SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2003
Commission file number: 1-11997
SPHERION CORPORATION
(Exact name of registrant as specified in its charter)
|
Delaware |
|
36-3536544 |
|
(State or other jurisdiction of |
|
(I.R.S. Employer |
|
|
|
|
|
2050 Spectrum Boulevard, Fort Lauderdale, Florida |
|
33309 |
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(Address of principal executive offices) |
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(Zip code) |
|
|
|
|
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(954) 308-7600 |
||
|
(Registrant’s telephone number, including area code) |
||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Number of shares of Registrant’s Common Stock, par value $.01 per share (“Common Stock”), outstanding on October 24, 2003 was 59,728,408.
TABLE OF CONTENTS
2
Part I—FINANCIAL INFORMATION
SPHERION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, amounts in thousands, except per share amounts)
|
|
|
Three Months Ended |
|
||||
|
|
|
September 26, |
|
September 27, |
|
||
|
Revenues |
|
$ |
528,008 |
|
$ |
528,602 |
|
|
Cost of services |
|
407,452 |
|
397,007 |
|
||
|
|
|
|
|
|
|
||
|
Gross profit |
|
120,556 |
|
131,595 |
|
||
|
|
|
|
|
|
|
||
|
Selling, general and administrative expenses |
|
109,127 |
|
114,111 |
|
||
|
Licensee commissions |
|
11,444 |
|
12,272 |
|
||
|
Amortization of intangibles |
|
122 |
|
87 |
|
||
|
Interest expense |
|
1,478 |
|
3,015 |
|
||
|
Interest income |
|
(1,237 |
) |
(1,779 |
) |
||
|
Restructuring, asset impairments and other charges |
|
2,539 |
|
— |
|
||
|
Other gains |
|
— |
|
(3,948 |
) |
||
|
|
|
123,473 |
|
123,758 |
|
||
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before income taxes and discontinued operations |
|
(2,917 |
) |
7,837 |
|
||
|
Income tax benefit (expense) |
|
1,017 |
|
(4,014 |
) |
||
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations |
|
(1,900 |
) |
3,823 |
|
||
|
|
|
|
|
|
|
||
|
Discontinued operations: |
|
|
|
|
|
||
|
Loss from discontinued operations (including loss on disposal of $1,309 in 2002) |
|
(63 |
) |
(2,367 |
) |
||
|
Income tax benefit |
|
19 |
|
800 |
|
||
|
Loss from discontinued operations |
|
(44 |
) |
(1,567 |
) |
||
|
|
|
|
|
|
|
||
|
Net (loss) earnings |
|
$ |
(1,944 |
) |
$ |
2,256 |
|
|
|
|
|
|
|
|
||
|
(Loss) earnings per share — Basic: |
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations |
|
$ |
(0.03 |
) |
$ |
0.06 |
|
|
Loss from discontinued operations |
|
(0.00 |
) |
(0.03 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
$ |
(0.03) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
||
|
(Loss) earnings per share — Diluted: |
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations |
|
$ |
(0.03 |
) |
$ |
0.06 |
|
|
Loss from discontinued operations |
|
(0.00 |
) |
(0.03 |
) |
||
|
|
|
|
|
|
|
||
|
|
|
$ |
(0.03) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
||
|
Weighted average shares used in computation of (loss) earnings per share: |
|
|
|
|
|
||
|
Basic |
|
60,054 |
|
59,469 |
|
||
|
Diluted |
|
60,054 |
|
60,295 |
|
||
See notes to Condensed Consolidated Financial Statements.
3
SPHERION
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(unaudited, amounts in thousands, except per share amounts)
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 26, |
|
September 27, |
|
||
|
Revenues |
|
$ |
1,514,482 |
|
$ |
1,589,552 |
|
|
Cost of services |
|
1,160,110 |
|
1,195,273 |
|
||
|
|
|
|
|
|
|
||
|
Gross profit |
|
354,372 |
|
394,279 |
|
||
|
|
|
|
|
|
|
||
|
Selling, general and administrative expenses |
|
332,933 |
|
349,065 |
|
||
|
Licensee commissions |
|
33,244 |
|
35,813 |
|
||
|
Amortization of intangibles |
|
341 |
|
226 |
|
||
|
Interest expense |
|
4,546 |
|
9,416 |
|
||
|
Interest income |
|
(4,393 |
) |
(4,726 |
) |
||
|
Restructuring, asset impairments and other charges |
|
2,063 |
|
5,165 |
|
||
|
Other gains |
|
(313 |
) |
(3,948 |
) |
||
|
|
|
368,421 |
|
391,011 |
|
||
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle |
|
(14,049 |
) |
3,268 |
|
||
|
Income tax benefit (expense) |
|
4,676 |
|
(2,407 |
) |
||
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations and cumulative effect of change in accounting principle |
|
(9,373 |
) |
861 |
|
||
|
|
|
|
|
|
|
||
|
Discontinued operations: |
|
|
|
|
|
||
|
Loss from discontinued operations (including loss on disposal of $1,058 and $8,564 in 2003 and 2002, respectively) |
|
(949 |
) |
(17,887 |
) |
||
|
Income tax (expense) benefit |
|
(2,903 |
) |
7,017 |
|
||
|
Net loss from discontinued operations |
|
(3,852 |
) |
(10,870 |
) |
||
|
|
|
|
|
|
|
||
|
Loss before cumulative effect of change in accounting principle |
|
(13,225 |
) |
(10,009 |
) |
||
|
Cumulative effect of change in accounting principle, net of income tax benefit of $76,012 in 2002 |
|
— |
|
(615,563 |
) |
||
|
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(13,225 |
) |
$ |
(625,572 |
) |
|
|
|
|
|
|
|
||
|
(Loss) earnings per share – Basic: |
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations and cumulative effect of change in accounting principle |
|
$ |
(0.16 |
) |
$ |
0.01 |
|
|
Loss from discontinued operations |
|
(0.06 |
) |
(0.18 |
) |
||
|
Cumulative effect of change in accounting principle |
|
— |
|
(10.37 |
) |
||
|
|
|
$ |
(0.22 |
) |
$ |
(10.54 |
) |
|
(Loss) earnings per share – Diluted: |
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before discontinued operations and cumulative effect of change in accounting principle |
|
$ |
(0.16 |
) |
$ |
0.01 |
|
|
Loss from discontinued operations |
|
(0.06 |
) |
(0.18 |
) |
||
|
Cumulative effect of change in accounting principle |
|
— |
|
(10.23 |
) |
||
|
|
|
$ |
(0.22 |
) |
$ |
(10.39 |
) |
|
Weighted average shares used in computation of (loss) earnings per share: |
|
|
|
|
|
||
|
Basic |
|
59,859 |
|
59,375 |
|
||
|
Diluted |
|
59,859 |
|
60,201 |
|
||
See notes to Condensed Consolidated Financial Statements.
4
SPHERION
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(unaudited, amounts in thousands, except share data)
|
|
|
September 26, |
|
December 27, |
|
||
|
Assets |
|
|
|
|
|
||
|
Current Assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
52,395 |
|
$ |
65,456 |
|
|
Receivables, less allowance for doubtful accounts of $5,470 and $6,760 |
|
308,603 |
|
284,675 |
|
||
|
Deferred tax asset |
|
21,065 |
|
19,897 |
|
||
|
Income tax receivable |
|
27,846 |
|
90,788 |
|
||
|
Insurance deposit |
|
27,866 |
|
26,808 |
|
||
|
Other current assets |
|
16,026 |
|
16,341 |
|
||
|
Assets of discontinued operations |
|
— |
|
11,000 |
|
||
|
|
|
|
|
|
|
||
|
Total current assets |
|
453,801 |
|
514,965 |
|
||
|
Goodwill |
|
48,087 |
|
30,894 |
|
||
|
Property and equipment, net |
|
135,073 |
|
94,520 |
|
||
|
Deferred tax asset |
|
136,419 |
|
134,971 |
|
||
|
Insurance deposit |
|
72,562 |
|
61,892 |
|
||
|
Other assets, net |
|
29,103 |
|
26,453 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
875,045 |
|
$ |
863,695 |
|
|
|
|
|
|
|
|
||
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
||
|
Current Liabilities: |
|
|
|
|
|
||
|
Current portion of long-term debt |
|
$ |
2,647 |
|
$ |
5,419 |
|
|
Accrued restructuring |
|
5,424 |
|
5,938 |
|
||
|
Accounts payable and other accrued expenses |
|
92,042 |
|
88,751 |
|
||
|
Accrued salaries, wages and payroll taxes |
|
76,340 |
|
72,820 |
|
||
|
Accrued insurance reserves and other current liabilities |
|
35,215 |
|
40,738 |
|
||
|
Liabilities of discontinued operations |
|
— |
|
8,316 |
|
||
|
|
|
|
|
|
|
||
|
Total current liabilities |
|
211,668 |
|
221,982 |
|
||
|
Long-term debt, net of current portion |
|
8,326 |
|
8,535 |
|
||
|
Convertible subordinated notes |
|
89,748 |
|
96,715 |
|
||
|
Accrued insurance reserves |
|
44,494 |
|
45,935 |
|
||
|
Accrued income tax payable |
|
81,953 |
|
67,619 |
|
||
|
Deferred compensation and other long-term liabilities |
|
32,602 |
|
18,896 |
|
||
|
|
|
|
|
|
|
||
|
Total liabilities |
|
468,791 |
|
459,682 |
|
||
|
|
|
|
|
|
|
||
|
Stockholders’ Equity: |
|
|
|
|
|
||
|
Preferred stock, par value $.01 per share; authorized, 2,500,000 shares; none issued or outstanding |
|
— |
|
— |
|
||
|
Common stock, par value $.01 per share; authorized, 200,000,000 shares; issued 65,341,609 shares |
|
653 |
|
653 |
|
||
|
Treasury stock, at cost, 5,698,474 and 6,376,964 shares, respectively |
|
(58,543 |
) |
(66,860 |
) |
||
|
Additional paid-in capital |
|
854,424 |
|
859,551 |
|
||
|
Accumulated deficit |
|
(401,912 |
) |
(388,687 |
) |
||
|
Accumulated other comprehensive income (loss) |
|
11,632 |
|
(644 |
) |
||
|
|
|
|
|
|
|
||
|
Total stockholders’ equity |
|
406,254 |
|
404,013 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
875,045 |
|
$ |
863,695 |
|
See notes to Condensed Consolidated Financial Statements.
