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Manpower 10-Q 2010 FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended:
June 30, 2010
or
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from: ______to______
Commission file number: 1-10686
MANPOWER INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (414) 961-1000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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MANPOWER INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements (unaudited)
MANPOWER INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(in millions)
ASSETS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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MANPOWER INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(in millions, except share and per share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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MANPOWER INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in millions, except per share data)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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MANPOWER INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in millions)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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MANPOWER INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
For the Three Months and Six Months Ended June 30, 2010 and 2009
(in millions, except share and per share data)
(1) Basis of Presentation and Accounting Policies
Basis of Presentation
Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although we believe that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our 2009 Annual Report to Shareholders.
The information furnished reflects all adjustments that, in the opinion of management, were necessary for a fair statement of the results of operations for the periods presented. Such adjustments were of a normal recurring nature.
Revenues
During the fourth quarter of 2009, we determined that one of our subsidiaries within the Other EMEA segment prematurely recognized revenues related to a workforce solutions contract. These revenues were recorded on a cash-basis rather than being deferred and recognized over the performance period. Accordingly, we have restated our accompanying Consolidated Statement of Operations for both the three months and the six months ended June 30, 2009 to defer certain amounts of revenue to future periods, net of income taxes. This restatement had no impact on cash flows under the contract and only affects the timing of when revenues are earned. The total revenues under this contract are expected to remain unchanged.
The effects of this restatement for the three months ended June 30, 2009 were as follows:
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The effects of this restatement for the six months ended June 30, 2009 were as follows:
Subsequent Events
We have evaluated events and transactions occurring after the balance sheet date through our filing date and noted no events that are subject to recognition or disclosure.
(2) New Accounting Standards
In October 2009, the FASB issued new accounting guidance on multiple-deliverable revenue arrangements. The new guidance amends the criteria for separating deliverables as well as how to measure and allocate consideration for multiple arrangements. The guidance also expands the disclosures related to a vendor’s multiple-deliverable revenue arrangements. The new guidance will be effective prospectively for our multiple-deliverable revenue arrangements entered into or materially modified in 2011. We are currently assessing the impact of the adoption of this guidance.
(3) Stock Compensation Plans
During the three months ended June 30, 2010 and 2009, we recognized share-based compensation expense of approximately $6.0 and $3.4, respectively, and $11.5 and $7.5 for the six months ended June 30, 2010 and 2009, respectively. The expense relates to grants of stock options, deferred stock units, and restricted stock units and performance share units. Consideration received from stock-based awards was $15.6 and $7.5 for the six months ended June 30, 2010 and 2009, respectively. We recognize share-based compensation expense related to grants of share-based awards in Selling and Administrative Expenses on a straight-line basis over the service period of each award.
(4) Acquisitions
On April 5, 2010, we acquired COMSYS IT Partners, Inc. (“COMSYS”) from its existing shareholders. The value of the consideration for each outstanding share of COMSYS common stock was approximately $17.65, for a total enterprise value of $427.0, including debt of $47.1, which we repaid upon closing. The consideration was approximately 50% Manpower common stock (3.2 million shares with a fair value of $188.5 upon closing) and approximately 50% cash (consideration of $191.4). In addition, we incurred approximately $0.7 and $1.9 of transaction costs associated with the acquisition during the three and six months ended June 30, 2010, respectively, which have been classified in Selling and Administrative Expenses.
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Of the $427.0 of net acquired assets, $127.1 was assigned to customer relationships and will be amortized over 14 years, using an accelerating method. Total amortization expense related to intangible assets for the remainder of 2010 is $22.8 and in each of the next five years is as follows: 2011- $37.6, 2012 - $33.8, 2013 - $27.4, 2014 - $22.4 and 2015 - $19.2.
The remaining fair value of $281.6, which was not directly attributable to any specific assets or liabilities, was assigned to goodwill as part of the US reporting unit. Of the goodwill assigned, $19.9 is deductible for tax purposes.
