Kforce Inc. (KFRC) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kforce Q4 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Michael Blackman, Chief Corporate Development Officer. Sir, you may begin.

Thank you. Good afternoon, and welcome to the Kforce Fourth Quarter and Year End 2011 Conference Call. Before we get started, I would like to remind you that this call may contain certain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from the factors listed in Kforce 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 would now like to turn this call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael. You can 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 improve the dissemination of information about our performance and the quality of this call. We are very pleased with both Q4 and full year 2011 results. Fourth quarter revenues of $285.6 million and earnings per share of $0.20 were both at the top end of our guidance. In the quarter, the firm also achieved several milestones, establishing record quarterly revenue per billing day marks for total revenue, Flex revenue, total Tech revenue and Tech Flex revenue. Kforce recorded revenue for the year ended December 31, 2011, of $1.1 billion, an increase of 12.1%. Net income was $27.2 million, which represents a year-over-year increase of 31.6%, and EPS was $0.70, a 37.3% increase. Total Technology revenue of $624 million and Tech Flex revenue of $606.2 million represent historical high watermarks for that business unit. We are optimistic about the firm's prospects in what we believe continues to be a secular shift towards a greater use of flexible staffing in an environment of high demand for skilled professionals. Looking back on 2011, we believe that the staffing industry performance has been significantly different than in previous economic cycles, further supporting the secular shift in super cycle theory. The unemployment rate among college degree workers is currently 4.2%, about half that of the overall U.S. rate of unemployment, and is substantially lower in several of the specialized skill sets Kforce specializes in, particularly in Technology. Our revenue footprint and domestic platform are focused in the areas of greatest demand in today's economy. We continue to benefit from our clients' desire for a flexible workforce during the slow economic recovery, combined with significant uncertainty in regulatory, tax and health care reform. All of this bodes well for the future of our firm. The objectives that we established for 2011 were to further penetrate existing Strategic Accounts, capture additional client share and selectively target new accounts while our service offerings and business model add value to our clients. Our Strategic Accounts program, supported by the National Recruiting Center, has continued its steady growth. At the same time, the growing needs for flexible staffing at small- and medium-sized customers, particularly in the second half of the year, has allowed us to sequentially improve the bill-pay spreads in our Technology Flex business, more typical of what we have seen in past more traditional economic recoveries. And looking back on 2011, we also believe that the staffing industry performance has been significantly different -- oops, I'm sorry. I had 2 pages stuck together. We believe that the uncertain economic outlook in 2011 negatively impacted the valuation of Kforce and other staffing stocks disproportionately. The firm was aggressive in response and was able to repurchase 5.7 million shares of stock during the year, which represented 13.8% of outstanding shares for a total of 59.6 million. Looking forward to 2012, we remain committed in our belief the temporary staffing penetration, which has improved from 1.34% at the beginning of this economic cycle and is currently 1.82% of the workforce, will achieve historic highs in the U.S. during this economic expansion. We believe the strengthening demand for our services as a result of this trend will only be enhanced if economic growth accelerates. Our strategic -- our strategy remains intact as we believe there remained significant opportunity for continued strong growth in our Tech and FA businesses, as well as our Health Information Management business, which is well positioned for continued success through the implementation of ICD-10 and electronic medical records. We expect our Clinical Research business to perform reasonably well as we navigate the rapidly changing environment in the pharmaceutical and biotech industries, as blockbuster drugs come off patent. Our Government business is expected to continue to face a challenging environment, although our team is competing effectively. Overall, the demand for our services continues to improve, and we expect continued strong revenue growth. We also expect gross margin and operating margin improvement in 2012, though, overall improvements will be negatively impacted by increase in payroll tax-related costs as states continue to raise unemployment insurance rates in wage basis in an effort to replenish their depleted unemployment funds. We expect 2012 to be a strong year overall at the firm and we remain excited about our prospects. I'll now turn the call over to Bill Sanders, Kforce President, who will provide his comments; and Joe Liberatore, Kforce CFO, will then provide additional insights on operating trends and expectations. Bill?

