MSX International 10-Q 2001 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 1, 2001

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to

Commission File Number: 333-49821

MSX International, Inc.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	38-3323099 (I.R.S. Employer Identification No.)
275 Rex Boulevard, Auburn Hills, Michigan (Address of principal executive offices)	48326 (Zip Code)

(248) 299-1000
(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       No  

TABLE OF CONTENTS

Part I. Finacial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets as of July 1, 2001 (Unaudited) and December 31, 2000
		Consolidated Statements of Income (Unaudited) for the Fiscal Quarters and Fiscal Six Months Ended July 1, 2001 and July 2, 2000
		Consolidated Statements of Cash Flows (Unaudited) for the Fiscal Six Months Ended July 1, 2001 and July 2, 2000
		Notes to Consolidated Financial Statements (Unaudited)
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K
Signature

MSX INTERNATIONAL, INC.
INDEX

PART I.  FINANCIAL INFORMATION
	ITEM 1.  Financial Statements:		Pages
		Consolidated Balance Sheets as of July 1, 2001 (Unaudited) and December 31, 2000		2
		Consolidated Statements of Income (Unaudited) for the Fiscal Quarters and Fiscal Six Months Ended July 1, 2001 and July 2, 2000		3
		Consolidated Statements of Cash Flows (Unaudited) for the Fiscal Six Months Ended July 1, 2001 and July 2, 2000		4
		Notes to Consolidated Financial Statements (Unaudited)		5
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
PART II. OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K			17
SIGNATURE				18

1

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
as of July 1, 2001 and December 31, 2000

				July 1,
				2001			December 31,
				(Unaudited)			2000
				(dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents			$	6,206		$	4,686
	Accounts receivable, net (Note 3)				287,126			317,458
	Inventory				7,469			7,464
	Prepaid expenses and other assets				10,258			8,578
	Deferred income taxes, net				3,731			3,209
		Total current assets			314,790			341,395
Property and equipment, net					39,475			40,959
Goodwill and other intangibles, net of accumulated amortization of $14,465 and $11,395, respectively					171,355			172,091
Other assets					23,398			18,774
Deferred income taxes, net					4,511			3,810
			Total assets	$	553,529		$	577,029
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
	Notes payable and current portion of long-term debt (Note 4)			$	16,336		$	13,170
	Accounts payable and drafts				159,049			176,569
	Accrued payroll and benefits				20,162			30,561
	Other accrued liabilities				75,515			71,017
			Total current liabilities		271,062			291,317
Long-term debt (Note 4)					248,444			253,676
Long-term deferred compensation liabilities and other					10,998			10,406
	Total liabilities				530,504			555,399
Minority interests					1,364			1,092
Redeemable Series A Preferred Stock (Note 5)					36,000			36,000
Shareholders’ deficit:
	Common Stock, $.01 par value, 200,000,000 aggregate shares of Class A and Class B Common Stock authorized; 20,080,800 and 20,400,600 shares of Class A Common Stock issued and outstanding, respectively				201			204
	Additional paid-in-capital				(21,769	)		(21,705	)
	Note receivable from officer				(3,000	)		(3,000	)
	Accumulated other comprehensive loss (Note 6)				(17,406	)		(15,641	)
	Retained earnings				27,635			24,680
			Total shareholders’ deficit		(14,339	)		(15,462	)
			Total liabilities and shareholders’ deficit	$	553,529		$	577,029

The accompanying notes are an integral part of the consolidated financial statements

2

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
for the fiscal quarters and fiscal six months ended July 1, 2001 and July 2, 2000

		Fiscal Quarter Ended				Fiscal Six Months Ended
		July 1,		July 2,		July 1,		July 2,
		2001		2000		2001		2000
				(in thousands)
Net sales (Note 7)		$	241,921	$	269,512	$	498,558	$	517,477
Cost of sales			209,424		230,913		433,869		443,718
	Gross profit		32,497		38,599		64,689		73,759
Selling, general and administrative expenses			18,685		21,642		39,928		41,729
Amortization of goodwill and other intangibles			1,508		1,398		3,112		2,500
	Operating income		12,304		15,559		21,649		29,530
Interest expense, net			7,556		7,659		14,484		14,570
	Income before income taxes, minority interests, and equity in net losses of affiliates		4,748		7,900		7,165		14,960
Income tax provision			1,946		3,222		2,961		6,150
Less minority interests and equity in net losses of affiliates, net of taxes			548		548		750		466
	Net income	$	2,254	$	4,130	$	3,454	$	8,344

