Business Context and Reporting Period
Company: Manpower Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: Global provider of workforce solutions, including temporary staffing, permanent recruitment, and human resources services. Operations are segmented by geography (U.S., France, Other EMEA, Italy, Other Operations) and business line (Jefferson Wells, Right Management).
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 30, 2007 |
6 Months Ended June 30, 2007 |
|---|---|---|
| Revenues from Services | $5,034.4 | $9,570.0 |
| Gross Profit | $1,024.1 | $1,824.1 |
| Gross Profit Margin | 20.3% | 19.1% |
| Operating Profit | $277.0 | $380.3 |
| Operating Profit Margin | 5.5% | 4.0% |
| Net Earnings (Continuing Ops) | $160.4 | $219.9 |
| Diluted EPS (Continuing Ops) | $1.86 | $2.54 |
| Cash from Operating Activities | N/A | $141.3 |
| Cash and Equivalents (End of Period) | $710.8 | $710.8 |
| Total Debt (Short + Long Term) | $847.7 | $847.7 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 14.8% (Q2) and 15.8% (YTD) compared to 2006. On a constant currency basis, growth was 8.8% (Q2) and 9.2% (YTD), driven by increased demand in France, Other EMEA, Italy, and permanent recruitment services.
- Profitability Surge: Operating profit increased 100.7% (Q2) and 91.7% (YTD). Net earnings from continuing operations rose 101.5% (Q2) and 101.6% (YTD).
- Margin Expansion: Gross profit margin improved by 250 basis points (Q2) and 120 basis points (YTD). Operating profit margin improved by 240 basis points (Q2) and 160 basis points (YTD).
- Segment Performance:
- France: Significant revenue and profit growth, heavily influenced by a retroactive payroll tax modification.
- United States: Revenues declined 8.6% (Q2) due to lower staffing volume, though permanent recruitment grew 32.0%.
- Jefferson Wells: Revenues declined 15.1% (Q2) due to reduced Sarbanes-Oxley related services.
- Other EMEA & Italy: Strong growth driven by permanent recruitment and favorable currency impacts.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items: French Payroll Tax Modification
A significant portion of the reported earnings improvement is attributable to a retroactive modification of payroll tax calculations in France (effective Jan 1, 2006). This resulted in a net benefit of $99.3 million ($57.2 million after-tax) recognized in Q2 2007.
- Impact: Increased Gross Profit by $113.9 million and Selling/Admin expenses by $14.6 million.
- Future Risk: On July 26, 2007, the French Senate passed an amendment expected to eliminate this benefit effective October 1, 2007. Earnings from Q4 2007 onward will no longer include this favorable impact.
Outlook and Guidance
- Tax Rate: Management estimates the 2007 annual effective tax rate at 37.4%, higher than the 2006 rate of 36.6% due to discrete tax items and state taxes.
- Capital Allocation: Continued share repurchases ($89.0 million in H1 2007) and dividends ($0.32/share paid in June 2007).
Risks and Contingencies
- Regulatory Change: The potential elimination of the French payroll tax benefit starting Q4 2007 poses a risk to future margins.
- Market Risk: Exposure to foreign currency exchange rates; a weaker U.S. dollar boosted reported results in 2007.
- Operational Risk: Reliance on third-party vendors for data center infrastructure introduces risks of disruption or increased costs.
- Reorganization Costs: Ongoing payments related to prior reorganization reserves in the U.K., France, and Right Management operations.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of Q2 2007 margins by excluding the $99.3 million French tax benefit to understand organic performance.
- Future Tax Impact: Confirm the effective date and financial impact of the French Senate amendment eliminating the payroll tax benefit in Q4 2007.
- U.S. Market Trends: Monitor the U.S. segment's revenue decline (-8.6% Q2) and the shift in demand from temporary staffing to permanent recruitment.
- Liquidity Position: Review the $710.8 million cash balance against the $847.7 million total debt and upcoming reorganization payment obligations.
- Share Count: Note the reduction in diluted shares (86.2 million) due to aggressive buybacks, which supports EPS growth despite revenue volatility in some segments.