ManpowerGroup 2012 Q2 SEC Filing Summary
Business context and reporting period
Manpower Inc., doing business as ManpowerGroup, provides contingent staffing, recruitment, workforce solutions, talent management, consulting and outplacement services. Operations are reported through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue from services | $5,206.7 million | $5,667.3 million | $10,303.1 million | $10,739.7 million |
| Gross profit | $861.7 million | $962.2 million | $1,709.1 million | $1,819.8 million |
| Gross margin | 16.6% | 17.0% | 16.6% | 16.9% |
| Operating profit | $94.4 million | $150.8 million | $188.2 million | $236.4 million |
| Operating margin | 1.8% | 2.7% | 1.8% | 2.2% |
| Net earnings | $41.0 million | $72.7 million | $81.2 million | $108.4 million |
| Diluted EPS | $0.51 | $0.87 | $1.01 | $1.30 |
| Effective tax rate | 50.7% | 47.7% | 50.8% | 49.2% |
- Reported Q2 revenue declined 8.1% year over year; revenue declined 0.8% in constant currency and 1.4% on an organic constant-currency basis.
- Six-month revenue declined 4.1% reported but increased 1.0% in constant currency and 0.1% on an organic constant-currency basis.
- Q2 operating profit fell 37.3%, and six-month operating profit fell 20.4%. Results included reorganization costs and U.S. legal costs.
- Cash used in operating activities was $39.6 million for the first six months, improving from $192.1 million in 2011. Working-capital use was $191.2 million versus $389.5 million in the prior-year period.
- Capital expenditures were $33.8 million and acquisition spending was $34.0 million in the first six months. Total investing cash outflow was $66.9 million.
- Cash and cash equivalents were $454.6 million at June 30, 2012, down from $580.5 million at December 31, 2011.
- Total debt comprised $308.8 million of short-term borrowings and current maturities plus $446.3 million of long-term debt. The company issued €350.0 million of 4.50% senior notes due June 2018 and used the proceeds primarily to repay revolving-credit borrowings.
- The $800.0 million revolving facility had $798.4 million available after $1.6 million of letters of credit. Debt-to-EBITDA was 1.13 to 1 versus a 3.5 to 1 maximum, and fixed-charge coverage was 3.08 to 1 versus a 1.5 to 1 minimum.
Material changes versus the prior comparable period
- Revenue weakness was concentrated in Southern Europe and Northern Europe, reflecting softer economic conditions. Q2 constant-currency revenue declined 2.7% in Southern Europe and 1.2% in Northern Europe.
- France and Italy reported Q2 constant-currency revenue declines of 2.5% and 10.8%, respectively. U.S. revenue declined 3.6%, primarily because of softer demand from larger strategic accounts in the Experis business.
- APME revenue increased 1.8% in constant currency in Q2 and 5.6% in the first half. Other Americas revenue increased 11.6% in organic constant currency in Q2 and 13.8% in the first half.
- Right Management experienced lower demand for talent-management services, down 12.1% in constant currency in Q2, partly offset by 12.5% growth in outplacement services.
- Gross margin declined 40 basis points in Q2 and 30 basis points for the first half, driven primarily by pricing pressure, business mix, unbillable labor and the timing of European holidays.
- Selling and administrative expenses included $21.0 million of net reorganization costs for the first half, including $18.7 million in Q2, and $10.0 million of U.S. legal costs. The prior-year first-half reorganization cost was $1.6 million.
- The company acquired Damilo Group, a French IT design-solutions firm, for €21.2 million, or approximately $28.0 million, adding approximately €22.1 million of goodwill.
- The diluted weighted-average share count declined to 80.4 million in Q2 and 80.8 million for the first half, primarily reflecting share repurchases.
Guidance, outlook, risks and unusual items
- Management expects the annual effective tax rate to be in the mid-forty-percent range. The reported rate was elevated by the mix of U.S. and non-U.S. earnings, valuation allowances, permanent items, repatriations, discrete restructuring-related items and French business tax.
- Management stated that available cash and existing credit facilities should cover cash needs for the foreseeable future and expects compliance with debt covenants for the next 12 months.
- Demand depends on labor-market strength and economic growth. Slowing economies can reduce staffing demand and cause operating deleverage because expenses may not decline as quickly as revenue.
- Pricing pressure, weaker demand in Europe, foreign-exchange movements, lower discretionary spending on talent management and changes in business mix remain key operating risks.
- New German collective labor agreements effective November 2012 are expected to increase temporary-worker wages. Management intends to pass the increases to clients but could not assess the effect on demand or margins with certainty.
- The company recorded $10.0 million of U.S. legal costs, primarily related to a proposed $8.0 million settlement, plus taxes and administrative fees, concerning an Illinois vacation-pay lawsuit. The settlement remained subject to final court approval, and the company admitted no liability or wrongdoing.
- Remaining reorganization reserves were $35.9 million at June 30, 2012, with the majority expected to be paid during 2012.
- Goodwill was $1,014.0 million at June 30, 2012. No interim impairment test was performed because management identified no significant impairment indicators.
Important facts for investors to verify
- Whether staffing demand and operating margins stabilize in France, Italy, Northern Europe and the U.S. Experis business.
- Progress in realizing savings from the reorganization program and the timing of the remaining $35.9 million of reserve payments.
- Whether pricing actions offset wage inflation, particularly under the German labor agreements.
- Conversion of earnings into operating cash flow, given the first-half operating cash outflow and the seasonal increase in accounts receivable.
- Debt maturities, refinancing requirements and continued compliance with revolving-credit covenants.
- The final outcome and cash cost of the Illinois vacation-pay settlement and other legal proceedings.
- Potential goodwill or intangible-asset impairment if economic conditions deteriorate, especially in weaker European markets.