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, 2004
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of May 4, 2004:
105,098,572 shares of $0.01 par value Common Stock
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
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,' 'can,' 'hopes,'
'perhaps,' 'would,' or 'become' or the negative of these terms or other
comparable terminology. In addition, except for historical facts, all
information provided in Part 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 Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three Months
ended March 31, 2004 and 2003...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2004 and 2003...................................................................... 5
Notes to Unaudited 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 Risk............................................. 16
Item 4 Controls and Procedures................................................................................ 19
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 20
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities....................... 20
Item 3 Defaults Upon Senior Securities........................................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 20
Item 5 Other Information...................................................................................... 20
Item 6 Exhibits and Reports on Form 8-K....................................................................... 20
Signatures............................................................................................. 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) 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 112,693 $ 124,830
Accounts receivable, net of allowance of $13,059 and $12,899 184,237 159,359
Prepaid expenses 7,437 6,417
Deferred income taxes 2,200 2,200
Other 12,478 10,662
----------------------------------
Total current assets 319,045 303,468
Furniture, equipment, and leasehold improvements, net 29,658 29,488
Goodwill, net 499,857 486,630
Deferred income taxes 57,425 62,464
Other assets, net 11,108 11,101
----------------------------------
Total assets $ 917,093 $ 893,151
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 39,687 32,601
Accrued payroll and related taxes 48,587 37,848
Income taxes payable 10,557 16,140
----------------------------------
Total current liabilities 98,831 86,589
Other 14,774 13,100
----------------------------------
Total liabilities 113,605 99,689
----------------------------------
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;
104,862,919 and 104,576,204 shares issued, respectively 1,049 1,046
Additional contributed capital 635,980 634,492
Retained earnings 167,868 162,546
Accumulated other comprehensive income 9,841 6,933
Deferred stock compensation (2,190) (2,495)
Treasury stock, at cost (1,613,400 shares at 2004 and 2003) (9,060) (9,060)
----------------------------------
Total stockholders' equity 803,488 793,462
----------------------------------
Total liabilities and stockholders' equity $ 917,093 $ 893,151
==================================
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) 2004 2003
- ----------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue $ 310,481 $ 264,263
Cost of revenue 232,246 197,258
------------------------------
Gross profit 78,235 67,005
------------------------------
Operating expenses:
General and administrative 66,294 57,575
Depreciation and intangibles amortization 3,922 4,427
------------------------------
Total operating expenses 70,216 62,002
------------------------------
Operating income 8,019 5,003
Other income (expense), net 635 (6)
------------------------------
Income from continuing operations before provision
for income taxes 8,654 4,997
Provision for income taxes 3,332 2,063
------------------------------
Income from continuing operations 5,322 2,934
Income from discontinued operations (net of income
taxes of $3) - 5
------------------------------
Net income $ 5,322 $ 2,939
==============================
Basic net income per common share:
Income from continuing operations $ 0.05 $ 0.03
Income from discontinued operations, net of tax - 0.00
------------------------------
Basic net income per common share $ 0.05 $ 0.03
==============================
Average common shares outstanding, basic 104,274 102,004
==============================
Diluted income per common share:
Income from continuing operations $ 0.05 $ 0.03
Income from discontinued operations, net of tax - 0.00
------------------------------
Diluted net income per common share $ 0.05 $ 0.03
==============================
Average common shares outstanding, diluted 107,996 102,667
==============================
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) 2004 2003
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Income from continuing operations $ 5,322 $ 2,934
Adjustments to income from continuing operations to net
cash provided by operating activities:
Deferred income taxes 5,039 691
Deferred compensation 305 505
Depreciation and intangibles amortization 3,922 4,427
Changes in certain assets and liabilities, net of acquisitions:
Accounts receivable (17,825) 2,139
Prepaid expenses and other assets (790) (295)
Accounts payable and accrued expenses (1,600) (1,685)
Accrued payroll and related taxes 9,319 6,699
Other, net (861) (24)
--------------- ---------------
Net cash provided by operating activities 2,831 15,391
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (3,097) (1,269)
Purchase of businesses, including additional consideration on
acquisitions, net of cash acquired (15,832) (1,027)
--------------- ---------------
Net cash used in investing activities (18,929) (2,296)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock - (3,706)
Discount realized on employee stock purchase plan (95) (38)
Proceeds from stock options exercised 1,586 30
Repayments on indebtedness (264) (29)
--------------- ---------------
Net cash provided by (used in) financing activities 1,227 (3,743)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 1,244 (120)
Net (decrease) increase in cash and cash equivalents (13,627) 9,232
Net cash provided by discontinued operations 1,490 255
Cash and cash equivalents, beginning of period 124,830 66,934
--------------- ---------------
Cash and cash equivalents, end of period $ 112,693 $ 76,421
=============== ===============
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 per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by MPS Group, Inc. ('MPS' or 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, 2003.
