FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-24484
MPS Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida 32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. October 31, 2002.
Common Stock, $0.01 par value Outstanding: 102,566,674 (No. of shares)
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are subject to
certain risks, uncertainties or assumptions and may be affected by certain other
factors, including but not limited to the specific factors discussed in Part I,
Item 3 under 'Liquidity and Capital Resources,' 'Seasonality,' and 'Factors
Which May Impact Future Results and Financial Condition.' In some cases, you can
identify forward-looking statements by terminology such as 'will,' 'may,'
'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,'
'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,'
'would,' or 'become' or the negative of these terms or other comparable
terminology. In addition, except for historical facts, all information provided
in Part I, Item 3, under 'Quantitative and Qualitative Disclosures About Market
Risk' should be considered forward-looking statements. Should one or more of
these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements of the
Company may vary materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
MPS Group, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months
ended September 30, 2002 and 2001.................................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2002 and 2001.................................................................. 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 18
Item 4 Controls and Procedures................................................................................ 21
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 22
Item 2 Changes in Securities and Use of Proceeds.............................................................. 22
Item 3 Defaults Upon Senior Securities........................................................................ 22
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 22
Item 5 Other Information...................................................................................... 22
Item 6 Exhibits and Reports on Form 8-K....................................................................... 22
Signatures............................................................................................. 23
Certifications......................................................................................... 24-25
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
(dollar amounts in thousands except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 51,834 $ 49,208
Accounts receivable, net 197,401 227,069
Prepaid expenses 6,098 6,444
Deferred income taxes 5,668 5,873
Other 10,886 12,102
----------------------------------
Total current assets 271,887 300,696
Furniture, equipment, and leasehold improvements, net 39,065 48,742
Goodwill, net 511,759 1,165,961
Deferred income taxes, long-term 62,735 -
Other assets, net 28,880 28,223
----------------------------------
Total assets $ 914,326 $ 1,543,622
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 37,514 $ 49,207
Accrued payroll and related taxes 36,638 39,524
Income taxes payable 2,177 7,243
----------------------------------
Total current liabilities 76,329 95,974
Credit facility 25,000 101,000
Deferred income taxes, long-term - 22,214
Other 9,547 13,623
----------------------------------
Total liabilities 110,876 232,811
----------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized;
102,553,340 and 98,306,783 shares issued and outstanding, respectively 1,028 983
Additional contributed capital 622,023 594,061
Retained earnings 187,785 730,085
Accumulated other comprehensive loss (2,722) (9,400)
Deferred stock compensation (4,464) (4,918)
Treasury stock, at cost (40,400 shares in 2002) (200) -
----------------------------------
Total stockholders' equity 803,450 1,310,811
----------------------------------
Total liabilities and stockholders' equity $ 914,326 $ 1,543,622
==================================
See accompanying notes to condensed consolidated financial statements.
3
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September, 30 September 30, September 30,
(dollar amounts in thousands except per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 289,428 $ 368,853 $ 874,534 $ 1,222,902
Cost of revenue 213,493 270,844 647,820 885,875
------------- ------------- -------------- -------------
Gross profit 75,935 98,009 226,714 337,027
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 60,307 79,028 188,404 264,449
Depreciation 5,456 5,490 15,379 16,243
Amortization of goodwill - 9,635 - 28,936
------------- ------------- -------------- -------------
Total operating expenses 65,763 94,153 203,783 309,628
------------- ------------- -------------- -------------
Income from operations 10,172 3,856 22,931 27,399
Other expense, net 1,206 1,897 3,761 7,281
------------- ------------- -------------- -------------
Income before provision for income taxes and
cumulative effect of accounting change 8,966 1,959 19,170 20,118
Provision for income taxes 3,676 881 7,758 9,041
------------- ------------- -------------- -------------
Income before cumulative effect of accounting change 5,290 1,078 11,412 11,077
Cumulative effect of accounting change (net of
a $112,953 income tax benefit) - - (553,712) -
------------- ------------- -------------- -------------
Net income (loss) $ 5,290 $ 1,078 $ (542,300) $ 11,077
============= ============= ============== =============
Basic net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.05 $ 0.01 $ 0.11 $ 0.11
Cumulative effect of accounting change, net of tax - - (5.52) -
------------- ------------- -------------- -------------
Basic net income (loss) per common share $ 0.05 $ 0.01 $ (5.41) $ 0.11
============= ============= ============== =============
Average common shares outstanding, basic 102,369 98,071 100,337 97,754
============= ============= ============== =============
Diluted net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.05 $ 0.01 $ 0.11 $ 0.11
Cumulative effect of accounting change, net of tax - - (5.41) -
------------- ------------- -------------- -------------
Diluted net income (loss) per common share $ 0.05 $ 0.01 $ (5.30) $ 0.11
============= ============= ============== =============
Average common shares outstanding, diluted 103,115 98,291 102,303 97,948
============= ============= ============== =============
See accompanying notes to condensed consolidated financial statements.
4
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30,
------------------------------
(dollar amounts in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net (loss) income $ (542,300) $ 11,077
Adjustments to net (loss) income to net cash provided
by operating activities:
Depreciation 15,379 16,243
Amortization of goodwill - 28,936
Cumulative effect of accounting change, net of tax 553,712 -
Deferred income taxes 14,717 6,012
Deferred compensation 1,212 897
Changes in assets and liabilities:
Accounts receivable 38,663 53,331
Prepaid expenses and other assets (1,245) (1,860)
Accounts payable and accrued expenses (13,389) (2,441)
Accrued payroll and related taxes (4,042) 2,513
Other, net 9,900 (1,747)
--------------- ---------------
Net cash provided by operating activities 72,607 112,961
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (3,482) (13,771)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (6,702) (3,807)
--------------- ---------------
Net cash used in investing activities (10,184) (17,578)
--------------- ---------------
Cash flows from financing activities:
Repurchases of stock (200) -
Proceeds from stock options exercised 16,334 76
Repayments on indebtedness (76,406) (75,320)
--------------- ---------------
Net cash used in financing activities (60,272) (75,244)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 475 (7,201)
Net increase in cash and cash equivalents 2,626 12,938
Cash and cash equivalents, beginning of period 49,208 5,013
--------------- ---------------
Cash and cash equivalents, end of period $ 51,834 $ 17,951
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission ('SEC'). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Form 10-K, as filed with the SEC on March 26, 2002.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
The accompanying condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the interim periods presented. The results of operations for
an interim period are not necessarily indicative of the results of operations
for a full fiscal year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statements of Financial Accounting Standards ('SFAS') No. 142, 'Goodwill and
Other Intangible Assets,' which is required to be adopted in fiscal 2002. SFAS
No. 142 establishes accounting and reporting standards for goodwill and
intangible assets resulting from business combinations. SFAS No. 142 includes
provisions discontinuing the periodic amortization of, and assessing the
potential impairments of goodwill (and intangible assets deemed to have
indefinite lives). As SFAS No. 142 replaces the measurement guidelines for
goodwill impairment, goodwill not considered impaired under previous accounting
literature may be considered impaired under SFAS No. 142. SFAS 142 also requires
that the Company complete a two-step goodwill impairment test. The first step
compares the fair value of each reporting unit to its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired and the second step is not required.
