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, 2003
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, 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
There were 101,488,430 shares with a par value of $0.01 outstanding at May 2,
2003.
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 of this report and under the heading '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, 2003 (unaudited)
and December 31, 2002.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three Months
ended March 31, 2003 and 2002...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2003 and 2002...................................................................... 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 15
Item 4 Controls and Procedures................................................................................ 18
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
Certifications......................................................................................... 21
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 share amounts) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 76,421 $ 66,934
Accounts receivable, net of allowance of $17,665 and $17,506 181,577 185,510
Prepaid expenses 5,384 5,099
Deferred income taxes 3,350 3,386
Other 10,959 11,632
----------------------------------
Total current assets 277,691 272,561
Furniture, equipment, and leasehold improvements, net 36,207 38,792
Goodwill, net 512,518 511,796
Deferred income taxes 63,258 64,085
Other assets, net 10,264 10,749
----------------------------------
Total assets $ 899,938 $ 897,983
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 45,382 49,834
Accrued payroll and related taxes 41,795 35,885
Income taxes payable 17,622 14,911
----------------------------------
Total current liabilities 104,799 100,630
Other 15,282 15,794
----------------------------------
Total liabilities 120,081 116,424
----------------------------------
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;
102,542,029 and 102,531,491 shares issued, respectively 1,025 1,025
Additional contributed capital 622,071 622,079
Retained earnings 166,734 163,781
Accumulated other comprehensive (loss) income (1,167) 66
Deferred stock compensation (3,453) (3,958)
Treasury stock, at cost (783,000 shares in 2003
and 290,400 shares in 2002) (5,353) (1,434)
----------------------------------
Total stockholders' equity 779,857 781,559
----------------------------------
Total liabilities and stockholders' equity $ 899,938 $ 897,983
==================================
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) 2003 2002
- ----------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue $ 271,799 $ 296,453
Cost of revenue 201,566 220,195
------------------------------
Gross profit 70,233 76,258
------------------------------
Operating expenses:
General and administrative 60,602 66,547
Depreciation and intangibles amortization 4,620 4,998
------------------------------
Total operating expenses 65,222 71,545
------------------------------
Income from operations 5,011 4,713
Other expense, net 6 1,574
------------------------------
Income before provision for income taxes and
cumulative effect of accounting change 5,005 3,139
Provision for income taxes 2,052 1,193
------------------------------
Income before cumulative effect of accounting change 2,953 1,946
Cumulative effect of accounting change (net of
a $112,953 income tax benefit) - (553,712)
------------------------------
Net income (loss) $ 2,953 $ (551,766)
==============================
Basic net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.03 $ 0.02
Cumulative effect of accounting change, net of tax - (5.62)
------------------------------
Basic net income (loss) per common share $ 0.03 $ (5.60)
==============================
Average common shares outstanding, basic 102,004 98,475
==============================
Diluted income (loss) per common share:
Income before cumulative effect of accounting change $ 0.03 $ 0.02
Cumulative effect of accounting change, net of tax - (5.49)
------------------------------
Diluted net income (loss) per common share $ 0.03 $ (5.47)
==============================
Average common shares outstanding, diluted 102,677 100,799
==============================
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) 2003 2002
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,953 $ (551,766)
Adjustments to net income (loss) to net cash provided by
by operating activities:
Cumulative effect of accounting change, net of tax - 553,712
Depreciation and intangibles amortization 4,620 4,998
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable 3,023 20,059
Prepaid expenses and other assets (283) (520)
Deferred income taxes 863 4,933
Deferred compensation 505 400
Accounts payable and accrued expenses (2,057) (7,209)
Accrued payroll and related taxes 6,062 269
Other, net (24) 4,169
--------------- ---------------
Net cash provided by operating activities 15,662 29,045
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (1,285) (513)
Purchase of businesses, net of cash acquired (1,027) -
--------------- ---------------
Net cash used in investing activities (2,312) (513)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock (3,706) -
Discount realized on employee stock purchase plan (38) (490)
Proceeds from stock options exercised 30 2,578
Repayments on indebtedness (29) (45,359)
--------------- ---------------
Net cash used in financing activities (3,743) (43,271)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (120) (309)
Net increase (decrease) in cash and cash equivalents 9,487 (15,048)
Cash and cash equivalents, beginning of period 66,934 49,208
--------------- ---------------
Cash and cash equivalents, end of period $ 76,421 $ 34,160
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 for the year ended December 31, 2002.