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
The Company accounts for its employee and director stock option plans in
accordance with Accounting Principles Board 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 fair 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 fair 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 Statement of
Financial Accounting Standards ('SFAS') No. 148, 'Accounting for Stock-Based
Compensation - Transition and Disclosure,' to stock-based employee compensation,
net income and earnings 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) 2004 2003
- ----------------------------------------------------------------------------------------------------
Net income
As reported $ 5,322 $ 2,939
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (683) (1,245)
---------------------------
Pro forma $ 4,639 $ 1,694
===========================
Basic net income per common share
As reported $ 0.05 $ 0.03
Pro forma $ 0.04 $ 0.02
Diluted net income per common share
As reported $ 0.05 $ 0.03
Pro forma $ 0.04 $ 0.02
6
2. Net Income per Common Share
The calculation of basic net income per common share and diluted net income
per common share is presented below:
Three months ended March 31,
------------------------------
(dollar amounts in thousands except per share amounts) 2004 2003
- ----------------------------------------------------------------------------------------------------
Basic income per common share computation:
Income from continuing operations $ 5,322 $ 2,934
Income from discontinued operations, net of tax - 5
------------------------------
Net income $ 5,322 $ 2,939
==============================
Basic average common shares outstanding 104,274 102,004
==============================
Basic income per common share:
Income from continuing operations $ 0.05 $ 0.03
Income from discontinued operations, net of tax - 0.00
------------------------------
Basic net income per common share $ 0.05 $ 0.03
==============================
Diluted income per common share computation:
Income from continuing operations $ 5,322 $ 2,934
Income from discontinued operations, net of tax - 5
------------------------------
Net income $ 5,322 $ 2,939
==============================
Basic average common shares outstanding 104,274 102,004
Incremental shares from assumed exercise of stock
options and restricted awards 3,722 663
------------------------------
Diluted average common shares outstanding 107,996 102,667
==============================
Diluted income per common share:
Income from continuing operations $ 0.05 $ 0.03
Income from discontinued operations, net of tax - 0.00
------------------------------
Diluted net income per common share $ 0.05 $ 0.03
==============================
Options to purchase 670,000 and 8.5 million shares of common stock that
were outstanding as of March 31, 2004 and 2003, 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. As
such, these options were antidilutive.
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: professional services, IT
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 professional
services division provides expertise in a wide variety of disciplines including
accounting and finance, law, engineering, health care, and executive search. 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 IT solutions
division provides IT strategy consulting, design and branding, application
development, and integration. The professional services division's results for
2004, include the results from the acquisitions of two legal staffing businesses
acquired in February and August of 2003, two health care staffing businesses
acquired in February and March of 2004, and one accounting staffing business
acquired in February of 2004. The Company evaluates segment performance based on
revenues, gross profit, and income before provision for income taxes. The
Company does not allocate income taxes, interest, 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) 2004 2003
- -----------------------------------------------------------------------------------
<s> <c> <c>
Revenue
Professional services $ 156,568 $ 119,441
IT services 137,414 126,620
IT solutions 16,499 18,202
------------ ------------
Total revenue $ 310,481 $ 264,263
============ ============
Gross profit
Professional services $ 43,481 $ 33,192
IT services 28,864 27,593
IT solutions 5,890 6,220
------------ ------------
Total gross profit $ 78,235 $ 67,005
============ ============
Income from continuing operations before
provision for income taxes
Professional services $ 6,753 $ 4,012
IT services 519 575
IT solutions 747 416
------------ ------------
8,019 5,003
Corporate interest and other
income (expense), net 635 (6)
------------ ------------
Total income from continuing operations
before provision for income taxes $ 8,654 $ 4,997
============ ============
Geographic Areas
Revenue
United States $ 191,681 $ 171,155
U.K. 115,891 90,409
Other 2,909 2,699
------------ ------------
Total revenue $ 310,481 $ 264,263
============ ============
8
March 31, December 31,
2004 2003
- ----------------------------------------------------------------------------------------------
Assets
