MAN

Business Context and Reporting Period

Company: Manpower Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2002
Business Overview: Manpower Inc. operates a global workforce solutions business through company-owned branches and franchises. The company reported a significant contraction in revenues and earnings for the first quarter of 2002 compared to the prior year, driven by economic conditions in key markets and unfavorable currency exchange rates.

Key Financial Metrics

Note: Total Debt for Q1 2002 calculated as Short-term borrowings ($112.6M) + Long-term debt ($714.4M).

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 13.9% year-over-year. At constant exchange rates, the decline was 10.3%. The U.S. segment saw a 21.5% revenue drop, while France and the U.K. also experienced double-digit declines.
• Earnings Compression: Net earnings fell 74.3% to $6.9 million. Operating profit dropped 64.2% to $18.7 million.
• Segment Performance: The U.S. operating unit posted a loss of $4.9 million compared to a profit of $8.2 million in the prior year. Conversely, the "Other Operations" segment grew 21.9% (constant currency), driven largely by acquisitions.
• Cash Flow: Cash provided by operating activities decreased 62.7% to $30.4 million, primarily due to lower earnings and changes in working capital timing.
• Accounting Changes: The company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) on January 1, 2002, which prohibits goodwill amortization. This resulted in no goodwill amortization expense in Q1 2002, compared to $3.8 million in Q1 2001.

Guidance, Outlook, and Risks

• Management Commentary: Management attributed revenue declines to a strengthening U.S. dollar, weaker customer demand in the U.K. and U.S., and economic conditions in Europe. They noted that gross profit margins remained consistent year-over-year due to improved pricing in some regions offsetting mix changes in others.
• Capital Allocation: The company completed a $30.7 million repurchase of common stock under a forward repurchase agreement. Capital expenditures were reduced to $14.1 million from $21.6 million in the prior year.
• Credit Rating Risk: Subsequent to the quarter end, Standard & Poor's changed the company's credit rating outlook from neutral to negative, and Moody's placed the rating under review for a possible downgrade. Management maintains an investment-grade rating and does not anticipate a drop below investment grade.
• Convertible Debentures: The company holds unsecured zero-coupon convertible debentures due in 2021. While management does not anticipate a "put" (repurchase request) on the first anniversary, they noted that a significant change in the economic environment could force a settlement in common stock, causing dilution.
• Goodwill Impairment: The company is performing the first step of the goodwill impairment review required by SFAS 142, with completion expected by June 30, 2002. Any impairment losses would be recognized as a cumulative effect of a change in accounting principle.

Investor Verification Checklist

• Currency Impact: Verify the specific impact of the strengthening U.S. dollar on the reported 13.9% revenue decline versus the 10.3% decline at constant rates.
• U.S. Segment Turnaround: Monitor the U.S. segment's ability to reverse the 21.5% revenue decline and return to profitability, given the $4.9 million operating loss.
• Goodwill Impairment Test: Review the results of the SFAS 142 goodwill impairment test due by June 30, 2002, for potential non-cash charges.
• Credit Rating Status: Confirm the final outcome of the Moody's review and S&P's negative outlook to assess potential impacts on borrowing costs and liquidity.
• Acquisition Integration: Assess the sustainability of the 21.9% growth in the "Other Operations" segment, which was driven primarily by recent acquisitions.