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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 0-24484
MPS GROUP, INC.
(Exact name of registrant as specified in its charter)
| Florida | 59-3116655 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1 Independent Drive, Jacksonville, FL | 32202 | |
| (Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number including area code): (904) 360-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s class of common stock as of July 27, 2007:
102,651,491 shares of $0.01 par value common stock
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MPS Group, Inc. and Subsidiaries
Index
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| Item 1. | Financial Statements |
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(dollar amounts in thousands except share amounts) | June 30, 2007 | December 31, 2006 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 128,232 | $ | 172,692 | ||||
Short term investments | 25,525 | — | ||||||
Accounts receivable, net of allowance of $15,864 and $14,766, respectively | 317,408 | 278,438 | ||||||
Prepaid expenses | 10,616 | 7,997 | ||||||
Deferred income taxes | 1,328 | 2,997 | ||||||
Other | 20,883 | 17,798 | ||||||
Total current assets | 503,992 | 479,922 | ||||||
Furniture, equipment, and leasehold improvements, net | 33,453 | 28,472 | ||||||
Goodwill, net | 637,626 | 602,112 | ||||||
Deferred income taxes | 4,405 | 11,165 | ||||||
Other assets, net | 22,976 | 20,608 | ||||||
Total assets | $ | 1,202,452 | $ | 1,142,279 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 94,465 | $ | 81,069 | ||||
Accrued payroll and related taxes | 82,585 | 67,186 | ||||||
Income taxes payable | — | 12,788 | ||||||
Total current liabilities | 177,050 | 161,043 | ||||||
Income taxes payable | 6,129 | — | ||||||
Other | 20,219 | 17,938 | ||||||
Total liabilities | 203,398 | 178,981 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued | — | — | ||||||
Common stock, $.01 par value; 400,000,000 shares authorized; 117,079,055 and 114,902,247 shares issued, respectively | 1,171 | 1,149 | ||||||
Additional contributed capital | 725,727 | 716,980 | ||||||
Retained earnings | 374,301 | 332,777 | ||||||
Accumulated other comprehensive income | 50,669 | 42,196 | ||||||
Treasury stock, at cost (14,116,859 and 12,466,236 shares, respectively) | (152,814 | ) | (129,804 | ) | ||||
Total stockholders’ equity | 999,054 | 963,298 | ||||||
Total liabilities and stockholders’ equity | $ | 1,202,452 | $ | 1,142,279 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||
(dollar amounts in thousands except per share amounts) | June 30, 2007 | June 30, 2006 | June 30, 2007 | June 30, 2006 | ||||||||
Revenue | $ | 535,161 | $ | 468,425 | $ | 1,045,289 | $ | 907,734 | ||||
Cost of revenue | 382,543 | 337,445 | 752,809 | 659,638 | ||||||||
Gross profit | 152,618 | 130,980 | 292,480 | 248,096 | ||||||||
Operating expenses: | ||||||||||||
General and administrative | 114,370 | 97,041 | 223,086 | 186,436 | ||||||||
Depreciation and intangibles amortization | 4,678 | 3,980 | 9,159 | 7,454 | ||||||||
Total operating expenses | 119,048 | 101,021 | 232,245 | 193,890 | ||||||||
Income from operations | 33,570 | 29,959 | 60,235 | 54,206 | ||||||||
Other income, net | 2,944 | 1,158 | 4,935 | 2,734 | ||||||||
Income before provision for income taxes | 36,514 | 31,117 | 65,170 | 56,940 | ||||||||
Provision for income taxes | 13,626 | 12,109 | 24,802 | 21,922 | ||||||||
Net income | $ | 22,888 | $ | 19,008 | $ | 40,368 | $ | 35,018 | ||||
Basic net income per common share | $ | 0.23 | $ | 0.19 | $ | 0.40 | $ | 0.34 | ||||
Average common shares outstanding, basic | 100,391 | 102,038 | 100,391 | 101,880 | ||||||||
Diluted net income per common share | $ | 0.22 | $ | 0.18 | $ | 0.39 | $ | 0.33 | ||||
Average common shares outstanding, diluted | 103,110 | 105,329 | 102,968 | 105,046 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Six months ended June 30, | ||||||||
(dollar amounts in thousands) | 2007 | 2006 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 40,368 | $ | 35,018 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Deferred income taxes | 12,938 | 10,954 | ||||||
Excess tax benefit from share-based awards | (1,808 | ) | (11,704 | ) | ||||
Share-based plans expense | 3,612 | 2,741 | ||||||
Depreciation and intangibles amortization | 9,159 | 7,454 | ||||||
Changes in certain assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (30,573 | ) | (21,843 | ) | ||||
Prepaid expenses and other assets | (2,512 | ) | (2,396 | ) | ||||
Accounts payable and accrued expenses | (4,666 | ) | 2,965 | |||||
Accrued payroll and related taxes | 13,441 | 10,851 | ||||||
Other, net | (1,732 | ) | (3,664 | ) | ||||
Net cash provided by operating activities | 38,227 | 30,376 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of short term investments | (75,475 | ) | — | |||||
Proceeds from sale of short term investments | 49,950 | — | ||||||
Purchase of furniture, equipment and leasehold improvements, net of disposals | (11,551 | ) | (6,647 | ) | ||||
Purchase of businesses, including additional consideration on acquisitions, net of cash acquired | (34,647 | ) | (32,152 | ) | ||||
Net cash used in investing activities | (71,723 | ) | (38,799 | ) | ||||
Cash flows from financing activities: | ||||||||
Excess tax benefit from share-based awards | 1,808 | 11,704 | ||||||
Settlement of share-based awards | (1,943 | ) | (7,559 | ) | ||||
Repurchases of common stock | (12,678 | ) | (25,217 | ) | ||||
Discount realized on employee stock purchase plan | (17 | ) | — | |||||
Proceeds from stock options exercised | 3,387 | 13,069 | ||||||
Repayments on indebtedness | (3,073 | ) | — | |||||
Net cash used in financing activities | (12,516 | ) | (8,003 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 1,552 | 3,624 | ||||||
Net decrease in cash and cash equivalents | (44,460 | ) | (12,802 | ) | ||||
Cash and cash equivalents, beginning of period | 172,692 | 142,951 | ||||||
Cash and cash equivalents, end of period | $ | 128,232 | $ | 130,149 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands except per share amounts)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by MPS Group, Inc. (“MPS”, “we”, “us”, or “our”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Form 10-K for the year ended December 31, 2006.
