News Column

KFORCE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 27, 2014

This section is intended to help the reader understand Kforce, our operations, and our present business environment. 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.



This overview summarizes the MD&A, which includes the following sections:

Executive Summary - an executive summary of our results of operations for

2013. Critical Accounting Estimates - a discussion of the accounting estimates



that are most critical to fully understanding and evaluating our reported

financial results and that require management's most difficult, subjective

or complex judgments.



New Accounting Standards - a discussion of recently issued accounting

standards and their potential impact on our Consolidated Financial Statements.



Results of Operations - an analysis of Kforce's consolidated results of

operations for the three years presented in its 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 and contractual obligations and

commitments and the impact of changes in interest rates on our business.

On March 31, 2012, Kforce sold all of the issued and outstanding stock of KCR. See Note 2 - "Discontinued Operations" to the Notes to Consolidated Financial Statements, included in this annual report. The results presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012 and 2011 include activity relating to KCR as discontinued operations. Except as specifically noted, our discussions below exclude any activity related to KCR, which is addressed separately in the discussion of income from discontinued operations, net of income taxes. 22



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EXECUTIVE SUMMARY

The following is an executive summary of what Kforce believes are important 2013 highlights, which should be considered in the context of the additional discussions herein and in conjunction with the Consolidated Financial Statements and notes thereto. We believe such highlights are as follows:



Net service revenues increased 6.4% to $1.15 billion in 2013 from $1.08

billion in 2012. Net service revenues increased 9.4% for Tech, 1.7% for

FA, 1.5% for HIM, and 0.6% for GS. Flex revenues increased 6.6% to $1.10 billion in 2013 from $1.03 billion

in 2012.



Search revenues increased 2.5% to $48.9 million in 2013 from $47.7 million

in 2012.



Quarterly sequential revenues grew for three consecutive quarters, driving

Q4 revenue growth to 12.3% year over year. Flex gross profit margin increased 10 basis points to 29.1% in 2013 from



29.0% in 2012. Flex gross profit margin increased 30 basis points for Tech

and 270 basis points for GS and decreased 20 basis points for FA and 320

basis points for HIM year over year. SG&A as a percentage of revenues for the year ended December 31, 2013 was



28.1% compared to 29.8% in 2012. This decrease was primarily a result of

the acceleration of substantially all long-term incentive awards ("LTIs")

on March 31, 2012, which resulted in the acceleration of $31.3 million of

compensation expense and payroll taxes recorded in 2012. The reduction in

SG&A was partially offset by the investment in revenue generator headcount

in the fourth quarter of 2012 and throughout 2013 and the severance and

termination-related charge and Compensation Committee approved bonuses of

$7.1 million and $3.6 million, respectively, incurred during the fourth

quarter of 2013 as a result of the Firm's organizational realignment plan.

Net income from continuing operations of $10.8 million for 2013 increased



$46.5 million from a net loss from continuing operations of $35.7 million

in 2012. The results for 2013 include an after-tax goodwill impairment

charge of $9.3 million as well as the previously mentioned organizational

realignment charges. The results for 2012 include an after-tax goodwill

impairment charge of $44.5 million as well as the previously mentioned

acceleration of LTIs during 2012. Earnings per share from continuing operations for 2013 was $0.32 compared

to a loss per share of $1.00 per share in 2012.



During 2013, Kforce repurchased 1.8 million shares of common stock on the

open market at a total cost of approximately $27.3 million. The Firm amended its Credit Facility in December 2013 to increase borrowing capacity by $35.0 million to $135.0 million. The Firm initiated a quarterly dividend program and declared and paid a



cash dividend of $0.10 per share in the fourth quarter of 2013 resulting

in a payout in cash of $3.3 million. The total amount outstanding under the Credit Facility increased $41.6 million to $62.6 million as of December 31, 2013 as compared to $21.0 million as of December 31, 2012. 23



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CRITICAL ACCOUNTING ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("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, 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 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. Our significant accounting policies are discussed in Note 1 - "Summary of Significant Accounting Policies" to the Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. 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 estimates about the effect of matters that are inherently uncertain. Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Allowance for Doubtful Accounts, Fallouts and Other Accounts Receivable Reserves See Note 1 - "Summary of Kforce performs an ongoing We have not made any Significant Accounting analysis of factors material changes in the Policies" to the Notes to including recent write-off accounting methodology Consolidated Financial and delinquency trends, used to establish our Statements, included in changes in economic allowance for doubtful Item 8. Financial Statements conditions, a specific accounts, fallouts and and Supplementary Data of analysis of material other accounts this Annual Report on accounts receivable receivable reserves. As Form 10-K, for a complete balances that are past due, of December 31, 2013 and discussion of our policies and concentration of 2012, the allowance was related to determining our accounts receivable among 1.1% and 1.4% as a allowance for doubtful clients, in establishing percentage of gross accounts, fallouts and other its allowance for doubtful accounts receivable, accounts receivable accounts. respectively. reserves. Kforce estimates its We do not believe there allowance for Search is a reasonable fallouts based on our likelihood that there historical experience with will be a material the actual occurrence of change in the future fallouts. estimates or assumptions we use to calculate our Kforce estimates its allowance for doubtful reserve for future revenue accounts, fallouts and adjustments (e.g. bill rate other accounts adjustments, time card receivable reserves. adjustments, early pay However, if our discounts) based on our estimates regarding historical experience. estimated accounts receivable losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in actual accounts receivable losses reserved at December 31, 2013, would have impacted our net income for 2013 by approximately $0.1 million. 24



