Kforce Inc.
Q2 2009 Earnings Call Transcript

Published: 5 Aug 2009

[Operator:]

Welcome to the Kforce second quarter 2009 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Michael Blackman.

[Michael Blackman:]

Good afternoon and welcome to the Q2 Kforce conference call. Before we get started I would like to remind that this call may contain statements that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially because of factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. I will now turn this call over to David Dunkel, Chairman and Chief Executive Officer.

[David Dunkel:]

You're going to find additional information about Kforce in our 10-Q, 10-K and 8-K filings with the SEC. We provide substantial disclosure in our release and our hope is that this will prove that dissemination of information about our performance and the quality of this call. Once again we are very pleased with our team's performance against the challenging macro economic environment. We are often asked how we are able to perform at this level when compared to the decline we experienced in prior recessions. As I reflect on the question, I conclude it's not a singular event. It's the result of years of building a strong culture, refining our service offerings and developing an operating platform that provides flexibility and leverage. Our team is gelling and we are seeing the results. Our focus is to provide high quality, high value services to our customers that will lead to a gain in both market and customer share. We are continuing to see vendor lists consolidate and are pleased to see Kforce shortlisted due to our performance, quality, scale and delivery capability and financial stability. There are indications the economic downturn may be moderating or ending as fear and uncertainty give way to cautious optimism. We believe the recovery, when it begins, may be marked by a greater utilization of flexible consultants that we have seen in recent cycles due to the severity and length of this recession. With that said, we still believe the recession has masked the underlying secular drivers for highly skilled, knowledge workers and those drivers remain intact. As we discussed on our last call, we're now drawing our hand for the coming up cycle and implementing plans that we believe will produce accelerated revenue and earnings growth. We have completed a review of key strategic initiatives and reprioritized for those that we believe will further enhance our financial performance in an improving economy. We do not contemplate any change to our portfolio of services and believe that with our current service offerings, we are well positioned to serve our clients and to see enhanced operating leverage to fuel EPS growth earlier in the cycle. We are pleased to have reduced bank debt in the past quarter and will use cash flow for continued debt retirement, share repurchase and acquisitions that meet a very high standard. I will turn the call over to Bill Sanders, Kforce President, who will provide his comments and Joe Liberatore, CFO will then provide additional insights on operating trends and expectations, then I will conclude.

[William Sanders:]

