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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, 2003
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, FL 32202
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
There were 104,428,475 shares with a par value of $0.01 outstanding at November
3, 2003.
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
factors, including but not limited to the specific factors discussed in Part I,
Item 2 of this report and under the heading '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, 2003 (unaudited)
and December 31, 2002.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months
ended September 30, 2003 and 2002.................................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2003 and 2002.................................................................. 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 17
Item 4 Controls and Procedures................................................................................ 20
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 21
Item 2 Changes in Securities and Use of Proceeds.............................................................. 21
Item 3 Defaults Upon Senior Securities........................................................................ 21
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 21
Item 5 Other Information...................................................................................... 21
Item 6 Exhibits and Reports on Form 8-K....................................................................... 21
Signatures............................................................................................. 22
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) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 108,910 $ 66,934
Accounts receivable, net of allowance of $15,056 and $17,506 163,610 185,510
Prepaid expenses 7,213 5,099
Deferred income taxes 3,277 3,386
Other 11,067 11,632
----------------------------------
Total current assets 294,077 272,561
Furniture, equipment, and leasehold improvements, net 33,880 38,792
Goodwill, net 523,023 511,796
Deferred income taxes 54,021 64,085
Other assets, net 9,432 10,749
----------------------------------
Total assets $ 914,433 $ 897,983
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 40,629 $ 49,834
Accrued payroll and related taxes 40,778 35,885
Income taxes payable 12,574 14,911
----------------------------------
Total current liabilities 93,981 100,630
Other 16,563 15,794
----------------------------------
Total liabilities 110,544 116,424
----------------------------------
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;
105,838,674 and 102,531,491 shares issued, respectively 1,058 1,025
Additional contributed capital 633,348 622,079
Retained earnings 178,541 163,781
Accumulated other comprehensive income 2,805 66
Deferred stock compensation (2,803) (3,958)
Treasury stock, at cost (1,613,400 shares in 2003 and 290,400 shares in 2002) (9,060) (1,434)
----------------------------------
Total stockholders' equity 803,889 781,559
----------------------------------
Total liabilities and stockholders' equity $ 914,433 $ 897,983
==================================
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) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 278,836 $ 289,428 $ 829,538 $ 874,534
Cost of revenue 204,378 213,493 609,376 647,820
------------- ------------- -------------- -------------
Gross profit 74,458 75,935 220,162 226,714
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 60,363 60,307 182,121 188,404
Depreciation and intangibles amortization 4,301 5,456 13,360 15,379
------------- ------------- -------------- -------------
Total operating expenses 64,664 65,763 195,481 203,783
------------- ------------- -------------- -------------
Income from operations 9,794 10,172 24,681 22,931
Other income (expense), net 186 (1,206) 170 (3,761)
------------- ------------- -------------- -------------
Income before provision for income taxes and
cumulative effect of accounting change 9,980 8,966 24,851 19,170
Provision for income taxes 3,992 3,676 10,101 7,758
------------- ------------- -------------- -------------
Income before cumulative effect of accounting change 5,988 5,290 14,750 11,412
Cumulative effect of accounting change (net of
a $112,953 income tax benefit) - - - (553,712)
------------- ------------- -------------- -------------
Net income (loss) $ 5,988 $ 5,290 $ 14,750 $ (542,300)
============= ============= ============== =============
Basic net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.05 $ 0.15 $ 0.11
Cumulative effect of accounting change, net of tax - - - (5.52)
------------- ------------- -------------- -------------
Basic net income (loss) per common share $ 0.06 $ 0.05 $ 0.15 $ (5.40)
============= ============= ============== =============
Average common shares outstanding, basic 101,795 102,369 101,680 100,337
============= ============= ============== =============
Diluted net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.05 $ 0.14 $ 0.11
Cumulative effect of accounting change, net of tax - - - (5.41)
------------- ------------- -------------- -------------
Diluted net income (loss) per common share $ 0.06 $ 0.05 $ 0.14 $ (5.30)
============= ============= ============== =============
Average common shares outstanding, diluted 104,866 103,115 103,515 102,303
============= ============= ============== =============
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) 2003 2002
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 14,750 $ (542,300)
Adjustments to net income (loss) to net cash provided
by operating activities:
Cumulative effect of accounting change, net of tax - 553,712
Depreciation and intangibles amortization 13,360 15,379
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 27,507 38,663
Prepaid expenses and other assets (2,112) (1,245)
Deferred income taxes 8,511 14,717
Deferred compensation 1,155 1,212
Accounts payable and accrued expenses (8,135) (13,389)
Accrued payroll and related taxes 3,989 (4,042)
Other, net 1,472 9,900
--------------- ---------------
Net cash provided by operating activities 60,497 72,607
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (5,586) (3,482)
Purchase of businesses, net of cash acquired (14,945) (6,702)
--------------- ---------------
Net cash used in investing activities (20,531) (10,184)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock (7,626) (200)
Discount realized on employee stock purchase plan (328) (494)
Proceeds from stock options exercised 8,926 16,828
Repayments on indebtedness (40) (76,406)
--------------- ---------------
Net cash provided by (used in) financing activities 932 (60,272)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 1,078 475
Net increase in cash and cash equivalents 41,976 2,626
Cash and cash equivalents, beginning of period 66,934 49,208
--------------- ---------------
Cash and cash equivalents, end of period $ 108,910 $ 51,834
=============== ===============
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 for the year ended December 31, 2002.