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Table of Contents Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Goodwill Impairment We evaluate goodwill for We determine the fair value For our Tech and FA impairment annually or more of our reporting units reporting units, Kforce frequently whenever events using widely accepted assessed the qualitative and circumstances indicate valuation techniques, factors of each that the carrying value of including discounted cash reporting unit to the goodwill may not be flow, guideline transaction determine if it was more recoverable. See Note 6 - method and guideline likely than not that the "Goodwill and Other company method. These types fair value of the Intangible Assets" to the of analyses contain reporting unit was less Notes to Consolidated uncertainties because they than its carrying Financial Statements, require management to make amount, including included in Item 8. significant assumptions and goodwill. Based upon the Financial Statements and judgments including: (i) an qualitative assessments, Supplementary Data of this appropriate rate to it was determined that Annual Report on Form 10-K discount the expected it was not more likely for a complete discussion of future cash flows, (ii) the than not that the fair the valuation methodologies inherent risk in achieving value of the reporting employed. forecasted operating units were less than the results, (iii) long-term carrying values. During the fourth quarter of growth rates, (iv) 2013, Kforce management made expectations for future For our HIM and GS a strategic business economic cycles, (v) market reporting units, decision with regard to the comparable companies and however, a quantitative GS segment, which is appropriate adjustments step one impairment ultimately expected to have thereto and (vi) market assessment was performed a negative impact on multiples. as of December 31, 2013. near-term growth prospects For the HIM reporting and result in a moderate It is our policy to conduct unit, the step one reduction in revenues and impairment testing based on analysis resulted in the profitability over the next our current business fair value exceeding the few years. As a result of strategy in light of carrying value of the strategic decision, we present industry and invested capital by believe there was a economic conditions, as $19.3 million, or 156%. triggering event during the well as future Due to the reductions in fourth quarter. In expectations. the forecasted revenues connection with our annual for the GS reporting assessment of goodwill unit, the step one impairment as of analysis indicated December 31, we performed a potential impairment as step one and step two the carrying value of analysis, which ultimately invested capital resulted in an impairment exceeded the fair value. charge of $14.5 million in our GS reporting unit. As a result of the potential impairment The carrying value of indication for the GS goodwill as of December 31, reporting unit, a step 2013 by reporting unit was two analysis was $17.0 million, $8.0 million, performed, resulting in $4.9 million and $19.0 a pre-tax impairment million for our Tech, FA, charge of $14.5 million HIM and GS reporting units, for the year ended respectively. December 31, 2013. A deterioration in the assumptions discussed in Note 6 - "Goodwill and Intangible Assets" to the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, could result in an additional impairment charge. 25



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Table of Contents Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Self-Insured Liabilities We are self-insured for Our self-insured We have not made any certain losses related to liabilities contain material changes in the health insurance and uncertainties because accounting methodologies workers' compensation management is required to used to establish our claims. However, we obtain make assumptions and to self-insured liabilities third-party insurance apply judgment to estimate during the past three coverage to limit our the ultimate total cost to fiscal years. exposure to these claims. settle reported claims and claims incurred but not We do not believe there When estimating our reported as of the balance is a reasonable self-insured liabilities, we sheet date. likelihood that there consider a number of will be a material factors, including change in the estimates historical claims or assumptions we use to experience, plan structure, calculate our internal claims management self-insured activities, demographic liabilities. However, if factors and severity actual results are not factors. Periodically, consistent with our management reviews its estimates or assumptions to determine the assumptions, we may be adequacy of our self-insured exposed to losses or liabilities. gains that could be material. Our liabilities for health insurance and workers' A 10% change in our compensation claims as of self-insured liabilities December 31, 2013 were $3.0 related to health million and $1.7 million, insurance and workers' respectively. compensation as of December 31, 2013 would have impacted our net income for 2013 by approximately $0.3 million. Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Stock-Based Compensation We have stock-based Restricted stock which We do not believe there compensation programs, which contain a market vesting is a reasonable include options, stock condition require likelihood that there appreciation rights ("SARs") management to make will be a material and unvested share awards assumptions regarding the change in the future and an employee stock likelihood of achieving estimates or assumptions purchase plan. See Note 1 - market conditions during we use to determine "Summary of Significant the vesting period, which stock-based compensation Accounting Policies," Note are inherently difficult to expense. However, if 12 - "Employee Benefit estimate but are modeled actual results are not Plans," and Note 14 - "Stock using a Monte Carlo consistent with our Incentive Plans" to the simulation model. The stock estimates or Notes to Consolidated compensation expense assumptions, we may be Financial Statements, recorded is impacted by our exposed to changes in included in Item 8. estimated forfeiture rates, stock-based compensation Financial Statements and which are based on expense that could be Supplementary Data of this historical employee material or the Annual Report on Form 10-K turnover. stock-based compensation for a complete discussion of expense reported in our our stock-based compensation financial statements may programs. not be representative of the actual economic cost We have not granted any of the stock-based stock options or SARs over compensation. the last three years. We determine the fair market A 10% change in value of our restricted unrecognized stock-based stock based on the closing compensation expense stock price of Kforce's would have impacted our common stock on the date of net income by $0.5 grant. We utilize a Monte million for 2013. Carlo model to determine the derived service period for any restricted stock which contain a market vesting condition. 26



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Table of Contents Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Defined Benefit Pension Plan - U.S. We have a defined benefit When estimating the We do not believe there pension plan that benefits obligation for our pension is a reasonable certain named executive and postretirement benefit likelihood that there officers, the Supplemental plans, management is will be a material Executive Retirement Plan required to make certain change in the estimates ("SERP") and a defined assumptions and to apply or assumptions we use to benefit postretirement judgment with respect to calculate our health plan, the determining an appropriate obligation. However, if Supplemental Executive discount rate, bonus actual results are not Retirement Health Plan percentage assumptions, consistent with our ("SERHP"). See Note 12 - expected health care and estimates or "Employee Benefit Plans" to premium cost trends, assumptions, we may be the Notes to Consolidated applicability of health exposed to losses or Financial Statements care regulations and gains that could be included in Item 8. expected future material. Financial Statements and compensation increases for Supplementary Data of this the participants in the A 10% change in the Annual Report on Form 10-K plans, as they apply to our discount rate used to for a complete discussion of plans. measure the net periodic the terms of these plans. pension cost for the SERP and SERHP during Neither the SERP or SERHP 2013 would have had an were funded as of insignificant impact on December 31, 2013 or 2012. our net income for 2013. Effect if Actual Results Description Judgments and Uncertainties Differ From Assumptions Accounting for Income Taxes See Note 4 - "Income Taxes" Our consolidated effective We do not believe that to the Notes to Consolidated income tax rate is there is a reasonable Financial Statements, influenced by tax planning likelihood that there included in Item 8. opportunities available to will be a material Financial Statements and us in the various change in our liability Supplementary Data of this jurisdictions in which we for uncertain income tax Annual Report on Form 10-K conduct business. positions or our for a complete discussion of Significant judgment is effective income tax the components of Kforce's required in determining our rate. However, if actual income tax expense as well effective tax rate and in results are not as the temporary differences evaluating our tax consistent with our that exist as of positions, including those estimates or December 31, 2013. that may be uncertain. assumptions, we may be exposed to losses that Kforce is also required to could be material. exercise judgment with Kforce recorded a respect to the realization valuation allowance of of our net deferred tax $0.1 million as of assets. Management December 31, 2013 evaluates all positive and related primarily to negative evidence and state net operating exercises judgment losses. regarding past and future events to determine if it A 0.50% change in our is more likely than not effective income tax that all or some portion of rate from continuing the deferred tax assets may operations would have not be realized. If impacted our net income appropriate, a valuation for 2013 by allowance is recorded approximately $0.1 against deferred tax assets million. to offset future tax benefits that may not be realized. 27



