MAN

Business Context and Reporting Period

Company: Manpower Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Business Overview: Manpower Inc. is a global leader in employment services, operating approximately 4,200 offices in 82 countries. The company provides staffing, workforce management, outsourcing, and consulting solutions. The reporting period reflects the severe impact of the global economic downturn and credit crisis on staffing demand, offset partially by counter-cyclical growth in career transition services (Right Management).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 32.3% year-over-year (21.8% in constant currency). The decline was driven by reduced demand in staffing markets across the Americas, France, EMEA, and Asia Pacific. Right Management was the only segment with growth, up 30.7% (43.4% constant currency) due to increased demand for outplacement services.
• Profitability Compression: Operating profit plummeted 95.8% to $5.5 million. While gross profit margin improved slightly to 18.4%, selling and administrative expenses decreased only 20.5%, leading to significant expense deleveraging.
• Net Earnings: Net earnings dropped 96.9% to $2.3 million. The effective tax rate was 136.9% (a benefit) due to valuation allowance reversals and a mix of earnings, compared to a 37.4% expense in 2008.
• Cash Flow Improvement: Operating cash flow increased significantly to $249.8 million, primarily due to a $690.3 million reduction in accounts receivable as collections outpaced new billings during the revenue contraction.
• Cost Reductions: The company reduced its full-time equivalent employee base by 4,500 (13%) and closed 350 branches (8%) since September 2008. Reorganization charges of $6.9 million were recorded in Q1 2009.

Guidance, Outlook, and Risks

• Outlook: Management states it is difficult to predict when the company will return to prior revenue and earnings levels due to the uncertainty of global economic trends. They anticipate continued volatility but believe the long-term economic outlook will rebound.
• Goodwill Impairment Risk: Management performed impairment testing and concluded no impairment was necessary as of March 31, 2009. However, they warn that continued volatile stock prices or further revenue erosion could trigger material impairment charges in the near term.
• Liquidity and Debt Covenants: The company maintains a net positive cash position of $1.0 billion. However, Moody's and S&P have placed a "negative" outlook on the company's credit ratings. Management notes that if the economic downturn persists, they may struggle to maintain compliance with debt-to-EBITDA and fixed charge ratio covenants in the latter part of 2009, potentially requiring waivers or amendments.
• Legal Contingency: The company paid a €42.0 million ($55.9 million) fine in April 2009 related to a French competition investigation and has appealed the decision. This payment negatively impacted Q2 2009 cash flow.
• Dividend: A cash dividend of $0.37 per share was declared on April 28, 2009.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the goodwill impairment test, specifically the projected revenue growth rates and discount rates for Right Management and Jefferson Wells, given the severe economic contraction.
• Debt Covenant Compliance: Monitor the Debt-to-EBITDA and fixed charge ratios closely for the remainder of 2009 to assess the risk of covenant breaches and potential refinancing costs.
• Reorganization Costs: Track the remaining $22.5 million in reorganization reserves to ensure actual severance and closure costs align with estimates.
• French Competition Fine: Monitor the status of the appeal regarding the €42.0 million fine to determine if further financial exposure exists.
• Accounts Receivable Quality: Assess the allowance for doubtful accounts ($116.4 million) given the economic environment and the rapid decline in receivables balances.