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
During April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting for certain derivative
instruments. Management does do not expect the adoption of this statement to
have a material impact on the Company's consolidated financial statements, as
the Company is not currently a party to derivative financial instruments
addressed by this standard.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The Company has not issued
any financial instruments with the scope of SFAS No. 150, nor does it currently
hold any financial instruments within its scope.
Stock-Based Compensation
During December 2002, the FASB issued SFAS No. 148, 'Accounting for
Stock-Based Compensation - Transition and Disclosure,' which provides for
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, 'Accounting for Stock-Based
Compensation,' to require more prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company accounts for its employee and director stock option plans in
accordance with Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees,' and related Interpretations. The Company measures
compensation expense for employee and director stock options as the aggregate
difference between the market value of its common stock and exercise prices of
the options on the date that both the number of shares the grantee is entitled
to receive and the exercise prices are known. Compensation expense associated
with restricted stock grants is equal to the market value of the shares on the
date of grant and is recorded pro rata over the required holding period. If the
Company had elected to recognize compensation cost for all outstanding options
granted by the Company by applying the fair value recognition provisions of SFAS
No. 148 to stock-based employee compensation, net income (loss) and earnings
(loss) per share would have been reduced to the pro forma amounts indicated
below.
6
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(dollar amounts in thousands except per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ 5,988 $ 5,290 $ 14,750 $ (542,300)
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (1,325) (950) (3,879) (3,123)
--------------------------- ---------------------------
Pro forma $ 4,663 $ 4,340 $ 10,871 $ (545,423)
=========================== ===========================
Basic net income (loss) per common share
As reported $ 0.06 $ 0.05 $ 0.15 $ (5.41)
Pro forma $ 0.05 $ 0.04 $ 0.11 $ (5.44)
Diluted net income (loss) per common share
As reported $ 0.06 $ 0.05 $ 0.14 $ (5.30)
Pro forma $ 0.04 $ 0.04 $ 0.11 $ (5.33)
2. 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,
(dollar amounts in thousands except per share amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income before cumulative effect of accounting change $ 5,988 $ 5,290 $ 14,750 $ 11,412
Cumulative effect of accounting change, net of tax - - - (553,712)
------------ ------------ ------------ ------------
Net income (loss) $ 5,988 $ 5,290 $ 14,750 $ (542,300)
============ ============ ============ ============
Basic average common shares outstanding 101,795 102,369 101,680 100,337
============ ============ ============ ============
Basic income (loss) per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.05 $ 0.15 $ 0.11
Cumulative effect of accounting change, net of tax - - - (5.52)
------------ ------------ ------------ ------------
Basic net income (loss) per common share $ 0.06 $ 0.05 $ 0.15 $ (5.40)
============ ============ ============ ============
Diluted income (loss) per common share computation:
Income before cumulative effect of accounting change $ 5,988 $ 5,290 $ 14,750 $ 11,412
Cumulative effect of accounting change, net of tax - - - (553,712)
------------ ------------ ------------ ------------
Net income (loss) $ 5,988 $ 5,290 $ 14,750 $ (542,300)
============ ============ ============ ============
Basic average common shares outstanding 101,795 102,369 101,680 100,337
Incremental shares from assumed exercise of stock options 3,071 746 1,835 1,966
------------ ------------ ------------ ------------
Diluted average common shares outstanding 104,866 103,115 103,515 102,303
============ ============ ============ ============
Diluted income (loss) per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.05 $ 0.14 $ 0.11
Cumulative effect of accounting change, net of tax - - - (5.41)
------------ ------------ ------------ ------------
Diluted net income (loss) per common share $ 0.06 $ 0.05 $ 0.14 $ (5.30)
============ ============ ============ ============
Options to purchase shares of common stock were not included in the
computation of diluted earnings per share if the exercise prices of these
options were greater than the average market price of the common shares. So, for
the three months ended September 30, 2003 and 2002, options to purchase 1.2
million and 8.6 million shares of common stock, respectively, were not included
in the computation of diluted earnings per share. For the nine months ended
September 30, 2003 and 2002, options to purchase 2.0 million and 2.2 million
shares of common stock, respectively, were not included in the computation of
diluted earnings per share.
3. 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, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its
consolidated financial position, results of operations, or cash flows.