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.
Stock-Based Compensation
During December 2002, the Financial Accounting Standards Board (FASB),
issued Statement of Financial Accounting Standards (SFAS) No. 148, 'Accounting
for Stock-Based Compensation - Transition and Disclosure,' which provides for
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, 'Accounting for Stock-Based
Compensation,' to require more prominent disclosure in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company accounts for its employee and director stock option plans in
accordance with APB Opinion No. 25, 'Accounting for Stock Issued to Employees,'
and related Interpretations. The Company measures compensation expense for
employee and director stock options as the aggregate difference between the
market value of its common stock and exercise prices of the options on the date
that both the number of shares the grantee is entitled to receive and the
exercise prices are known. Compensation expense associated with restricted stock
grants is equal to the market value of the shares on the date of grant and is
recorded pro rata over the required holding period. If the Company had elected
to recognize compensation cost for all outstanding options granted by the
Company by applying the fair value recognition provisions of SFAS No. 148 to
stock-based employee compensation, net income (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts indicated below.
Three months ended March 31,
------------------------------
(dollar amounts in thousands except per share amounts) 2003 2002
- ----------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ 2,953 $ (551,766)
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (1,245) (1,080)
---------------------------
Pro forma $ 1,708 $ (552,846)
===========================
Basic net income (loss) per common share
As reported $ 0.03 $ (5.60)
Pro forma $ 0.02 $ (5.61)
Diluted net income (loss) per common share
As reported $ 0.03 $ (5.47)
Pro forma $ 0.02 $ (5.48)
6
2. Net Income per Common Share
The calculation of basic net income (loss) per common share and diluted net
income (loss) per common share is presented below:
Three months ended March 31,
------------------------------
(dollar amounts in thousands except per share amounts) 2003 2002
- ----------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income before cumulative effect of accounting change $ 2,953 $ 1,946
Cumulative effect of accounting change, net of tax - (553,712)
------------------------------
Net income (loss) $ 2,953 $ (551,766)
==============================
Basic average common shares outstanding 102,004 98,475
==============================
Basic income (loss) per common share:
Income before cumulative effect of accounting change $ 0.03 $ 0.02
Cumulative effect of accounting change, net of tax - (5.62)
------------------------------
Basic net income (loss) per common share $ 0.03 $ (5.60)
==============================
Diluted income (loss) per common share computation:
Income before cumulative effect of accounting change $ 2,953 $ 1,946
Cumulative effect of accounting change, net of tax - (553,712)
------------------------------
Net income (loss) $ 2,953 $ (551,766)
==============================
Basic average common shares outstanding 102,004 98,475
Incremental shares from assumed exercise of stock options 673 2,324
------------------------------
Diluted average common shares outstanding 102,677 100,799
==============================
Diluted income (loss) per common share:
Income before cumulative effect of accounting change $ 0.03 $ 0.02
Cumulative effect of accounting change, net of tax - (5.49)
------------------------------
Diluted net income (loss) per common share $ 0.03 $ (5.47)
==============================
Options to purchase 8.5 million and 2.4 million shares of common stock that
were outstanding as of March 31, 2003 and 2002, respectively, were not included
in the computation of diluted earnings per share as the exercise prices of these
options were greater than the average market price of the common shares.