5
SPHERION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited, amounts in thousands)
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 26, |
|
September 27, |
|
||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
||
|
Loss before cumulative effect of change in accounting principle |
|
$ |
(13,225 |
) |
$ |
(10,009 |
) |
|
Adjustments to reconcile loss before cumulative effect of change in accounting principle to net cash provided by operating activities: |
|
|
|
|
|
||
|
Discontinued operations - loss on disposal |
|
1,058 |
|
8,564 |
|
||
|
Gain on bond repurchase |
|
(313 |
) |
(3,948 |
) |
||
|
Depreciation and amortization |
|
21,268 |
|
22,125 |
|
||
|
Deferred income tax (benefit) expense |
|
(2,616 |
) |
20,311 |
|
||
|
Restructuring, asset impairments and other charges |
|
2,063 |
|
5,165 |
|
||
|
Other non-cash items |
|
6,112 |
|
5,500 |
|
||
|
Changes in assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
||
|
Receivables, net |
|
(13,368 |
) |
46,156 |
|
||
|
Other assets |
|
928 |
|
(4,453 |
) |
||
|
Income tax receivable |
|
78,667 |
|
(18,698 |
) |
||
|
Accounts payable, income taxes payable, accrued liabilities and other liabilities |
|
3,577 |
|
(13,820 |
) |
||
|
Accrued restructuring |
|
(2,917 |
) |
(12,183 |
) |
||
|
Net Cash Provided by Operating Activities |
|
81,234 |
|
44,710 |
|
||
|
|
|
|
|
|
|
||
|
Cash Flows from Investing Activities: |
|
|
|
|
|
||
|
Acquisitions and earnout payments, net of cash acquired |
|
(11,025 |
) |
(3,554 |
) |
||
|
Capital expenditures, net |
|
(58,887 |
) |
(25,395 |
) |
||
|
Insurance deposits |
|
(13,090 |
) |
(111,891 |
) |
||
|
Proceeds from sale of assets |
|
1,000 |
|
— |
|
||
|
Other |
|
2,249 |
|
2,305 |
|
||
|
Net Cash Used in Investing Activities |
|
(79,753 |
) |
(138,535 |
) |
||
|
|
|
|
|
|
|
||
|
Cash Flows from Financing Activities: |
|
|
|
|
|
||
|
Debt proceeds |
|
— |
|
200 |
|
||
|
Debt repayments |
|
(11,537 |
) |
(16,394 |
) |
||
|
Repurchase of convertible subordinated notes |
|
(6,602 |
) |
(17,539 |
) |
||
|
Purchase of treasury stock |
|
— |
|
(1,660 |
) |
||
|
Proceeds from exercise of employee stock options |
|
977 |
|
770 |
|
||
|
Other, net |
|
2,620 |
|
2,783 |
|
||
|
Net Cash Used in Financing Activities |
|
(14,542 |
) |
(31,840 |
) |
||
|
|
|
|
|
|
|
||
|
Net decrease in cash and cash equivalents |
|
(13,061 |
) |
(125,665 |
) |
||
|
Cash and cash equivalents, beginning of period |
|
65,456 |
|
260,259 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, end of period |
|
$ |
52,395 |
|
$ |
134,594 |
|
|
|
|
|
|
|
|
||
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
||
|
Debt assumed with Canadian acquisition |
|
$ |
10,889 |
|
$ |
— |
|
|
Repurchase of Convertible Subordinated Notes: |
|
|
|
|
|
||
|
Total purchase price of notes |
|
$ |
— |
|
$ |
39,576 |
|
|
Payable as of September 27, 2002 |
|
— |
|
(22,037 |
) |
||
|
Cash paid for notes |
|
$ |
— |
|
$ |
17,539 |
|
See notes to Condensed Consolidated Financial Statements.
6
SPHERION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements of Spherion Corporation and subsidiaries (“Spherion”), included herein, do not include all footnote disclosures normally included in annual financial statements and, therefore, should be read in conjunction with Spherion’s consolidated financial statements and notes thereto for each of the fiscal years in the three-year period ended December 27, 2002 included in its Annual Report on Form 10-K.
The accompanying condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods presented. Results for the three and nine months ended September 26, 2003 are not necessarily indicative of results to be expected for the full fiscal year ending December 26, 2003. As discussed in Note 7, Discontinued Operations, certain portions of Spherion’s operations have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Additionally, certain 2002 amounts have been reclassified to conform with the current year presentation.
The accompanying condensed consolidated financial statements include the accounts of Spherion Corporation and its subsidiaries. All material intercompany transactions and balances have been eliminated.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46 provides guidance on identifying variable interest entities and assessing whether or not a variable interest entity should be consolidated. The provisions of FIN 46 are to be applied immediately to variable interest entities created after January 31, 2003. In October 2003, the FASB delayed the effective date for variable interest entities created on or before January 31, 2003, to the first reporting period ending after December 15, 2003. Spherion is currently evaluating the implication of FIN 46 on certain franchisee and licensee relationships in which the franchisee or licensee has obtained financing from Spherion. As of September 26, 2003, Spherion has seven franchisees and 31 licensees with loan balances approximating $2.7 million and $1.8 million, respectively, which are included in “Receivables” and “Other Assets” in the accompanying condensed consolidated balance sheets. Spherion plans to adopt the provisions of FIN 46 during the fourth quarter of 2003 and is currently evaluating the impact, if any, on its consolidated results of operations and/or financial position.
In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded into other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Spherion adopted the provisions of SFAS No. 149 during the third quarter of 2003, which did not have an impact on its consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No.150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Spherion adopted the provisions of SFAS No. 150 during the third quarter of 2003, which did not have an impact on its consolidated results of operations or financial position.
7
2. Stock-Based Compensation
Spherion accounts for stock-based compensation to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of Spherion’s stock at the date of grant over the amount an employee must pay for the stock. Compensation cost related to restricted stock or deferred stock units granted is recognized in the period the compensation is earned and measured using the quoted market price on the effective grant date.
Spherion has one primary stock option plan, the 2000 Stock Incentive Plan. As all options granted under this plan had exercise prices equal to the market value of the underlying common stock on the date of grant; Spherion has not historically or in the periods presented, recorded stock-based compensation cost in its net earnings or loss. The following table illustrates the effect on net (loss) earnings and (loss) earnings per share for the three and nine months ended September 26, 2003 and September 27, 2002, if Spherion had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share data):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 26, |
|
September 27, |
|
September 26, |
|
September 27, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net (loss) earnings, as reported |
|
$ |
(1,944 |
) |
$ |
2,256 |
|
$ |
(13,225 |
) |
$ |
(625,572 |
) |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(545 |
) |
(935 |
) |
(2,668 |
) |
(2,600 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Pro forma net (loss) earnings |
|
$ |
(2,489 |
) |
$ |
1,321 |
|
$ |
(15,893 |
) |
$ |
(628,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic —as reported |
|
$ |
(0.03 |
) |
$ |
0.04 |
|
$ |
(0.22 |
) |
$ |
(10.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted—as reported |
|
$ |
(0.03 |
) |
$ |
0.04 |
|
$ |
(0.22 |
) |
$ |
(10.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic —pro forma |
|
$ |
(0.04 |
) |
$ |
0.02 |
|
$ |
(0.27 |
) |
$ |
(10.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted —pro forma |
|
$ |
(0.04 |
) |
$ |
0.02 |
|
$ |
(0.27 |
) |
$ |
(10.43 |
) |
The fair value of options at grant date was estimated using the Black-Scholes multiple option model where each vesting increment is treated as a separate option with its own expected life and own fair value. The following weighted average assumptions were used:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 26, |
|
September 27, |
|
September 26, |
|
September 27, |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Expected life (in years) |
|
3 |
|
3 |
|
3 |
|
3 |
|
||||
|
Interest rate |
|
1.91 |
% |
2.38 |
% |
1.92 |
% |
2.58 |
% |
||||
|
Volatility |
|
61.00 |
% |
68.00 |
% |
62.00 |
% |
68.00 |
% |
||||
|
Expected dividends |
|
— |
|
— |
|
— |
|
— |
|
||||
|
Weighted average per share fair value |
|
$ |
2.73 |
|
$ |
3.54 |
|
$ |
2.67 |
|
$ |
3.72 |
|
8
3. Comprehensive (Loss) Income
The following table displays the computation of comprehensive (loss) income (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 26, |
|
September 27, |
|
September 26, |
|
September 27, |
|
||||
|
Net (loss) earnings |
|
$ |
(1,944 |
) |
$ |
2,256 |
|
$ |
(13,225 |
) |
$ |
(625,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
||||
|
Foreign currency translation adjustments arising during the period |
|
742 |
|
(1,492 |
) |
6,372 |
|
5,437 |
|
||||
|
Reclassification adjustment for foreign currency translation relating to the sale of The Netherlands Technology subsidiary |
|
— |
|
— |
|
5,904 |
|
— |
|
||||
|
Total other comprehensive income (loss) |
|
742 |
|
(1,492 |
) |
12,276 |
|
5,437 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total comprehensive (loss) income |
|
$ |
(1,202 |
) |
$ |
764 |
|
$ |
(949 |
) |
$ |
(620,135 |
) |
4. Segment Information
Spherion has three operating segments: Recruitment, Technology, and Outsourcing. Spherion evaluates the performance of its operating segments and allocates resources based on revenues, gross profit and segment operating profit. Segment operating profit is defined as (loss) earnings from continuing operations before unallocated central costs, amortization expense, interest expense, interest income, special items (restructuring, asset impairments, other charges and other gains), income taxes, discontinued operations and cumulative effect of change in accounting principle. All material intercompany revenues and expenses have been eliminated. Amounts related to discontinued operations have been eliminated from the segment information presented below.
