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 September 30, 2008
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
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 October 24, 2008:
92,318,172 shares of $0.01 par value common stock
MPS Group, Inc. and Subsidiaries
Index
2
Part I. Financial Information
| Item 1. | Financial Statements |
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| | | | | | |
(dollar amounts in thousands except share amounts) | | September 30,
2008 | | December 31,
2007 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 63,546 | | $ | 105,285 |
Short term investments | | | — | | | 2,500 |
Accounts receivable, net of allowance of $18,663 and $20,102, respectively | | | 343,763 | | | 323,804 |
Prepaid expenses | | | 12,245 | | | 10,867 |
Deferred income taxes | | | 2,527 | | | 3,785 |
Other | | | 17,085 | | | 17,463 |
| | | | | | |
Total current assets | | | 439,166 | | | 463,704 |
Furniture, equipment, and leasehold improvements, net | | | 37,177 | | | 35,859 |
Goodwill, net | | | 699,409 | | | 678,530 |
Other assets, net | | | 28,488 | | | 31,558 |
| | | | | | |
Total assets | | $ | 1,204,240 | | $ | 1,209,651 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | | $ | 97,813 | | $ | 99,101 |
Accrued payroll and related taxes | | | 98,663 | | | 88,439 |
Income taxes payable | | | 2,333 | | | 11,014 |
| | | | | | |
Total current liabilities | | | 198,809 | | | 198,554 |
Income taxes payable | | | 7,835 | | | 7,303 |
Credit facility | | | 9,023 | | | — |
Other | | | 40,385 | | | 27,449 |
| | | | | | |
Total liabilities | | | 256,052 | | | 233,306 |
| | | | | | |
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; 92,655,852 and 96,789,586 shares issued, respectively | | | 927 | | | 968 |
Additional contributed capital | | | 449,013 | | | 504,969 |
Retained earnings | | | 478,028 | | | 421,021 |
Accumulated other comprehensive income | | | 20,220 | | | 49,387 |
| | | | | | |
Total stockholders’ equity | | | 948,188 | | | 976,345 |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,204,240 | | $ | 1,209,651 |
| | | | | | |
See accompanying notes to unaudited condensed consolidated financial statements.
3
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
| | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
(dollar amounts in thousands except per share amounts) | | September 30,
2008 | | | September 30,
2007 | | September 30,
2008 | | | September 30,
2007 |
Revenue | | $ | 577,484 | | | $ | 556,581 | | $ | 1,734,755 | | | $ | 1,601,870 |
Cost of revenue | | | 413,390 | | | | 395,078 | | | 1,237,257 | | | | 1,147,887 |
| | | | | | | | | | | | | | |
Gross profit | | | 164,094 | | | | 161,503 | | | 497,498 | | | | 453,983 |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | |
General and administrative | | | 129,237 | | | | 119,054 | | | 384,758 | | | | 342,140 |
Depreciation and intangibles amortization | | | 5,677 | | | | 5,451 | | | 16,772 | | | | 14,610 |
| | | | | | | | | | | | | | |
Total operating expenses | | | 134,914 | | | | 124,505 | | | 401,530 | | | | 356,750 |
| | | | | | | | | | | | | | |
Income from operations | | | 29,180 | | | | 36,998 | | | 95,968 | | | | 97,233 |
Other income (expense), net | | | (2,715 | ) | | | 984 | | | (4,259 | ) | | | 5,919 |
| | | | | | | | | | | | | | |
Income before provision for income taxes | | | 26,465 | | | | 37,982 | | | 91,709 | | | | 103,152 |
Provision for income taxes | | | 9,257 | | | | 14,813 | | | 34,702 | | | | 39,615 |
| | | | | | | | | | | | | | |
Net income | | $ | 17,208 | | | $ | 23,169 | | $ | 57,007 | | | $ | 63,537 |
| | | | | | | | | | | | | | |
Basic net income per common share | | $ | 0.19 | | | $ | 0.23 | | $ | 0.63 | | | $ | 0.64 |
| | | | | | | | | | | | | | |
Average common shares outstanding, basic | | | 88,459 | | | | 99,071 | | | 90,159 | | | | 99,951 |
| | | | | | | | | | | | | | |
Diluted net income per common share | | $ | 0.19 | | | $ | 0.23 | | $ | 0.62 | | | $ | 0.62 |
| | | | | | | | | | | | | | |
Average common shares outstanding, diluted | | | 90,315 | | | | 100,802 | | | 91,738 | | | | 102,246 |
| | | | | | | | | | | | | | |
See accompanying notes to unaudited condensed consolidated financial statements.