3. 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
4. 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: IT services, professional
services, and IT solutions. The Company's reportable segments are strategic
divisions that offer different services and are managed separately as each
division requires different resources and marketing strategies. The IT services
division 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 professional services division
provides expertise in a wide variety of disciplines including accounting and
finance, law, engineering and technical, workforce management, executive search,
human resource consulting, and health care. The IT solutions division, operating
under the brand Idea Integration, provides IT strategy consulting, design and
branding, application development, and integration. The professional services
division's results for the three months ended March 31, 2003, include the
results of the Company's health care staffing unit, which was acquired by the
Company in July 2002, and the results from an immaterial acquisition of a legal
staffing business, which was acquired in the first quarter of 2003. 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,
(dollar amounts in thousands) 2003 2002
- -----------------------------------------------------------------------------------
<s> <c> <c>
Revenue
IT services $ 126,620 $ 150,747
Professional services 126,977 122,908
IT solutions 18,202 22,798
------------ ------------
Total revenue $ 271,799 $ 296,453
============ ============
Gross profit
IT services $ 27,593 $ 30,935
Professional services 36,420 37,973
IT solutions 6,220 7,350
------------ ------------
Total gross profit $ 70,233 $ 76,258
============ ============
Income before provision for income taxes and
cumulative effect of accounting change
IT services $ 575 $ 691
Professional services 4,020 6,245
IT solutions 416 (2,223)
------------ ------------
5,011 4,713
Corporate interest and other expense, net (6) (1,574)
------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 5,005 $ 3,139
============ ============
Geographic Areas
Revenue
United States $ 178,691 $ 201,667
U.K. 90,409 91,537
Other 2,699 3,249
------------ ------------
Total revenue $ 271,799 $ 296,453
============ ============
8
March 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 472,289 $ 457,163
Professional services 371,272 380,340
IT solutions 55,766 59,700
------------ ------------
899,327 897,203
Corporate 611 780
------------ ------------
Total assets $ 899,938 $ 897,983
============ ============
Geographic Areas
Identifiable Assets
United States $ 637,495 $ 636,351
U.K. 255,169 254,169
Other 7,274 7,463
------------ ------------
Total assets $ 899,938 $ 897,983
============ ============
5. 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, 2003 and 2002, is as follows:
Three months ended March 31,
------------------------------
2003 2002
- -----------------------------------------------------------------------------
Net income (loss) $ 2,953 $ (551,766)
Unrealized loss on foreign currency
translation adjustments (a) (1,233) (1,407)
Unrealized gain on derivative instruments,
net of deferred taxes - 830
----------- ----------
Total other comprehensive loss (1,233) (577)
Comprehensive income (loss) $ 1,720 $ (552,343)
=========== ==========
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
9
6. Excess Real Estate Obligations
During June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
for a cost associated with an exit or disposal activity be recognized, at fair
value, when the liability is incurred rather than at the time an entity commits
to a plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
The Company adopted the provisions of SFAS No. 146 in 2002. In the fourth
quarter of 2002, the Company recorded a $9.7 million charge relating to its
abandonment of excess real estate obligations for certain vacant office space.
In 2001 and 2002, the Company experienced a material decrease in demand for
its domestic operations. To reflect this decreased demand, the Company made
attempts to realign its real estate capacity needs by vacating and reorganizing
certain office space.
In the fourth quarter of 2002, management determined that the Company would
not be able to utilize this vacated office space and, therefore, notified the
respective lessors of their intentions. This determination eliminated the
economic benefit associated with the vacated office space. As a result, the
Company recorded a charge for contract termination costs, mainly due to, costs
that will continue to be incurred under the lease contract for its remaining
term without economic benefit to the Company. While the Company looks to settle
excess lease obligations, the current economic environment has made it difficult
for the Company to either settle or find acceptable subleasing opportunities.
The average remaining lease term for the lease obligations included herein is
approximately 2.5 years.