The accompanying condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) which, in our opinion, are necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.
Short Term Investments
At June 30, 2007, our short term investments were comprised of auction rate securities. We classify these investments as available-for-sale securities and in accordance with Statement of Financial Accounting Standards (“SFAS”) 115,Accounting for Certain Investments in Debt and Equity Securities, we record these securities at fair value in Current Assets on our Condensed Consolidated Balance Sheets. In addition, we report changes in the fair value of these securities, if any, as unrealized holding gains and losses, net of the related tax effect, as a separate component of other comprehensive income until realized.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather clarifies the application of other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Earlier application is encouraged, provided the reporting entity has not yet issued financial statements for that fiscal year. While we are currently evaluating the impact of SFAS 157, we do not currently expect the adoption of SFAS 157 to have a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. While we are currently evaluating the impact of SFAS 159, we do not currently expect the adoption of SFAS 159 to have a material effect on our consolidated financial statements.
2. Share-Based Compensation
During the three months ended June 30, 2007, we granted approximately 1.7 million shares of restricted stock with a weighted average fair value at grant of $14.21 to non-employee directors, executives, and certain other employees. The restricted stock granted vests over four to seven years.
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
3. Income Taxes
We adopted FASB Interpretation No. (“FIN”) 48Accounting for Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on recognition, classification, and disclosure of tax positions. Upon adoption of FIN 48, we reduced our reserve for uncertain tax positions by $1.2 million and recorded this reduction as an adjustment to the opening balance of Retained earnings on our Condensed Consolidated Balance Sheets. At January 1, 2007, our unrecognized tax benefits – that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements – were $10.5 million. If recognized, $6.9 million of our unrecognized tax benefits would impact our Provision for income taxes on our Condensed Consolidated Statements of Operations and thus our effective tax rate.
During the second quarter of 2007, we settled a state income tax audit. We recorded a $257,000 tax benefit and reduced our gross unrecognized tax benefit by $3.3 million as a result of this settlement.
We classify interest on uncertain tax positions as interest expense, and we classify income tax penalties as a component of income tax expense. Prior to the adoption of FIN 48, both interest and penalties were accrued as a component of income tax expense. At January 1, 2007, before any tax benefits, our accrued interest on unrecognized tax benefits was $6.2 million and related accrued penalties were $130,000.
In the second quarter of 2007, we accrued approximately $188,000 of additional interest expense and reversed approximately $1,021,000 of accrued interest for the settlement of the above referenced state income tax audit. Accrued interest is in Accounts payable and accrued expenses on our Condensed Consolidated Balance Sheets at June 30, 2007.
We are subject to periodic review by federal, foreign, state and local taxing authorities in the ordinary course of business. With few exceptions, we are no longer subject to examination by these taxing authorities for years prior to 2002. Currently, we have no outstanding income tax audits with the Internal Revenue Service. Our federal income tax returns have been audited or surveyed by the Internal Revenue Service through 2002. Many of our UK subsidiaries have been audited through 2003. HM Revenue and Customs is currently conducting an income tax audit of our UK subsidiaries for 2004. Lastly, we generally have several state income tax audits throughout the year since we operate in a multi-state environment. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
4. Net Income per Common Share
The calculation of basic net income per common share and diluted net income per common share is presented below:
| Three Months Ended | Six Months Ended | |||||||||||
(dollar amounts in thousands except per share amounts) | June 30, 2007 | June 30, 2006 | June 30, 2007 | June 30, 2006 | ||||||||
Basic income per common share computation: | ||||||||||||
Net income | $ | 22,888 | $ | 19,008 | $ | 40,368 | $ | 35,018 | ||||
Basic average common shares outstanding | 100,391 | 102,038 | 100,391 | 101,880 | ||||||||
Incremental shares from assumed exercise of stock options and restricted stock awards | 2,719 | 3,291 | 2,577 | 3,166 | ||||||||
Diluted average common shares outstanding | 103,110 | 105,329 | 102,968 | 105,046 | ||||||||
Basic net income per common share | $ | 0.23 | $ | 0.19 | $ | 0.40 | $ | 0.34 | ||||
Diluted net income per common share | $ | 0.22 | $ | 0.18 | $ | 0.39 | $ | 0.33 | ||||
Options to purchase approximately 130,000 and 131,000 shares of common stock that were outstanding during the three months ended June 30, 2007 and 2006, respectively, were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common shares for the respective periods. For the six months ended June 30, 2007 and 2006, options to purchase approximately 122,000 and 148,000 shares of common stock, respectively, were not included in the computation of diluted earnings per share for the aforementioned reason.
5. Commitments and Contingencies
We are a party to a number of lawsuits and claims arising out of the ordinary conduct of our business. In our opinion, based on the advice of in-house and external legal counsel, the lawsuits and claims pending are not likely to have a material adverse effect on us, our financial position, results of operations, or cash flows.
6. Segment Reporting
We disclose segment information in accordance with SFAS 131,Disclosure About Segments of an Enterprise and Related Information.We have four reportable segments: North American Professional Services, European Professional Services, North American Information Technology (“IT”) Services, and European IT Services. Our reportable segments offer different services, have different client bases, experience differing economic characteristics, and are managed separately as each requires different resources and marketing strategies. Our segments’ results include the results from acquisitions named in Footnote 3 to our Form 10-K for the year ended December 31, 2006, along with the results from acquisitions named in Footnote 8 to this Form 10-Q. We evaluate segment performance based on revenues, gross profit, and income before provision for income taxes. We do not allocate income taxes, interest or unusual items to the segments. In addition, we do not report total assets by segment.