The accompanying notes are an integral part of the consolidated financial statements

3

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the fiscal six months ended July 1, 2001 and July 2, 2000

			Fiscal Six Months Ended
			July 1,			July 2,
			2001			2000
			(in thousands)
Cash flows from operating activities:
	Net income		$	3,454		$	8,344
	Adjustments to reconcile net income to net cash provided by (used for) operating activities:
		Minority interests and equity in net losses of affiliates		750			466
		Depreciation		8,058			8,566
		Amortization		3,671			3,032
		Deferred taxes		(1,223	)		4,326
		Loss on sale/disposal of property and equipment		—			80
		(Increase) decrease in receivables, net		30,332			22,388
		(Increase) decrease in inventory		(5	)		(80	)
		(Increase) decrease in prepaid expenses and other assets		(1,680	)		(1,231	)
		Increase (decrease) in current liabilities		(17,111	)		8,826
		Other, net		(899	)		(1,906	)
Net cash provided by operating activities				25,347			52,811
Cash flows from investing activities:
	Capital expenditures			(7,374	)		(8,367	)
	Acquisition of businesses, net of cash received			(11,519	)		(57,747	)
	Proceeds from sale/disposal of equipment			104			113
	Other, net			97			761
Net cash used for investing activities				(18,692	)		(65,240	)
Cash flows from financing activities:
	Proceeds from issuance of debt			—			25,000
	Repayment of debt			(2,625	)		(1,917	)
	Debt issuance costs			(12	)		(178	)
	Changes in revolving debt, net			559			(9,467	)
	Changes in book overdraft, net			(1,621	)		1,369
	Repurchase of common stock			(4,178	)		—
	Sale of common stock			3,612			—
Net cash provided by (used for) financing activities				(4,265	)		14,807
Effect of foreign exchange rate changes on cash and cash equivalents				(870	)		(2,620	)
Cash and cash equivalents:
	Increase (decrease) for the period			1,520			(242	)
	Balance, beginning of period			4,686			6,879
	Balance, end of period		$	6,206		$	6,637

The accompanying notes are an integral part of the consolidated financial statements

4

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollars in thousands unless otherwise stated)

1. Organization and Basis of Presentation:

      The accompanying financial statements represent the consolidated assets and liabilities and results of operations of MSX International, Inc. and its majority owned subsidiaries (“MSXI”). MSXI is a leading global provider of technology-driven business services, which enable our customers to significantly improve their competitive advantage. We utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31.

      All intercompany transactions and balances between subsidiaries of MSXI have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters and fiscal six months ended July 1, 2001 and July 2, 2000 are not necessarily indicative of the results of operations for the entire year. Reference should be made to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Certain prior year amounts have been reclassified to conform to the presentation adopted in fiscal 2001.

2. Acquisitions of Businesses:

      CSR Acquisition.   On February 23, 2000 we acquired the professional staffing operations of Corporate Staffing Resources, Inc. (the “CSR Acquisition”). Specifically, we acquired 100% of the outstanding common stock of Intranational Computer Consultants, Inc. and Programming Management and Systems, Inc. and selected assets and liabilities of CMS Management Services and Ascend. The total purchase price, upon settlement of certain contractual matters, of about $31.8 million was funded with borrowings under our credit facility. These companies provide information technology and technical professional staffing services throughout the United States with combined historical annual sales in excess of $57 million. The CSR Acquisition was accounted for under the purchase method of accounting, resulting in goodwill of $26.9 million.

      The operating results of acquired companies have been included in our consolidated operating results from the effective date of each acquisition. The proforma effects of the CSR acquisition would not be materially different from reported results for the periods presented.

      The terms of certain of our acquisition agreements provide for additional contingent consideration to be paid over a period of up to two years if the acquired entity’s future operating results exceed targeted levels. Contingent consideration is earned when the acquired entity’s financial performance grows in excess of the targeted levels established at the time of acquisition. Such additional consideration is generally recorded, when earned, as additional purchase price. In this regard, we recorded additional consideration during fiscal 2000 and 2001, related to prior year acquisitions, which resulted in additional goodwill capitalization. Additional goodwill is amortized over the remaining amortization period.

3. Accounts Receivable:

      Accounts receivable include the portion of our billings for purchasing support services attributable to services provided by our vendors which are passed on to our customers. These amounts totaled $57.3 million as of July 1, 2001 and $82.5 million as of December 31, 2000. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivable is recognized.