The following table summarizes the activity of the charge for contract
termination costs from origination through March 31, 2003 by reportable segment:
IT Professional IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 675 $ 1,163 $ 7,861 $ 9,699
Costs paid or otherwise settled during the
three months ended March 31, 2003 (184) (157) (1,862) (2,203)
----------- ----------- ----------- -----------
Balance as of March 31, 2003 $ 491 1,006 5,999 7,496
=========== =========== =========== ===========
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS Group, Inc. ('MPS' or the 'Company') (NYSE:MPS) is a leading global provider
of business services with over 180 offices throughout the United States, Canada,
the United Kingdom, and continental Europe. MPS delivers a mix of consulting,
solutions, and staffing services in the disciplines such as IT services, finance
and accounting, legal, engineering, IT solutions, workforce management,
executive search, human capital automation, and health care.
The following detailed analysis of operations should be read in conjunction with
the 2002 Consolidated Financial Statements and related notes included in the
Company's Form 10-K for the year ended December 31, 2002.
Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002
Consolidated Results
Revenue. Revenue decreased $24.7 million, or 8.3%, to $271.8 million in the
three months ended March 31, 2003, from $296.5 million in the year earlier
period. The decrease in revenue was attributable to diminished demand for the
Company's services. For example, the Company's customers continued to experience
a constrained ability to spend on IT initiatives due to uncertainties relating
to the economy.
Included in the results for the three months ended March 31, 2003, was revenue
from the Company's health care staffing business, which was acquired in July
2002, and revenue from an acquisition of a legal staffing business, for $1.6
million of consideration, in the first quarter of 2003. These businesses
(together, the 'acquisitions') contributed $5.3 million in revenue for the three
months ended March 31, 2003.
Approximately 34% of the Company's revenue for the three months ended March 31,
2003 was generated internationally, primarily in the United Kingdom. The
Company's revenue is therefore subject to changes in foreign currency exchange
rates. The weakening of the U.S. dollar in the first quarter of 2003 had a
positive impact on revenue, as revenue, on a constant currency basis decreased
11.7%, as compared to the decrease of 8.3% above. Constant currency removes the
impact on financial data from changes in exchange rates between the U.S. dollar
and the functional currencies of its foreign subsidiaries, by translating the
current period financial data into U.S. dollars using the same foreign currency
exchange rates that were used to translate the financial data for the previous
period.
Gross Profit. Gross profit decreased $6.1 million or 8.0% to $70.2 million in
the three months ended March 31, 2003, from $76.3 million in the year earlier
period. Gross margin increased slightly to 25.8% in the three months ended March
31, 2003, from 25.7% in the year earlier period.
Operating expenses. Total operating expenses decreased $6.3 million or 8.8% to
$65.2 million in the three months ended March 31, 2003, from $71.5 million in
the year earlier period. The Company's general and administrative ('G&A')
expenses decreased $5.9 million, or 8.9%, to $60.6 million in the three months
ended March 31, 2003, from $66.5 million in the year earlier period. As a
percentage of revenue, the Company's G&A expenses decreased slightly to 22.3% in
the three months ended March 31, 2003, from 22.4% in the year earlier period.
The decrease in G&A expenses was attributable to a decrease in revenue for the
first quarter of 2003, and cost reduction initiatives that were implemented
throughout 2002 across MPS's divisions in response to the lower revenue levels.
The decrease in revenue primarily reduces the variable component of compensation
for the Company's employees. Certain of the cost reduction initiatives include
the reduction of the Company's salaried workforce, and the realignment of
compensation levels for the Company's employees.
Income from operations. Income from operations increased $0.3 million, or 6.4%,
to $5.0 million in the three months ended March 31, 2003, from $4.7 million 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 $1.6 million, or 84.2%, to $0.3 million in the three
months ended March 31, 2003, from $1.9 million in the year earlier period. The
decrease in interest expense is related to the reduction of borrowings under the
Company's credit facility between these two periods. As of March 31, 2002, the
Company had $56 million outstanding under its credit facility, while there were
no borrowings outstanding during the first quarter of 2003. Interest expense was
offset by $0.3 million of interest and other income in both the three months
ended March 31, 2003 and 2002.