Thank you, Dave, and thanks to all of you for your interest in Kforce. We are pleased with a successful completion of the final year of our 3-year strategic plan, called the Triple Crown, in 2011, and are excited to embark upon the expedition, our 2012 to 2014 plan. Our foundation of great people, processes and tools, combined with our flexible NRC and Strategic Accounts model and our tenured leadership and sales teams, drove record high revenues in excess of $1.1 billion in 2011, as well as revenue records in Tech and HIM Flex. We are very pleased with the results for the fourth quarter. While we have sequential revenue increases in all Flex business lines on a billing-day basis, except for Kforce Clinical Research, which is highly impacted by paid time off around the holidays. We were able to continue to take advantage of our advanced sales and delivery platform that leverages the combination of our field associates, Strategic Accounts executives and National Recruiting Center to profitably grow revenue with both large and small clients. We also now have more than a full year of data and visibility into our key performance indicators through the firm's new reporting vehicle we call AMP [ph]. This tool provides a realtime dashboard into our associates activity levels, which assists us in managing and incentivizing our teams to achieve success. Tech Flex continues to have strong demand in the quarter. Tech Flex is our largest business unit, and represents 55% of total firm revenues. Q4 revenues increased 2.5% sequentially on a billing-day basis, and increased 15.1% year-over-year and increased 16.1% for the year 2011 over 2010. Our key performance indicators for Technology remained at high levels and fill ratios are improving, suggesting strong demand. The candidate pool for Technology consultants, in particular, is very tight. This is especially true for skill sets and demand such as EPIC, Java and .NET. Maintaining a pipeline and finding candidates through passive recruiting and social media is a necessity. January trends for Tech Flex are typically down from the prior quarter. The declines in January 2012 due to assignment ends were slightly deeper than last year but recovering faster, with stronger KPI volume further suggesting strength in this business. We expect sequential revenues for Tech Flex to increase in the first quarter. Revenues for our Finance and Accounting Flex business, which represents 18% of our total revenue, increased 11.2% sequentially on a billing-day basis and increased 7.2% year-over-year and 17.2% for the year 2011 over 2010. The year-over-year growth is impacted by a decline in activity and lower bill rate position, inclusive of the mortgage-related assignments, which constitutes approximately 17% of our F&A business and was very strong last year. This portion of our F&A business improved quarter-over-quarter, though we expect to continue to experience volatility in this area based upon changes in the housing and mortgage market. FA Flex revenue showed an upward trend throughout the fourth quarter, recent trends and performance indicators for FA Flex are strong, and we expect continued growth for this unit in Q1. Both of our Tech Flex and FA Flex businesses benefit from our cost-effective and highly elastic National Recruiting Center, coupled with our Strategic Accounts strategy and highly tenured workforce serving all of our clients. Currently, approximately 30% of Technology and FA revenue is being supported by the NRC, which is consistent with Q3 levels as the broad-based demand in our small- to medium-size clients is not keeping pace with the growth of our Strategic Accounts. In the aggregate, the firm provides consultants to approximately 3,000 clients at any time. We have an extremely diversified revenue stream with no one client constituting more than 5% of total revenues. Our flexible model allows us to redeploy consultants in the industry with the greatest demand for our services such as Healthcare. Four of our top 25 clients are in financial services and comprise approximately 8.9% of total revenues, which has declined from 10.2% a year ago. Financial services represent 20.7% of Tech Flex revenue, which remains unchanged from Q4 of 2010. The NRC and Strategic Account team was successful in 2011, and we expect to continue our focus on the evolution of these teams in 2012. During 2011, due to the significant demand for its resources because of large increases in Java order flow, a key focus of the NRC was on enhancing and refining its assignment prioritization processes and tools. We have already seen positive results on this front. Our field teams are