1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE OF 1934
For the quarterly period ended July 28, 1996
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Commission File No. 0-24300
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NORRELL CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-0953709
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3535 Piedmont Road, NE, Atlanta, GA 30305
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404)240-3000
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Not applicable
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such (reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 23,578,530 shares on August
25, 1996.
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Norrell Corporation and Subsidiaries
FORM 10-Q
INDEX
Page No.
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets -
July 28, 1996 (Unaudited) and October 29, 1995 2
Consolidated Statements of Income
(Unaudited) - Three months and nine months ended
July 28, 1996 and July 30, 1995 3
Consolidated Statements of Cash Flows
(Unaudited) - Nine months ended July 28, 1996 and
July 30, 1995 4
Notes to Consolidated Financial Statements
(Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 8
(a) Exhibits:
11 Statement Regarding Computation of Per Share Earnings
(b) Reports on Form 8-K
SIGNATURE 11
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Part I
Item 1
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
July 28, 1996 October 29
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ASSETS
CURRENT ASSETS
Cash $ 7,412 $ 5,103
Accounts receivable, less allowances of $6,516 and $4,797 129,272 115,929
Deferred income taxes 6,192 6,160
Prepaid and refundable income taxes 996 2,558
Other current assets 3,735 3,149
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Total current assets 147,607 132,899
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PROPERTY AND EQUIPMENT, less
accumulated depreciation 12,292 9,273
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NONCURRENT DEFERRED INCOME TAXES 10,763 6,059
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OTHER ASSETS
Intangibles, net of amortization 45,346 13,617
Investments and other assets 25,844 14,269
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Total other assets 71,190 27,886
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TOTAL ASSETS $241,852 $176,117
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 575 $ 377
Accounts payable and accrued expenses 75,651 69,236
Deferred revenue 8,480 10,179
Accrued income taxes 188 0
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Total current liabilities 84,894 79,792
LONG-TERM DEBT, less current maturities 30,673 2,057
LONG-TERM ACCRUED EXPENSES 38,602 24,030
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Total liabilities 154,169 105,879
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SHAREHOLDERS' EQUITY
Common stock, stated value $.01 per share,
50,000,000 shares authorized, with shares
issued of 22,511,084 in 1996 and 22,213,808
in 1995 225 222
Treasury stock, at cost, 27,052 shares
in 1996 and 41,290 in 1995 (515) (476)
Additional paid-in-capital 43,417 41,388
Notes receivable from officers and employees (149) (398)
Retained earnings 44,705 29,502
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Total shareholders' equity 87,683 70,238
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $241,852 $176,117
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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4
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
July 28, 1996 July 30, 1995 July 28, 1996 July 30, 1995
------------- ------------- ------------- -------------
REVENUES $245,864 $202,219 $707,762 $585,061
COST OF SERVICES 194,074 157,526 557,468 456,732
-------- -------- -------- --------
Gross profit 51,790 44,693 150,294 128,329
OPERATING EXPENSES
General and administrative 39,891 35,883 117,234 103,503
Depreciation and amortization 1,199 1,031 3,781 2,996
-------- -------- -------- --------
Total operating expenses 41,090 36,914 121,015 106,499
Income from operations 10,700 7,779 29,279 21,830
OTHER EXPENSE
Interest 170 26 442 84
Other 73 121 487 700
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INCOME BEFORE INCOME TAXES 10,457 7,632 28,350 21,046
INCOME TAXES 4,024 3,206 10,913 8,840
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INCOME FROM CONTINUING OPERATIONS $ 6,433 $ 4,426 $ 17,437 $ 12,206
DISCONTINUED OPERATONS
Loss on disposal - (348) - (348)
-------- -------- -------- --------
NET INCOME $ 6,433 $ 4,078 $ 17,437 $ 11,858
======== ======== ======== ========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
Continuing Operations $ 0.263 $ 0.190 $ 0.723 $ 0.523
Discontinued Operations $ 0.000 $ (0.015) $ 0.000 $ (0.015)
-------- -------- -------- --------
$ 0.263 $ 0.175 $ 0.723 $ 0.508
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 24,485 23,288 24,125 23,312
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
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July 28, 1996 July 30, 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $17,437 $11,858
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 3,781 2,996
Depreciation and amortization - cost of services 285 60
Loss on disposal of discontinued operations 0 348
Gain on retirement of common stock (1,706) (3,150)
Provision for doubtful accounts 1,603 1,791
Deferred income taxes (4,756) (468)
Long-term accrued expenses 1,507 2,593
Deferred gain on sale of building 13,339 0
Other 279 59
Change in current assets and current liabilities
Accounts and notes receivable (9,300) (15,992)
Prepaid expenses (306) 761
Accounts payable and accrued expenses 2,703 3,350
Accrued and refundable income taxes 1,750 (608)
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Net cash provided by operating activities 26,616 3,598
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of businesses, net of cash acquired (32,775) 0
Increase in other long-term assets, net (9,258) (1,657)
Additions to property and equipment, net (4,397) (3,648)
Other (3,188) (268)
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Net cash used by investing activities (49,618) (5,573)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 31,630 0.00
Repayments of long-term debt (5,513) (363)
Proceeds from the issuance of common stock 1,655 1,601
Acquisition of treasury stock (476) (237)
Dividends paid on common stock (2,234) (1,973)
Reduction in receivables from officers and employees 249 156
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Net cash provided (used) by financing activities 25,311 (816)
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NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS 2,309 (2,791)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 5,103 7,410
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CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 7,412 $4,619
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SUPPLEMENTARY CASH FLOW DISCLOSURE
Cash payments during the period for:
Interest $ 431 $ 93
Income taxes, net of refunds 13,963 8,910
Non-cash investing and financing activity
Issuance of options to benefit plan 805 559
The accompanying notes are an integral part of these consolidated financial
statements.
