FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida
32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. April 30, 2002.
Common Stock, $0.01 par value Outstanding: 99,078,359 (No. of shares)
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are subject to
certain risks, uncertainties or assumptions and may be affected by certain other
factors, including but not limited to the specific factors discussed in Part I,
Item 2 under 'Liquidity and Capital Resources,' 'Seasonality,' and 'Factors
Which May Impact Future Results and Financial Condition.' In some cases, you can
identify forward-looking statements by terminology such as 'will,' 'may,'
'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,'
'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,'
'would,' or 'become' or the negative of these terms or other comparable
terminology. In addition, except for historical facts, all information provided
in Part I, Item 3, under 'Quantitative and Qualitative Disclosures About Market
Risk' 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 the
Company 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 the Company's
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly 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.
MPS Group, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three Months
ended March 31, 2002 and 2001...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2002 and 2001...................................................................... 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 17
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 19
Item 2 Changes in Securities and Use of Proceeds.............................................................. 19
Item 3 Defaults Upon Senior Securities........................................................................ 19
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 19
Item 5 Other Information...................................................................................... 19
Item 6 Exhibits and Reports on Form 8-K....................................................................... 19
Signatures............................................................................................. 20
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
(dollar amounts in thousands except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 34,160 $ 49,208
Accounts receivable, net 205,377 227,069
Prepaid expenses 6,964 6,444
Deferred income taxes 5,632 5,873
Other 5,026 12,102
----------------------------------
Total current assets 257,159 300,696
Furniture, equipment, and leasehold improvements, net 44,257 48,742
Goodwill, net 499,296 1,165,961
Deferred income taxes, long-term 85,539 -
Other assets, net 29,022 28,223
----------------------------------
Total assets $ 915,273 $ 1,543,622
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 43,600 $ 49,207
Accrued payroll and related taxes 39,708 39,524
Income taxes payable 3,415 7,243
----------------------------------
Total current liabilities 86,723 95,974
Credit facility 56,000 101,000
Deferred income taxes - 22,214
Other 11,594 13,623
----------------------------------
Total liabilities 154,317 232,811
----------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized;
98,638,205 and 98,306,783 shares issued and outstanding, respectively 986 983
Additional contributed capital 596,643 594,061
Retained earnings 178,319 730,085
Accumulated other comprehensive loss (9,977) (9,400)
Deferred stock compensation (5,015) (4,918)
----------------------------------
Total stockholders' equity 760,956 1,310,811
----------------------------------
Total liabilities and stockholders' equity $ 915,273 $ 1,543,622
==================================
See accompanying notes to condensed consolidated financial statements.
3
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three months ended March 31,
------------------------------
(dollar amounts in thousands except per share amounts) 2002 2001
- ----------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue $ 296,453 $ 444,410
Cost of revenue 220,195 320,695
------------------------------
Gross profit 76,258 123,715
------------------------------
Operating expenses:
General and administrative 66,547 94,506
Depreciation 4,998 5,368
Amortization of goodwill - 9,599
------------------------------
Total operating expenses 71,545 109,473
------------------------------
Income from operations 4,713 14,242
Other expense, net 1,574 3,177
------------------------------
Income before provision for income taxes and
cumulative effect of accounting change 3,139 11,065
Provision for income taxes 1,193 4,647
------------------------------
Income before cumulative effect of accounting change 1,946 6,418
Cumulative effect of accounting change (net of
a $112,953 income tax benefit) (553,712) -
------------------------------
Net (loss) income $ (551,766) $ 6,418
==============================
Basic (loss) income per common share:
Income before cumulative effect of accounting change $ 0.02 $ 0.07
Cumulative effect of accounting change (5.62) -
------------------------------
Basic net (loss) income per common share $ (5.60) $ 0.07
==============================
Average common shares outstanding, basic 98,475 97,173
==============================
Diluted (loss) income per common share:
Income before cumulative effect of accounting change $ 0.02 $ 0.07
Cumulative effect of accounting change (5.49) -
------------------------------
Diluted net (loss) income per common share $ (5.47) $ 0.07
==============================
Average common shares outstanding, diluted 100,799 97,359
==============================
See accompanying notes to condensed consolidated financial statements.
