FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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 AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-15539
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RIGHT MANAGEMENT CONSULTANTS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2153729
---------------------------- -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1818 Market Street, Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-1588
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 Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of November 1, 2003:
Common Stock, $0.01 par value 22,821,721
----------------------------- ----------------
Class Number of Shares
Right Management Consultants, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
(Unaudited)
September 30, December 31,
2003 2002
Assets ---- ----
Current Assets:
Cash and cash equivalents $ 16,984 $ 33,886
Accounts receivable, trade, net of allowance for doubtful accounts
of $3,139 and $3,283 in 2003 and 2002, respectively 76,283 86,972
Royalties and fees receivable from Affiliates 5,993 6,523
Prepaid expenses and other current assets 9,344 9,235
Deferred income taxes 1,593 1,692
--------------------- --------------------
Total Current Assets 110,197 138,308
Property and equipment, net of accumulated depreciation of $67,705 39,723 38,988
and $55,082 in 2003 and 2002, respectively
Goodwill, net of accumulated amortization of $23,518 and
$22,277 in 2003 and 2002, respectively 246,128 225,401
Amortizable intangibles, net of accumulated amortization of $9,946
and $5,308 in 2003 and 2002, respectively 20,536 21,733
Deferred income taxes 3,177 2,444
Other 19,717 16,796
--------------------- --------------------
Total Assets $ 439,478 $ 443,670
===================== ====================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt and other obligations $ 21,317 $ 22,152
Accounts payable 21,595 37,593
Fees payable to Affiliates 3,596 3,649
Accrued incentive compensation and benefits 9,192 33,768
Other accrued expenses 29,886 30,915
Deferred revenue 53,447 72,757
--------------------- --------------------
Total Current Liabilities 139,033 200,834
Long-term debt and other obligations, net of current portion 105,098 96,349
Deferred compensation and other long term liabilities 14,726 10,127
Minority interest in subsidiaries 3,654 5,272
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par value; 1,000,000 shares authorized; no
shares issued - -
Common stock, $.01 par value; 100,000,000 shares authorized;
27,177,605 and 27,002,858 shares issued in 2003 and 2002, respectively 272 270
Additional paid-in capital 33,410 31,907
Retained earnings 138,669 107,938
Accumulated other comprehensive income 18,521 4,878
--------------------- --------------------
190,872 144,993
Less treasury stock, at cost, 4,375,134 shares
in 2003 and 2002 (13,905) (13,905)
--------------------- --------------------
Total Shareholders' Equity 176,967 131,088
--------------------- --------------------
Total Liabilities and Shareholders' Equity $ 439,478 $ 443,670
===================== ====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
Right Management Consultants, Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Earnings per Share Data)
(Unaudited)
Three Months Ended September 30,
-------------------------------
2003 2002
---- ----
Revenue:
Company office revenue $ 99,977 $ 114,635
Affiliate royalties 1,088 1,569
------------------- -------------------
Revenue before reimbursed expenses 101,065 116,204
Reimbursed expenses 1,345 1,456
------------------- -------------------
Total revenue 102,410 117,660
------------------- -------------------
Expenses:
Consultants' compensation 40,708 44,382
Office administration 29,164 30,900
Office sales and consulting support 9,057 12,716
Office depreciation 2,592 2,323
General sales and administration 3,906 6,811
Depreciation and amortization 2,454 1,980
------------------- -------------------
Total expenses 87,881 99,112
------------------- -------------------
Income from operations 14,529 18,548
Net interest expense 1,357 1,415
------------------- -------------------
Income before income taxes 13,172 17,133
Provision for income taxes 5,149 7,882
Minority interest in net (loss) income of subsidiaries (79) 682
------------------- -------------------
Net income $ 8,102 $ 8,569
=================== ===================
Basic earnings per share $ 0.36 $ 0.38
=================== ===================
Diluted earnings per share $ 0.33 $ 0.35
=================== ===================
Basic weighted average shares outstanding 22,780,000 22,646,000
=================== ===================
Diluted weighted average shares outstanding 24,414,000 24,375,000
=================== ===================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Right Management Consultants, Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Earnings per Share Data)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Revenue:
Company office revenue $ 335,190 $ 334,007
Affiliate royalties 4,239 5,287
--------------------- ---------------------
Revenue before reimbursed expenses 339,429 339,294
Reimbursed expenses 4,801 4,086
--------------------- ---------------------
Total revenue 344,230 343,380
--------------------- ---------------------
Expenses:
Consultants' compensation 131,522 130,144
Office administration 92,042 86,088
Office sales and consulting support 31,168 31,373
Office depreciation 7,805 6,269
General sales and administration 18,292 25,406
Depreciation and amortization 7,288 5,458
--------------------- ---------------------
Total expenses 288,117 284,738
--------------------- ---------------------
Income from operations 56,113 58,642
Net interest expense 4,338 3,299
--------------------- ---------------------
Income before income taxes 51,775 55,343
Provision for income taxes 20,976 25,459
Minority interest in net income of subsidiaries 68 1,520
--------------------- ---------------------
Net income $ 30,731 $ 28,364
===================== =====================
Basic earnings per share $ 1.35 $ 1.26
===================== =====================
Diluted earnings per share $ 1.26 $ 1.16
===================== =====================
Basic weighted average shares outstanding 22,721,000 22,583,000
===================== =====================
Diluted weighted average shares outstanding 24,302,000 24,377,000
===================== =====================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Right Management Consultants, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Operating Activities:
Net income $ 30,731 $ 28,364
Adjustments to reconcile net income to net cash
(utilized in) provided by operating activities:
Depreciation and amortization 15,017 11,965
Deferred income taxes (417) (407)
Tax benefit from the exercise of stock options 361 938
Minority interest in net income of subsidiaries 68 1,520
Increase in cash surrender value of
company-owned life insurance (1,129) (603)
Provision for doubtful accounts 555 1,556
Amortization of debt commitment fees 568 --
Stock option compensation -- 42
Other non-cash items 1,649 478
Loss on sale of business 1,043 --
Foreign exchange gains on transactions (2,245) (904)
Changes in operating accounts, net of acquired businesses:
Accounts receivable, trade and from Affiliates 15,610 28,984
Prepaid expenses and other assets 2,496 (4,140)
Accounts payable (17,679) (7,887)
Accrued incentive compensation, benefits and other expenses (27,720) (7,873)
Fees payable to Affiliates and other liabilities (113) (2,551)
Deferred revenue (23,004) (13,225)
--------- ---------
Net cash (utilized in) provided by operating activities (4,209) 36,257
--------- ---------
Investing Activities:
Purchase of property and equipment (11,387) (12,723)
Acquisitions, net of cash acquired (11,298) (119,096)
Proceeds from sale of business 34 --
--------- ---------
Net cash utilized in investing activities (22,651) (131,819)
--------- ---------
Financing Activities:
Borrowings under credit agreements 30,000 135,432
Payment of long-term debt and other obligations (21,599) (53,413)
Principal payments under capital lease obligations (657) --
Termination value of swap agreements -- 358
Debt commitment fees -- (3,516)
Cash dividends declared and paid to minority interests (666) --
Proceeds from stock issuances 1,157 1,499
--------- ---------
Net cash provided by financing activities 8,235 80,360
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 1,723 (1,812)
Decrease in cash and cash equivalents (16,902) (17,014)
Cash and cash equivalents, beginning of period 33,886 48,655
--------- ---------
Cash and cash equivalents, end of period $ 16,984 $ 31,641
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnote disclosures necessary for a fair presentation of
consolidated financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the financial statements
and footnotes thereto included in Right Management Consultants, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2002.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Right Management
Consultants, Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Revenue Recognition
- -------------------
The Company recognizes revenue under the provisions of Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101
expresses the views of the Securities and Exchange Commission in applying
accounting principles generally accepted in the United States to revenue
recognition for certain transactions. Under SAB No. 101, the Company recognizes
career transition revenue from individual programs on a straight-line basis over
the average length of time for candidates to find jobs based on statistically
valid data for the specific type of program. If statistically valid data is not
available, then the Company recognizes career transition revenue on a
straight-line basis over the nominal life of the agreements. For group programs
and large projects within the career transition line of business, the Company
will defer and recognize revenue over the period within which the contracts are
completed. The difference between the amount billed for career transition
services and the amount recognized as revenue is carried on the Company's
balance sheet as deferred revenue.