Thanks to all of you for your interest in Kforce. We are pleased with our results for the second quarter against a continued backdrop of a difficult operating environment. Our results are driven by the great people we have on our team and a strong partnership and culture we have built. We believe our operating platform and stable, diversified portfolio of service offerings that is almost entirely domestic, provides a strong foundation on which to outperform in any economic environment. We continue to execute and take market share utilizing competitive advantages such as our national recruiting center which is particularly effective in delivering to our national account, and our state of the art technology and infrastructure. These competitive differentiators are the result of purposeful, strategic decisions that have been made by our seasoned executive team in preparation for the next economic up cycle. During the second quarter total revenues of $226 million declined 2.3% sequentially. The revenue declines we're seeing in our Technology and Health and Life Sciences flexible staffing businesses and our search business. These declines were partially offset by continued strong growth in our Government business as well as sequential increase in F&A Flex revenues. Our Technology Flex business which represents roughly half of total firm revenues declined 3.4% sequentially and is down 10.4% year over year. We have been pleased with our ability to substantially maintain our Technology Flex revenue stream throughout the current cycle. Tech Flex revenues declined slightly over the first two months of the quarter, but were relatively stable in June. Tech Flex margins have also been relatively stable and are down 20 basis points year over year from 27.5% to 27.3%. Recent trends for Tech Flex are slightly down from June levels, but the rate of decline continues to slow. The order pipeline is improving, but clients are still slow to pull the trigger. We expect Tech Flex revenues to be slightly down in Q3. Our HLS business segment which comprises 18.5% of total revenues is made up of two businesses; clinical research and health care. During the second quarter, our clinical research business declined 6.9% sequentially and 7.2% year over year and health care declined 9.4% sequentially and 24.3% year over year. We continue to expect low revenue visibility for clinical research and flat to slightly down revenue for the third quarter as we continue to see a consolidation and restructuring in the large bio pharma space. In the longer term, we believe the quality of our relationships with the strong companies in this space will provide opportunities for continued growth as demonstrated by our recent award of an exclusive arrangement with one of the larger bio pharma's. Our health care started this year at a slower pace than recent years and the trends are showing a continued slower pace in 2009 versus 2008. This revenue decline is largely due to a reduction in hospital census and nine out of 10 hospitals reported cutting back to address economic concerns. We continue to focus on strengthening business development to reach a greater population of clients. We expect revenues to be stable for the third quarter as the latest trends are positive. Our Finance and Accounting Flex business which now represents 16.4% of total revenues, increased 3.2% sequentially and down 16.8% year over year. We are particularly pleased with the performance of our FA Flex business which has had stable to improving revenues throughout 2009. This growth is relatively broad based with the largest increase in the lower rate job classification such as mortgage related services which is supported by our low cost centralized delivery function in the national recruiting center. Though the summer months are slower for our FA Flex business, we have continued to see stability in this revenue stream and expect Q3 revenues to be flat with Q2. The strongest contributor to our top line in the quarter was our Government business which had sequential growth of 6.1% and year over year growth of 56.9%. This prime Federal contracting business now has annualized revenues approaching $120 million. The integration of dNovas which was acquired in December of 2008 was substantially completed in Q1 and we are therefore unable to precisely segregate the revenue contributions between the previous stand alone entity. We continue to be pleased with the excellent job being done by Larry Grant and Glen Shaffer and their team as they grow our government business. Federal activity looks to be promising in areas such as health care, data integrity, finance and technology services where our business is concentrated. As we look forward into Q3, we continue to be optimistic about the growth prospects of this business and expect continued growth. We have seen some recent wins with the Federal Government slow in making awards and roughly 60% of our revenue platform is being re-competed this year. Due to a probable loss of a significant contract, revenues will be flat to slightly improved in Q3. Search revenues from direct placements and conversion which are only 2.9% of total revenues in Q2 declined 15.3% sequentially and 66.8% year over year. While search activity has declined at an accelerating rate compared to the last down turn, we experienced a slower rate of decline in recent months. While search revenue trends are very difficult to predict at this point in the cycle, we expect search to continue to decline in Q3. As we continue to navigate through the current economic environment, we look at internal KPI as one of our primary near term forecasting tools. These KPI's were down in Q1 from Q4 levels, but were stable throughout Q2, consistent with recent revenue trends. We continue to diligently manage the performance of our sales associates with heightened focus on productivity and exiting under performers quickly. Flex head count was up 1.5% and search down 16.8% sequentially. Total sales head count is 2.6% less than last quarter and 15.6% less than a year ago. We believe significant capacity exists on our sales force to take advantage of market opportunities as they evolve and economic conditions as they improve. Our focus includes retaining and inspiring the top performers for the economic upturn. In fact, our careful preparation for the current downturn has allowed us to deliver strong results and also focus on how we might position ourselves to take advantage of the next up cycle. As we consider the total Kforce business footprint, we believe we are very well positioned to both maximize market share in this current recession as well as take advantage of opportunities when the economy rebounds. Our Government and KCR business which constitutes 25% of our revenue stream are focused on stable, long term contracts. We have established a cost effective delivery model in our national recruiting center that services our FA select and technology flex business. We have evolved our revenue footprint to take advantage of our nationwide geographic presence, take customer share as large clients continue to consolidate vendor lists. However, our largest 25 clients constitute only 39.2% of our revenue stream. Additionally, our decision coming out of the last downturn to be less than 10% of total revenues, has allowed us to minimize the impact on the profitability and future prospects. A recent industry publication ranked Kforce as the fifth largest staffing firm in the U.S. in terms of market share, both with technology and S&A product lines. Our strength in these product lines coupled with our HLS and Government product lines, we believe differentiate Kforce from our competitors. We are well into our first year of our three year strategic plan which we are calling the Race for the Triple Crown and we are currently well positioned to win the first race. We understand that our clients believe our services are a cost effective way to acquire talent. Our immediate plans are to continue to have a relentless focus on retaining our great people and to improve client satisfaction while balancing revenue and expenses as well as to continue to prepare the firm for the next economic up cycle. I'll now turn the call over to our Chief Financial Officer and Executive Vice President, Joe Liberatore.