7
4. 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: IT services, professional
services, and IT solutions. The Company's reportable segments are strategic
divisions that offer different services and are managed separately as each
division requires different resources and marketing strategies. The IT services
division 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, workforce management, executive search,
human resource consulting, and health care. The IT solutions division provides
IT strategy consulting, design and branding, application development, and
integration. The professional services division's results for the three and nine
months ended September 30, 2003, include the results of the Company's health
care staffing unit, which was acquired by the Company in July 2002, and the
results from the acquisitions of two legal staffing businesses, which were
acquired in February and August of 2003. The Company evaluates segment
performance based on revenues, gross profit, and income before provision for
income taxes. The Company does not allocate income taxes, interest 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,
(dollar amounts in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Revenue
IT services $ 125,266 $ 143,650 $ 380,142 $ 440,371
Professional services 136,459 125,755 394,020 370,293
IT solutions 17,111 20,023 55,376 63,870
------------ ------------ ------------ ------------
Total revenue $ 278,836 $ 289,428 $ 829,538 $ 874,534
============ ============ ============ ============
Gross profit
IT services $ 28,851 $ 30,792 $ 85,789 $ 92,958
Professional services 39,642 37,873 113,788 112,644
IT solutions 5,965 7,270 20,585 21,112
------------ ------------ ------------ ------------
Total gross profit $ 74,458 $ 75,935 $ 220,162 $ 226,714
============ ============ ============ ============
Income before provision for income taxes and
cumulative effect of accounting change
IT services $ 2,829 $ 3,688 $ 5,392 $ 8,635
Professional services 6,758 6,113 16,109 18,225
IT solutions 207 371 3,180 (3,929)
------------ ------------ ------------ ------------
9,794 10,172 24,681 22,931
Corporate other income (expense), net 186 (1,206) 170 (3,761)
------------ ------------ ------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 9,980 $ 8,966 $ 24,851 $ 19,170
============ ============ ============ ============
Geographic Areas
Revenue
United States $ 182,335 $ 193,433 $ 544,601 $ 591,106
U.K. 93,866 92,970 276,882 273,709
Other 2,635 3,025 8,055 9,719
------------ ------------ ------------ ------------
Total revenue $ 278,836 $ 289,428 $ 829,538 $ 874,534
============ ============ ============ ============
8
September 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 462,220 $ 457,163
Professional services 401,008 380,340
IT solutions 51,205 59,700
------------ ------------
914,433 897,203
Corporate - 780
------------ ------------
Total assets $ 914,433 $ 897,983
============ ============
Geographic Areas
Identifiable Assets
United States $ 653,834 $ 636,351
U.K. 252,614 254,169
Other 7,985 7,463
------------ ------------
Total $ 914,433 $ 897,983
============ ============
5. Comprehensive Income
The Company discloses other comprehensive income in accordance with SFAS
No. 130, 'Reporting 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, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,988 $ 5,290 $ 14,750 $ (542,300)
Unrealized gain on foreign currency
translation adjustments (a) 1,464 1,508 2,739 5,309
Unrealized gain on derivative instruments,
net of deferred income taxes - 442 - 1,369
------------- ------------- -------------- -------------
Total other comprehensive income 1,464 1,950 2,739 6,678
Comprehensive income (loss) $ 7,452 $ 7,240 $ 17,489 $ (535,622)
============= ============= ============== =============
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
6. Excess Real Estate Obligations
During June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
for a cost associated with an exit or disposal activity be recognized, at fair
value, when the liability is incurred rather than at the time an entity commits
to a plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
The Company adopted the provisions of SFAS No. 146 in 2002. In the fourth
quarter of 2002, the Company recorded a $9.7 million charge relating to its
abandonment of excess real estate obligations for certain vacant office space.
In 2001 and 2002, the Company experienced a material decrease in demand for
its domestic operations. To reflect this decreased demand, the Company made
attempts to realign its real estate capacity needs by vacating and reorganizing
certain office space.
In the fourth quarter of 2002, management determined that the Company would
not be able to utilize this vacated office space and, therefore, notified the
respective lessors of their intentions. This determination eliminated the
economic benefit associated with the vacated office space. As a result, the
Company recorded a charge for contract termination costs, mainly due to, costs
that will continue to be incurred under the lease contract for its remaining
term without economic benefit to the Company. While the Company looks to settle
excess lease obligations, the current economic environment has made it difficult
for the Company to either settle or find acceptable subleasing opportunities.
The average remaining lease term for the lease obligations included herein is
approximately 2 years.
9
The following table summarizes the activity of the charge for contract
termination costs from origination through September 30, 2003 by reportable
segment:
IT Professional IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 675 $ 1,163 $ 7,861 $ 9,699
Costs paid or otherwise settled during the
three months ended:
March 31, 2003 (184) (157) (1,248) (1,589)
June 30, 2003 (45) (145) (642) (832)
September 30, 2003 (52) (142) (1,234) (1,428)
----------- ----------- ----------- -----------
Balance as of September 30, 2003 $ 394 719 4,737 5,850
=========== =========== =========== ===========
7. Business Combination
In February and August of 2003, the Company acquired the legal staffing
businesses of LawPros and LawCorps, respectively. Purchase consideration totaled
$15.5 million in cash at closing, and deferred cash payments of $1.3 million.
These acquisitions, which are included in the Company's professional services
division, were immaterial to the Company's results of operations for the three
and nine months ended September 30, 2003.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS Group, Inc. ('MPS' or the 'Company') (NYSE:MPS) is a leading global provider
of business services with over 180 offices throughout the United States, Canada,
the United Kingdom, and continental Europe. MPS delivers a mix of consulting,
solutions, and staffing services in disciplines such as IT services, finance and
accounting, legal, engineering, IT solutions, workforce management, executive
search, human capital automation, and health care.
The following detailed analysis of operations contains certain financial
information on a 'constant currency' basis. Constant currency removes the impact
on financial data from changes in exchange rates between the U.S. dollar and the
functional currencies of our foreign subsidiaries, by translating the current
period financial data into U.S. dollars using the same foreign currency exchange
rates that were used to translate the financial data for the previous period. We
believe presenting some results on a constant currency basis is useful to
investors because it allows a more meaningful comparison of the performance of
our foreign operations from period to period. We caution you, however, that
constant currency measures should not be considered in isolation or as an
alternative to financial measures that reflect current period exchange rates, or
to other financial measures calculated and presented in accordance with U.S.
generally accepted accounting principles ('GAAP').
The following detailed analysis of operations also presents the revenue
generated by our professional services division in the United States excluding
the effect of acquisitions. We believe presenting some results excluding the
effects of businesses we acquire is helpful to investors because it permits a
comparison of the performance of our core internal operations from period to
period. We exclude the effect of acquisitions for the first 12 months following
the acquisition date. Subsequent to this, we consider acquisitions to be
integrated. Again however, you should consider such measures only in conjunction
with the correlative measures that include the results from acquisitions, as
calculated and presented in accordance with GAAP.