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements includes in the Company's Annual Report Form 10-K. The
information furnished reflects all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of
operations for the periods presented. Such adjustments are of a normal
recurring nature.
2. Acquisition of Assets
Effective July 15, 1996, the Company acquired all of the assets and
certain of the liabilities of Analytical Technologies, Inc. and ANATEC
Canada, Inc. (collectively "Anatec") in a business combination accounted
for as a purchase. ANATEC is a software services and technology
organization serving primarily Fortune 500 companies in the midwestern
United States. Services include consulting, project management, software
development, training and software systems integration services. The
$25.8 million excess of the acquisition cost over the fair value of
ANATEC's tangible assets has been allocated to goodwill and is being
amortized over 40 years. In addition to the $27.1 million paid at
closing, ANATEC has the right to receive a contingent payment based upon
achieving a specified level of gross profit for the 12-month period
ending December 31, 1996.
The results of operations of ANATEC are included in the statements of
income beginning July 16, 1996.
3. Long-Term Debt
Effective July 1996, the Company increased its credit facility which
consisted of a $25 million overnight loan and $55 million revolving
credit facility to a $40 million overnight loan and $55 million revolving
credit facility, for a total facility of $95 million.
4. Subsequent Event
On August 5, 1996, the Company acquired all of the issued and outstanding
stock of American Technical Resources ("ATR") in exchange for 1,000,000
shares of Company common stock in a transaction accounted for as a
pooling of interests. ATR is an information technology staffing company
that specializes in providing computer professionals for short-and
long-term assignments, including contract programming, contract
recruiting and payrolling services.
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Part 1
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Operating Results Third Quarter Ended July 28, 1996 Compared to Third Quarter
Ended July 30, 1995
Revenues increased 21.6%, or $43.6 million, to $245.9 million. Staffing
Services revenues grew 22.6% to $193.4 million and accounted for 78.7%
and 78.0% of total 1996 and 1995 period revenues, respectively. Staffing
Services volume, as measured by hours that staffing employees worked, increased
17.1% and prices rose 4.6% compared to 9.7% and 9.0% for the 1995 period.
Office openings, net of closings, for the 1996 period included 2 company-owned
offices, 5 franchise offices and 1 Financial Staffing office. In addition, 3
Outsourcing Services sites were opened, net of closings, to serve Outsourcing
customers. On July 15, 1996, Norrell acquired Analytical Technologies Inc. and
ANATEC, Canada, Inc., (collectively "ANATEC"), a software services and
information technology company. Revenues from ANATEC for the 1996 period of
$968,000 were included in Staffing Services revenues. Outsourcing Services
revenue grew 18.0% to $52.4 million. Outsourcing Services revenues from IBM
amounted to $36.7 million, up from $32.5 million in the 1995 period. Revenues
from customers other than IBM increased $3.8 million from the 1995 period to
$15.7 million. Included in Outsourcing Services revenues was the recognition
of $471,000 and $1.4 million in 1996 and 1995, respectively, of deferred gain
from the return in January 1995 of shares of Company stock held by IBM.
Gross profit increased 15.9%, or $7.1 million, to $51.8 million. Gross margin
(gross profit as a percentage of revenues) decreased from 22.1% in the 1995
period to 21.1% in the 1996 period. Staffing Services gross margin decreased
from 22.4% in the 1995 period to 22.0% in the 1996 period primarily as a result
of the higher proportion of large accounts which typically have lower gross
margins. Outsourcing Services gross margin decreased from 21.0% in the
1995 period to 17.6% in the 1996 period. Of the 3.4 point decline, 1.9 points
related to the January 1996 renegotiation of the Management Service Agreement
("MSA") which extended the term of the agreement through December 1998, two
years longer than the previous agreement. The remaining decline is due to a
lower proportion of MSA revenue in the 1996 period compared to the prior year
period. The MSA has higher margins than other outsourcing contracts.