[Joseph Liberatore:]

The firm continues to perform well in a challenging environment in Q2 coming in at the high end of guidance for revenue and exceeding guidance on earnings per share. We believe the second quarter performance is a reflection of our strong culture and extreme focus on execution in all aspects of the business including improving client relations, ships, balancing bill pay rate spread, expense management and optimizing cash flow. Revenues for the quarter of $226 million were down 11.4% from Q2 2008 and down 2.3% sequentially. Flex revenues of $219.3 million were down 6.7% year over year and 1.9% sequentially. Generally speaking, Flex revenues declined sequentially in April and May and improved modestly in June. Search revenues of $6.6 million continued to see the increasing impacts of the economic slowdown. Search declined 15.3% sequentially and 66.8% year over year. Monthly search revenues were down each month in the quarter compared to prior year though the rate of decline slowed as search improved sequentially from May to June. Revenue trends at the beginning of the third quarter of 2009 have been mixed versus 2008 activity. Flex revenues for the first four weeks of July are down 5.4% year over year with Tech Flex down 10.1% year over year and Finance and Accounting down 12.7% year over year. The deterioration in search revenues, though still significant, has slowed slightly as search is down 61.7% year over year for the first five weeks of Q3 2009. We caution it is difficult to draw conclusion for Q3 based upon this limited data. Net income of $3.9 million and earnings per share of $0.10 in Q2 2009 increased sequentially 23.6% and 25% respectively compared to Q1 net income of $3.2 million and earnings per share was $0.08. These increases are largely the result of our successful managing bill rate pressure and operating expenses as we continue to take market share. Year over year net income and earnings per share declined sequentially 55.1% and 54.5% from $8.7 million and $0.22 respectively. We are very pleased with our ability to maintain gross margin, though overall gross profit percentage of 31.7% is decreased 410 basis points year over year as a result of the changes in business mix attributable to the decline of our search business. Gross margin increased 50 basis points sequentially. Our Flex gross profit percentage of 29.6% in Q2 2009 has declined 80 basis points year over year and increased 80 basis points sequentially from Q1. When factoring in the effect of reduced payroll taxes between Q1 and Q2, Flex margins were stable sequentially. The relative stability in our Flex gross margin percentage is the result of the aggressive management of the spread between bill rate and pay rate. This is especially true in Tech's Flex, our largest business where gross margins have declined only 20 basis points year over year. In general, we've been successful balancing pay rate reductions with reduced bill rate as we passed client bill rate reductions to our billable consultants. Staff and bill rates have declined 2.9% sequentially and 3.5% year over year and pay rates have declined 3.7% sequentially and 1.4% year over year. As we look forward to Q3 and beyond, we will maintain our focus on managing spreads and believe additional bill rate pay rate compression is possible due to the continued pricing pressure and the potential lag in our ability to reduce pay rates as quickly as the declining bill rate. However, this impact will be somewhat mitigated by the continued shift in our business mix to higher margin business as well as the increasing support in the recruiting process by our national recruiting center. The firm is aggressively managing operating expenses. We continue to highly scrutinize every expense to ensure a proper return on investment and alignment of the cost structure with the revenue stream including variable costs such as travel, entertainment, lease costs and FTE. Operating expense remain low at 28.8% in Q2 an increase of 10 basis points from 28.7% in Q1 and a decrease of 110 basis points from 29.9% in Q2 2008 after excluding the impact of the acceleration of the equity grants related to the sale of Scientific and Nursing which occurred in Q2 last year. The majority of our cost structure is variable and compensation expense which is highly correlated to gross profit comprises over 75% of our operating expenses. We continue to see leverage in our non compensation based cost structure as a result of the significant infrastructure investments made over the past four years. These significant capital expenditures have prepared the firm well to create efficiencies in this environment and in the future. As we begin to look beyond the current environment in anticipation of a recovery, we expect operating efficiencies to continue to evolve and corresponding leverage in earnings over the next few years as these efforts become fully appreciated. Additionally, we continue to balance current profitability with selected investment with a focus on further evolving our current infrastructure to support the growth of the business when the economy recovers. Examples of current ongoing investments include further development of our national recruiting center and our shared services platform to continue to increase quality and responsiveness to the customer at the right price. Should revenues continue to decline, we will continue to manage expenses aggressively with a priority on keeping the great people in our firm and maintaining positive cash flow. Though we expect operating expenses to decline as revenues decline, they will likely do so at a slower rate, resulting in decreased profitability. EIBTDA, an indication of the firm's strong cash flow with $11.2 million or $0.29 per share in Q2 as compared to $20.5 million or $0.49 per share in Q2 2008. Our strong operating cash flow is a source of significant stability. Debt on our credit facility decreased to $25 million at the end of Q2 from $44 million at the end of Q1. As of today, debt is currently $18.5 million. There were no material stock repurchases during Q2. The firm has $74.4 million available for future stock repurchases under the current Board of Directors authorization. The firm has always taken a conservative view on balancing the use of its cash flows between debt retirement, stock repurchases and acquisitions, as evidenced by our proved track record of significant debt retirement after an acquisition. We will continue to balance the opportunities that present themselves with respect to stock repurchases and acquisitions. Our priority is to maintain maximum flexibility in this uncertain environment with a focus on debt reduction. The firm continues to have significant availability under its credit facility which does not expire until November 2011 to meet its funding needs. Our accounts receivable portfolio continues to perform very well. Receivable days over 60 days decreased from $5 million at the end of Q1 to $4.9 million at the end of Q2 and net write offs were virtually zero. However, we believe that significant risk remains for future defaults in this uncertain economic environment. Our allowance for doubtful accounts is currently $5.9 million and we believe sufficient to account for the current risk. In terms of guidance for the second quarter we expect revenues may be in the range of $221 million to $226 million range. Total firm earnings per share may be between $0.07 and $0.10 which reflects an effective tax rate of 40.1% and approximately 39 million weighted average diluted shares outstanding. The bottom end of guidance reflects a continued deterioration from July results for Flex revenue and results consistent with July trends for service revenue as well as a decline in Flex gross profit attributable to continued margin compression. The third quarter of 2009 has 64 billing days versus 64 billing days in the second quarter of 2009. Our guidance has not considered a potential non cash charge related to the acceleration investing of long term incentive grants made to management. These grants contain a performance provision to accelerate vesting should the firms stock price appreciate from it's issued price by 50% for 10 trading days. From a financial perspective, we are pleased with the second quarter results. We continue to invest in our business to prepare for the upturn, but we have also move aggressively to control costs during this recession. As Dave and Bill referred to in their comments, we believe we are well positioned during these difficult times as a result of the actions taken over the past few years to increase flexibility and leverage. We have the quality revenue stream and balance sheet that will survive this recession and we are well underway in our actions to improve our ability to further gain share and grow in this coming up cycle. I'd like to now turn the call back over to our CEO, Dave Dunkel for questions.