Professional services $ 400,545 $ 379,959
IT services 468,276 464,538
IT solutions 48,272 48,654
------------ ------------
Total assets $ 917,093 $ 893,151
============ ============
Geographic Areas
Identifiable Assets
United States $ 649,752 $ 633,810
U.K. 259,853 250,640
Other 7,488 8,701
------------ ------------
Total assets $ 917,093 $ 893,151
============ ============
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. A
summary of comprehensive income for the three months ended March 31, 2004 and
2003, is as follows:
Three months ended March 31,
------------------------------
2004 2003
- -----------------------------------------------------------------------------
Net income $ 5,322 $ 2,939
Unrealized loss on foreign currency
translation adjustments (a) 2,908 (1,233)
----------- ----------
Comprehensive income $ 8,230 $ 1,706
=========== ==========
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
6. Excess Real Estate Obligations
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 2002, management determined that the Company would not be able to
utilize this vacated office space and, therefore, notified the respective
lessors of its 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 1.5 years.
The charge for contract termination costs was recorded in accordance with
SFAS No. 146, 'Accounting for Costs Associated with Exit or Disposal
Activities.' The following table summarizes the activity of the charge for
contract termination costs from origination through March 31, 2004 by reportable
segment:
9
Professional IT IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 431 $ 675 $ 7,861 $ 8,967
Costs paid or otherwise settled
during 2003 (223) (431) (3,620) (4,274)
Amounts recaptured during 2003 (39) (229) (16) (284)
----------- ----------- ----------- -----------
Balance as of December 31, 2003 169 15 4,225 4,409
Costs paid or otherwise settled during the
three months ended March 31, 2004 (106) (11) (530) (647)
----------- ----------- ----------- -----------
Balance as of March 31, 2004 $ 63 $ 4 $ 3,695 $ 3,762
=========== =========== =========== ===========
7. Discontinued Operations
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester. For the
three months ended March 31, 2003, revenue and income before taxes were $7.5
million and $8,000, respectively. The remaining net liabilities as of March 31,
2004 were $1.4 million, of which $950,000 were for contract termination costs
associated with abandoned real estate. The remaining net liabilities of
Manchester are included in the line item 'Accounts payable and accrued expenses'
in the Company's Condensed Consolidated Balance Sheets.
8. Business Combinations
In the three months ended March 31, 2004, the Company acquired three
businesses in its professional services division: two health care staffing
businesses, Management Search and Sunbelt Staffing, acquired in February and
March of 2004; and one accounting staffing business, Lillian Kloock and
Associates, acquired in February of 2004. Purchase consideration for the three
acquisitions totaled $12.9 million in cash at closing, and deferred cash
payments of $1.2 million. These acquisitions were immaterial to the Company's
results of operations on an actual and pro forma basis for the three months
ended March 31, 2004.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2004 are as follows:
Professional IT IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $ 212,317 $ 253,588 $ 20,725 $ 486,630
Acquisitions 13,227 - - 13,227
----------- ----------- ----------- -----------
Balance as of March 31, 2004 $ 225,544 $ 253,588 $ 20,725 $ 499,857
=========== =========== =========== ===========
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS (the 'Company') is a leading global provider of business services with over
175 offices throughout the United States, Canada, the United Kingdom, and
continental Europe. MPS delivers a mix of consulting, solutions, and staffing
services in disciplines such as IT services, finance and accounting, legal,
engineering, IT solutions, health care, executive search, and human capital
automation.
The following detailed analysis of operations contains certain financial
information on a 'constant currency' basis. Such constant currency financial
data is not a U.S. generally accepted accounting principles ('GAAP') financial
measure. Constant currency removes from financial data the impact of changes in
exchange rates between the U.S. dollar and the functional currencies of the
Company's 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. The Company believes
presenting certain results on a constant currency basis is useful to investors
because it allows a more meaningful comparison of the performance of its foreign
operations from period to period. Additionally, certain internal reporting and
compensation targets are based on constant currency financial data for the
Company's various foreign subsidiaries. However, constant currency measures
should not be considered in isolation or as an alternative to financial measures
that reflect current period exchange rates, or to other financial measures
calculated and presented in accordance with GAAP.