Income taxes. The Company's effective tax rate increased to 41.0% in the three
months ended March 31, 2003, as compared to 38.0% in the year earlier period.
The increase was due to the higher level of non-deductible expenses in the first
quarter of 2003.
11
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $1.1
million, or 57.9%, to $3.0 million in the three months ended March 31, 2003,
from $1.9 million in the year earlier period. Income before cumulative effect of
accounting change as a percentage of revenue increased to 1.1% in the three
months ended March 31, 2003, from 0.7% in the year earlier period.
Segment Results
IT Services division
Revenue in the IT services division decreased $24.1 million, or 16.0%, to $126.6
million in the first quarter of 2003, from $150.7 million in the year earlier
period. On a constant currency basis, excluding the effects of exchange rates,
revenue decreased 19.3%. The decrease in revenue was attributable to the
diminished demand for IT services. The division's customers continued to
experience a constrained ability to spend on IT initiatives due to uncertainties
relating to the economy.
Of the division's revenue, approximately 62% and 64% was generated in the United
States in the three months ended March 31, 2003 and 2002, respectively. The
remainder was generated internationally, primarily in the United Kingdom.
Revenue generated in the United States decreased 19.2% in the first quarter of
2003. On a constant currency basis, revenue decreased 19.6% for revenue
generated internationally.
Gross profit for the IT services division decreased $3.3 million, or 10.8%, to
$27.6 million in the first quarter of 2003, from $30.9 million in the year
earlier period. The gross margin increased to 21.8% in the three months ended
March 31, 2003, from 20.5% in the year earlier period. The increase in gross
margin is attributable to the division's domestic operations where the gross
margin increased to 25.7% in the first quarter of 2003, from 23.3% in the year
earlier period. In the year earlier period, the division's domestic operations
experienced a decrease in bill rates and a shift in the mix of its services,
which exceeded the related decrease in pay rates of its primarily hourly
employees. The Company was able to more effectively manage the differential in
the bill and pay rates throughout 2002, which resulted in an increase in gross
margin from the year earlier period. For revenue generated internationally, the
gross margin remained constant at 15.4% for both the three months ended March
31, 2003 and 2002.
The IT services division's G&A expenses decreased $3.1 million, or 11.1%, to
$24.8 million in the three months ended March 31, 2003, from $27.9 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 19.6% in the three months ended March 31, 2003, from 18.5% in the
year earlier period. The decrease in the division's G&A expenses is associated
with the decrease in revenue for the three months ended March 31, 2003, and cost
reduction initiatives implemented within the division throughout 2002.
Income from operations for the IT services division decreased $0.1 million, or
14.3 %, to $0.6 million in the three months ended March 31, 2003, from $0.7
million in the year earlier period.
Professional services division
Revenue in the professional services division increased $4.1 million, or 3.3%,
to $127.0 million in the three months ended March 31, 2003, from $122.9 million
in the year earlier period. Acquisitions contributed $5.3 million in revenue for
the three months ended March 31, 2003.
Of the division's revenue, approximately 65% and 64% was generated in the United
States in the first quarter of 2003 and 2002, respectively. The remainder was
generated in the United Kingdom. Excluding the contribution from acquisitions,
revenue generated in the United States decreased 2.6% for the first quarter of
2003. On a constant currency basis, revenue decreased 8.8% for revenue generated
in the United Kingdom. The decrease in revenue was attributable to the
diminished demand for staffing services and workforce solutions provided by the
division.
The professional services division operates primarily through five operating
units consisting of accounting and finance, legal, engineering, workforce
management and executive search, and health care, which contributed 41.1%,
13.1%, 34.2%, 7.6%, and 4.0%, respectively, of the division's revenue by group
during the three months ended March 31, 2003, as compared to 43.3%, 11.1%,
34.7%, 10.9%, and 0%, respectively, during the year earlier period.