The following detailed analysis of operations should be read in conjunction with
the 2002 Consolidated Financial Statements and related notes included in the
Company's Form 10-K for the year ended December 31, 2002.
Three Months Ended September 30, 2003 Compared To Three Months Ended September
30, 2002
Consolidated Results
Revenue. Revenue decreased $10.6 million, or 3.7%, to $278.8 million in the
three months ended September 30, 2003, from $289.4 million in the year earlier
period. The decrease in revenue was attributable to diminished demand for the
Company's services. For example, the Company's customers continued to experience
a constrained ability to spend on IT initiatives due to uncertainties relating
to the economy.
Included in the results for the three months ended September 30, 2003, was
revenue from the acquisitions of the two legal staffing businesses acquired in
February and August of 2003. These businesses (together, the 'legal
acquisitions') contributed $0.9 million and $2.4 million, respectively, in
revenue for the three months ended September 30, 2003.
Approximately 35% of the Company's revenue for the three months ended September
30, 2003 was generated internationally, primarily in the United Kingdom. The
Company's revenue is therefore subject to changes in foreign currency exchange
rates. The weakening of the U.S. dollar in the third quarter of 2003 had a
positive impact on revenue, as revenue, on a constant currency basis decreased
5.0%, as compared to the decrease of 3.7% above.
Gross Profit. Gross profit decreased $1.4 million or 1.8% to $74.5 million in
the three months ended September 30, 2003, from $75.9 million in the year
earlier period. Gross margin increased to 26.7% in the three months ended
September 30, 2003, from 26.2% in the year earlier period.
Operating expenses. Total operating expenses decreased $1.1 million or 1.7% to
$64.7 million in the three months ended September 30, 2003, from $65.8 million
in the year earlier period. The Company's general and administrative ('G&A')
expenses remained relatively stable at $60.4 million in the three months ended
September 30, 2003, compared to $60.3 million in the year earlier period. As a
percentage of revenue, the Company's G&A expenses increased to 21.6% in the
three months ended September 30, 2003, from 20.8% in the year earlier period,
due to the decline in revenue.
Income from operations. Income from operations decreased $0.4 million, or 3.9%,
to $9.8 million in the three months ended September 30, 2003, from $10.2 million
in the year earlier period.
11
Other income (expense), net. Other income (expense), net consists primarily of
interest expense related to borrowings under the Company's expired credit
facility and notes issued in connection with acquisitions, net of interest
income related to investment income from (1) certain investments owned by the
Company and (2) cash on hand. Interest expense decreased $1.5 million, or 88.2%,
to $0.2 million in the three months ended September 30, 2003, from $1.7 million
in the year earlier period. The decrease in interest expense is related to the
reduction of borrowings under the Company's expired credit facility between
these two periods. As of September 30, 2002, the Company had $25 million
outstanding under its expired credit facility, while there were no borrowings
outstanding during the third quarter of 2003. Interest expense was offset by
$0.4 million and $0.5 million of interest and other income in the three months
ended September 30, 2003 and 2002, respectively.
Income taxes. The Company's effective tax rate decreased to 40.0% in the three
months ended September 30, 2003, as compared to 41.0% in the year earlier
period. The decrease was due to the lower level of non-deductible expenses in
the third quarter of 2003.
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $0.7
million, or 13.2%, to $6.0 million in the three months ended September 30, 2003,
from $5.3 million in the year earlier period. Income before cumulative effect of
accounting change as a percentage of revenue increased to 2.1% in the three
months ended September 30, 2003, from 1.8% in the year earlier period.
Segment Results
IT Services division
Revenue in the IT services division decreased $18.4 million, or 12.8%, to $125.3
million in the third quarter of 2003, from $143.7 million in the year earlier
period. On a constant currency basis, revenue decreased 14.0%. The decrease in
revenue was attributable to the diminished demand for IT services. The
division's customers continued to experience a constrained ability to spend on
IT initiatives due to uncertainties relating to the economy.
Of the division's revenue, approximately 64% and 65% were generated in the
United States in the three months ended September 30, 2003 and 2002,
respectively. The remainder was generated internationally, primarily in the
United Kingdom. Revenue generated in the United States decreased 14.3% in the
third quarter of 2003, from the year earlier period. Revenue generated
internationally decreased 9.9% in the third quarter of 2003, from the year
earlier period. However on a constant currency basis, revenue generated
internationally decreased 13.4%.
Gross profit for the IT services division decreased $1.9 million, or 6.2%, to
$28.9 million in the third quarter of 2003, from $30.8 million in the year
earlier period. However, the gross margin increased to 23.0% in the three months
ended September 30, 2003, from 21.4% in the year earlier period. The increase in
gross margin is attributable to the division's domestic operations where the
gross margin increased to 27.6% in the third quarter of 2003, from 24.4% in the
year earlier period. In the year earlier period, the division's domestic
operations experienced a decrease in bill rates and a shift in the mix of its
services, which exceeded the related decrease in pay rates of its primarily
hourly employees. The Company was able to more effectively manage the
differential in the bill and pay rates throughout 2003, which resulted in an
increase in gross margin from the year earlier period. For revenue generated
internationally, the gross margin decreased to 14.9% in the three months ended
September 30, 2003, from 15.9% in the year earlier period, primarily due to a
shift in the mix of services provided internationally.