5

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

4. Debt:

      Debt is comprised of the following:

		Interest Rates at						Outstanding at
		July 1,			December 31,			July 1,		December 31,
		2001			2000			2001		2000
Senior Subordinated Notes			11.375	%		11.375	%	$	130,000	$	130,000
Credit Facility, as amended and restated:
	Revolving line of credit notes	5.81 - 7.28		%	7.47 - 9.75		%		22,510		19,964
	Swingline notes	6.78 - 7.75		%	7.53 - 9.00		%		3,275		7,712
	Term notes	6.21 - 7.01		%	8.21 - 9.69		%		98,625		101,250
Satiz Facility			5.47	%		5.73	%		9,301		6,392
Other debt		5.47 - 7.75		%	7.50 - 8.00		%		1,069		1,528
									264,780		266,846
Less current portion									16,336		13,170
Total long-term debt								$	248,444	$	253,676

      As of July 1, 2001, $25.8 million was outstanding under the revolving and swingline portions of our credit facility and has been classified as long-term debt as we have both the ability and intent to refinance such amounts under the credit facility.

5. Redeemable Series A Preferred Stock:

      We are authorized to issue up to 1,500,000 shares of preferred stock, divided into two classes: 500,000 shares of Redeemable Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. As of July 1, 2001 and December 31, 2000, 360,000 shares of our Redeemable Series A Preferred Stock are issued and outstanding. Dividends on preferred stock are payable in cash at a rate per annum equal to 12 percent of the stated value plus an amount equal to any accrued and unpaid dividends. As of July 1, 2001, we have not declared or paid any dividends. Dividends accumulated but not declared totaled about $24.8 million as of July 1, 2001.

6. Comprehensive Income:

      Our comprehensive income was:

		Fiscal Quarter Ended						Fiscal Six Months Ended
		July 1,			July 2,			July 1,			July 2,
		2001			2000			2001			2000
Net income		$	2,254		$	4,130		$	3,454		$	8,344
Other comprehensive loss -
	Foreign currency translation adjustments		(3,230	)		(2,284	)		(1,765	)		(3,986	)
Comprehensive income		$	(976	)	$	1,846		$	1,689		$	4,358

6

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

7. Segment Information:

      MSXI is a leading global provider of technology-driven business services to the automotive and other industries. We group our services into three service line categories: engineering services, information technology (“IT”) and professional staffing services, and business and technology services. Due to the similar characteristics of our service lines, including the nature of our service offerings, processes supporting the delivery of our services, our customers, and our marketing and sales processes, our operations have been aggregated following the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131 for segment reporting purposes.

      The following is a summary of our net sales by service line:

	Fiscal Quarter Ended				Fiscal Six Months Ended
	July 1,		July 2,		July 1,		July 2,
	2001		2000		2001		2000
Engineering Services	$	130,127	$	141,966	$	272,945	$	285,771
IT and Professional Staffing Services		42,090		51,921		88,100		87,056
Business and Technology Services		69,704		75,625		137,513		144,650
Total net sales	$	241,921	$	269,512	$	498,558	$	517,477

      We evaluate performance based on earnings before interest and taxes (EBIT), including the Michigan Single Business Tax and other similar taxes, as defined. A reconciliation of consolidated EBIT to consolidated income before income taxes, minority interests and equity in net losses of affiliates is as follows:

		Fiscal Quarter Ended						Fiscal Six Months Ended
		July 1,			July 2,			July 1,			July 2,
		2001			2000			2001			2000
Total EBIT before minority interests and equity in		$	13,601		$	16,895		$	23,985		$	32,308
	net losses of affiliates
Interest expense			(7,556	)		(7,659	)		(14,484	)		(14,570	)
Michigan Single Business Tax and other similar taxes			(1,297	)		(1,336	)		(2,336	)		(2,778	)
Consolidated income before taxes, minority interests and equity in net losses of affiliates		$	4,748		$	7,900		$	7,165		$	14,960

8. Recent Accounting Pronouncements:

      In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. We are currently reviewing the impact of SFAS Nos. 141 and 142 and will be performing a fair-value analysis at a later date in connection with the adoption of SFAS No. 142 during the first quarter of fiscal 2002.

7

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries:

      In connection with our $130 million of senior subordinated notes outstanding, each of our significant domestic restricted subsidiaries, as defined in the related bond indenture (the “Guarantor Subsidiaries”), irrevocably and unconditionally guarantee MSXI’s performance as primary obligor. The following condensed consolidating financial data provides information regarding the financial position, results of operations and cash flows of the Guarantor Subsidiaries as set forth below. Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined those would not be material to the holders of the senior subordinated notes.