4
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three months ended March 31,
------------------------------
(dollar amounts in thousands except per share amounts) 2002 2001
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net (loss) income $ (551,766) $ 6,418
Adjustments to net (loss) income to net cash provided by
by operating activities:
Depreciation 4,998 5,368
Amortization of goodwill - 9,599
Cumulative effect of accounting change 666,665 -
Deferred income taxes (108,020) 3,412
Deferred compensation 400 117
Changes in certain assets and liabilities:
Accounts receivable 20,059 3,052
Prepaid expenses and other assets (520) (3,745)
Accounts payable and accrued expenses (7,209) 5,522
Accrued payroll and related taxes 269 1,521
Other, net 4,169 (925)
--------------- ---------------
Net cash provided by operating activities 29,045 30,339
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (513) (4,766)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired - (1,504)
--------------- ---------------
Net cash used in investing activities (513) (6,270)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised 2,088 24
Repayments on indebtedness (45,359) (23,030)
--------------- ---------------
Net cash used in financing activities (43,271) (23,006)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (309) (4,829)
Net decrease in cash and cash equivalents (15,048) (3,766)
Cash and cash equivalents, beginning of period 49,208 5,013
--------------- ---------------
Cash and cash equivalents, end of period $ 34,160 $ 1,247
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company 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 the Company's Form 10-K, as filed with the SEC on March 26, 2002.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statements of Financial Accounting Standards ('SFAS') No. 142, 'Goodwill and
Other Intangible Assets,' which is required to be adopted in fiscal 2002. SFAS
No. 142 establishes accounting and reporting standards for goodwill and
intangible assets resulting from business combinations. SFAS No. 142 includes
provisions discontinuing the periodic amortization of and assessing the
potential impairments of goodwill (and intangible assets deemed to have
indefinite lives). As SFAS No. 142 replaces the measurement guidelines for
goodwill impairment, goodwill not considered impaired under previous accounting
literature may be considered impaired under SFAS No. 142. SFAS 142 also requires
that the Company complete a two-step goodwill impairment test. The first step
compares the fair value of each reporting unit to its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired and the second step is not required.
SFAS 142 requires completion of this first step within the first six months of
initial adoption and annually thereafter. If the carrying amount of a reporting
unit exceeds its fair value, the second step is performed to measure the amount
of impairment loss. The second step compares the implied fair value of goodwill
to the carrying value of a reporting unit's goodwill. The implied fair value of
goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. This allocation process is
only performed for purposes of evaluating goodwill impairment and does not
result in an entry to adjust the value of any assets or liabilities. An
impairment loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. In the initial year of adoption, any
impairment loss identified is presented as a change in accounting principle, net
of applicable income tax benefit, and recorded as of the beginning of that year.
In years subsequent to the initial year of adoption, any impairment loss
recognized would be recorded as a charge to income from operations.
The Company has adopted SFAS 142 as of January 1, 2002. During the quarter
ended March 31, 2002, the Company completed both steps of the transitional
goodwill impairment tests which resulted in an impairment charge of $553,712,
net of an income tax benefit of $112,953. Refer to Note 4, 'Goodwill' for
further discussion of the impact of SFAS 142 on the Company's financial position
and results of operations.
Additionally, in August and October 2001, the FASB issued SFAS No. 143,
'Accounting for Asset Retirement Obligations' and SFAS No. 144, 'Accounting for
the Impairment or Disposal of Long-Lived Assets,' respectively. SFAS No. 143
requires the fair value of a liability be recorded for an asset retirement
obligation in the period in which it is incurred. SFAS No. 144 addresses the
accounting and reporting for the impairment of long-lived assets, other than
goodwill, and for long-lived assets to be disposed of. Further, SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale. The Company has adopted both SFAS No. 143 and No. 144 for 2002. The
adoption of these statements' did not have an effect on the Company's
consolidated results of operations and financial position.
6
2. Comprehensive Income
The Company discloses other comprehensive income in accordance with SFAS
No. 130, 'Reporting Comprehensive Income'. Comprehensive income includes
unrealized gains and losses on foreign currency translation adjustments and
changes in the fair value of certain derivative financial instruments which
qualify for hedge accounting. A summary of comprehensive income for the three
months ended March 31, 2002 and 2001, is as follows:
Three months ended March 31,
------------------------------
2002 2001
- -----------------------------------------------------------------------------
Net (loss) income $ (551,766) $ 6,418
Unrealized loss on foreign currency
translation adjustments (a) (1,407) (8,198)
Unrealized gain (loss) on derivative
instruments, net of deferred income taxes 830 (620)
----------- ----------
Total other comprehensive loss (577) (8,818)
Comprehensive loss $ (552,343) $ (2,400)
=========== ==========
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
3. Derivative Instruments and Hedging Activities
In 2001, the Company engaged in derivatives classified as cash flow hedges.