The following unaudited pro forma information reflects the results of Manpower’s operations for the three and six months ended June 30, 2010 and 2009 as if the COMSYS acquisition had been completed on January 1st of each respective year. Pro forma adjustments have been made to illustrate the incremental impact on earnings of amortization expense related to the acquired intangible assets, lost interest income that would have been earned on the cash proceeds used to acquire COMSYS and the tax impact of these respective items.
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The unaudited pro forma information is provided for illustrative purposes only and does not represent what our consolidated results of operations would have been if the transaction had actually occurred as of January 1, 2010 or 2009 and does not represent our expected future consolidated results of operations.
From time to time, we acquire and invest in companies throughout the world, including franchises. Excluding COMSYS, the total cash consideration paid for acquisitions, net of cash acquired, for the six months ended June 30 was $20.8 and $21.7 for 2010 and 2009, respectively.
(5) Reorganization Costs
We recorded reorganization costs of $2.5 in the first half of 2010 in Selling and Administrative Expenses, related to severances and office closures and consolidations in several countries. We also made payments of $10.9 relating to reorganization costs out of this and prior-year reserves. Since 2007, we have recorded reorganization costs totaling $81.6 (including $33.5, $37.2 and $8.4 recorded in 2009, 2008 and 2007, respectively). As of June 30, 2010, $68.8 has been paid out of these reserves. We expect a majority of the remaining $12.8 will be paid by the end of 2011. Changes in the reorganization liability balances for each reportable segment and were as follows:
(6) Income Taxes
We recorded income tax expense, at an effective rate of 51.5%, for the three months ended June 30, 2010, as compared to an income tax benefit, at an effective rate of -97.3%, for the three months ended June 30, 2009. The 2010 rate was favorably impacted by the overall mix of earnings, primarily an increase to non-U.S. income, but was unfavorably impacted by valuation allowances related to losses in certain non-U.S. entities and the repatriation of certain non-U.S. earnings. The 2010 rate was also unfavorably impacted by $16.4 related to a French Business Tax, which has been classified as a component of income tax beginning in January 2010, in accordance with the current accounting guidance on income taxes. Prior to January 2010, the French Business Tax had been presented as a non-income tax and included as a component of Cost of Services. The French government changed the business tax from an asset-based tax to an income-based tax, thereby requiring the classification of this tax as an income tax effective January 1, 2010. The 2009 rate was favorably impacted by a discrete tax benefit that reduced the amount of deferred taxes related to the French earnings that would likely be repatriated because of the payment of the fine for the French competition case, which is disclosed in Note 13 to the Consolidated Financial Statements.
This 51.5% rate was higher than the U.S. Federal statutory rate of 35%, and we currently expect an annual effective tax rate of approximately 55%, due primarily to valuation allowances, other permanent items and the French Business Tax. Excluding the impact of the French Business Tax, our tax rate would be approximately 40%, which is lower than the previous year, due to a favorable impact from changes in the mix of U.S. and non-U.S. earnings.
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We recorded an income tax expense, at an effective rate of 59.2%, for the first half of 2010, as compared to an income tax benefit, at an effective rate of -740.8%, for the first half of 2009. The 2010 rate was favorably impacted by the overall mix of earnings, primarily an increase to non-U.S. income, but was unfavorably impacted by valuation allowances related to losses in certain non-U.S. entities and the repatriation of certain non-U.S. earnings. The 2010 rate was also unfavorably impacted by $30.1 million related to a French Business Tax, which has been classified as a component of income tax beginning in January 2010, in accordance with the current accounting guidance on income taxes. The 2009 rate was favorably impacted by a discrete tax benefit that reduced the amount of deferred taxes related to the French earnings that would likely be repatriated because of the payment of the fine for the French competition case and a valuation allowance reversal related to a European entity for prior net operating losses that would be utilized.
As of June 30, 2010, we had gross unrecognized tax benefits of $45.0 recorded in accordance with the current accounting guidance on uncertain tax positions. Our uncertain tax position accrual was related to various tax jurisdictions, including $3.0 of interest and penalties, and related tax benefits of $13.4. As of December 31, 2009, we had gross unrecognized tax benefits of $44.4 and related tax benefits of $13.4. The net amount of $31.6 as of June 30, 2010 would favorably affect the effective tax rate if recognized. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.