The IT services division's G&A expenses decreased $0.9 million, or 3.6%, to
$23.8 million in the three months ended September 30, 2003, from $24.7 million
in the year earlier period. As a percentage of revenue, the division's G&A
expenses increased to 19.0% in the three months ended September 30, 2003, from
17.2% in the year earlier period.
Income from operations for the IT services division decreased $0.9 million, or
24.3 %, to $2.8 million in the three months ended September 30, 2003, from $3.7
million in the year earlier period.
Professional services division
Revenue in the professional services division increased $10.7 million, or 8.5%,
to $136.5 million in the three months ended September 30, 2003, from $125.8
million in the year earlier period. The legal acquisitions contributed $3.3
million in revenue for the three months ended September 30, 2003.
Of the division's revenue, approximately 62% and 64% were generated in the
United States in both the third quarter of 2003 and 2002, respectively. The
remainder was generated in the United Kingdom. Excluding the contribution from
the legal acquisitions, revenue generated in the United States increased 2.4%
for the third quarter of 2003, from the year earlier period. Revenue generated
in the United Kingdom increased 12.0% in the third quarter of 2003, from the
year earlier period. However on a constant currency basis, revenue generated in
the United Kingdom increased 7.4%. The increase in revenue was attributable to
the raised demand for staffing services provided by the division.
12
The professional services division operates primarily through five operating
units consisting of accounting and finance, legal, engineering, workforce
management and executive search, and health care, which contributed 43.5%, 15.3,
32.8%, 4.7%, and 3.7%, respectively, of the division's revenue by group during
the three months ended September 30, 2003, as compared to 42.6%, 12.0%, 34.0%,
8.0%, and 3.4%, respectively, during the year earlier period.
Gross profit for the professional services division increased $1.7 million, or
4.5%, to $39.6 million in the third quarter of 2003, from $37.8 million in the
year earlier period. The gross margin decreased to 29.1% in the three months
ended September 30, 2003, from 30.1% in the year earlier period. The decrease in
gross margin is primarily attributable to the decrease in demand for the
division's workforce management unit, which utilizes a higher percentage of a
salaried workforce.
The professional services division's G&A expenses increased $1.6 million, or
5.4%, to $31.5 million in the three months ended September 30, 2003, from $29.9
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 23.1% in the three months ended September 30, 2003,
from 23.7% in the year earlier period.
Income from operations for the professional services division increased $0.7
million, or 11.5 %, to $6.8 million in the three months ended September 30,
2003, from $6.1 million in the year earlier period.
IT Solutions division
Revenue in the IT solutions division decreased $2.9 million, or 14.5%, to $17.1
million in the three months ended September 30, 2003, from $20.0 million in the
year earlier period. Weak demand for IT consulting solutions was intensified by
the uncertainties relating to the economy. As a result, management refined its
focus by deciding to exit certain non-strategic markets over 2002, the last of
which occurred in August 2002. These markets, while generating revenue, were not
producing positive income or cash flow from operations.
Gross profit for the IT solutions division increased $1.3 million, or 17.8%, to
$6.0 million in the three months ended September 30, 2003, from $6.0 million in
the year earlier period. The gross margin decreased to 34.9% in the third
quarter of 2003, from 36.3% in the year earlier period. This decrease was
primarily due to lower utilization of the Company's salaried consultants. This
division's business model, unlike the Company's other divisions, uses primarily
salaried consultants to meet customer demand.
The IT solutions division's G&A expenses decreased $0.8 million, or 13.8%, to
$5.0 million in the three months ended September 30, 2003, from $5.8 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 29.3% in the third quarter of 2003, from 28.9% in the year earlier
period. The decrease in the division's G&A expenses was primarily related to
reductions in its work force throughout 2002.
Income from operations for the IT solutions division decreased $0.2 million, or
50.0%, to $0.2 million in the three months ended September 30, 2003, from a $0.4
million in the year earlier period.
Nine Months Ended September 30, 2003 Compared To Nine Months Ended September 30,
2002
Consolidated Results
Revenue. Revenue decreased $45.0 million, or 5.1%, to $829.5 million in the nine
months ended September 30, 2003, from $874.5 million in the year earlier period.
The decrease in revenue was attributable to diminished demand for the Company's
services. For example, the Company's customers continued to experience a
constrained ability to spend on IT initiatives due to uncertainties relating to
the economy.
Included in the results for the nine months ended September 30, 2003, was
revenue from health care and legal acquisitions (together, the 'acquisitions').
The Company's health care staffing business, which was acquired in July 2002,
contributed $14.5 million and $4.3 million in revenue in the nine months ended
September 30, 2003 and 2002, respectively. The legal acquisitions contributed
$5.0 million in revenue in the nine months ended September 30, 2003.
Approximately 34% of the Company's revenue for the nine months ended September
30, 2003 was generated internationally, primarily in the United Kingdom. The
weakening of the U.S. dollar in the nine months ended September 30, 2003 had a
positive impact on revenue, as revenue, on a constant currency basis decreased
7.8%, as compared to the decrease of 5.1% above.
Gross Profit. Gross profit decreased $6.5 million or 2.9% to $220.2 million in
the nine months ended September 30, 2003, from $226.7 million in the year
earlier period. However, gross margin increased to 26.5% in the nine months
ended September 30, 2003, from 25.9% in the year earlier period.