      The Guarantor Subsidiaries account for their investments in the non-guarantor subsidiaries, if any, on the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions.

8

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of July 1, 2001

			MSXI			Guarantor		Non-Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	3,259		$	49	$	2,898	$	—		$	6,206
	Accounts receivable, net			70			161,873		125,183		—			287,126
	Inventory			—			6,603		866		—			7,469
	Prepaid expenses and other assets			198			4,818		5,242		—			10,258
	Deferred income taxes, net			—			2,656		1,075		—			3,731
		Total current assets		3,527			175,999		135,264		—			314,790
Property and equipment, net				—			19,148		20,327		—			39,475
Goodwill and other intangibles, net				—			130,820		40,535		—			171,355
Investment in subsidiaries				174,192			87,107		5,228		(254,624	)		11,903
Other assets				6,024			5,194		277		—			11,495
Deferred income taxes, net				728			1,435		2,348		—			4,511
		Total assets	$	184,471		$	419,703	$	203,979	$	(254,624	)	$	553,529
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Notes payable and current portion of long-term debt		$	6,000		$	—	$	10,336	$	—		$	16,336
	Accounts payable and drafts			—			113,291		45,758		—			159,049
	Accrued liabilities			3,602			56,904		35,171		—			95,677
		Total current liabilities		9,602			170,195		91,265		—			271,062
Long-term debt				225,429			10,196		12,819		—			248,444
Intercompany accounts				(72,217	)		60,480		11,737		—			—
Long-term deferred compensation liabilities and other				—			4,640		6,358		—			10,998
		Total liabilities		162,814			245,511		122,179		—			530,504
Minority interests				—			—		1,364		—			1,364
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(14,343	)		174,192		80,436		(254,624	)		(14,339	)
		Total liabilities and shareholders’ equity (deficit)	$	184,471		$	419,703	$	203,979	$	(254,624	)	$	553,529

9

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2000

			MSXI			Guarantor		Non-Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	569	$	4,117	$	—		$	4,686
	Accounts receivable, net			171			194,128		123,159		—			317,458
	Inventory			—			6,142		1,322		—			7,464
	Prepaid expenses and other assets			262			4,837		3,479		—			8,578
	Deferred income taxes, net			—			2,770		439		—			3,209
		Total current assets		433			208,446		132,516		—			341,395
Property and equipment, net				—			19,770		21,189		—			40,959
Goodwill and other intangibles, net				—			132,914		39,177		—			172,091
Investment in subsidiaries				163,697			80,666		5,523		(242,417	)		7,469
Other assets				6,569			4,252		484		—			11,305
Deferred income taxes, net				—			1,635		2,175		—			3,810
		Total assets	$	170,699		$	447,683	$	201,064	$	(242,417	)	$	577,029
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Notes payable and current portion of long-term debt		$	5,250		$	—	$	7,920	$	—		$	13,170
	Accounts payable and drafts			—			126,198		50,371		—			176,569
	Accrued liabilities						65,340		29,807		—			101,578
				6,431
		Total current liabilities		11,681			191,538		88,098		—			291,317
Long-term debt				230,554			10,196		12,926		—			253,676
Intercompany accounts				(92,074	)		78,312		13,762		—			—
Long-term deferred compensation liabilities and other				—			3,940		6,466		—			10,406
		Total liabilities		150,161			283,986		121,252		—			555,399
Minority interests				—			—		1,092		—			1,092
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(15,462	)		163,697		78,720		(242,417	)		(15,462	)
		Total liabilities and shareholders’ Equity (deficit)	$	170,699		$	447,683	$	201,064	$	(242,417	)	$	577,029

10

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the fiscal quarters ended July 1, 2001 and July 2, 2000