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
The accounting policies of the segments are consistent with those described in the summary of significant accounting policies in Footnote 2 to our Form 10-K for the year ended December 31, 2006, and all intersegment sales and transfers are eliminated. In addition, no one customer represents more than 5% of our overall revenue.
The following tables summarize performance, accounts receivable, and long-lived assets by segment, and revenue by geographic location:
| Three Months Ended | Six Months Ended | |||||||||||||||
(dollar amounts in thousands) | June 30, 2007 | June 30, 2006 | June 30, 2007 | June 30, 2006 | ||||||||||||
Revenue | ||||||||||||||||
North American Professional Services | $ | 173,317 | $ | 157,683 | $ | 336,682 | $ | 304,952 | ||||||||
European Professional Services | 127,611 | 106,308 | 253,566 | 204,001 | ||||||||||||
North American IT Services | 160,175 | 140,704 | 308,627 | 272,229 | ||||||||||||
European IT Services | 74,058 | 63,730 | 146,414 | 126,552 | ||||||||||||
Total revenue | $ | 535,161 | $ | 468,425 | $ | 1,045,289 | $ | 907,734 | ||||||||
Gross profit | ||||||||||||||||
North American Professional Services | $ | 54,917 | $ | 47,395 | $ | 105,319 | $ | 91,878 | ||||||||
European Professional Services | 37,598 | 31,564 | 73,012 | 58,522 | ||||||||||||
North American IT Services | 47,118 | 41,871 | 89,067 | 78,043 | ||||||||||||
European IT Services | 12,985 | 10,150 | 25,082 | 19,653 | ||||||||||||
Total gross profit | $ | 152,618 | $ | 130,980 | $ | 292,480 | $ | 248,096 | ||||||||
Income before provision for income taxes | ||||||||||||||||
North American Professional Services | $ | 17,738 | $ | 14,550 | $ | 32,748 | $ | 27,872 | ||||||||
European Professional Services | 8,453 | 8,664 | 16,557 | 15,888 | ||||||||||||
North American IT Services | 11,922 | 12,328 | 21,004 | 21,386 | ||||||||||||
European IT Services | 2,976 | 1,638 | 4,442 | 3,005 | ||||||||||||
| 41,089 | 37,180 | 74,751 | 68,151 | |||||||||||||
Corporate expenses (1) | (7,519 | ) | (7,221 | ) | (14,516 | ) | (13,945 | ) | ||||||||
Other income, net | 2,944 | 1,158 | 4,935 | 2,734 | ||||||||||||
Total income before provision for income taxes | $ | 36,514 | $ | 31,117 | $ | 65,170 | $ | 56,940 | ||||||||
Geographic Areas | ||||||||||||||||
Revenue | ||||||||||||||||
North America | $ | 333,492 | $ | 298,387 | $ | 645,309 | $ | 577,181 | ||||||||
Europe | 201,669 | 170,038 | 399,980 | 330,553 | ||||||||||||
Total revenue | $ | 535,161 | $ | 468,425 | $ | 1,045,289 | $ | 907,734 | ||||||||
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
(dollar amounts in thousands) | June 30, 2007 | December 31, 2006 | ||||
Accounts receivable, net | ||||||
North American Professional Services | $ | 93,530 | $ | 85,477 | ||
European Professional Services | 60,701 | 47,084 | ||||
North American IT Services | 113,198 | 98,041 | ||||
European IT Services | 49,979 | 47,836 | ||||
Total accounts receivable, net | $ | 317,408 | $ | 278,438 | ||
Long-lived assets | ||||||
North American Professional Services | $ | 191,325 | $ | 178,922 | ||
European Professional Services | 152,325 | 143,640 | ||||
North American IT Services | 276,785 | 261,652 | ||||
European IT Services | 40,505 | 41,887 | ||||
| 660,940 | 626,101 | |||||
Corporate | 10,139 | 4,483 | ||||
Total long-lived assets | $ | 671,079 | $ | 630,584 | ||
| (1) | Corporate expenses include unallocated expenses not directly related to the segments’ operations. |
7. Comprehensive Income
We disclose other comprehensive income in accordance with SFAS 130,Reporting Comprehensive Income. Comprehensive income includes unrealized gains and losses on foreign currency translation adjustments. A summary of comprehensive income for the three and six months ended June 30, 2007 and 2006 is as follows:
| Three Months Ended | Six Months Ended | |||||||||||
| June 30, 2007 | June 30, 2006 | June 30, 2007 | June 30, 2006 | |||||||||
Net income | $ | 22,888 | $ | 19,008 | $ | 40,368 | $ | 35,018 | ||||
Unrealized gain on foreign currency translation adjustments (1) | 6,979 | 14,592 | 8,473 | 16,788 | ||||||||
Comprehensive income | $ | 29,867 | $ | 33,600 | $ | 48,841 | $ | 51,806 | ||||
| (1) | The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. |
8. Business Combinations
In the six months ended June 30, 2007, we acquired two legal staffing businesses, Esquire Search, Ltd. and Davidson Personnel, Inc., a marketing staffing and solution business, The Paladin Companies, Inc., and a recruitment process outsourcing business, Employer Services Corporation. Purchase consideration totaled $33.3 million, of which $30.3 million was paid in cash at closing.