The following detailed analysis of operations also presents the revenue
generated by the Company's professional services division in the United States
excluding the effect of acquisitions. Such financial data that excludes the
effect of acquisitions is not a GAAP financial measure. The Company believes
presenting some results excluding the effects of businesses we acquire is
helpful to investors because it permits a comparison of the performance of its
core internal operations from period to period. Additionally, certain internal
reporting and compensation targets are based on core internal operations. The
effect of acquisitions are excluded for the first 12 months following the
acquisition date. Subsequent to this, acquisitions are considered to be
integrated for reporting purposes. Again however, such measures should be
considered only in conjunction with the correlative measures that include the
results from acquisitions, as calculated and presented in accordance with GAAP.
Additionally, from time to time the Company may use EBITDA to measure results of
operations. EBITDA is a non-GAAP financial measure that is defined as earnings
before interest, taxes, depreciation and amortization. The Company believes
EBITDA is a meaningful measure of operating performance as it gives management a
consistent measurement tool for evaluating the operating activities of the
business as a whole as well, as the various operating units, before the effect
of investing activities, interest and taxes. In addition, the Company believes
EBITDA provides useful information to investors, analysts, lenders, and other
interested parties because it excludes transactions that management considers
unrelated to core business operations, thereby helping interested parties to
more meaningfully evaluate, trend and analyze the operating performance of the
business. The Company also uses EBITDA for certain internal reporting purposes,
and certain compensation targets may be based on EBITDA. Finally, certain
covenants in the Company's debt facility are based on EBITDA performance
measures. EBITDA, as with all non-GAAP financial measures, should be considered
only in conjunction with the comparable measures, as calculated and presented in
accordance with GAAP, including net income.
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester. As a result
of the sale of Manchester and in accordance with GAAP, the Company's
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations report the results of operations
of Manchester as discontinued operations for all periods presented. For the
three months ended March 31, 2003, Manchester's revenue and income before taxes
were $7.5 million and $8,000, respectively.
The following detailed analysis of operations should be read in conjunction with
the 2003 Consolidated Financial Statements and related notes included in the
Company's Form 10-K for the year ended December 31, 2003.
Three Months Ended March 31, 2004 Compared To Three Months Ended March 31, 2003
Revenue. Revenue increased $46.2 million, or 17.5%, to $310.5 million in the
three months ended March 31, 2004, from $264.3 million in the year earlier
period. The increase was due to an increase in revenue in both the Company's
Professional Services and IT Services divisions of 31.2% and 8.5%, respectively.
This increase was offset by a revenue decrease of 9.3% in the Company's IT
Solutions division.
11
Approximately 38% of the Company's revenue for the three months ended March 31,
2004, 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 since the first quarter of 2003, had an
impact on revenue, as revenue, on a constant currency basis increased 11.9%, as
compared to the increase of 17.5% above.
In 2003 and through the first quarter of 2004, the Company acquired five
businesses for its Professional Services division (together, the
'acquisitions'): two legal staffing businesses acquired in February and August
of 2003; two health care staffing businesses acquired in February and March of
2004; and one accounting staffing business acquired in February of 2004. These
acquisitions contributed $9.3 million in revenue for the three months ended
March 31, 2004, and $300,000 in the year earlier period.
Gross profit. Gross profit increased $11.2 million, or 16.7%, to $78.2 million
in the three months ended March 31, 2004, from $67.0 million in the year earlier
period. On a constant currency basis, gross profit increased $8.0 million, or
11.9%, in the three months ended March 31, 2004. Acquisitions also contributed
$2.9 million of gross profit in the three months ended March 31, 2004. Gross
margin decreased to 25.2% in the three months ended March 31, 2004, from 25.4%
in the year earlier period. The lower margin is due primarily to a higher
concentration of the Company's revenue being generated internationally. On
average, the Company's international operations operate at a lower gross margin
compared to the Company's domestic operations.