For the Company's organizational consulting line of business, SAB No. 101 has
minimal impact on its revenue recognition policy. The Company generally
recognizes consulting contract revenue upon the performance of its obligations
under consulting service contracts.
6
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
- --------
Statement of Financial Accounting Standards ("SFAS") No. 142 establishes a
method of testing goodwill for impairment and requires this testing on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. During
the fourth quarter 2003, the Company will perform its annual impairment testing
of its goodwill, including new acquisitions.
Changes in the carrying amount of consolidated goodwill for the nine months
ended September 30, 2003 are as follows:
Dollars in Thousands
--------------------
Balance as of December 31, 2002 $ 247,678
Acquisitions and adjustments 6,453
Earnout payments 2,049
Goodwill from search
businesses that were sold (See Note D) (1,082)
Currency translation and other 14,548
---------
Balance as of September 30, 2003 $ 269,646
=========
The increase in goodwill was principally due to currency translation,
acquisitions and adjustments related to prior acquisitions. See Note C for
further discussion regarding acquisitions made in the current year.
Stock-based Compensation Arrangements
- -------------------------------------
At September 30, 2003, the Company has two active stock based compensation
plans: the 1993 Stock Incentive Plan and the Directors' Stock Option Plan. The
Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Under APB No. 25, no
compensation expense is recognized for stock option grants because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of the grant. Had compensation cost for these plans been
determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123," the Company's net income and earnings per share ("EPS") for 2003 and 2002
would have been reduced to the following pro-forma amounts:
7
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income - as reported $8,102,000 $8,569,000 $30,731,000 $28,364,000
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (877,000) (677,000) (2,657,000) (1,827,000)
---------- ---------- ---------- -----------
Net income - pro-forma $7,225,000 $7,892,000 $28,074,000 $26,537,000
========== ========== ========== ===========
Basic EPS - as reported $0.36 $0.38 $1.35 $1.26
Basic EPS - pro-forma $0.32 $0.35 $1.24 $1.18
Diluted EPS - as reported $0.33 $0.35 $1.26 $1.16
Diluted EPS - pro-forma $0.30 $0.32 $1.16 $1.09
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model. Grants were assumed to have no dividend
yield. The weighted-average assumptions used for grants in 2003 were a risk-free
interest rate of 3.61%, an expected volatility of 63.4%, and an expected option
life of approximately 7 years. The weighted-average assumptions used for grants
in 2002 were a risk-free interest rate of 4.14%, an expected volatility of 65.0%
and an expected option life of 7 years.
Income Taxes
- ------------
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes". In accordance with SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using enacted tax rates
and laws that are expected to be in effect when the difference is reversed.
The income tax rate for the three and nine months ended September 30, 2003 was
39% and 41%, respectively, compared to 46% for the three and nine months ended
September 30, 2002, respectively. The decrease reflects lower non-deductible
costs in the current year as compared to 2002, as well as the impact of greater
amounts of income being generated in lower foreign tax jurisdictions in the
current year.
New Accounting Pronouncements
- -----------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Emerging Issues Task Force Issue No. 00-21 ("EITF Issue No. 00-21"), "Accounting
for Revenue Arrangements with Multiple Deliverables." This issue addresses how
to account for arrangements that may involve the delivery or performance of
multiple products, services and/or right to use assets. The final consensus of
this issue is applicable to agreements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a
material impact on the Company's financial position, cash flows and results of
operations.
8
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). It clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which the equity investors do not have a controlling
financial interest or do not have sufficient equity at risk. FIN No. 46 is
applicable to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. The effective date for variable interest entities acquired on or before
January 31, 2003 is December 31, 2003. While the adoption of FIN No. 46 is not
expected to have a material impact on the Company's financial position, cash
flows and results of operations, the Company is still evaluating the effects of
this Interpretation.
Reclassifications
- -----------------
Certain amounts have been reclassified in the prior year's Condensed
Consolidated Financial Statements and Notes thereto to conform with the current
year presentation.
NOTE B - ACCUMULATED OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) are as follows
(dollars in thousands):
Currency Derivative and
Translation Hedging Instruments
Adjustments Losses Total
----------- ------------------- -------
Balance at December 31, 2002 $ 5,935 $ (1,057) $ 4,878
Change in fair value of derivatives
and hedging instruments,
net of tax benefit -- (111) (111)
Currency translation adjustment 13,754 -- 13,754
-------- --------- --------
Balance at September 30, 2003 $ 19,689 $ (1,168) $ 18,521
======== ========= ========
The earnings associated with the Company's investment in its foreign
subsidiaries are considered to be permanently invested and no provision for U.S.
federal and state income taxes has been made on these foreign currency
translation adjustments. The following table sets forth the Company's
comprehensive income for the three and nine months ended September 30, 2003 and
2002:
9
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - ACCUMULATED OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME
Dollars in Thousands
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 8,102 $ 8,569 $ 30,731 $ 28,364
Change in the fair value of derivatives and
hedging instruments, net of tax benefit 247 -- (111) (38)
Termination of derivatives and hedging
instruments -- -- -- 183
Currency translation adjustment 1,994 506 13,754 7,333
--------- --------- --------- ---------
Comprehensive income $ 10,343 $ 9,075 $ 44,374 $ 35,842
========= ========= ========= =========
NOTE C - ACQUISITIONS
Effective January 1, 2003, the Company acquired for cash and future defined
contingent payments, the remaining 49% interest in its Spanish subsidiary, Right
Glenoit SL, for a total ownership of 100% of this subsidiary. The purchase price
for the 49% interest, including transaction costs, totaled $1,214,000.
