ManpowerGroup Inc. Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, talent solutions, career transition and related workforce services across the Americas, Southern Europe, Northern Europe and Asia Pacific Middle East (APME). The filing covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019. Results were significantly affected by the COVID-19 pandemic and related labor-market disruption.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Revenue from services | $4,584.8 million | $5,248.9 million | $12,946.1 million | $15,666.9 million |
| Gross profit | $725.1 million | $840.3 million | $2,025.8 million | $2,515.5 million |
| Gross margin | 15.8% | 16.0% | 15.6% | 16.1% |
| Operating profit | $61.6 million | $217.0 million | $49.3 million | $453.3 million |
| Operating margin | 1.3% | 4.1% | 0.4% | 2.9% |
| Net earnings (loss) | $10.3 million | $146.1 million | $(52.4) million | $326.9 million |
| Diluted EPS | $0.18 | $2.42 | $(0.90) | $5.40 |
| Cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $715.7 million | $495.4 million |
Q3 revenue declined 12.7% reported and 14.5% in constant currency. Nine-month revenue declined 17.4% reported and 16.4% in constant currency. Q3 operating profit declined 71.6%, while nine-month operating profit declined 89.1%. The nine-month effective tax rate was 407.4%, compared with 34.5% in 2019, primarily because of the low level and mix of pretax earnings, valuation allowances, the nondeductible German goodwill impairment and French business taxes.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,587.7 million at September 30, 2020, compared with $1,025.8 million at December 31, 2019.
- Long-term debt was $1,058.5 million and current borrowings and current maturities were $29.2 million. The principal euro-denominated notes, totaling $1,049.6 million at period end, mature in 2022 and 2026.
- The $600 million revolving credit facility was substantially unused, with $599.5 million available after letters of credit. Additional local credit lines of up to $300 million had $262.0 million available.
- Management reported a net debt-to-EBITDA ratio of negative 0.24-to-1 and fixed-charge coverage of 3.33-to-1 at September 30, 2020, and expected compliance with covenants for the next 12 months.
- Operating cash flow benefited from collections, lower receivables and COVID-19-related government payment deferrals. Management expects lower operating cash flow in the fourth quarter of 2020 and first quarter of 2021 as remaining deferral benefits mature.
- Capital expenditures were $30.5 million in the first nine months of 2020, compared with $36.2 million in 2019. The company paid $63.2 million of dividends and repurchased $63.8 million of common stock during the first nine months.
Material changes versus the prior comparable period
- COVID-19 reduced demand across nearly all operations. Monthly year-over-year revenue declines improved from 18% in July to 16% in August and 9% in September, indicating sequential recovery but continued contraction.
- Permanent recruitment revenue declined 25.1% in Q3 and 28.1% for the first nine months, pressuring gross margins. Career transition services and the MSP offering were more resilient, while RPO activity remained weak because of client hiring freezes.
- Q3 gross margin declined 20 basis points to 15.8%; the nine-month margin declined 50 basis points to 15.6%. Lower permanent recruitment activity, client mix and reduced consultant utilization were partly offset by higher-margin career transition services and certain pricing or cost adjustments.
- Selling and administrative expenses increased 6.5% in Q3, despite lower personnel and discretionary costs, due largely to $49.9 million of restructuring costs, a $5.8 million disposition loss and the absence of a $30.4 million 2019 gain from the deconsolidation of ManpowerGroup Greater China.
- Restructuring costs were $98.1 million for the first nine months, compared with $42.5 million in 2019. The remaining restructuring reserve was $49.9 million, with most expected to be paid by year-end 2020.
- The company recorded a $66.8 million noncash goodwill impairment charge in Q2 2020, fully impairing Germany’s remaining goodwill. No additional impairment was recorded in the Q3 annual test.
- On September 30, 2020, the company disposed of businesses in Serbia, Croatia, Slovenia and Bulgaria for net proceeds of $5.8 million and recognized a one-time $5.8 million loss.
- Segment reporting was realigned in 2020, with Right Management combined into the respective geographic businesses; prior periods were restated for comparability.
Outlook, management commentary and risks
Management described signs of a gradual global recovery during Q3 but expects the recovery to be uneven and slower than initially anticipated, with some industries recovering sooner than others. The company expects more targeted and localized COVID-19 restrictions rather than the broad countrywide lockdowns experienced earlier in 2020, but acknowledged substantial uncertainty regarding public-health conditions, government restrictions and fiscal stimulus.
Management expects restructuring actions to generate cost savings over the following 12 months, with full run-rate savings beginning in the first quarter of 2021. The company reported that approximately 90% of full-time equivalent employees were working remotely at September 30, 2020. Management believes liquidity and existing credit facilities are sufficient for foreseeable needs.
- Principal risks include renewed COVID-19 restrictions, prolonged macroeconomic and labor-market weakness, changing tax legislation, challenges in European markets, foreign-exchange volatility and execution of technology and digital investments.
- Goodwill impairment remains a risk, particularly for the Netherlands reporting unit, whose fair value exceeded carrying value by approximately 3.3%; sustained declines in profitability or cash flow could result in a material impairment.
- The company had $2,139.3 million of aggregate commitments and approximately $941.7 million of guarantees and standby letters of credit. Management does not expect significant cash payments under the guarantee arrangements based on historical experience.
- Tax audits were ongoing in several jurisdictions. Management did not expect their resolution to have a material earnings impact. Gross unrecognized tax benefits were $68.2 million.
Important facts for investors to verify
- Whether revenue trends continued improving after September 2020 or reversed because of renewed COVID-19 restrictions.
- The sustainability of operating cash flow after government payment deferrals and working-capital benefits rolled off.
- Actual cost savings and cash expenditures associated with the $98.1 million restructuring program and remaining $49.9 million reserve.
- Operating performance and valuation headroom of the Netherlands and other Northern Europe reporting units, particularly given the prior German goodwill impairment.
- Future demand for permanent recruitment, RPO, staffing/interim and higher-margin career transition and MSP services.
- Compliance with debt covenants, refinancing plans for the 2022 and 2026 euro notes, and the availability of revolving and local credit facilities.
- The effect of unusually high effective tax rates, valuation allowances and international tax audits on future earnings and cash taxes.