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NEW ACCOUNTING STANDARDS

In July 2013, the FASB issued authoritative guidance regarding presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is to be applied for annual reporting periods beginning on or after December 15, 2013, and interim periods within those annual periods. Kforce does not expect the adoption of this guidance to have a material impact on its future consolidated financial statements. RESULTS OF OPERATIONS Net service revenues for the years ended December 31, 2013, 2012 and 2011 were $1.15 billion, $1.08 billion and $1.00 billion, respectively, which represents an increase of 6.4% from 2012 to 2013 and 7.7% from 2011 to 2012. The increase in 2013 from 2012 was primarily due to our Tech segment which had an increase in net service revenues of 9.4% and represented 64.2% of our total net service revenues in 2013. The increase in 2012 from 2011 was primarily due to our Tech and FA segments, which had increases in net service revenues of 8.3% and 8.6%, respectively and represented 62.4% and 22.0%, respectively, of our net service revenues in 2012. In addition, net service revenues for HIM increased 1.5% in 2013 from 2012 and 12.1% in 2012 from 2011. Our GS segment net service revenues increased 0.6% in 2013 from 2012 and decreased 1.1% in 2012 from 2011. Search revenues increased 2.5% in 2013 compared to 2012 and 9.6% in 2012 compared to 2011. Flex gross profit margins increased 10 basis points to 29.1% for the year ended December 31, 2013 from 29.0% for the year ended December 31, 2012. Flex gross profit margins increased from 28.5% for the year ended December 31, 2011 to 29.0% for the year ended December 31, 2012 due primarily to an increase in the spread between our bill and pay rates. SG&A expenses as a percentage of net service revenues were 28.1% and 29.8% for the years ended December 31, 2013 and 2012, respectively. The decrease in SG&A expenses as a percentage of net service revenues during the year ended December 31, 2013 was primarily a result of the acceleration of substantially all of the outstanding and unvested restricted stock and ALTI awards on March 31, 2012, which resulted in the acceleration of $31.3 million of compensation expense and payroll taxes recorded during the three months ended March 31, 2012. The decrease in 2013 was partially offset by the investment in revenue generator headcount additions during the fourth quarter of 2012 and throughout 2013 and severance and termination-related charges of $7.1 million incurred during the fourth quarter of 2013 as a result of the Firm's organizational realignment plan. Additionally, during the years ended December 31, 2013 and 2012, Kforce recorded a goodwill impairment charge in the amount of $14.5 million and $69.2 million, respectively, in our GS reporting unit. In 2013, the goodwill impairment charge was a result of a business strategy decision made during the fourth quarter regarding the GS reporting unit, to focus its service offerings and efforts on prime integrated business solution services. As a result of the change in focus, management plans to reallocate existing investments in the business and redirect the business development team to concentrate on a more specific and, in our opinion, a higher quality revenue stream. These plans will ultimately result in the transition away from certain existing revenue streams, specific revenue-generating contracts and opportunities in the business development life cycle that do not fit within the revised strategic scope of service offerings, including pure staff augmentation as well as product sales. We expect that the change in strategy, coupled with the lengthy contract procurement cycle within the government sector of approximately 18 months for solution-based contracts, will have a negative impact on near-term growth prospects of the GS segment and that GS will experience a moderate reduction in revenues and profitability over the next few years. This reduction in the forecast was the primary driver for the impairment charge during the fourth quarter of 2013. During 2012, the goodwill impairment charge was the result of the adverse effect of the unexpected significant delays in the start-up of already executed and funded projects, uncertainty of funding levels of various Federal Government programs and agencies and the increasingly uncertain macro-economic and political environment. From an economic standpoint, temporary employment figures and trends are important indicators of staffing demand, which improved during 2013 as compared to 2012 based on data published by the BLS. Total temporary employment increased 9.6% and the penetration rate (the percentage of temporary staffing to total employment) increased 8.4% from December 2012 to December 2013, bringing the rate to 2.06% in December 2013, an all-time high. While the macro-employment picture remains uncertain, it has continuously improved, with the unemployment rate at 6.7% as of December 2013, and non-farm payroll expanding an average of 182,000 jobs per month in 2013. Also, the college-level unemployment rate, which serves as a proxy for professional employment and is more closely aligned with the Firm's business strategy, was at 3.3% in December 2013. Kforce believes that uncertainty in the overall U.S. economic outlook related to the political landscape, potential tax changes, geo-political risk and impact of health care reform, will continue to fuel growth in temporary staffing as employers may be reluctant to increase full-time hiring. If the penetration rate of temporary staffing continues to experience growth in the coming years, 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. 28



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During 2013 and over the last few years, we have undertaken several significant initiatives including: (i) executing a realignment plan to streamline our leadership and revenue enablers in an effort to better align a higher percentage of roles closer to the customer; (ii) increasing our focus on consultant care processes and communications to redeploy our consultants in a timely fashion; (iii) increasing revenue generator headcount to capitalize on targeted growth opportunities; (iv) further optimizing our NRC team in support of our field operations; (v) upgrading our corporate systems with a focus on business intelligence, compensation management, job order prioritization and the development of mobile applications; (vi) focusing on process improvement, centralization and technology infrastructure and (vii) divesting KCR in March 2012 in an attempt to enhance Kforce's focus on our core service offerings. We believe our realigned field operations and back office 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 primarily in the U.S., are also a key contributor to our long-term financial stability. Net Service Revenues. The following table sets forth, as a percentage of net service revenues, certain items in our consolidated statements of operations and comprehensive income (loss) for the years ended: December 31, 2013 2012 2011 Revenues by Segment: Tech 64.2 % 62.4 % 62.1 % FA 21.0 22.0 21.9 HIM 6.8 7.1 6.8 GS 8.0 8.5 9.2 Net service revenues 100.0 % 100.0 % 100.0 % Revenues by Type: Flex 95.8 % 95.6 % 95.7 % Search 4.2 4.4 4.3 Net service revenues 100.0 % 100.0 % 100.0 % Gross profit 32.1 % 32.1 % 31.6 % Selling, general and administrative expenses 28.1 % 29.8 % 27.3 % Goodwill impairment 1.3 % 6.4 % - Depreciation and amortization 0.9 % 1.0 % 1.2 % Income (loss) from continuing operations, before income taxes 1.7 % (5.1 )% 3.0 % Income (loss) from continuing operations 0.9 % (3.3 )% 1.9 % Net income (loss) 0.9 % (1.3 )% 2.7 % 29



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The following table details net service revenues for Flex and Search revenues by segment and changes from the prior year.

