Business Context and Reporting Period
ManpowerGroup Inc. filed its Form 10-K for the fiscal year ended December 31, 2020, with quarterly data including the fourth quarter. The company provides staffing, recruitment, professional resourcing, workforce outsourcing, career management, training and consulting services through more than 2,200 offices in 75 countries and territories. Principal brands include Manpower, Experis and Talent Solutions.
2020 results were materially affected by the COVID-19 pandemic, particularly lockdowns and reduced labor-market activity in Europe and North America. The company reported a gradual recovery during the second half of the year; fourth-quarter revenue declined 2.7% year over year, compared with declines of 8.4%, 30.4% and 12.7% in the first three quarters, respectively.
Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue from services | $18,001.0 million | $20,863.5 million | (13.7%) |
| Gross profit | $2,824.7 million | $3,375.1 million | (16.3%) |
| Gross profit margin | 15.7% | 16.2% | Down 50 basis points |
| Operating profit | $187.6 million | $644.9 million | (70.9%) |
| Operating profit margin | 1.0% | 3.1% | Down 210 basis points |
| Net earnings | $23.8 million | $465.7 million | (94.9%) |
| Diluted earnings per share | $0.41 | $7.72 | (94.7%) |
| Cash provided by operating activities | $936.4 million | $814.4 million | Up $122.0 million |
| Capital expenditures | $50.7 million | $52.9 million | Down $2.2 million |
| Cash and cash equivalents | $1,567.1 million | $1,025.8 million | Up $541.3 million |
| Total debt | $1,123.9 million | Approximately $1,073.4 million | Debt-to-capitalization increased to 31% from 28% |
Operating cash flow benefited from collections of accounts receivable, lower payroll costs associated with reduced activity and government payment-deferral programs. Management expects lower operating cash flow in 2021 as remaining deferrals mature.
Accounts receivable was $4,912.4 million at year-end, compared with $5,273.1 million in 2019. Days sales outstanding improved by approximately three days to approximately 54 days. The company declared dividends of $2.26 per share and repurchased 3.4 million shares for $264.7 million during 2020.
Liquidity included $1,567.1 million of cash, $599.5 million of available borrowing capacity under the $600.0 million revolving credit facility, and approximately $270.6 million of additional availability under subsidiary credit lines. The revolving facility had no borrowings at year-end. Long-term debt was primarily composed of euro-denominated notes due in 2022 and 2026.
Material Changes Versus the Prior Comparable Period
- Revenue declined 13.7%, reflecting reduced staffing, permanent recruitment and RPO activity during the pandemic. Permanent recruitment revenue declined 25.2%.
- Operating profit margin fell to 1.0% from 3.1% because selling and administrative expenses did not decline as quickly as revenue, producing significant operating deleveraging.
- Gross margin declined because of lower permanent recruitment activity, weaker Proservia utilization and a less favorable staffing-client mix. Higher-margin MSP and career-transition services partly offset the decline.
- Operating profit included $110.7 million of restructuring costs, compared with $39.8 million in 2019, and $72.8 million of goodwill and other impairment charges, compared with $65.6 million in 2019.
- The company recorded a $66.8 million non-cash impairment charge that fully impaired remaining goodwill in the Germany reporting unit. The United Kingdom and Netherlands reporting units had relatively limited excess fair value and remain sensitive to further deterioration.
- 2020 included a $5.8 million loss on the disposition of businesses in Serbia, Croatia, Slovenia and Bulgaria. By comparison, 2019 included an $80.4 million gain from the Manpower Switzerland transaction and a $30.4 million gain from the deconsolidation of ManpowerGroup Greater China.
- The effective tax rate increased to 83.9% from 32.1%, primarily because of the low level and geographic mix of pretax earnings, valuation allowances in Germany and the Netherlands, non-deductible goodwill impairment and French business taxes.
- Segment revenue declined 11.4% in the Americas, 14.6% in Southern Europe, 16.0% in Northern Europe and 10.5% in APME. Northern Europe reported an operating unit loss margin of 0.7%, compared with a positive 1.6% margin in 2019.
Guidance, Outlook, Risks and Unusual Items
Management described the recovery as gradual and uneven, with some industries recovering faster than others. The filing does not provide full-year 2021 revenue or earnings guidance. Management expects an effective tax rate of approximately 35% in 2021 and pension expense of approximately $22.0 million.
- COVID-19 remains the principal uncertainty. New outbreaks, vaccination rates, government restrictions, client closures, client creditworthiness and the adequacy of government relief could materially affect demand, liquidity and results.
- The company is highly sensitive to economic cycles and particularly exposed to Europe, which represented approximately 66% of revenue. Approximately 87% of revenue was generated outside the United States.
- Large national and multinational clients represented approximately 60% of 2020 revenue and may terminate or reduce non-exclusive arrangements on short notice.
- Foreign currency movements can materially affect reported results. Approximately $1,123.9 million of debt was outstanding at year-end, including $1,094.5 million related to euro-denominated notes.
- Cybersecurity, data privacy, remote work, reliance on third-party vendors, employment regulation, wage-and-hour claims, tax audits and competition-law matters remain significant risks.
- The filing identifies potential goodwill impairment sensitivity in the United Kingdom and Netherlands reporting units. The company also disclosed $890.0 million of guarantees and standby letters of credit, although it does not expect significant payments under these arrangements.
- Aggregate commitments for debt, leases, severance and other items totaled $2,140.8 million, including $372.6 million due in 2021.
- The company reported effective internal control over financial reporting, and Deloitte & Touche issued unqualified audit opinions on the financial statements and internal controls.
Investor Verification Items
- Verify the pace and durability of quarterly revenue recovery after the fourth-quarter 2020 decline of 2.7%, especially in Europe.
- Assess whether cost reductions and restructuring actions can restore operating leverage without impairing service capacity or growth investments.
- Reconcile reported earnings with restructuring, impairment, pension settlement, disposition and tax-valuation items.
- Monitor operating cash flow as COVID-related payment deferrals mature and working-capital requirements normalize.
- Evaluate refinancing plans for the approximately $494.0 million of debt maturing in 2022 and compliance with revolving-credit covenants.
- Review goodwill sensitivity in the United Kingdom and Netherlands and the effect of further weakness in Germany or other markets.
- Track client concentration, permanent recruitment demand, MSP growth and the performance of counter-cyclical Right Management services.
- Confirm the status of regulatory proposals affecting temporary staffing, including the proposed Mexican labor-law changes referenced in the filing.