Accordingly, changes in the fair value of these hedges are recorded in
'Accumulated other comprehensive loss' on the balance sheet. The Company
formally documents all relations between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy for undertaking
hedging transactions. The Company formally assesses whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
cash flows of the hedged items. The non-effective portions of these hedges are
recorded as a component of current earnings.
The Company is currently a party to and in the future may enter into
interest rate swap agreements in the normal course of business to manage and
reduce the risk inherent in interest rate fluctuations. Interest rate swap
agreements are considered hedges of specific borrowings, and differences
received under the swap agreements are recognized as adjustments to interest
expense. On February 12, 2001, the Company entered into an interest rate swap
agreement to convert certain floating rate debt outstanding under the Company's
credit facility into fixed rate debt by fixing the base rate, as defined by the
credit facility. The actual interest rate on the credit facility is equal to
this base rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial notional amount of $110.4 million as
of February 12, 2001, which amortizes to $55.7 million on January 2, 2003. On
March 2, 2001, the Company entered into an additional interest rate swap
agreement to convert an additional $25.0 million into fixed rate debt. This
additional agreement was settled in the fourth quarter of 2001. These agreements
were approved by the Board of Directors. As of March 31, 2002, the Company had
an outstanding interest rate swap agreement with a total notional amount of
$55.7 million and an underlying rate of 5.185%.
Hedging interest rate exposure through the use of swaps is specifically
intended to manage risk in keeping with management policy. The Company does not
utilize derivatives for speculative purposes. These swaps are
transaction-specific so that a specific debt instrument determines the amount,
maturity and specifics of each swap.
7
4. Goodwill
The Company adopted SFAS 142, Goodwill and Other Intangibles, effective
January 1, 2002. In connection with the adoption of SFAS 142, the Company
discontinued amortizing goodwill. The changes in the carrying amount of goodwill
for the three months ended March 31, 2002, are as follows:
Information
Professional e-Business Technology
Services Solutions Services Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 312,952 $ 260,972 $ 592,037 $1,165,961
Impairment losses (87,969) (240,247) (338,449) (666,665)
----------- ----------- ----------- -----------
Balance as of March 31, 2002 $ 224,983 $ 20,725 $ 253,588 $ 499,296
=========== =========== =========== ===========
In accordance with SFAS 142, the Company performed transitional goodwill
impairment tests at the reporting unit level as defined in SFAS 142. Reporting
units are equal to or one level below reportable segments. The Company engaged
independent valuation consultants to assist with the transitional goodwill
impairment tests.
The fair value of each of the reporting units was calculated on an
enterprise value basis using the following approaches: (i) market multiple
approach and (ii) discounted cash flow approach. Under the market multiple
approach, market ratios and performance fundamentals relating to similar public
companies' stock prices or enterprise values were applied to the reporting units
to determine their enterprise value. Under the discounted cash flow ("DCF")
approach, the indicated enterprise value was determined using the present value
of the projected future cash flows to be generated considering appropriate
discount rates. The discount rates used in the calculation reflected all
associated risks of realizing the projected future cash flows.
