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ManpowerGroup ( MAN - Analyst Report ) , the global leader in the employment services industry, posted better-than-expected third-quarter 2012 results on the back of increased gross margin and effective cost management. However, earnings per share dropped year-over-year as the current sluggish macroeconomic environment resulted in soft demand for recruitment services, particularly in Europe, and weighed upon its results. Strong dollar also acted as a deterrent.
The quarterly earnings of 79 cents a share surpassed the Zacks Consensus Estimate of 68 cents but dropped 18.6% from 97 cents earned in the prior-year quarter. Unfavorable foreign currencies fluctuation undermined the earnings by 6 cents. Net earnings per share also came ahead of management’s previously provided guidance range of 64 cents to 72 cents a share.
To counter this, the company is now contemplating on exiting its lower margin business and venturing into high margin business. The company is also focusing on controlling expense. On the other hand, the ManpowerGroup Solutions business sustained its growth momentum. The demand for the counter-cyclical outplacement services portrayed signs of steadiness, which increased 18% during the quarter.
Let’s Unveil Further
When comparing sequentially, the rate of decline in total revenue of Milwaukee, Wisconsin based Manpower has accelerated. After falling 8.1% year-over-year in the second quarter of 2012, total revenue dropped 10.5% to $5,172.3 million during the third quarter. In constant currency too rate of decline increased to 3.8% in the quarter under review from 0.8% in the previous quarter. The soft top line performance did weigh upon the bottom line. However, one thing that instilled confidence was that unlike the second quarter, total revenue in the third quarter beat the Zacks Consensus Estimate of $5,106 million.
We observe that although cost of services decreased 10.7% to $4,316.1 million, gross profit fell 10% to $856.2 million due to a decline in the top line. However, gross profit margin jumped 10 basis points to 16.6%, and exceeded management’s expectation of gross profit margin expansion of 16.3% to 16.5% buoyed by growth witnessed across ManpowerGroup Solutions and Right Management outplacement services.
Manpower posted operating profit of $118.6 million, down 25% from the prior-year period, whereas operating margin contracted 40 basis points to 2.3% due to deleverage in SG&A expense.
By geographic segments, revenue from services in the United States fell 8.2% to $760.8 million from the prior-year quarter. Segment operating profit plunged 23.7% to $24.5 million.
In Other Americas, revenue rose 1.9% to $388.3 million and 8.1% in constant currency, whereas segment operating profit climbed 3.3% to $10.9 million and 6.1% in constant currency.
In France, revenue fell 16.7% to $1,392 million and 5.7% in constant currency, whereas segment operating profit plummeted 36.7% to $17.7 million and 27.6% in constant currency.
In Italy, revenue fell 23.1% to $246.8 million and 13.3% in constant currency, whereas segment operating profit tumbled 51% to $9.4 million and 45% in constant currency.
In Other Southern Europe, revenue dipped 8.5% to $189.2 million but increased 2.8% in constant currency, whereas operating profit came in at $2.2 million, down 28.5% from the prior-year quarter, and 20% in constant currency.
In Northern Europe, revenue slipped 10.6% to $1,426.9 million and 3.5% in constant currency, whereas operating profit plunged 32.3% to $42.5 million and 27.6% in constant currency.
In APME (Asia-Pacific Middle East), revenue came in at $688.2, down 1.8% from the prior-year quarter but up 0.2% in constant currency. Segment operating profit fell 4% to $20.8 million and 1.6% in constant currency.
Revenue from Right Management grew 3.4% year over year to $80.1 million, and 6.4% in constant currency. The company posted operating income of $5.6 million compared with operating loss of $1.9 million in the year-ago quarter.
Manpower ended the quarter with cash and cash equivalents of $444.6 million, total debt of $751 million, reflecting a debt-to-capitalization ratio of 23%, and shareholders’ equity of $2,568.4 million. The company has no borrowings under its $800 million revolving credit facility. Capital expenditures for the nine month period were $49 million.
During the quarter, the company generated free cash flow of approximately $10 million. The company bought back 750,000 shares worth of $28 million during the quarter, and still had 2 million shares at its disposal at the end of the quarter under its share buyback program.
Strolling through Guidance
Manpower, which competes with Kelly Services Inc. ( KELYA - Snapshot Report ) and Robert Half International Inc. ( RHI - Analyst Report ) , now expects fourth-quarter 2012 earnings in the range of 72 cents to 80 cents a share, including an unfavorable impact of foreign currency translation of 1 cent. The current Zacks Consensus Estimate for the quarter is 75 cents.
Management now projects fourth quarter total revenue to decline between 5% and 7% in the U.S. dollars, or in the band of 3% to 5% in constant currency from the prior-year quarter.
For the fourth quarter, management projects gross profit margin between 16.7% and 16.9%, which is up sequentially and forecasts operating profit margin in the range of 2.2% to 2.4% for the fourth quarter that dovetails with the third quarter.
We remain concerned about the company’s dwindling top and bottom lines performances as well as soft projections of the same for the fourth quarter. Currently, we maintain our long-term “Underperform” recommendation on the stock.
With a well-established network of approximately 3,900 offices in about 80 countries, Manpower currently offers its services to about 400,000 clients. We believe that Manpower’s brand value, comprehensive range of services and a strong global network provide a competitive advantage and reinforce its dominant position in the market. As a result, the stock holds a Zacks #3 Rank that translates into a short-term “Hold” rating.
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