4
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | |
| | | Nine months ended
September 30, | |
(dollar amounts in thousands) | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 57,007 | | | $ | 63,537 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Deferred income taxes | | | 15,399 | | | | 18,975 | |
Excess tax benefit from share-based awards | | | (320 | ) | | | (2,051 | ) |
Share-based plans expense | | | 8,483 | | | | 5,922 | |
Depreciation and intangibles amortization | | | 16,772 | | | | 14,610 | |
Changes in certain assets and liabilities, net of acquisitions: | | | | | | | | |
Accounts receivable | | | (20,426 | ) | | | (47,180 | ) |
Prepaid expenses and other assets | | | (1,693 | ) | | | (2,296 | ) |
Accounts payable and accrued expenses | | | (2,604 | ) | | | 8,444 | |
Accrued payroll and related taxes | | | 11,667 | | | | 21,864 | |
Other, net | | | 654 | | | | (1,596 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 84,939 | | | | 80,229 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of short term investments | | | — | | | | (144,875 | ) |
Proceeds from sale of short term investments | | | 2,500 | | | | 115,450 | |
Purchase of furniture, equipment and leasehold improvements, net of disposals | | | (13,467 | ) | | | (15,917 | ) |
Purchase of businesses, including additional consideration on acquisitions, net of cash acquired | | | (51,110 | ) | | | (80,553 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (62,077 | ) | | | (125,895 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Excess tax benefit from share-based awards | | | 320 | | | | 2,051 | |
Settlement of share-based awards | | | (1,855 | ) | | | (1,943 | ) |
Repurchases of common stock | | | (64,407 | ) | | | (41,517 | ) |
Payments on employee stock purchase plan, net of discount | | | (5 | ) | | | (28 | ) |
Proceeds from stock options exercised | | | 2,138 | | | | 4,462 | |
Borrowings on indebtedness | | | 29,973 | | | | — | |
Repayments on indebtedness | | | (28,078 | ) | | | (3,073 | ) |
| | | | | | | | |
Net cash used in financing activities | | | (61,914 | ) | | | (40,048 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (2,687 | ) | | | 2,469 | |
Net decrease in cash and cash equivalents | | | (41,739 | ) | | | (83,245 | ) |
Cash and cash equivalents, beginning of period | | | 105,285 | | | | 172,692 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 63,546 | | | $ | 89,447 | |
| | | | | | | | |
See accompanying notes to unaudited condensed consolidated financial statements.
5
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, 2007.
The accompanying condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year.
New Accounting Pronouncements
In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. The provisions of FSP FAS 142-3 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application is prohibited. We do not expect the adoption of FSP FAS 142-3 to have a material effect on our consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 141-R,Business Combinations. This statement is effective for us on January 1, 2009, and applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. SFAS 141-R significantly changes the accounting for acquisitions. Some of the major provisions are that acquisition related costs will generally be expensed as incurred, contingent consideration will be recorded at fair value on the acquisition date, with adjustments to certain forms of contingent liabilities impacting the results of operations. The impact that SFAS 141-R will have on our consolidated financial statements after adoption will depend on the nature, terms, and size of the acquisitions we consummate after adoption.
2. Share Repurchases
In the nine months ended September 30, 2008, we repurchased 5.9 million shares of our common stock on the open market for a total cost of $64.4 million. All repurchased shares were retired and accounted for using the cost method. The retirement of these shares was applied against “Additional contributed capital” on the Condensed Consolidated Balance Sheet as of September 30, 2008.
6
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
3. 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 | | Nine Months Ended |
(dollar amounts in thousands except per share amounts) | | September 30,
2008 | | September 30,
2007 | | September 30,
2008 | | September 30,
2007 |
Basic net income per common share computation: | | | | | | | | | | | | |
Net income | | $ | 17,208 | | $ | 23,169 | | $ | 57,007 | | $ | 63,537 |
| | | | | | | | | | | | |
Basic average common shares outstanding | | | 88,458 | | | 99,071 | | | 90,159 | | | 99,951 |
Incremental shares from assumed exercise of stock options and restricted stock awards | | | 1,857 | | | 1,731 | | | 1,579 | | | 2,295 |
| | | | | | | | | | | | |
Diluted average common shares outstanding | | | 90,315 | | | 100,802 | | | 91,738 | | | 102,246 |
| | | | | | | | | | | | |
Basic net income per common share | | $ | 0.19 | | $ | 0.23 | | $ | 0.63 | | $ | 0.64 |
| | | | | | | | | | | | |
Diluted net income per common share | | $ | 0.19 | | $ | 0.23 | | $ | 0.62 | | $ | 0.62 |
| | | | | | | | | | | | |
Options to purchase approximately 307,000 and 205,000 shares of common stock that were outstanding during the three months ended September 30, 2008 and 2007, respectively, were not included in the computation of diluted net income 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 nine months ended September 30, 2008 and 2007, options to purchase approximately 335,000 and 149,000 shares of common stock, respectively, were not included in the computation of diluted net income per share for the aforementioned reason.
4. 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.
5. 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, International Professional Services, North American IT Services, and International 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 segment results include the results from acquisitions discussed in Footnote 7, as well as in Footnote 3 to our Form 10-K for the year ended December 31, 2007. We evaluate segment performance based on revenues, gross profit, and income from continuing operations 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.
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, 2007, and all intersegment sales and transfers are eliminated. In addition, no one customer represents more than 5% of our overall revenue.