Operating expenses. Total operating expenses increased $8.2 million, or 13.2%,
to $70.2 million in the three months ended March 31, 2004, from $62.0 million in
the year earlier period. The Company's general and administrative ('G&A')
expenses, which are included in operating expenses, increased $8.7 million, or
15.1%, to $66.3 million in the three months ended March 31, 2004, from $57.6
million in the year earlier period. The increase in G&A expenses was due to the
following: the increase in compensation expense related to the increase in
revenue; the hiring of additional sales and recruiting personnel; the impact of
changes in foreign currency exchange rates; and the additional G&A expenses from
acquired companies.
Operating income. Operating income increased $3.0 million, or 60%, to $8.0
million in the three months ended March 31, 2004, from $5.0 million in the year
earlier period. Operating income as a percentage of revenue increased to 2.6% in
the three months ended March 31, 2004, from 1.9% in the year earlier period.
Other income (expense), net. Other expense, net consists primarily of interest
expense related to 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 $0.1 million, to $0.2
million in the three months ended March 31, 2004, from $0.3 million in the year
earlier period. Interest expense was offset by interest and other income of $0.8
million in the three months ended March 31, 2004, and $0.3 million in the year
earlier period.
Income taxes. The Company's effective tax rate decreased to 38.5% in the three
months ended March 31, 2004, as compared to 41.3% in the year earlier period.
The decrease was associated with the higher level of pre-tax earnings for the
first quarter of 2004.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $2.4 million, or 82.8%, to $5.3 million in the
three months ended March 31, 2004, from $2.9 million in the year earlier period.
Income from continuing operations as a percentage of revenue increased to 1.7%
in the three months ended March 31, 2004, from 1.1% in the year earlier period.
Segment Results
Professional Services division
Revenue in the professional services division increased $37.2 million, or 31.2%,
to $156.6 million in the three months ended March 31, 2004, from $119.4 million
in the year earlier period. On a constant currency basis, revenue increased
24.2%. Acquisitions contributed $9.3 million in revenue for the three months
ended March 31, 2004 and $300,000 in the year earlier period.
Of the division's revenue, approximately 60% and 62% was generated in the United
States in the three months ended March 31, 2004 and 2003, respectively. The
remainder was generated in the United Kingdom. Excluding the contribution from
acquisitions, revenue generated in the United States increased 12.7% in the
three months ended March 31, 2004. On a constant currency basis, revenue
increased 23.5% for revenue generated in the United Kingdom.
12
Excluding the contribution from acquisitions and the favorable impact from
changes in foreign currency exchange rates, all of the professional services
division's operating units, as listed below, increased revenue in the three
months ended March 31, 2004, from the year earlier period. This increase in
revenue was attributable to the increased demand for the services provided by
the division.
Revenue contribution from the professional services division's operating units
for the three months ended March 31, 2004 and 2003 are as follows:
Three months ended March 31,
-----------------------------
2004 2003
------------------------------------------------------------------
Accounting and finance 46.0% 43.7%
Engineering 31.0 36.4
Legal 16.1 13.9
Health care 5.4 4.2
Executive search 1.5 1.8
Gross profit for the professional services division increased $10.3 million, or
31.0%, to $43.5 million in the three months ended March 31, 2004, from $33.2
million in the year earlier period. On a constant currency basis, gross profit
for the division increased $8.0 million, or 24.1%, in the three months ended
March 31, 2004. Acquisitions also contributed $2.9 million of gross profit in
the three months ended March 31, 2004. The gross margin remained constant at
27.8% in both the three months ended March 31, 2004 and 2003, respectively.
The professional services division's G&A expenses increased $7.6 million, or
27.3%, to $35.4. million in the three months ended March 31, 2004, from $27.8
million in the year earlier period. The increase in the division's G&A expenses
was due to the following: the increase in compensation expense related to the
increase in revenue; the hiring of additional sales and recruiting personnel;
the impact of changes in foreign currency exchange rates; and the additional G&A
expenses from acquired companies. While the division's G&A expenses increased,
G&A expenses as a percentage of revenue decreased to 22.6% in the three months
ended March 31, 2004, from 23.3% in the year earlier period.
Operating income for the professional services division increased $2.8 million,
or 70.0%, to $6.8 million in the three months ended March 31, 2004, from $4.0
million in the year earlier period.
