ManpowerGroup Inc. Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with the three months ended March 31, 2012. ManpowerGroup provides contingent staffing, permanent recruitment, workforce solutions, talent management and outplacement services through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. Management attributed weaker results primarily to economic uncertainty, declining staffing demand, slower permanent recruitment and two fewer billing days.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue from services | $4,768.9 million | $5,096.4 million | (6.4%) reported; (5.8%) constant currency |
| Gross profit | $790.1 million | $847.4 million | (6.8%) |
| Gross profit margin | 16.6% | 16.6% | Flat |
| Selling and administrative expenses | $735.7 million | $753.6 million | (2.4%) |
| Operating profit | $54.4 million | $93.8 million | (42.0%) |
| Operating margin | 1.1% | 1.8% | Down 70 basis points |
| Net earnings | $23.9 million | $40.2 million | (40.6%) |
| Diluted EPS | $0.31 | $0.50 | (38.0%) |
| Effective tax rate | 44.3% | 50.9% | Down 660 basis points |
Cash flow and liquidity: Cash used in operating activities was $62.3 million, compared with $20.7 million used in Q1 2012. Capital expenditures were $12.8 million, compared with $19.7 million. Ending cash and cash equivalents were $583.4 million, down from $648.1 million at December 31, 2012.
Debt and credit capacity: Current borrowings and current maturities were $302.2 million, and long-term debt was $448.9 million at March 31, 2013. The company had $799.1 million available under its $800.0 million revolving credit facility, subject to covenants. Its reported debt-to-EBITDA ratio was 1.08 to 1, versus a maximum of 3.5 to 1; fixed-charge coverage was 2.78 to 1, versus a minimum of 1.5 to 1. Separate subsidiary credit lines totaled $364.0 million, of which $317.8 million was unused.
Balance sheet: Total assets were $6,803.3 million, down from $7,012.6 million at year-end 2012. Accounts receivable declined to $4,042.0 million from $4,179.0 million. Shareholders’ equity was $2,501.1 million, essentially unchanged from December 31, 2012.
Material changes versus the prior comparable period
- Revenue declined across all reporting segments. Southern Europe revenue decreased 9.0% reported, Northern Europe 5.1%, APME 7.0%, the Americas 4.0% and Right Management 3.8%.
- France revenue declined 11.3% and the United States declined 4.0%; management cited weak demand, fewer billing days and softness in key accounts.
- Operating profit fell $39.4 million, driven by lower revenue, operating deleverage and $34.8 million of restructuring costs, compared with $0.1 million in Q1 2012.
- Excluding restructuring costs, selling and administrative expenses decreased 7.0% in constant currency, reflecting lower headcount, incentive compensation and lease costs.
- ManpowerGroup Solutions continued to grow, while permanent recruitment declined approximately 10% and Right Management experienced lower demand for discretionary talent-management services.
- Operating cash usage increased by $41.6 million year over year, primarily because changes in operating assets and liabilities used $125.2 million of cash.
- Diluted weighted-average shares decreased to 78.2 million from 80.9 million, primarily reflecting 3.6 million shares repurchased after March 31, 2012.
Guidance, outlook, commentary, risks and unusual items
- Management expected an annual effective tax rate of approximately 40%, compared with the 44.3% rate recorded in Q1. Excluding specified items, the Q1 2013 tax rate would have been approximately 32%.
- Management expected restructuring-related savings of more than $80 million in 2013 from the simplification plan implemented in late 2012, while also expecting further restructuring costs. The remaining restructuring reserve was $51.4 million, with most expected to be paid during 2013.
- The €200.0 million notes mature in June 2013. Management planned to repay them using available cash and borrowings under the revolving credit facility. The €350.0 million notes mature in June 2018 and will likely require refinancing.
- Management stated that available cash and credit facilities should cover foreseeable needs and expected covenant compliance for the next 12 months, but cautioned that future borrowing costs and availability could be affected by credit-market conditions.
- The French CICE payroll tax credit supported gross margins in France and Southern Europe. Management noted uncertainty regarding potential pricing concessions or other market effects that could reduce the net benefit.
- New German collective labor agreements were expected to increase temporary-worker wages and pressure German gross margins, although management did not expect a significant consolidated or Northern Europe impact.
- Foreign currency translation produced a $41.3 million other comprehensive loss, resulting in a comprehensive loss of $17.4 million despite net earnings of $23.9 million.
- Goodwill and indefinite-lived intangible assets were not tested for impairment in Q1 because management identified no significant impairment indicators. Goodwill was $1,031.0 million, net of cumulative impairment losses of $513.4 million.
- As of March 31, 2013, $312.3 million of cash was held by foreign subsidiaries and was not available for domestic operations unless repatriated. The company identified $371.7 million of non-U.S. earnings that were not permanently invested.
- The Board declared a semi-annual dividend of $0.46 per share on April 30, 2013, payable June 14, 2013. No share repurchases were made under the repurchase authorization during the quarter.
Important facts for investors to verify
- Verify the company’s ability to refinance or repay the €200.0 million notes due in June 2013 and its plans for the €350.0 million notes due in 2018.
- Assess whether the expected restructuring savings exceed the remaining $51.4 million reserve and whether additional restructuring charges will be incurred.
- Monitor labor-market demand, billing-day comparisons, staffing volumes and permanent-recruitment trends, particularly in France, Italy, Northern Europe and the United States.
- Evaluate the sustainability of cash generation given Q1 operating cash usage of $62.3 million and significant working-capital requirements.
- Review exposure to foreign exchange movements, foreign subsidiary cash restrictions, tax audits and the $26.1 million net unrecognized tax benefit.
- Assess the effect of the French CICE credit and German wage agreements on pricing, gross margins and cash taxes.
- Consider the sensitivity of goodwill and intangible assets to further economic deterioration, especially in underperforming European markets.
- Confirm the April 30 dividend declaration, subsequent debt activity and any changes in liquidity after the March 31 balance-sheet date.