SFAS 142 requires completion of this first step within the first six months of
initial adoption and annually thereafter. If the carrying amount of a reporting
unit exceeds its fair value, the second step is performed to measure the amount
of impairment loss. The second step compares the implied fair value of goodwill
to the carrying value of a reporting unit's goodwill. The implied fair value of
goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. This allocation process is
only performed for purposes of evaluating goodwill impairment and does not
result in an entry to adjust the value of any assets or liabilities. An
impairment loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Upon the initial adoption, any
impairment loss identified is presented as a change in accounting principle, net
of applicable income tax benefit, and recorded as of the beginning of that year.
Subsequent to the initial adoption, any impairment loss recognized would be
recorded as a charge to income from operations.
The Company adopted SFAS 142 as of January 1, 2002. During the first
quarter of 2002, the Company completed both steps of the transitional goodwill
impairment tests which resulted in an impairment charge of $553,712, net of an
income tax benefit of $112,953. Refer to Note 4, 'Goodwill' for further
discussion of the impact of SFAS 142 on the Company's financial position and
results of operations.
In August and October 2001, the FASB issued SFAS No. 143, 'Accounting for
Asset Retirement Obligations' and SFAS No. 144, 'Accounting for the Impairment
or Disposal of Long-Lived Assets,' respectively. SFAS No. 143 requires the fair
value of a liability be recorded for an asset retirement obligation in the
period in which it is incurred. SFAS No. 144 addresses the accounting and
reporting for the impairment of long-lived assets, other than goodwill, and for
long-lived assets to be disposed of. Further, SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale. The Company
has adopted both SFAS No. 143 and No. 144 for 2002. The adoption of these
statements did not have a material effect on the Company's consolidated results
of operations and financial position.
Additionally, in July 2002, the FASB issued SFAS No. 146, 'Accounting for
Costs Associated with Exit or Disposal Activities.' SFAS No. 146 establishes
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to recognition based on the
date of an entity's commitment to an exit plan. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. Management does not anticipate the adoption of
this statement to have a material effect on the Company's consolidated results
of operations and financial position.
6
2. Business Combinations
In July 2002, the Company acquired Elite Medical, Inc., a health care
staffing business. Purchase consideration totaled $7.0 million in cash at
closing, a $1.0 million deferred cash payment and 1,141,269 shares of stock
valued at $8.7 million. This acquisition, which is included in the Company's
professional services division, was immaterial to the Company's third quarter
results of operations. Refer to Note 4 'Goodwill' for the amount of goodwill
recorded for this acquisition.
3. Derivative Instruments and Hedging Activities
In 2001, the Company engaged in derivatives classified as cash flow hedges.
Accordingly, changes in the fair value of these hedges are recorded in
'Accumulated other comprehensive loss' on the balance sheets. The Company
formally documents all relations between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy for undertaking
hedging transactions. The Company formally assesses whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
cash flows of the hedged items. The non-effective portions of these hedges are
recorded as a component of current earnings.
The Company is currently a party to and in the future may enter into
interest rate swap agreements in the normal course of business to manage and
reduce the risk inherent in interest rate fluctuations. Hedging interest rate
exposure through the use of swaps is specifically intended to manage risk in
keeping with management policy. The Company does not utilize derivatives for
speculative purposes. Interest rate swap agreements are considered hedges of
specific borrowings, and differences received under the swap agreements are
recognized as adjustments to interest expense.
In February 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement was approved by the Board of Directors and expires
January 2, 2003. As of September 30, 2002, this swap agreement had a total
notional amount of $25.0 million and an underlying rate of 5.185%.
4. Goodwill
The Company adopted SFAS 142, 'Goodwill and Other Intangibles', effective
January 1, 2002. In connection with the adoption of SFAS 142, the Company
discontinued amortizing goodwill. The changes in the carrying amount of goodwill
for the nine months ended September 30, 2002, are as follows:
Information
Technology Professional e-Business
Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 592,037 $ 312,952 $ 260,972 $1,165,961
Impairment losses (338,449) (87,969) (240,247) (666,665)
Acquisition of Elite Medical, Inc. - 12,463 - 12,463
----------- ----------- ----------- -----------
Balance as of September 30, 2002 $ 253,588 $ 237,446 $ 20,725 $ 511,759
=========== =========== =========== ===========
In accordance with SFAS 142, the Company performed transitional goodwill
impairment tests at the reporting unit level as defined in SFAS 142. Reporting
units are equal to or one level below reportable segments. The Company engaged
an independent valuation consultant to assist with the transitional goodwill
impairment tests.
7
The fair value of each of the reporting units was calculated on an
enterprise value basis using the following approaches: (i) market multiple
approach and (ii) discounted cash flow approach. Under the market multiple
approach, market ratios and performance fundamentals relating to similar public
companies' stock prices or enterprise values were applied to the reporting units
to determine their enterprise value. Under the discounted cash flow ("DCF")
approach, the indicated enterprise value was determined using the present value
of the projected future cash flows to be generated considering appropriate
discount rates. The discount rates used in the calculation reflected all
associated risks of realizing the projected future cash flows.