9
Information on operating segments and a reconciliation to (loss) earnings from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle for the three and nine months ended September 26, 2003 and September 27, 2002, are as follows (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 26, |
|
September 27, |
|
September 26, |
|
September 27, |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||||
|
Recruitment |
|
$ |
386,750 |
|
$ |
367,063 |
|
$ |
1,078,449 |
|
$ |
1,081,788 |
|
|
Technology |
|
68,158 |
|
82,960 |
|
212,779 |
|
261,763 |
|
||||
|
Outsourcing |
|
73,100 |
|
78,579 |
|
223,254 |
|
246,001 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total |
|
$ |
528,008 |
|
$ |
528,602 |
|
$ |
1,514,482 |
|
$ |
1,589,552 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit: |
|
|
|
|
|
|
|
|
|
||||
|
Recruitment |
|
$ |
88,198 |
|
$ |
87,446 |
|
$ |
249,396 |
|
$ |
254,975 |
|
|
Technology |
|
17,338 |
|
23,554 |
|
55,272 |
|
75,510 |
|
||||
|
Outsourcing |
|
15,020 |
|
20,595 |
|
49,704 |
|
63,794 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total |
|
$ |
120,556 |
|
$ |
131,595 |
|
$ |
354,372 |
|
$ |
394,279 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Segment operating profit: |
|
|
|
|
|
|
|
|
|
||||
|
Recruitment |
|
$ |
4,427 |
|
$ |
4,490 |
|
$ |
1,925 |
|
$ |
8,323 |
|
|
Technology |
|
780 |
|
1,418 |
|
1,537 |
|
4,856 |
|
||||
|
Outsourcing |
|
2,534 |
|
5,302 |
|
8,412 |
|
14,636 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Segment operating profit |
|
7,741 |
|
11,210 |
|
11,874 |
|
27,815 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Unallocated central costs |
|
(7,756 |
) |
(5,998 |
) |
(23,679 |
) |
(18,414 |
) |
||||
|
Amortization of intangibles |
|
(122 |
) |
(87 |
) |
(341 |
) |
(226 |
) |
||||
|
Interest expense |
|
(1,478 |
) |
(3,015 |
) |
(4,546 |
) |
(9,416 |
) |
||||
|
Interest income |
|
1,237 |
|
1,779 |
|
4,393 |
|
4,726 |
|
||||
|
Restructuring, asset impairments and other charges |
|
(2,539 |
) |
— |
|
(2,063 |
) |
(5,165 |
) |
||||
|
Other gains |
|
— |
|
3,948 |
|
313 |
|
3,948 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
(Loss) earnings from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle |
|
$ |
(2,917 |
) |
$ |
7,837 |
|
$ |
(14,049 |
) |
$ |
3,268 |
|
5. Acquisitions
On April 4, 2003, in connection with a three-year old agreement, Spherion acquired 85% of its Canadian franchise operation for consideration of $21.6 million, including $10.9 million of debt assumed. Spherion also entered into a new put/call agreement with the minority interest holder that can be exercised by either party any time after December 31, 2005, which would require/allow Spherion to purchase the remaining 15% interest in this operation. The results of this operation are included in the Recruitment operating segment and Spherion’s consolidated results of operations as of the acquisition date.
10
The fair value of assets acquired and liabilities assumed in connection with this acquisition are as follows (in thousands):
|
Receivables |
|
$ |
10,144 |
|
|
Goodwill |
|
15,305 |
|
|
|
Other intangible assets |
|
272 |
|
|
|
Other assets |
|
1,101 |
|
|
|
Accounts payable and other accrued expenses |
|
(3,359 |
) |
|
|
Debt assumed |
|
(10,889 |
) |
|
|
Minority interest |
|
(1,861 |
) |
|
|
Net assets acquired for cash |
|
$ |
10,713 |
|
Other intangible assets acquired include a customer contract and certain key employment agreements. These other intangible assets are being amortized over a period of approximately three years. Spherion recorded goodwill in connection with the acquisition of $15.3 million, none of which is deductible for tax purposes.
Pro forma consolidated results of operations have not been presented as the Canadian results of operations are not material to Spherion’s consolidated results of operations.
6. (Loss) / Earnings Per Share
Basic (loss) earnings per share are computed by dividing Spherion’s (loss) earnings from continuing operations before discontinued operations and cumulative effect of change in accounting principle by the weighted average number of shares outstanding during the period.
When not anti-dilutive, diluted earnings per share are computed by dividing Spherion’s earnings from continuing operations before discontinued operations and cumulative effect of change in accounting principle plus after-tax interest on the convertible subordinated notes, by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options, convertible subordinated notes, restricted stock and deferred stock units. The dilutive impact of stock options is determined by applying the “treasury stock” method and the dilutive impact of the convertible subordinated notes is determined by applying the “if converted” method.
There is no effect of dilutive securities on the calculation of loss per share for the three or nine months ended September 26, 2003, due to the fact that such potential common shares are anti-dilutive since Spherion incurred a loss from continuing operations.
The following table reconciles the numerator (net earnings/(loss)) and denominator (shares) of the basic and diluted earnings per share computation for the three and nine months ended September 27, 2002 (in thousands, except per share amounts):
|
|
|
Three Months
Ended |
|
Nine Months
Ended |
|
||||||||||||
|
|
|
Net Earnings |
|
Shares |
|
Per Share |
|
Net Earnings |
|
Shares |
|
Per Share |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic EPS |
|
$ |
2,256 |
|
59,469 |
|
$ |
0.04 |
|
$ |
(625,572 |
) |
59,375 |
|
$ |
(10.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stock options and other |
|
— |
|
826 |
|
|
|
— |
|
826 |
|
|
|
||||
|
Diluted EPS |
|
$ |
2,256 |
|
60,295 |
|
$ |
0.04 |
|
$ |
(625,572 |
) |
60,201 |
|
$ |
(10.39 |
) |
11
7. Discontinued Operations
During the second quarter of 2002, Spherion adopted a plan to dispose of its consulting subsidiaries in the United Kingdom and The Netherlands within its Technology segment and Saratoga, a human capital measurement business within its Outsourcing segment. Spherion’s decision to dispose of these subsidiaries is consistent with Spherion’s business strategy to improve productivity and enhance profitability. Spherion disposed of the United Kingdom technology subsidiary prior to December 27, 2002 and completed the disposition of Saratoga and The Netherlands technology subsidiary during the first half of 2003.