[David Dunkel:]

I'm going to make a quick comment. As far as our quarterly performance is concerned, I just once again want to take hats off to our team for just delivering an exceptional quarter. Thank you. We'll open it up to questions.

[Operator:]

(Operator Instructions) Your first question comes from Kevin Mcveigh – Credit Suisse.

[Kevin Mcveigh:]

I wonder if you could give us a sense of where you think we are in the cycle today relative to the last cycle. It sounds like we're in a stabilization period now and as we think about the next couple of quarters, do we bounce along here? Obviously internally you've done a great job. Are we in a better position to power out earlier as opposed to last cycle? Just any thoughts you could share with us on that.

[David Dunkel:]

I think it was a Who song where the line was, I wish I knew. As far as the cycle is concerned, anybody's guess. I've seen everything from L to V to W to I don't even know what letter in the alphabet, I just hope they don't use Z. The key is that what we've done is to position Kforce to manage the business through whatever happens in the cycle and as we mentioned, as we moved into this year, we shifted from defense to offense and started to align the business to take advantage of what we think may be an improving environment as we move into the back end of this year and 2010. If you look at the progress that we've made in operating expenses and productivity, if you look at the progress we've made in support infrastructure and shared services, our goal is to see enhanced revenue growth and enhanced operating leverage as we go forward. I do believe that the environment that we're in and the severity and the length of the slowdown here, this recession, is likely going to buy us the clients more towards using consultants and flexible workers than to going to direct hire. That's been our experience in past recessions and the more severe it is, the less likely they are to trust it, so we believe that that will probably be what we'll see early on, but we are still obviously monitoring the market very closely, talking to our clients and it's too early to tell.

[Kevin Mcveigh:]

What are you thoughts on the bill rate environment? It seems like on a relative basis, you aren't down as much as some of your peers. Is that kind of a function of the end markets? Any thought you have on that relative to the environment overall?