13
Operating expenses. Total operating expenses decreased $8.3 million or 4.1% to
$195.5 million in the nine months ended September 30, 2003, from $203.8 million
in the year earlier period. The Company's G&A expenses decreased $6.3 million,
or 3.3%, to $182.1 million in the nine months ended September 30, 2003, from
$188.4 million in the year earlier period. As a percentage of revenue, the
Company's G&A expenses increased to 22.0% in the nine months ended September 30,
2003, from 21.5% in the year earlier period. The decrease in G&A expenses was
attributable to a decrease in revenue for the nine months ended September 30,
2003, and cost reduction initiatives that were implemented throughout 2002
across MPS's divisions in response to the lower revenue levels. The decrease in
revenue primarily reduces the variable component of compensation for the
Company's employees. Certain of the cost reduction initiatives include the
reduction of the Company's salaried workforce, and the realignment of
compensation levels for the Company's employees.
Income from operations. Income from operations increased $1.8 million, or 7.9%,
to $24.7 million in the nine months ended September 30, 2003, from $22.9 million
in the year earlier period.
Other income (expense), net. Other income (expense), net consists primarily of
interest expense related to borrowings under the Company's expired credit
facility and notes issued in connection with acquisitions, net of interest
income related to investment income from (1) certain investments owned by the
Company and (2) cash on hand. Interest expense decreased $3.7 million, or 75.5%,
to $1.2 million in the nine months ended September 30, 2003, from $4.9 million
in the year earlier period. The decrease in interest expense is related to the
reduction of borrowings under the Company's expired credit facility between
these two periods. As of September 30, 2002, the Company had $25 million
outstanding under its expired credit facility, while there were no borrowings
outstanding during the nine months ended September 30, 2003. Interest expense
was offset by $1.4 million and $1.2 million of interest and other income in the
nine months ended September 30, 2003 and 2002, respectively.
Income taxes. The Company's effective tax rate increased slightly to 40.6% in
the nine months ended September 30, 2003, as compared to 40.5% in the year
earlier period.
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $3.4
million, or 29.8%, to $14.8 million in the nine months ended September 30, 2003,
from $11.4 million in the year earlier period. Income before cumulative effect
of accounting change as a percentage of revenue increased to 1.8% in the nine
months ended September 30, 2003, from 1.3% in the year earlier period.
Segment Results
IT Services division
Revenue in the IT services division decreased $60.3 million, or 13.7%, to $380.1
million in the nine months ended September 30, 2003, from $440.4 million in the
year earlier period. On a constant currency basis, revenue decreased 16.2%. The
decrease in revenue was attributable to the diminished demand for IT services.
The division's customers continued to experience a constrained ability to spend
on IT initiatives due to uncertainties relating to the economy.
Of the division's revenue, approximately 63% and 66% was generated in the United
States in the nine months ended September 30, 2003 and 2002, respectively. The
remainder was generated internationally, primarily in the United Kingdom.
Revenue generated in the United States decreased 17.7% in the nine months ended
September 30, 2003, from the year earlier period. Revenue generated
internationally decreased 5.8% in the nine months ended September 30, 2003, from
the year earlier period. However on a constant currency basis, revenue generated
internationally decreased 13.1%.
Gross profit for the IT services division decreased $7.2 million, or 7.7%, to
$85.8 million in the nine months ended September 30, 2003, from $93.0 million in
the year earlier period. However, the gross margin increased to 22.6% in the
nine months ended September 30, 2003, from 21.1% in the year earlier period. The
increase in gross margin is attributable to the division's domestic operations
where the gross margin increased to 27.0% in the nine months ended September 30,
2003, from 24.0% in the year earlier period. In the year earlier period, the
division's domestic operations experienced a decrease in bill rates and a shift
in the mix of its services, which exceeded the related decrease in pay rates of
its primarily hourly employees. The Company was able to more effectively manage
the differential in the bill and pay rates throughout 2003, which resulted in an
increase in gross margin from the year earlier period. For revenue generated
internationally, the gross margin decreased to 15.1% in the nine months ended
September 30, 2003, from 15.5% in the year earlier period.
The IT services division's G&A expenses decreased $3.4 million, or 4.4%, to
$73.8 million in the nine months ended September 30, 2003, from $77.2 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 19.4% in the nine months ended September 30, 2003, from 17.5% in
the year earlier period. The decrease in the division's G&A expenses is
associated with the decrease in revenue for the nine months ended September 30,
2003, and cost reduction initiatives implemented within the division throughout
2002.
14
Income from operations for the IT services division decreased $3.2 million, or
37.2 %, to $5.4 million in the nine months ended September 30, 2003, from $8.6
million in the year earlier period.
Professional services division
Revenue in the professional services division increased $23.7 million, or 6.4%,
to $394.0 million in the nine months ended September 30, 2003, from $370.3
million in the year earlier period. Acquisitions contributed $14.5 million in
revenue for the nine months ended September 30, 2003.
Of the division's revenue, approximately 63% and 64% was generated in the United
States in both the nine months ended September 30, 2003 and 2002, respectively.
The remainder was generated in the United Kingdom. Excluding the contribution
from acquisitions, revenue generated in the United States decreased 0.4% in the
nine months ended September 30, 2003, from the year earlier period. Revenue
generated in the United Kingdom increased 7.6% in the nine months ended
September 30, 2003, from the year earlier period. However on a constant currency
basis, revenue generated in the United Kingdom decreased 1.2%. The decrease in
revenue was attributable to the diminished demand for staffing services and
workforce solutions provided by the division.
The professional services division operates primarily through five operating
units consisting of accounting and finance, legal, engineering, workforce
management and executive search, and health care, which contributed 42.3%,
14.3%, 33.7%, 6.0%, and 3.7%, respectively, of the division's revenue by group
during the nine months ended September 30, 2003, as compared to 43.0%, 11.6%,
35.0%, 9.2%, and 1.2%, respectively, during the year earlier period.