highly leveraging NRC and the related processes and tools are deriving real benefit and experiencing higher fill rates. We expect continued process improvements in 2012, and should also see benefits of increasing tenure with NRC in the form of improvements as 55% of the team has now been with the firm for greater than one year. Though the firm is already realizing significant benefits from the NRC, we expect continued improvement in 2012 and future years. Revenues for our Health Information Management business increased 12.5% sequentially on a billing day basis and 17% year-over-year and 19% for the year 2011 over 2010. Our HIM Flex revenues were at record levels, and revenue trends continue to be promising as hospital spend continues to improve, particularly in the project services and remote coding areas. This business has grown more quickly than all of our other businesses over the past year and has now grown 7 straight quarters. We believe in the long-term demand for this profitable business and in particular, opportunities that are evolving for both HIM and Tech Flex, with client transition to electronic medical records and with the October 2013 deadline for the adoption of ICD-10. We expect HIM revenues to be up again in the first quarter. During the fourth quarter, revenues in our Clinical Research business declined 1.6% sequentially on a billing day basis and increased 14% year-over-year. The sequential decline in Clinical Research was expected due to significant traditional holiday shutdowns in our largest clients in Q4. We have been very successful in transitioning our valuable billable resources to other clients as major projects end. In some cases, this has led to improved profitability as we avail ourselves of higher margin opportunities at new or smaller clients. We are pleased to achieve the milestones of 50 active regularly generating clients in the fourth quarter. We intend to leverage our strong platform for additional growth opportunity and remain highly focused on continuing to diversify our client portfolio in 2012. For example, we expect to expand our project monitoring solutions practice, which carries much higher margins. We are expecting revenues to grow in Q1. Revenues for Kforce Government Solutions increased 2.4% sequentially on a billing day basis, but decreased 0.2% year-over-year. The sequential growth was driven by a combination of new project wins and incremental headcount additions on existing projects. We believe we have made significant process in repositioning this profitable unit for success. Government contractors continue to see the negative impacts of a challenging federal procurement environment and funding cuts. As a result, revenue visibility remains limited, though, we believe with our diverse and quality sales pipeline, we may take market share in this project base business. As we look forward to Q1, we anticipate revenues will be flat to slightly up. However, negative revenue trends in this business could result in a noncash impairment charge on this unit's intangible assets. Perm revenues from direct placement and conversions, which constitute 3.6% of total revenues, decreased 12.4% sequentially and 6% year-over-year and were up 13.1% for 2011 over 2010. We continue to make measured investments in our field and NRC Search teams to support this revenue stream. Q1 historically has improved as the quarter progresses and, thus, revenues are very difficult to predict. We expect Perm revenues to continue to be relatively stable in Q1. In terms of core headcount trends, we maintained a stable headcount during Q4. Sales headcount, inclusive of the NRC and Strategic Accounts, decreased 1% sequentially, but increased 10.8% year-over-year. We expect to continue to make selective investments in our sales associate headcount as we achieve certain performance metrics. Revenues per employee is now 2.7% higher than a year ago. We performed well in 2011 and are poised for success as we embark on our 3-year strategic plan. We believe our diversified service offering, fortified by our tenured field teams, and our National Recruiting Center and Strategic Account executives, will result in continued revenue growth as we move further through this economic recovery. As we embark on our expedition to attack the summit during the next 3 years, our priorities are continuing relentless focus on retaining our great people and improving client satisfaction while driving continued profitable revenue growth. I will now turn the call over to Joe Liberatore, Kforce CFO and Executive Vice President, who will provide additional insights on operating trends and expectations. Joe?