Increase Increase (in $000's) 2013 (Decrease) 2012 (Decrease) 2011 Tech Flex $ 720,179 9.9 % $ 655,062 8.1 % $ 606,238 Search 19,183 (6.5 %) 20,525 15.5 % 17,774 Total Tech $ 739,362 9.4 % $ 675,587 8.3 % $ 624,012 FA Flex $ 213,158 0.6 % $ 211,797 9.0 % $ 194,359 Search 29,259 9.7 % 26,679 5.8 % 25,216 Total FA $ 242,417 1.7 % $ 238,476 8.6 % $ 219,575 HIM Flex $ 77,745 1.6 % $ 76,517 12.2 % $ 68,181 Search 414 (12.8 )% 475 (10.4 )% 530 Total HIM $ 78,159 1.5 % $ 76,992 12.1 % $ 68,711 GS Flex $ 91,949 0.6 % $ 91,424 (1.1 )% $ 92,449 Search - - - - - Total GS $ 91,949 0.6 % $ 91,424 (1.1 )% $ 92,449 Total Flex $ 1,103,031 6.6 % $ 1,034,800 7.7 % $ 961,227 Total Search 48,856 2.5 % 47,679 9.6 % 43,520 Total Net Service Revenues $ 1,151,887 6.4 % $ 1,082,479 7.7 % $ 1,004,747 While quarterly comparisons are not fully discussed herein, certain quarterly revenue trends are referred to in discussing annual comparisons. Our quarterly operating results are affected by the number of billing days in a quarter, which is provided in the table below. The following 2013 quarterly information is presented for informational purposes only. Three Months Ended (in $000's, except Billing Days) December 31 September 30 June 30 March 31 Billing Days 62 64 64 63 Flex Revenues Tech $ 193,238$ 188,888$ 175,213$ 162,840 FA 55,552 54,791 52,954 49,861 HIM 20,678 19,602 18,921 18,544 GS 21,695 24,127 23,297 22,830 Total Flex $ 291,163$ 287,408$ 270,385$ 254,075 Search Revenues Tech $ 4,338$ 4,694$ 5,356$ 4,795 FA 7,238 7,456 7,900 6,665 HIM 180 94 48 92 Total Search $ 11,756$ 12,244$ 13,304$ 11,552 Total Revenues Tech $ 197,576$ 193,582$ 180,569$ 167,635 FA 62,790 62,247 60,854 56,526 HIM 20,858 19,696 18,969 18,636 GS 21,695 24,127 23,297 22,830 Total Revenues $ 302,919$ 299,652$ 283,689$ 265,627 30



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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. Flex revenues for our largest segment, Tech, increased 9.9% during the year ended December 31, 2013 as compared to 2012 and increased 8.1% in 2012 from 2011. We believe the increase in revenue is primarily a result of candidate skill sets that are in demand, our great people and operating model, and our increase in revenue generator headcount. According to an IT growth update published by SIA during the fourth quarter of 2013, industries that utilized IT staffing are estimated to grow at a higher rate than the overall U.S. employment growth rate. SIA estimates the IT staffing market will grow 7% in 2014, 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 an increasing influence of technology, and an increasing influence of technology in business driving up the overall 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. In an effort to take advantage of this continued expected growth, revenue generator headcount focused on Tech was significantly increased year-over-year. Kforce's operating model includes our NRC, which we believe has been highly effective in increasing the quality and speed of delivery of services to our clients. We continue to believe that our operating model allows us to deliver our service offerings in a disciplined and consistent manner across all geographies and business lines. Our FA segment experienced an increase in Flex revenues of 0.6% during the year ended December 31, 2013 as compared to 2012, which was a deceleration from the increase of 9.0% during the year ended December 31, 2012 as compared to 2011. According to an update in September 2013 from SIA, the finance and accounting growth estimate for 2013 was lowered to 2% as a result of headwinds within the industry but the U.S. market for temporary finance and accounting workers is expected to grow 5% in 2014 as the overall economy gains momentum. Management believes the benefit from the significant investment in the revenue generator headcount for FA made in 2012 and 2013 will be realized in 2014 through the capture of the expected growth in the FA industry as a result of improvements in associate productivity that typically come with tenure. HIM Flex revenues increased 1.6% during the year ended December 31, 2013 compared to 2012 and increased 12.2% during the year ended December 31, 2012 compared to 2011. The increase in 2013 is partially attributable to the required implementation of ICD-10 by October 1, 2014. The increase in revenues from ICD-10 was partially offset by a reduction in spending by customers as a result of increased healthcare reimbursement regulations. We expect ICD-10 to continue contributing to the growth of HIM service revenues throughout 2014. Our GS segment experienced an increase in net service revenues of 0.6% during the year ended December 31, 2013 as compared to 2012 and decreased 1.1% during the year ended December 31, 2012 as compared to 2011. The slight growth in 2013 was primarily related to the expansion of revenues with existing GS customers in addition to the ramping of new government contract wins through the third quarter, partially offset by delays in certain government contracts during the fourth quarter due to the government shutdown. We expect 2014 revenues to decline over 2013 as a result of the aforementioned strategic decision made by Kforce management with regard to the GS reporting unit to focus its service offerings and efforts on prime integrated business solution services. The following table details total Flex hours for our Tech, FA and HIM segments and percentage changes over the prior period for the years ended December 31: Increase Increase (in 000's) 2013 (Decrease) 2012 (Decrease) 2011 Tech 10,929 9.0 % 10,023 4.2 % 9,615 FA 6,550 3.1 % 6,352 10.8 % 5,731 HIM 1,168 2.6 % 1,138 7.3 % 1,061 Total hours 18,647 6.5 % 17,513 6.7 % 16,407



As the GS segment primarily provides solutions-based services as compared to staffing services, Flex hours are not presented above.