7
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
The following tables summarize performance, accounts receivable, net, and long-lived assets by segment, and revenue by geographic location:
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
(dollar amounts in thousands) | | September 30,
2008 | | | September 30,
2007 | | | September 30,
2008 | | | September 30,
2007 | |
Revenue | | | | | | | | | | | | | | | | |
North American Professional Services | | $ | 192,185 | | | $ | 176,120 | | | $ | 557,453 | | | $ | 512,802 | |
International Professional Services | | | 142,033 | | | | 144,657 | | | | 443,383 | | | | 398,223 | |
North American IT Services | | | 154,765 | | | | 158,919 | | | | 471,854 | | | | 467,546 | |
International IT Services | | | 88,501 | | | | 76,885 | | | | 262,065 | | | | 223,299 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 577,484 | | | $ | 556,581 | | | $ | 1,734,755 | | | $ | 1,601,870 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
North American Professional Services | | $ | 58,380 | | | $ | 56,750 | | | $ | 171,296 | | | $ | 162,069 | |
International Professional Services | | | 41,597 | | | | 44,112 | | | | 135,046 | | | | 117,124 | |
North American IT Services | | | 47,797 | | | | 47,033 | | | | 145,525 | | | | 136,100 | |
International IT Services | | | 16,320 | | | | 13,608 | | | | 45,631 | | | | 38,690 | |
| | | | | | | | | | | | | | | | |
Total gross profit | | $ | 164,094 | | | $ | 161,503 | | | $ | 497,498 | | | $ | 453,983 | |
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | | | | | | | | | | | | | | |
North American Professional Services | | $ | 17,104 | | | $ | 18,467 | | | $ | 51,645 | | | $ | 51,215 | |
International Professional Services | | | 5,213 | | | | 10,408 | | | | 23,839 | | | | 26,965 | |
North American IT Services | | | 10,367 | | | | 12,298 | | | | 33,326 | | | | 33,302 | |
International IT Services | | | 4,009 | | | | 3,551 | | | | 9,879 | | | | 7,973 | |
| | | | | | | | | | | | | | | | |
| | | 36,693 | | | | 44,724 | | | | 118,689 | | | | 119,455 | |
Corporate expenses (1) | | | (7,513 | ) | | | (7,726 | ) | | | (22,721 | ) | | | (22,222 | ) |
Other income (expense), net | | | (2,715 | ) | | | 984 | | | | (4,259 | ) | | | 5,919 | |
| | | | | | | | | | | | | | | | |
Total income before provision for income taxes | | $ | 26,465 | | | $ | 37,982 | | | $ | 91,709 | | | $ | 103,152 | |
| | | | | | | | | | | | | | | | |
Geographic Areas | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | |
North American | | $ | 346,950 | | | $ | 335,039 | | | $ | 1,029,307 | | | $ | 980,348 | |
International | | | 230,534 | | | | 221,542 | | | | 705,448 | | | | 621,522 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 577,484 | | | $ | 556,581 | | | $ | 1,734,755 | | | $ | 1,601,870 | |
| | | | | | | | | | | | | | | | |
8
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) | | September 30,
2008 | | December 31,
2007 |
Accounts receivable, net | | | | | | |
North American Professional Services | | $ | 110,043 | | $ | 95,758 |
International Professional Services | | | 56,506 | | | 64,673 |
North American IT Services | | | 117,849 | | | 115,575 |
International IT Services | | | 59,365 | | | 47,798 |
| | | | | | |
Total accounts receivable, net | | $ | 343,763 | | $ | 323,804 |
| | | | | | |
Long-lived assets | | | | | | |
North American Professional Services | | $ | 213,972 | | $ | 200,404 |
International Professional Services | | | 168,498 | | | 184,011 |
North American IT Services | | | 290,255 | | | 278,968 |
International IT Services | | | 53,139 | | | 39,716 |
| | | | | | |
| | | 725,864 | | | 703,099 |
Corporate | | | 10,722 | | | 11,290 |
| | | | | | |
Total long-lived assets | | $ | 736,586 | | $ | 714,389 |
| | | | | | |
| (1) | Corporate expenses include unallocated expenses not directly related to the segments’ operations. |
6. 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 nine months ended September 30, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
(dollar amounts in thousands) | | September 30,
2008 | | | September 30,
2007 | | September 30,
2008 | | | September 30,
2007 |
Net income | | $ | 17,208 | | | $ | 23,169 | | $ | 57,007 | | | $ | 63,537 |
Unrealized gain on foreign currency translation adjustments (1) | | | (32,961 | ) | | | 6,779 | | | (29,167 | ) | | | 15,252 |
| | | | | | | | | | | | | | |
Comprehensive income | | $ | (15,753 | ) | | $ | 29,948 | | $ | 27,840 | | | $ | 78,789 |
| | | | | | | | | | | | | | |
| (1) | The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. |
7. Business Combinations
In the nine months ended September 30, 2008, we acquired a pharmacy staffing business, an IT staffing business, certain assets of a vendor management solutions business, and an IT solutions business. Purchase consideration totaled $50.3 million in cash, of which $47.9 million was paid at closing.
9
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(dollar amounts in thousands except per share amounts)
8. Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill for 2008 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Professional Services | | | IT Services | | | | |
(dollar amounts in thousands) | | North
American | | | International | | | North
American | | | International | | | Total | |
Balance as of December 31, 2007 | | $ | 195,883 | | | $ | 177,380 | | | $ | 268,550 | | | $ | 36,717 | | | $ | 678,530 | |
Acquisitions | | | (38 | ) | | | 61 | | | | 7,716 | | | | — | | | | 7,739 | |
Effect of foreign currency exchange rates | | | — | | | | 920 | | | | (312 | ) | | | 85 | | | | 693 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2008 | | | 195,845 | | | | 178,361 | | | | 275,954 | | | | 36,802 | | | | 686,962 | |
Acquisitions | | | 12,663 | | | | — | | | | 158 | | | | 17,594 | | | | 30,415 | |
Effect of foreign currency exchange rates | | | — | | | | 1,278 | | | | 107 | | | | 130 | | | | 1,515 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2008 | | | 208,508 | | | | 179,639 | | | | 276,219 | | | | 54,526 | | | | 718,892 | |
Acquisitions | | | 11 | | | | — | | | | 2,771 | | | | 924 | | | | 3,706 | |
Effect of foreign currency exchange rates | | | — | | | | (17,805 | ) | | | (190 | ) | | | (5,194 | ) | | | (23,189 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2008 | | $ | 208,519 | | | $ | 161,834 | | | $ | 278,800 | | | $ | 50,256 | | | $ | 699,409 | |
| | | | | | | | | | | | | | | | | | | | |
We allocated the purchase price of acquisitions in accordance with SFAS 141,Business Combinations. At September 30, 2008 and December 31, 2007, there was $8.7 million and $10.0 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.