		MSXI			Guarantor		Non-Guarantor						MSXI
		(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended July 1, 2001:
Net sales		$	—		$	147,881	$	98,526		$	(4,486	)	$	241,921
Cost of sales			—			125,079		88,831			(4,486			209,424
	Gross profit		—			22,802		9,695			—			32,497
Selling, general and administrative expenses			—			13,070		5,615			—			18,685
Amortization of goodwill and other intangibles			—			1,167		341			—			1,508
	Operating income		—			8,565		3,739			—			12,304
Interest income (expense), net			(7,060	)		48		(544	)		—			7,556
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		(7,060	)		8,613		3,195			—			4,748
Income tax provision (benefit)			(2,605	)		3,187		1,364			—			1,946
Minority interests and equity in net losses of affiliates, net of taxes			6,709			1,283		(301	)		(8,239	)		(548	)
	Net income	$	2,254		$	6,709	$	1,530		$	(8,239	)	$	2,254
Fiscal Quarter Ended July 2, 2000:
Net sales		$	—		$	174,404	$	99,252		$	(4,144	)	$	269,512
Cost of sales			—			148,637		86,420			(4,144	)		230,913
	Gross profit		—			25,767		12,832			—			38,599
Selling, general and administrative expenses			—			14,798		6,844			—			21,642
Amortization of goodwill and other intangibles			—			1,115		283			—			1,398
	Operating income		—			9,854		5,705			—			15,559
Interest income (expense), net			(7,254	)		425		(830	)		—			(7,659	)
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		(7,254	)		10,279		4,875			—			7,900
Income tax provision (benefit)			(2,555	)		3,967		1,810			—			3,222
Minority interests and equity in net losses of affiliates, net of taxes			8,829			2,517		(548	)		(11,346	)		(548	)
	Net income	$	4,130		$	8,829	$	2,517		$	(11,346	)	$	4,130

11

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the fiscal six months ended July 1, 2001 and July 2, 2000

				MSXI			Guarantor		Non-Guarantor						MSXI
				(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Fiscal Six Months Ended July 1, 2001:
Net sales				$	—		$	308,131	$	199,483		$	(9,056	)	$	498,558
Cost of sales					—			263,077		179,848			(9,056	)		433,869
		Gross profit			—			45,054		19,635			—			64,689
Selling, general and administrative expenses					—			28,492		11,436			—			39,928
Amortization of goodwill and other intangibles					—			2,337		775			—			3,112
			Operating income		—			14,225		7,424			—			21,649
Interest income (expense), net					(13,958	)		121		(647	)		—			14,484
		Income (loss) before income taxes, minority interests, and equity in net losses of affiliates			(13,958	)		14,346		6,777			—			7,165
Income tax provision (benefit)					(5,143	)		5,308		2,796			—			2,961
Minority interests and equity in net Losses of affiliates, net of taxes					12,269			3,231		(503	)		(15,747	)		(750	)
		Net income		$	3,454		$	12,269	$	3,478		$	(15,747	)	$	3,454
Fiscal Six Months Ended July 2, 2000:
Net sales				$	—		$	331,529	$	193,738		$	(7,790	)	$	517,477
Cost of sales					—			280,934		170,574			(7,790	)		443,718
		Gross profit			—			50,595		23,164			—			73,759
Selling, general and administrative expenses					—			28,906		12,823			—			41,729
Amortization of goodwill and other intangibles					—			1,980		520			—			2,500
		Operating income			—			19,709		9,821			—			29,530
Interest income (expense), net					(13,762	)		834		(1,642	)		—			(14,570	)
		Income (loss) before income taxes, minority interests, and equity in net Losses of affiliates			(13,762	)		20,543		8,179			—			14,960
Income tax provision (benefit)					(4,927	)		7,793		3,284			—			6,150
	Minority interests and equity in net losses of affiliates, net of taxes				17,179			4,429		(466	)		(21,608	)		(466	)
			Net income	$	8,344		$	17,179	$	4,429		$	(21,608	)	$	8,344