Thank you, Bill. I also applaud our team for their performance in the final year of our 3-year strategic plan. From a financial standpoint, 2011 provides the opportunity for the firm to take advantage of our flexibility and capacity to gain market share while protecting our strong balance sheet and delivering solid results of record high revenues of $1.1 billion, $27.2 million of net income and earnings per share of $0.70. Cash flow and EBITDA also continue to be strong in 2011. We are well positioned to take advantage of available opportunities in 2012 and return to strong results to our shareholders. The firm continued its strong performance in the fourth quarter. Total revenues for the quarter of $285.6 million increased 3.7% sequentially on a billing day basis, and increased 10.5% year-over-year, driven by broad-based growth in our flexible staffing businesses. Quarterly revenues for Flex of $275.2 million, increased 4.2% sequentially on a billing day basis and increased 11.2% year-over-year. Search revenue of $10.4 million decreased by 12.4% sequentially and decreased 6% year-over-year. Overall, revenue per billing day were at record highs, and trends in Q4 showed improvement in October and November, followed by a decrease in December. Sequential monthly revenue trends for Tech Flex were flat from prior months in October, improved in November and declined in December. Sequential revenue trends for FA Flex increased steadily in each month through the quarter. HIM revenue increased in October, was flat in November and decreased in December. Clinical Research decreased in each of the 3 months in Q4. Search decreased in October, strengthened in November but decreased again in December. Flex revenue trends for the beginning of the first quarter of 2012 are down from December, primarily as a result of the year-end assignment ends. For the first 3 weeks of January, Tech Flex is up 14.3% year-over-year. Finance & Accounting Flex is up 11.3% year-over-year. KCR is up 21.9% year-over-year, and HIM is up 13.9% year-over-year. Search revenues are up 9.4% year-over-year for the first 4 weeks of Q1 2012. We caution that early quarter trends don't necessarily accurately reflect potential full quarter results. Net income of $7.1 million and earnings per share of $0.20 in Q4 2011 decreased sequentially 16.1% and 9.1%, respectively, compared to Q3 2011. Year-over-year net income and earnings per share increased 11.8% and 25% from $6.3 million and $0.16 in Q4 of 2010. Our overall gross profit percentage of 31.2% decreased 50 basis points sequentially and decreased 70 basis points year-over-year. Our Flex gross profit percentage of 28.6% in Q4 2011 decreased 30 basis points sequentially and decreased 20 basis points year-over-year. The sequential decrease was driven primarily by paid time off impact and escalating statutory costs. Year-over-year, improvement in spreads of 100 basis points was largely offset by the impact of the new higher tax credit that was recognized in Q4 2010. The new higher tax credit added 90 basis points to Flex margins in Q4 2010. This program expired at the end of 2010 and, thus, did not impact margins in 2011. Bill rates in Tech Flex increased 1.6% sequentially. The increase in Flex gross profit percentage due to the expansion of spreads between bill and pay rate and Tech Flex was 40 basis points sequentially and 130 basis points year-over-year. Bill rates in F&A decreased 1.7% sequentially and were impacted by business mix. The sequential decrease in Flex gross profit percentage due to the contraction of spreads between bill and pay rate and FA Flex was 20 basis points. Year-over-year, there was a positive impact of 130 basis points due to the expansion of bill pay spreads. Margins in this cycle have been significantly impacted by increasing statutory costs and have not improved as rapidly as in the prior cycles. However, based upon our experience in 2011, it appears that bill pay spread may now be expanding at a rate more typical to traditional recoveries. We continue to be highly focused on margin expansion and expect to recapture a significant portion of the impact of increasing statutory costs through higher bill rates on both new and existing assignments. We believe that the current supply-demand environment suggests that pricing power will continue to improve over time, though it may not be at the same rates seen historically. As we look to Q1, Flex margins in the first quarter will be negatively impacted by payroll taxes, which could reduce Flex margins as much as 120 basis points, though we expect bill pay spreads to be stable to improving. Overall, we expect to see continued modest margin expansion in 2012. We've continued to diligently manage operating expenses during Q4 and throughout 2011. Operating expenses were 27.2% of revenue in Q4 2011, which increased 10 basis points from Q3 2011, but decreased 60 basis points from 27.8% in Q4 2010. Over time, we expect to see additional operating leverage as revenues increase. Our accounts receivable portfolio continues to perform very well. Write-off continued to be small, and a percentage of receivables aged over 60 days remained at low levels. The firm's cash flow continues to be strong. EBITDA was $17.9 million or $0.50 per share in Q4 as compared to $20.1 million or $0.52 per share in Q3. Year-over-year, EBITDA increased 17.5% from $15.2 million in Q4 2010. Bank debt at quarter end of $49.5 million was down $9.9 million from $59.4 million at the end of Q3. Borrowing availability under our credit facility as of the end of Q4 is $35.9 million. The firm repurchased approximately 172,000 shares of stock at an average price of $9.84 in Q4. For the year, we repurchased 5.7 million shares at an average price of $10.38 per share. There's currently 84.2 million available for future stock repurchases under the current Board of Directors authorization. We will continue to be opportunistic in future repurchases as cash flow and market conditions warrant. With respect to guidance, the first quarter of 2012 had 54 billing days compared to 61 billing days in the fourth quarter. We expect revenues may be in the $293 million to $300 million range. Earnings per share may be $0.14 to $0.16. Our effective tax rate in Q1 is expected to be approximately 39%, with approximately 35.7 million weighted average diluted shares outstanding. We expect the increase in payroll taxes in both cost of sales and SG&A to reduce EPS by approximately $0.07 relative to our fourth quarter. This guidance does not consider the effect, if any, of charges related to the impairment of intangible assets, acceleration of equity incentives, costs related to the settlement of any pending legal matters, the impact of revenues of any disruption in the government funding of the firm's -- or the firm's response to regulatory, legal or tax law changes. We are pleased with our fourth quarter results and we continue to be confident in our long-term success as we strive to capitalize on the changes in the external environment and the impact on our business. Our mix of service offerings, particularly in Tech, FA and HIM, position us well as we see continued secular shift towards flexible staffing. Our gross margin profile is already one of the most attractive in the industry, but the capability to cost effectively meet customer needs for speed and quality allows us to derive EBIT both through increased gross margin and through operating efficiencies as flexible compensation structures. We launch our next 3-year strategic plan with a high-quality revenue stream and balance sheet, a highly tenured associate population and a very strong management team. We expect to capitalize on the capacity that exists in our associate base to grow revenues and improve earnings. Operator, we'd like to now open up the call for questions.