10
| 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, 2007 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,’ ‘probably,’ ‘potential,’ ‘continues,’ ‘can,’ ‘hopes,’ ‘perhaps,’ ‘would,’ ‘seek,’ 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, 2007, 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 225 offices in the United States, Canada, the United Kingdom, continental Europe, Australia, and Asia. 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® |
Healthcare | | Soliant Health® |
Workforce Automation | | Beeline® |
We present the financial results of the above brands under our four reporting segments: North American Professional Services, International Professional Services, North American IT Services and International 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, 2007.
For the quarter ended September 30, 2008, our consolidated revenue increased 4% and our consolidated operating income decreased 21% compared to the third quarter of the prior year. Revenue grew in our North
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American Professional Services segment and our International IT Services segment and decreased in our North American IT Services segment and our International Professional Services segment compared to the third quarter of 2007. Looking ahead to the fourth quarter of 2008, we expect revenue and operating income to decrease in all four of our segments due to weakening economic conditions in the markets in which we do business.
The demand for our services is highly dependent upon the state of the economy and upon the staffing needs of our clients. Economic conditions worsened throughout the third quarter and into the fourth quarter of 2008, further reducing the demand for our services. This deterioration was more evident in our international segments than in our North American segments and more in our permanent placement business than in our staffing business. We expect permanent placement fees to weaken first as economic conditions worsen. This permanent placement weakening is evident in our third quarter results. In particular, permanent placement fees, which generate a higher gross margin, decreased 16% from the second quarter of 2008 to the third quarter of 2008. This decrease occurred primarily in our International Professional Services segment and to a lesser extent in our North American Professional Services segment. Staffing services in both our North American and international segments were not as impacted in the third quarter of 2008 by the worsening economic conditions. However, our staffing services revenue decreased during October 2008, as compared to September 2008. If economic conditions continue to deteriorate demand for both our permanent placement fees and staffing services will likely further decrease and our revenues and profits will decrease.
Our revenue and to a lesser extent profits, are impacted by fluctuations in foreign currency exchange rates. The British Pound, the main functional currency for our international segments, weakened against the United States Dollar throughout the third quarter. We continued to see this devaluation of the British Pound into October 2008. If this trend does not reverse for the remainder of the fourth quarter of 2008, our revenue for the fourth quarter will be significantly reduced.
We expect to realize a decrease in compensation expenses associated with decreases in revenue as many of our employees are compensated based on revenue production. As economic conditions weaken, we can take steps to improve our cost efficiency including slowing the hiring of new staff, reducing personnel through attrition and eliminating staff positions. If we do not undertake short-term steps to improve our cost efficiency, the revenue declines discussed above could have a greater negative impact on our operating income. However, we do not want to take actions that may impede our ability to grow revenue once the economic conditions strengthen.
In accordance with Statement of Financial Accounting Standards (“SFAS”) 142,Goodwill and Other Intangible Assets, we are required to annually review our goodwill for any indications of impairment utilizing a fair-value approach. We use an equally blended value of a discounted cash flow analysis and a market comparables analysis to arrive at fair value for SFAS No. 142. Since our adoption of this pronouncement in 2002, we have performed our annual impairment review during the fourth quarter of each fiscal year, and we are scheduled once more to perform this review during the fourth quarter of 2008. If economic conditions continue to weaken and reduce the fair value of our reporting units below their respective carrying values, combined with a recent decline in the valuations of our market comparable companies, we could recognize a goodwill impairment charge during the fourth quarter of 2008. Although a goodwill impairment charge impacts operating income, it is a non-cash charge.
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 2007 Consolidated Financial Statements and related notes included in our Form 10-K for the year ended December 31, 2007.
Results Of Operations For The Three and Nine Months Ended September 30, 2008 and 2007—Consolidated
Consolidated revenue was $577.5 million and $556.6 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 3.8%. Consolidated revenue was $1,734.8 million and $1,601.9 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 8.3%.
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Revenue from our Professional Services division represented 58% of consolidated revenue in the three months ended September 30, 2008 and 2007. Revenue from our international segments represented 40% of consolidated revenue in the three months ended September 30, 2008 and 2007. Revenue from our international segments is directly impacted by changes in foreign currency exchange rates as we do not hedge our financial statement exposure to foreign currency exchange movements.
During 2007 and through September 30, 2008, we completed eleven acquisitions. We target potential acquisitions that will either increase the geographic presence of our businesses or provide complementary service offerings. Five acquisitions were completed within our North American Professional Services segment that expanded our geographic footprint and increased our market penetration in our legal and healthcare units, and increased our recruitment pipeline in our healthcare unit. We refer to these acquisitions herein as the North American Professional Acquisitions. Four acquisitions were completed in our North American IT Services segment that increased our service offerings and market penetration in our IT solutions and workforce solutions units. We refer to these acquisitions herein as the North American IT Acquisitions. One acquisition was completed in our International Professional Services segment that increased our service offerings and geographic footprint. We refer to this acquisition herein as the International Professional Acquisition. One acquisition was completed in our International IT Services segment that increased our geographic footprint. We refer to this acquisition herein as the International IT Acquisition.