12

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended July 1, 2001

			MSXI			Guarantor			Non-Guarantor							MSXI
			(Issuer)			Subsidiaries				Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income		$	3,454		$	12,269			$	3,478		$	(15,747	)	$	3,454
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in earnings of subsidiaries		(12,269	)		(3,231	)			503			15,747			750
		Depreciation		—			4,021				4,037			—			8,058
		Amortization		559			2,337				775			—			3,671
		Deferred taxes		(728	)		314				(809	)		—			(1,223	)
		Loss on sale/disposal of property and equipment		—			—				—			—			—
		(Increase) decrease in receivables, net		102			32,255				(2,025	)		—			30,332
		(Increase) decrease in inventory		—			(461	)			456			—			(5	)
		(Increase) decrease in prepaid expenses and other assets		63			19				(1,762	)		—			(1,680	)
		Increase (decrease) in current liabilities		(2,828	)		(13,763	)			(520	)		—			(17,111	)
		Other, net		—			(529	)			(370	)		—			(899	)
Net cash provided by (used for) operating activities				(11,647	)		33,231				3,763			—			25,347
Cash flows from investing activities:
	Capital expenditures			—			(3,206	)			(4,168	)		—			(7,374	)
	Acquisition of businesses, net of cash received			—			(11,093	)			(426	)		—			(11,519	)
	Proceeds from sale/disposal of property and equipment			—			6				98			—			104
	Other, net			—			97				—			—			97
Net cash used for investing activities				—			(14,196	)			(4,496	)		—			(18,692	)
Cash flows from financing activities:
	Intercompany			19,857			(17,832	)			(2,025	)		—			—
	Transactions with subsidiaries			1,772			1,688				71			(3,531	)		—
	Proceeds from issuance of debt			—			—				—			—			—
	Repayment of debt			(2,625	)		—				—			—			(2,625	)
	Debt issuance costs			(12	)		—				—			—			(12	)
	Changes in revolving debt, net			(1,750	)		—				2,309			—			559
	Changes in book overdraft, net			—			(1,642	)			21			—			(1,621	)
	Repurchase of common stock			(566	)		(3,612	)			—			—			(4,178	)
	Sale of common stock			—			3,612				—			—			3,612
Net cash provided by (used for) financing activities				16,676			(17,786	)			376			(3,531	)		(4,265	)
Effect of foreign exchange rate changes on cash and cash equivalents				(1,770	)		(1,769	)			(862	)		3,531			(870	)
Cash and cash equivalents:
	Increase (decrease) for the period			3,259			(520	)			(1,219	)		—			1,520
	Balance, beginning of period			—			569				4,117			—			4,686
	Balance, end of period		$	3,259		$	49			$	2,898		$	—		$	6,206

13

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended July 2, 2000

			MSXI			Guarantor			Non-Guarantor						MSXI
			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income		$	8,344		$	17,179		$	4,429		$	(21,608	)	$	8,344
	Adjustments to reconcile net income to net cash provided by (used for) operating activities:
		Equity in earnings of subsidiaries		(17,179	)		(4,429	)		466			21,608			466
		Depreciation		—			5,070			3,496			—			8,566
		Amortization		532			1,980			520			—			3,032
		Deferred taxes		—			3,157			1,169			—			4,326
		Loss on sale/disposal of property and equipment		—			71			9			—			80
		(Increase) decrease in receivables, net		(70	)		638			21,820			—			22,388
		(Increase) decrease in inventory		—			(484	)		404			—			(80	)
		(Increase) decrease in prepaid expenses and other assets		64			(358	)		(937	)		—			(1,231	)
		Increase (decrease) in current liabilities		11,126			10,771			(13,104	)		33			8,826
		Other, net		—			(436	)		(1,470	)		—			(1,906	)
Net cash provided by operating activities				2,817			33,159			16,802			33			52,811
Cash flows from investing activities:
	Capital expenditures			—			(2,742	)		(5,625	)		—			(8,367	)
	Acquisition of businesses, net of cash received			—			(39,660	)		(18,087	)		—			(57,747	)
	Proceeds from sale/disposal of equipment			—			22			91			—			113
	Other, net			—			761			—			—			761
Net cash used for investing activities				—			(41,619	)		(23,621	)		—			(65,240	)
Cash flows from financing activities:
	Intercompany			(5,818	)		3,721			2,097			—			—
	Transactions with subsidiaries			3,986			(5,881	)		10,437			(8,542	)		—
	Proceeds from issuance of debt			25,000			—			—			—			25,000
	Repayment of debt			(1,875	)		(42	)		—			—			(1,917	)
	Debt issuance costs			(178	)		—			—			—			(178	)
	Changes in revolving debt, net			(19,946	)		10,196			283			—			(9,467	)
	Changes in book overdrafts, net			—			4,315			(2,946	)		—			1,369
Net cash provided by financing activities				1,169			12,309			9,871			(8,542	)		14,807
Effect of foreign exchange rate changes on cash and cash equivalents				(3,986	)		(3,986	)		(3,157	)		8,509			(2,620	)
Cash and cash equivalents:
	Increase (decrease) for the period			—			(137	)		(105	)		—			(242	)
	Balance, beginning of period			—			873			6,006			—			6,879
	Balance, end of period		$	—		$	736		$	5,901		$	—		$	6,637

14

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations

      Net Sales

      Consolidated net sales were $241.9 million for the second quarter of fiscal 2001 compared to $269.5 during fiscal 2000, a decrease of $27.6 million, or 10.2%. Consolidated net sales for the first six months of fiscal 2001 decreased $18.9 million, or 3.7%, from $517.5 million in fiscal 2000 to $498.6 million in fiscal 2001. Fiscal 2001 sales continue to be negatively impacted by declines in foreign currency exchange rates in certain countries in which we operate. The net impact of declining exchange rates was to reduce consolidated net sales by $6.1 million and $13.3 million for the second quarter and first six months of fiscal 2001, respectively. Excluding the impact of foreign currency exchange rate fluctuations, consolidated net sales decreased $21.5 million for the second quarter, and $5.6 million for the first six month of fiscal 2001. Sales to non-automotive customers increased to 20.5% of total sales for the first six months of fiscal 2001 compared to 17.1% for the first quarter of fiscal 2000. This increase reflects our continued efforts to diversify our customer base.