[Operator Instructions] Our first question comes from Kevin McVeigh of Macquarie.

Joe, one question. I know there's $0.07 impact from payroll tax in Q1. Where's that been relative to history in terms of EPS impact over the last couple of years?

Yes. Well, if I reflect on last year, last year, we had about a $0.06 impact. So what we've really built into our guidance is a comparable scenario to what we experienced last year, roughly 120 basis points of statutory. Now, last year, we did experience 210 basis points of total payroll tax impact, but 90 basis points of that was related to the new higher tax credit. So very similar. So if you think of it last year, it was about $0.05 impact for our Flex population, about $0.01 impact for our core population, and this year, it's about $0.06 and $0.01. Because part of the dynamic there, too, Kevin, is with the lower share count, we also get some impact on that EPS.

Got it, got it. And then, Joe, it sounds like the pricing is definitely starting to firm as we think about 2012. The supply demand has been pretty tight in IT over the last couple of years. What's starting to change were you're really starting to see kind of some of the clients sounds like they're willing to pay up a little bit for the candidate at this point?

Yes, I think the big part of it is we've been after the pricing education in terms of what's happening with not just the statutory cost increases, but as well as the supply-demand shifts that are taking place. And I think the clients also have had more experiences in losing candidates that they wanted or not getting the quality candidate that they desired, which is assisting us on some of the bill rate expansion and our team's done a very effective job on managing the pay side of it. And I would attribute part of that to we offer a pretty robust benefits programs and various other things to our consultant population, which provides us a little leverage on the pay front.

Got it. And just switching gears, and this will be my last question. ICD-10, I just want to make sure -- where's that captured amongst the segments? Is it all in one or across a couple? And as a percentage of revenue today, how does that kind of impact the business?

Yes, today, a very small percentage of revenue. I think we're going to see probably most of that opportunity to materialize in the next 18 months. So it's captured predominantly in our HIM unit today. We will see some of that, but Tech follow-on business would be captured in our Tech service line as we handle -- get involved with any remediation type work.

Our next question comes from Mark Marcon of Robert W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Just wondering if you could talk a little bit -- first of all, just on the guidance with regards to the SUTA impact, just to make 100% sure, the 120 basis points is the sequentially, right?

Correct. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: And what percentage of that do you think you would be able to get back through price increases passing it along to the client, et cetera?

Mark, this is Bill. We have a -- last year, as you know, we did not pass along as much of that, and this year, we are going to -- we have been working with our clients. By the mid-February, we expect to have passed on to approximately 65% to 70% of our clients, to have passed on this rate. So we were working that hard and so have a -- effect on half this quarter, and we expect the rest of that in the second and third quarters of this year as turnover improves. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And so by the time we get to the back half, I mean, just given the way SUTA works, we shouldn't see much of an impact and at that point, then you should see a flow-through with regards to the bill pay spread that has been improving?

I would say, yes. But as you may be aware, the states are getting very clever and they have assessments -- extra assessments and a variety of things that happen. That is certainly our plan and hope. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then can you talk a little bit about -- you ended up increasing headcount by 10% over the course of the year, but it was down a little bit sequentially. How should we think about both headcount additions, internal comp expectations? And then also, CapEx and where you would make investments over the course of this year? And what would -- in a normal economic environment, how much operating margin improvement should we hope for?

There's several question there, Mark.

Mark, okay. I'll take on the headcount additions. Certainly, as our metrics proved to be met, we will add at a very measured way to our headcount additions. As we have suggested, we've been more measured in adding to our Search team and more aggressive in adding to our Flex team. But it's all about KPIs, and as we indicated in our prepared remarks, KPIs are very strong. And so that would suggest to us if our historical trends workout to what we have seen against job orders, and if submittals turn into sales, then we would expect to see headcount increasing as we make those metrics.

Yes, Mark, from a CapEx standpoint, we anticipate 2012 to be very similar to 2011. 2011 CapEx was about $7.7 million. We were forecasting approximately $8 million of CapEx spend in 2012. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then I know you're not giving full year guidance or anything, but just as we look out towards the overall year, if we were to experience growth rates that were similar to what you ended up experiencing in the fourth quarter, when we think about the incremental GP, how much of that should end up dropping down to the operating line? You had a good performance this year, roughly 30% of your incremental GP ended up falling down to the EBIT line.