Consolidated gross profit was $164.1 million and $161.5 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 1.6%. Consolidated gross margin was 28.4% and 29.0% in the three months ended September 30, 2008 and 2007, respectively. Consolidated gross profit was $497.5 million and $454.0 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 9.6%. Consolidated gross margin was 28.7% and 28.3% in the nine months ended September 30, 2008 and 2007, respectively.
We continue to look for opportunities to increase gross margin, which can be accomplished through better management of the bill and pay rate spread, acquiring companies with higher margins, and focusing more resources on permanent placement. In addition, we aim to leverage existing staff while investing in future growth opportunities and personnel. We were able to increase our staffing gross margin 30 basis points to 24.4% in the third quarter of 2008 from 24.1% in the year earlier period. The staffing gross margins increased in our North American and International IT Services segments, and decreased in our North American and International Professional Services segments. For the three months ended September 30, 2008, gross margin was negatively impacted by a decline in the percentage of revenue attributable to permanent placement fees, which has been decreasing in all four of our segments. Permanent placement fees represented 5.3% of revenue in the third quarter of 2008, down from 6.5% in the year earlier period.
Consolidated operating expenses were $134.9 million and $124.5 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 8.4%. General and administrative (“G&A”) expenses, which are included in operating expenses, were $129.2 million and $119.1 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 8.5%. Consolidated operating expenses were $401.5 million and $356.8 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 12.5%. G&A expenses were $384.8 million and $342.1 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 12.5%.
Unallocated corporate expenses, included in consolidated operating expenses, pertain to certain functions such as executive management, accounting, administration, tax, and treasury that are not directly attributable to our operating units. Unallocated corporate expense was $7.5 million and $7.7 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 2.6%. As a percentage of revenue, unallocated corporate expense was 1.3% and 1.4% for the three months ended September 30, 2008 and 2007,
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respectively. Unallocated corporate expense was $22.7 million and $22.2 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 2.3%. As a percentage of revenue, unallocated corporate expense was 1.3% and 1.4% for the nine months ended September 30, 2008 and 2007, respectively.
Consolidated operating income was $29.2 million and $37.0 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 21.1%. Operating income as a percentage of revenue was 5.1% and 6.6% for the three months ended September 30, 2008 and 2007, respectively. Consolidated operating income was $96.0 million and $97.2 million in the nine months ended September 30, 2008 and 2007, respectively, representing a decrease of 1.2%. Operating income as a percentage of revenue was 5.5% and 6.1% for the nine months ended September 30, 2008 and 2007, respectively.
Consolidated other expense, net, was $2.7 million and consolidated other income, net, was $1.0 million in the three months ended September 30, 2008 and 2007, respectively. Consolidated other expense, net, was $4.3 million and consolidated other income, net, was $5.9 million in the nine months ended September 30, 2008 and 2007, respectively. Included in the three and nine months ended September 30, 2007 was $1.0 million interest benefit from the settlement of a state income tax audit. Other income (expense), net, primarily includes changes in the cash surrender value of our company-owned life insurance, 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 cash surrender value of our company-owned life insurance decreased by $2.6 million and $5.1 million from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008, respectively. The decrease in the cash surrender value of our company-owned life insurance was due to a decrease in the value of the equity mutual funds within our company-owned life insurance.
The consolidated income tax provision was $9.3 million and $14.8 million in the three months ended September 30, 2008 and 2007, respectively. The effective tax rate was 35.0% and 39.0% in the three months ended September 30, 2008 and 2007, respectively. The consolidated income tax provision was $34.7 million and $39.6 million in the nine months ended September 30, 2008 and 2007, respectively. The effective tax rate was 37.8% and 38.4% in the nine months ended September 30, 2008 and 2007, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2008 was due to the recognition of certain tax credits. We expect an increased effective tax rate in the fourth quarter due primarily to decreased earnings from our international segments.
Consolidated net income was $17.2 million and $23.2 million in the three months ended September 30, 2008 and 2007, respectively. Consolidated net income was $57.0 million and $63.5 million in the nine months ended September 30, 2008 and 2007, respectively.
Results Of Operations For The Three and Nine Months Ended September 30, 2008 and 2007—By Business Segment
Professional Services Division
North American Professional Services Segment
Revenue in our North American Professional Services segment was $192.2 million and $176.1 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 9.1%. Revenue in our North American Professional Services segment was $557.5 million and $512.8 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 8.7%. North American Professional Acquisitions contributed $9.9 million and $20.7 million in revenue in the three and nine months ended September 30, 2008, respectively. The increase in revenue for the three months ended September 30, 2008 was due primarily to an acquisition in the segment’sSoliant Healthbusiness unit and internal growth in theSpecial Counsel business unit. The increase in revenue for the nine months ended September 30, 2008 was due primarily to revenue from internal growth and acquisitions in the segment’sSpecial Counselbusiness unit, and internal growth in theEntegeebusiness unit.