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MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
9. Goodwill And Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for 2007 are as follows:
| Professional Services | IT Services | Total | |||||||||||||
(dollar amounts in thousands) | North America | Europe | North America | Europe | |||||||||||
Balance as of December 31, 2006 | $ | 175,692 | $ | 137,986 | $ | 252,156 | $ | 36,278 | $ | 602,112 | |||||
Acquisitions | 6,732 | 43 | 5,189 | — | 11,964 | ||||||||||
Effect of foreign currency exchange rates | — | 624 | 80 | 164 | 868 | ||||||||||
Balance as of March 31, 2007 | $ | 182,424 | $ | 138,653 | $ | 257,425 | $ | 36,442 | $ | 614,944 | |||||
Acquisitions | 4,787 | 5,303 | 8,525 | — | 18,615 | ||||||||||
Effect of foreign currency exchange rates | — | 2,706 | 650 | 711 | 4,067 | ||||||||||
Balance as of June 30, 2007 | $ | 187,211 | $ | 146,662 | $ | 266,600 | $ | 37,153 | $ | 637,626 | |||||
We allocated the purchase price of acquisitions in accordance with SFAS 141,Business Combinations. At June 30, 2007 and December 31, 2006, there was $6.3 million and $6.0 million, respectively, of identifiable intangible assets on our Condensed Consolidated Balance Sheets relating to our acquisitions. Identifiable intangible assets relate primarily to the value of the acquired business’ customer relationships and trade names at the acquisition date.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
References to “we”, “our”, “us”, or “MPS” in this Quarterly Report on Form 10-Q refer to MPS Group, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to certain risks, uncertainties or assumptions and may be affected by certain factors, including but not limited to the specific factors discussed in our Form 10-K for the year ended December 31, 2006 in Part I, Item 1A under ‘Risk Factors,’ in Part II, Item 5 under ‘Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities’, and Part II, Item 7 under ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’ In some cases, you can identify forward-looking statements by terminology such as ‘may,’ ‘should,’ ‘could,’ ‘expects,’ ‘plans,’ ‘indicates,’ ‘projects,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘appears,’ ‘predicts,’ ‘potential,’ ‘continues,’ ‘can,’ ‘hopes,’ ‘perhaps,’ ‘would,’ or ‘become,’ or the negative of these terms or other comparable terminology. In addition, except for historical facts, all information provided in Part II, Item 7A of our Form 10-K for the year ended December 31, 2006, under ‘Quantitative and Qualitative Disclosures About Market Risk’ as referenced by Item 3 herein should be considered forward-looking statements. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of MPS may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of our management and on information currently available to such management. Forward looking statements speak only as of the date they are made, and MPS undertakes no obligation to publicly update any of them in light of new information or future events. Undue reliance should not be placed on such forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of performance.
Executive Summary
We are a leading provider of business services with over 215 offices throughout the United States, Canada, the United Kingdom, and continental Europe. We deliver specialty staffing, consulting and business solutions to virtually all industries in the following disciplines, through the following primary brands:
Discipline | Brand(s) | |
Information Technology (IT) Services | Modis® | |
Accounting and Finance | Badenoch & Clark® , Accounting Principals® | |
Engineering | Entegee® | |
Legal | Special Counsel® | |
IT Solutions | Idea Integration® | |
Health Care | Soliant Health® | |
Work Force Solutions | Beeline® |
We present the financial results of the above brands under our four reporting segments: North American Professional Services, European Professional Services, North American IT Services and European IT Services. The accounting policies of these segments are consistent with those described in Part II, Item 7 under ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ to our Form 10-K for the year ended December 31, 2006.
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For the quarter ended June 30, 2007, our consolidated revenue increased 14% and our consolidated operating income increased 12% compared to the second quarter of the prior year. Revenue grew across all four of our segments compared to the second quarter of 2006. We believe this growth was attributable to the performance of our sales and recruiting staff, acquisitions, and favorable macroeconomic conditions for business services within our disciplines in both the United States and abroad. In addition, we benefited from the effects of changes in foreign currency, which contributed 3.5% of our consolidated revenue increase compared to the second quarter of the prior year. For the third quarter of 2007, we continue to believe we will experience future revenue growth.
We target potential acquisitions that will either increase the geographic presence of our businesses or offer complementary service offerings. Our target acquisitions have generally ranged from $5 million to $25 million in annual revenue. During 2006 and through June 30, 2007, we acquired the following businesses:
Name/Description | Segment | Business | Year | |||
Davidson Personnel (1) | North American Professional | Legal Staffing | 2007 | |||
Esquire Search (1) | North American Professional | Legal Staffing | 2007 | |||
Garelli Wong (1) | North American Professional | Accounting and Finance Staffing | 2006 | |||
Pharmacy Staffing Unit of Cardinal Health (1) | North American Professional | Pharmacy Staffing | 2006 | |||
Employer Services Corporation (2) | North American IT | Recruitment Process Outsourcing | 2007 | |||
The Paladin Companies (2) | North American IT | Marketing Staffing and Solutions | 2007 | |||
Integrated Performance Systems (2) | North American IT | Workforce Solutions | 2006 | |||
Chronos International (3) | European Professional | European Permanent Placement | 2006 | |||
Corinthe Holding BV (3) | European Professional | European Staffing | 2006 | |||
Netlogic (4) | European IT | European IT Staffing | 2006 |
| (1) | Referred to herein as the “North American Professional Acquisitions.” |
| (2) | Referred to herein as the “North American IT Acquisitions.” |
| (3) | Referred to herein as the “European Professional Acquisitions.” |
| (4) | Referred to herein as the “European IT Acquisition.” |
We continue to believe that long-term opportunities for growth in the professional services market are more robust than in the IT services market, and as a result, continue to diversify our revenue base. Revenue from our Professional Services division represented 56% of consolidated revenue in the three months ended June 30, 2007.
We continue to look for opportunities to increase gross margin along with increasing operating leverage within each segment. We were able to increase our staffing gross margin 10 basis points to 24.3% in the second quarter of 2007 from 24.2% in the year earlier period. The staffing gross margins have increased in our North American Professional Services and European IT Services segments, and have decreased in our North American IT and European Professional Services segments. As we review our gross margin trends for the three months ended June 30, 2007, gross margin has been aided by the percentage of revenue attributable to direct hire fees within each segment. Direct hire fees represented 5.5% of revenue in the second quarter of 2007, up from 4.9% in the year earlier period. The increase in direct hire fees allowed our gross margin to reach 28.5% in the second quarter of 2007, up from 28.0% in the year earlier period.