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The changes in billable expenses, which are included as a component of net services revenues, are primarily attributable to increases or decreases in project-based work. Flex billable expenses for each of our segments were as follows for the years ended December 31:

Increase Increase (in $000's) 2013 (Decrease) 2012 (Decrease) 2011 Tech $ 5,630 (22.0 )% $ 7,222 58.0 % $ 4,571 FA 423 (19.7 )% 527 (17.8 )% 641 HIM 5,245 (17.8 )% 6,381 7.2 % 5,955 GS 348 (37.4 )% 556 (34.7 )% 852 Total billable expenses $ 11,646 (20.7 )% $ 14,686 22.2 % $ 12,019 Search Fees. The primary drivers of Search fees are the number of placements and the average placement fee. Search 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.



Search revenues increased 2.5% during the year ended December 31, 2013 as compared to 2012 and increased 9.6% during the year ended December 31, 2012 as compared to 2011. We expect the slight growth in Search to continue in 2014.

Total placements for each segment were as follows for the years ended December 31: Increase Increase 2013 (Decrease) 2012 (Decrease) 2011 Tech 1,222 (7.2 )% 1,317 8.7 % 1,212 FA 2,449 19.8 % 2,044 2.1 % 2,001 HIM 23 (42.5 )% 40 (45.2 )% 73 Total placements 3,694 8.6 % 3,401 3.5 % 3,286 The average fee per placement for each segment was as follows for the years ended December 31: Increase Increase 2013 (Decrease) 2012 (Decrease) 2011 Tech $ 15,695 0.8 % $ 15,577 6.2 % $ 14,665 FA 11,946 (8.5 )% 13,051 3.5 % 12,605 HIM 17,990 49.6 % 12,029 65.6 % 7,264 Total average placement fee $ 13,224 (5.7 )% $ 14,017 5.8 % $ 13,244 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 subcontractor costs) from net Flex service revenues. In addition, consistent with industry practices, gross profit dollars from Search fees are equal to revenues, because there are generally no direct costs associated with such revenues.



The following table presents, for each segment, the gross profit percentage (gross profit as a percentage of revenues) for the year as well as the increase or decrease over the preceding period, as follows:

Increase Increase 2013 (Decrease) 2012 (Decrease) 2011 Tech 29.7 % - 29.7 % 1.4 % 29.3 % FA 38.6 % 1.0 % 38.2 % 2.1 % 37.4 % HIM 32.3 % (9.0 )% 35.5 % (0.3 )% 35.6 % GS 34.1 % 8.6 % 31.4 % 2.3 % 30.7 % Total gross profit percentage 32.1 % - 32.1 % 1.6 % 31.6 % 32



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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 bill rate and pay rate for Flex. The increase in Search gross profit from 2012 to 2013 was $1.2 million, composed of a $3.9 million increase in volume, offset by a $2.7 million decrease in rate. The increase in Search gross profit from 2011 to 2012 was $4.2 million, composed of a $1.6 million increase in volume and a $2.6 million increase in rate.



The following table presents, for each segment, the Flex gross profit percentage for the years ended December 31:

Increase Increase 2013 (Decrease) 2012 (Decrease) 2011 Tech 27.8 % 1.1 % 27.5 % 1.1 % 27.2 % FA 30.2 % (0.7 )% 30.4 % 4.1 % 29.2 % HIM 31.9 % (9.1 )% 35.1 % 0.0 % 35.1 % GS 34.1 % 8.6 % 31.4 % 2.3 % 30.7 % Total Flex gross profit percentage 29.1 % 0.3 % 29.0 % 1.8 % 28.5 % The increase in Flex gross profit from 2012 to 2013 was $20.5 million, composed of a $19.8 million increase in volume and a $0.7 million increase in rate. The increase in Flex gross profit from 2011 to 2012 was $26.0 million, composed of a $21.0 million increase in volume and a $5.0 million increase in rate. The increase in Flex gross profit percentage of 10 basis points in 2013 from 2012 was primarily driven by the improvement in the spread between our bill rates and pay rates predominately within our GS segment. This improvement was partially offset by a decrease in the Flex gross profit in our HIM segment which was primarily related to investments we are making to retain and train consultants in preparation for future ICD-10 related opportunities. A continued focus for Kforce is to optimize 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. We anticipate that Flex gross profit margins will remain flat in 2014 as compared to 2013 as we balance improvement in the spread between our bill rates and pay rates with capturing market demand. Selling, General and Administrative ("SG&A") Expenses. For the years ended December 31, 2013, 2012 and 2011, total commissions, compensation, payroll taxes, and benefit costs as a percentage of SG&A represented 85.2%. 86.2%, and 87.4%, respectively. Commissions and related payroll taxes and benefit costs are variable costs driven primarily by revenues and gross profit levels, and associate performance. Therefore, as gross profit levels change, these expenses are also generally 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 years ended December 31:

% of % of % of (in $000's) 2013 Revenues 2012 Revenues 2011 Revenues Compensation, commissions, payroll taxes and benefits costs $ 275,881 24.0 % $ 277,851 25.7 % $ 239,457 23.8 % Other 48,052 4.1 44,585 4.1 34,615 3.5 Total SG&A $ 323,933 28.1 % $ 322,436 29.8 % $ 274,072 27.3 %



SG&A as a percentage of net service revenues decreased 170 basis points in 2013 compared to 2012. This was primarily attributable to the following:

Decrease in compensation, commissions, payroll taxes and benefits cost of

1.7% of net service revenues, which was primarily related to the

discretionary acceleration of substantially all of the outstanding and

unvested restricted stock and ALTI awards on March 31, 2012. This resulted in

incremental compensation expense of $31.3 million, including payroll taxes,

that was recorded during the first quarter of 2012. This decrease was

partially offset by the impact of the revenue generator headcount additions

in 2012 and 2013, as well as the Firm's execution of a realignment plan

during the fourth quarter of 2013. 33



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As mentioned above, the Firm executed an organizational realignment plan, whereby we streamlined the Firm's leadership and revenue enablers to align a higher percentage of roles closer to the customer. During the fourth quarter, the Firm incurred severance and termination-related charges of $7.1 million as a result of the plan. Additionally, in connection with the realignment and succession planning, the Compensation Committee approved a discretionary bonus of $3.6 million paid to a broad group of senior management during the fourth quarter of 2013. The new alignment has resulted in more significant focus on our revenue generating activities and more streamlined processes and tools that enable us to simplify and improve how we do business with our clients and consultants. Additionally, we believe that this organizational realignment could positively impact our operating margins in 2014.