The fair value conclusion of the reporting units reflects an equally
blended value of the market multiple approach and the DCF approach discussed
above. As a result of performing steps 1 and 2 of the goodwill impairment test,
a loss of $553,712, net of an income tax benefit of $112,953, was recognized and
recorded as a cumulative effect of accounting change in the accompanying
Condensed Consolidated Statements of Income.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of income taxes, for the periods
presented:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change,
as reported $ 5,290 $ 1,078 $ 11,412 $ 11,077
Goodwill amortization, net of income taxes - 6,784 - 20,355
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 5,290 $ 7,862 $ 11,412 $ 31,432
Cumulative effect of accounting change, net of income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss), as adjusted $ 5,290 $ 7,862 $ (542,300) $ 31,432
============ ============ ============ ============
Basic income (loss) per common share:
Income before cumulative effect of accounting change,
as reported $ 0.05 $ 0.01 $ 0.11 $ 0.11
Goodwill amortization, net of income taxes - 0.07 - 0.21
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 0.05 $ 0.08 $ 0.11 $ 0.32
Cumulative effect of accounting change, net of income taxes - - (5.52) -
------------ ------------ ------------ ------------
Basic net income (loss) per common share, as adjusted $ 0.05 $ 0.08 $ (5.41) $ 0.32
============ ============ ============ ============
Diluted income (loss) per common share:
Income before cumulative effect of accounting change,
as reported $ 0.05 $ 0.01 $ 0.11 $ 0.11
Goodwill amortization, net of income taxes - 0.07 - 0.21
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 0.05 $ 0.08 $ 0.11 $ 0.32
Cumulative effect of accounting change, net of income taxes - - (5.41) -
------------ ------------ ------------ ------------
Diluted net income (loss) per common share, as adjusted $ 0.05 $ 0.08 $ (5.30) $ 0.32
============ ============ ============ ============
8
5. Net Income per Common Share
The calculation of basic net income (loss) per common share and diluted net
income (loss) per common share is presented below:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income before cumulative effect of accounting change $ 5,290 $ 1,078 $ 11,412 $ 11,077
Cumulative effect of accounting change, net of
income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss) $ 5,290 $ 1,078 $ (542,300) $ 11,077
============ ============ ============ ============
Basic average common shares outstanding 102,369 98,071 100,337 97,754
============ ============ ============ ============
Basic income (loss) per common share:
Income before cumulative effect of accounting change $ 0.05 $ 0.01 $ 0.11 $ 0.11
Cumulative effect of accounting change, net of
income taxes - - (5.52) -
------------ ------------ ------------ ------------
Basic net income (loss) per common share $ 0.05 $ 0.01 $ (5.41) $ 0.11
============ ============ ============ ============
Diluted income (loss) per common share computation:
Income before cumulative effect of accounting change $ 5,290 $ 1,078 $ 11,412 $ 11,077
Cumulative effect of accounting change, net of
income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss) $ 5,290 $ 1,078 $ (542,300) $ 11,077
============ ============ ============ ============
Basic average common shares outstanding 102,369 98,071 100,337 97,754
Incremental shares from assumed exercise of stock options 746 220 1,966 194
------------ ------------ ------------ ------------
Diluted average common shares outstanding 103,115 98,291 102,303 97,948
============ ============ ============ ============
Diluted income (loss) per common share:
Income before cumulative effect of accounting change $ 0.05 $ 0.01 $ 0.11 $ 0.11
Cumulative effect of accounting change, net of
income taxes - - (5.41) -
------------ ------------ ------------ ------------
Diluted net income (loss) per common share $ 0.05 $ 0.01 $ (5.30) $ 0.11
============ ============ ============ ============
Options to purchase 8,644,664 and 2,229,563 shares of common stock that
were outstanding during the three and nine months ended September 30, 2002,
respectively, were not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the average market
price of the common shares.
6. Commitments and Contingencies
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, the lawsuits
and claims pending are not likely to have a material adverse effect on the
Company, its financial position, its results of operations, or its cash flows.
7. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: information technology (IT)
services, professional services, and e-Business solutions. The Company's
reportable segments are strategic divisions that offer different services and
9
are managed separately as each division requires different resources and
marketing strategies. The IT services division, operating under the brand Modis,
offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support. The professional services division
provides expertise in a wide variety of disciplines including accounting and
finance, law, engineering and technical, career management, executive search,
human resource consulting, and health care. The e-Business solutions division,
operating under the brand Idea Integration, provides e-Business strategy
consulting, design and branding, application development, and integration. The
professional services division's results for the three and nine months ended
September 30, 2001, include the results of the Company's scientific operating
unit. Results for 2002 do not include this unit as it was sold in December 2001.