Also effective January 1, 2003, the Company acquired certain assets of Aston
Promentor, an organizational consulting firm in Denmark. The purchase price,
including transaction costs, totaled $2,098,000.
Effective April 1, 2003, the Company acquired an additional 46% interest in its
Brazilian subsidiary bringing its total ownership in this subsidiary to 97%. The
purchase price for the 46% interest was a combination of cash and future defined
contingent payments. The upfront cash paid totaled $1,680,000. In April 2003,
the Company borrowed $2,000,000 under its Revolving Loan, to fund this
acquisition and for working capital purposes.
Also during the second and third quarters of 2003, the Company acquired an
aggregate 95 additional shares in its Japanese subsidiary for a total of
$474,000. As of September 30, 2003, the Company's interest in this subsidiary
remains at 85%.
These acquisitions were accounted for using the purchase method. The purchase
price allocations for these acquisitions are based upon information available at
this time and are subject to change.
Also during the first quarter of 2003, the Company acquired certain products and
methodologies, recorded by the Company as amortizable intangible assets, with a
value of $650,000 from The Atlanta Consulting Group ("TACG"). The Company
previously had sold and delivered these products and methodologies under a
license agreement with TACG. The Company paid $200,000 in upfront cash for these
assets and the Company will pay an aggregate of $450,000 in two separate future
purchase price installments.
10
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - ACQUISITIONS (Continued)
For the nine months ended September 30, 2003, earnout payments totaling
$2,049,000 and purchase price adjustments totaling $3,133,000 were recorded to
goodwill. These additional purchase price adjustments relate to liabilities
assumed and direct transaction costs from acquisitions made in the prior year.
The following table represents the assets acquired and liabilities assumed to
arrive at net cash paid for the acquisitions discussed above, as well as for
earnout payments and other adjustments related to prior acquisitions for the
nine months ended September 30, 2003 and 2002. The prior year non-amortizable
goodwill and amortizable intangibles are adjusted for final purchase price
allocations.
(Dollars in Thousands)
Nine Months Ended September 30,
------------------------------
2003 2002
---- ----
Assets acquired:
Accounts receivable $ -- $22,276
Prepaid expenses and other assets -- 3,320
Fixed assets 88 4,030
Non-amortizable goodwill 8,502 113,449
Amortizable intangibles 1,946 18,728
Additional equity acquired in Spain and Japan 1,080 1,704
Other non-current assets 28 2,159
-------- --------
11,644 165,666
Less liabilities acquired:
Current portion of long-term debt -- 4
Accounts payable and accrued expenses 346 19,940
Deferred revenue -- 23,623
Long-term debt -- 17
-------- --------
346 43,584
Less minority shareholder interests in Japan -- 2,986
-------- --------
Cash paid for acquisitions, net of cash acquired $11,298 $119,096
======== ========
11
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - ACQUISITIONS (Continued)
As of September 30, 2003, the Company estimates that the aggregate amount of
future contingent earnout payments related to completed acquisitions and payable
over the next two years, will range between $5,000,000 and $7,000,000.
The unaudited pro-forma results of operations for the three and nine months
ended September 30, 2003 and 2002, reflecting the combined results of the
Company and acquisitions made subsequent to January 1, 2002, as if the
acquisitions had been consummated at the beginning of each period presented, are
as follows:
(Dollars and Shares in Thousands Except Earnings Per Share Data)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenue $102,410 $118,824 $344,230 $377,959
======== ======== ======== ========
Income before income taxes $ 13,172 $ 16,361 $ 51,775 $ 55,321
======== ======== ======== ========
Net income $ 8,102 $ 8,224 $ 30,712 $ 28,853
======== ======== ======== ========
Diluted earnings per share $ 0.33 $ 0.34 $ 1.26 $ 1.18
======== ======== ======== ========
Diluted weighted average
number of shares outstanding 24,414 24,375 24,302 24,377
======== ======== ======== ========
NOTE D - SALE OF BUSINESS
Effective January 31, 2003, the Company sold its executive search business in
Norway for a purchase price of approximately $50,000. Also effective in April
2003, the Company sold its executive search business in Sweden for a nominal
purchase price. The pre-tax loss on these sales, included in general sales and
administration on the Condensed Consolidated Statement of Operations for the
nine months ended September 30, 2003, was $1,043,000 and includes the write-off
of intangible assets recorded at the time the Company acquired the executive
search businesses and a provision for severance to terminated employees. The
Company does not anticipate making any future material provisions related to the
sale of these businesses.
For the nine months ended September 30, 2003 and 2002, the executive search
operations in Norway and Sweden generated revenue of $239,000 and $1,599,000,
respectively, and a net loss of $181,000 and $322,000, respectively.
12
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - DEBT AND OTHER OBLIGATIONS
On March 22, 2002, the Company entered into a Credit Agreement with a syndicate
of banks including Wachovia Securities as Administrative Agent (the "Credit
Agreement"). The Credit Agreement provides for a maximum $180,000,000 of total
borrowings, consisting of a revolving loan commitment of $90,000,000 (the
"Revolving Loan"), and a term loan of $90,000,000 (the "Term Loan").
The Revolving Loan and Term Loan are together referred to herein as the "Loans".
The Loans require the Company to meet certain financial and non-financial
covenants as defined in the Credit Agreement which was filed as exhibit 10.26 in
the Company's Form 10-K for the fiscal year ended December 31, 2001.
Initial proceeds from the Loans of $130,000,000 together with Company cash were
used to finance the acquisition of Coutts Consulting Group ("Coutts") in March
2002 and to repay the Company's outstanding indebtedness of $41,038,000 under
its previous credit agreement that was terminated. The Company may borrow, repay
and re-borrow funds during the five-year term of the Revolving Loan, subject to
the financial covenants of the Credit Agreement. During the first nine months of
2003, the Company borrowed $28,000,000 in order to fund incentive payments and
$2,000,000 for the purchase of an additional interest in its Brazilian
subsidiary (See Note C). As of September 30, 2003, approximately $3,900,000
remained available under the Revolving Loan. Future borrowings under this Loan
will be used to finance working capital and other general corporate purposes,
including permitted acquisitions. The Term Loan provides for equal, mandatory
principal repayments made quarterly over its five-year term, and provides for
additional voluntary prepayments during its term as defined in the Credit
Agreement. During the first nine months of 2003, the Company made mandatory
principal payments totaling $13,500,000 under the Term Loan, and made voluntary
principal payments totaling $8,000,000 under the Revolving Loan. The principal
balance outstanding under the Loans as of September 30, 2003 was $122,000,000,
of which $18,000,000 was included in the current portion of long term debt based
on the mandatory principal payments due within one year.