The following detailed analysis of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and the 2006 Consolidated Financial Statements and related notes included in our Form 10-K for the year ended December 31, 2006.
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Results Of Operations For The Three and Six Months Ended June 30, 2007 and 2006—Consolidated
Consolidated revenue was $535.2 million and $468.4 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 14.3%. Consolidated revenue was $1,045.3 million and $907.7 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 15.2%.
Consolidated gross profit was $152.6 million and $131.0 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 16.5%. Consolidated gross margin was 28.5% and 28.0% in the three months ended June 30, 2007 and 2006, respectively. Consolidated gross profit was $292.5 million and $248.1 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 17.9%. Consolidated gross margin was 28.0% and 27.3% in the six months ended June 30, 2007 and 2006, respectively.
Consolidated operating expenses were $119.0 million and $101.0 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 17.8%. General and administrative (“G&A”) expenses, which are included in operating expenses, were $114.4 million and $97.0 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 17.9%. Consolidated operating expenses were $232.2 million and $193.9 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 19.8%. G&A expenses were $223.1 million and $186.4 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 19.7%.
Unallocated corporate expenses, included in consolidated operating expenses, pertain to certain functions such as executive management, accounting, administration, tax, and treasury that are not attributable to our operating units. Unallocated corporate expense was $7.5 million and $7.2 million in the three months ended June 30, 2007 and 2006, respectively, increasing 4.2% in the three months ended June 30, 2007. As a percentage of revenue, unallocated corporate expense was 1.4% and 1.5% for the three months ended June 30, 2007 and 2006, respectively. Unallocated corporate expense was $14.5 million and $13.9 million in the six months ended June 30, 2007 and 2006, respectively, increasing 4.3% in the six months ended June 30, 2007. As a percentage of revenue, unallocated corporate expense was 1.4% and 1.5% for the six months ended June 30, 2007 and 2006, respectively.
Consolidated operating income was $33.6 million and $30.0 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 12.0%. Operating income as a percentage of revenue was 6.3% and 6.4% for the three months ended June 30, 2007 and 2006, respectively. Consolidated operating income was $60.2 million and $54.2 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 11.1%. Operating income as a percentage of revenue was 5.8% and 6.0% for the six months ended June 30, 2007 and 2006, respectively.
Consolidated other income, net, was $2.9 million and $1.2 million in the three months ended June 30, 2007 and 2006, respectively. Consolidated other income, net, was $4.9 million and $2.7 million in the six months ended June 30, 2007 and 2006, respectively. Included in the three months ended June 30, 2007 was $1.0 million interest benefit from the settlement of a state income tax audit. Other income, net, primarily includes interest income related to our investments and cash on hand, net of interest expense related to notes issued in connection with acquisitions and fees and interest on our credit facility.
The consolidated income tax provision was $13.6 million and $12.1 million in the three months ended June 30, 2007 and 2006, respectively. The effective tax rate was 37.3% and 38.9% in the three months ended June 30, 2007 and 2006, respectively. The consolidated income tax provision was $24.8 million and $21.9 million in the six months ended June 30, 2007 and 2006, respectively. The effective tax rate was 38.1% and 38.5% in the six months ended June 30, 2007 and 2006, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 2007 was due primarily to the settlement of a state income tax audit.
Consolidated net income was $22.9 million and $19.0 million in the three months ended June 30, 2007 and 2006, respectively. Consolidated net income was $40.4 million and $35.0 million in the six months ended June 30, 2007 and 2006, respectively.
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Results Of Operations For The Three and Six Months Ended June 30, 2007 and 2006— By Business Segment
Professional Services Division
North American Professional Services Segment
Revenue in our North American Professional Services segment was $173.3 million and $157.7 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 9.9%. Revenue in our North American Professional Services segment was $336.7 million and $305.0 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 10.4%. North American Professional Acquisitions contributed $2.1 million and $11.0 million in revenue in the three and six months ended June 30, 2007, respectively. The increase in revenue for the three and six months ended June 30, 2007 was due primarily to revenue from internal growth in Entegee, and acquisitions in Special Counsel and Soliant Health.
Revenue contribution from the North American Professional Services businesses for the three and six months ended June 30, 2007 and 2006 were as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Entegee | 44.9 | % | 44.1 | % | 44.9 | % | 45.1 | % | ||||
Special Counsel | 23.3 | 22.0 | 22.5 | 22.3 | ||||||||
Accounting Principals | 16.0 | 17.1 | 16.3 | 17.1 | ||||||||
Soliant Health | 15.8 | 16.8 | 16.3 | 15.5 | ||||||||
Gross profit in our North American Professional Services segment was $54.9 million and $47.4 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 15.8%. Gross profit in our North American Professional Services segment was $105.3 million and $91.9 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 14.6%. North American Professional Acquisitions contributed $1.0 million and $4.2 million in gross profit in the three and six months ended June 30, 2007, respectively. Gross margin in our North American Professional Services segment was 31.7% and 30.1% in the three months ended June 30, 2007 and 2006, respectively, and 31.3% and 30.1% in the six months ended June 30, 2007 and 2006, respectively. The increase in gross margin in both the three and six months ended June 30, 2007 was due to a combination of improved margins from the segment’s staffing services and an increased level of direct hire fees. Direct hire fees, which generate a higher margin, increased to 6.4% of the segment’s revenue in the three months ended June 30, 2007, from 5.4% in the year earlier period, and increased to 6.4% of the segment’s revenue in the six months ended June 30, 2007, from 5.7% in the year earlier period.
G&A expenses in our North American Professional Services segment were $35.9 million and $31.7 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 13.2%. As a percentage of revenue, G&A expenses were 20.7% and 20.1% in the three months ended June 30, 2007 and 2006, respectively. G&A expenses in our North American Professional Services segment were $70.0 million and $61.7 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 13.5%. As a percentage of revenue, G&A expenses were 20.8% and 20.2% in the six months ended June 30, 2007 and 2006, respectively. The increase in G&A expenses for the three and six months ended June 30, 2007 was due primarily to the increase in compensation expense related to the increases in the segment’s revenue and additional G&A expenses from the North American Professional Acquisitions.