The Company evaluates segment performance based on revenues, gross profit, and
income before provision for income taxes. The Company does not allocate income
taxes or unusual items to the segments. The following table summarizes segment
and geographic information:
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Revenue
IT services $ 143,650 $ 183,616 $ 440,371 $ 605,890
Professional services 125,755 150,501 370,293 479,000
e-Business solutions 20,023 34,736 63,870 138,012
------------ ------------ ------------ ------------
Total revenue $ 289,428 $ 368,853 $ 874,534 $ 1,222,902
============ ============ ============ ============
Gross profit
IT services $ 30,792 $ 40,328 $ 92,958 $ 133,645
Professional services 37,873 48,011 112,644 156,874
e-Business solutions 7,270 9,670 21,112 46,508
------------ ------------ ------------ ------------
Total gross profit $ 75,935 $ 98,009 $ 226,714 $ 337,027
============ ============ ============ ============
Income before provision for income taxes and
cumulative effect of accounting change
IT services $ 3,688 $ 8,547 $ 8,635 $ 30,210
Professional services 6,113 10,567 18,225 42,546
e-Business solutions 371 (5,623) (3,929) (16,421)
------------ ------------ ------------ ------------
10,172 13,491 22,931 56,335
Amortization of goodwill - (9,635) - (28,936)
Corporate interest and other income (1,206) (1,897) (3,761) (7,281)
------------ ------------ ------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 8,966 $ 1,959 $ 19,170 $ 20,118
============ ============ ============ ============
Geographic Areas
Revenue
United States $ 193,433 $ 260,813 $ 591,106 $ 895,599
United Kingdom 92,970 104,822 273,709 317,928
Other 3,025 3,218 9,719 9,375
------------ ------------ ------------ ------------
Total $ 289,428 $ 368,853 $ 874,534 $ 1,222,902
============ ============ ============ ============
September 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 468,081 $ 781,845
Professional services 361,069 426,547
e-Business solutions 68,950 319,284
------------ ------------
898,100 1,527,676
Corporate 16,226 15,946
------------ ------------
Total assets $ 914,326 $ 1,543,622
============ ============
Geographic Areas
Identifiable Assets
United States $ 664,222 $ 1,133,372
United Kingdom 242,435 399,259
Other 7,669 10,991
------------ ------------
Total $ 914,326 $ 1,543,622
============ ============
10
8. Comprehensive Income
Comprehensive income includes unrealized gains and losses on foreign
currency translation adjustments and changes in the fair value of certain
derivative financial instruments which qualify for hedge accounting. A summary
of comprehensive income for the three and nine months ended September 30, 2002
and 2001 is as follows:
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,290 $ 1,078 $ (542,300) $ 11,077
Unrealized gain (loss) on foreign currency
translation adjustments (a) 1,508 963 5,309 (7,914)
Unrealized gain (loss) on derivative
instruments, net of deferred income taxes 442 (904) 1,369 (1,769)
------------- ------------- -------------- -------------
Total other comprehensive income (loss) 1,950 59 6,678 (9,683)
------------- ------------- -------------- -------------
Comprehensive income (loss) $ 7,240 $ 1,137 $ (535,622) $ 1,394
============= ============= ============== =============
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
9. Income Taxes
The Company is subject to periodic review by federal, state, and local
taxing authorities in the ordinary course of business. During 2001, the Company
was notified by the Internal Revenue Service that certain prior year income tax
returns will be examined. As part of this examination, the net tax benefit
associated with an investment in a subsidiary that the Company recognized in
2000 of $86.3 million is also being reviewed. There can be no assurance that the
Internal Revenue Service will not disallow any or all of the tax benefit. A
disallowance would result in the Company having to repay any or all of the tax
benefit to the Internal Revenue Service which may affect the Company's financial
condition and financial covenants of the Company's credit facility.
10. Equity Investment
The Company has a minority investment in a privately held company that is
recorded as a non-current asset, and is included in the line item 'Other Assets,
net' on the Condensed Consolidated Balance Sheets. The asset is carried at its
original cost plus accrued interest. The investment was originally made in 1996
and the balance at September 30, 2002 was $15.4 million. The process of
assessing whether a particular equity investment's net realizable value is less
than its carrying cost requires a significant amount of judgment. The Company
monitors the investment for impairment by considering, among other things, the
investee's cash position, projected cash flows, financing needs, liquidation
preference, most recent valuation data (including the duration and extent to
which the fair value is less than cost), the current investing environment,
competition and the Company's intent and ability to hold the investment.
Based on the Company's most recent review of the investment, it is possible
that a future reduction in the carrying value of the investment may be
necessary. Among other concerns, the Company was notified during the third
quarter, that this privately held company is trying to raise additional capital,
through a recapitalization, at terms which could dilute the value of the
Company's investment, should the Company elect not to participate in the
recapitalization. Therefore, if the Company does not elect to participate, it is
possible that a reduction in the carrying value of this investment, in part or
in whole, will be necessary if the recapitalization is completed. Such a
reduction would decrease the Company's results of operations for the period in
which the determination was made.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS Group, Inc. ('MPS' or the 'Company') helps its client companies thrive by
delivering a unique mix of consulting, solutions, and staffing services in the
disciplines of information technology (IT), finance and accounting, legal,
e-Business, human capital automation, engineering, executive search, work force
management, and health care. MPS consists of three divisions: the IT services
division, operating under the brand Modis; the professional services division;
and the e-Business solutions division, operating under the brand Idea
Integration.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ('SFAS') No. 142, 'Goodwill and Other Intangibles.' Comparability of
results prior to 2002 is affected by the Company's adoption of SFAS 142 as SFAS
142 requires the discontinuance of goodwill amortization. While the Company did
not recognize any goodwill amortization for 2002, the Company recorded $9.6
million and $28.9 million of goodwill amortization for the three and nine months
ended September 30, 2001, respectively. See Note 4 to the Condensed Consolidated
Financial Statements for a discussion of SFAS 142.
Included in the results for the three and nine months ended September 30, 2002,
is $5.1 million and $17.3 million, respectively, in revenue from the Company's
scientific operating unit which was sold in December 2001. Additionally, the
Company acquired a health care staffing business in July 2002 which contributed
$4.2 million in revenue for the three months ended September 30, 2002. See Note
2 to the Condensed Consolidated Financial Statements for a discussion of the
acquisition. The results from both of these transactions were immaterial to the
Company's results.
The following detailed analysis of operations should be read in conjunction with
the 2001 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed March 26, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenue. Revenue decreased $79.5 million, or 21.6%, to $289.4 million in the
three months ended September 30, 2002, from $368.9 million in the year earlier
period. The decrease was attributable primarily to diminished demand for
services. This diminished demand has primarily led to a reduction in billable
headcount throughout the Company's divisions and, to a lesser extent, a
reduction in the Company's bill rates.
For the IT services division, which accounted for 49.6% and 49.8% of the
Company's total revenue for the three months ended September 30, 2002 and 2001,
respectively, the Company's customers continued to limit spending on IT
initiatives due to uncertainties relating to the economy. Revenue in the IT
services division decreased $39.9 million, or 21.7%, to $143.7 million in the
three months ended September 30, 2002, from $183.6 million in the year earlier
period.
Revenue in the professional services division decreased $24.7 million, or 16.4%,
to $125.8 million in the three months ended September 30, 2002, from $150.5
million in the year earlier period. This decrease in the division's revenue was
primarily attributable to the diminished demand for knowledge worker resources
in the services provided by the division, primarily in the United States.