The fair value conclusion of the reporting units reflects an equally
blended value of the market multiple approach and the DCF approach discussed
above. As a result of performing steps 1 and 2 of the goodwill impairment test,
a loss of $553,712, net of an income tax benefit of $112,953, was recognized and
recorded as a cumulative effect of accounting change in the accompanying
Condensed Consolidated Statements of Income.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of income taxes, for the periods
presented:
Three months ended March 31,
------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change, as reported $ 1,946 $ 6,418
Goodwill amortization, net of income taxes - 6,748
------------------------------
Income before cumulative effect of accounting change, as adjusted $ 1,946 $ 13,166
Cumulative effect of accounting change, net of income taxes (553,712) -
------------------------------
Net (loss) income, as adjusted $ (551,766) $ 13,166
==============================
Basic (loss) income per common share:
Income before cumulative effect of accounting change, as reported $ 0.02 $ 0.07
Goodwill amortization, net of income taxes - 0.07
------------------------------
Income before cumulative effect of accounting change, as adjusted $ 0.02 $ 0.14
Cumulative effect of accounting change, net of income taxes (5.62) -
------------------------------
Basic net (loss) income per common share $ (5.60) $ 0.14
==============================
Diluted (loss) income per common share:
Income before cumulative effect of accounting change, as reported $ 0.02 $ 0.07
Goodwill amortization, net of income taxes - 0.07
------------------------------
Income before cumulative effect of accounting change, as adjusted $ 0.02 $ 0.14
Cumulative effect of accounting change, net of income taxes (5.49) -
------------------------------
Diluted net (loss) income per common share $ (5.47) $ 0.14
==============================
8
5. Net Income per Common Share
The calculation of basic net (loss) income per common share and diluted net
(loss) income per common share is presented below:
Three months ended March 31,
------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------
Basic (loss) income per common share computation:
Income before cumulative effect of accounting change $ 1,946 $ 6,418
Cumulative effect of accounting change, net of income taxes (553,712) -
------------------------------
Net (loss) income $ (551,766) $ 6,418
==============================
Basic average common shares outstanding 98,475 97,173
==============================
Basic (loss) income per common share:
Income before cumulative effect of accounting change $ 0.02 $ 0.07
Cumulative effect of accounting change, net of income taxes (5.62) -
------------------------------
Basic net (loss) income per common share $ (5.60) $ 0.07
==============================
Diluted (loss) income per common share computation:
Income before cumulative effect of accounting change $ 1,946 $ 6,418
Cumulative effect of accounting change, net of income taxes (553,712) -
------------------------------
Net (loss) income $ (551,766) $ 6,418
==============================
Basic average common shares outstanding 98,475 97,173
Incremental shares from assumed exercise of stock options 2,324 186
------------------------------
Diluted average common shares outstanding 100,799 97,359
==============================
Diluted (loss) income per common share:
Income before cumulative effect of accounting change $ 0.02 $ 0.07
Cumulative effect of accounting change, net of income taxes (5.49) -
------------------------------
Diluted net (loss) income per common share $ (5.47) $ 0.07
==============================
Options to purchase 2,399,799 shares of common stock that were outstanding
as of March 31, 2002, 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 during the three months ended March 31, 2002.
6. Commitments and Contingencies
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, 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 the Company, its financial
position, its results of operations, or its cash flows.
7. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: information technology (IT)
services, e-Business solutions, and professional services. The Company's
reportable segments are strategic divisions that offer different services and
9
are managed separately as each division requires different resources and
marketing strategies. The IT services division, operating under the brand Modis,
offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support. The e-Business solutions division,
operating under the brand Idea Integration, provides e-Business strategy
consulting, design and branding, application development, and integration. The
professional services division provides expertise in a wide variety of
disciplines including accounting and finance, law, engineering and technical,
career management, executive search, and human resource consulting. For the
three months ended March 31, 2001, results from the scientific operating unit of
which the Company sold the assets of in December 2001 are included therein. The
Company evaluates segment performance based on revenues, gross profit, and
income before provision for income taxes. The Company does not allocate income
taxes or unusual items to the segments. The following table summarizes segment
and geographic information:
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
- -----------------------------------------------------------------------------------
<s> <c> <c>
Revenue
IT services $ 150,747 $ 219,509
e-Business solutions 22,798 54,717
Professional services 122,908 170,184
------------ ------------
Total revenue $ 296,453 $ 444,410
============ ============
Gross profit
IT services $ 30,935 $ 48,661
e-Business solutions 7,350 18,103
Professional services 37,973 56,951
------------ ------------
Total gross profit $ 76,258 $ 123,715
============ ============
Income before provision for income taxes and
cumulative effect of accounting change
IT services $ 691 $ 6,573
e-Business solutions (2,223) (7,409)
Professional services 6,245 15,078
------------ ------------
4,713 14,242
Corporate interest and other income (1,574) (3,177)
------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 3,139 $ 11,065
============ ============
Geographic Areas
Revenues
United States $ 201,667 $ 331,625
U.K. 91,537 109,769
Other 3,249 3,016
------------ ------------
Total $ 296,453 $ 444,410
============ ============
March 31, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 460,273 $ 781,845
e-Business solutions 99,663 319,284
Professional services 339,224 426,547
------------ ------------
899,160 1,527,676
Corporate 16,113 15,946
------------ ------------
Total assets $ 915,273 $ 1,543,622
============ ============
Geographic Areas
Identifiable Assets
United States $ 662,495 $ 1,133,372
U.K. 245,340 399,259
Other 7,438 10,991
------------ ------------
Total $ 915,273 $ 1,543,622
============ ============
10
8. Income Taxes
The Company is subject to periodic review by federal, state, and local
taxing authorities in the ordinary course of business. During the second quarter
of 2001, the Company was notified by the Internal Revenue Service that certain
prior year income tax returns will be examined. As part of this examination, the
tax benefit associated with an investment in a subsidiary that the Company
recognized in 2000 will also be reviewed. The impact or adjustment, if any, as a
result of this examination cannot be reasonably estimated at this time.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS Group, Inc. ('MPS' or the 'Company') (NYSE:MPS) helps its client companies
thrive by delivering a unique mix of consulting, solutions, and staffing
services in the disciplines of information technology (IT), finance and
accounting, legal, e-Business, human capital automation, engineering, executive
search, and work force management. MPS consists of three divisions: the IT
services division, operating under the brand Modis; the e-Business solutions
division, operating under the brand Idea Integration; and the professional
services division.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ('SFAS') No. 142, 'Goodwill and Other Intangibles.' Comparability of
results prior to 2002 is affected by the Company's adoption of SFAS 142 as SFAS
142 requires the discontinuance of goodwill amortization.