As a result of Spherion’s decision to dispose of these businesses, the operating results for all periods presented for these subsidiaries have been reclassified as discontinued operations in the accompanying condensed consolidated financial statements in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Revenue, pre-tax income (loss) from operations and the expected loss on disposal of these subsidiaries included within earnings (loss) from discontinued operations in the accompanying condensed consolidated statements of operations for the three and nine months ended September 26, 2003 and September 27, 2002, are as follows (in thousands):
|
|
|
Three Months Ended |
|
||||||||||||||||
|
|
|
September 26, 2003 |
|
September 27, 2002 |
|
||||||||||||||
|
|
|
Technology |
|
Outsourcing |
|
Total |
|
Technology |
|
Outsourcing |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
5,905 |
|
$ |
469 |
|
$ |
6,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Pre-tax loss from operations |
|
$ |
(63 |
) |
$ |
— |
|
$ |
(63 |
) |
$ |
(550 |
) |
$ |
(508 |
) |
$ |
(1,058 |
) |
|
Pre-tax loss on disposal |
|
— |
|
— |
|
— |
|
— |
|
(1,309 |
) |
(1,309 |
) |
||||||
|
Income tax benefit |
|
19 |
|
— |
|
19 |
|
142 |
|
658 |
|
800 |
|
||||||
|
Net loss from discontinued operations |
|
$ |
(44 |
) |
$ |
— |
|
$ |
(44 |
) |
$ |
(408 |
) |
$ |
(1,159 |
) |
$ |
(1,567 |
) |
|
|
|
Nine Months Ended |
|
||||||||||||||||
|
|
|
September 26, 2003 |
|
September 27, 2002 |
|
||||||||||||||
|
|
|
Technology |
|
Outsourcing |
|
Total |
|
Technology |
|
Outsourcing |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Revenues |
|
$ |
4,485 |
|
$ |
484 |
|
$ |
4,969 |
|
$ |
19,911 |
|
$ |
2,083 |
|
$ |
21,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Pre-tax income (loss) from operations |
|
$ |
306 |
|
$ |
(203 |
) |
$ |
103 |
|
$ |
(7,588 |
) |
$ |
(1,735 |
) |
$ |
(9,323 |
) |
|
Pre-tax (loss) gain on disposal |
|
(1,450 |
) |
398 |
|
(1,052 |
) |
(6,755 |
) |
(1,809 |
) |
(8,564 |
) |
||||||
|
Income tax (expense) benefit |
|
(2,842 |
) |
(61 |
) |
(2,903 |
) |
5,718 |
|
1,299 |
|
7,017 |
|
||||||
|
Net (loss) income from discontinued operations |
|
$ |
(3,986 |
) |
$ |
134 |
|
$ |
(3,852 |
) |
$ |
(8,625 |
) |
$ |
(2,245 |
) |
$ |
(10,870 |
) |
The net loss from discontinued operations for the nine months ended September 26, 2003, includes tax expense of $3.2 million attributable to a change in tax estimates resulting from the sale of the technology consulting business in The Netherlands.
8. Restructuring, Asset Impairments and Other Charges
During the third quarter of 2003, Spherion identified certain cost reduction opportunities and adopted a restructuring plan (the “2003 Plans”) to terminate redundant employees, centralize business support functions and reduce excess capacity, resulting in a restructuring charge of $2.5 million during the three months ended September 26, 2003. The charge included $1.3 million relating to Outsourcing, $0.8 million relating to Recruitment and the remainder of the charge related to corporate initiatives.
12
During 2001, Spherion announced its business strategy which was focused on increasing the predictability of revenues and earnings, continuous productivity improvements and enhancing profitability. This strategy combined with the slowdown in the economy, led to an assessment of the strategic direction and product mix. Consequently, restructuring plans were adopted in 2001 to terminate redundant employees, reduce excess capacity and dispose of certain non-strategic assets (the “2001 Plans”).
An analysis of the 2003 Plans, along with accrued amounts remaining to be distributed under restructuring plans initiated in 1999, 2000 and 2001 are as follows (dollar amounts in thousands):
|
|
|
Facility |
|
Number of |
|
Severance |
|
Number of |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at December 27, 2002 |
|
$ |
5,722 |
|
2 |
|
$ |
216 |
|
— |
|
$ |
5,938 |
|
|
Utilization |
|
(429 |
) |
— |
|
(216 |
) |
— |
|
(645 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at March 28, 2003 |
|
5,293 |
|
2 |
|
— |
|
— |
|
5,293 |
|
|||
|
Utilization |
|
(695 |
) |
— |
|
— |
|
— |
|
(695 |
) |
|||
|
Reversal of over accrual |
|
(476 |
) |
— |
|
— |
|
— |
|
(476 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at June 27, 2003 |
|
4,122 |
|
2 |
|
— |
|
— |
|
4,122 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accrual |
|
338 |
|
2 |
|
2,201 |
|
59 |
|
2,539 |
|
|||
|
Utilization |
|
(684 |
) |
(2 |
) |
(553 |
) |
(50 |
) |
(1,237 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at September 26, 2003 |
|
$ |
3,776 |
|
2 |
|
$ |
1,648 |
|
9 |
|
$ |
5,424 |
|
(1) Number of locations remaining as of September 26, 2003, are properties that have been vacated, but not yet subleased or bought out.
(2) Employees terminated during the three months ended September 26, 2003, although severance payments may have been made after the end of the quarter.
During the second quarter of 2003, as part of Spherion’s on-going restructuring monitoring process, accruals of $0.5 million were identified that were unnecessary primarily as the result of lower severance costs than initially anticipated and lower broker fees, and these amounts were reversed to income.
During the second quarter of 2002, accruals of $4.8 million were identified that were unnecessary primarily as the result of the buyout or sublease of existing lease obligations at better than expected rates and the favorable resolution of severance payouts, and these amounts were reversed to income. Also, during the second quarter of 2002, Spherion recorded other charges (included in “Restructuring, asset impairments and other charges” in the attached condensed consolidated statements of operations) in the amount of $10.0 million for additional anticipated losses associated with the subleases of Norrell’s former headquarters building in Atlanta, Georgia. The $10.0 million charge reflects the weakening of the commercial rental market.
The remaining accruals for facility closures and asset write-offs of $3.8 million primarily relate to lease payments on closed locations that will be paid out through 2006 (unless earlier lease terminations can be negotiated), estimated losses on subleases of approximately 25 properties and remaining assets to be disposed of.
9. Goodwill and Other Intangibles
The change in the carrying amount of goodwill for the nine months ended September 26, 2003 is as follows (in thousands):
|
|
|
Recruitment |
|
Technology |
|
Outsourcing |
|
Total |
|
||||
|
Balance at December 27, 2002 |
|
$ |
11,028 |
|
$ |
6,724 |
|
$ |
13,142 |
|
$ |
30,894 |
|
|
Goodwill acquired during the period |
|
15,535 |
|
— |
|
— |
|
15,535 |
|
||||
|
Foreign currency changes |
|
1,658 |
|
— |
|
— |
|
1,658 |
|
||||
|
Balance at September 26, 2003 |
|
$ |
28,221 |
|
$ |
6,724 |
|
$ |
13,142 |
|
$ |
48,087 |
|
13
Other intangible assets, which will continue to be amortized, is comprised of trade names, trade marks, a customer contract and non-compete and employment agreements and aggregated $1.8 million, less accumulated amortization of $0.8 million as of September 26, 2003, and is included in other assets in the accompanying condensed consolidated balance sheets. Annual amortization expense on other intangible assets is expected to be $0.4 million, $0.3 million and $0.2 million for fiscal years 2004 through 2006, respectively.
Effective at the beginning of 2002, Spherion adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. As a result of the initial adoption of SFAS No. 142, Spherion recorded a pre-tax charge to earnings of $691.6 million ($615.6 million after-tax) as of January 1, 2002. Additionally, Spherion performed its annual impairment test as of November 2002, and recorded an additional pre-tax impairment charge to earnings of $291.5 million.
10. Legal Proceedings and Contingencies
Spherion, in the ordinary course of its business, is threatened with or named as a defendant in various lawsuits. Spherion maintains insurance in such amounts and with such coverages and deductibles as management believes are reasonable and prudent. The principal risks that Spherion insures against are workers’ compensation, personal injury, bodily injury, property damage, professional malpractice, errors and omissions, employment practices and fidelity losses. Spherion’s management does not expect that the outcome of any of these lawsuits, individually or collectively, will have a material adverse effect on Spherion’s financial condition, results of operations or cash flows.
On April 2, 2001, Cincinnati Financial Corporation (“CFC”) filed a lawsuit against Spherion in the U.S. District Court, Southern District of Ohio seeking $50 million in compensatory damages and $300 million in punitive damages. The lawsuit arose out of a dispute between the parties in connection with Spherion’s contract to develop a software application for use with CFC’s insurance business. The plaintiff’s complaint alleged breach of contract, fraud, negligence and misrepresentation. Spherion denied the allegations of CFC’s complaint and vigorously defended against the claims. On April 2, 2001, Spherion filed a lawsuit against CFC in U.S. District Court, Northern District of Illinois seeking collection from CFC of $2,212,000 in unpaid fees in connection with the contract. On July 15, 2002, these actions were consolidated in U.S. District Court, Southern District of Ohio. On October 9, 2002, CFC filed an amended complaint to add a claim for fraudulent inducement. On August 11, 2003, CFC and Spherion entered into a Confidential Settlement Agreement and Mutual General Release under which (i) neither party admitted fault; (ii) the parties agreed to dismiss both lawsuits; and (iii) CFC agreed to accept a payment in full satisfaction and settlement of its claims. On August 15, 2003, the Final Order of Dismissal with Prejudice was entered by the Court under which all claims by the parties were dismissed. Spherion has been released of any and all liability with respect to CFC’s claims, and the settlement amount was paid in full by Spherion’s insurance carriers to CFC, not by Spherion. Accordingly, the resolution of this matter had no material impact on Spherion’s consolidated financial position, liquidity or results of operations.
Interim HealthCare Inc., Catamaran Acquisition Corp. and Cornerstone Equity Investors IV, L.P. have an action pending against Spherion in the Delaware Court of Chancery. Their complaint, filed on June 26, 2001 and amended on July 24, 2001, relates to Spherion’s divestiture of Interim HealthCare (the “Healthcare Divestiture”) in 1997 and seeks damages of approximately $10 million for breach of contract, reformation of the purchase agreement to reduce the purchase price by approximately $24 million, or rescission of the contract. The same parties are also seeking damages against Spherion in an action pending in Delaware Superior Court alleging multiple breach of contract claims arising out of the Healthcare Divestiture, allowing the same judge to preside over both actions. Management believes the resolution of this matter will not have a material impact on Spherion’s consolidated financial position, liquidity or results of operations.