Revenue generated in the United Kingdom decreased 7.7% year over year, while
revenue generated in the United States decreased 20.7%. Excluding the results of
the scientific unit, the professional services division operates primarily
through five operating units consisting of accounting and finance, legal,
engineering/technical, career management and consulting, and health care which
contributed 42.6%, 12.0%, 34.0%, 8.0%, and 3.4% respectively, of the division's
revenue by group during the three months ended September 30, 2002, as compared
to 42.3%, 13.1%, 34.6%, 10.0%, and 0% respectively, during the year earlier
period.
For the e-Business solutions division, weak demand for e-Business consulting
services was intensified by the uncertainties relating to the economy. Revenue
in the division decreased $14.7 million, or 42.4%, to $20.0 million in the three
months ended September 30, 2002, from $34.7 million in the year earlier period.
Gross Profit. Gross profit decreased $22.1 million or 22.6% to $75.9 million in
the three months ended September 30, 2002, from $98.0 million in the year
earlier period. Gross margin decreased to 26.2% in the three months ended
September 30, 2002, from 26.6% in the year earlier period.
The gross margin in the IT services division decreased to 21.4% in the three
months ended September 30, 2002, from 22.0% in the year earlier period. The
decrease in gross margin in the IT services division is mainly attributable to a
decrease in bill rates, which exceeded the related decrease in pay rates of the
division's primarily hourly employees, along with a shift in the mix of services
provided by the division.
12
The gross margin in the professional services division decreased to 30.1% in the
three months ended September 30, 2002, from 31.9% in the year earlier period.
The decrease in gross margin in the professional services division is primarily
attributable to the lower level of direct hire and permanent placement fees,
which generate a higher margin and, to a lesser extent, a decrease in bill rates
in the services provided by the division. As a percentage of revenue, the
division's direct hire and permanent placement fees decreased to 4.6% of revenue
in the three months ended September 30, 2002, from 6.3% in the year earlier
period.
The gross margin in the e-Business solutions division increased to 36.3% in the
three months ended September 30, 2002, from 27.8% in the year earlier period.
This increase was driven by higher utilization of the Company's salaried
consultants. This division's business model, unlike the Company's other
divisions, uses salaried consultants to meet customer demand. While the Company
has significantly reduced billable headcount in this division to reflect lower
customer demand, increased use of the remaining billable consultants increases
the Company's gross margin.
Operating expenses. Operating expenses decreased $28.4 million or 30.1% to $65.8
million in the three months ended September 30, 2002, from $94.2 million in the
year earlier period. During the year earlier period, operating expenses included
$9.6 million of goodwill amortization, while the Company did not recognize any
goodwill amortization during the current year period as a result of the adoption
of SFAS 142 in 2002. The Company's general and administrative ('G&A') expenses
decreased $18.7 million or 23.7% to $60.3 million in the three months ended
September 30, 2002, from $79.0 million in the year earlier period.
The IT services division's G&A expenses decreased $4.4 million, or 15.0%, to
$24.7 million in the three months ended September 30, 2002, from $29.1 million
in the year earlier period. As a percentage of revenue, the division's G&A
expenses increased to 17.2% in the three months ended September 30, 2002, from
15.9% in the year earlier period. The decrease in the IT services division's G&A
expenses is associated with the decrease in revenue for the three months ended
September 30, 2002, and cost reduction initiatives implemented within the
division throughout 2001 and continuing through 2002.
The professional services division's G&A expenses decreased $6.0 million, or
16.7%, to $29.9 million in the three months ended September 30, 2002, from $35.9
million in the year earlier period. The professional services G&A expenses
decreased 14.2% in the three months ended September 30, 2002, from the year
earlier period. As a percentage of revenue, the division's G&A expenses
decreased slightly to 23.7% in the three months ended September 30, 2002, from
23.8% in the year earlier period. The decrease in the professional services
division's G&A expenses is associated with the decrease in revenue for the three
months ended September 30, 2002, and cost reduction initiatives implemented
within the division beginning in 2001 and continuing through 2002.
The e-Business solutions division's G&A expenses decreased $8.3 million, or
58.9%, to $5.8 million in the three months ended September 30, 2002, from $14.1
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 28.9% in the three months ended September 30, 2002,
from 40.5% in the year earlier period. The decrease in the e-Business solutions
division's G&A expenses was primarily related to reductions in its work force
that started in early 2001 and has continued through 2002.
Income from operations. Income from operations increased $6.3 million, or
161.5%, to $10.2 million in the three months ended September 30, 2002, from $3.9
million in the year earlier period. Excluding goodwill amortization in the year
earlier period, income from operations decreased 24.4% in the three months ended
September 30, 2002, from the year earlier period. Income from operations for the
IT services division remained constant at $3.7 million for both the three months
ended September 30, 2002, and 2001. Excluding goodwill amortization in the year
earlier period, income from operations for the IT services division decreased
56.5% in the three months ended September 30, 2002, from the year earlier
period. Income from operations for the professional services division decreased
$1.5 million, or 19.7%, to $6.1 million in the three months ended September 30,
2002, from $7.6 million in the year earlier period. Excluding goodwill
amortization in the year earlier period, income from operations for the
professional services division decreased 42.5% in the three months ended
September 30, 2002, from the year earlier period. Income from operations for the
e-Business solutions division increased $7.6 million, to $0.4 million in the
three months ended September 30, 2002, from a $7.5 million loss in the year
earlier period. Excluding goodwill amortization in the year earlier period,
income from operations for the e-Business solutions division increased to $0.4
million in the three months ended September 30, 2002, from a $5.6 million loss
in the year earlier period. For the Company as a whole, income from operations
as a percentage of revenue increased to 3.5% in the three months ended September
30, 2002, from 1.0% in the year earlier period. Excluding goodwill amortization
in the year earlier period, for the Company as a whole, income from operations
as a percentage of revenue decreased to 3.5% in the three months ended September
30, 2002, from 3.7% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facility and notes issued in
connection with acquisitions, net of interest income related to investment
income from certain investments owned by the Company and cash and cash
equivalents on hand. Interest expense decreased $0.5 million, or 22.7%, to $1.7
million in the three months ended September 30, 2002, from $2.2 million in the
13
year earlier period. The decrease in interest expense is related to the lower
level of borrowings under the Company's credit facility during the third quarter
of 2002. Interest expense was offset by $0.5 million of interest and other
income in the three months ended September 30, 2002, as compared to $0.3 million
in the year earlier period.