IT Services division
Revenue in the IT services division increased $10.8 million, or 8.5%, to $137.4
million in the three months ended March 31, 2004, from $126.6 million in the
year earlier period. On a constant currency basis, revenue increased 3.2%.
Of the division's revenue, approximately 60% and 62% was generated in the United
States in the three months ended March 31, 2004 and 2003, respectively. The
remainder was generated internationally, primarily in the United Kingdom.
Revenue generated in the United States increased 4.9% in the three months ended
March 31, 2004. On a constant currency basis, revenue increased 0.5% for revenue
generated internationally.
Gross profit for the IT services division increased $1.3 million, or 4.7%, to
$28.9 million in the three months ended March 31, 2004, from $27.6 million in
the year earlier period. However, the gross margin decreased to 21.0% in the
three months ended March 31, 2004, from 21.8% in the year earlier period. The
decrease is attributable to the decrease in gross margin in the division's
international operations. The gross margin in the division's international
operations decreased to 13.6% in the three months ended March 31, 2004, from
15.4% in the year earlier period. For revenue generated in the United States,
the gross margin increased to 25.9% in the three months ended March 31, 2004,
from 25.7% in the year earlier period.
The IT services division's G&A expenses increased $1.5 million, or 6.0%, to
$26.3 million in the three months ended March 31, 2004, from $24.8 million in
the year earlier period. As a percentage of revenue, the division's G&A expenses
decreased to 19.1% in the three months ended March 31, 2004, from 19.6% in the
year earlier period. The increase in the division's G&A expenses was associated
with the following: the increase in compensation expense related to the increase
in revenue; the hiring of additional sales and recruiting personnel; and the
impact of changes in foreign currency exchange rates.
Operating income for the IT services division decreased $0.1 million, or 16.7%,
to $0.5 million in the three months ended March 31, 2004, from $0.6 million in
the year earlier period.
13
IT Solutions division
Revenue in the IT solutions division decreased $1.7 million, or 9.3%, to $16.5
million in the three months ended March 31, 2004, from $18.2 million in the year
earlier period. The decrease was due to weak demand for IT consulting solutions.
Gross profit for the IT solutions division decreased $0.3 million, or 4.8%, to
$5.9 million in the three months ended March 31, 2004 from $6.2 million in the
year earlier period. However, the gross margin increased to 35.7% in the three
months ended March 31, 2004, from 34.2% in the year earlier period. This
increase was driven by higher utilization of the division's salaried
consultants. This division's business model, unlike the Company's other
divisions, uses primarily salaried consultants to meet customer demand.
The IT solutions division's G&A expenses decreased $0.4 million, or 8.0%, to
$4.6 million in the three months ended March 31, 2004, from $5.0 million in the
year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 28.1% in the three months ended March 31, 2004, from 27.4% in the
year earlier period.
Operating income for the IT solutions division increased $0.3 million, or 75.0%,
to $0.7 million in the three months ended March 31, 2004, from $0.4 million 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 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 $220.2 million and $216.9 million as of March
31, 2004 and December 31, 2003, respectively. The Company had cash and cash
equivalents of $112.7 million and $124.8 million as of March 31, 2004 and
December 31, 2003, respectively.
For the three months ended March 31, 2004 and 2003, the Company generated $2.8
million and $15.4 million of cash flow from operations, respectively. The
decrease in cash flow from operations, from 2003 to 2004, is primarily due to
the Company's revenue growth, and to a lesser extent, a slight reduction in
receivables collection as days sales outstanding increased two days. These
factors increased the cash needed to fund accounts receivable.
For the three months ended March 31, 2004, the Company used $18.9 million of
cash for investing activities, of which $15.8 million, net of cash acquired, was
used for the acquisition of two health care staffing businesses and one
accounting staffing business, and $3.1 million was used for capital
expenditures. For the three months ended March 31, 2003, the Company used $2.3
million of cash for investing activities, of which $1.3 million was used for
capital expenditures, and $1.0 million was used for an acquisition of a legal
staffing business.
For the three months ended March 31, 2004, the Company generated $1.2 million of
cash from financing activities, primarily from stock option exercises. For the
three months ended March 31, 2003, the Company used $3.7 million of cash for
financing activities, primarily for the repurchase of stock.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's Common Stock. Beginning in the third quarter of 2002
through the second quarter of 2003, 1.6 million shares at a cost of $9.1 million
have been repurchased under this authorization. There has been no purchases
under this authorization since the second quarter of 2003.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems,
during the remainder of 2004 will be approximately $6 million.