In 2002, Spherion engaged in transactions that generally had the effect of accelerating certain future projected tax deductions and losses, resulting in an increase in the amount of net operating losses and capital losses available for carry back into prior tax years. As a result of these transactions, Spherion’s tax refund for its 2002 filing year was increased by approximately $60 million. Spherion believes that it has appropriately reported these transactions in its tax returns, and that it has established adequate reserves with respect to any tax liabilities that may arise in relation to these transactions should its position be challenged by the Internal Revenue Service. However, an unfavorable settlement or adverse resolution of a challenge by the Internal Revenue Service could result in the repayment of some or all of the refund received.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Results of Operations
We have three operating segments: Recruitment, Technology, and Outsourcing. We evaluate the performance of our operating segments and allocate resources based on revenues, gross profit and segment operating profit. Segment operating profit is defined as earnings (loss) from continuing operations before unallocated central costs, amortization expense, interest expense, interest income, special items (restructuring, asset impairments, other charges and other gains), income taxes, discontinued operations and cumulative effect of change in accounting principle. All material intercompany revenues and expenses have been eliminated. Amounts related to discontinued operations have been eliminated from our segment information below.
Information on operating segments and a reconciliation to (loss) earnings from continuing operations before income taxes and discontinued operations for the three months ended September 26, 2003 and September 27, 2002, are as follows (amounts in thousands):
|
|
|
Three Months Ended |
|
||||||||
|
|
|
September 26, 2003 |
|
September 27, 2002 |
|
||||||
|
|
|
|
|
% of total |
|
|
|
% of total |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
386,750 |
|
73.3 |
% |
$ |
367,063 |
|
69.4 |
% |
|
Technology |
|
68,158 |
|
12.9 |
% |
82,960 |
|
15.7 |
% |
||
|
Outsourcing |
|
73,100 |
|
13.8 |
% |
78,579 |
|
14.9 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
528,008 |
|
100.0 |
% |
$ |
528,602 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
% of |
|
|
|
% of |
|
||
|
Gross profit: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
88,198 |
|
22.8 |
% |
$ |
87,446 |
|
23.8 |
% |
|
Technology |
|
17,338 |
|
25.4 |
% |
23,554 |
|
28.4 |
% |
||
|
Outsourcing |
|
15,020 |
|
20.5 |
% |
20,595 |
|
26.2 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
120,556 |
|
22.8 |
% |
$ |
131,595 |
|
24.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
Segment operating profit: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
4,427 |
|
1.1 |
% |
$ |
4,490 |
|
1.2 |
% |
|
Technology |
|
780 |
|
1.1 |
% |
1,418 |
|
1.7 |
% |
||
|
Outsourcing |
|
2,534 |
|
3.5 |
% |
5,302 |
|
6.7 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Segment operating profit |
|
7,741 |
|
1.5 |
% |
11,210 |
|
2.1 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Unallocated central costs |
|
(7,756 |
) |
|
|
(5,998 |
) |
|
|
||
|
Amortization of intangibles |
|
(122 |
) |
|
|
(87 |
) |
|
|
||
|
Interest expense |
|
(1,478 |
) |
|
|
(3,015 |
) |
|
|
||
|
Interest income |
|
1,237 |
|
|
|
1,779 |
|
|
|
||
|
Restructuring, asset impairments and other charges |
|
(2,539 |
) |
|
|
— |
|
|
|
||
|
Other gains |
|
— |
|
|
|
3,948 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before income taxes and discontinued operations |
|
$ |
(2,917 |
) |
|
|
$ |
7,837 |
|
|
|
15
Three Months Ended September 26, 2003 Compared With Three Months Ended September 27, 2002
Recruitment. Recruitment revenues were $386.8 million in 2003 compared to $367.1 million in the prior year. Recruitment revenues for the three months ended September 26, 2003 include $16.2 million of revenue from our Canadian operations acquired on April 4, 2003. Excluding this acquisition, Recruitment revenues would have been $370.6 million, an increase of 1.0% from prior year due to an increase in revenues from placing professionals in temporary and permanent positions within finance, accounting, engineering and legal fields, which more than offset a decrease in commercial staffing services. Recruitment revenues by service line for 2003 within the segment were comprised of 95.6% staffing and 4.4% permanent placement, compared to 95.8% staffing and 4.2% permanent placement in prior year. Demand increased during the three month period ended September 26, 2003 and revenues increased 8.0% from the second quarter of 2003. However, the recruitment market remains highly competitive and is characterized by intense pricing pressure and competitive bidding. We believe that pricing pressure will continue at least in the near term.
Recruitment gross profit increased 0.9% to $88.2 million in 2003 from $87.4 million in the prior year, and the overall gross profit percentage was 22.8% in 2003 compared to 23.8% in the prior year. Excluding the Canadian acquisition in 2003, Recruitment gross profit was $85.0 million, a decrease of 2.8% from prior year and the overall gross profit percentage was 22.9%, a 0.9% decline from the prior year. The decrease in gross profit from prior year is due primarily to pricing pressures within commercial staffing in the United States, Europe and Australia, which were only partially offset by increases in the gross profit rate from higher permanent placement services in the United States.
The Recruitment segment operating profit decreased 1.4% to $4.4 million in 2003 compared to $4.5 million in the prior year, which includes a segment operating loss from the Canadian acquisition of $0.2 million. Exclusive of Canada, the increase in segment operating profit from prior year was due to lower operating expenses of $2.5 million offset by the decrease in gross profit of $2.4 million. Excluding Canada, operating expenses as a percentage of revenues decreased to 21.7% in 2003 from 22.6% in 2002 due to cost control efforts.
Technology. Technology revenues decreased 17.8% to $68.2 million in 2003 from $83.0 million in the prior year due to continued lower demand for IT related services. Technology revenues by service line for 2003 were comprised of 77.1% staffing and 22.9% managed services, compared to 76.5% staffing and 23.5% managed services in 2002. As a percentage of total technology revenues, managed services decreased from the 2002 level due to lost business during the third quarter of 2003. Technology revenues continue to be negatively impacted by industry-wide decreases in demand.
Technology gross profit decreased 26.4% to $17.3 million in 2003 from $23.6 million in the prior year, and the overall gross profit percentage decreased to 25.4% in 2003 from 28.4% in the prior year. The decrease in gross profit percentage is primarily due to pricing pressures and the increase in lower margin staffing revenues as percentage of total revenues.
Technology segment operating profit decreased 45.0% to $0.8 million in 2003 compared to $1.4 million in the prior year. The decrease was due to the decrease in gross profit of $6.2 million, partially offset by lower operating expenses of $5.6 million. Operating expenses as a percentage of revenues decreased to 24.3% in 2003 from 26.7% in 2002 as we incurred costs during the third quarter of 2002 to integrate certain office and administrative functions within our Technology segment, thus reducing operating expenses in 2003.
Outsourcing. Outsourcing revenues decreased 7.0% to $73.1 million in 2003 from $78.6 million in 2002, primarily due to the loss of contracts, the largest of which was MCI Worldcom, as well as lower outplacement revenues. New contracts and volume increases at certain existing customers have not offset the revenue decreases.
Outsourcing gross profit decreased 27.1% to $15.0 million in 2003 from $20.6 million in the prior year, and the overall gross profit percentage decreased to 20.5% in 2003 from 26.2% in the prior year. The decrease in gross profit percentage is primarily due to lower revenues as a result of the loss of contracts in some of our existing domestic call centers which have a relatively consistent amount of fixed costs, and lower revenues from higher margin outplacement services.
Outsourcing segment operating profit decreased 52.2% to $2.5 million in 2003 from $5.3 million in the prior year. The decrease was due to the decrease in gross profit of $5.6 million partially offset by lower operating expenses of $2.8 million. Operating expenses as a percentage of revenues decreased to 17.1% in 2003 from 19.5% in 2002 and is primarily due to lower employee costs.
16
Unallocated Central Costs. Unallocated central costs increased 29.3% to $7.8 million in 2003 from $6.0 million in the prior year, primarily due to non-capitalizable costs related to the implementation of our enterprise-wide information system. Prior year included severance costs related to a former corporate executive. As a percentage of consolidated revenues, these costs increased to 1.5% in 2003 from 1.1% in the prior year. Excluding the non-capitalizable costs for the enterprise-wide information system in the current year and the severance costs in the prior year, these costs as a percentage of revenue would have been 1.0% in both years.
Amortization of Intangibles. Amortization of intangibles was $0.1 million in 2003 and 2002.
Interest Expense. Interest expense decreased 51.0% to $1.5 million in 2003 from $3.0 million in 2002. This decrease resulted from lower debt levels primarily related to the repurchase of certain of our convertible subordinated notes during 2002. Average borrowings outstanding during the third quarter of 2003 of $98.5 million carried an average rate of interest of 6.0% compared with $211.6 million outstanding during the third quarter of 2002 at an average rate of interest of 5.7%. The average interest rate increased during the current year as fees related to our four-year U.S. dollar loan facility obtained in July 2003 are being amortized within interest expense.
Interest Income. Interest income decreased 30.5% to $1.2 million in 2003 from $1.8 million in the prior year primarily due to lower invested cash balances during the current year.
Restructuring, Asset Impairments and Other Charges. During the third quarter of 2003, we recorded a pre-tax restructuring charge of $2.5 million. See section “Restructuring, Asset Impairments and Other Charges” below for further discussion.