      Sales of our engineering services for the second quarter of fiscal 2001 decreased $11.8 million, or 8.3% compared to fiscal 2000. For the first six month of fiscal 2001, sales of engineering services decreased $12.8 million, or 4.5% compared to fiscal 2000. The decreases reflect reduced volumes of certain engineering services in the United Kingdom and North America in addition to reductions caused by declining foreign currency exchange rates. Reductions caused by declining volumes and exchange rate fluctuations were partially offset by an improved mix of services in North America. Sales of our IT and professional staffing services decreased $9.8 million, or 18.9% during the second quarter of fiscal 2001. For the first six months of fiscal 2001, sales of IT and professional staffing services increased $1.0 million, or 1.2%, compared to fiscal 2000. The increase, on a year to date basis, reflects the favorable impact of businesses acquired early in fiscal 2000, partially offset by decreased volumes in existing businesses. Sales of our business and technology services during the second quarter of fiscal 2001 decreased $5.9 million, or 7.8%, compared to fiscal 2000. For the first six months of fiscal 2001, sales of business and technology services were down $7.1 million, or 4.9% compared to fiscal 2000. The decrease resulted from declining foreign currency exchange rates and lower volumes due to the divestiture of a non-core business during fiscal 2000.

      Operating Income

      Our consolidated operating income for the periods presented was:

		July 1,		July 2,		Change
		2001		2000		$			%
				(dollars in thousands)
Fiscal Quarter:
	Operating income	$	12,304	$	15,559	$	(3,255	)		(20.9%)
	% of net sales		5.1%		5.8%		n/a			n/a
Fiscal Six Months:
	Operating income	$	21,649	$	29,530	$	(7,881)			(26.7%)
	% of net sales		4.3%		5.7%		n/a			n/a

      Overall, operating income decreased during the second quarter and for the first six months of fiscal 2001 compared to fiscal 2000 due to reduced gross profits and increased spending required to position the company for future growth and expansion. Gross profit, as a percentage of sales, decreased to 13.4% for the second quarter and 13.0% for the first six months of fiscal 2001 compared to 14.3% for the comparable periods of fiscal 2000. The decline in gross margin resulted from unfavorable volumes, primarily in our engineering operations, unfavorable sales mix in our IT staffing operations, and added operating costs. The overall decline in our operating results is attributable to the general economic downturn, which has impacted demand for technical services in the automotive and telecommunications sectors. We cannot predict with certainty when economic conditions will improve and are taking steps to further diversify our business to other markets and customers while containing our operating costs.

15

      Selling, general and administrative expenses, as a percentage of net sales, were 7.7% during the second quarter of fiscal 2001 compared to 8.0% during the comparable period of fiscal 2000. For the first six months of fiscal 2001, selling, general and administrative expenses were 8.0% of net sales compared to 8.1% during the first six months of fiscal 2000. The decreases in selling, general and administrative expenses resulted from reductions in accrued incentive compensation totaling $2.8 million for the second quarter and $4.3 million for the first six months of fiscal 2001. After adjusting for decreased incentive compensation, selling general and administrative expenses increased on a year to date basis. The increased costs were incurred to develop our service offerings and sales efforts within our developing vertical markets.

      Interest Expense

      Interest expense decreased marginally from $7.7 million during the second quarter of fiscal 2000 to $7.6 million for the second quarter of 2001. For the first six months of fiscal 2001 interest expense was $14.5 million compared to $14.6 million in 2000. Interest expense improved during 2001, despite higher average borrowings required to fund acquisitions and investments, due to improvements in interest rates on our variable rate debt outstanding.

      Net Income

      As a result of the foregoing, net income for the second quarter of fiscal 2001 decreased $1.9 million, or 45.4%, from $4.1 million in 2000, to $2.2 million in 2001. Net income for the first six months of 2001 decreased $4.9 million, or 58.6%, from $8.3 million in 2000 to $3.4 million in 2001. Our effective income tax rate was constant during the quarter and six-month periods, while minority interests and equity losses increased on a year to date basis as a result of losses reported by our equity investees during the periods.