Gross profit for the professional services division increased $1.2 million, or
1.1%, to $113.8 million in the nine months ended September 30, 2003, from $112.6
million in the year earlier period. The gross margin decreased to 28.9% in the
nine months ended September 30, 2003, from 30.4% in the year earlier period. The
decrease in gross margin is primarily attributable to the decrease in demand for
the division's workforce management unit, which utilizes a higher percentage of
a salaried workforce and, to a lesser extent, a 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
4.9% of revenue in the nine months ended September 30, 2003, from 5.3% in the
year earlier period.
The professional services division's G&A expenses increased $3.7 million, or
4.1%, to $93.2 million in the nine months ended September 30, 2003, from $89.5
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 23.7% in the nine months ended September 30, 2003,
from 24.2% in the year earlier period.
Income from operations for the professional services division decreased $2.1
million, or 11.5 %, to $16.1 million in the nine months ended September 30,
2003, from $18.2 million in the year earlier period.
IT Solutions division
Revenue in the IT solutions division decreased $8.5 million, or 13.3%, to $55.4
million in the nine months ended September 30, 2003, from $63.9 million in the
year earlier period. Weak demand for IT consulting solutions was intensified by
the uncertainties relating to the economy. As a result, management refined its
focus by deciding to exit certain non-strategic markets over 2002, the last of
which occurred in August 2002. These markets, while generating revenue, were not
producing positive income or cash flow from operations.
Gross profit for the IT solutions division decreased $0.5 million, or 2.4%, to
$20.6 million in the nine months ended September 30, 2003, from $21.1 million in
the year earlier period. The gross margin increased to 37.2% in the nine months
ended September 30, 2003, from 33.1% in the year earlier period. This increase
was driven primarily by higher utilization of the Company's salaried
consultants. This division's business model, unlike the Company's other
divisions, uses primarily salaried consultants to meet customer demand. To
reflect lower customer demand, the division significantly reduced billable
headcount during 2002.
The IT solutions division's G&A expenses decreased $6.6 million, or 30.4%, to
$15.1 million in the nine months ended September 30, 2003, from $21.7 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
decreased to 27.2% in the nine months ended September 30, 2003, from 33.9% in
the year earlier period. The decrease in the division's G&A expenses was
primarily related to reductions in its work force throughout 2002.
Income from operations for the IT solutions division increased $7.1 million, to
$3.2 million in the nine months ended September 30, 2003, from a $3.9 million
loss in the year earlier period.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical 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 customers. 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 $200.1 million and $171.9 million as of
September 30, 2003 and December 31, 2002, respectively. The Company had cash and
cash equivalents of $108.9 million and $66.9 million as of September 30, 2003
and December 31, 2002, respectively.
For the nine months ended September 30, 2003 and 2002, the Company generated
$60.5 million and $72.6 million of cash flow from operations, respectively. The
decrease in cash flow from operations, from 2002 to 2003, is primarily due the
reduced level of earnings in the current year.
For the nine months ended September 30, 2003, the Company used $20.5 million of
cash for investing activities, of which $14.9 million was used for acquisitions
of legal staffing businesses in February and August of 2003, and $5.6 million
was used for capital expenditures. For the nine months ended September 30, 2002,
the Company used $10.2 million of cash for investing activities, of which $6.7
million was used for an acquisition of a health care staffing business in July
2002, and $3.5 million was used for capital expenditures.
For the nine months ended September 30, 2003, the Company generated $0.9 million
of cash for financing activities, primarily comprised of $8.9 million generated
from stock option exercises, net of $7.6 million used for the repurchase of the
Company's common stock. 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 expired credit facility, and
$16.3 million was generated from stock option exercises. These repurchases and
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 November 3, 2003, 1.6 million
shares at a cost of $9.1 million 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 2003, will be approximately $2.0 million.
While there can be no assurance in this regard, the Company believes that funds
provided by operations, and current amounts of cash will be sufficient to meet
its presently anticipated needs for working capital and capital expenditures for
at least the next 12 months.
Indebtedness of the Company
The Company had a revolving credit facility that expired on October 27, 2003,
with no borrowings outstanding. Management is negotiating with lenders regarding
a new credit facility and expects to enter into a new credit facility in the
near future.
At November 3, 2003, the Company had outstanding letters of credit in the amount
of $2.7 million.
SEASONALITY
The Company's quarterly operating results are affected by the number of billing
days in the quarter and the seasonality of its customers' businesses. Demand for
the Company's services has historically been lower during the calendar year-end,
as a result of holidays, through February of the following year, as the
Company's customers approve annual budgets. Extreme weather conditions may also
affect demand in the early part of the year as certain of the Company's client
bases are located in geographic areas subject to extreme weather.
16
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 expired
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.
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 34% of its consolidated revenues
for the nine months ended September 30, 2003, from international operations,
approximately 97% of which were from the United Kingdom. The British pound
sterling to U.S. dollar exchange rate has increased approximately 3% in 2003,
from 1.61 at December 31, 2002, to 1.66 at September 30, 2003. 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 the nine months ended September 30, 2003. While fluctuations in the
British pound sterling have not historically had a material impact on the
Company's consolidated 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, 2003, the Company did not hold and has not previously entered
into any foreign currency derivative instruments.
17
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Our Revenues Have Declined Because Demand For Our Services Has Weakened
Significantly, And Demand Will Likely Remain Weak For Some Time Because Of The
Current Economic Climate.
