Business Context and Reporting Period
Manpower Inc. reported unaudited results for the three and nine months ended September 30, 2010. The company provides staffing, recruitment, workforce solutions, outplacement, talent management and professional services globally. The filing was signed November 3, 2010.
Results include COMSYS IT Partners from April 5, 2010. The 2009 comparative results were restated for premature revenue recognition in an Other EMEA workforce-solutions contract; the restatement changed the timing of revenue and did not affect contract cash flows or expected total contract revenue.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue from services | $4,972.0 million | $4,189.6 million | $13,656.9 million | $11,626.1 million |
| Gross profit | $841.2 million | $704.1 million | $2,339.7 million | $2,062.1 million |
| Gross profit margin | 16.9% | 16.8% | 17.1% | 17.7% |
| Operating profit (loss) | $108.9 million | $(21.5) million | $220.6 million | $(1.1) million |
| Operating margin | 2.2% | (0.5)% | 1.6% | Effectively 0.0% |
| Net earnings (loss) | $51.3 million | $(52.8) million | $86.8 million | $(38.3) million |
| Diluted EPS | $0.62 | $(0.67) | $1.06 | $(0.49) |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $(56.4) million | $411.9 million |
Q3 revenue increased 18.7% reported and 24.1% in constant currency. Nine-month revenue increased 17.5% reported and 18.0% in constant currency. Organic constant-currency revenue growth was 19.3% in Q3 and 14.8% for the nine months.
At September 30, 2010, cash and cash equivalents were $598.3 million, accounts receivable were $3,890.9 million and total assets were $7,015.4 million. Current liabilities were $3,191.7 million, long-term debt was $681.8 million and shareholders’ equity was $2,765.6 million.
Total debt, including current maturities and short-term borrowings, was approximately $706.4 million. The company had $396.0 million available under its $400.0 million revolving credit agreement, after $4.0 million of letters of credit. Separate subsidiary credit lines totaled $397.9 million, of which $374.0 million was unused.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially, with Q3 operating profit of $108.9 million versus a $21.5 million operating loss in 2009, and nine-month operating profit of $220.6 million versus a $1.1 million loss.
- Q3 2009 included a $61.0 million goodwill and intangible-asset impairment charge; no such charge was recorded in 2010. The 2010 third-quarter impairment review found no impairment, although the company identified sensitivity to future earnings, revenue growth and discount-rate assumptions.
- Revenue growth was broad-based in staffing markets. Q3 constant-currency revenue increased 62.0% in the Americas, 18.8% in France, 20.1% in EMEA and 20.5% in Asia Pacific.
- Right Management revenue declined 36.5% in constant currency in Q3 as outplacement demand fell during the economic recovery. Jefferson Wells revenue declined 6.9%.
- Operating leverage improved as revenue grew faster than selling and administrative expenses. Q3 selling and administrative expenses increased only 0.9% reported, while nine-month expenses increased 2.7%.
- Operating cash flow declined to an outflow of $56.4 million from $411.9 million of inflow, principally because accounts receivable increased with higher business volumes and working capital consumed cash.
- COMSYS contributed $193.0 million of Q3 revenue and $375.3 million for the nine months. The acquisition had a $427.0 million enterprise value, funded approximately half with stock and half with cash.
- Cash used in investing activities increased to $299.3 million, including $260.6 million of acquisitions, compared with $31.7 million in 2009.
- The company repurchased 0.8 million shares for $34.8 million during the nine months and paid $30.6 million of dividends. A quarterly dividend of $0.37 per share was declared in October 2010.
Guidance, Outlook, Risks and Unusual Items
- Management reported improvement in most markets but stated that the strength and duration of the recovery remained uncertain and that the timing of a return to prior revenue and earnings levels could not be predicted.
- Management expected a full-year 2010 effective tax rate of approximately 53%, including the French Business Tax. Excluding that tax, the expected rate was approximately 40%.
- The company expected additional fourth-quarter 2010 reorganization charges of $20.0 million to $25.0 million, primarily related to realignment of Right Management and Jefferson Wells. Jefferson Wells was expected to move into the Americas reporting structure beginning in the fourth quarter.
- As of September 30, $14.6 million remained in reorganization reserves, with the majority expected to be paid by the end of 2011.
- Debt maturities included €300.0 million of notes due June 2012 and €200.0 million of notes due June 2013; the revolving credit agreement expires in November 2012. Management expected to repay or refinance these obligations and did not anticipate difficulty accessing credit markets, but acknowledged refinancing risk if economic or credit conditions deteriorate.
- The company was in compliance with its revolving-credit covenants, reporting a debt-to-EBITDA ratio of 1.85 to 1 versus a 5.75 maximum and a fixed-charge ratio of 2.17 to 1 versus a 1.25 minimum. Management expected compliance for the next 12 months.
- Aggregate commitments were $1,508.7 million. Guarantees and standby letters of credit totaled approximately $174.2 million; management did not expect significant payments under these arrangements.
- A French competition fine of €42.0 million was paid in April 2009. The company’s appeal was denied in January 2010 and a further appeal was filed with the Cour de Cassation in March 2010.
- Potential risks include labor-market weakness, pricing pressure, foreign-exchange movements, employment-services regulation, proposed changes to French payroll-tax subsidies, Japanese staffing restrictions, U.S. health-care legislation and possible goodwill impairment if long-term forecasts or discount rates worsen.
Most Important Facts for Investors to Verify
- Whether staffing-market growth and operating leverage persist after the COMSYS acquisition contribution is annualized.
- Whether the sharp decline in Right Management and continued weakness in Jefferson Wells offset growth in core staffing markets.
- Conversion of revenue growth into operating cash flow, particularly as accounts receivable and working-capital requirements increase.
- Execution and cost of the planned Right Management and Jefferson Wells restructuring, including the expected $20.0 million to $25.0 million of fourth-quarter charges.
- Ability to refinance or repay the 2012 and 2013 debt maturities while maintaining covenant compliance and liquidity.
- Tax-rate assumptions, including the impact of the French Business Tax, valuation allowances and uncertain tax positions.
- Sensitivity of goodwill and intangible assets to changes in revenue growth, operating margins and discount rates.