise judgment with respect to the realization of our net deferred tax assets. Management evaluates positive and negative evidence and exercises judgment regarding past and future events to determine if it is more likely than not that all or some portion of the deferred tax assets may not be realized. If appropriate, a valuation allowance is recorded against deferred tax assets to offset future tax benefits that may not be realized. A 0.5% change in our effective tax rate would have impacted our net income by approximately $0.5 million in 2021.

Refer to Note 7 – “Income Taxes” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the components of our income tax expense, as well as the temporary differences that exist as of December 31, 2021.

Goodwill Impairment

Goodwill is tested at the reporting unit level which is generally an operating segment, or one level below the operating segment level, where a business operates and for which discrete financial information is available and reviewed by segment management. We evaluate goodwill for impairment annually or more frequently whenever events or circumstances indicate that the fair value of a reporting unit is below its carrying value. We monitor the existence of potential impairment indicators throughout the year. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.

When performing a quantitative assessment, we determine the fair value of our reporting units using widely accepted valuation techniques, including the discounted cash flow, guideline transaction and guideline company methods. These types of analyses contain uncertainties because they require management to make significant assumptions and judgments including: (1) an appropriate rate to discount the expected future cash flows; (2) the inherent risk in achieving forecasted operating results; (3) long-term growth rates; (4) expectations for future economic cycles; (5) market comparable companies and appropriate adjustments thereto; and (6) market multiples. When performing a qualitative assessment, we assess qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the reporting unit was less than its carrying amount.

Refer to Note 9 – “Goodwill” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a complete discussion of the valuation methodologies employed.

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Self-Insured Liabilities

We are self-insured for certain losses related to health insurance claims that are below insurable limits. However, we obtain third-party insurance coverage to limit our exposure to claims in excess of insurable limits. When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, plan structure, internal claims management activities, demographic factors and severity factors. Periodically, management reviews its assumptions to determine the adequacy of our self-insured liabilities.

Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate total cost to settle reported claims and claims incurred but not reported (“IBNR”) as of the balance sheet date. A 10% change in our self-insured liabilities related to health insurance, as of December 31, 2021, would have impacted our net income by approximately $0.5 million in 2021.

NEW ACCOUNTING STANDARDS

Refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this report, for a discussion of new accounting standards.