[David Dunkel:]

From a bill rate standpoint, in aggregate bill rates decreased 2.4% sequentially and decreased 1.6% year over year. On some it will be different when you look at it by the various service lines, but overall it's the focus on the customer footprint that we've been chasing for many years and the strategies that we've evolved in and around that, and with most of our businesses being a little bit on the higher end of the spectrum, even in the technology service line, that really positions us. There's still a tremendous demand for the services of those highly skilled individuals which I think has helped us to a certain extent.

[Kevin Mcveigh:]

Let me just clarify, was that 1.6% year on year or 1.5% decline year on year?

[David Dunkel:]

From a bill rate standpoint, 1.6% year over year, average bill rate across the firm.

[Operator:]

Your next question comes from Mark Marcon – Robert W. Baird.

[Mark Marcon:]

Can you talk a little bit about what you're seeing on the IT services side just in terms of, it clearly seems like its stable I think. Where are you seeing the pockets of strength? I know you're gaining share relative to some players, but any particular types of clients or any particular verticals, and how far along are you in terms of fully exploiting the advantage of the national recruiting center and a reduced cost delivery method?

[William Sanders:]

There is one group in the Tech Flex side that is certainly out performing all the others by a significant margin and that's the federal sector and the Federal Government continues to be a lucrative place for us to play, and that is done primarily out of our Federal Service center. So from that standpoint, Tech Flex is doing very well. The NRC is approximately six to seven years in its making. It's greatly developed. There is a trust and communication and a means to facilitate hand offs that has occurred that takes a long time to develop and is working very well. However, with that said, our vision is still significant improvement. We are doing a very detailed sigma study right now to improve the national recruiting center. It is a great advantage for our firm, there's no question about it. There's so much more that it can do for us. We are very excited about the NRC and we look forward to it helping us as we go forward.

[Mark Marcon:]

Can you talk a little bit about what you're seeing on HLS, specifically on the clinical research? When do you think you're going to get good visibility there?

[William Sanders:]

As you know, a couple of things are happening there. The big pharma, they're watching every penny very closely as they're reducing their research on projects that are further out. Therefore the clinical trials that are in early stages, they're not being looked at as closely and so we look at that as slowing down the issue somewhat on the research side. At the same time, they have been going through a number of acquisitions, and those integrations have slowed down that activity as we go forward. So as I mentioned in my prepared remarks, we just won a very nice exclusive arrangement with a large bio pharma. We continue to win smaller engagements and larger engagements. I believe as the economy turns around and these companies go through their integration activities, I think that combined with our outstanding client list that we'll be real winners in this space.

[Mark Marcon:]

Can you talk a little bit about Government? You mentioned a contract that may not get renewed. How big is that?

[William Sanders:]

That contract is a very nice contract. We believe that there may be a number of protests as we go thought this. It ranges depending on exactly what happens somewhere in the $7 million range. Larry Grant, the President of KGS is here with us. Do you want to elaborate a little bit on that?

[Larry Grant:]

This particular contract right now, and I won't speak a lot to it because we have a window right now where it's going to go under protest potentially, so just like a client attorney privilege, I can't say too much about it, but it's a contract where the government decided, a particular agency to roll six contracts up into one, one of which was the one KGS is performing on, and award it to small business lowest price. The winning bidder at this moment offered a significantly lower price that we'd be able to offer and be able to recognize the brand and the margin which we expect to need to continue to provide services the client would expect and be pleased with. So at this time, it's going to represent approximately $700,000 a month to the business.

[Mark Marcon:]

So you foresee many other contracts like that coming up for renewal where you have that same sort of competitive set?

[Larry Grant:]

There is potential for this to occur. Right now in the life of the government contracting industry, we're going to have every quarter, a number of re-competes are going to occur that we have to deal with. We're please though because we have a 90% win rate on our re-competes, but we do see there's going to be many times where we're going to be approached with this. But what's really good about it is, we also take that into account and we have built a pipeline right now of qualified opportunities representing $1.1 billion. Also in this pipeline, we have 25 proposals that we've submitted that are awaiting award that total up to $256 million in new business. We also have eight proposals that we submitted that are winning awards for IDIQ's which have large ceilings some of them in the billion dollar range. They have ten new proposals underway right now for new work. So while we have to take into account when we weight our pipeline there is potential for a loss, we also have many other opportunities to offset it with new business.