Yes, probably, we would tail off from that to a certain extent because we have certain other costs that are coming back into the business in reinvestment. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then last question, and I'll jump back in the queue. Obviously, there's lots of news flow out there on the pharma industry and I know you can't name specific clients, but you've done a terrific job so far in the second half in terms of maintaining the Clinical Research revenue. I'm wondering, is it realistic to assume that you can continue to successfully transition folks? Or would it be smart to assume that there'll probably be a little bit of a tail off as the year unfolds?

It's a 2 or 3 things to you Mark. This is Bill. One, we've almost, in the last year to 18 months, we have doubled the number of clients we have and now we're now up to 50 clients. In our largest account, for example, we continue to grow headcount. We're not sure what to expect and that will unfold as it unfolds. But our consultants have been with us, many of them 10 years or so, redeploying them and this labor shortage is something that we can do rather quickly as there are very high demand. And so at the moment, we are not predicting any significant consequences.

Our next question comes from Tobey Sommer of SunTrust.

I just wanted to ask you about the pricing in your KPIs for Tech Flex. Could you describe what's your monitoring and what's giving you confidence that momentum there is durable?

Well, I'm not sure. This is Bill. I'm not sure that it's the pricing that's as durable as much of the KPIs and the job orders and the activity that we'll see, obviously -- well, not obviously, the large clients are still quite aggressive in pricing and are starting to see a loss -- a lack of retention of consultants and hard to find new consultants to have the appropriate capabilities they are looking for. The spot market is moving faster than that and the pricing realm, and so we're happier there. And it's certainly is, as time goes along, where we are in the skill shortage and in Tech, mostly in Tech, but it also certainly in HIM and KCR. So we look forward to pricing pressure as we go forward.

Tobey, this is Joe. I'd also reference some of our Tech Flex rebuild. While Tech Flex fell a little bit further in the beginning of this year than what we experienced last year, which was really off of a historic best in terms of the amount of deterioration, we're seeing that rebuild take place faster. Likewise, when I look at the margin story, especially on the Tech Flex front in Q4, where we actually had margin improve in spite of more paid time off. I mean, I've been around the Tech Flex business for going on 23 years now, and I honestly don't know if I can recall another time where we improved Tech Flex margin from Q3 to Q4 with that phenomenon.

Joe, do you have an expected tax rate in the first quarter in 2012?

39%.

39%. And can you give me an update on the share repurchase authorization and were there any shares repurchased year-to-date?

Yes -- year-to-date, no, I didn't mention anything in my opening comments. I just mentioned what we repurchased in Q4, which is a little over 172,000 shares, and we have a little over 84 million remaining on our Board of Directors authorization.

And so the share count would be a little bit lower headed into the first quarter based on the fourth quarter activity?

I mean, when you average it, I provided -- I mean, I provided the number in guidance that we're using...

I apologize, I didn't catch that.

The 35.7 million is what I would be using.

Our next question comes from Giri Krishnan of Crédit Suisse. Giridhar Krishnan - Crédit Suisse AG, Research Division: I had a couple of questions. First, regarding KGS where it sounded like there may be an impairment coming. But I wanted to go back to some comments you made, I think, the last couple of quarters where you sounded like you're trying to use more employees to drive more commercial or could you update us on where or how much progress you've made there or what are the plans given what you know about the visibility in the segment?

Yes, this is Joe. I'll address the front end of your question and then Bill can address the second part of your question. In terms of impairment, we go through our exhaustive end-of-year impairment taxing. So as of the close of 12/31, that business has not impaired. We do have a cushion in that business. So that's where we stand at this point in time. You do probably referencing maybe Bill's comments, as well as I referenced some comments there. If we were to see revenue deterioration, it is possible that we have about $103 million of goodwill that we carry in that business, a potential impairment on that front. But the revenue would have to be deteriorating or profitability would have to be deteriorating.

Can you repeat your second part of your question so we'll make sure we answer it correctly. Giridhar Krishnan - Crédit Suisse AG, Research Division: Yes, I think you are contemplating using some of the employees in that segment given the capacity have available to drive more commercial work, I mean, have them staff more commercial projects. And I don't know if you are still doing that today.

Sure. We are doing it. But there's some -- that some, that group are -- they're permanent employees, and they are very highly talented in the solutions business. And government is just another client, and it is applicable to the commercial side as well and we are doing activities in commercial clients as we speak. So yes, we'll continue to utilize those talented people to grow that practice. Giridhar Krishnan - Crédit Suisse AG, Research Division: Okay. And then just sort of a broader question. Even sort of the trends you've seen in the last couple of quarters and it seems like you have better visibility, bill pay spreads seemed to be moving the right direction, could you revisit sort of the long-term targets you have provided some time last year, your 3- to 5-year targets, what would you need to see -- give us sort of an update on what you think are realistic 3- to 5-year revenue and earnings growth targets?