We conduct business globally and, as a result, we are routinely audited by the various tax jurisdictions in which we operate. Generally, the tax years that remain subject to tax examination are 2005 through 2009 for our major operations in the U.S., France, the United Kingdom and Italy. As of June 30, 2010, we are under audit in France, the U.S., Belgium, and Denmark, and we believe that the resolution of these audits will not have a material impact on earnings. There was no significant change in the total unrecognized tax benefits due to the settlement of audits, the expiration of statute of limitations, or for other items during the three and six months ended June 30, 2010.
(7) Net Earnings Per Share
The calculation of Net Earnings Per Share – Basic and Net Earnings Per Share – Diluted was as follows:
There were 3.2 million and 3.7 million stock-based awards excluded from the calculation of Net Earnings Per Share – Diluted for the three months ended June 30, 2010 and 2009, respectively, and 2.6 million and 0.8 million stock-based awards excluded from the calculation of Net Earnings Per Share – Diluted for the six months ended June 30, 2010 and 2009, respectively, as the exercise price for these awards was greater than the average market price of the common shares during the period.
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(8) Goodwill
Changes in the carrying value of goodwill by reportable segment and Corporate were as follows:
(1) Balances related to Italy were $4.2 and $4.9 as of June 30, 2010 and December 31, 2009, respectively. The ($0.7) change represents a currency impact.
(3) Balances were net of accumulated impairment loss of $201.8 as of June 30, 2010 and December 31, 2009.
Goodwill balances by reporting unit were as follows:
We did not perform an interim impairment test of our goodwill and indefinite-lived intangible assets in the second quarter of 2010 as we noted no significant indicators of impairment as of June 30, 2010.
(9) Retirement Plans
The components of the net periodic benefit cost for our plans were as follows:
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During the three and six months ended June 30, 2010, contributions made to our pension plans were $4.8 and $9.4, respectively, and contributions made to our retiree health care plan were $0.3 and $0.7, respectively. During 2010, we expect to make total contributions of $22.5 to our pension plans and to fund our retiree health care payments as incurred.
Effective January 1, 2009, we terminated our defined benefit plan in Japan and replaced it with a defined contribution plan, resulting in a curtailment and settlement gain of $4.3 in the six months ended June 30, 2009.
(10) Shareholders’ Equity
The components of Comprehensive (Loss) Income, net of tax, were as follows:
The components of Accumulated Other Comprehensive (Loss) Income, net of tax, were as follows:
On April 27, 2010, the Board of Directors declared a cash dividend of $0.37 per share, which was paid on June 15, 2010 to shareholders of record on June 3, 2010.
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(11) Interest and Other Expenses
Interest and Other Expenses consisted of the following:
(12) Derivative Financial Instruments and Fair Value Measurements
We are exposed to various risks relating to our ongoing business operations. The primary risks, which are managed through the use of derivative instruments, are foreign currency exchange rate risk and interest rate risk. In certain circumstances, we enter into foreign currency forward exchange contracts (“forward contracts”) to reduce the effects of fluctuating foreign currency exchange rates on our cash flows denominated in foreign currencies. Our exposure to market risk for changes in interest rates relates primarily to our Long-Term Debt obligations. We have historically managed interest rate risk through the use of a combination of fixed and variable rate borrowings and interest rate swap agreements. In accordance with current accounting guidance on derivative instruments and hedging activities, we record all of our derivative instruments as either an asset or liability measured at their fair value.
Substantially all of the €300.0 ($366.6) Notes and the €200.0 ($244.1) Notes were designated as economic hedges of our net investment in our foreign subsidiaries with a Euro functional currency as of June 30, 2010.
For derivatives designated as an economic hedge of the foreign currency exposure of a net investment in a foreign operation, the gain or loss associated with foreign currency translation is recorded as a component of Accumulated Other Comprehensive (Loss) Income, net of taxes. As of June 30, 2010, we had a $21.1 loss included in Accumulated Other Comprehensive Income, net of taxes, as the net investment hedge was deemed effective.