While there can be no assurance in this regard, 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
In the fourth quarter of 2003, the Company closed on a $150 million revolving
credit facility syndicated by a group of leading financial institutions. The
credit facility contains certain financial and non-financial covenants relating
to the Company's operations, including maintaining certain financial ratios.
Repayment, if applicable, of funds borrowed under the credit facility is
guaranteed by substantially all of the subsidiaries of the Company. The facility
matures in November 2006. As of May 4, 2004, there are no borrowings outstanding
under this facility, other than $2.8 million of standby letters of credit.
14
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
locations are located in geographic areas subject to inclement weather.
15
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 continually
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 38% of its consolidated revenues
for the three months ended March 31, 2004 from international operations,
approximately 98% of which were from the United Kingdom. The British pound
sterling to U.S. dollar exchange rate has increased approximately 4% in the
three months ended March 31, 2004, from 1.78 at December 31, 2003 to 1.85 at
March 31, 2004. The Company prepared sensitivity analysis 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 at March 31, 2004. 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, 2004, the Company did not hold and has not
previously entered into any foreign currency derivative instruments.
16
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Demand For The Company's Services Is Impacted By The Economic Climate In The
Industries And Markets The Company Serves. This Economic Climate Is Difficult To
Predict, With Downturns Weakening Demand.
MPS's revenues 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 we serve. While we have experienced a recent uptick in demand
related to the current economic environment, a downturn or deterioration in
global economic or political conditions could significantly adversely impact our
revenues and results of operations.
We cannot predict when the economic climate will significantly improve.
Although we have seen a slight improvement in the economic climate, we cannot
predict to what extent the demand for our services will improve. Even though we
have a somewhat variable cost base, further declines in revenue will have a
material adverse impact on our results.
The current economic climate may also encourage customer downsizings, or
consolidations through mergers and otherwise of our major customers or between
our major customers with non-customers. These may result in redundant functions
or services and a resulting reduction in demand by those customers for our
services. Also, spending for outsourced business services may be put on hold
until the consolidations are completed.
Economic considerations may also encourage our customers to consolidate
their vendor lists in an attempt to achieve cost and expense savings, which
increases competitive pressure as described below.
Our Market Is Highly Competitive, Which Puts Pressure On The Profit Margins Of
Our Services.
Our industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. MPS faces significant competition in
the industries and markets it serves, and will face significant competition in
any geographic market that it may enter. In each market in which we operate, we
compete for both clients and qualified candidates with other firms offering
similar services. Competition creates an aggressive pricing environment, which
puts pressure on profit margins.
We have increasingly competed against service 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 our service offerings when we compete with
competitors offering remote services. While we believe that our 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 our profitability.
The effects of competition may be intensified by our customers'
consolidation of their vendor lists. As customers have consolidated their number
of vendors, often in an attempt to secure cost or expense savings in the face of
difficult economic conditions, competition to be an approved vendor has greatly
intensified. If we fail to remain on these consolidated vendor lists, our
results of operations will suffer accordingly. Competing to remain on, or get
on, these vendor lists could obligate us to offer our services at prices that
offer lower margins, and less profit, than we might otherwise be able to
achieve.
Our Business Depends On Key Personnel, Including Executive Officers, Local
Managers And Field Personnel; Our Failure To Retain Existing Key Personnel Or
Attract New People Will Reduce Business And Revenues.
MPS's operations depend on the continued efforts of our officers and
executive management. The loss of key officers and members of executive
management may cause a significant disruption to our business.
We also depend on the performance and productivity of our local managers
and field personnel. Our ability to attract and retain new business is
significantly affected by local relationships and the quality of service
rendered. The loss of key managers and field personnel may also jeopardize
existing client relationships with businesses that continue to use our services
based upon past relationships with local managers and field personnel. Our
revenues could decline in that event.
17
The Inability To Comply With Existing Government Regulation Along With Increased
Regulation Of The Workplace Could Adversely Effect The Company.