MPS's revenues are affected by the level of business activity of its
customers, which is driven by the level of economic activity in the industries
and markets we serve. Consequently, the current economic downturn and
uncertainty has significantly hurt our revenues and results of operations.
Further deterioration in global economic or political conditions could increase
these effects. As long as this uncertainty remains, we believe that the demand
for our services will remain diminished.
We cannot predict when the economic climate will significantly improve.
When the economic climate does improve, we cannot predict whether and to what
extent the demand for our services will improve. Although we have implemented a
somewhat variable cost model, further declines in revenue will have a material
adverse impact on our results.
The difficult economic climate may also encourage customer downsizings, or
consolidations through mergers and otherwise of our major customers or between
our major customers with non-customers. These may result in redundant functions
or services and a resulting reduction in demand by those customers for our
services. Also, spending for outsourced business services may be put on hold
until the consolidations are completed.
Economic considerations may also encourage our customers to consolidate
their vendor lists in an attempt to achieve cost and expense savings, which
increases competitive pressure as described below.
Our Market Is Highly Competitive, Which Puts Pressure On The Profit Margins Of
Our Services.
Our industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. MPS faces significant competition in
the markets it serves, and will face significant competition in any geographic
market that it may enter. In each market in which we operate, we compete for
both clients and qualified professionals with other firms offering similar
services. Competition creates an aggressive pricing environment, which puts
pressure on profit margins.
We have increasingly competed against service providers offering their
services from remote locations, particularly from offshore locations such as
India. The substantially lower cost of the labor pool in these remote locations
puts significant pricing pressure on our service offerings when we compete with
them. While we believe that our service delivery model provides a superior level
of service than many of these offshore based competitors, the increased pricing
pressure from these providers may have a material adverse impact on our
profitability.
The effects of competition may be intensified by our customers'
consolidation of their vendor lists. As customers have consolidated their number
of vendors, often in an attempt to secure cost or expense savings in the face of
difficult economic conditions, competition to be an approved vendor has greatly
intensified. If we fail to remain on these consolidated vendor lists, our
results of operations will suffer accordingly. Competing to remain on, or get
on, these vendor lists could obligate us to offer our services at prices that
offer lower margins, and less profit, than we might otherwise be able to
achieve.
Our Business Depends On Key Personnel, Including Executive Officers, Local
Managers And Field Personnel; Our Failure To Retain Existing Key Personnel Or
Attract New People Will Reduce Business And Revenues.
MPS's operations depend on the continued efforts of our officers and
executive management. The loss of key officers and members of executive
management may cause a significant disruption to our business.
We also depend on the performance and productivity of our local managers
and field personnel. Our ability to attract and retain new business is
significantly affected by local relationships and the quality of service
rendered. The loss of key managers and field personnel may also jeopardize
existing client relationships with businesses that continue to use our services
based upon past relationships with local managers and field personnel. Our
revenues would decline in that event.
18
Legislation Requiring Companies To Offer Benefits To Consultants And Temporary
Personnel Could Hurt Our Industry.
From time to time, legislation is proposed in the United States Congress,
state legislative bodies, and the foreign governments of the United Kingdom and
continental Europe 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. This legislation would
eliminate one of the key economic reasons for outsourcing certain business
resources, and could significantly adversely impact MPS's staff augmentation
business, thus reducing revenues.
IRS Adjustments During Periodic Income Tax Audits May Increase Our Tax Liability
And Hurt Our Results Of Operations.
MPS is subject to periodic review by federal, state, and local taxing
authorities in the ordinary course of business. During 2001, MPS 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 MPS recognized in 2000 of $86.3 million is also
being reviewed. In the fourth quarter of 2002, the company recorded an $8.7
million charge for an adjustment related to its audit of prior years' tax
returns. While MPS has not received notice of any additional adjustments
relating to its audit of prior years' tax returns, we cannot assure you that the
IRS will not propose additional adjustments. Additional adjustments may affect
our financial condition.
The Price Of Our Common Stock May Fluctuate Significantly, Which May Result In
Losses For Investors.
The market price for our common stock has been and may continue to be volatile.
For example, during the period from January 1, 2003 until September 30, 2003,
the closing price of the common stock as reported on the New York Stock Exchange
ranged from a high of $10.10 to a low of $4.85. Our stock price can fluctuate as
a result of a variety of factors, including factors listed above and others,
many of which are beyond our control. These factors include:
- actual or anticipated variations in quarterly operating results;
- announcement of new services by us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates or other statements by securities
analysts;
- valuation fluctuations which may cause a negative impact to our
operating results as it relates to Statement of Financial Accounting
Standards No. 142; and
- changes in general economic conditions.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts, and our stock price could decline as a
result.
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Item 4. Controls And Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, supervised and participated in an evaluation of the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14) as of the end of the period covered by this report. Based on their
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of the
date of that evaluation.
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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
31.1 Certification of Timothy D. Payne pursuant to Rule 13a-14(a)
31.2 Certification of Robert P. Crouch pursuant to Rule 13a-14(a)
32.1 Certification of Timothy D. Payne pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Robert P. Crouch pursuant to 18 U.S.C.
Section 1350
B. Reports on Form 8-K
On July 22, 2003, we furnished a Report on Items 7 and 9 of Form
8-K pertaining to the issuance of a press release announcing our
financial results for the three and six months ended June 30,
2003. This Form 8-K is not deemed incorporated by reference into
any of our filings with the Securities and Exchange Commission.
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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 13, 2003
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, November 13, 2003
Robert P. Crouch Treasurer, and Chief
Financial Officer
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