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Tickers in this Article: MAN, KELYA, RHI
ManpowerGroup (MAN), the global leader in the employment services industry, hinted that the current sluggish macroeconomic environment resulted in soft demand for recruitment services, particularly in Europe, and weighed upon its second-quarter 2012 results. Strong dollar also acted as a deterrent. 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. The re-organization initiative undertaken by management will results in annual savings of $20 million.

On the other hand, the ManpowerGroup Solutions business sustained its growth momentum. The demand for the counter-cyclical outplacement services portrayed signs of steadiness.

Let's Unveil the Picture

The quarterly earnings of 76 cents a share dropped 12.6% from 87 cents earned in the prior-year quarter but surpassed the Zacks Consensus Estimate of 72 cents. Unfavorable foreign currencies fluctuation undermined the earnings by 7 cents. Net earnings per share came at the high-end of management's guidance of 68 cents to 76 cents.

On a reported basis, including one-time items, earnings came in at 51 cents, down 41.4%.

Milwaukee, Wisconsin based Manpower said that the quarter's total revenue of $5,206.7 million fell 8.1% from the prior-year quarter and 0.8% in constant currency. The revenue also fell short of the Zacks Consensus Estimate of $5,224 million. The company had earlier projected total revenue of flat or down 2% in constant currency.

We observe that although cost of services decreased 7.7% to $4,345 million, gross profit fell 10.4% to $861.7 million due to a decline in the top line. Gross profit margin shriveled 50 basis points to 16.5% due to a fall in permanent recruitment revenue and a soft temporary recruitment gross margin in a few European countries.

Manpower posted operating profit of $94.4 million, down 37.3% from the prior-year period, whereas operating margin expanded 90 basis points to 1.8%.

Segment Details

By geographic segments, revenue from services in the United States edged down 3.6% to $763.2 million from the prior-year quarter. Segment operating profit plunged 71.6% to $7.7 million.

In Other Americas, revenue rose 2.6% to $389.2 million and 12% in constant currency, whereas segment operating profit fell 15% to $10.5 million and 8.3% in constant currency.

In France, revenue fell 13.2% to $1,427.6 million and 2.5% in constant currency, whereas segment operating profit plummeted 37.4% to $15.5 million and 29.3% in constant currency.

In Italy, revenue fell 20.6% to $274 million and 10.8% in constant currency, whereas segment operating profit tumbled 43.6% to $12.6 million and 36.6% in constant currency.

In Other Southern Europe, revenue dipped 1.9% to $190.1 million but increased 9.8% in constant currency, whereas operating profit came in at $3 million, up 12.8% from the prior-year quarter, and 26.3% in constant currency.

In Northern Europe, revenue slipped 9.6% to $1,415.8 million and 1.2% in constant currency, whereas operating profit plunged 30.2% to $39.2 million and 23.9% in constant currency.

In APME (Asia-Pacific Middle East), revenue came in at $662.9 almost flat with the prior-year quarter and rose 1.8% in constant currency. Segment operating profit jumped 16% to $21.8 million and 17.6% in constant currency.

Revenue from Right Management dropped 0.9% year over year to $83.9 million but jumped 2.9% in constant currency. The company posted operating loss of $2.9 million compared with operating profit of $2.8 million in the year-ago quarter.

Financial Aspects

Manpower ended the quarter with cash and cash equivalents of $454.6 million and total debt of $755.1 million, reflecting a debt-to-capitalization ratio of 23%, and shareholders' equity of $2,510.9 million. The company has no borrowings under its $800 million revolving credit facility.

During the quarter, the company generated a negative free cash flow of approximately $33 million. The company repurchased 879,000 shares for $32.6 million.

Strolling through Guidance

Manpower now expects third-quarter 2012 earnings in the range of 64 cents to 72 cents a share, including an unfavorable impact of foreign currency translation of 8 cents. The current Zacks Consensus Estimate for the quarter is 81 cents.

Management now projects third quarter total revenue growth to be down in the range of 3% to 5% in constant currency from the prior-year quarter. Including currency exchange rates, it is expected to be down 11% to 13%.

On a segment basis, management anticipates revenues to contract sequentially in constant currency in the Americas, Southern Europe and Northern Europe. However, it forecasts a low single-digit growth in Asia-Pacific Middle East and Right Management.

Management projects gross profit margin between 16.3% and 16.5%. Operating profit margin is projected in the range of 2.1% to 2.3% compared with 2.7% in the prior-year quarter.

Closing Commentary

With a well-established network of nearly 3,600 offices in approximately 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.

Currently, we have a long-term 'Outperform' recommendation on ManpowerGroup. However, the company, which competes with Kelly Services Inc. (KELYA) and Robert Half International Inc. (RHI), holds a Zacks #4 Rank that translates into a short-term 'Sell' rating, and well defines the company's second quarter results as well as soft third quarter outlook.

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