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Revenue contribution from the North American Professional Services businesses for the three and nine months ended September 30, 2008 and 2007 were as follows:
| | | | | | | | | | | | |
| | | Three months ended
September 30, | | | Nine months ended
September 30, | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Entegee | | 42.9 | % | | 44.6 | % | | 43.5 | % | | 44.8 | % |
Special Counsel | | 25.8 | | | 24.2 | | | 26.4 | | | 23.1 | |
Accounting Principals | | 13.0 | | | 16.6 | | | 13.6 | | | 16.4 | |
Soliant Health | | 18.3 | | | 14.6 | | | 16.5 | | | 15.7 | |
Gross profit in our North American Professional Services segment was $58.4 million and $56.8 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 2.8%. Gross profit in our North American Professional Services segment was $171.3 million and $162.1 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 5.7%. North American Professional Acquisitions contributed $3.0 million and $8.4 million in gross profit in the three and nine months ended September 30, 2008, respectively. Gross margin in our North American Professional Services segment was 30.4% and 32.3% in the three months ended September 30, 2008 and 2007, respectively, and 30.7% and 31.6% in the nine months ended September 30, 2008 and 2007, respectively. The decrease in gross margin in the three and nine months ended September 30, 2008 was due primarily to a decrease in the level of permanent placement fees as a percentage of total segment revenue, and a decrease in staffing margins in theSpecial Counsel business unit resulting from increased sales and delivery of document review projects, which typically generate a lower staffing margin. Permanent placement fees, which generate a higher margin, decreased to 5.5% of the segment’s revenue in the three months ended September 30, 2008, from 7.2% in the year earlier period, and decreased to 5.9% of the segment’s revenue in the nine months ended September 30, 2008, from 6.6% in the year earlier period.
G&A expenses in our North American Professional Services segment were $39.9 million and $36.8 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 8.4%. As a percentage of revenue, G&A expenses were 20.8% and 20.9% in the three months ended September 30, 2008 and 2007, respectively. G&A expenses in our North American Professional Services segment were $115.7 million and $106.8 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 8.3%. As a percentage of revenue, G&A expenses were 20.8% in the nine months ended September 30, 2008 and 2007. The increase in G&A expenses for the three and nine months ended September 30, 2008 was due primarily to additional G&A expenses from the North American Professional Acquisitions.
Operating income in our North American Professional Services segment was $17.1 million and $18.5 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 7.6%. Operating income as a percentage of revenue was 8.9% and 10.5% in the three months ended September 30, 2008 and 2007, respectively. Operating income in our North American Professional Services segment was $51.6 million and $51.2 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of .8%. Operating income as a percentage of revenue was 9.3% and 10.0% in the nine months ended September 30, 2008 and 2007, respectively.
International Professional Services Segment
Revenue in our International Professional Services segment was $142.0 million and $144.7 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 1.9%. Revenue in our International Professional Services segment was $443.4 million and $398.2 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 11.4%. Changes in foreign currency exchange rates decreased revenue by $8.1 million and $3.9 million from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008, respectively. International
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Professional Acquisitions contributed $4.0 million and $28.8 million in revenue in the three and nine months ended September 30, 2008, respectively. Apart from the effect of changes in foreign currency exchange rates and the execution of our acquisition strategy, the increase in revenue for the nine months ended September 30, 2008 was due to the increased demand for our services.
Gross profit in our International Professional Services segment was $41.6 million and $44.1 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 5.7%. Gross profit in our International Professional Services segment was $135.0 million and $117.1 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 15.3%. Changes in foreign currency exchange rates decreased gross profit by $2.0 million and $325,000 from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008, respectively. The International Professional Acquisition contributed $2.5 million and $18.3 million in gross profit in the three and nine months ended September 30, 2008. Gross margin in our International Professional Services segment was 29.3% and 30.5% in the three months ended September 30, 2008 and 2007, respectively, and 30.4% and 29.4% in the nine months ended September 30, 2008 and 2007, respectively. The decrease in gross margin for the three months ended September 30, 2008 was due primarily to a decrease in the level of permanent placement fees as a percentage of total segment revenue. The increase in gross margin in the nine months ended September 30, 2008 was due primarily to increased permanent placement fees contributed by the International Professional Acquisition, and to a lesser extent an increase in gross margins from the segment’s staffing services. Permanent placement fees decreased to 10.4% of the segment’s revenue for the three months ended September 30, 2008, from 11.9% in the year earlier period, and increased to 11.6% of the segment’s revenue for the nine months ended September 30, 2008, from 10.4% in the year earlier period.
G&A expenses in our International Professional Services segment were $34.9 million and $32.5 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 7.4%. As a percentage of revenue, G&A expenses were 24.6% and 22.5% in the three months ended September 30, 2008 and 2007, respectively. G&A expenses in our International Professional Services segment were $106.8 million and $87.2 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 22.5%. As a percentage of revenue, G&A expenses were 24.1% and 21.9% in the nine months ended September 30, 2008 and 2007, respectively. The increase in G&A expenses for the three months ended September 30, 2008, was due primarily to additional G&A expenses from the International Professional Acquisition. The increase in G&A expenses for the nine months ended September 30, 2008, was due primarily to additional G&A expenses from the International Professional Acquisition, and to a lesser extent, investments and restructuring efforts in our European operations.
Operating income in our International Professional Services segment was $5.2 million and $10.4 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 50.0%. Operating income as a percentage of revenue was 3.7% and 7.2% in the three months ended September 30, 2008 and 2007, respectively. Operating income in our International Professional Services segment was $23.8 million and $27.0 million in the nine months ended September 30, 2008 and 2007, respectively, representing a decrease of 11.9%. Operating income as a percentage of revenue was 5.4% and 6.8% in the nine months ended September 30, 2008 and 2007, respectively.