The following detailed analysis of operations should be read in conjunction with
the 2001 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed March 26, 2002.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenue. Revenue decreased $147.9 million, or 33.3%, to $296.5 million in the
three months ended March 31, 2002, from $444.4 million in the year earlier
period. The decrease was attributable primarily to diminished demand for
services provided by the Company's divisions.
For the IT services division, which accounted for 50.9% and 49.4% of the
Company's total revenue for the three months ended March 31, 2002 and 2001,
respectively, the Company's customers continued to limit spending on IT
initiatives due to uncertainties relating to the economy. Revenue in the IT
services division decreased $68.8 million, or 31.3%, to $150.7 million in 2002,
from $219.5 million in the year earlier period.
For the e-Business solutions division, weak demand for e-Business consulting
services was intensified by the uncertainties relating to the economy. Revenue
in the division decreased $31.9 million, or 58.8%, to $22.8 million in the three
months ended March 31, 2002, from $54.7 million in the year earlier period.
Revenue in the professional services division decreased $47.3 million, or 27.8%,
to $122.9 million in the three months ended March 31, 2002, from $170.2 million
in the year earlier period. Included in revenue in the year earlier period is
$6.3 million of revenue from the division's scientific operating unit, which was
sold in December 2001. Excluding the results of the scientific unit in the year
earlier period, revenue in the professional services division decreased 25.0% in
the three months ended March 31, 2002, from the year earlier period. This
decrease in the division's revenue was primarily attributable to the diminished
demand for knowledge worker resources in the services provided by the division,
primarily in the United States. Excluding the results of the scientific unit in
the year earlier period, revenue generated in the United Kingdom decreased 15.5%
year over year, while revenue generated in the United States decreased 29.4%.
Excluding the results of the scientific unit, the professional services division
operates primarily through four operating units consisting of the accounting and
finance, legal, engineering/technical, and career management and consulting,
which contributed 43.3%, 11.1%, 34.7%, and 10.9%, respectively, of the
division's revenue by group during the three months ended March 31, 2002, as
compared to 42.2%, 12.8%, 36.2%, and 8.8%, respectively, during the year earlier
period.
Gross Profit. Gross profit decreased $47.4 million or 38.3% to $76.3 million in
the three months ended March 31, 2002, from $123.7 million in the year earlier
period. Gross margin decreased to 25.7% in the three months ended March 31,
2002, from 27.8% in the year earlier period.
The gross margin in the IT services division decreased to 20.5% in the three
months ended March 31, 2002, from 22.2% in the year earlier period. The decrease
in gross margin in the IT services division is primarily attributable to a
decrease in bill rates and, to a lesser extent, the lower level of direct hire
and permanent placement fees, which generate a higher margin. As a percentage of
revenue, the division's direct hire and permanent placement fees decreased to
0.4% of revenue in the three months ended March 31, 2002, from 1.0% of revenue
in the year earlier period.
The gross margin in the e-Business solutions division decreased to 32.2% in the
three months ended March 31, 2002, from 33.1% in the year earlier period.
Consultant utilization within the e-Business solutions division decreased as a
result of (1) the division's business model utilizing salaried consultants and
(2) the weak demand for e-Business consulting services. The Company continued to
address consultant utilization within the division through the downsizing of its
consultant base.