Our forward contracts are not designated as hedges. Consequently, any gain or loss resulting from the change in fair value is recognized in the current period earnings. These gains or losses are offset by the exposure related to receivables and payables with our foreign subsidiaries and to interest due on our Euro-denominated notes, which is paid annually in June. We recorded a loss of $2.4 associated with our forward contracts in Interest and Other Expenses for the quarter ended June 30, 2010, which offset the gains recorded for the items noted above. We had a $0.2 liability related to the forward contracts’ fair value included in Other Long-Term Liabilities as of June 30, 2010.
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The fair value measurements of those items recorded in our Consolidated Balance Sheets were as follows:
The carrying value of Long-Term Debt approximates fair value, except for the Euro-denominated notes. The fair value of the Euro-denominated notes was $616.1 and $717.7 as of June 30, 2010 and December 31, 2009, respectively, compared to a carrying value of $610.7 and $714.6, respectively.
(13) Contingencies
In February 2009, the French Competition Council rendered its decision and levied a fine of €42.0 ($55.9) related to the competition investigation that began in November 2004, conducted by France’s Direction Generale de la concurrence, de la Consommation et de la Repression des Fraudes (DGCCRF”), a body of the French Finance Minister that investigates frauds and competition violations. We had accrued for this fine as of December 31, 2008, paid this fine in April 2009 and appealed the Competition Council’s decision. In January 2010 we received notification that our appeal was denied and in March 2010, we again appealed the Competition Council’s decision.
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(14) Segment Data
The French Business Tax, as disclosed in Note 6 to the Consolidated Financial Statements, is reported in Provision for Income Taxes rather than in Cost of Services, in accordance with the current accounting guidance on income taxes. However, we view this tax as operational in nature. Accordingly, the financial information reviewed internally continues to include the French Business Tax within the Operating Unit Profit of our France reportable segment. Therefore, we have shown the amount of the French Business Tax above to be able to reconcile to our Earnings (Loss) before Income Taxes.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis has been revised for the effects of the restatement discussed in Note 1 to the Consolidated Financial Statements.
See financial measures on pages 26 and 27 for further information on constant currency and organic constant currency.
Operating Results - Three Months Ended June 30, 2010 and 2009
In the second quarter of 2010, we continued to see improvement in most of our markets. This allowed us to utilize our operating leverage and improve our operating results during the quarter over the prior year as well as sequentially. We also experienced a decline in our operating cash flows as our working capital needs increased as revenues grew. The improved operating leverage resulted from our being able to utilize excess capacity in the network to support the revenue growth without a similar increase in expenses. This leverage was possible due to the cost reduction efforts taken during the economic downturn to reduce the adverse impact of the economy during that period yet preserve capacity within our network to handle increased demand as experienced during the current year period.
Client demand for employment services is dependent on the overall strength of the labor market and secular trends towards greater workforce flexibility within each of the countries in which we operate. Improving economic growth typically results in increasing demand for labor, resulting in greater demand for our staffing services. During periods of increasing demand, we are able to improve our profitability and operating leverage as our current cost base can support some increase in business without a similar increase in selling and administrative expenses. During these periods, we generally see an increase in our working capital needs, resulting from an increase in our accounts receivable balance in line with the revenue growth, which may result in a decline in operating cash flows.
While we experienced growth in our businesses during the current period, the strength of this growth will be dependent on whether the underlying economies continue to improve. Given the uncertainties of predicting economic trends, however, it is not possible to predict when we will return to prior revenue and earnings levels.
On April 5, 2010, we completed our previously announced acquisition of COMSYS IT Partners, Inc. (“COMSYS”) from its existing shareholders. The value of the consideration for each outstanding share of COMSYS common stock was approximately $17.65, for a total enterprise value of $427.0 million, including debt of $47.1 million, which we repaid upon closing. The consideration was approximately 50% Manpower common stock (3.2 million shares at a fair value of $188.5 million) upon closing and approximately 50% cash (consideration of $191.4 million). COMSYS’s operating results have been included within our consolidated results from April 5, 2010 and forward.