Operating income in our North American Professional Services segment was $17.7 million and $14.6 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 21.2%. Operating income as a percentage of revenue was 10.2% and 9.3% in the three months ended June 30, 2007 and 2006, respectively. Operating income in our North American Professional Services segment was $32.7 million and $27.9 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 17.2%. Operating income as a percentage of revenue was 9.7% and 9.1% in the six months ended June 30, 2007 and 2006, respectively.
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European Professional Services Segment
Revenue in our European Professional Services segment was $127.6 million and $106.3 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 20.0%. Revenue in our European Professional Services segment was $253.6 million and $204.0 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 24.3%. Changes in foreign currency exchange rates increased revenue by $10.6 million and $23.8 million from the three and six months ended June 30, 2006 to the three and six months ended June 30, 2007, respectively. European Professional Acquisitions contributed $10.1 million in revenue in the six months ended June 30, 2007. Apart from the effect of changes in foreign currency exchange rates and the execution of our acquisition strategy, the increase in revenue for the three and six months ended June 30, 2007 was due to the increased demand for our services.
Gross profit in our European Professional Services segment was $37.6 million and $31.6 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 19.0%. Gross profit in our European Professional Services segment was $73.0 million and $58.5 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 24.8%. Changes in foreign currency exchange rates increased gross profit by $3.1 million and $6.9 million from the three and six months ended June 30, 2006 to the three and six months ended June 30, 2007, respectively. European Professional Acquisitions contributed $4.7 million in gross profit in the six months ended June 30, 2007. Gross margin in our European Professional Services segment was 29.5% and 29.7% in the three months ended June 30, 2007 and 2006, respectively, and 28.8% and 28.7% in the six months ended June 30, 2007 and 2006, respectively. Although staffing margins decreased in both the three and six months ended June 30, 2007, the increase in direct hire fees more than offset the decrease in gross margin from the segment’s staffing services in the six months ended June 30, 2007. Direct hire fees increased to 10.5% of the segment’s revenue for the three months ended June 30, 2007, from 9.7% in the year earlier period, and increased to 9.6% of the segment’s revenue for the six months ended June 30, 2007, from 8.4% in the year earlier period.
G&A expenses in our European Professional Services segment were $28.3 million and $21.9 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 29.2%. As a percentage of revenue, G&A expenses were 22.2% and 20.6% in the three months ended June 30, 2007 and 2006, respectively. G&A expenses in our European Professional Services segment were $54.7 million and $41.1 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 33.1%. As a percentage of revenue, G&A expenses were 21.6% and 20.1% in the six months ended June 30, 2007 and 2006, respectively. The increase in G&A expenses for the three and six months ended June 30, 2007, was due primarily to our investment in additional sales and recruiting personnel, and to a lesser extent for the six months ended June 30, 2007, additional G&A expenses from the European Professional Acquisitions.
Operating income in our European Professional Services segment was $8.5 million and $8.7 million in the three months ended June 30, 2007 and 2006, respectively, representing a decrease of 2.3%. Operating income as a percentage of revenue was 6.7% and 8.2% in the three months ended June 30, 2007 and 2006, respectively. Operating income in our European Professional Services segment was $16.6 million and $15.9 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 4.4%. Operating income as a percentage of revenue was 6.5% and 7.8% in the six months ended June 30, 2007 and 2006, respectively.
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IT Services Division
North American IT Services Segment
Revenue in our North American IT Services segment was $160.2 million and $140.7 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 13.9%. Revenue in our North American IT Services segment was $308.6 million and $272.2 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 13.4%. North American IT Acquisitions contributed $5.7 million and $8.2 million in revenue in the three and six months ended June 30, 2007, respectively. The increase in revenue for the three and six months ended June 30, 2007 was due primarily to increased spending on IT initiatives by our clients and the realization of our prior investments in additional sales and recruiting personnel.
Revenue within the North American IT Services segment is generated primarily fromModis, as it generated 81.3% and 83.6% of the segment’s revenue for the three months ended June 30, 2007 and 2006, respectively.Idea Integration andBeeline are responsible for the remainder of this segment’s revenue.
Gross profit in our North American IT Services segment was $47.1 million and $41.9 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 12.4%. Gross profit in our North American IT Services segment was $89.1 million and $78.0 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 14.2%. North American IT Acquisitions contributed $3.1 million and $4.8 million in gross profit in the three and six months ended June 30, 2007, respectively. Gross margin in our North American IT Services segment was 29.4% and 29.8% in the three months ended June 30, 2007 and 2006, respectively. The decrease in gross margin for the three months ended June 30, 2007 was due primarily to an increased contribution from higher volume accounts, which traditionally generate lower margins. Gross margin in our North American IT Services segment was 28.9% and 28.7% in the six months ended June 30, 2007 and 2006, respectively. Direct hire fees were 1.8% of the segment’s revenue for the three months ended June 30, 2007 and 2006, and increased to 1.6% of the segment’s revenue for the six months ended June 30, 2007, from 1.5% in the year earlier period.
G&A expenses in our North American IT Services segment were $33.2 million and $28.0 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 18.6%. As a percentage of revenue, G&A expenses were 20.7% and 19.9% in the three months ended June 30, 2007 and 2006, respectively. G&A expenses in our North American IT Services segment were $64.3 million and $53.7 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 19.7%. As a percentage of revenue, G&A expenses were 20.8% and 19.7% in the six months ended June 30, 2007 and 2006, respectively. The increase in the segment’s G&A expenses for the three and six months ended June 30, 2007, was due primarily to our investment in additional sales and recruiting personnel, the increase in compensation expense related to the increases in the segment’s revenue, and additional G&A expenses from the North American IT Acquisitions.