12
The gross margin in the professional services division decreased to 30.9% in the
three months ended March 30, 2002, from 33.5% in the year earlier period. The
decrease in gross margin in the professional services division is primarily
attributable to a lower level of direct hire and permanent placement fees in the
three months ended March 31, 2002 as compared to 2001. Excluding the results of
the scientific unit, as a percentage of revenue, the division's direct hire and
permanent placement fees decreased to 5.4% of revenue in the three months ended
March 31, 2002, from 7.4% in the year earlier period.
Operating expenses. Operating expenses decreased $38.0 million or 34.7% to $71.5
million in the three months ended March 31, 2002, from $109.5 million in the
year earlier period. During the year earlier period, operating expenses included
$9.6 million of goodwill amortization. The Company's general and administrative
('G&A') expenses decreased $28.0 million or 29.6% to $66.5 million in the three
months ended March 31, 2002, from $94.5 million in the year earlier period.
The IT services division's G&A expenses decreased $6.5 million, or 18.9%, to
$27.9 million in the three months ended March 31, 2002, from $34.4 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 18.5% in the three months ended March 31, 2002, from 15.7% in the
year earlier period. The decrease in the IT services division's G&A expenses is
associated with the decrease in revenue for the three months ended March 31,
2002, and cost reduction initiatives implemented within the division throughout
2001 and into the first quarter of 2002.
The e-Business solutions division's G&A expenses decreased $14.3 million, or
63.3%, to $8.3 million in the three months ended March 31, 2002, from $22.6
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 36.6% in the three months ended March 31, 2002, from
41.3% in the year earlier period. The decrease in the e-Business solutions
division's G&A expenses was related to reductions in its work force that started
in early 2001 and has continued through the first quarter of 2002.
The professional services division's G&A expenses decreased $7.2 million, or
19.2%, to $30.3 million in the three months ended March 31, 2002, from $37.5
million in the year earlier period. Excluding the results of the scientific unit
in the year earlier period, the professional services G&A expenses decreased
16.3% in the three months ended March 31, 2002, from the year earlier period. As
a percentage of revenue, the division's G&A expenses increased to 24.6% in the
three months ended March 31, 2002, from 22.0% in the year earlier period. The
decrease in the professional services division's G&A expenses is associated with
the decrease in revenue for the three months ended March 31, 2002, and cost
reduction initiatives implemented within the division beginning in the spring of
2001 and into the first quarter of 2002.
Income from operations. Income from operations decreased $9.5 million, or 66.9%,
to $4.7 million in the three months ended March 31, 2002, from $14.2 million in
the year earlier period. Excluding goodwill amortization in the year earlier
period, income from operations decreased 80.3% in the three months ended March
31, 2002, from the year earlier period. Income from operations for the IT
services division decreased $5.9 million, or 89.4 %, to $0.7 million in the
three months ended March 31, 2002, from $6.6 million in the year earlier period.
Excluding goodwill amortization in the year earlier period, income from
operations for the IT services division decreased 93.9% in the three months
ended March 31, 2002, from the year earlier period. Loss from operations for the
e-Business solutions division decreased $5.2 million, to a $2.2 million loss in
the three months ended March 31, 2002, from a $7.4 million loss in the year
earlier period. Excluding goodwill amortization in the year earlier period, loss
from operations for the e-Business solutions division decreased to a $2.2
million loss in the three months ended March 31, 2002, from a $5.5 million loss
in the year earlier period. Income from operations for the professional services
division decreased $8.9 million, or 58.9%, to $6.2 million in the three months
ended March 31, 2002, from $15.1 million in the year earlier period. Excluding
goodwill amortization in the year earlier period, income from operations for the
professional services division decreased 65.4% in the three months ended March
31, 2002, from the year earlier period. For the Company as a whole, income from
operations as a percentage of revenue decreased to 1.6% in the three months
ended March 31, 2002, from 3.2% in the year earlier period. Excluding goodwill
amortization in the year earlier period, for the Company as a whole, income from
operations as a percentage of revenue decreased to 1.6% in the three months
ended March 31, 2002, from 5.4% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facility and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $1.8 million, or 48.6%, to $1.9 million in the three
months ended March 31, 2002, from $3.7 million in the year earlier period. The
decrease in interest expense is related to the lower level of borrowings under
the Company's credit facility during the first quarter of 2002. Interest expense
was offset by $0.3 million of interest and other income in the three months
ended March 31, 2002, as compared to $0.5 million in the year earlier period.