Other Gains. We recorded a pre-tax gain of $3.9 million during the third quarter of the 2002 on the repurchase of a portion of our 4½% convertible subordinated notes.
Income Taxes. The effective income tax rate on the loss for the third quarter of 2003 from continuing operations was 35%, which is the federal statutory rate. The effective tax rate for the third quarter of 2002 was 51%, and differed from the statutory rate primarily due to the impact of foreign, state and local income taxes, federal employment tax credits, and the impact of permanent tax differences. The decrease in the effective tax benefit to 35% in the current year from the prior year expense of 51% is reflective of a reduction in the relative amount of permanent tax differences in the current year.
Discontinued Operations. During the third quarter of 2002, we recorded a pre-tax loss from discontinued operations in the amount of $2.4 million. This loss was comprised of a loss of $1.3 million to write-down the businesses to their expected fair market value and operating losses of $1.1 million.
Weighted Average Shares Outstanding. The diluted weighted average number of shares decreased to 60.1 million in the third quarter of 2003 from 60.3 million in the third quarter of the prior year, due to the exclusion of common stock equivalents in the current year as we had a loss from continuing operations for the quarter ended September 26, 2003, partially offset by normal quarterly issuances of shares under various employee benefit programs.
17
Results of Operations
Information on operating segments and a reconciliation to (loss) earnings from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle for the nine months ended September 26, 2003 and September 27, 2002, are as follows (amounts in thousands):
|
|
|
Nine Months Ended |
|
||||||||
|
|
|
September 26, 2003 |
|
September 27, 2002 |
|
||||||
|
|
|
|
|
% of total |
|
|
|
% of total |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
1,078,449 |
|
71.2 |
% |
$ |
1,081,788 |
|
68.1 |
% |
|
Technology |
|
212,779 |
|
14.1 |
% |
261,763 |
|
16.4 |
% |
||
|
Outsourcing |
|
223,254 |
|
14.7 |
% |
246,001 |
|
15.5 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
1,514,482 |
|
100.0 |
% |
$ |
1,589,552 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
% of |
|
|
|
% of |
|
||
|
Gross profit: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
249,396 |
|
23.1 |
% |
$ |
254,975 |
|
23.6 |
% |
|
Technology |
|
55,272 |
|
26.0 |
% |
75,510 |
|
28.8 |
% |
||
|
Outsourcing |
|
49,704 |
|
22.3 |
% |
63,794 |
|
25.9 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
354,372 |
|
23.4 |
% |
$ |
394,279 |
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
|
Segment operating profit: |
|
|
|
|
|
|
|
|
|
||
|
Recruitment |
|
$ |
1,925 |
|
0.2 |
% |
$ |
8,323 |
|
0.8 |
% |
|
Technology |
|
1,537 |
|
0.7 |
% |
4,856 |
|
1.9 |
% |
||
|
Outsourcing |
|
8,412 |
|
3.8 |
% |
14,636 |
|
5.9 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Segment operating profit |
|
11,874 |
|
0.8 |
% |
27,815 |
|
1.7 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Unallocated central costs |
|
(23,679 |
) |
|
|
(18,414 |
) |
|
|
||
|
Amortization of intangibles |
|
(341 |
) |
|
|
(226 |
) |
|
|
||
|
Interest expense |
|
(4,546 |
) |
|
|
(9,416 |
) |
|
|
||
|
Interest income |
|
4,393 |
|
|
|
4,726 |
|
|
|
||
|
Restructuring, asset impairments and other charges |
|
(2,063 |
) |
|
|
(5,165 |
) |
|
|
||
|
Other gains |
|
313 |
|
|
|
3,948 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
(Loss) earnings from continuing operations before income taxes, discontinued operations and cumulative effect of change in accounting principle |
|
$ |
(14,049 |
) |
|
|
$ |
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 26, 2003 Compared With Nine Months Ended September 27, 2002
Recruitment. Recruitment revenues were $1,078.4 million in 2003 and $1,081.8 million in 2002. Recruitment revenues in 2003 include $31.6 million of revenue from our Canadian operations acquired on April 4, 2003. Excluding this acquisition, Recruitment revenues would have been $1,046.8 million, a decrease of 3.2% from the prior year. Within the United States, Recruitment revenues were down 3.4% due primarily to the partial loss of a large staffing contract in early January 2003 and conversions of company-owned branches to franchised operations throughout 2002. This decrease was partially offset by an increase in revenues from placing professionals in temporary and permanent positions within finance, accounting, engineering and legal fields and increases in the third quarter of 2003 for industrial and clerical staffing. Recruitment revenues by service line for 2003 within the segment were comprised of 95.6% staffing and 4.4% permanent placement, compared to 95.8% staffing and 4.2% permanent placement during the same period in 2002. In spite of recent increases in clerical and industrial staffing revenues, the market remains highly competitive and is characterized by intense pricing pressures and competitive bidding. We believe that pricing pressure will continue at least in the near term.
18
Recruitment gross profit decreased 2.2% to $249.4 million in 2003 compared to $255.0 million in the prior year, and the overall gross profit percentage was 23.1% in 2003 compared to 23.6% in 2002. Excluding the Canadian acquisition in 2003, Recruitment gross profit was $243.3 million, a decrease of 4.6% from prior year, and the overall gross profit percentage was 23.2%. The impact of pricing pressures within commercial staffing in the United States and in Europe, was partially offset by higher levels of permanent placement and staffing services within finance, accounting, engineering and legal fields, which have higher gross profit rates.
The Recruitment segment operating profit decreased 76.9% to $1.9 million in 2003 compared to $8.3 million in the prior year. Excluding the Canadian acquisition in 2003, the Recruitment segment operating profit was $1.7 million. The decrease from prior year, excluding Canada, was due to the decrease in gross profit of $11.7 million partially offset by lower operating expenses of $5.1 million. Excluding Canada, operating expenses as a percentage of revenues increased to 23.1% in 2003 from 22.8% in 2002 as operating expenses for the nine months ended September 26, 2003 include obligations under an employment agreement with a former recruitment executive and a loss incurred in Australia to sell a portion of the corporate education business. The European and Australian operations represented combined losses of $7.5 million in the first nine months of 2003 due to weaker customer demand, pricing pressure in Europe and the aforementioned loss.
Technology. Technology revenues decreased 18.7% to $212.8 million in 2003 from $261.8 million in the prior year due to continued lower demand for IT related services. Technology revenues by service line for 2003 were comprised of 76.1% staffing and 23.9% managed services, compared to 77.3% staffing and 22.7% managed services in 2002. As a percentage of total technology revenues, staffing decreased from the 2002 level as the demand for staffing services decreased at a greater rate than managed services, which are supported by longer-term contracts. Technology revenues continue to be negatively impacted by industry-wide decreases in demand.
Technology gross profit decreased 26.8% to $55.3 million in 2003 from $75.5 million in the prior year, and the overall gross profit percentage decreased to 26.0% in 2003 from 28.8% in the prior year. The decrease in gross profit percentage is primarily due to pricing pressures.
Technology segment operating profit decreased 68.3% to $1.5 million in 2003 compared to $4.9 million in the prior year. The decrease was due to the decrease in gross profit of $20.2 million, partially offset by lower operating expenses of $16.8 million. Operating expenses as a percentage of revenues decreased to 25.3% in 2003 from 27.0% in 2002 as we continue to reduce operating expenses as revenues and gross profits decline.
Outsourcing. Outsourcing revenues decreased 9.2% to $223.3 million in 2003 from $246.0 million primarily due to the loss of customer contracts, the largest of which was MCI Worldcom, volume decreases at a major customer and lower revenues from outplacement services.
Outsourcing gross profit decreased 22.1% to $49.7 million in 2003 from $63.8 million in the prior year, and the overall gross profit percentage decreased to 22.3% in 2003 from 25.9% in the prior year. The decrease in gross profit percentage is primarily due to lower revenues in some of our domestic call centers which have a relatively consistent amount of fixed costs, lower revenues from higher margin human resource consulting services and start-up costs related to our new call center in Panama during the second quarter of 2003.
Outsourcing segment operating profit decreased 42.5% to $8.4 million in 2003 from $14.6 million in the prior year. The decrease was due to the decrease in gross profit of $14.1 million, partially offset by lower operating expenses of $7.9 million. Operating expenses as a percentage of revenues decreased to 18.5% in 2003 from 20.0% in 2002. This was primarily due to the disposition of a software development operating unit in the fourth quarter of 2002 and lower employee costs, partially offset by obligations under an employment agreement with a former Outsourcing executive.
Unallocated Central Costs. Unallocated central costs increased 28.6% to $23.7 million in 2003 from $18.4 million in the prior year, primarily due to non-capitalizable costs related to the implementation of our enterprise-wide information system. Unallocated central costs for the nine months ended September 27, 2002, included the write-off of a loan associated with the sale of a business and severance costs related to a former corporate executive. As a percentage of consolidated revenues, these costs increased to 1.6% in 2003 from 1.2% in the prior year. Excluding the non-capitalizable costs for the enterprise-wide information system in the current year and the write-off of the loan and severance costs related to a former corporate executive in prior year, these costs as a percentage of revenue would have been 1.1% in both years.
19
Amortization of Intangibles. Amortization of intangibles increased slightly to $0.3 million in 2003 compared to $0.2 million in 2002.