SG&A as a percentage of net service revenues increased 250 basis points in 2012 compared to 2011. This was primarily attributable to the following:

Increase in compensation and benefits cost of 2.0% of net service revenues,

which was primarily related to an increase in stock-based compensation

expense and related payroll taxes for the acceleration of the vesting for

substantially all of the outstanding and unvested restricted stock and ALTI

awards on March 31, 2012. This resulted in compensation expense of $31.3

million, including payroll taxes, being recorded during the three months

ended March 31, 2012.



Decrease in commission expense of 0.2% of net service revenues, which was

primarily attributable to a decrease in the estimated annual effective

commission rate due to certain changes made to our compensation plans. This

decrease was partially offset by the increase in the average revenue generator headcount during 2012 as compared to 2011.



Increase in bad debt expense of 0.3% of net service revenues, which was

primarily attributable to (i) an increased level of write-offs in the first

half of 2012 as compared to 2011 and (ii) a reduction in the allowance for doubtful accounts during 2011 due to positive collection trends.



Increase in professional fees of 0.2% of net service revenues as compared to

2011 due to an additional investment in compliance-related activities.

Goodwill Impairment. As discussed above, Kforce management made a strategic business decision during the fourth quarter of 2013 with regard to the GS reporting unit to focus its service offerings and efforts on prime integrated business solution services. As a result of the change in focus, management plans to reallocate existing investments in the business and redirect the business development team to concentrate on a more specific and, in our opinion, a higher quality revenue stream. These plans will ultimately result in the transition away from certain existing revenue streams, specific revenue-generating contracts and opportunities in the business development life cycle that do not fit within the revised strategic scope of service offerings, including pure staff augmentation as well as product sales. This change in strategy, coupled with the lengthy contract procurement cycle within the government sector of approximately 18 months for solutions-based services, led us to expect negative impacts on near-term growth prospects of the GS segment and reductions in revenues and profitability over the next few years. We believe these circumstances resulted in a possible impairment trigger during the fourth quarter, which was assessed in conjunction with the Firm's annual goodwill impairment analysis as of December 31, 2013. The step one analysis for the GS reporting unit resulted in the carrying value of invested capital exceeding the fair value of the GS reporting unit, primarily due to the reduction in the forecast. As a result, Kforce performed a step two goodwill impairment test for its GS reporting unit which ultimately resulted in Kforce recording an impairment charge of approximately $14.5 million, with a related tax benefit of approximately $5.2 million, during the fourth quarter of 2013. During 2012, Kforce took an impairment charge on the GS reporting unit goodwill in the amount of $69.2 million, as previously discussed. Goodwill allocated to the GS reporting unit was $19.0 million and $33.5 million as of December 31, 2013 and 2012, respectively.



A deterioration in the assumptions discussed in Note 6 - "Goodwill and Intangible Assets" to the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, could result in an additional impairment charge.

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Depreciation and Amortization. The following table presents depreciation and amortization expense by major category for the years ended December 31, 2013, 2012 and 2011 as well as the increases (decreases) experienced during 2013 and 2012: Increase Increase (in $000's) 2013 (Decrease) 2012 (Decrease) 2011 Fixed asset depreciation $ 4,325 16.7 % $ 3,706 (11.7 )% $ 4,197 Capital lease asset depreciation 1,538 (7.5 ) 1,662 2.0 1,629 Capitalized software amortization 3,236 (28.3 ) 4,514 (18.3 ) 5,527 Intangible asset amortization 747 (17.6 ) 907 (21.3 ) 1,152 Total depreciation and amortization $ 9,846 (8.7 )% $ 10,789 (13.7 )% $ 12,505 Fixed Asset Depreciation: The $0.6 million increase in 2013 is primarily the result of the leasehold improvement additions made during 2013. The $0.5 million decrease in 2012 is primarily the result of certain assets becoming fully depreciated during early 2012.



Capitalized Software Amortization: The $1.3 million decrease in 2013 is primarily the result of several significant capitalized software balances becoming fully amortized during 2013. The $1.0 million decrease in 2012 is related to software becoming fully amortized during 2012.

Other Expense, Net. Other expense, net was $1.2 million in 2013, $1.1 million in 2012, and $1.3 million in 2011, and consists primarily of interest expense related to Kforce's Credit Facility.

Income Tax Expense (Benefit). For the year ending December 31, 2013, income tax expense as a percentage of income before income taxes (our "effective rate") was 46.3%, which was impacted by the partially non-deductible goodwill impairment charge and certain other non-deductible expenses. For the year ending December 31, 2012, income tax benefit as a percentage of loss before income taxes (our "effective rate") was 35.7%. The income tax benefit for 2012 was primarily related to tax benefits associated with the partially deductible goodwill impairment charge taken in 2012. For the year ending December 31, 2011, income tax expense as a percentage of income before income taxes was 36.3%. Income from Discontinued Operations, Net of Income Taxes. Discontinued operations for each of the years ended December 31, 2012 and 2011 includes the consolidated income and expenses of KCR. During the three months ended March 31, 2012, Kforce completed the sale of KCR resulting in a pre-tax gain, including adjustments, of $36.4 million. Included in the determination of the pre-tax gain is approximately $5.5 million of goodwill and transaction expenses totaling approximately $2.2 million, which primarily included commissions, legal fees and transaction bonuses. Income tax expense as a percentage of income from discontinued operations, before income taxes, for the year ended December 31, 2012 and 2011 were 44.6% and 39.5%, respectively. The increase in the effective income tax rate of discontinued operations during the year ended December 31, 2012 is primarily related to the partially deductible nature of the goodwill impairment charge of $5.5 million. 35