The Loans are secured by a pledge of substantially all of the tangible and
intangible assets of the Company, including the pledge of 100% of the capital
stock of each of the Company's domestic subsidiaries and generally 65% of the
voting equity of the Company's significant foreign subsidiaries. Under the
Credit Agreement, future acquisitions are subject to certain limits and any
acquisition in excess of these limits requires the banks' advance approval. As
of September 30, 2003, the remaining annual limit through the end of 2003 for
permitted acquisitions was approximately $27,240,000.
13
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - DEBT AND OTHER OBLIGATIONS (Continued)
Interest on the Loans is variable and will be determined by London interbank
offered rates (LIBOR) plus a margin ranging from 1.50% to 2.25% based on the
relationship of funded debt to the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the Credit Agreement.
Alternatively, the interest on the Loans will be determined by the greater of
prime or the Federal Funds Effective Rate plus one half of 1% plus a margin of
up to 0.75% based on the relationship of funded debt to the Company's EBITDA, as
defined in the Credit Agreement. The weighted average interest rate on the Loans
for the first nine months of 2003 was 3.26%.
As of September 30, 2003, $2,557,000 in loan notes to certain sellers of Coutts
was included in the current portion of long-term debt on the Company's Condensed
Consolidated Balance Sheet. The notes are payable in seven years and bear
interest at the rate of 4% per annum. Provisions of these loan notes allow the
note-holders to redeem the notes upon demand. In order to secure these loan
notes, letters of credit were issued to each of the note-holders. As of
September 30, 2003, the notional amount on these letters of credit total
$2,953,000 and expire in March 2004.
The Company has two fixed interest rate swap agreements, each designated as a
cash flow derivative, for purposes of hedging against interest rate fluctuations
on the outstanding amount under its Term Loan. The Company accounts for these
swap agreements under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133." The Company recognizes derivatives on the balance sheet at fair value.
Each swap agreement has a notional principal amount at September 30, 2003 of
$31,500,000, and scheduled reductions in notional principal of $2,250,000 each
quarter over the life of the swap. These agreements terminate on March 22, 2007.
Under the terms of the swap agreements, the Company pays interest at a fixed
rate of 2.815% on one swap and 2.57% on the other swap, and its lenders pay the
Company interest at 90-day LIBOR, that was 1.14% as of September 30, 2003.
The Company's earnings and cash flow are subject to fluctuations due to changes
in foreign currency exchange rates. Generally, if the U.S. dollar weakens
against the foreign currencies that will result in a favorable impact to
earnings and if the U.S. dollar strengthens against the foreign currencies, that
will result in an unfavorable impact on earnings. From time to time, the Company
enters into forward foreign exchange contracts to minimize the risk associated
with currency movement relating to certain intercompany transactions. Through
January 31, 2004, the Company has two separate forward Japanese yen (JPY)
exchange contracts for an aggregate of JPY 260,000,000 at an average exchange
rate of 119 per $1.00 U.S. dollar. The gains and losses from these forward
contracts were not material at September 30, 2003.
14
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - TERMINATION ACCRUAL
During the second quarter 2003, the Company accrued for a one-time charge of
$1,167,000 for severance related to employee terminations, pursuant to SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
employee terminations are a result of aligning costs with business volume
anticipated over the remainder of 2003. As of September 30, 2003, the remaining
severance accrual was nominal.
NOTE G - EARNINGS PER SHARE
Earnings per share ("EPS") for the three and nine months ended September 30,
2003 and 2002 as calculated under SFAS No. 128, "Earnings per Share" is as
follows:
For the three months For the three months
ended September 30, 2003 ended September 30, 2002
------------------------------------ -------------------------------------
Income Shares EPS Income Shares EPS
Basic EPS: ------ ------ --- ------ ------ ---
Net income $8,102,000 22,780,000 $0.36 $8,569,000 22,646,000 $0.38
Impact of options --- 1,634,000 ===== --- 1,729,000 =====
----------- ---------- ----------- ----------
Diluted EPS:
Net income $8,102,000 24,414,000 $0.33 $8,569,000 24,375,000 $0.35
=========== ========== ===== =========== ========== =====
For the nine months For the nine months
ended September 30, 2003 ended September 30, 2002
------------------------------------ -------------------------------------
Income Shares EPS Income Shares EPS
Basic EPS: ------ ------ --- ------ ------ ---
Net income $30,731,000 22,721,000 $1.35 $28,364,000 22,583,000 $1.26
Impact of options --- 1,581,000 ===== --- 1,794,000 =====
----------- ---------- ----------- ----------
Diluted EPS:
Net income $30,731,000 24,302,000 $1.26 $28,364,000 24,377,000 $1.16
=========== ========== ===== =========== ========== =====
For the three and nine months ended September 30, 2003, outstanding options to
purchase 495,634 and 770,765, respectively, of Company Common Shares at option
exercise prices ranging from $14.11 to $17.60 per share were excluded from the
computation of diluted EPS, as the exercise price of these options was greater
than the average market price of the Common Shares. For the three and nine
months ended September 30, 2002, outstanding options to purchase 26,250 Company
Common Shares at an option exercise price of $17.60 per share were excluded from
the computation of diluted EPS, as the exercise price of these options was
greater than the average market price of the Common Shares.
As of September 30, 2003 and 2002, the Company's majority-owned Japanese
subsidiary has stock options and warrants outstanding with certain minority
shareholders and employees that are convertible into shares of this subsidiary's
company stock. The dilutive impact of these stock options and warrants is
immaterial to earnings per share for the three and nine months ended September
30, 2003 and 2002.
15
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H- SEGMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," provides standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Company's operations are segregated into two lines of business: career
transition and organizational consulting. The Company operates these lines of
business across the geographic areas of the United States, Canada, Europe,
Asia-Pacific, Japan and Brazil. These operations offer different services and
require different marketing strategies. Career transition offers support for
organizations separating employees, including assistance in handling the initial
difficulties of termination, identifying continuing career goals and options,
and aiding in developing skills for the search for a new job. Consulting
specializes in helping companies with organizational performance, leadership
development and talent management. With more than 300 service locations
worldwide, the Company manages operations by geographic areas to enhance global
growth and establish major accounts with global clients. The Company primarily
delivers its services to mid-size and large companies, with no concentration in
specific companies or industries.
Summarized operations of each of the Company's geographic areas as of September
30, 2003 and 2002 and for the three and nine months then ended are presented
below.