IT Services Division
North American IT Services Segment
Revenue in our North American IT Services segment was $154.8 million and $158.9 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 2.6%. Revenue in our North American IT Services segment was $471.9 million and $467.5 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 0.9%. Changes in foreign currency exchange rates increased revenue by $2.3 million from the nine months ended September 30, 2007 to the nine months ended September 30, 2008. North American IT Acquisitions contributed $3.1 million and $9.3 million in
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revenue in the three and nine months ended September 30, 2008, respectively. Apart from the execution of our acquisition strategy, the decrease in revenue for the three and nine months ended September 30, 2008 was due primarily to the wind down of certain lower-margin client contracts in theModis business unit.
Revenue within the North American IT Services segment is generated primarily fromModis, as it generated 78.7% and 81.4% of the segment’s revenue for the three months ended September 30, 2008 and 2007, respectively.Idea Integration andBeeline are responsible for the remainder of this segment’s revenue.
Gross profit in our North American IT Services segment was $47.8 million and $47.0 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 1.7%. Gross profit in our North American IT Services segment was $145.5 million and $136.1 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 6.9%. Changes in foreign currency exchange rates increased gross profit by $428,000 from the nine months ended September 30, 2007 to the nine months ended September 30, 2008. North American IT Acquisitions contributed $2.3 million and $6.2 million in gross profit in the three and nine months ended September 30, 2008, respectively. Gross margin in our North American IT Services segment was 30.9% and 29.6% in the three months ended September 30, 2008 and 2007, respectively. Gross margin in our North American IT Services segment was 30.8% and 29.1% in the nine months ended September 30, 2008 and 2007, respectively. The increase in gross margin for the three and nine months ended September 30, 2008 was due to increased fees generated from ourBeeline business unit, which generates higher margins than the other business units. Increased gross margins from theModis business unit’s staffing services were offset by decreased permanent placement fees. Permanent placement fees decreased to 1.6% of the segment’s revenue for the three months ended September 30, 2008, from 2.2% in the year earlier period, and decreased to 1.7% of the segment’s revenue for the nine months ended September 30, 2008, from 1.8% in the year earlier period.
G&A expenses in our North American IT Services segment were $35.1 million and $32.7 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 7.3%. As a percentage of revenue, G&A expenses were 22.7% and 20.6% in the three months ended September 30, 2008 and 2007, respectively. G&A expenses in our North American IT Services segment were $105.4 million and $97.0 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 8.7%. As a percentage of revenue, G&A expenses were 22.3% and 20.7% in the nine months ended September 30, 2008 and 2007, respectively. The increase in the segment’s G&A expenses for the three and nine months ended September 30, 2008, was due to a combination of investments in ourBeeline unit and additional G&A expenses from the North American IT Acquisitions.
Operating income in our North American IT Services segment was $10.4 million and $12.3 million in the three months ended September 30, 2008 and 2007, respectively, representing a decrease of 15.4%. Operating income as a percentage of revenue was 6.7% and 7.7% in the three months ended September 30, 2008 and 2007, respectively. Operating income in our North American IT Services segment was $33.3 million in the nine months ended September 30, 2008 and 2007. Operating income as a percentage of revenue was 7.1% in the nine months ended September 30, 2008 and 2007.
International IT Services Segment
Revenue in our International IT Services segment was $88.5 million and $76.9 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 15.1%. Revenue in our International IT Services segment was $262.1 million and $223.3 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 17.4%. Changes in foreign currency exchange rates decreased revenue by $5.6 million and $4.7 million from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008, respectively. The International IT Acquisition contributed $7.2 million and $13.6 million in revenue in the three and nine months ended September 30, 2008. Apart from the effect of the execution of our acquisition strategy, the increase in revenue for the three and nine months ended September 30, 2008 was due to the increased demand for our services.
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Gross profit in our International IT Services segment was $16.3 million and $13.6 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 19.9%. Gross profit in our International IT Services segment was $45.6 million and $38.7 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 17.8%. Changes in foreign currency exchange rates decreased gross profit by $1 million and $778,000 from the three and nine months ended September 30, 2007 to the three and nine months ended September 30, 2008, respectively. The International IT Acquisition contributed $1.9 million and $3.6 million in gross profit in the three and nine months ended September 30, 2008, respectively. Gross margin in our International IT Services segment was 18.4% and 17.7% in the three months ended September 30, 2008 and 2007, respectively, and 17.4% and 17.3% in the nine months ended September 30, 2008 and 2007, respectively. The increase in gross margin for the three and nine months ended September 30, 2008 was due to increased gross margins from the segment’s staffing services. Permanent placement fees as a percentage of revenue remained roughly flat for the three months ended September 30, 2008, as compared to the prior year period, and decreased slightly for the nine months ended September 30, 2008, as compared to the prior year period.
G&A expenses in our International IT Services segment were $11.9 million and $9.4 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 26.6%. As a percentage of revenue, G&A expenses were 13.4% and 12.2% in the three months ended September 30, 2008 and 2007, respectively. G&A expenses in our International IT Services segment were $34.1 million and $28.9 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 18.0%. As a percentage of revenue, G&A expenses were 13.0% and 12.9% in the nine months ended September 30, 2008 and 2007, respectively. Apart from the effect of increased G&A expenses from the International IT acquisition, the increase in G&A expenses for the three and nine months ended September 30, 2008 was due primarily to increases in sales and recruiting personnel and to a lesser extent increases in compensation expense related to the increases in the segment’s revenue. G&A expenses in the nine months ended September 30, 2007 included expenses associated with certain management restructuring activities, which contributed to the increased G&A expenses as a percentage of revenue in the nine months ended September 30, 2007.