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Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure, is defined by Kforce as net (loss) income before discontinued operations, goodwill impairment (pre-tax) charges, interest, income taxes, depreciation and amortization and amortization of stock-based compensation expense. 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 evaluate its operations including its ability to generate cash flows and, consequently, management believes this is useful information to investors. 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 thus susceptible to varying calculations. Also, Adjusted EBITDA, 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 we may have previously 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 results and includes a reconciliation of Adjusted EBITDA to net income for the years ended December 31: (in $000's) except per share amounts Years Ended December 31, 2013 Per Share 2012 Per Share 2011 Per Share Net income (loss) $ 10,787$ 0.32$ (13,703 )$ (0.38 )$ 27,156$ 0.70 Income from discontinued operations, net of income taxes - - 22,009 0.62 8,100 0.21 Income (loss) from continuing operations $ 10,787$ 0.32$ (35,712 )$ (1.00 )$ 19,056$ 0.49 Goodwill impairment, pre-tax 14,510 0.43 69,158 1.93 - - Depreciation and amortization 9,846 0.29 10,789 0.30 12,505 0.32 Amortization of restricted stock 2,570 0.08 25,688 0.72 11,819 0.30 Interest expense and other 1,290 0.04 994 0.03 1,272 0.04 Income tax (benefit) expense 9,311 0.28 (19,854 ) (0.55 ) 10,858 0.28 Earnings per share adjustment (1) - - - (0.01 ) - - Adjusted EBITDA $ 48,314$ 1.44$ 51,063$ 1.42$ 55,510$ 1.43



(1) This earnings per share adjustment is necessary to properly reconcile net

loss per share on a GAAP basis to Adjusted EBITDA per share. 36



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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 December 31, 2013, Kforce had $112.9 million in working capital compared to $72.7 million in 2012. Kforce's current ratio (current assets divided by current liabilities) was 2.3 at the end of 2013 and 1.7 at the end of 2012. The increase in working capital was primarily due to increases in the accounts receivable and the income tax receivable. Please see the accompanying Consolidated Statements of Cash Flows for each of the three years ended December 31, 2013, 2012 and 2011 in Item 8. Financial Statements and Supplementary Data for a more detailed description of our cash flows. Kforce is principally focused on achieving the appropriate balance in the following areas of cash flow: (i) achieving positive cash flow from operating activities; (ii) returning capital to our shareholders through our dividend program; (iii) reducing the outstanding balance of our Credit Facility; (iv) repurchasing our common stock; (v) investing in our infrastructure to allow sustainable growth via capital expenditures; and (vi) 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, cash flow, liquidity and the ability of our lenders to fund borrowings. There is no assurance that: (i) our lenders will be able to fund our borrowings or (ii) 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 and dividends.

The following table presents a summary of our cash flows from operating, investing and financing activities, as follows:

Years Ended December 31, (in $000's) 2013 2012 2011 Cash provided by (used in): Operating activities $ 465$ 55,978$ 31,240 Investing activities (8,547 ) 52,405 (10,090 ) Financing activities 7,576 (107,941 ) (21,266 ) Net (decrease) increase in cash and cash equivalents $ (506 )$ 442$ (116 ) Discontinued Operations As was previously discussed, Kforce divested KCR on March 31, 2012. The accompanying consolidated statements of cash flows have been presented on a combined basis (continuing operations and discontinued operations). 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 in 2013 are principally related to adjustments to net income for certain non-cash charges such as depreciation and amortization expense and stock-based compensation as well as the goodwill impairment charge. These adjustments are more fully detailed in our Consolidated Statements of Cash Flows for the three years ended December 31, 2013 in Item 8. Financial Statement and Supplementary Data. When comparing cash flows from operating activities for the years ended December 31, 2013, 2012 and 2011, the primary drivers of cash inflows and outflows are net trade receivables and accounts payable. The decrease in cash provided by operating activities in 2013 compared to 2012 is a result of the increase in account receivable due to the timing of collections. 37



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Investing Activities

Capital expenditures have been made over the years on Kforce's infrastructure to support the growth in our business. Capital expenditures during 2013, 2012 and 2011, which exclude equipment acquired under capital leases, were $8.1 million, $5.8 million and $6.5 million, respectively.



Effective March 31, 2012, Kforce sold all of the issued and outstanding stock of KCR for a purchase price of $50.0 million plus a $7.3 million post-closing working capital adjustment. Proceeds from the divestiture of KCR were $55.4 million, net of transaction costs, during the year ended December 31, 2012.

We expect to continue to selectively invest in our infrastructure in order to support the expected future growth in our business. Kforce believes it has sufficient cash and availability under its Credit Facility to make any expected necessary capital expenditures in the foreseeable future. In addition, we continually review our portfolio of businesses and their operations in comparison to our internal strategic and performance objectives. As part of this review, we may acquire other businesses and further invest in, fully divest and/or sell parts of our current businesses.



Financing Activities

During 2013, Kforce repurchased common stock totaling $29.8 million, which was comprised of approximately $27.3 million of open market common stock repurchases and common stock repurchases attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards, and the settlement of approximately $2.5 million of common stock repurchases from the fourth quarter of 2012. During 2012, Kforce repurchased common stock totaling $44.4 million, which included open market repurchases of common stock of approximately $28.9 million and repurchases of common stock attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards of approximately $15.5 million. In 2011, repurchases of common stock were $59.6 million, which included open market repurchases of common stock of approximately $58.1 million and repurchases of common stock attributable to shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards of approximately $1.5 million. During the fourth quarter of 2013, Kforce declared and paid a cash dividend of $3.3 million, or $0.10 per share. During the fourth quarter of 2012, Kforce declared and paid a special cash dividend of $35.2 million, or $1.00 per share. We currently expect to continue to declare and pay quarterly dividends of an amount similar to our December 2013 dividend of $0.10 per share. However, the declaration and payment of future dividends are discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial performance.