[Joseph Liberatore:]

I want to give you a little bit of staffing color here as well to kind of pull this together. Unlike the staff business, where obviously the objective is to win an opportunity to play, and then once you win that opportunity to play it pretty much is on a transaction by transaction basis. The Government business is very different because obviously the first step in the process is to win, but the next piece of the process is you have to be able to perform and that performance is evaluated. So it is not uncommon in the Government business where an award may be to the lowest bidder and the lower bidder can't perform. That's one of the dynamics that we believe we've run into with this contract. When we look at this, the supply and demand of cleared resources that are required to perform on a contract of this nature, you can't drive down pay rates in a highly competitive environment, so some of these things do come back around.

[Mark Marcon:]

So when we put everything together it sounds like you assume that there's probably going to be a small set back in this quarter sequentially but then a re-continuation of the nice growth trends that we've seen. Is that correct?

[Joseph Liberatore:]

Actually as Bill stated in his opening comments, even contemplating if through the protest we were to lose this full revenue in the quarter, we're still anticipating slight growth even with that contemplated.

[Mark Marcon:]

On a sequential basis?

[Joseph Liberatore:]

On a sequential basis, correct, on the billing day basis.

[David Dunkel:]

One thing that it's very difficult to apply staffing standards to the Government business and I know that sometimes for those that have followed us for years to have this new animal come in with all kinds of new concepts and terms and so forth. I would just point you to Bill's comments and to the guidance that we provide because we've gone through an extensive amount of work to refine the message so that we are able to give you the kind of guidance that will help you as you're doing your models. So as Joe said, Bill's comments do reflect the full loss of this contract in a slight up, and of course if things change that would improve and also what Larry indicated, at any point in time contracts are rebid and also there's a strong pipeline of wins and so forth. So stay with us in each quarter, rather than try to get ahead of us on it because it's pretty dynamic.

[Operator:]

Your next question comes from Frank for Tobey Sommer – Suntrust Robinson Humphrey.

[Frank for Tobey Sommer:]

You mentioned bi-service line, the bill pay spreads showed a little bit of differences. Could you go through that a little bit and provide some color there?

[Joseph Liberatore:]

When we look at bi-service line, Tech Flex bill rate declined 1.2% sequentially and 3.6% year over year. FA bill rate declined 1.3% sequentially and 7% year over year. HLS bill rate declined 5.4% sequentially and 1% year over year and Government bill rate declined 1.4% sequentially and 5.5% year over year. The Government bill rate decline continues to be attributable to shift in the mix of business from the high FA business into the more competitive technology business.

[Frank for Tobey Sommer:]

Going to the Health and Life Sciences, could you talk a little bit about the health care portion, what you're seeing from clients in terms of budget issues there?

[William Sanders:]

We have the big American Hospital Association study that says nine out of ten hospitals are having difficulty in budget constraints. How that basically is affecting us is our patient coding continues to be weak, but local in patient coding continues to be our biggest demand. So what we have really done is we've taken some of our sales approach and our sales coverage and making sure that we are handling the hospitals in such a way that we can provide them the solutions that are necessary because they cannot afford to have large backlogs of unbilled services that haven't been coded and sent off to the insurance company. So it's a problem. Hospitals are under severe pressure right now.

[Frank for Tobey Sommer:]

A couple of quarters ago you talked about CFO as being very involved in the decision making and kind of a shift in who was making those decisions. Has there been any change in that environment?

[Joseph Liberatore:]

I believe I made that comment when I was really reflecting over my 20 plus year career in this space and how we've kind of gone full circle with much heavier CFO involvement in technology oriented decisions versus the days of the dot com bubble where the CIO's of the world were basically driving decisions down on the finance organization. We continue to see rigor in all investment decisions with the majority of the organizations that we're making. If they can't tie an ROI to it or a strategic competitive advantage, they're not just doing things for the sake of doing them. So I don't think anything has really changed from that landscape. I won't necessarily say it's a CFO dynamic. I think it's a good business process that has really come full circle.

[Operator:]

Your next question comes from Michael Baker – Raymond James.