Interest Expense. Interest expense decreased 51.7% to $4.5 million in 2003 from $9.4 million last year. This decrease resulted from lower debt levels primarily related to the repurchase of some of our convertible subordinated notes during 2002 and 2003. Average borrowings outstanding during the nine months ended September 26, 2003 of $102.4 million carried an average rate of interest of 5.9% compared with $219.1 million outstanding during the same period of 2002 at an average rate of interest of 5.7%.
Interest Income. Interest income for the nine months ended September 26, 2003 was $4.4 million compared to $4.7 million for the same period in the prior year primarily due to lower invested cash balances during the current year.
Restructuring, Asset Impairments and Other Charges. For the nine months ended September 26, 2003, we recorded pre-tax restructuring charges, net of reversals of $2.1 million. During the nine months ended September 27, 2002, we recorded pre-tax restructuring, asset impairments and other charges of $5.2 million. See section “Restructuring, Asset Impairments and Other Charges” below for further discussion.
Other Gains. We recorded a pre-tax gain of $0.3 million and $3.9 million on the repurchase of a portion of our 4½% convertible subordinated notes during the nine months ended September 26, 2003 and September 27, 2002, respectively.
Income Taxes. The effective income tax rate on the loss for the nine month period ended September 26, 2003 from continuing operations was 33%. This rate differs from the statutory federal income tax rate primarily due to the impact of foreign income taxes, federal employment tax credits, and the impact of permanent tax differences. The effective tax rate for 2002 was 74%, and differed from the statutory rate primarily due to the impact of foreign income taxes, federal employment tax credits, and the impact of permanent tax differences. The decrease in the effective tax benefit to 33% in the current year from the prior year expense of 74% is reflective of the larger pre-tax loss from continuing operations in the current year.
Discontinued Operations. During the second quarter of 2002, we adopted a plan to exit certain smaller consulting operations, primarily in our technology segment. All of these operations were disposed of prior to the end of the second quarter of 2003. The net loss from discontinued operations for the nine months ended September 26, 2003, of $3.9 million includes tax expense of $3.2 million attributable to a change in tax estimates resulting from the sale of the technology consulting business in The Netherlands during the second quarter of 2003. We recorded a net loss from discontinued operations of $10.9 million during the nine months ended September 27, 2002. This included a pre-tax loss of $8.6 million to write-down the businesses to their expected fair market value.
Cumulative Effect of Change in Accounting Principle. Effective at the beginning of 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which required our intangible assets be tested for impairment. This resulted in a pre-tax charge of $691.6 million ($615.6 million after-tax). Additionally, we performed our annual impairment test as of November 2002, and recorded an additional pre-tax impairment charge to earnings of $291.5 million during the fourth quarter of 2002.
Weighted Average Shares Outstanding. The diluted weighted average number of shares decreased to 59.9 million in 2003 from 60.2 million in the prior year, due to the exclusion of common stock equivalents in the current year as we had a loss from continuing operations for the nine months ended September 26, 2003, offset by normal quarterly issuances of shares under various employee benefit programs.
Restructuring, Asset Impairments and Other Charges
During the third quarter of 2003, we identified certain cost reduction opportunities and adopted a restructuring plan (the “2003 Plans”) to terminate redundant employees, centralize business support functions and reduce excess capacity, resulting in a restructuring charge of $2.5 million during the three months ended September 26, 2003. The charge included $1.3 million relating to Outsourcing, $0.8 million relating to Recruitment and the remainder of the charge related to corporate initiatives.
During 2001, we announced our business strategy which was focused on increasing the predictability of revenues and earnings, continuous productivity improvements and enhancing profitability. This strategy combined with the slowdown in the economy, led to an assessment of the strategic direction and product mix. Consequently, restructuring plans were
20
adopted in 2001 to terminate redundant employees, reduce excess capacity and dispose of certain non-strategic assets (the “2001 Plans”).
An analysis of the 2003 Plans, along with accrued amounts remaining to be distributed under restructuring plans initiated in 1999, 2000 and 2001 are as follows (dollar amounts in thousands):
|
|
|
Facility |
|
Number of |
|
Severance |
|
Number of |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at December 27, 2002 |
|
$ |
5,722 |
|
2 |
|
$ |
216 |
|
— |
|
$ |
5,938 |
|
|
Utilization |
|
(429 |
) |
— |
|
(216 |
) |
— |
|
(645 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at March 28, 2003 |
|
5,293 |
|
2 |
|
— |
|
— |
|
5,293 |
|
|||
|
Utilization |
|
(695 |
) |
— |
|
— |
|
— |
|
(695 |
) |
|||
|
Reversal of over accrual |
|
(476 |
) |
— |
|
— |
|
— |
|
(476 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at June 27, 2003 |
|
4,122 |
|
2 |
|
— |
|
— |
|
4,122 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accrual |
|
338 |
|
2 |
|
2,201 |
|
59 |
|
2,539 |
|
|||
|
Utilization |
|
(684 |
) |
(2 |
) |
(553 |
) |
(50 |
) |
(1,237 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at September 26, 2003 |
|
$ |
3,776 |
|
2 |
|
$ |
1,648 |
|
9 |
|
$ |
5,424 |
|
(1) Number of locations remaining as of September 26, 2003 that have been vacated, but not yet subleased or bought out.
(2) Employees terminated during the three months ended September 26, 2003, although severance payments may have been made after the end of the quarter.
During the second quarter of 2003, as part of our on-going restructuring monitoring process, accruals of $0.5 million were identified that were unnecessary primarily as the result of lower severance costs than initially anticipated and lower broker fees, and these amounts were reversed to income.
During the second quarter of 2002, accruals of $4.8 million were identified that were unnecessary primarily as the result of the buyout or sublease of existing lease obligations at better than expected rates and the favorable resolution of severance payouts, and these amounts were reversed to income. Also, during the second quarter of 2002, we recorded other charges (included in “Restructuring, asset impairments and other charges” in the attached condensed consolidated statements of operations) in the amount of $10.0 million for additional anticipated losses associated with the subleases of Norrell’s former headquarters building in Atlanta, Georgia. The $10.0 million charge reflects the weakening of the commercial rental market.
The remaining accruals for facility closures and asset write-offs of $3.8 million primarily relate to lease payments on closed locations that will be paid out through 2006 (unless earlier lease terminations can be negotiated), estimated losses on subleases of approximately 25 properties and remaining assets to be disposed of.
We plan to incur additional restructuring charges primarily related to severance, as we complete each phase of our enterprise-wide information system implementation and other cost containment initiatives. We currently expect to incur a $3.0 million pre-tax restructuring charge during the fourth quarter of 2003.
Liquidity and Capital Resources
Cash Flow
Cash provided by operating activities for the nine months ended September 26, 2003 was $81.2 million compared with $44.7 million in the same period of 2002. Higher operating cash flows in the current year are primarily due to cash provided by working capital of $66.9 million in 2003, which was provided primarily through federal tax refunds of $80.9 million, partially offset by a use of cash as days sales outstanding increased from the beginning of the year. For the nine months ended September 27, 2002, cash flows from operating activities were primarily comprised of a
21
$3.0 million reduction in cash from working capital combined with $22.1 million of depreciation and amortization and $20.3 million of deferred tax increases.
Investing activities used $79.8 million of cash during the nine months ended September 26, 2003 compared with $138.5 million in the prior year. Capital expenditures increased to $58.9 million in 2003 from $25.4 million for the comparable 2002 period. Current year capital expenditures include the investment in our enterprise-wide information system which amounted to $42.2 million during the first nine months of 2003. We expect capital spending for our enterprise-wide information system investment to be approximately $46 million for the twelve months ended December 26, 2003. We expect the remainder of our 2003 capital expenditures to be funded through existing cash resources. We paid $10.7 million (excluding the assumption of debt) to acquire 85% of our Canadian franchise during the second quarter of 2003. Cash outflows during 2003 and 2002 included $13.1 million, net of reimbursements, and $111.9 million, respectively, to fund insurance deposits to collateralize workers’ compensation obligations.
Cash used in financing activities was $14.5 million for the nine months ended September 26, 2003 compared with $31.8 million in the prior year. Debt repayments during 2003 relate to the repurchase of some of our 4½% convertible subordinated notes, the repayment of a portion of the debt assumed in conjunction with the Canadian acquisition and repayment of a portion of the short-term note payable for software and related costs. The use of cash during 2002 primarily reflects the repurchase of some of our 4½% convertible subordinated notes and the repayment of short-term borrowings associated with prior years acquisitions.
Liquidity
As of September 26, 2003, cash resources available to us totaled $52.4 million. Of this amount, $40.0 million was held in the United States and the remainder by our foreign subsidiaries. The funds held in the United States are invested primarily in investment grade money market funds.
In July 2003, we cancelled our 364-day U.S. dollar loan facility and entered into a four-year U.S. dollar loan facility (also secured by substantially all of our domestic accounts receivable) with a new lender. The new loan facility provides us $200 million of on-balance sheet financing through July of 2007, with an option (expiring in July 2006) to increase our total availability to a maximum of $250 million. Interest on this facility is based on LIBOR plus a credit spread. As of September 26, 2003, there were no amounts outstanding under our accounts receivable securitization facility. We believe we have sufficient liquidity to meet our operating and capital needs for the foreseeable future.