This is Dave. I think we learned our lesson last year when we tried to look at a little bit further ahead and perhaps the headlights were going on the road, and as we saw things change pretty significantly. So we withdrew our longer-term targets and have not reestablished those. And at this time, I do not think it's prudent to, particularly given the level of uncertainty in the external climate and the lack of visibility. However, with that said, we can clearly see that there's been a consistent high level of activity across all of our business units. And in addition, our front-end system in measuring activity, AMP [ph] does suggest that activity is not only stable, it's actually accelerating. And we are seeing indications from other clients, but particularly in Tech, that their demand is also increasing. So what we can see today through our front-end systems, KPI and in discussions with clients would suggest the business is strong and continuing to get stronger. However, with the external climate, given what's going on in Europe, I don't even know how they settle the Greek crisis today, they keep saying the next day. And of course, geopolitical risk and so forth, oil prices, I don't think it's prudent to go along in any guidance. I'll just say that from what we can see today, we're very optimistic and very confident.

Our next question comes from Paul Ginocchio of Deutsche Bank.

Just a question about IT scarcity. And is there any metrics that you look at or is there anything you can help us understand better maybe how much scarce your talent is getting versus maybe 6 and 9 months ago? And when it comes to unfilled orders or whatever you look at that sort of help us understand that metric better?

Yes, Paul, this is Dave. Bill will probably comment as well. That's one of the benefits of the AMP [ph] system is we can look at activity levels. We can look at submittals. We can look at bill rate percentages, and we grade them based on the quality of the assignment. And that was one of the things that we had to improve off of the last years as we were victims of our own success and greatly creating an avalanche of demand that was impossible for our NRC team to be able to support. So with that being said, the key metrics that we look at really are the number of assignments, submittals and fill rates, and that is particularly for what we call the high-quality assignments that we pay orders. And those are the things that would tell us that we're getting stronger. Part of that is, I think, Joe mentioned earlier, is an education process for the client because we want the clients to understand, which they're also experiencing, that there's tremendous amount of demand for this talent and they don't last long. So it's a part of our sales process. We're educating them on speed to a decision. And in many cases, we've actually significantly compressed that decision-making cycle, which is improved the bill rates. Bill, do you want to add any comments to that?

I'll just say that demand exceeds supply.

Great. Certainly, I noticed the q-on-q decrease in SG&A and the pickup in the gross margin. So it does look like you are able to get an offset from the higher Search costs. Is that a good way to think about it? Or how do you think about it?

Yes, I mean, I think the way that we look at the business is we have a responsibility to continue to optimize to become more efficient internally. And then if we were to have traditional margin expansion take place that, that should be additive to us. So we're doing everything that's within our power to optimize our delivery capabilities, as well as managing every SG&A expense line item in the P&L.

Just a final one. Again, it sounds like Search costs are not going up as fast as maybe the bill pay rate spread?

The Search revenues?

No. Sorry, the cost of finding Tech Flex talent?

That's embedded in our SG&A, Paul. And that's one of the measures that we look at in terms of our productivity and efficiency. So no, it's not going up.

Our next question comes from John Healy of North Coast Research.

I wanted to ask a question about the mix of your customer base today, and I was hoping if you could give some color on the percentage of the business that you define as kind of the small and medium-size customers? Because it sounded like you were starting to see some life there. And was just trying to put that into context versus historical standards and maybe how we think about the gross margin difference on that business relative to your larger customer business?

Well, as you look at our business, 27% of F&A and Tech is in large clients, and 23% of total revenues are in large clients. And that's in -- when you look at those segments, we also see the different segments that we have suggested to you so there's large clients and KCR -- Clinical Research. There's large clients in government as well. But I would say if you want an overall big picture, 1/3, 1/3, 1/3. It's a well-balanced portfolio, 3,000 clients, no more -- no client, 5% of revenue.

This is Joe. Relative to the margin profiles, the way that I would kind of talk about that in a simplistic fashion is in Tech Flex, we see some margin difference between our larger customers, whether that be Strategic Account or firm's sponsor in the spot market. The spot market typically, we are able to pay margins that are some more 15% to 20% greater. Likewise in FA. In FA, the gap is even larger between the strategic customers and the spot market, mainly because what we see in our larger customers, strategic profile customers for FA, is more of that high-volume lower margin business. So it's a little bit more exaggerated in that business. Lower bill rate as well.

