Manpowergroup Inc. quarterly report, Q2 FY2011

ManpowerGroup 2011 Q2 Form 10-Q Summary

Business context and reporting period

Manpower Inc., doing business as ManpowerGroup, reported unaudited results for the three and six months ended June 30, 2011. The company provides staffing, workforce solutions, permanent recruitment, talent management and outplacement services globally. Results reflected improving labor-market demand in most regions, operating leverage from prior cost reductions and foreign-currency translation benefits.

Effective January 1, 2011, the company reorganized its European reporting structure, separating Southern Europe and Northern Europe from the former Other EMEA segment. Prior-period segment results were restated to conform to the new presentation.

Key financial metrics

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Revenue from services	$5,667.3 million	$4,585.6 million	$10,739.7 million	$8,684.9 million
Gross profit	$962.2 million	$797.0 million	$1,819.8 million	$1,498.5 million
Gross profit margin	17.0%	17.4%	16.9%	17.3%
Operating profit	$150.8 million	$79.1 million	$236.4 million	$111.7 million
Operating profit margin	2.7%	1.7%	2.2%	1.3%
Net earnings	$72.7 million	$32.7 million	$108.4 million	$35.5 million
Diluted EPS	$0.87	$0.40	$1.30	$0.44

Q2 revenue increased 23.6% reported and 12.0% in constant currency. Six-month revenue increased 23.7% reported and 16.6% in constant currency.
Q2 operating profit increased 90.6%; six-month operating profit increased 111.7%. Expense growth was substantially below revenue growth, improving operating leverage.
Q2 effective tax rate was 47.7%, compared with 51.5% in the prior year; the six-month rate was 49.2%, compared with 59.2%. Management expected an annual effective tax rate of approximately 46%.
Excluding the French Business Tax, the reported tax rate would have been approximately 37% for both Q2 and the first half of 2011.
Cash used in operating activities was $192.1 million for the first half of 2011, compared with $65.7 million in the prior-year period. The decline primarily reflected higher working-capital requirements from revenue growth and tax-payment timing.
Capital expenditures were $27.6 million, compared with $27.9 million. Acquisition spending was $15.2 million, compared with $258.5 million in the prior-year period, which included the COMSYS acquisition.
Cash and cash equivalents were $543.5 million at June 30, 2011, compared with $772.6 million at December 31, 2010. Accounts receivable increased to $4,496.8 million from $3,844.1 million.
Short-term borrowings and current maturities of long-term debt were $468.2 million, compared with $28.7 million at year-end; long-term debt was $290.6 million, compared with $669.3 million.
The company paid a $0.40 per-share dividend and repurchased 305,600 shares during the first half of 2011 for $18.8 million. Approximately 2.9 million shares remained authorized for repurchase under the 2010 authorization at June 30, 2011.

Material changes versus the prior comparable period

Revenue growth was broad-based: Q2 constant-currency growth was 11.8% in the Americas, 14.5% in Southern Europe, 9.4% in Northern Europe and 16.4% in APME.
APME revenue increased 31.0% reported and 16.4% in constant currency in Q2, including contributions from three acquisitions completed in April 2011. Organic constant-currency growth was 8.7%.
Right Management revenue declined 19.9% in constant currency in Q2 and 21.3% for the first half, primarily because improving economic conditions reduced demand for higher-margin counter-cyclical outplacement services. Its Q2 operating-unit-profit margin fell to 3.3% from 7.9%.
Gross margin declined 40 basis points in both Q2 and the first half. Factors included the reduced mix of high-margin outplacement services, revenue mix changes, APME acquisitions and the effect of French payroll-tax changes.
Selling and administrative expenses increased 13.0% in Q2 and 14.2% for the first half, but declined as a percentage of revenue because of productivity improvements and operating leverage.
Foreign-currency translation increased reported Q2 revenue growth by 11.6 percentage points and first-half growth by 7.1 percentage points.
Comprehensive income was $92.4 million in Q2 and $178.9 million for the first half, compared with a comprehensive loss of $31.2 million and $91.4 million, respectively, in the prior-year periods. The change primarily reflected foreign-currency translation.

Liquidity, debt and contingencies

At June 30, 2011, $397.8 million was available under the $400.0 million revolving credit agreement, with $2.2 million of letters of credit outstanding. The company also had $387.1 million unused under subsidiary credit lines totaling $419.8 million.
The revolving credit agreement required a maximum debt-to-EBITDA ratio of 3.75 to 1 and a minimum fixed-charge ratio of 1.35 to 1. Reported ratios were 1.35 to 1 and 2.84 to 1, respectively. Management expected compliance for the next 12 months.
€300.0 million of notes were due in June 2012, the revolving credit agreement expired in November 2012, and €200.0 million of notes were due in June 2013. Management expected to repay or refinance these obligations but noted that an extended economic downturn could limit repayment capacity or increase refinancing costs.
Aggregate commitments for debt repayments, leases, severances, office closures, unrecognized tax benefits and other items totaled $1,722.2 million at June 30, 2011.
The remaining reorganization reserve was $19.7 million, and management expected most of it to be paid during 2011.
The French Competition Council fine of €42.0 million had been paid previously; France’s highest court confirmed the decision in March 2011.
French legislation reducing employer payroll-tax subsidies was expected to unfavorably affect 2011 margin by approximately 90 basis points. Management expected to recover the cost through higher billing rates, but timing caused an unfavorable Q2 impact.
The company was evaluating the potential effects of a new French employee-bonus requirement and could not estimate the impact of the United Kingdom’s implementation of the Agency Workers Directive in October 2011.

Guidance, outlook and unusual items

Management stated that most markets continued to improve and expected demand for staffing and workforce solutions to remain tied to labor-market conditions and economic growth.
Management expected an annual effective tax rate of approximately 46% and expected to recover the French payroll-tax cost through pricing by the fourth quarter of 2011.
In July 2011, the company offered to acquire Proservia SA, a French information-technology and systems-engineering provider, for €14.39 per share in cash. Closing was expected in late September 2011.
No interim goodwill or indefinite-lived intangible-asset impairment test was performed in Q2 because management identified no significant impairment indicators.
Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.

Most important facts for investors to verify

Whether revenue growth and operating leverage persist if labor-market conditions moderate.
Conversion of earnings into cash, particularly the effect of accounts-receivable growth and working-capital needs.
Availability and cost of refinancing for the June 2012 and June 2013 euro-denominated maturities.
The ability to recover French payroll-tax costs through billing-rate increases and the eventual impact of French and United Kingdom labor regulations.
The continuing decline in Right Management’s higher-margin outplacement business and its effect on consolidated margins.
The closing, financing and integration of the proposed Proservia acquisition.
Potential exposure from tax audits, unrecognized tax benefits, guarantees, letters of credit and other commitments.