Gross profit for the professional services division decreased $1.6 million, or
4.2%, to $36.4 million in the first quarter of 2003, from $38.0 million in the
year earlier period. The gross margin decreased to 28.7% in the three months
ended March 31, 2003, from 30.9% in the year earlier period. The decrease in
gross margin is primarily attributable to a decrease in bill rates for the
services provided by the division 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 4.2% of revenue in the three months ended March 31, 2003, from 5.4%
in the year earlier period.
12
The professional services division's G&A expenses increased $0.5 million, or
1.7%, to $30.8 million in the three months ended March 31, 2003, from $30.3
million in the year earlier period. On a constant currency basis, G&A expenses
decreased 3.0%, as compared to the 1.7% increase above.
As a percentage of revenue, the division's G&A expenses decreased to 24.3% in
the three months ended March 31, 2003, from 24.6% in the year earlier period.
The decrease in the professional services division's G&A expenses is associated
with the decrease in revenue, on a constant currency basis, for the first
quarter of 2003, and cost reduction initiatives implemented within the division
throughout 2002.
Income from operations for the professional services division decreased $2.2
million, or 35.5 %, to $4.0 million in the three months ended March 31, 2003,
from $6.2 million in the year earlier period.
IT Solutions division
Revenue in the IT solutions division decreased $4.6 million, or 20.2%, to $18.2
million in the three months ended March 31, 2003, from $22.8 million in the year
earlier period. Weak demand for IT consulting solutions was intensified by the
uncertainties relating to the economy. As a result, management refined its focus
by deciding to exit certain non-strategic markets. These markets, while
generating revenue, were not producing positive income or cash flow from
operations.
Gross profit for the IT solutions division decreased $1.2 million, or 16.2%, to
$6.2 million in the three months ended March 31, 2003, from $7.4 million in the
year earlier period. However, the gross margin increased to 34.2% in the first
quarter of 2003, from 32.2% in the year earlier period. This increase was driven
by higher utilization of the Company's salaried consultants. This division's
business model, unlike the Company's other divisions, uses primarily salaried
consultants to meet customer demand. To reflect lower customer demand, the
division significantly reduced billable headcount during 2002.
The IT solutions division's G&A expenses decreased $3.3 million, or 39.8%, to
$5.0 million in the three months ended March 31, 2003, from $8.3 million in the
year earlier period. As a percentage of revenue, the division's G&A expenses
decreased to 27.4% in the first quarter of 2003, from 36.6% in the year earlier
period. The decrease in the division's G&A expenses was primarily related to
reductions in its work force throughout 2002.
Income from operations for the IT solutions division increased $2.6 million, to
$0.4 million in the three months ended March 31, 2003, from a $2.2 million loss
in the year earlier period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical 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 customers. 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 $172.9 million and $171.9 million as of March
31, 2003 and December 31, 2002, respectively. The Company had cash and cash
equivalents of $76.4 million and $66.9 million as of March 31, 2003 and December
31, 2002, respectively.
For the three months ended March 31, 2003 and 2002, the Company generated $15.7
million and $29.0 million of cash flow from operations, respectively. The
reduction in cash flow from operations, from 2002 to 2003, is primarily due to a
reduced level of earnings in the current year, which was somewhat offset by an
improvement in receivables collection.
For the three months ended March 31, 2003, the Company used $2.3 million of cash
for investing activities, of which $1.3 million were used for capital
expenditures and $1.0 million for an acquisition of a legal staffing business.
For the three months ended March 31, 2002, the Company used $0.5 million of cash
for investing activities, all of which were used for capital expenditures.