Very helpful. And when I think about how you use -- utilize the NRC, has there been much change in strategy over in 2011 or maybe how we should think about it for 2012 in terms of redeploying your resources? And I'm trying to understand is there anything funny going on with the growth rates between F&A and Tech as a result of you may be moving members of the NRC into the Tech vertical and away from the F&A vertical? And maybe you're kind of chasing the longer-term opportunity in Tech. I'm trying to understand in terms of the how the NRC is being utilized? Has it changed meaningfully when you look at it in 2011 versus 2010? And does it change anyway going forward in 2012?

Joe, this is Dave. The evolution of the NRC continues. And as we learn and learn how to apply it, at scale in different points in the cycle, that by definition is going to cause us to change our strategy. For example in '11 -- '08 and '09 and early '10, we were playing offense in a relatively difficult environment. I mean, we're enormously successful in retaining clients and actually growing it. In 2010 and going into early '11, as we saw a pretty significant shift in demand and a spike in demand, we were really victims of our own success. Our field sales folks and Strategic Accounts folks were selling tremendous amounts of business, which frankly, we couldn't handle. I love to be able to fill all of it, couldn't do it. So as we looked at that situation, we went back and remodeled the way that we prioritize and the way that we allocate resources, and that led to some significant improvements in our processes in systems, which allowed us to narrow focus and improve fill rates. And we are still, I would say, probably in the early part of experiencing the benefits of that and the continued evolution. And so when you think about the NRC, the best way to say is that it's still early in the evolution as we apply it. I would also point out, as Joe said and Bill said, the 55% of our people are now just crossing one year. So they're now heading a maturation point where they have the experience and the understanding to perform at a higher level because tenure equals improved performance. So with that being said, the key leverage point for the NRC is our ability to be able to allocate resources to the surges in demand. Unlike what most can do in a field-base delivery model, we're it's very difficult to match supply and demand in any one particular market, we can do that here. That for our NRC also applies across functional areas, so we can move people from Finance to Tech and Tech to Finance. With that being said, there are some that are specifically assigned and stay with those accounts because of the intimate knowledge that's required of their hiring processes and the Technology, and there are others that are able to move in a swat team kind of basis as there was spikes in demand. So I wouldn't get hung up on thinking about the NRC as being functionally specific or inflexible. In fact, it's just the opposite. The process of assignment and focus is -- it is being improved and will continue to be, but the real advantage, the strategic advantage in the NRC is its flexibility.

Our next question comes from Morris Ajzenman of Griffin Securities.

Two follow-up questions. One, early in the presentation, you spoke about expecting to pass through about 2/3 of the state unemployment taxes to your customers as 2012 unfolds. Let's talk about the other 1/3. What is it that takes more time and how much patience do you have with the other 1/3 of your customer base of not being able to pass through as always high state employment taxes as quickly as you'd like?

Yes, I think -- that was one of timing. So I think you're referencing a comment that Bill had shared earlier in terms of some of the pricing initiatives that we have going on here in Q1. So that's related to timing. So through the course of the year, we anticipate will be passing along 100% through the course of the year, but it's timing as assignments end, those consultants will be repriced to market. So I think that's where that got lost in the translation.

And one other little bit here because most of the questions have been pretty well picked over. When you look at the year-to-year, just the data point, revenues were up a healthy 12.1%. Trades receivable, up 17.8% year-over-year. Any comment on that?

Well, part of it is the makeup of our client portfolio, much higher mixture of larger Strategic Accounts and if those come on board, they typically have a little bit longer cycle from receivables. But it is important to note that our write-offs continue to remain at historic low levels. I mean, write-offs were 2011 in total were less than $500,000. So I believe our team has done a tremendous job in terms of the creditworthiness of the profile. So that's just one more of a timing of collections because of certain contractual obligations. But in terms of the quality of the receivable base, I would say, it's at highest level ever.

I'm not showing any further questions at this time. I would now like to turn the call back to David Dunkel for any further remarks.

Okay, that's great. Once again, we want to thank you for your interest in support for Kforce. And once again, thanks to our team for performing very well on these somewhat confusing and challenging market conditions and for really getting it done out of the field everyday. Thanks to each and every member of our field and corporate teams, to our consultants and in our client for allowing us the privilege of serving you, and we will look forward to speaking with you again in our Q1 call. Have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.