[Michael Baker:]

My first question has to do with the health side of the business. Bill, you mentioned towards the latter part of your commentary on health business that the latest trends appear to pick up a bit and I was wondering if that's a function of some of the increases in utilization or if it's a function of hospitals now using coding as a way to enhance reimbursement.

[William Sanders:]

Probably a little bit of both. Certainly they cut back on the coding to save expenses and found out that's nothing but a death spiral that you have to get the revenues to cover the costs. So I think it's a little bit of both of them.

[Michael Baker:]

How much of your business is kind of focused in on non profit versus for profit providers?

[William Sanders:]

We don't segment our hospitals that way so that would be a hard question for me to answer.

[Michael Baker:]

How much of the slowdown do you think is attributable to some of the health reform dynamics both on the clinical side and on the health side. What I mean on the clinical side is that there has been some talk about putting in place some patent protections say for 12 years on a bio tech drug. I'm just wondering if some of these things as we get better clarity, would you anticipate a pick up once we get better clarity on some of the health reform issues that are out there.

[William Sanders:]

That is possible that that is some of the strategic activities that the large firms are working. We're not aware of that. That doesn't flow down to us so there may be a pick up. There may not be. That's not something that we're really knowledgeable about.

[Operator:]

Your next question comes from James Janesky – Stifel Nicolaus.

[James Janesky:]

On the Tech Flex specifically and the F&A Flex, when you talk to your customers in those two areas, obviously we saw a dramatic declines in a very short period of time in the employment markets, especially late last year and early this year. Do your clients feel that they may be cut too much that when they do come back to you it's going to be, because they might have cut too much they're going to need to hire back temps fairly aggressively? What do they plan to do with the people they did lay off? Are they going to turn to them first? Just what they're thinking is now that things seem to have stabilized.

[William Sanders:]

That's a hard question to know what each client is thinking, but I will tell you this. Clients are telling us they did cut very deeply. There is good talent available out there except for probably certain niche skill sets. The candidates right now are somewhat reluctant; those candidates are reluctant to move from client to client. But I do believe from what we've seen and the speed for which it has happened in this particular cycle, there is certainly the possibility of a significant bounce back. How long that will last, what that will be, you know as well as I do what could possibly happen. But yes, there has been a quick drop off. There has been deferred maintenance and projects put on hold until the budgets have loosened up.

[Joseph Liberatore:]

I would summarize it in two points that I hear consistently from our field leaders [audio break]. Entities are operating at lean staff levels to get done what they have to get done. There is pent up demand that's been built up through this recession of things that need to get done.

[James Janesky:]

All of you have been through many cycles, have a lot of experience in this industry. I know the company was a lot different in the last cycle that ended in the 2000, 2001 time frame. What does it feel like now? Was this worse but just for a short period of time or was this worse this time around overall?

[Joseph Liberatore:]

I just finished 29 years and fortunately having started at the age of 12, I'm still young. I've been through too many of them and I'm obviously grateful to still be alive at the back end of this one, or so it appears. There's no question that the severity of this recession was amplified by a number of factors and the financial crisis I think manifested in policy decisions that have been well publicized. And the failure in the financial sector created a fear and panic that we didn't see the last time and that fear and panic I think triggered a number of other actions as well. So my sense is that this is certainly different and more severe in its initial response. How long it goes and how deep it is, still remains to be seen because there are many that still believe that the recovery, when it comes, will take on many different shapes and there are those that believe we've just created another bubble which is a government financing bubble which is something else that could occur. I would say at this point in the game, as a firm, Kforce was much better prepared and going into this recession because we managed the entire up cycle with the expectation that the down cycle was coming, and that preparation allowed us to respond quickly, to have much more flexible cost structure, to not be unduly dependent so as a firm, I would say this one was probably less painful to us than the last one because of the significant changes we had to go through and an unwind of search and real estate and of course the tech bubble. So to the firm, probably less painful this time, but probably more severe in its abruptness.

[Operator:]

There are no further questions. I'd like to turn the conference back over to management for any additional or closing comments.

[David Dunkel:]

I'll just go ahead and close and once again we want to thank each of you for your interest in and support for Kforce. And once again, our sincere appreciation to our team just for performing very well in these challenging conditions. You did an exceptional job and we're very thankful for each and every one of you both in the field and our corporate teams, and also to our consultants and clients for allowing us the privilege of serving them. So thank you once again for your interest in Kforce and we'll see you next quarter.