(Dollars in Thousands)
Asia-
September 30, 2003 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ --- ------ ------ ------- ------ ------ ------------
Identifiable assets $ 118,778 $ 27,069 $242,695 $14,479 $32,810 $ 3,647 $439,478
--------- --------- --------- -------- ------- ------- --------
September 30, 2002
- ------------------
Identifiable assets 118,989 22,830 210,395 13,293 38,652 2,030 406,189
--------- --------- --------- -------- ------- ------- --------
16
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H - SEGMENTS (Continued)
(Dollars in Thousands)
For the three
months ended Asia-
September 30, 2003 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ --- ------ ------ ------- ------ ------ ------------
Revenue $47,707 $ 5,803 $35,028 $ 4,487 $8,518 $ 867 $102,410
--------- --------- --------- -------- ------- ------- --------
Operating
Income (loss) (1), (2) 12,019 2,042 728 582 (757) (85) 14,529
--------- --------- --------- -------- ------- ------- --------
Depreciation 2,052 271 819 113 301 34 3,590
--------- --------- --------- -------- ------- ------- --------
Amortization (2) 155 16 1,145 -- 109 31 1,456
--------- --------- --------- -------- ------- ------- --------
Capital expenditures (3) 3,250 45 1,685 57 63 8 5,108
--------- --------- --------- -------- ------- ------- --------
For the three
months ended
September 30, 2002
- ------------------
Revenue 52,070 8,022 32,996 5,408 18,453 711 117,660
--------- --------- --------- -------- ------- ------- --------
Operating
income (1), (2) 7,750 2,365 404 1,348 6,532 149 18,548
--------- --------- --------- -------- ------- ------- --------
Depreciation 1,810 126 711 267 177 11 3,102
--------- --------- --------- -------- ------- ------- --------
Amortization (2) 348 16 764 -- 63 10 1,201
--------- --------- --------- -------- ------- ------- --------
Capital expenditures (3) 2,310 889 1,192 35 336 37 4,799
--------- --------- --------- -------- ------- ------- --------
(1) The operating income reported for the U.S. segment includes
Affiliate royalties and general sales and administration expenses
and corporate depreciation and amortization expenses ("G&A
Expenses") reported on the Condensed Consolidated Statements of
Operations. For the three months ended September 30, 2003 and 2002,
Affiliate royalties total $1,088,000 and $1,569,000, respectively,
and the G&A Expenses aggregate $6,360,000 and $8,791,000,
respectively. Affiliate royalties relate exclusively to U.S.
franchises. G&A Expenses are not specific to one geographic
location, but relate to the consolidated operations of the Company.
(2) Total amortization on a consolidated basis is included in the U.S.
segment only for the operating income (loss) reported above.
(3) The capital expenditures reported exclude fixed assets acquired from
acquisitions.
17
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H - SEGMENTS (Continued)
(Dollars in Thousands)
For the nine
months ended Asia-
September 30, 2003 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ --- ------ ------ ------- ------ ------ ------------
Revenue $151,281 $18,830 $124,605 $13,793 $33,446 $2,275 $344,230
--------- --------- --------- -------- ------- ------- --------
Operating
income (loss) (1), (2) 26,013 6,260 18,126 2,651 3,233 (170) 56,113
--------- --------- --------- -------- ------- ------- --------
Depreciation 6,060 816 2,523 327 910 78 10,714
--------- --------- --------- -------- ------- ------- --------
Amortization (2) 542 47 3,414 -- 325 51 4,379
--------- --------- --------- -------- ------- ------- --------
Capital expenditures (3) 5,956 184 4,597 371 148 131 11,387
--------- --------- --------- -------- ------- ------- --------
For the nine
months ended
September 30, 2002
- ------------------
Revenue 178,278 20,677 86,667 15,251 39,933 2,574 343,380
--------- --------- --------- -------- ------- ------- --------
Operating
income (1), (2) 29,716 7,051 5,668 3,792 11,704 711 58,642
--------- --------- --------- -------- ------- ------- --------
Depreciation 5,450 283 1,704 593 473 27 8,530
--------- --------- --------- -------- ------- ------- --------
Amortization (2) 728 21 2,219 -- 198 31 3,197
--------- --------- --------- -------- ------- ------- --------
Capital expenditures (3) 7,322 1,100 3,038 279 706 278 12,723
--------- --------- --------- -------- ------- ------- --------
(1) The operating income reported for the U.S. segment includes Affiliate
royalties and general sales and administration expenses and corporate
depreciation and amortization expenses ("G&A Expenses") reported on the
Condensed Consolidated Statements of Operations. For the nine months
ended September 30, 2003 and 2002, Affiliate royalties total $4,239,000
and $5,287,000, respectively, and the G&A Expenses aggregate
$25,580,000 and $30,864,000, respectively. Affiliate royalties relate
exclusively to U.S. franchises. G&A Expenses are not specific to one
geographic location, but relate to the consolidated operations of the
Company.
(2) Total amortization on a consolidated basis is included in the U.S.
segment only for the operating income (loss) reported above.
(3) The capital expenditures reported exclude fixed assets acquired from
acquisitions.
Revenues and expenses of the Company's lines of business for Company offices,
excluding Affiliate royalties, reimbursed expenses, total general sales and
administration expenses and depreciation and amortization expenses ("G & A
Expenses"), are evaluated by management. The Company does not measure assets by
lines of business as assets are generally not distinctive to a particular line
of business and they are not fundamental in assessing segment performance.
Company office revenue and operating income for each of the Company's lines of
business in the aggregate for the three and nine months ended September 30, 2003
and 2002 are as follows:
18
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE H - SEGMENTS (Continued)
(Dollars in Thousands)
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------- ------------------------------------------
Career Career
Transition Consulting Consolidated Transition Consulting Consolidated
2003 ---------- ---------- ------------ ---------- ---------- ------------
----
Company office
revenue $83,447 $16,530 $99,977 $278,291 $56,899 $335,190
======== ======== ======= ========= ======= ========
Company office
operating income (loss) 20,056 (255) 19,801 74,522 2,932 77,454
======== ======== ======= ========= ======= ========
2002
-----
Company office
revenue 96,417 18,218 114,635 282,881 51,126 334,007
======== ======== ======= ========= ======= ========
Company office
operating income 25,129 641 25,770 81,710 2,509 84,219
======== ======== ======= ========= ======= ========
A reconciliation of Company office operating income to net income for the three
and nine months ended September 30, 2003 and 2002 is as follows:
(Dollars in Thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Company office revenue $ 99,977 $ 114,635 $ 335,190 $ 334,007
Consultants' compensation (40,708) (44,382) (131,522) (130,144)
Office administration (29,164) (30,900) (92,042) (86,088)
Office sales and consulting support (9,057) (12,716) (31,168) (31,373)
Office depreciation (2,592) (2,323) (7,805) (6,269)
Reimbursed expenses 1,345 1,456 4,801 4,086
--------- --------- --------- ---------
Company office operating income 19,801 25,770 77,454 84,219
Affiliate royalties 1,088 1,569 4,239 5,287
General sales and administration (3,906) (6,811) (18,292) (25,406)
Depreciation and amortization (2,454) (1,980) (7,288) (5,458)
--------- --------- --------- ---------
Income from operations 14,529 18,548 56,113 58,642
Interest expense, net (1,357) (1,415) (4,338) (3,299)
--------- --------- --------- ---------
Income before income taxes 13,172 17,133 51,775 55,343
Provision for income taxes (5,149) (7,882) (20,976) (25,459)
Minority interest in net (income)
loss of subsidiaries 79 (682) (68) (1,520)
--------- --------- --------- ---------
Net income $ 8,102 $ 8,569 $ 30,731 $ 28,364
========= ========= ========= =========
19
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth results of operations for the three and nine
months ended September 30, 2003 and 2002. This discussion and analysis should be
read together with the condensed consolidated financial statements and
accompanying notes thereto.