On April 4, 2003, in connection with a three-year old agreement, we acquired 85% of our Canadian franchise operation for consideration of $21.6 million, including $10.9 million of debt assumed. We also entered into a new put/call agreement with the minority interest holder that can be exercised by either party any time after December 31, 2005, which would require/allow us to purchase the remaining 15% interest in this operation. The results of this operation are included in the Recruitment operating segment and our consolidated results of operations as of the acquisition date.
During the nine months ended September 26, 2003, we repurchased an aggregate face value of $7.0 million of our outstanding 4½% convertible subordinated notes for a purchase price of $6.6 million. We recorded a gain, net of bond issuance cost write-offs, of $0.3 million, which is included in “Other gains” in the accompanying condensed consolidated statements of operations. Repurchases during 2003 are not necessarily indicative of the future. Additional repurchases, if any, will depend on factors such as the prevailing market price of the notes, overall market conditions and alternative uses of our liquidity.
Forward-looking Statements – Safe Harbor
In evaluating our business, you should carefully consider the following factors in addition to the information contained elsewhere in this Form 10-Q and our Annual Report on Form 10-K. Statements contained in this Quarterly Report on Form 10-Q may contain forward-looking statements, including but not limited to statements regarding the following: (i) our plans, intentions and expectations with respect to our future prospects, including business and growth strategies; (ii) industry trends and competitive conditions; (iii) expected capital expenditures to be made in the future; (iv) resolution of pending litigation without material adverse effect on us; and (v) our quantitative and qualitative estimates as to market risk. This notice is intended to take advantage of the “safe harbor” provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Among others, factors that could cause actual results to differ materially from our beliefs or expectations are the following:
22
• We operate in highly competitive markets with low barriers to entry, and may be unable to compete successfully against existing or new competitors.
• Any significant economic downturn could result in our clients using fewer temporary employees or the loss or bankruptcy of a significant client.
• We are dependent upon availability of qualified personnel, and may not be able to attract and retain sufficient numbers of qualified personnel necessary to succeed.
• We may not achieve the intended effects of our business strategy.
• Lack of client investments in new technology may result in reduced demand for our Technology services. As a result, revenues from our Technology operating segment may continue to decline.
• Our investment in technology initiatives may not yield their intended results.
• Regulatory challenges to our tax filing positions could result in additional taxes.
• We may be exposed to employment-related claims and costs as well as new regulations that could materially adversely affect our business, financial condition and results of operations.
• Government regulation, including such items as unemployment taxes, state and local taxes and related costs, may significantly increase our costs.
• We are subject to business risks associated with international operations, which could make our international operations significantly more costly.
• Our failure or inability to complete our outsourcing projects could result in damage to our reputation and give rise to legal claims against us.
• Managing or integrating any future acquisitions may strain our resources.
• We are a defendant in a variety of litigation and other actions from time to time, which may have a material adverse effect on our business, financial condition and results of operations.
• Our contracts contain termination provisions and pricing risks that could decrease our revenues, profitability and cash flow.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 26, 2003, the majority of our cash and cash equivalents were invested in investment grade money market funds. These financial instruments are not considered to be subject to interest rate risk due to their short duration.
Our outstanding variable-rate debt at September 26, 2003 and September 27, 2002 was approximately $8.0 million and $8.9 million, respectively. Based on the outstanding balance, a change of 1% in the interest rate would cause a change in interest expense of approximately $0.1 million in both 2003 and 2002, on an annual basis.
Based upon published prices, the fair value of our 4½% fixed rate convertible subordinated notes as of September 26, 2003 and September 27, 2002 was $85.3 million and $133.8 million, respectively, compared with the related carrying value of $89.7 million and $163.0 million, respectively.
23
From time to time, we participate in foreign exchange hedging to mitigate the impact of changes in foreign currency exchange rates. We attempt to hedge transaction exposures through natural offsets. To the extent this is not practicable, exposure areas which are considered for hedging include foreign currency denominated receivables and payables, intercompany loans and firm committed transactions and dividends related to foreign subsidiaries. We use financial instruments, principally forward exchange contracts, in our management of foreign currency exposures. We do not enter into forward contracts for trading purposes. At September 26, 2003, we had two outstanding forward contracts, one with a notional amount of 5.0 million Canadian dollars and one with a notional amount of 1.5 million Australian dollars, both with a fair value or cost to unwind which is not material to our consolidated results of operations. At September 27, 2002, we had no outstanding forward contracts.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report in timely alerting them as to material information relating to our company (including our consolidated subsidiaries) required to be included in this Quarterly Report.
There has been no change in our internal control over financial reporting during our last fiscal quarter, identified in connection with the evaluation referred to above, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Beginning in July 2003, we started the implementation of our new enterprise-wide information system. The full implementation is expected to be completed during the first half of 2004 and is expected to improve controls over financial reporting.
24
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Spherion first reported litigation filed by Cincinnati Financial Corporation (“CFC”) on its Form 10-Q for the fiscal quarter ended June 29, 2001. On August 11, 2003, CFC and Spherion entered into a Confidential Settlement Agreement and Mutual General Release under which (i) neither party admitted fault; (ii) the parties agreed to dismiss both lawsuits; and (iii) CFC agreed to accept a payment in full satisfaction and settlement of its claims. On August 15, 2003, the Final Order of Dismissal with Prejudice was entered by the Court under which all claims by the parties were dismissed. Spherion has been released of any and all liability with respect to CFC’s claims, and the settlement amount was paid in full by Spherion’s insurance carriers to CFC, not by Spherion. Accordingly, the resolution of this matter had no material impact on Spherion’s consolidated financial position, liquidity or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
|
Exhibit |
|
Document |
|
|
|
|
|
3.2 |
|
Second Amended and Restated Bylaws of Spherion, as amended July 5, 2003 filed as Exhibit 3.2 hereto. |
|
|
|
|
|
10.60 |
|
Credit Agreement, dated as of July 24, 2003 is made by and among the financial institutions from time to time parties hereto (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), Bank of America, N.A., as Administrative Agent and Collateral Agent for the Lenders and Spherion Corporation filed as Exhibit 10.60 hereto. |
|
|
|
|
|
10.61 |
|
First Amendment to Credit Agreement, Security Agreement, Pledge Agreement and Guaranty Agreement dated August 25, 2003 by and among Spherion Corporation, as borrower, each subsidiary of Borrower party to the Security Agreement, the Pledge Agreement and the Guaranty Agreement, each of the Lenders signatory hereto and Bank of America, N.A., as agent to the Lenders, filed as Exhibit 10.61 hereto. |
|
|
|
|
|
31.1 |
|
Rule 13a-14(a) Certification in Accordance with Section 302 of the Sarbanes- Oxley Act of 2002 filed as Exhibit 31.1 hereto. |
|
|
|
|
|
31.2 |
|
Rule 13a-14(a) Certification in Accordance with Section 302 of the Sarbanes- Oxley Act of 2002 filed as Exhibit 31.2 hereto. |
|
|
|
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as Exhibit 32.1 hereto. |
|
|
|
|
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished as Exhibit 32.2 hereto. |
25
(b) Reports on Form 8-K.
On July 7, 2003, we filed a Report on Item 5 of Form 8-K pertaining to the issuance of a press release announcing that the Chief Executive Officer Cinda A. Hallman had taken a medical leave of absence and that Roy G. Krause had been appointed President and Chief Operating Officer and Mark W. Smith had been appointed Chief Financial Officer.
On July 28, 2003, we furnished a Report on Item 12 of Form 8-K pertaining to the issuance of a press release announcing our results of operations for the fiscal quarter ended June 27, 2003. This Form 8-K is not deemed incorporated by reference into any of our filings with the Securities and Exchange Commission.
On September 2, 2003, we filed a Report on Item 5 of Form 8-K pertaining to the issuance of a press release announcing the appointment of Byrne K. Mulrooney as President of Staffing Services.
26
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.
|
|
|
SPHERION CORPORATION |
|
|
|
(Registrant) |
|
|
|
|
|
DATE—November 10, 2003 |
BY |
/s/ Mark W. Smith |
|
|
|
Mark W. Smith |
|
|
|
Senior Vice President and |
|
|
|
(principal financial and accounting officer) |
27
|
Exhibit |
|
Document |
|
|
|
|
|
3.2 |
|
Second Amended and Restated Bylaws of Spherion, as amended July 5, 2003. |
|
|
|
|
|
10.60 |
|
Credit Agreement, dated as of July 24, 2003 is made by and among the financial institutions from time to time parties hereto (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “Lenders”), Bank of America, N.A., as Administrative Agent and Collateral Agent for the Lenders and Spherion Corporation. |
|
|
|
|
|
10.61 |
|
First Amendment to Credit Agreement, Security Agreement, Pledge Agreement and Guaranty Agreement dated August 25, 2003 by and among Spherion Corporation, as borrower, each subsidiary of Borrower party to the Security Agreement, the Pledge Agreement and the Guaranty Agreement, each of the Lenders signatory hereto and Bank of America, N.A., as agent to the Lenders. |
|
|
|
|
|
31.1 |
|
Rule 13a-14(a) Certification in Accordance with Section 302 of the Sarbanes- Oxley Act of 2002. |
|
|
|
|
|
31.2 |
|
Rule 13a-14(a) Certification in Accordance with Section 302 of the Sarbanes- Oxley Act of 2002. |
|
|
|
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28