ManpowerGroup Inc. 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
ManpowerGroup provides contingent staffing, permanent recruitment, workforce solutions, career management, talent management, and outplacement services through the Americas, Southern Europe, Northern Europe, APME, and Right Management segments. This unaudited filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key Financial Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue from services | $5,040.7 million | $5,206.7 million | $9,809.6 million | $10,303.1 million |
| Gross profit | $836.4 million | $861.7 million | $1,626.5 million | $1,709.1 million |
| Gross profit margin | 16.6% | 16.6% | 16.6% | 16.6% |
| Operating profit | $128.1 million | $94.4 million | $182.5 million | $188.2 million |
| Operating profit margin | 2.5% | 1.8% | 1.9% | 1.8% |
| Net earnings | $68.2 million | $41.0 million | $92.1 million | $81.2 million |
| Diluted EPS | $0.87 | $0.51 | $1.17 | $1.01 |
| Cash used in operating activities | Not separately provided for the quarter | $(71.6) million | $(39.6) million |
Second-quarter revenue declined 3.2% year over year, or 2.9% in constant currency. First-half revenue declined 4.8%, or 4.3% in constant currency. Selling and administrative expenses decreased 7.7% in the quarter and 5.1% year to date, reflecting cost reductions, lower headcount and lease costs, and the absence of $10.0 million of U.S. legal costs recorded in 2012.
At June 30, 2013, cash and cash equivalents were $280.9 million, compared with $648.1 million at December 31, 2012. Accounts receivable were $4,172.0 million and total assets were $6,673.3 million. Current liabilities were $3,321.1 million, long-term debt was $455.5 million, and shareholders’ equity was $2,532.5 million.
Total debt, based on current borrowings and long-term debt, was approximately $534.1 million. The company repaid its €200.0 million, 4.75% notes at maturity on June 14, 2013. Its remaining €350.0 million, 4.5% notes are due in June 2018. The $800.0 million revolving credit facility had $799.1 million available, subject to covenants. Debt-to-EBITDA was 0.99 to 1 and fixed-charge coverage was 2.82 to 1, compared with covenant limits of 3.5 to 1 and 1.5 to 1, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue decreased across most regions because of economic uncertainty and weaker demand for staffing and recruitment services. Southern Europe was particularly weak, with first-half revenue down 8.0% in constant currency.
- Right Management revenue declined 2.0% in constant currency in the quarter and 2.3% in the first half, as clients deferred discretionary talent-management spending. Outplacement demand increased modestly.
- ManpowerGroup Solutions continued to grow, including U.S. second-quarter revenue growth of 16.3%, primarily from recruitment-process outsourcing and managed-service-provider businesses.
- Gross profit margin remained 16.6% in both comparable periods. Benefits from France’s CICE payroll tax credit and higher-margin solutions were offset by weaker permanent recruitment and margin pressure in Northern Europe and APME.
- Operating profit increased 35.6% in the quarter despite lower revenue, but declined 3.1% for the first half. The quarterly improvement reflected cost reductions, lower legal costs, and lower restructuring costs at Right Management, partly offset by $20.0 million of current-quarter restructuring charges.
- Net earnings rose 66.4% in the quarter and 13.4% for the first half. The effective tax rate declined to 42.1% from 50.7% in the quarter and to 42.7% from 50.8% year to date, aided by earnings mix and the U.S. Work Opportunity Tax Credit.
- Cash used in operations increased to $71.6 million year to date from $39.6 million, primarily because changes in operating assets and liabilities used $242.8 million of cash.
- No share repurchases were made in the first half of 2013. The company paid a semiannual dividend of $0.46 per share and retained authorization to repurchase 8.0 million shares.
Outlook, Commentary, Risks, and Unusual Items
- Management expects its simplification and cost-recalibration plan to reduce selling and administrative expenses by more than $180 million in 2013, with additional restructuring costs expected.
- The restructuring reserve was $49.6 million at June 30, 2013; management expects most of this amount to be paid during 2013. Six-month restructuring costs were $54.8 million versus $21.0 million in the prior year.
- Management expects an annual effective tax rate of approximately 40%, driven by valuation allowances, permanent items, and the French business tax.
- The company believes cash, operating cash flows, and available credit facilities are sufficient for foreseeable needs and expects to remain in compliance with debt covenants for the next 12 months.
- French clients asserted claims seeking refunds of payroll tax subsidies dating back to 2003. Management believes the claims lack merit and does not expect a material financial impact.
- U.S. employer-mandate provisions under the Patient Protection and Affordable Care Act were delayed until 2015. The company expects higher employment costs but may not be able to fully pass those costs to clients.
- New German collective labor agreements are expected to increase temporary-worker wages and pressure German gross margins, although management does not expect a significant consolidated impact.
- Foreign-exchange movements reduced other comprehensive income by $57.3 million in the first half, primarily through translation adjustments.
- The company identified no significant goodwill or indefinite-lived intangible-asset impairment indicators at June 30, 2013 and performed no interim impairment test.
Important Facts for Investors to Verify
- Whether revenue demand stabilizes in France, Northern Europe, the United States, and APME, particularly in staffing/interim and permanent recruitment businesses.
- Whether the cost-recalibration program delivers more than $180 million of 2013 expense savings and how much additional restructuring spending is required.
- The timing and cash impact of the remaining $49.6 million restructuring reserve and other commitments totaling $1,745.2 million.
- Whether operating cash flow improves as collections, accruals, and payments normalize.
- The ability to pass through higher costs associated with PPACA, German labor agreements, and other employment regulations.
- The resolution and potential financial exposure from French payroll-tax-subsidy claims and ongoing tax audits.
- Foreign-currency effects, the company’s reliance on non-U.S. operations, and the availability and cost of future borrowing.