Operating expenses increased 11.3%, or $4.2 million. However, operating
expenses as a percentage of revenues declined from 18.3% in the 1995 period to
16.7% in the 1996 period as the Company continues to experience favorable
operating leverage. Staffing Services accounted for substantially all of the
increased spending with $2.2 million of added personnel and personnel related
costs and $726,000 of increased costs associated with 8 new offices. Personnel
costs increased primarily as a result of the continuing emphasis on improved
service delivery, hiring of additional onsite managers for new Managed Staffing
and Master Vendor Partner clients and the opening of new offices. Commissions
paid to franchisees increased $928,000.
The Company's income tax rate declined from 42.0% in the 1995 period to 38.5%
in the 1996 period primarily as a result of reduced state income taxes. The tax
rate reduction added $.015 to 1996 period earnings per share.
Operating Results Nine Months Ended July 28, 1996 Compared to Nine Months Ended
July 30, 1995
Revenues increased 21.0%, or $122.7 million, to $707.8 million. Staffing
Services revenues grew 21.1% to $555.0 million and accounted for 78.4% of
total 1996 period revenues versus 78.3% of total 1995 period revenues.
Staffing Services volume increased 16.3% and prices rose 4.1% compared to 12.7%
and 5.7% in the 1995 period. Office openings, net of closings in the 1996
period, included 16 company-owned offices, 10 franchised offices and 2
Financial Staffing offices. In addition, 11 Outsourcing Services sites were
opened. Outsourcing Services revenue grew 20.4% to $152.8 million. Outsourcing
Services revenues from IBM amounted to $110.1 million, up from $94.0 million in
the 1995 period. Revenues from customers other than IBM increased $9.4 million
from the 1995 period to $42.7 million. Included in Outsourcing Services
revenues was the recognition of $1.7 million and $3.2 million in 1996 and 1995,
respectively, of deferred gain from the return in January 1995 of shares of
Company stock held by IBM.
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Gross profit increased 17.1%, or $22.0 million, to $150.3 million. Gross
margin declined from 21.9% in the 1995 period to 21.2% in the 1996 period.
Staffing Services gross margin decreased slightly from 22.2% in the 1995 period
to 22.1% in the 1996 period. During the first quarter of the 1996 period,
workers' compensation liability for the franchise division of Norrell Services
was adjusted to give effect to much better than expected loss experience. The
adjustment resulted in a reduction of $800,000 in cost of sales which added
0.2% to the Staffing Services gross margin. Without this adjustment
year-to-year gross margin declined to 21.9% in the 1996 period. Outsourcing
Services gross margin was 18.2% in the 1996 period compared to 20.8% in the
1995 period. Of the 2.6 point decline, 1.8 points were due to the impact of
the MSA renegotiation. The remaining difference was due to a decline in the
proportion of MSA revenue which has higher margins than other outsourcing
contracts.
Operating expenses increased 13.6%, or $14.5 million. Operating expenses as a
percentage of revenues declined from 18.2% in the 1995 period to 17.1% in the
1996 period. Substantially all of the $14.5 million increase occurred to
Staffing Services. Of the additional Staffing Services expense, $8.3 million
of the increase was in personnel and personnel related costs, $2.5 million was
in operating expenses associated with 28 new offices, and $2.1 million was for
increased commissions paid to franchisees.
The Company's income tax rate declined from 42.0% in the 1995 period to 38.5%
in the 1996 period primarily as a result of reduced state income taxes. The tax
rate reduction added $.041 to 1996 period earnings per share.
Liquidity and Capital Resources
Net cash provided by operating activities was $26.6 million in the 1996 period
compared to $3.6 million in the 1995 period. Included in the 1996 period was
$13.3 million provided by the gain from the December 1995 sale of the Company's
interest in its Atlanta headquarters building. However, the cash from the sale
was received December 11, 1995. Concurrent with the sale, the Company extended
its lease for office space in the building for an additional five years to now
expire in 2005. The gain is being deferred and amortized on a straight-line
basis over the new lease term as a reduction in rent expense. The 1996 period
net income increased $5.6 million or 47.1% compared to the 1995 period.
Cash flows used in investing activities in the 1996 period included increases
in goodwill of $25.8 and $6.2 million as a result of purchasing ANATEC and
Valley Staffing Services, Inc., respectively, and an investment of $9.0 million
for management information systems.
At July 28, 1996, the Company had $31.2 million of total debt outstanding.
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(a) Exhibits:
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The following reports on Form 8-K filed for the period covered
under this quarterly filing are incorporated by reference.
Form 8-K report dated July 22, 1996
Form 8-K report dated August 5, 1996
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORRELL CORPORATION
(REGISTRANT)
Date: September 5, 1996 By: S/C. Kent Garner
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C. Kent Garner
Vice President and Chief Financial Officer
(On behalf of the Registrant and as Chief
Accounting Officer)
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