ManpowerGroup Inc. 2011 Q3 Form 10-Q Summary
Business context and reporting period
Manpower Inc., doing business as ManpowerGroup, filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company provides staffing, workforce solutions, recruitment, talent management and outplacement services across the Americas, Southern Europe, Northern Europe, Asia Pacific Middle East (APME) and Right Management.
Effective January 1, 2011, the company reorganized its European reporting structure and restated prior-period segment information. Management reported continued growth in most markets, although growth moderated during the third quarter because of economic slowing and more difficult prior-year comparisons.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenues from services | $5,782.3 million | $4,972.0 million | $16,522.0 million | $13,656.9 million |
| Gross profit | $951.3 million | $841.2 million | $2,771.1 million | $2,339.7 million |
| Gross profit margin | 16.5% | 16.9% | 16.8% | 17.1% |
| Operating profit | $158.0 million | $108.9 million | $394.4 million | $220.6 million |
| Operating profit margin | 2.7% | 2.2% | 2.4% | 1.6% |
| Net earnings | $79.6 million | $51.3 million | $188.0 million | $86.8 million |
| Diluted earnings per share | $0.97 | $0.62 | $2.26 | $1.06 |
- Reported revenue increased 16.3% in Q3 and 21.0% for the first nine months. Constant-currency growth was 8.8% and 13.7%, respectively.
- Operating profit increased 45.1% in Q3 and 78.8% for the first nine months. Selling and administrative expenses grew more slowly than revenue, producing operating leverage.
- Net earnings increased approximately 55% in Q3 and 117% for the first nine months. The effective tax rate declined to 45.9% in Q3 from 48.9% and to 47.9% for the nine months from 53.7%.
- Cash used in operating activities was $73.4 million for the first nine months, compared with $56.4 million in the prior-year period. Increased accounts receivable and a two-day increase in days sales outstanding drove higher working-capital requirements.
- Capital expenditures were $45.9 million, compared with $41.8 million. Acquisition spending declined to $32.1 million from $260.6 million.
- Cash and cash equivalents were $563.5 million at September 30, 2011, compared with $772.6 million at December 31, 2010.
- Total current and long-term debt was approximately $703.4 million at September 30, 2011, compared with approximately $698.0 million at December 31, 2010. Current borrowings increased while long-term debt declined.
- Accounts receivable increased to $4,342.0 million from $3,844.1 million at year-end 2010. Total assets increased to $7,075.7 million from $6,729.7 million.
Material changes versus the prior comparable period
- Revenue growth was broad-based: Q3 constant-currency revenue increased 7.8% in the Americas, 8.8% in Southern Europe, 8.5% in Northern Europe and 14.5% in APME. Right Management revenue declined 13.6% in constant currency.
- Right Management’s outplacement revenue declined 22.3% in constant currency in Q3 and 30.4% for the first nine months, consistent with reduced counter-cyclical demand as labor markets improved. Its Q3 operating unit margin declined to negative 2.4% from 0.0%.
- APME revenue growth included acquisitions completed in China and India. Q3 organic constant-currency growth was 5.9%, versus reported constant-currency growth of 14.5%.
- Gross margin declined because of lower temporary-staffing margins, reduced French payroll-tax subsidies, the mix shift away from higher-margin Right Management outplacement services and APME acquisitions. Permanent recruitment growth partially offset these effects.
- Management reported a 100-basis-point expected 2011 margin impact from French payroll-tax subsidy reductions, with recovery dependent on the timing of price increases.
- During the first nine months, the company repurchased 923,200 shares and paid $32.8 million in dividends. A further 3.0 million-share repurchase authorization was approved in November 2011.
Guidance, outlook, risks and unusual items
- Management expected an annual effective tax rate of approximately 47%; excluding the French Business Tax, the Q3 rate would have been approximately 36% and the nine-month rate approximately 37%.
- Management expected available cash and credit facilities to satisfy foreseeable liquidity needs and expected compliance with financial covenants for the next 12 months.
- On October 5, 2011, the company entered into an $800.0 million five-year revolving credit agreement, replacing its $400.0 million facility. The agreement matures in October 2016 and includes a maximum Debt-to-EBITDA ratio of 3.5 to 1 and a minimum fixed-charge coverage ratio of 1.5 to 1.
- The €300.0 million notes mature in June 2012 and the €200.0 million notes mature in June 2013. Management expected to use cash, refinance through the new facility or issue replacement long-term debt.
- Management expected fourth-quarter 2011 reorganization costs of $16.0 million to $22.0 million before tax benefit, primarily for Right Management office closures, severance and the transition of professional services offices to the Experis brand.
- The remaining reorganization reserve was $17.5 million at September 30, 2011, with the majority expected to be paid by the end of 2012.
- The company acquired approximately 70% of Proservia SA on September 22, 2011 and most remaining shares on November 2, 2011. Purchase accounting was incomplete at September 30.
- Third-quarter goodwill and indefinite-lived intangible-asset impairment testing identified no impairment. The test relied on forecast revenue growth, operating margins, working-capital levels, discount rates of 12.3% to 20.0% and terminal value assumptions.
- Risks include labor-market and economic weakness, moderating demand, foreign-exchange movements, working-capital needs, credit-market access, margin pressure from French labor-tax changes, regulatory changes under the EU Agency Workers Directive and ongoing tax and legal proceedings.
- The French Competition Council fine of €42.0 million was paid in 2009, and France’s highest court confirmed the decision in March 2011. Management stated that other legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue growth continues to moderate and whether operating leverage offsets slowing demand.
- Accounts receivable, days sales outstanding and operating cash flow, given the company used cash in operations despite higher earnings.
- Refinancing plans and market conditions for the €300.0 million 2012 maturity and €200.0 million 2013 maturity.
- The size and timing of fourth-quarter reorganization charges and the associated effect on earnings and cash flow.
- Recovery of French staffing margins following payroll-tax subsidy reductions and price increases.
- Right Management’s ongoing outplacement decline and the profitability of its replacement businesses.
- Completion and financial impact of the Proservia acquisition purchase accounting.
- Goodwill sensitivity to changes in forecast growth, margins, discount rates and terminal values.