Operating income in our North American IT Services segment was $11.9 million and $12.3 million in the three months ended June 30, 2007 and 2006, respectively, representing a decrease of 3.6%. Operating income as a percentage of revenue was 7.4% and 8.7% in the three months ended June 30, 2007 and 2006, respectively. Operating income in our North American IT Services segment was $21.0 million and $21.4 million in the six months ended June 30, 2007 and 2006, respectively, representing a decrease of 1.9%. Operating income as a percentage of revenue was 6.8% and 7.9% in the six months ended June 30, 2007 and 2006, respectively.
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European IT Services Segment
Revenue in our European IT Services segment was $74.1 million and $63.7 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 16.3%. Revenue in our European IT Services segment was $146.4 million and $126.6 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 15.6%. Changes in foreign currency exchange rates increased revenue by $6.2 million and $13.8 million from the three and six months ended June 30, 2006 to the three and six months ended June 30, 2007. The European IT Acquisition contributed $1.4 million and $2.7 million in revenue in the three and six months ended June 30, 2007, respectively.
Gross profit in our European IT Services segment was $13.0 million and $10.2 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 27.5%. Gross profit in our European IT Services segment was $25.1 million and $19.7 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 27.4%. Changes in foreign currency exchange rates increased gross profit by $1.1 million and $2.4 million from the three and six months ended June 30, 2006 to the three and six months ended June 30, 2007, respectively. The European IT Acquisition contributed approximately $500,000 and $800,000 in gross profit in the three and six months ended June 30, 2007. Gross margin in our European IT Services segment was 17.5% and 16.0% in the three months ended June 30, 2007 and 2006, respectively, and 17.1% and 15.6% in the six months ended June 30, 2007 and 2006, respectively. The increase in gross margin for the three and six months ended June 30, 2007 was due primarily to a combination of improved margins from the segment’s staffing services and an increase in direct hire fees. Direct hire fees increased to 3.2% of the segment’s revenue for the three months ended June 30, 2007, from 2.8% in the year earlier period, and increased to 3.3% of the segment’s revenue for the six months ended June 30, 2007, from 2.5% in the year earlier period.
G&A expenses in our European IT Services segment were $9.5 million and $8.2 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 15.9%. As a percentage of revenue, G&A expenses were 12.8% and 12.9% in the three months ended June 30, 2007 and 2006, respectively. G&A expenses in our European IT Services segment were $19.5 million and $16.0 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 21.9%. As a percentage of revenue, G&A expenses were 13.3% and 12.6% in the six months ended June 30, 2007 and 2006, respectively. Apart from the effect of changes in foreign currency exchange rates, the increase in G&A expenses for the three and six months ended June 30, 2007 was due primarily to a combination of the increase in compensation expense related to the increases in the segment’s revenue and additional G&A expenses from the European IT Acquisition.
Operating income in our European IT Services segment was $3.0 million and $1.6 million in the three months ended June 30, 2007 and 2006, respectively, representing an increase of 87.5%. Operating income as a percentage of revenue was 4.0% and 2.5% in the three months ended June 30, 2007 and 2006, respectively. Operating income in our European IT Services segment was $4.4 million and $3.0 million in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 46.7%. Operating income as a percentage of revenue was 3.0% and 2.4% in the six months ended June 30, 2007 and 2006, respectively.
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Liquidity and Capital Resources
Overview
We intend to generate stockholder value through strategic investments in our existing businesses, acquisitions, and stock repurchases, as appropriate. Changes to our liquidity have historically been due primarily to the net effect of: (i) funds generated by operations and proceeds from stock option exercises; and (ii) funds used for operations, acquisitions, repurchases of common stock and capital expenditures. While there can be no assurances in this regard, we believe that funds provided by operations and our current cash and short term investment balances will be sufficient to meet our presently anticipated needs for working capital, capital expenditures, repurchases of common stock and acquisitions for at least the next 12 months.
In the six months ended June 30, 2007, cash of $84.2 million used in investing and financing activities exceeded the $39.8 million of cash provided from operating activities and the effect of changes in foreign currency exchange rates. Our net decrease in cash in the six months ended June 30, 2007 was due primarily to acquisitions, our purchases of short term investments, and repurchases of our common stock. In the six months ended June 30, 2006, cash of $46.8 million used in investing and financing activities exceeded the $34.0 million of cash provided from operating activities and the effect of changes in foreign currency exchange rates. The table below highlights working capital, cash and cash equivalents and short term investments as of June 30, 2007 and December 31, 2006, respectively:
(dollar amounts in millions) | June 30, 2007 | December 31, 2006 | ||||
Working capital | $ | 326.9 | $ | 318.9 | ||
Cash and cash equivalents and short term investments | $ | 153.8 | $ | 172.7 | ||
Operating cash flows
For the six months ended June 30, 2007 and 2006, we generated $38.2 million and $30.4 million of cash flow from operations, respectively. The increase in cash flow from operations was due primarily to a higher level of earnings.
Investing cash flows
For the six months ended June 30, 2007, we used $71.7 million of cash for investing activities, including $34.6 million for acquisitions, net of cash acquired, $25.5 million for short term investments, net of proceeds, and $11.6 million for capital expenditures. At June 30, 2007, our short term investments were comprised of auction rate securities. We classify these investments as available-for-sale securities and in accordance with Statement of Financial Accounting Standards (“SFAS”) 115,Accounting for Certain Investments in Debt and Equity Securities, we record these securities at fair value in Current Assets on our Condensed Consolidated Balance Sheets. In addition, we report changes in the fair value of these securities, if any, as unrealized holding gains and losses, net of the related tax effect, as a separate component of other comprehensive income until realized.
For the six months ended June 30, 2006, we used $38.8 million of cash for investing activities, including $32.2 million for acquisitions, net of cash acquired, and $6.6 million for capital expenditures.
We anticipate that capital expenditures for furniture and equipment, including improvements to our management information and operating systems, for the remainder of 2007 will be approximately $8.0 million.