The Company's business is subject to regulation or licensing in many states
and in certain foreign countries. While the Company has had no material
difficulty complying with regulations in the past, there can be no assurance
that the Company will be able to continue to obtain all necessary licenses or
approvals, or that the cost of compliance will not prove to be material. Any
inability of the Company to comply with government regulation or licensing
requirements could materially adversely effect the Company. Additionally, the
Company's temporary services business entails employing individuals on a
temporary basis and placing such individuals in clients' workplaces. Increased
government regulation of the workplace or of the employer-employee relationship
could materially adversely effect the Company.
The Company Is Exposed To Employment-Related Claims and Costs And Other
Litigation That Could Materially Adversely Effect The Company's Business,
Financial Condition, And Results Of Operations.
The Company's temporary services business entails employing individuals on
a temporary basis and placing such individuals in clients' workplaces. The
Company's ability to control the workplace environment is limited. As the
employer of record of its temporary employees, the Company incurs a risk of
liability to its temporary employees for various workplace events, including
claims of physical injury, discrimination, harassment, or retroactive
entitlement to the Company's or clients' employee benefits. The Company also
incurs a risk of liability to its clients resulting from allegations of errors,
omissions, misappropriation, or theft of property or information by its
temporary employees. The Company maintains insurance with respect to many of
such claims. While such claims have not historically had a material adverse
effect on the Company, there can be no assurance that the Company will continue
to be able to obtain insurance at a cost that does not have a material adverse
effect upon the Company or that such claims (whether by reason of the Company
not having insurance or by reason of such claims being outside the scope of the
Company's insurance) will not have a material adverse effect upon the Company.
Adjustments During Periodic Tax Audits May Increase Our Tax Liability And
Adversely Impact Our Results Of Operations.
MPS is subject to periodic review by federal, state, foreign and local
taxing authorities in the ordinary course of business. During 2001, MPS was
notified by the Internal Revenue Service that certain prior year income tax
returns would be examined. As part of this examination, the net tax benefit
associated with an investment in a subsidiary that MPS recognized in 2000 of
$86.3 million is also being reviewed. In 2002, the company recorded an $8.7
million charge for an agreed upon adjustment related to its audit of prior
years' tax returns. This Internal Revenue Service examination will be finalized
once it has been reviewed by the Joint Committee on Taxation. Additional
adjustments may affect our financial condition.
The Price Of Our Common Stock May Fluctuate Significantly, Which May Result In
Losses For Investors.
The market price for our common stock has been and may continue to be
volatile. For example, during the period from January 1, 2004 until March 31,
2004, the closing price of the common stock as reported on the New York Stock
Exchange ranged from a high of $11.89 to a low of $9.50. Our stock price can
fluctuate as a result of a variety of factors, including factors listed above
and others, many of which are beyond our control. These factors include:
- actual or anticipated variations in quarterly operating results;
- announcement of new services by us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates or other statements by securities
analysts;
- valuation fluctuations which may cause a negative impact to our
operating results as it relates to Statement of Financial Accounting
Standards No. 142; and
- changes in general economic conditions.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts, and our stock price could decline as a
result.
18
Item 4. Controls And Procedures
Our management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on that evaluation, the Chief Executive officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
to provide reasonable assurance that the objectives of disclosure controls and
procedures are met.
There have been no changes in the Company's internal control structure over
financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred
during the Company's last fiscal quarter that has materially affected or is
reasonably likely to materially affect the Company's internal control over
financial reporting.
19
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
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 Required by Item 601 of Regulation S-K:
See Index of Exhibits.
B. Reports on Form 8-K
On February 2, 2004, we furnished a Report on Form 8-K with
respect to Items 7 and 12 pertaining to the issuance of a press
release announcing our financial results for the three months and
year-end December 31, 2003. This Form 8-K is not deemed
incorporated by reference into any of our filings with the
Securities and Exchange Commission.
Exhibit No. Description
31.1 Certification of Timothy D. Payne pursuant to Rule 13a-14(a)
31.2 Certification of Robert P. Crouch pursuant to Rule 13a-14(a)
32.1 Certification of Timothy D. Payne pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Robert P. Crouch pursuant to 18 U.S.C.
Section 1350
20
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.
MPS GROUP, INC.
By: /s/ Robert P. Crouch
Robert P. Crouch
Senior Vice President, Treasurer, and Chief Financial Officer
(Principal Financial Officer and duly authorized signatory)
Date: May 7, 2004
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