MAN

Business Context and Reporting Period

Company: Manpower Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2002
Business Overview: Global workforce solutions provider operating through company-owned branches and franchises. The company reported 76,546,107 shares of common stock outstanding as of June 30, 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 0.7% in Q2 and 7.3% in the first half of 2002 compared to the prior year. On an organic constant currency basis, revenues declined 5.7% (Q2) and 9.3% (6 months), driven by lower customer demand due to the global economic slowdown.
• Margin Compression: Gross profit margin decreased 70 basis points in Q2 to 18.0% and 40 basis points for the six months to 18.1%. This was attributed to increased social costs (U.S. and France), unfavorable business mix, and pricing pressures.
• Profitability Drop: Operating profit fell 17.4% in Q2 and 38.6% for the six months ended June 30, 2002. Net earnings per share (diluted) dropped from $0.45 to $0.33 in Q2 and from $0.80 to $0.42 for the six-month period.
• Segment Performance:
  • United States: Revenues down 9.3% (Q2) and 15.5% (6 months) due to economic slowdown, though Light Industrial sector trends improved.
  • France: Local currency revenues contracted 5.6% (Q2) and 9.8% (6 months).
  • United Kingdom: Revenues down 12.8% (Q2 constant currency) due to lower demand and loss of contact center business.
  • Other Operations: The only segment with growth, up 21.0% (Q2 constant currency), driven by acquisitions and 6.8% organic growth.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management estimates the annual effective tax rate for 2002 will be 38.5%, higher than the 35% U.S. statutory rate due to foreign repatriations and higher foreign tax rates.
• Acquisitions: The company spent $29.6 million on acquisitions in the first half of 2002, primarily U.S. franchises. These contributed less than 2.5% to consolidated revenues and operating profit in Q2.
• Debt and Liquidity:
  • Debt-to-EBITDA ratio was 3.52 to 1 as of June 30, 2002, within the covenant limit of 3.75 to 1.
  • Accounts receivable increased to $2,226.8 million, partly due to foreign currency fluctuations ($163 million impact) and higher business volume.
• Credit Rating Risks:
  • Moody's: Downgraded rating from Baa2 to Baa3 in June 2002.
  • S&P: Changed outlook to negative in April 2002 and placed the company on "CreditWatch" with negative implications in August 2002. A potential downgrade to BBB- could increase facility fees and interest rates.
• Regulatory Risk: The French government announced a review of social programs (35-hour workweek, minimum wage, subsidies) in July 2002. The impact on future results cannot currently be estimated.
• Convertible Debentures: The company elected to settle any "put" on the first anniversary of its zero-coupon convertible debentures in cash, though it anticipates no substantial "put" under current economic conditions.

Investor Verification Checklist

• Organic Growth Trends: Verify if the 5.7% (Q2) and 9.3% (6 months) organic revenue declines are stabilizing or accelerating in subsequent quarters.
• Margin Recovery: Monitor if cost control initiatives can offset rising social costs and pricing pressures to restore gross margins above 18%.
• Credit Rating Impact: Assess the likelihood of an S&P downgrade to BBB- and the resulting increase in interest expense and facility fees.
• Working Capital Management: Review Days Sales Outstanding (DSO) trends given the $309 million increase in accounts receivable since year-end 2001.
• French Regulatory Exposure: Track the outcome of the French government's social program review for potential cost increases in a key operating region.