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Financing cash flows
For the six months ended June 30, 2007, we used $12.5 million of cash for financing activities, consisting primarily of $12.7 million for the repurchase of common stock. For the six months ended June 30, 2006, we used $8.0 million of cash from financing activities, consisting primarily of $25.2 million for the repurchase of common stock and $7.6 million for the settlement of share-based awards, net of $13.1 million generated from stock option exercises and $11.7 million of excess tax benefits from share-based awards.
Our Board of Directors has authorized certain repurchases of our common stock. Based on trade date, we repurchased 767,000 shares at an aggregate cost of $10.4 million for the second quarter of 2007, of which $8.4 million was settled in July. Subsequent to June 30, 2007, we repurchased an additional 360,000 shares at an aggregate cost of $4.9 million for a total, as of July 27, 2007, of 13.9 million shares at a cost of $148.2 million under this plan. We anticipate that we will continue to repurchase shares under this authorization in the future, to the extent we deem appropriate, as we have approximately $19.2 million remaining under this authorization as of July 27, 2007. There is no expiration date for this authorization.
Indebtedness of the Company
In the fourth quarter of 2006, we closed on a $250 million revolving credit facility which replaced an expiring $150 million facility. Our credit facility is syndicated to a group of leading financial institutions and contains certain financial and non-financial covenants relating to our operations, including maintaining certain financial ratios. Repayment of the credit facility is guaranteed by substantially all of our subsidiaries. The facility expires in November 2011. To date, there have been no borrowings outstanding under this facility, other than $7.2 million of standby letters of credit for certain operational matters.
Seasonality
Our quarterly operating results are affected by the number of billing days in the quarter and the seasonality of our customers’ businesses. Demand for our services has historically been lower during the calendar year-end, as a result of holidays, through February of the following year, as our customers approve annual budgets. Extreme weather conditions may also adversely affect demand in the early part of the year as certain of our clients��� facilities are located in geographic areas subject to closure or reduced hours due to inclement weather. In addition, we experience an increase in our cost of sales and a corresponding decrease in gross profit and gross margin in the first fiscal quarter of each year, as a result of certain state and federal employment tax resets.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather clarifies the application of other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Earlier application is encouraged, provided the reporting entity has not yet issued financial statements for that fiscal year. While we are currently evaluating the impact of SFAS 157, we do not currently expect the adoption of SFAS 157 to have a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. While we are currently evaluating the impact of SFAS 159, we do not currently expect the adoption of SFAS 159 to have a material effect on our consolidated financial statements.
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| Item 3. | Quantitative And Qualitative Disclosures About Market Risk |
For information regarding our exposure to certain market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A to our Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on February 28, 2007. There were no material changes to our market risk for the three and six months ended June 30, 2007.
| Item 4. | Controls And Procedures |
We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the supervision and participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
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| Item 1A. | Risk Factors |
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing MPS. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Repurchases of Equity Securities
Our Board of Directors has authorized certain repurchases of our common stock. The following table sets forth information about our common stock repurchases for the three months ended June 30, 2007. As of July 27, 2007, we have repurchased a total of 13.9 million shares at a cost of $148.2 million under this plan. We anticipate that we will continue to purchase shares under this authorization in the future as we have approximately $19.2 million remaining under this authorization as of July 27, 2007. There is no expiration date for this authorization.
Period (1) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased Part of Publicly Announced Plans or Programs | Maximum Number (or Plans or Programs | ||||||
April 1, 2007 to April 30, 2007 | — | $ | — | — | $ | 34,562,751 | ||||
May 1, 2007 to May 31, 2007 | — | $ | — | — | $ | 34,562,751 | ||||
June 1, 2007 to June 30, 2007 | 766,800 | $ | 13.58 | 766,800 | $ | 24,149,960 | ||||
Total | 766,800 | $ | 13.58 | 766,800 | $ | 24,149,960 | ||||
| (1) | Based on trade date, not settlement date. |
| Item 4. | Submission of Matters to a Vote of Security Holders |
The Annual Meeting of the Company’s shareholders was held on May 17, 2007. Proxies were solicited from shareholders of record as of March 31, 2007, and filed on the close of business on April 20, 2007. On March 31, 2007, there were 101,768,167 shares outstanding and entitled to vote at the Annual Meeting. At the Annual Meeting, the following proposals were submitted to a shareholder vote:
1. Approval of a proposal to elect the following individuals as directors of the Company:
Name | For | Withhold Authority | ||
Derek E. Dewan | 92,669,600 | 1,092,183 | ||
Timothy D. Payne | 93,132,726 | 629,057 | ||
Peter J. Tanous | 87,932,463 | 5,829,320 | ||
T. Wayne Davis | 92,529,539 | 1,232,244 | ||
John R. Kennedy | 92,528,084 | 1,233,699 | ||
Michael D. Abney | 92,751,799 | 1,009,984 | ||
William M. Isaac | 92,531,643 | 1,230,140 | ||
Darla D. Moore | 93,134,743 | 627,040 | ||
Arthur B. Laffer | 92,326,093 | 1,435,690 |
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| Item 6. | Exhibits |
A. Exhibits Required by Item 601 of Regulation S-K:
See Index of Exhibits.
| Exhibit No. | Description | |
| 10* | 2004 Equity Incentive Plan – Form of Restricted Stock Agreement. | |
| 31.1* | Certification of Timothy D. Payne pursuant to Rule 13a-14(a). | |
| 31.2* | Certification of Robert P. Crouch pursuant to Rule 13a-14(a). | |
| 32.1* | Certification of Timothy D. Payne pursuant to 18 U.S.C. Section 1350. | |
| 32.2* | Certification of Robert P. Crouch pursuant to 18 U.S.C. Section 1350. | |
| * | Copy of Exhibit is filed herewith. |
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Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MPS GROUP, INC. | ||
| By: | /S/ ROBERT P. CROUCH | |
Robert P. Crouch Senior Vice President, Treasurer, and | ||
Date: August 7, 2007
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