13
For the three months ended March 31, 2003, the Company used $3.7 million of cash
for financing activities, which were used for the repurchase of the Company's
common stock. For the three months ended March 31, 2002, the Company used $43.3
million of cash for financing activities. This amount primarily represented
repayments on the Company's credit facility and on notes issued in connection
with the acquisition of certain companies. These repurchases and repayments were
mainly funded from cash flow from operations.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's common stock. The Company began to utilize this
authorization in the third quarter of 2002. As of May 2, 2003, 1.1 million
shares at a cost of $5.4 million 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 2003, will be approximately $6.0 million.
While there can be no assurance in this regard, the Company believes that funds
provided by operations, 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 $200 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 if cash
consideration for the acquisition would exceed 10% of consolidated stockholders'
equity of the Company.
At both December 31, 2002, and May 2, 2003, there were no borrowings outstanding
under the credit facility. The Company had outstanding letters of credit in the
amount of $2.4 million, reducing the amount of funds available under the credit
facility to approximately $197.6 million at both December 31, 2002, and May 2,
2003. While there can be no assurance that a new credit facility can be obtained
on terms acceptable to management, management expects to enter into a new
revolving credit facility during 2003. The size and timing will depend upon the
capital needs of the Company and the condition of the lending environment. While
there can be no assurance in this regard, the Company believes that borrowings
under the credit facility will not be needed to fund its operations for at least
the next 12 months.
SEASONALITY
The Company's quarterly operating results are affected by the number of billing
days in the quarter and the seasonality of its customers' businesses. Demand for
the Company's services has historically been lower during the calendar year-end,
as a result of holidays, through February of the following year, as the
Company's customers approve annual budgets. Extreme weather conditions may also
affect demand in the early part of the year as certain of the Company's client
bases are located in geographic areas subject to extreme weather.
14
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.
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 34% of its consolidated revenues
for the three months ended March 31, 2003, from international operations,
approximately 97% of which were from the United Kingdom. The British pound
sterling to U.S. dollar exchange rate has decreased approximately 2% in 2003,
from 1.61 at December 31, 2002 to 1.58 at March 31, 2003. 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 the
three months ended March 31, 2003. While fluctuations in the British pound
sterling have not historically had a material impact on the Company's
consolidated 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, 2003, the Company did not hold and has not previously entered into any
foreign currency derivative instruments.
15
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Demand For The Company's Services has Weakened Significantly And Demand Will
Likely Remain Weak For Some Time Because Of The Current Economic Climate.
The Company's results are affected by the level of business activity of its
customers, which is driven by the level of economic activity in the industries
and markets they serve. The current economic downturn and uncertainty has
significantly hurt its results of operations. Further deterioration in global
economic or political conditions could increase these effects. As long as this
uncertainty remains, management believes that the demand for the Company's
services will remained diminished. Therefore, management cannot predict when the
demand for the Company's services will significantly improve. When the market
does improve, management cannot predict, whether and to what extent, the demand
for the Company's services will improve. Although the Company has implemented a
largely variable cost model, as it relates to compensation for a substantial
part of its business, further declines in revenue will have a material adverse
impact on its results.
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.
Our Market Is Highly Competitive And The Company May Not Be Able To Continue To
Compete Efficiently.
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. The Company has increasingly competed against
services providers offering their services from remote locations, particularly
from offshore locations such as India. The substantially lower cost of the labor
pool in these remote locations puts significant pricing pressure on the
Company's service offerings when it competes with these service providers. While
the Company believes that its service delivery model provides a superior level
of service than many of these offshore based competitors, the increased pricing
pressure from these providers may have a material adverse impact on the
Company's business. Competition creates an aggressive pricing environment and
higher wage costs, which puts pressure on gross margins.
The Company may also be adversely effected by the consolidation of vendor
lists. As customers have consolidated their number of vendors, the Company
historically has a high percentage of wins in that it has remained on these
shortened lists of approved vendors. Competition to be an approved vendor has
only intensified and if the Company fails to maintain its percentage of wins for
these consolidated vendor lists, its failure will have a material impact on the
Company's results.