Income taxes. The Company's effective tax rate decreased to 41.0% in the three
months ended September 30, 2002, as compared to 45.0% in the year earlier
period, due to the discontinuance of goodwill amortization required by SFAS 142.
In the year earlier period, non-deductible goodwill amortization on certain
acquisitions had an increased effect on the Company's effective tax rate.
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $4.2
million, or 381.8%, to $5.2 million in the three months ended September 30,
2002, from $1.1 million in the year earlier period. Excluding goodwill
amortization in the year earlier period, income before cumulative effect of
accounting change decreased 32.9% in the three months ended September 30, 2002,
from the year earlier period. Income before cumulative effect of accounting
change as a percentage of revenue increased to 1.8% in the three months ended
September 30, 2002, from 0.3% in the year earlier period. Excluding goodwill
amortization in the year earlier period, income before cumulative effect of
accounting change as a percentage of revenue decreased to 1.8% in the three
months ended September 30, 2002, from 2.1% in the year earlier period.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Revenue. Revenue decreased $348.4 million, or 28.5%, to $874.5 million in the
nine months ended September 30, 2002, from $1,222.9 million in the year earlier
period. The decrease was attributable primarily to diminished demand for
services. This diminished demand has primarily led to a reduction in billable
headcount throughout the Company's divisions and, to a lesser extent, a
reduction in the Company's bill rates.
For the IT services division, which accounted for 50.4% and 49.5% of the
Company's total revenue for the nine months ended September 30, 2002 and 2001,
respectively, the Company's customers continued to limit spending on IT
initiatives due to uncertainties relating to the economy. Revenue in the IT
services division decreased $165.5 million, or 27.3%, to $440.4 million in the
nine months ended September 30, 2002, from $605.9 million in the year earlier
period.
Revenue in the professional services division decreased $108.7 million, or
22.7%, to $370.3 million in the nine months ended September 30, 2002, from
$479.0 million in the year earlier period. This decrease in the division's
revenue was primarily attributable to the diminished demand for knowledge worker
resources in the services provided by the division, primarily in the United
States. Revenue generated in the United Kingdom decreased 10.8% year over year,
while revenue generated in the United States decreased 28.1%. Excluding the
results of the scientific unit, the professional services division operates
primarily through five operating units consisting of accounting and finance,
legal, engineering/technical, career management and consulting, and health care,
which contributed 43.0%, 11.6%, 35.0%, 9.2%, and 1.2%, respectively, of the
division's revenue by group during the nine months ended September 30, 2002, as
compared to 42.1%, 12.9%, 35.6%, 9.4%, and 0%, respectively, during the year
earlier period.
For the e-Business solutions division, weak demand for e-Business consulting
services was intensified by the uncertainties relating to the economy. Revenue
in the division decreased $74.1 million, or 53.7%, to $63.9 million in the nine
months ended September 30, 2002, from $138.0 million in the year earlier period.
Gross Profit. Gross profit decreased $110.3 million or 32.7% to $226.7 million
in the nine months ended September 30, 2002, from $337.0 million in the year
earlier period. Gross margin decreased to 25.9% in the nine months ended
September 30, 2002, from 27.6% in the year earlier period.
The gross margin in the IT services division decreased to 21.1% in the nine
months ended September 30, 2002, from 22.1% in the year earlier period. The
decrease in gross margin in the IT services division is mainly attributable to a
decrease in bill rates, which exceeded the related decrease in pay rates of the
division's primarily hourly employees, along with a shift in the mix of services
provided by the division.
The gross margin in the professional services division decreased to 30.4% in the
nine months ended September 30, 2002, from 32.8% in the year earlier period. The
decrease in gross margin in the professional services division is primarily
attributable to a decrease in bill rates in the services provided by the
division and, to a lesser extent, the lower level of direct hire and permanent
placement fees, which generate a higher margin. As a percentage of revenue, the
division's direct hire and permanent placement fees decreased to 5.3% of revenue
in the nine months ended September 30, 2002, from 6.7% in the year earlier
period.
The gross margin in the e-Business solutions division decreased to 33.1% in the
nine months ended September 30, 2002, from 33.7% in the year earlier period.
This decrease was driven by lower utilization of the Company's salaried
consultants. This division's business model, unlike the Company's other
14
divisions, uses salaried consultants to meet customer demand. While the Company
has significantly reduced billable headcount in this division to reflect lower
customer demand, decreased use of the remaining billable consultants decreases
the Company's gross margin.
Operating expenses. Operating expenses decreased $105.8 million or 34.2% to
$203.8 million in the nine months ended September 30, 2002, from $309.6 million
in the year earlier period. During the year earlier period, operating expenses
included $28.9 million of goodwill amortization, while the Company did not
recognize any goodwill amortization during the current year period as a result
of the adoption of SFAS 142 in 2002. The Company's general and administrative
('G&A') expenses decreased $76.0 million or 28.7% to $188.4 million in the nine
months ended September 30, 2002, from $264.4 million in the year earlier period.
The IT services division's G&A expenses decreased $18.0 million, or 18.9%, to
$77.2 million in the nine months ended September 30, 2002, from $95.2 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 17.5% in the nine months ended September 30, 2002, from 15.7% in
the year earlier period. The decrease in the IT services division's G&A expenses
is associated with the decrease in revenue for the nine months ended September
30, 2002, and cost reduction initiatives implemented within the division
throughout 2001 and continuing through 2002.
The professional services division's G&A expenses decreased $20.3 million, or
18.5%, to $89.5 million in the nine months ended September 30, 2002, from $109.8
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 24.2% in the nine months ended September 30, 2002,
from 22.9% in the year earlier period. The decrease in the professional services
division's G&A expenses is associated with the decrease in revenue for the nine
months ended September 30, 2002, and cost reduction initiatives implemented
within the division beginning in 2001 and continuing through 2002.