Operating income in our International IT Services segment was $4.0 million and $3.6 million in the three months ended September 30, 2008 and 2007, respectively, representing an increase of 11.1%. Operating income as a percentage of revenue was 4.5% and 4.7% in the three months ended September 30, 2008 and 2007, respectively. Operating income in our International IT Services segment was $9.9 million and $8.0 million in the nine months ended September 30, 2008 and 2007, respectively, representing an increase of 23.8%. Operating income as a percentage of revenue was 3.8% and 3.6% in the nine months ended September 30, 2008 and 2007, respectively.
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 (ii) acquisitions, repurchases of common stock and capital expenditures. While there can be no assurances in this regard, we believe that funds provided by operations, our current cash balances, and borrowings available to us under our existing credit facility 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 nine months ended September 30, 2008, cash of $126.7 million used in investing and financing activities and the effect of changes in foreign currency exchange rates exceeded the $84.9 million of cash provided from operating activities. Our net decrease in cash in the nine months ended September 30, 2008 was due primarily to repurchases of our common stock and acquisitions. In the nine months ended September 30,
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2007, cash of $165.9 million used in investing and financing activities exceeded the $82.7 million of cash provided from operating activities and the effect of changes in foreign currency exchange rates. Our net decrease in cash in the nine months ended September 30, 2007 was due primarily to acquisitions, repurchases of our common stock, and our purchases of short term investments. The table below highlights working capital, cash and cash equivalents and short term investments as of September 30, 2008 and December 31, 2007, respectively:
| | | | | | |
(dollar amounts in millions) | | September 30, 2008 | | December 31, 2007 |
Working capital | | $ | 240.4 | | $ | 265.2 |
Cash and cash equivalents and short term investments | | $ | 63.5 | | $ | 107.8 |
Operating cash flows
For the nine months ended September 30, 2008 and 2007, we generated $84.9 million and $80.2 million of cash flow from operations, respectively. The increase in cash flow from operations was due primarily to increased cash collections on trade receivables.
Investing cash flows
For the nine months ended September 30, 2008, we used $62.1 million of cash for investing activities, including $51.1 million for acquisitions, net of cash acquired, and $13.5 million for capital expenditures.
For the nine months ended September 30, 2007, we used $125.9 million of cash for investing activities, including $80.6 million for acquisitions, net of cash acquired, $29.4 million for short term investments, net of sale proceeds, and $15.9 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 2008 will be approximately $5.0 million.
Financing cash flows
For the nine months ended September 30, 2008, we used $61.9 million of cash for financing activities, consisting primarily of $64.4 million for the repurchase of common stock. For the nine months ended September 30, 2007, we used $40.0 million of cash for financing activities, consisting primarily of $41.5 million for the repurchase of common stock.
Our Board of Directors has authorized certain repurchases of our common stock. We repurchased $5.9 million shares at an aggregate cost of $64.4 million in the nine months ended September 30, 2008. From the third quarter of 2002 through October 24, 2008, we have repurchased and retired a total of 26.0 million shares at a cost of $284.2 million under these authorizations. We have approximately $33.3 million remaining under these authorizations as of October 24, 2008. There is no expiration date for these authorizations.
Indebtedness of the Company
We have a $250 million revolving credit facility which 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. As of October 24, 2008, we have $7.9 million in borrowings outstanding under this facility, as well as $8.5 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.
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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 April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets. The provisions of FSP FAS 142-3 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application is prohibited. We do not expect the adoption of FSP FAS 142-3 to have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141-R,Business Combinations. This statement is effective for us on January 1, 2009, and applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. SFAS 141-R significantly changes the accounting for acquisitions. Some of the major provisions are that acquisition related costs will generally be expensed as incurred, contingent consideration will be recorded at fair value on the acquisition date, with adjustments to certain forms of contingent liabilities impacting the results of operations. The impact that SFAS 141-R will have on our consolidated financial statements after adoption will depend on the nature, terms, and size of the acquisitions we consummate after adoption.
| 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, 2007. There were no material changes to our market risk for the three and nine months ended September 30, 2008.
| 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 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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Part II. Other Information
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, 2007, 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 last of which increased this authorization by an additional $75 million in January of 2008. The following table sets forth information about our common stock repurchases for the three months ended September 30, 2008. From the third quarter of 2002 through October 24, 2008, we have repurchased a total of 26.0 million shares at a cost of $284.2 million under these authorizations. We have approximately $33.3 million remaining under these authorizations as of October 24, 2008. There is no expiration date for these authorizations.
| | | | | | | | | | |
Period (1) | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs | | Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet be Purchased
Under the
Plans or Programs |
July 1, 2008 to July 31, 2008 | | 419,425 | | $ | 10.46 | | 419,425 | | $ | 41,069,821 |
August 1, 2008 to August 31, 2008 | | — | | | — | | — | | | 41,069,821 |
September 1, 2008 to September 30, 2008 | | 452,500 | | | 11.81 | | 452,500 | | | 35,727,763 |
| | | | | | | | | | |
Total | | 871,925 | | $ | 11.16 | | 871,925 | | $ | 35,727,763 |
| | | | | | | | | | |
| (1) | Based on trade date, not settlement date. |
A. Exhibits Required by Item 601 of Regulation S-K:
See Index of Exhibits.
| | |
Exhibit No. | | Description |
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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SIGNATURES
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 there onto duly authorized
| | |
| MPS GROUP, INC. |
| |
| By: | | /s/ Robert P. Crouch |
| | Robert P. Crouch Senior Vice President, Treasurer, and
Chief Financial Officer
(Principal Financial Officer and
duly authorized signatory) |
Date: November 5, 2008
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