(Dollars in Thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
---- ---- ---- ----
Company office revenue $ 99,977 $114,635 $335,190 $334,007
Company office expenses
before reimbursed expenses (80,176) (88,865) (257,736) (249,788)
-------- -------- -------- --------
Company office operating income 19,801 25,770 77,454 84,219
Affiliate royalties 1,088 1,569 4,239 5,287
General sales and administration (3,906) (6,811) (18,292) (25,406)
Depreciation and amortization (2,454) (1,980) (7,288) (5,458)
Interest expense, net (1,357) (1,415) (4,338) (3,299)
-------- -------- -------- --------
Income before income taxes 13,172 17,133 51,775 55,343
Provision for income taxes (5,149) (7,882) (20,976) (25,459)
Minority interest in net (income) loss of subsidiaries 79 (682) (68) (1,520)
-------- -------- -------- --------
Net income $ 8,102 $ 8,569 $ 30,731 $ 28,364
======== ======== ======== ========
Third Quarter 2003 Compared to Third Quarter 2002
- -------------------------------------------------
For the three months ended September 30, 2003, revenue generated by Company
offices decreased by 12.8%, or $14,658,000, from the corresponding quarter in
2002. During the quarter, same office revenue, excluding 2002 revenue from the
search businesses that were sold in 2003, decreased by 12.1%, principally in
North America and Japan. Also during the third quarter 2003 there was a
favorable impact of foreign currency translation of $4,578,000.
For the three months ended September 30, 2003, the Company's career transition
line of business reported Company office revenue of $83,447,000, which
represents a 13.5% or $12,970,000 decrease from 2002. Same office revenue within
the career transition line of business decreased 13.5%, principally in Japan and
the Asia-Pacific region.
For the three months ended, September 30, 2003, the Company's consulting line of
business reported revenue of $16,530,000, which represents a 9.3% or $1,688,000
decrease from 2002. Same office revenue within the consulting line of business
decreased 4.4%, principally in North America.
For the three months ended September 30, 2003, Affiliate royalties, all
generated in the United States, decreased 30.7% or $481,000 from 2002. The
decrease in Affiliate royalties reflects a general decline in the demand for
career transition services within these Affiliate territories.
20
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
For the three months ended September 30, 2003, total Company office expenses
before reimbursed expenses decreased 9.8% or $8,689,000 from 2002. This decrease
is principally due to a reduction in incentive costs of $4,404,000, a decrease
in adjunct costs of $3,486,000, a decrease in variable delivery costs of
$2,479,000 and a decrease in payroll taxes and the Company match on the 401k
Plan of $1,192,000, offset by an unfavorable impact of $4,324,000 from foreign
currency translation. This decrease in costs is partly a result of the flexible
business model of the Company that allows certain expenses to adjust to sales
volume.
Company office operating income for the three months ended September 30, 2003
was $19,801,000 with a Company office margin of 19.8%, compared to operating
income of $25,770,000 and a Company office margin of 22.5% for the same period
in the prior year. The decrease in Company office margin is primarily due to a
decrease in career transition margin in Japan resulting from lower sales volume
in the current year due to pricing pressure and market conditions. The operating
margin in the consulting line of business in the third quarter 2003 was negative
1.5% compared to a profitable 3.5% in the third quarter 2002. This decrease
reflects lower margins in foreign markets.
For the three months ended September 30, 2003, general sales and administration
expenses and depreciation and amortization expenses, ("G & A expenses")
decreased 27.7% or $2,431,000 from the same period in the prior year, primarily
due to decreased incentive costs. G & A expenses as a percentage of total
revenue were 6.2% and 7.5% for the three months ended September 30, 2003 and
2002, respectively.
Net interest expense for the three months ended September 30, 2003 decreased
$58,000 as compared to the same period in the prior year. The decrease reflects
lower interest rates in the current year.
The minority interests in net losses of subsidiaries in Japan and Brazil for the
three months ended September 30, 2003 was $79,000. The minority interests in net
income of subsidiaries in Japan, Brazil & Spain for the three months ended
September 30, 2002 was $682,000. The change in minority interests in net income
and loss is attributable to reduced operating results in Japan and Brazil in
2003 and the Company's larger share of ownership of these subsidiaries in the
current year, including 100% ownership of its Spanish subsidiary that was 51%
owned during 2002.
The Company's effective tax rates for the three months ended September 30, 2003
and 2002 were 39% and 46%, respectively. The decrease in the effective tax rate
reflects lower non-deductible costs in the current year as compared to 2002, as
well as the impact of greater amounts of income being generated in lower foreign
tax jurisdictions in the current year.
21
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Nine Months of 2003 Compared to the Nine Months of 2002
- -------------------------------------------------------
For the nine months ended September 30, 2003, revenue generated by Company
offices was flat when compared to the corresponding period in 2002. The current
year includes incremental revenue from the acquisition of Coutts that is
included in the Company's results as of April 1, 2002 and a favorable impact of
foreign currency translation of $22,730,000. Since the date of the acquisition,
Coutts has been fully integrated with the Company's network. Management reviews
same office revenue for the Company on a pro-forma basis including the revenue
of Coutts in the period of January 1 to March 31, 2002, adjusted for revenue
recognition under SAB No. 101 (see Note A in the Notes to the Condensed
Consolidated Financial Statements), and adjusted for the revenue from the
executive search businesses in Norway and Sweden that were sold in the current
year (See Note D in the Notes to the Condensed Consolidated Financial
Statements). Management determines same office revenue in the current year by
excluding revenue from acquisitions consumated subsequent to the third quarter
of 2002. These pro-forma same office revenue statistics are discussed in the
following paragraphs and represent non-GAAP measurements.
The following table sets forth a reconciliation of the Company office revenue
reported for the nine months ended September 30, 2002 to pro-forma Company
office revenue that includes the revenue of Coutts for the period of January 1
to March 31, 2002 and excludes the revenue from the executive search businesses
that were sold.
(Dollars in Thousands)
Nine Months Ended Sept. 30, 2002
--------------------------------
Career Total
Transition Consulting Business
---------- ---------- --------
Company office revenue as reported $282,881 $51,126 $334,007
Add Coutts revenue for Jan. - Mar. 2002 adjusted for revenue
recognition under SAB No. 101 22,061 3,651 25,712
Less revenue from search businesses that were sold -- (4,258) (4,258)
---------- ---------- --------
Pro-forma Company office revenue $304,942 $50,519 $355,461
========== ========== ========
For the nine months ended September 30, 2003 the Company's career transition
line of business reported Company office revenue of $278,291,000, which
represents a 1.6% or $4,590,000 decrease from 2002. This decrease is due to a
general decline in the demand for career transition services, offset by
incremental revenues from Coutts and from the favorable impact of foreign
currency exchange. The pro-forma same office revenue within the career
transition line of business decreased by approximately 9.4%, attributable
primarily to lower sales volume in North America and Japan.