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The following table presents selected consolidated financial data for the three months ended June 30, 2010 as compared to 2009.
We continued to see stabilization and improvements in most markets with regard to our staffing business during
the second quarter of 2010 as economic conditions continued to improve globally. Offsetting this trend, however, was a decrease in business volumes for both Right Management and Jefferson Wells. At Right Management, we saw a decline in demand for the counter-cyclical outplacement services consistent with what we would expect to see with the improving economic conditions and growth in our staffing business. Jefferson Wells continues to show weak demand as companies remain hesitant to increase discretionary spend.
The year-over-year increase in Revenues from Services was primarily attributed to:
The year-over-year decrease in Gross Profit Margin was primarily attributed to:
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The 6.6% increase in Selling and Administrative Expenses for the current quarter (8.6% increase in constant currency or 1.6% in organic constant currency) was attributed to:
Selling and Administrative Expenses as a percent of revenues decreased 2.0% (-200 basis points) in the second quarter of 2010 compared to 2009 due primarily to the leveraging of these expenses, as we experienced an increase in revenues of 20.9% (or 23.7% in constant currency) without a commensurate increase in these expenses during the second quarter of 2010 as compared to 2009.
Interest and Other Expenses were $11.9 million for the second quarter of 2010 compared to $10.8 million for the same period in 2009. Net Interest Expense increased $0.4 million in the second quarter to $11.1 million as we incurred $2.2 million to write-off COMSYS’s deferred financing costs and had a decline in interest income due to lower cash balances on-hand as a result of the COMSYS acquisition, offset by lower borrowings during the second quarter of 2010. Translation losses in the second quarter of 2010 were $0.9 million compared to $1.0 million in the second quarter of 2009.
We recorded income tax expense, at an effective rate of 51.5%, for the three months ended June 30, 2010, as compared to an income tax benefit, at an effective rate of -97.3%, for the three months ended June 30, 2009. The 2010 rate was favorably impacted by the overall mix of earnings, primarily an increase to non-U.S. income, but was unfavorably impacted by valuation allowances related to losses in certain non-U.S. entities and the repatriation of certain non-U.S. earnings. The 2010 rate was also unfavorably impacted by $16.4 million related to a French Business Tax, which has been classified as a component of income tax beginning in January 2010, in accordance with the current accounting guidance on income taxes. Prior to January 2010, the French Business Tax had been presented as a non-income tax and included as a component of Cost of Services. The French government changed the business tax from an asset-based tax to an income-based tax, thereby requiring the classification of this tax as an income tax effective January 1, 2010. The 2009 rate was favorably impacted by a discrete tax benefit that reduced the amount of deferred taxes related to the French earnings that would likely be repatriated because of the payment of the fine for the French competition case, which is disclosed in Note 13 to the Consolidated Financial Statements.
This 51.5% rate was higher than the U.S. Federal statutory rate of 35%, and we currently expect an annual effective tax rate of approximately 55%, due primarily to valuation allowances, other permanent items and the French Business Tax. Excluding the impact of the French Business Tax, our tax rate would be approximately 40%, which is lower than the previous year, due to a favorable impact from changes in the mix of U.S. and non-U.S. earnings.
Net Earnings Per Share – Diluted increased to $0.40 in the second quarter of 2010 compared to $0.21 in the second quarter of 2009. Exchange rates had a negative impact of $0.02 on Net Earnings Per Share – Diluted. Weighted Average Shares – Diluted were 82.5 million for the second quarter of 2010 as compared to 78.8 million in the second quarter of 2009, an increase of 4.7%, due primarily to the issuance of 3.2 million shares as part of the COMSYS acquisition on April 5, 2010.
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Operating Results - Six Months Ended June 30, 2010 and 2009
The following table presents selected consolidated financial data for the six months ended June 30, 2010 as compared to 2009.
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