ManpowerGroup 2012 Q3 Form 10-Q Summary
Business Context and Reporting Period
Manpower Inc., doing business as ManpowerGroup, provides staffing, recruitment, workforce consulting, outplacement, and other workforce solutions through the Americas, Southern Europe, Northern Europe, APME, and Right Management segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $5,172.3 million | $5,782.3 million | $15,475.4 million | $16,522.0 million |
| Gross profit | $856.2 million | $951.3 million | $2,565.3 million | $2,771.1 million |
| Gross margin | 16.6% | 16.5% | 16.6% | 16.8% |
| Operating profit | $118.6 million | $158.0 million | $306.8 million | $394.4 million |
| Operating margin | 2.3% | 2.7% | 2.0% | 2.4% |
| Net earnings | $63.1 million | $79.6 million | $144.3 million | $188.0 million |
| Diluted EPS | $0.79 | $0.97 | $1.79 | $2.26 |
| Effective tax rate | 41.9% | 45.9% | 47.3% | 47.9% |
Q3 revenue declined 10.5% as reported, or 3.8% in constant currency and 4.4% on an organic constant-currency basis. Nine-month revenue declined 6.3% as reported, or 0.7% in constant currency and 1.5% organically. Foreign exchange reduced Q3 and nine-month revenue growth by 6.7% and 5.6%, respectively.
Operating profit declined 25.0% in Q3 and 22.2% for the nine months. Selling and administrative expenses declined more slowly than revenue, producing expense deleveraging. Q3 gross margin improved modestly because of growth in higher-margin Solutions and Right Management outplacement services; nine-month gross margin declined because of staffing pricing pressure and mix.
Cash Flow, Debt, and Liquidity
- Cash used in operating activities was $14.6 million for the first nine months of 2012, compared with $73.4 million used in the prior-year period.
- Cash used in investing activities was $92.2 million, including $48.6 million of capital expenditures and $46.0 million for acquisitions.
- Cash used in financing activities was $37.5 million, including $44.2 million of share repurchases and $34.3 million of dividends.
- Cash and cash equivalents were $444.6 million at September 30, 2012, down from $580.5 million at December 31, 2011.
- Short-term borrowings and current maturities were $299.6 million, and long-term debt was $451.4 million, for total reported debt of approximately $751.0 million.
- In June 2012, the company issued €350.0 million of 4.50% senior unsecured notes due June 2018. Proceeds were used primarily to repay revolving-credit borrowings that had funded the repayment of €300.0 million of notes maturing in June 2012.
- Approximately $798.4 million remained available under the $800.0 million revolving credit facility. The company reported a debt-to-EBITDA ratio of 1.22x versus a 3.5x covenant maximum and fixed-charge coverage of 2.97x versus a 1.5x minimum.
- The company expects to address €200.0 million of notes due June 2013 through cash, refinancing under the revolving facility, or new long-term financing.
- Foreign subsidiaries held $205.4 million of cash that was not immediately available for domestic operations without repatriation. Management stated that existing cash and credit facilities should cover foreseeable needs.
Material Changes Versus the Prior Comparable Period
- Demand weakened across staffing, interim, and permanent recruitment markets, particularly in Southern Europe and Northern Europe. Q3 revenue declined 16.8% in Southern Europe, 10.6% in Northern Europe, and 8.2% in the United States, each on a reported basis.
- France and Italy remained significant areas of weakness. Q3 revenue declined 5.7% in France and 13.3% in Italy on a constant-currency basis.
- APME revenue increased 3.7% in constant currency for the first nine months, while Other Americas grew 11.7% organically in constant currency.
- Right Management revenue increased 6.4% in constant currency during Q3, driven by an 18.1% increase in outplacement services, which offset an 11.3% decline in talent-management services.
- Q3 diluted weighted-average shares declined to 80.0 million from 82.4 million, primarily because of share repurchases. The company repurchased 1.18 million shares during the first nine months and had 2.4 million shares remaining under its 2011 authorization at September 30.
- Net reorganization costs increased to $22.2 million for the first nine months from $2.1 million in the prior-year period. Legal costs were $10.0 million, primarily related to an Illinois vacation-pay settlement.
- Goodwill and indefinite-lived intangible asset testing produced no impairment charge in the third quarter. Goodwill increased to $1,028.5 million from $984.7 million at year-end 2011, primarily from acquisitions and currency effects.
Guidance, Outlook, Risks, and Unusual Items
- Management expected revenue contraction and further expense deleveraging in Q4 2012, with additional reorganization charges anticipated to streamline and simplify the organization.
- Management expected the annual effective tax rate to remain in the mid-forty-percent range, driven by the geographic mix of earnings, valuation allowances, permanent items, discrete restructuring-related items, and French business tax.
- The remaining reorganization reserve was $27.8 million at September 30, 2012; the majority was expected to be paid by the end of 2013.
- German collective labor agreements scheduled to take effect between November 2012 and April 2013 are expected to increase temporary-worker wages. The company intends to pass the increases to clients but could face margin pressure or reduced demand if it cannot recover the costs.
- Key risks include economic contraction, lower labor-market demand, pricing pressure, adverse business mix, foreign-exchange movements, difficulty reducing expenses in line with revenue, credit-market access, and customer receivable collectability.
- The company was party to various legal proceedings and stated that their ultimate resolution was not expected to have a material adverse effect. The Illinois settlement remained subject to final court approval.
- Aggregate commitments for debt repayments, operating leases, severance and office-closure costs, and other commitments were $1,809.8 million at September 30, 2012. Guarantees and letters of credit totaled approximately $177.7 million.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2012, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Verify the company’s ability to refinance or repay the €200.0 million of notes due June 2013 and monitor revolving-facility covenant compliance.
- Assess whether weakening staffing demand in France, Italy, Northern Europe, and the United States continues and whether expense reductions can offset revenue declines.
- Track recovery of operating cash flow, accounts receivable, days sales outstanding, and bad-debt expense.
- Evaluate the sustainability of gross-margin performance, including pricing pressure, staffing mix, Solutions growth, and Right Management’s outplacement mix.
- Monitor restructuring execution, remaining cash payments, and the impact of the Illinois vacation-pay settlement.
- Review goodwill sensitivity to revenue growth, operating margins, discount rates, and terminal-value assumptions, particularly for the France and Netherlands reporting units.
- Confirm the treatment and timing of foreign cash repatriations, associated taxes, and the availability of cash held by foreign subsidiaries.