The e-Business solutions division's G&A expenses decreased $37.8 million, or
63.5%, to $21.7 million in the nine months ended September 30, 2002, from $59.5
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 33.9% in the nine months ended September 30, 2002,
from 43.1% in the year earlier period. The decrease in the e-Business solutions
division's G&A expenses was primarily related to reductions in its work force
that started in early 2001 and has continued through 2002.
Income from operations. Income from operations decreased $4.5 million, or 16.4%,
to $22.9 million in the nine months ended September 30, 2002, from $27.4 million
in the year earlier period. Excluding goodwill amortization in the year earlier
period, income from operations decreased 59.3% in the nine months ended
September 30, 2002, from the year earlier period. Income from operations for the
IT services division decreased $7.0 million, or 44.9%, to $8.6 million in the
nine months ended September 30, 2002, from $15.6 million in the year earlier
period. Excluding goodwill amortization in the year earlier period, income from
operations for the IT services division decreased 71.5% in the nine months ended
September 30, 2002, from the year earlier period. Income from operations for the
professional services division decreased $15.6 million, or 46.2%, to $18.2
million in the nine months ended September 30, 2002, from $33.8 million in the
year earlier period. Excluding goodwill amortization in the year earlier period,
income from operations for the professional services division decreased 57.2% in
the nine months ended September 30, 2002, from the year earlier period. Loss
from operations for the e-Business solutions division decreased $18.1 million,
to a $3.9 million loss in the nine months ended September 30, 2002, from a $22.0
million loss in the year earlier period. Excluding goodwill amortization in the
year earlier period, loss from operations for the e-Business solutions division
decreased to a $3.9 million loss in the nine months ended September 30, 2002,
from a $16.4 million loss in the year earlier period. For the Company as a
whole, income from operations as a percentage of revenue increased to 2.6% in
the nine months ended September 30, 2002, from 2.2% in the year earlier period.
Excluding goodwill amortization in the year earlier period, for the Company as a
whole, income from operations as a percentage of revenue decreased to 2.6% in
the nine months ended September 30, 2002, from 4.6% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facility and notes issued in
connection with acquisitions, net of interest income related to investment
income from certain investments owned by the Company and cash and cash
equivalents on hand. Interest expense decreased $3.5 million, or 41.7%, to $4.9
million in the nine months ended September 30, 2002, from $8.4 million in the
year earlier period. The decrease in interest expense is related to the lower
level of borrowings under the Company's credit facility during 2002. Interest
expense was offset by $1.1 million of interest and other income in the nine
months ended September 30, 2002, as compared to $1.2 million in the year earlier
period.
Income taxes. The Company's effective tax rate decreased to 40.5% in the nine
months ended September 30, 2002, as compared to 44.9% in the year earlier
period, due to the discontinuance of goodwill amortization required by SFAS 142.
In the year earlier period, non-deductible goodwill amortization on certain
acquisitions had an increased effect on the Company's effective tax rate.
15
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $0.3
million, or 2.7%, to $11.4 million in the nine months ended September 30, 2002,
from $11.1 million in the year earlier period. Excluding goodwill amortization
in the year earlier period, income before cumulative effect of accounting change
decreased 63.7% in the nine months ended September 30, 2002, from the year
earlier period. Income before cumulative effect of accounting change as a
percentage of revenue increased to 1.3% in the nine months ended September 30,
2002, from 0.9% in the year earlier period. Excluding goodwill amortization in
the year earlier period, income before cumulative effect of accounting change as
a percentage of revenue decreased to 1.3% in the nine months ended September 30,
2002, from 2.6% in the year earlier period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs, and capital expenditures.
These requirements have been met through a combination of bank debt and
internally generated funds. The Company's operating cash flows and working
capital requirements are affected significantly by the timing of payroll and by
the receipt of payment from the customer. Generally, the Company pays its
consultants weekly or semi-monthly, and receives payments from customers within
30 to 90 days from the date of invoice.
The Company had working capital of $195.6 million and $204.7 million as of
September 30, 2002 and December 31, 2001, respectively. The Company had cash and
cash equivalents of $51.8 million and $49.2 million as of September 30, 2002 and
December 31, 2001, respectively.
For the nine months ended September 30, 2002 and 2001, the Company generated
$72.6 million and $113.0 million of cash flow from operations, respectively. The
reduction in cash flow from operations is primarily due to a reduced level of
earnings in the current year combined with a decrease in the cash provided by
changes in accounts receivable. In the prior year, the Company experienced an
increase in receivables collection as the main elements of the Company's back
office integration and consolidation efforts were being completed. In addition,
adding to the cash flow from operations for the current year was a tax refund
received in the third quarter of $17.4 million stemming from the Job Creation
and Workers Assistance Act of 2002.
For the nine months ended September 30, 2002, the Company used $10.2 million of
cash for investing activities. $6.7 million, net of cash acquired, was used to
acquire a health care staffing business in July 2002, and $3.5 million was used
for capital expenditures. For the nine months ended September 30, 2001, the
Company used $17.6 million of cash for investing activities, of which $13.8
million was used for capital expenditures and $3.8 million for earn-out
payments.
For the nine months ended September 30, 2002, the Company used $60.3 million of
cash for financing activities, of which $76.4 million was used for repayments on
the Company's credit facility and $16.3 million was generated from stock option
exercises. For the nine months ended September 30, 2001, the Company used $75.2
million of cash for financing activities. This amount primarily represented
repayments on the Company's credit facility and on notes issued in connection
with the acquisition of certain companies. These repayments were mainly funded
from cash flow from operations.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's common stock. The Company began to utilize this
authorization in the third quarter of 2002. As of October 31, 2002, 290,400
shares have been repurchased under this authorization.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the remainder of 2002, will be approximately $2.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
16
Indebtedness of the Company
The Company has a $200 million revolving credit facility which is syndicated to
a group of 13 banks with Bank of America as the principal agent. This facility
expires on October 27, 2003. The credit facility contains certain financial and
non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment of the credit facility is
guaranteed by the material subsidiaries of the Company. In addition, approval of
an individual acquisition is required by the majority of the lenders if cash
consideration for the acquisition would exceed 10% of consolidated stockholders'
equity of the Company. In August 2002, the Company reduced the notional amount
of the facility from $350 million to $200 million to more closely align the
Company's facility with its anticipated capital needs.