22
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
For the nine months ended, September 30, 2003, the Company's consulting line of
business reported revenue of $56,899,000, which represents a 11.3% or $5,773,000
increase from 2002. This increase includes incremental revenues from
acquisitions, including Coutts, Aston Promentor and Assessment and Development
Consult Holding BV. Pro-forma same office revenue growth for the consulting line
of business was flat year over year.
For the nine months ended September 30, 2003, Affiliate royalties, all generated
in the United States, decreased 19.8% or $1,048,000 from 2002. The decrease in
Affiliate royalties reflects the decline in the demand for career transition
services in the United States.
For the nine months ended September 30, 2003, total Company office expenses
before reimbursed expenses increased 3.2% or $7,948,000 from 2002. This increase
is due primarily to incremental costs from the Coutts acquisition, an
unfavorable foreign currency translation impact of $18,801,000, as well as
increases in sales and delivery salaries and rent expense that were partly
offset by a decrease in incentive costs.
Company office operating income for the nine months ended September 30, 2003 was
$77,454,000 with a Company office margin of 23.1%, compared to Company office
operating income of $84,219,000 and a Company office margin of 25.2% for the
same period in the prior year. Company office operating income includes the
favorable net impact of foreign currency exchange of approximately $3,929,000.
The decrease in Company office margin is due to a decrease in career transition
margin in Japan resulting from lower sales volume in the current year due to
pricing pressure and market conditions. Additionally, the geographic mix of the
Company's operations has changed to a greater proportion of revenue and
operating results being reported from international operations that historically
have had lower operating margins than those in the United States. The operating
margin for the consulting line of business was flat year over year.
For the nine months ended September 30, 2003, general sales and administration
expenses and depreciation and amortization expenses ("G & A expenses"),
decreased 17.1% or $5,284,000 from the same period in the prior year. G & A
expenses in 2003 reflect decreased incentive costs and larger gains (increase of
$868,000) from the effects of exchange rate fluctuations in translating foreign
currency transactions, all of which is offset by an increase in amortization
expense mostly due to the amortization of intangible assets associated with the
Coutts client lists, and the $1,043,000 pre-tax loss on the sale of the
executive search businesses in Norway and Sweden (see Note D in the Notes to the
Condensed Consolidated Financial Statements). G & A expenses as a percentage of
total revenue were 7.4% and 9.0% for the nine months ended September 30, 2003
and 2002, respectively.
Net interest expense for the nine months ended September 30, 2003 increased
$1,039,000 as compared to the same period in the prior year. The increase
results from a full nine months of interest in 2003 on outstanding indebtedness
from borrowings to fund the acquisition of Coutts
23
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
as compared to six months of interest in 2002, and the $28,000,000 borrowing in
the current year to fund incentives (See Note E in the Notes to the Consolidated
Financial Statements). This was partially offset by lower interest rates in the
current year.
The minority interests in net income of subsidiaries in Japan and Brazil for the
nine months ended September 30, 2003 was $68,000. The minority interests in net
income of subsidiaries in Japan, Brazil and Spain for the nine months ended
September 30, 2002 was $1,520,000. The decrease is attributable to reduced
operating results in Japan and Brazil in 2003 and the Company's larger share of
ownership of these subsidiaries in the current year, including 100% ownership of
its Spanish subsidiary that was 51% owned during 2002.
The Company's effective tax rates for the nine months ended September 30, 2003
and 2002 were 41% and 46%. The decrease in the effective tax rate is due to
lower non-deductible costs in the current year as compared to 2002, as well as
the impact of greater amounts of income being generated in lower foreign tax
jurisdictions in the current year.
Capital Resources and Liquidity
- -------------------------------
As of September 30, 2003 and December 31, 2002, the Company had cash and cash
equivalents of $16,984,000 and $33,886,000, respectively. The decrease in cash
is primarily a result of paying bonuses to employees in the first quarter 2003
that related to 2002 performance. The decrease also relates to principal and
interest payments, tax payments out of operating cash and the funding of
acquisitions, offset by $30,000,000 of borrowings under the Credit Agreement
(See Note E in the Notes to the Condensed Consolidated Financial Statements). As
of September 30, 2003 and December 31, 2002, the Company had a working capital
deficit of $28,836,000 and $62,526,000, respectively. The decrease in the
working capital deficit is attributable to a decrease in accrued incentives,
accounts payable and deferred revenue, partly offset by lower accounts
receivable. Deferred revenue is eventually recognized into income over time,
with no cash utilization.
Net cash utilized in operating activities amounted to $4,209,000 for the nine
months ended September 30, 2003 and net cash provided by operating activities
amounted to $36,257,000 for the nine months ended September 30, 2002. The
decrease in cash from operating activities is primarily a result of decreases in
accounts payable, accrued incentives and deferred revenue, partly offset by
lower accounts receivable due to lower revenue levels in the current year.
Net cash utilized in investing activities amounted to $22,651,000 and
$131,819,000 for the nine months ended September 30, 2003 and 2002,
respectively. The investing activities for the nine months ended September 30,
2002 reflect the acquisition of Coutts. Acquisitions made by the Company in the
current period, including the additional interests in its Spanish and Brazilian
subsidiaries and the acquisition of certain assets of Aston Promentor in
Denmark, involved less cash utilization by the Company (See Note C in the Notes
to the Condensed Consolidated Financial Statements). The Company also incurred
fewer capital expenditures in the current year.
24
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Net cash provided by financing activities amounted to $8,235,000 and $80,360,000
for the nine months ended September 30, 2003 and 2002, respectively. The
financing activity for the nine months ended 2002 reflects the $130,000,000
borrowing under the Credit Agreement to finance the Coutts acquisition and to
repay outstanding indebtedness of $41,038,000 under the Company's prior credit
agreement that has been terminated. In connection with the Coutts acquisition,
the Company also issued loan notes to four individual sellers of Coutts for an
aggregate of $5,432,000 at the time of the acquisition. During the nine months
ended September 30, 2003, the Company borrowed $30,000,000 under its Credit
Agreement in order to fund incentive payments made in the first quarter of 2003
that related to 2002, and to fund the acquisition of the additional interest in
its Brazilian subsidiary. Also during the nine months ended September 30, 2003,
the Company made mandatory and voluntary principal payments totaling $21,500,000
against its Term Loan and Revolving Loan under the Credit Agreement (See Note E
in the Notes to the Condensed Consolidated Financial Statements).
As of September 30, 2003, the Company had approximately $3,900,000 available
under the Revolving Loan of the Credit Agreement. Management expects the
borrowing capacity to increase due to anticipated voluntary principal
prepayments and anticipated seasonal increase in cash flow in the fourth quarter
2003. Future borrowings under the Revolving Loan will be used to finance working
capital and other general corporate purposes, including permitted acquisitions.