Liquidity and Capital Resources

      Cash Flows

      General.   Historically, our principal capital requirements are for the acquisition of businesses and investments, capital expenditures, and working capital to support growth. These requirements have been met through a combination of bank debt, issuance of subordinated notes and cash from operations. Cash balances in excess of amounts required to fund daily operations are used to pay down amounts outstanding under the revolving credit portion of our credit facility.

      We typically pay our employees on a weekly basis and receive payment from our customers within invoicing terms, which is generally a 60-day period after the invoice date. However, in connection with our purchasing support services, we collect related receivables at approximately the same time we make payment to suppliers.

      Operating Activities.   Net cash provided by operating activities decreased by $27.5 million to $25.3 million for the first six months of fiscal 2001, compared to $52.8 million for the first six months of fiscal 2000. Cash provided by operations during fiscal 2000 included significant improvements in accounts receivable collections resulting from the transition of Satiz S.r.l., which was acquired in December 1999, into our cash management system. This reduction in Satiz accounts receivable resulted in a one time improvement in cash from operations of about $12 million during the first six months of fiscal 2000. Excluding the one-time improvements during fiscal 2000, cash provided by operations decreased from a combination of lower cash earnings and the net funding of accruals.

      Investing Activities.   Net cash used for investing activities decreased $46.5 million from $65.2 million for the first six months of fiscal 2000, to $18.7 million for the first six months of fiscal 2001. This included a decrease in cash used for business acquisitions of $46.2 million and a decrease of $1.0 million in capital expenditures. Cash used to acquire businesses during fiscal 2000 primarily relates to the acquisition of four companies from Corporate Staffing Resource, Inc. as detailed in Note 2 to our consolidated financial statements. Cash used to acquire businesses during fiscal 2001 includes the acquisition of a minority investment in MTE Groups LLC and the payment of contingent consideration related to certain prior year acquisitions. MTE is a certified minority enterprise offering tooling manufacturing, prototype design and build services, and placement services to automotive manufacturers and suppliers. Capital expenditures have declined commensurate with the decreased volumes of engineering and other services.

16

      Financing Activities.   Net cash used for financing activities during the first six months of fiscal 2001 was $4.3 compared to net cash provided by financing activities of $14.8 million during fiscal 2000. Financing requirements during the first six months of fiscal 2001 decreased consistent with the reduction in funds required to acquire companies. During the first quarter of fiscal 2001, a subsidiary of MSX International, Inc. completed a sale of unregistered securities to certain directors and members of management. The securities were sold in units with each unit comprised of MSX International Inc.’s Series A Preferred Stock, par value $0.01 per share, and Class A Common Stock, par value $0.01 per share. In total, 9,936 shares of Series A Preferred Stock and 482,400 shares of Class A Common Stock were sold. The shares of Series A Preferred Stock and Class A Common Stock, which comprised the units sold, were acquired from Citicorp, our majority stockholder, at a price equal to the price at which the units were offered to management. The proceeds of $3.6 million were wholly used to pay the purchase price of the shares acquired from Citicorp.

      Available Financing Sources

      Financing activities during fiscal 2000 included the issuance of an additional $25 million in term notes under our credit facility. During the first quarter of 2000, the seven-year institutional term note, with principal outstanding of $50 million as of January 2, 2000, was increased to $75 million pursuant the terms of our amended and restated credit facility. Upon completion of the syndication of the credit facility, our total borrowing capacity increased to $205 million. Proceeds from the additional term debt were used to repay amounts outstanding under the revolving credit portion of our credit facility. As of July 1, 2001, $71.9 million was available for potential future borrowings under the revolving credit portion of our amended and restated credit facility.

Forward — Looking Statements

      This quarterly report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. Actual results may vary materially from those in the forward-looking statements as a result of any number of factors, many of which are beyond the control of management. These factors include, but are not limited to, the Company’s leverage, its reliance on major customers in the automotive industry, the degree and nature of competition, the Company’s ability to recruit and place qualified personnel, risks associated with its acquisition strategy, and employment liability risk.

PART II.  OTHER INFORMATION

ITEM 6.Exhibits and Reports on Form 8-K

      (a) Exhibits:

  None.

      (b) Reports on Form 8-K:

  None.

17

SIGNATURE

      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.

Date:  August 14, 2001

MSX INTERNATIONAL, INC.
(Registrant)

By:	/s/ Frederick K. Minturn
	Frederick K. Minturn
	Executive Vice President and
	Chief Financial Officer

(Chief accounting officer
and authorized signator

18