The Company's Business May Suffer From The Loss of Key Personnel
The Company's operations are dependent on the continued efforts of its
officers and executive management. In addition, it is dependent on the
performance and productivity of its local managers and field personnel. The
Company's ability to attract and retain business is significantly affected by
local relationships and the quality of service rendered. The loss of those key
officers and members of executive management may cause a significant disruption
to our business. Moreover, the loss of its key managers and field personnel may
jeopardize existing client relationships with businesses that continue to use
the Company's services based upon past relationships with these local managers
and field personnel. The loss of such key personnel could materially adversely
affect the Company's operations, including its ability to establish and maintain
client relationships.
Possible Changes In Governmental Regulations Could Have A Material Impact On The
Company's Business
From time to time, legislation is proposed in the United States Congress,
state legislative bodies, and the foreign governments of the United Kingdom and
continental Europe, 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 business 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.
16
IRS Adjustments During Periodic Income Tax Audits May Have A Material Impact On
The Company's Results
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. In the fourth quarter of 2002, the
Company recorded an $8.7 million charge for a proposed adjustment related to its
ongoing audit of prior years' tax returns. While management has not received
notice of any additional proposed adjustments relating to its ongoing audit of
prior years' tax returns, there can be no assurance that the Internal Revenue
Service will not propose additional adjustments. Additional adjustments may
affect the Company's financial condition and financial covenants of the
Company's credit facility.
The Price Of The Company's Common Stock May Fluctuate Significantly, Which May
Result In Losses For Investors
The market price for MPS's Common Stock has been and may continue to be
volatile. For example, during the year ended December 31, 2002, the prices of
its Common Stock as reported on the New York Stock Exchange ranged from a high
of $9.80 to a low of $4.35. Its stock price can fluctuate as a result of a
variety of factors, including factors listed in the above Risk Factors and
others, many of which are beyond the Company's control. These factors include:
- actual or anticipated variations in the Company's quarterly operating
results;
- announcement of new services by the Company or its competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates or other statements by securities
analysts; and
- changes in general economic conditions.
Because of this volatility, the Company may fail to meet the expectations
of its shareholders or of securities analysts, and its stock price could decline
as a result.
17
Item 4. Controls And Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, supervised and participated in an evaluation of the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14) within the 90-day period preceding the filing of this report. Based
on their evaluation, the Chief Executive officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the date of that evaluation. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date that Chief Executive Officer and Chief
Financial Officer completed their last evaluation of internal controls.
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
3.2 Amended and Restated Bylaws.
10.16(a) Amendment to Executive Deferred Compensation Plan.
10.16(b) Executive Deferred Compensation Plan, as amended.
10.17 Form of Executive Employment Agreement entered into
by Gregory D. Holland, Tyra H. Tutor, and Richard
L. White.
10.18 Form of Director's and Officer's Indemnification
Agreement entered into by Richard J. Heckmann and
Arthur B. Laffer.
24(a) Form of Power of Attorney entered into by Richard J.
Heckmann and Arthur B. Laffer.
99.1 Certification of Timothy D. Payne pursuant to
18 U.S.C. Section 1350.
99.2 Certification of Robert P. Crouch pursuant to
18 U.S.C. Section 1350.
B. Reports on Form 8-K
Reports on Form 8-K dated January 24, 2003 and February 5, 2003,
were filed by the Company in January and February, respectively. The
reports were filed under Item 5, Other Events.
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 15, 2003
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief May 15, 2003
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
20
CERTIFICATION
I, Timothy D. Payne, President and Chief Executive Officer of MPS Group, Inc.,
certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MPS Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003
/s/ Timothy D. Payne
- -------------------------------------
Timothy D. Payne
President and Chief Executive Officer
21
CERTIFICATION
I, Robert P. Crouch, Senior Vice President and Chief Financial Officer of MPS
Group, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of MPS Group, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 15, 2003
/s/ Robert P. Crouch
- -------------------------------------
Robert P. Crouch
Senior Vice President and
Chief Financial Officer
22