Credit Facility

The maximum borrowings available to Kforce under the Credit Facility are limited to: (a) a revolving credit facility of up to $135 million (the "Revolving Loan Amount") and (b) a $15 million sub-limit included in the Credit Facility for letters of credit. Kforce has a remaining accordion option to increase the borrowing capacity an additional $15 million. Borrowing availability under the Credit Facility is limited to the remainder of: (a) the lesser of (i) $135.0 million minus the four week average aggregate weekly payroll of employees assigned to work for customers, or (ii) 85% of the net amount of eligible accounts receivable, plus 80% of the net amount of eligible unbilled accounts receivable, plus 80% of the net amount of eligible employee placement accounts, minus certain minimum availability reserves, and in either case; minus (b) the aggregate outstanding amount under the Credit Facility. Outstanding borrowings under the Revolving Loan Amount bear interest at a rate of: (a) LIBOR plus an applicable margin based on various factors; or (b) the higher of: (i) the prime rate, (ii) the federal funds rate plus 0.50% or (iii) LIBOR plus 1.25%. Fluctuations in the ratio of unbilled to billed receivables could result in material changes to availability from time to time. Letters of credit issued under the Credit Facility require Kforce to pay a fronting fee equal to 0.125% of the amount of each letter of credit issued, plus a per annum fee equal to the applicable margin for LIBOR loans based on the total letters of credit outstanding. To the extent that Kforce has unused availability under the Credit Facility, an unused line fee is required to be paid equal to the applicable margin times the amount by which the maximum revolver amount exceeded the sum of the average daily outstanding amount of the revolving loans and the average daily undrawn face amount of outstanding letters of credit during the immediately preceding month. Borrowings under the Credit Facility are secured by substantially all of the assets of Kforce and its subsidiaries, excluding the real estate located at Kforce's corporate headquarters in Tampa, Florida. Under the Credit Facility, Kforce is subject to certain affirmative and negative covenants including (but not limited to) the maintenance of a fixed charge coverage ratio of at least 1.00 to 1.00 if the Firm's availability under the Credit Facility is less than the greater of 10% of the aggregate amount of the commitment of all of the lenders under the Credit Facility and $11.0 million. Kforce had availability under the Credit Facility of $43.2 million as of December 31, 2013; therefore, the minimum fixed charge coverage ratio was not applicable. Kforce believes that it will be able to maintain the minimum availability requirement; however, in the event that Kforce is unable to do so, Kforce could fail the fixed charge coverage ratio covenant, which would constitute an event of default. Kforce believes the likelihood of default is remote. The Credit Facility expires September 20, 2016. 38



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As of December 31, 2013 and 2012, $62.6 million and $21.0 million was outstanding under the Credit Facility, respectively. During the three months ended December 31, 2013, maximum outstanding borrowings under the Credit Facility were $62.6 million. As of February 24, 2014, $67.5 million was outstanding and $40 million was available under the Credit Facility.

Off-Balance Sheet Arrangements

Kforce provides letters of credit to certain vendors in lieu of cash deposits. At December 31, 2013, Kforce had letters of credit outstanding for workers' compensation and other insurance coverage totaling $2.4 million and for facility lease deposits totaling $0.3 million. Aside from certain obligations more fully described in the Contractual Obligations and Commitments section below, we do not have any additional off-balance sheet arrangements that have had, or are expected to have, a material effect on our Consolidated Financial Statements.



Stock Repurchases

During the year ended December 31, 2012, Kforce repurchased approximately 3.4 million shares of common stock attributable to open market repurchases and shares withheld for statutory minimum tax withholding requirements pertaining to the vesting of restricted stock awards at a total cost of approximately $44.4 million. As of December 31, 2012, $39.9 million remained available for future repurchases. On February 1, 2013, our Board of Directors approved an increase to the existing authorization for repurchases of common stock by $50.0 million (exclusive of any previously unused authorizations). As a result, $89.9 million remained available for future repurchases as of February 1, 2013. During the year ended December 31, 2013, Kforce repurchased approximately 1.8 million shares of common stock at a total cost of approximately $27.3 million. As of December 31, 2013, $62.6 million remains available for future repurchases. 39



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Contractual Obligations and Commitments

The following table presents our expected future contractual obligations as of December 31, 2013: Payments due by period Less than More than (in $000's) Total 1 year 1-3 Years 3-5 Years 5 years Operating lease obligations $ 12,604$ 5,410$ 6,003$ 1,172$ 19 Capital lease obligations 8,082 3,539 4,484 59 - Credit Facility (a) 62,642 - 62,642 - - Interest payable - Credit Facility (b) 2,705 984 1,721 - - Purchase obligations 10,787 6,165 4,622 - - Liability for unrecognized tax positions (c) - - - - - Deferred compensation plan liability (d) 26,296 3,149 2,126 914 20,107 Other (e) - - - - - Supplemental executive retirement plan (f) 10,538 - - - 10,538 Supplement executive retirement health plan (f) 8,537 48 109 146 8,234 Foreign defined benefit pension plan (g) 13,251 - 404 - 12,847 Total $ 155,442$ 19,295$ 82,111$ 2,291$ 51,745



(a) The Credit Facility expires in September 2016.

(b) Kforce's weighted average interest rate as of December 31, 2013 was 1.57%,

which was utilized to forecast the expected future interest rate payments.

These payments are inherently uncertain due to interest rate and outstanding

borrowings fluctuations that will occur over the remaining term of the Credit

Facility.

(c) Kforce's liability for unrecognized tax positions as of December 31, 2013 was

$0.4 million. This balance has been excluded from the table above due to the

significant uncertainty with respect to expected settlements.

(d) Kforce has a non-qualified deferred compensation plan pursuant to which

eligible highly-compensated key employees may elect to defer part of their

compensation to later years. These amounts, which are classified as other

accrued liabilities and other long-term liabilities, respectively, 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.

(e) Kforce provides letters of credit to certain vendors in lieu of cash

deposits. Kforce currently has letters of credit totaling $2.7 million

outstanding as security for workers' compensation and property insurance

policies as well as facility lease deposits. Kforce maintains a sub-limit for

letters of credit of $15 million under its Credit Facility.

(f) There is no funding requirement associated with the SERP or the SERHP. Kforce

does not currently anticipate funding the SERP or SERHP during 2014. Kforce

has included the total undiscounted projected benefit payments, as determined

at December 31, 2013, in the table above. See Note 12 - "Employee Benefit

Plans" to the Consolidated Financial Statements for more detail.

(g) Kforce has included the total undiscounted projected benefit payments, as

determined at December 31, 2013 in the table above. There is no funding

requirement associated with this plan.

Kforce has no material unrecorded commitments, losses, contingencies or guarantees associated with any related parties or unconsolidated entities.

Income Tax Audits

Kforce is periodically subject to U.S. Internal Revenue Service ("IRS") audits as well as state and other local income tax audits for various tax years. During 2013, the IRS finished an examination of Kforce's U.S. income tax return for 2009 with no material adjustments, and no settlements. During 2013, the IRS commenced a Limited Issue Focused Exam of Kforce's 2010 and 2011 U.S. income tax returns. No material liabilities are expected to result from this ongoing examination. Although Kforce has not experienced any material liabilities in the past due to income tax audits, Kforce can make no assurances that this will continue. 40



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