Manpower Inc. Form 10-Q Summary
Business Context and Reporting Period
Manpower Inc. and subsidiaries filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company provides temporary staffing, permanent recruitment, workforce solutions, outplacement and talent-management services globally through the Americas, France, EMEA, Asia Pacific, Right Management and Jefferson Wells segments.
Management reported improving demand in most staffing markets as global economic conditions stabilized. Right Management and Jefferson Wells continued to experience lower demand, reflecting reduced outplacement activity and restrained discretionary project spending.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $4,585.6 million, up 20.9% | $8,684.9 million, up 16.8% |
| Gross profit | $797.0 million, up 15.1% | $1,498.5 million, up 10.3% |
| Gross margin | 17.4%, versus 18.3% | 17.3%, versus 18.3% |
| Operating profit | $79.1 million, versus $19.0 million | $111.7 million, versus $20.4 million |
| Operating margin | 1.7%, versus 0.5% | 1.3%, versus 0.3% |
| Net earnings | $32.7 million, versus $16.3 million | $35.5 million, versus $14.5 million |
| Diluted EPS | $0.40, versus $0.21 | $0.44, versus $0.18 |
- Second-quarter revenue increased 23.7% in constant currency; organic constant-currency growth excluding COMSYS was 18.9%.
- First-half revenue increased 14.6% in constant currency; organic constant-currency growth was 12.1%.
- Operating leverage improved as revenue grew faster than selling and administrative expenses. However, gross margin declined because of business mix, pricing pressure and lower-margin staffing growth.
- Six-month operating cash flow was negative $65.7 million, compared with positive $379.3 million in 2009, primarily because higher revenue increased accounts receivable and working-capital requirements.
- Capital expenditures were $27.9 million, compared with $16.9 million in the prior-year period. Cash used for acquisitions was $258.5 million, including COMSYS.
- Cash and cash equivalents were $552.5 million at June 30, 2010, compared with $1,014.6 million at December 31, 2009. Accounts receivable increased to $3,415.7 million from $3,070.8 million.
- Short-term borrowings and current maturities were $36.1 million, and long-term debt was $611.9 million at June 30, 2010.
- The company paid $30.6 million in dividends, or $0.37 per share, during the first half.
Material Changes Versus the Prior Comparable Period
- On April 5, 2010, Manpower completed the acquisition of COMSYS IT Partners for an enterprise value of $427.0 million, including $47.1 million of debt repaid at closing. Consideration consisted of approximately $191.4 million in cash and 3.2 million Manpower shares valued at $188.5 million.
- COMSYS contributed $182.3 million of second-quarter and first-half revenue. Its results included $6.9 million of amortization and $4.7 million of integration costs during the second quarter.
- Goodwill increased to $1,223.6 million from $959.1 million at year-end 2009, primarily because of the COMSYS acquisition. The company reported no significant interim impairment indicators.
- Americas revenue grew 63.9% in constant currency in the second quarter, including COMSYS, while France, EMEA and Asia Pacific grew 22.6%, 18.4% and 15.4%, respectively.
- Right Management revenue declined 37.8% in constant currency in the second quarter and 33.2% for the first half. Jefferson Wells revenue declined 15.8% and 19.5%, respectively.
- Reorganization costs were $2.5 million in the first half of 2010, compared with substantially higher prior-year charges. The remaining reorganization liability was $12.8 million, most of which management expected to pay by the end of 2011.
- The 2009 comparable results were restated to defer $3.1 million of second-quarter revenue and $7.2 million of first-half revenue related to a workforce-solutions contract that had been recognized prematurely. The restatement affected timing, not total contract revenue or cash flow.
- Accumulated other comprehensive income declined to a loss of $20.0 million from income of $106.9 million at December 31, 2009, largely because of foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- Management expected an annual effective tax rate of approximately 55% for 2010. Excluding the French Business Tax, the rate was expected to be approximately 40%.
- Management stated that available cash and existing credit facilities were sufficient for foreseeable cash needs and expected compliance with debt covenants for the next 12 months.
- The company’s $400.0 million revolving credit facility expires in November 2012. Euro-denominated notes of approximately $366.6 million mature in June 2012, and approximately $244.1 million of Euro-denominated notes mature in June 2013. Management expected to repay or refinance these obligations.
- At June 30, 2010, $396.0 million remained available under the revolving facility. The company reported a Debt-to-EBITDA ratio of 2.13 to 1 against a maximum of 6.00 to 1 and a fixed-charge ratio of 1.84 to 1 against a minimum of 1.25 to 1.
- Management cautioned that staffing demand depends on continued economic improvement and labor-market strength. A renewed or prolonged slowdown could reduce revenue, profitability and operating cash flow.
- Key risks include working-capital pressure from revenue growth, foreign-exchange volatility, pricing pressure, labor-market and employment regulations, credit-market access, and integration of COMSYS.
- The company was appealing a €42.0 million French competition fine. The fine was paid in April 2009; a further appeal was filed in March 2010.
- Potential U.S. health-care legislation was expected to increase employment costs, although the company could not quantify the impact or assure that all costs could be passed to clients. Potential changes to Japanese staffing regulations and French social programs also remained uncertain.
- Gross unrecognized tax benefits were $45.0 million at June 30, 2010, including interest and penalties of $3.0 million. Management did not expect a significant change over the following 12 months.
Important Facts for Investors to Verify
- Whether the revenue recovery in core staffing markets continues and offsets ongoing declines at Right Management and Jefferson Wells.
- COMSYS revenue retention, integration costs, amortization, margins and contribution to future earnings and cash flow.
- Conversion of revenue growth into operating cash flow as accounts receivable and other working-capital requirements increase.
- Progress toward reducing or refinancing the 2012 and 2013 debt maturities and continued compliance with credit covenants.
- The sustainability of reported earnings given the approximately 55% expected annual tax rate and the $30.1 million French Business Tax classification in the first half.
- Potential effects of foreign-currency movements, employment-law changes, health-care costs and the pending French competition appeal.
- The carrying value and impairment risk of $1,223.6 million of goodwill and related acquired intangible assets.