Income taxes. The Company's effective tax rate decreased to 38.0% in the three
months ended March 31, 2002, as compared to 42.0% in the year earlier period,
due to the discontinuance of goodwill amortization required by SFAS 142. In the
year earlier period, non-deductible goodwill amortization on certain
acquisitions had an increased effect on the Company's effective tax rate.
13
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change decreased $4.5
million, or 70.3%, to $1.9 million in the three months ended March 31, 2002,
from $6.4 million in the year earlier period. Excluding goodwill amortization in
the year earlier period, income before cumulative effect of accounting change
decreased 85.6% in the three months ended March 31, 2002, from the year earlier
period. Income before cumulative effect of accounting change as a percentage of
revenue decreased to 0.7% in the three months ended March 31, 2002, from 1.4% in
the year earlier period. Excluding goodwill amortization in the year earlier
period, income before cumulative effect of accounting change as a percentage of
revenue decreased to 0.7% in the three months ended March 31, 2002, from 3.0% in
the year earlier period.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs, and capital expenditures.
These requirements have been met through a combination of bank debt and
internally generated funds. The Company's operating cash flows and working
capital requirements are affected significantly by the timing of payroll and by
the receipt of payment from the customer. Generally, the Company pays its
consultants weekly or semi-monthly, and receives payments from customers within
30 to 90 days from the date of invoice.
The Company had working capital of $170.4 million and $204.7 million as of March
31, 2002 and December 31, 2001, respectively. The Company had cash and cash
equivalents of $34.2 million and $49.2 million as of March 31, 2002 and December
31, 2001, respectively.
For the three months ended March 31, 2002 and 2001, the Company generated $29.0
million and $30.3 million of cash flow from operations, respectively.
For the three months ended March 31, 2002, the Company used $0.5 million of cash
for investing activities. For the three months ended March 31, 2001, the Company
used $6.3 million of cash for investing activities, of which $4.8 million were
used for capital expenditures and $1.5 million for earn-out payments.
For the three months ended March 31, 2002 and 2001, the Company used $43.3
million and $23.0 million of cash for financing activities, respectively. This
amount primarily represented repayments on the Company's credit facility and on
notes issued in connection with the acquisition of certain companies. These
repayments were mainly funded from cash flow from operations.
On November 4, 1999, the Company's Board of Directors authorized the repurchase
of up to $65.0 million of the Company's common stock. As of March 31, 2002, no
shares have been repurchased under this authorization.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the remainder of 2002, will be approximately $7.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with Bank of America as the principal agent. This facility
expires on October 27, 2003. The credit facility contains certain financial and
non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment of the credit facility is
guaranteed by the material subsidiaries of the Company. In addition, approval of
an individual acquisition is required by the majority of the lenders when cash
consideration for the acquisition exceeds 10% of consolidated stockholders'
equity of the Company.
As of April 30, 2002, the Company had a balance of approximately $56.0 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $2.0 million, reducing the amount of funds available
under the credit facility to approximately $292.0 million as of April 30, 2002.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial notional amount of $110.4 million as
of February 12, 2001, which amortizes to $55.7 million on January 2, 2003. On
March 2, 2001, the Company entered into an additional interest rate swap
agreement to convert an additional $25.0 million into fixed rate debt. This
additional agreement was settled in the fourth quarter of 2001. These agreements
were approved by the Board of Directors. As of March 31, 2002, the Company had
an outstanding interest rate swap agreement with a total notional amount of
$55.7 million and an underlying rate of 5.185%.
15
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for professional services is typically lower during the first quarter
until customers' operating budgets are finalized and the profitability of the
Company's consultants is generally lower in the fourth quarter due to fewer
billing days because of the higher number of holidays and vacation days.
16
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's debt obligations under its credit
facility and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and seeks to preserve its invested funds by
placing these funds with high credit quality issuers. The Company constantly
evaluates its invested funds to respond appropriately to a reduction in the
credit rating of any investment issuer or guarantor.