As of October 31, 2002, the Company had a balance of $25.0 million outstanding
under the credit facility. The Company also had outstanding letters of credit in
the amount of $2.4 million.
In February 2001, the Company entered into an interest rate swap agreement to
convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement was approved by the Board of Directors and expires
January 2, 2003. As of October 31, 2002, this swap agreement had a total
notional amount of $25.0 million and an underlying rate of 5.185%.
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' demand for
services provided by the Company's divisions. Demand for business services is
typically lower during the first quarter until customers' operating budgets are
finalized and the profitability of the Company's consultants is generally lower
in the fourth quarter due to fewer billing days because of the higher number of
holidays and vacation days.
17
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's debt obligations under its credit
facility and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and seeks to preserve its invested funds by
placing these funds with high credit quality issuers. The Company constantly
evaluates its invested funds to respond appropriately to a reduction in the
credit rating of any investment issuer or guarantor.
The Company's debt obligations totaled $25.4 million as of September 30, 2002.
In February 2001, the Company entered into an interest rate swap agreement to
convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement was approved by the Board of Directors and expires
January 2, 2003. As of September 30, 2002, this swap agreement had a total
notional amount of $25.0 million and an underlying rate of 5.185%. Hedging
interest rate exposure through the use of swaps is specifically intended to
manage risk in keeping with management policy. The Company does not utilize
derivatives for speculative purposes.
The Company prepared sensitivity analyses of its borrowings under the credit
facility and its financial instruments to determine the impact of hypothetical
changes in interest rates on the Company's results of operations and cash flows,
and the fair value of its financial instruments. The interest-rate analysis
assumed a 50 basis point adverse change in interest rates on all borrowings
under the credit facility and financial instruments, representing approximately
10% of the Company's weighted average borrowing rate. However, the interest-rate
analysis did not consider the effects of the reduced level of economic activity
that could exist in such an environment. A 50 basis point adverse move in
interest rates on the Company's outstanding borrowings under the credit facility
would have an immaterial impact on the Company's results of operations and cash
flows.
Foreign currency exchange rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 32% of its consolidated revenues
for the nine months ended September 30, 2002 from international operations,
approximately 97% of which were from the United Kingdom. The exchange rate has
increased approximately 8% in the nine months ended September 30, 2002, from
1.45 at December 31, 2001 to 1.57 at September 30, 2002. The Company prepared
sensitivity analyses to determine the adverse impact of hypothetical changes in
the British pound sterling, relative to the U.S. Dollar, on the Company's
results of operations and cash flows. However, the analysis did not include the
potential impact on sales levels resulting from a change in the British pound
sterling. An additional 10% adverse movement in the exchange rate would have had
an immaterial impact on the Company's cash flows and financial position for
2002. While fluctuations in the British pound sterling have not historically had
a material impact on the Company's results of operations, the lower level of
earnings resulting from a decrease in demand for the services provided by the
Company's domestic operations have increased the impact of exchange rate
fluctuations. As of September 30, 2002, the Company did not hold and has not
previously entered into any foreign currency derivative instruments.
18
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Our results are affected by the level of business activity of our customers,
which is driven by the level of economic activity in the industries and markets
they serve. The current economic downturn has significantly hurt our results of
operations. If the current significant economic downturn persists, it will
continue its material adverse effect on our results of operations. Further
deterioration in the global economic or political conditions could increase
these effects.
The Company may also be adversely affected by consolidations through mergers and
otherwise of major customers or between major customers with non-customers.
These consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
Historically, the Company has included acquisitions as a part of the Company's
overall growth strategy. Although the Company continues to seek acquisition
opportunities, there can be no assurance that the Company will be able to
negotiate acquisitions on economic terms acceptable to the Company or that the
Company will be able to successfully identify acquisition candidates and
integrate all acquired operations into the Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Bank Facility
The Company's credit facility requires that specified financial ratios be
maintained. The Company's ability to meet these financial ratios can be affected
by events beyond its control. Failure to meet those financial ratios could allow
its lenders to terminate the credit facility and to declare all amounts
outstanding under those facilities to be immediately due and payable. Further,
the current facility expires October 2003. The Company may not be able to obtain
a replacement credit facility on terms and conditions or at interest rates as
favorable as those in current agreements.
19
Income Tax Audits
The Company is subject to periodic review by federal, state, and local taxing
authorities in the ordinary course of business. During 2001, the Company was
notified by the Internal Revenue Service that certain prior year income tax
returns will be examined. As part of this examination, the net tax benefit
associated with an investment in a subsidiary that the Company recognized in
2000 of $86.3 million is also being reviewed. There can be no assurance that the
Internal Revenue Service will not disallow any or all of the tax benefit. A
disallowance would result in the Company having to repay any or all of the tax
benefit to the Internal Revenue Service which may affect the Company's financial
condition and financial covenants of the Company's credit facility.
20
Item 4. Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on their
evaluation, the Chief Executive officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date that Chief Executive Officer and Chief
Financial Officer completed their evaluation.
21
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.12(b) Restricted Stock Agreement with Timothy D. Payne.
10.14(a) Restricted Stock Agreement with Robert P. Crouch.
B. Reports on Form 8-K
A report on Form 8-K dated November 14, 2002 was filed by the
Company in November 2002. The report was filed under Item 9,
Regulation FD Disclosure.
22
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Timothy D. Payne President, Chief November 14, 2002
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, November 14, 2002
Robert P. Crouch Treasurer, and Chief
Financial Officer
23
CERTIFICATION
I, Timothy D. Payne, President and Chief Executive Officer of MPS Group, Inc.,
certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MPS Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ Timothy D. Payne
- -------------------------------------
Timothy D. Payne
President and Chief Executive Officer
24
CERTIFICATION
I, Robert P. Crouch, Senior Vice President and Chief Financial Officer of MPS
Group, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MPS Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ Robert P. Crouch
- -------------------------------------
Robert P. Crouch
Senior Vice President and
Chief Financial Officer
25