ManpowerGroup Form 10-Q Summary
Business Context and Reporting Period
Manpower Inc. (d/b/a ManpowerGroup) provides staffing, workforce solutions, recruitment, talent management and outplacement services. The unaudited filing covers the three months ended March 31, 2011, compared with the same period in 2010. Results include COMSYS IT Partners from April 5, 2010; COMSYS was fully integrated during the first quarter of 2011.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue from services | $5,072.4 million | $4,099.3 million |
| Gross profit | $857.6 million | $701.5 million |
| Gross profit margin | 16.9% | 17.1% |
| Selling and administrative expenses | $772.0 million | $668.9 million |
| Operating profit | $85.6 million | $32.6 million |
| Operating profit margin | 1.7% | 0.8% |
| Earnings before income taxes | $74.5 million | $19.7 million |
| Net earnings | $35.7 million | $2.8 million |
| Diluted earnings per share | $0.43 | $0.04 |
| Cash used in operating activities | $(159.7) million | $(43.0) million |
| Capital expenditures | $11.2 million | $7.8 million |
Revenue increased 23.7% year over year, or 21.8% in constant currency. Gross profit increased 22.2%, while selling and administrative expenses increased 15.4%, producing substantial operating leverage. Net earnings margin was approximately 0.7%, compared with approximately 0.1% in the prior-year quarter.
Cash and cash equivalents were $649.5 million at March 31, 2011, down from $772.6 million at December 31, 2010. Accounts receivable increased to $4,201.0 million from $3,844.1 million, primarily because of higher business volumes and currency effects.
Short-term borrowings and current maturities were $38.2 million, and long-term debt was $708.1 million, for total reported debt of approximately $746.3 million. The company had $397.8 million available under its $400.0 million revolving credit agreement, subject to $2.2 million of outstanding letters of credit. Additional subsidiary credit lines totaled $415.6 million, of which $378.1 million was unused.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger demand across most staffing markets, the COMSYS acquisition, and a 1.9% favorable currency impact.
- Constant-currency revenue growth was 41.9% in the Americas, 22.0% in Southern Europe, 16.7% in Northern Europe and 11.2% in APME. Right Management revenue declined 22.7% in constant currency as counter-cyclical outplacement demand receded.
- Operating unit profit increased to $110.3 million from $47.8 million before corporate expenses and other reconciling items. Right Management operating unit profit margin fell to 4.0% from 12.1%, while margins improved in the other major operating segments.
- Gross profit margin declined 20 basis points, primarily because of the mix shift away from higher-margin Right Management outplacement services. Productivity improvements reduced selling and administrative expenses as a percentage of revenue by approximately 110 basis points.
- The effective tax rate improved to 52.1% from 85.5%, mainly because of a more favorable geographic earnings mix and prior-year valuation allowances. Excluding the French Business Tax, the Q1 2011 tax rate would have been approximately 38%.
- Operating cash flow deteriorated because working-capital needs increased with revenue growth and because of the timing of tax payments. Working capital needs increased $232.0 million in Q1 2011 versus $67.2 million in Q1 2010.
- Comprehensive income was $86.5 million, including a $49.3 million foreign-currency translation gain, compared with a comprehensive loss of $60.2 million in Q1 2010.
Guidance, Outlook, Risks and Unusual Items
- Management reported improving economic conditions and demand in most markets and expects to continue benefiting from operating leverage. The filing does not provide specific revenue or earnings guidance.
- Management currently expects an annual effective tax rate of approximately 45%, subject to the mix of U.S. and non-U.S. earnings, valuation allowances, permanent items and the French Business Tax.
- Management stated that available cash and existing credit facilities should cover foreseeable cash needs and expects compliance with debt covenants for the next 12 months. The Q1 debt-to-EBITDA ratio was 1.52 to 1 versus a 4.50-to-1 maximum, and the fixed-charge ratio was 2.61 to 1 versus a 1.25-to-1 minimum.
- The €300.0 million notes mature in June 2012, the $400.0 million revolving credit facility expires in November 2012, and the €200.0 million notes mature in June 2013. The company expects to repay or refinance these obligations but notes that a prolonged economic downturn could affect repayment capacity and refinancing terms.
- French legislation reducing employer payroll tax subsidies is expected to unfavorably affect 2011 margins by approximately 90 basis points. Management expects to recover the cost through higher client bill rates, although timing caused an unfavorable Q1 impact.
- The EU Agency Workers Directive may have an unfavorable effect on the United Kingdom staffing business when regulations take effect in October 2011; the company cannot currently estimate the impact.
- Net reorganization costs were $0.2 million in Q1 2011, with $23.7 million remaining in the reorganization reserve at March 31, 2011. Management expects most of the reserve to be paid during 2011.
- The French Competition Council fine of €42.0 million was confirmed by France’s highest court in March 2011. The fine had already been accrued and paid in 2009.
- No goodwill or indefinite-lived intangible asset impairment test was performed during Q1 2011 because management identified no significant impairment indicators.
- On May 3, 2011, the board declared a $0.40-per-share cash dividend payable June 15, 2011. No shares were repurchased under the company’s repurchase authorizations during the quarter, although limited shares were withheld for employee and director tax obligations.
Important Facts for Investors to Verify
- Assess whether revenue growth, particularly the U.S. and COMSYS-related growth, is sustainable after acquisition-related comparisons normalize.
- Monitor cash conversion and accounts receivable, given negative Q1 operating cash flow and substantial working-capital requirements.
- Track gross margin pressure from business mix, French payroll-tax changes and the decline in higher-margin Right Management outplacement services.
- Verify the company’s ability to refinance or repay the 2012 and 2013 debt maturities and maintain compliance with revolving-credit covenants.
- Evaluate the sensitivity of earnings to the unusually high effective tax rate and management’s approximately 45% annual tax-rate expectation.
- Review potential effects of the EU Agency Workers Directive, foreign-exchange movements, tax audits and other regulatory or employment-law changes.