The Company's debt obligations totaled $56.4 million as of March 31, 2002, and
the Company had $292.0 million available under its credit facility.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial notional amount of $110.4 million as
of February 12, 2001, which amortizes to $55.7 million on January 2, 2003. On
March 2, 2001, the Company entered into an additional interest rate swap
agreement to convert an additional $25.0 million into fixed rate debt. This
additional agreement was settled in the fourth quarter of 2001. These agreements
were approved by the Board of Directors. As of March 31, 2002, the Company had
an outstanding interest rate swap agreement with a total notional amount of
$55.7 million and an underlying rate of 5.185%. Hedging interest rate exposure
through the use of swaps are specifically contemplated to manage risk in keeping
with management policy. The Company does not utilize derivatives for speculative
purposes. These swaps are transaction-specific so that a specific debt
instrument determines the amount, maturity and specifics of each swap.
The Company prepared sensitivity analyses of its borrowings under the credit
facility and its financial instruments to determine the impact of hypothetical
changes in interest rates on the Company's results of operations and cash flows,
and the fair value of its financial instruments. The interest-rate analysis
assumed a 50 basis point adverse change in interest rates on all borrowings
under the credit facility and financial instruments, representing approximately
10% of the Company's weighted average borrowing rate. However, the interest-rate
analysis did not consider the effects of the reduced level of economic activity
that could exist in such an environment. A 50 basis point adverse move in
interest rates on the Company's outstanding borrowings under the credit facility
would have an immaterial impact on the Company's results of operations and cash
flows. However, a 50 basis point adverse move in interest rates would decrease
the fair value of the Company's interest rate swap agreement by approximately
$0.2 million.
Foreign currency exchange rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 32% of its consolidated revenues
for the three months ended March 31, 2002 from international operations,
approximately 97% of which were from the United Kingdom. The exchange rate has
decreased approximately 1% in the three months ended March 31, 2002, from 1.45
at December 31, 2001 to 1.43 at March 31, 2002. The Company prepared sensitivity
analyses to determine the adverse impact of hypothetical changes in the British
pound sterling, relative to the U.S. Dollar, on the Company's results of
operations and cash flows. However, the analysis did not include the potential
impact on sales levels resulting from a change in the British pound sterling. An
additional 10% adverse movement in the exchange rate would have had an
immaterial impact on the Company's cash flows and financial position for 2001.
While fluctuations in the British pound sterling have not historically had a
material impact on the Company's results of operations, the lower level of
earnings resulting from a decrease in demand for the services provided by the
Company's domestic operations have increased the impact of exchange rate
fluctuations. As of March 31, 2002, the Company did not hold or has not
previously entered into any foreign currency derivative instruments.
17
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's business services is significantly affected by the
general level of economic activity in the markets served by the Company. During
periods of slowing economic activity, companies may reduce the use of outside
consultants and staff augmentation services prior to undertaking layoffs of
full-time employees. Also during such periods, companies may elect to defer
installation of new IT systems and platforms (such as Enterprise Resource
Planning systems) or upgrades to existing systems and platforms. As a result,
any significant or continued economic downturn could have a material adverse
effect on the Company's results of operations or financial condition.
The Company may also be adversely affected by consolidations through mergers and
otherwise of major customers or between major customers with non-customers.
These consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
Historically, the Company has included acquisitions are a part of the Company's
overall growth strategy. Although the Company continues to seek acquisition
opportunities, there can be no assurance that the Company will be able to
negotiate acquisitions on economic terms acceptable to the Company or that the
Company will be able to successfully identify acquisition candidates and
integrate all acquired operations into the Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Financial Covenants
The Company's credit facility requires that specified financial ratios be
maintained. The Company's ability to meet these financial ratios can be affected
by events beyond its control. Failure to meet those financial ratios could allow
its lenders to terminate the credit facility and to declare all amounts
outstanding under those facilities to be immediately due and payable. Further,
the Company may not be able to obtain a replacement credit facility on terms and
conditions or at interest rates as favorable as those in current agreements.
Income Tax Audits
The Company is subject to periodic review by federal, state, and local taxing
authorities in the ordinary course of business. During 2001, the Company was
notified by the Internal Revenue Service that certain prior year income tax
returns will be examined. As part of this examination, the net tax benefit
associated with an investment in a subsidiary that the Company recognized in
2000 of $86.3 million is also being reviewed. There can be no assurance that the
Internal Revenue Service will not disallow any or all of the tax benefit. A
disallowance would result in the Company having to repay any or all of the tax
benefit to the Internal Revenue Service which may affect the Company's financial
condition and financial covenants.
18
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
3.1 Amended and Restated Articles of Incorporation.
B. Reports on Form 8-K
No disclosure required.
19
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Timothy D. Payne President, Chief May 14, 2002
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief May 14, 2002
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
20