The Company anticipates that its cash generation and borrowing capacity will be
sufficient to service its existing debt, outstanding commitments and to maintain
Company operations at current levels for the foreseeable future. However,
operating cash flows could be impacted by a prolonged decrease in the demand for
the Company's services. The Company will continue to consider acquisitions and
other expansion opportunities as they arise, subject to ongoing operating
results and access to capital on terms acceptable to the Company. The economics
of a proposed acquisition, the provisions of permitted acquisitions under the
Credit Agreement, strategic implications and other circumstances justifying the
expansion will be key factors in determining the amount and type of resources
the Company will commit to future acquisitions.
As of September 30, 2003, the Company's obligations and commitments include bank
debt commitments, loan notes to the sellers of Coutts, office leases and
equipment leases. For the periods subsequent to September 30, 2003, the
aggregate maturities on these obligations are as follows:
(Dollars in Thousands)
Less than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ----------- ---------- --------- --------
Bank debts &
loan notes $125,454 $20,837 $36,617 $68,000 $ --
Capital leases $961 $480 $361 $120 $ --
Office &
equipment leases $156,413 $34,435 $49,043 $31,186 $41,749
25
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
As of September 30, 2003, the Company estimates that the aggregate amount of
future contingent earnout payments related to completed acquisitions and payable
over the next three years, will range between $5,000,000 and $7,000,000.
The Company has previously disclosed in its Form 8-K filings that it had
received a proposal from an investor group comprised of Richard J. Pinola,
Chairman and Chief Executive Officer and certain senior executives of the
Company together with an affiliate of Hellman & Friedman LLC, a private equity
investment firm (the "investor group"), to purchase all of the Company's
outstanding common shares, other than those being retained by members of the
management group, for a cash price of $17.00 per share. The Company's Board
formed a Special Committee of independent directors to review, negotiate and
make recommendations to it as to the proposal and other strategic alternatives
available to the Company, including an alternative acquisition proposal received
from an unaffiliated party. The proposal from the investor group expired on
October 31, 2003. However, the Special Committee is continuing its evaluation of
strategic alternatives.
Forward Looking Statements
- --------------------------
Statements included in this Report on Form 10-Q, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are not historical in nature, are intended to be, and are
hereby identified as "forward looking statements" for purposes of the safe
harbor provided by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers that forward looking statements including, without
limitation, those relating to the Company's future business prospects, revenues,
cash flow, working capital, goodwill impairment, future earnout payments,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements due to several important
factors identified from time to time in the Company's reports filed with the
SEC. The Company hereby incorporates by reference the discussion concerning
forward looking statements set forth in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section of the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 filed with the SEC, as
well as the risk factors identified within the same Annual Report on Form 10-K.
Readers of this Report are cautioned not to place undue reliance upon these
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these forward
looking statements or reflect events or circumstances after the date hereof.
26
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
The Company has two fixed interest rate swap agreements for purposes of hedging
against interest rate fluctuations on the Term Loan under its Credit Agreement.
Each swap agreement has a notional principal amount at September 30, 2003 of
$31,500,000, and scheduled reductions in notional principal of $2,250,000 each
quarter over the life of the swap. These agreements terminate on March 22, 2007.
Under the terms of the swap agreements, the Company pays interest at a fixed
rate of 2.815% on one swap and 2.57% on the other swap, and its lenders pay the
Company interest at 90-day LIBOR, that was 1.14% as of September 30, 2003.
As of September 30, 2003, the Company had letters of credit totaling $2,953,000
that guarantee the fixed rate loan notes to the sellers of Coutts, and an
aggregate notional principal of $122,000,000 outstanding under its Credit
Agreement, that bears interest at variable rates. Based upon the variable rate
debt under the Credit Agreement and the fixed interest rate swap agreements, a
100 basis point (1.0%) increase in interest rates on variable rate debt would
increase interest expense for the three and nine months ended September 30, 2003
by $159,000 and $419,000, respectively.
The Company's earnings and cash flow are subject to fluctuations due to changes
in foreign currency exchange rates. Generally, if the U.S. dollar weakens
against the foreign currencies that will result in a favorable impact to
earnings and if the U.S. dollar strengthens against the foreign currencies, that
will result in an unfavorable impact on earnings. From time to time, the Company
enters into forward foreign exchange contracts to minimize the risk associated
with currency movement relating to certain intercompany transactions. Through
January 31, 2004, the Company has two separate forward Japanese yen (JPY)
exchange contracts for an aggregate of JPY 260,000,000 at an average exchange
rate of 119 per $1.00 U.S. dollar. The gains and losses from these forward
contracts were not material at September 30, 2003.
PART I - ITEM 4
CONTROLS AND PROCEDURES
Based upon an evaluation by the Company's management, including the
participation of the Chief Executive Officer and Chief Financial Officer, as of
the end of the period covered by this quarterly report on Form 10-Q, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) are effective for gathering, analyzing and disclosing the information
that is required to be disclosed in the Company's reports filed under such Act.
There have been no significant changes in the Company's internal controls over
financial reporting during the quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
27
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 were not applicable in the three months ended September
30, 2003.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits:
31.1 - Certification pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
31.2 - Certification pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
32.1 - Certification pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
32.2 - Certification pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
b. Reports on Form 8-K:
- On July 29, 2003 the Company filed a Current Report on
Form 8-K to provide, under Items 7 and 12, the Company's
earnings release reporting its financial results for the
quarter ended June 30, 2003. Such information shall not be
deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934.
- On September 24, 2003 the Company filed a Current Report
on Form 8-K to provide, under Items 5 and 7, the Company's
press release announcing the receipt of a proposal from an
investor group comprised of Richard J. Pinola, Chairman and
Chief Executive Officer and certain senior executives of the
Company together with an affiliate of Hellman & Friedman LLC,
a private equity investment firm, to purchase all of the
Company's outstanding common shares, other than those being
retained by members of the management group, for a cash price
of $17.00 per share. The press release also announced that the
Company's Board of Directors has formed a Special Committee of
independent directors to review, negotiate and make
recommendations to it as to this proposal and other strategic
alternatives, including an alternative acquisition proposal
received from an unaffiliated party. (Subsequent to the period
covered by this report, on November 3, 2003, the Company
announced the expiration of this outstanding proposal from
this investor group and that the Special Committee of the
Board of Directors is continuing its evaluation of strategic
alternatives.)
28
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIGHT MANAGEMENT CONSULTANTS, INC.
BY: /S/ RICHARD J. PINOLA November 13, 2003
------------------------------------ -----------------
Richard J. Pinola Date
Chairman and Chief Executive Officer
BY: /S/ CHARLES J. MALLON November 13, 2003
------------------------------------ -----------------
Charles J. Mallon Date
Chief Financial Officer and
Principal Accounting Officer
29