ManpowerGroup Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, outplacement and talent-management services through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue from services | $5,373.1 million | $5,656.9 million | $10,418.0 million | $11,179.3 million |
| Gross profit | $870.4 million | $922.7 million | $1,675.2 million | $1,808.1 million |
| Gross profit margin | 16.2% | 16.3% | 16.1% | 16.2% |
| Operating profit | $130.8 million | $208.3 million | $236.3 million | $362.1 million |
| Operating profit margin | 2.4% | 3.7% | 2.3% | 3.2% |
| Net earnings | $127.3 million | $143.4 million | $180.8 million | $240.4 million |
| Diluted earnings per share | $2.11 | $2.17 | $2.98 | $3.62 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $277.1 million | $175.6 million |
Reported second-quarter revenue decreased 5.0% year over year, while revenue declined 0.1% on a constant-currency basis and 1.5% on an organic constant-currency basis. Six-month revenue decreased 6.8% reported, 1.1% in constant currency and 1.5% organically in constant currency.
Cash and cash equivalents were $770.4 million at June 30, 2019, compared with $591.9 million at December 31, 2018. Accounts receivable was $5,415.6 million, and total assets were $9,048.3 million. Total debt consisted of $47.7 million of short-term borrowings and current maturities plus $1,025.8 million of long-term debt. The company reported $599.5 million of availability under its $600.0 million revolving credit facility and $273.1 million of unused subsidiary credit lines.
At June 30, 2019, the company reported a Net Debt-to-EBITDA ratio of 0.83 to 1 and a fixed-charge coverage ratio of 5.30 to 1, compared with required thresholds of no greater than 3.5 to 1 and no less than 1.5 to 1, respectively. Management expected to remain in compliance with its covenants for the next 12 months.
Material changes versus the prior comparable period
- Operating profit declined 37.2% in the second quarter and 34.8% for the first six months. Excluding the 2019 goodwill and related charges and 2018 second-quarter restructuring costs, second-quarter operating profit declined 7.5% in constant currency and operating margin decreased 30 basis points.
- Second-quarter revenue weakness was concentrated in Northern Europe, where revenue declined 15.1% reported and 9.6% in constant currency, primarily because of lower demand in Germany, the Netherlands and other markets. Southern Europe revenue declined 1.9% reported but increased 3.7% in constant currency. Americas revenue declined 0.9% reported but increased 2.5% in constant currency; APME revenue declined 2.2% reported but increased 1.3% in constant currency.
- The stronger U.S. dollar reduced second-quarter reported revenue by approximately 4.9%, operating profit by approximately 4.0% and diluted EPS by approximately $0.08. For the first six months, currency reduced diluted EPS by approximately $0.15.
- Gross profit margin decreased 10 basis points in both the quarter and first half, primarily because of weaker demand for higher-margin ManpowerGroup Solutions services.
- The company recorded $64.0 million of noncash goodwill impairment charges, including $60.2 million for Germany and $3.8 million for New Zealand, plus $1.6 million of related New Zealand charges. Germany’s impairment reflected weaker performance, temporary-staffing regulatory changes and a valuation allowance against German deferred tax assets.
- Interest and other income was $70.2 million in the second quarter and $58.3 million for the first half, compared with expenses of $10.5 million and $26.6 million, respectively, in 2018. The change primarily reflected an $80.4 million noncash gain from acquiring the remaining controlling interest in Manpower Switzerland.
- The effective income tax rate increased to 36.7% from 27.5% in the second quarter and to 38.6% from 28.3% for the first half. Drivers included French subsidy changes, nondeductible goodwill impairment and a German valuation allowance.
- ManpowerGroup acquired the remaining controlling interest in Manpower Switzerland and the remaining interest in Experis AG on April 3, 2019. Cash consideration was $212.7 million, funded from cash on hand; Manpower Switzerland contributed $111.0 million of revenue after acquisition.
- The company repurchased 1.2 million shares for $101.0 million during the first six months and paid $65.2 million of dividends. In August 2019, the board authorized an additional 6.0 million-share repurchase authorization.
- The company adopted the new lease standard on January 1, 2019, recognizing a $458.5 million operating lease right-of-use asset and $460.9 million of operating lease liabilities at June 30, 2019.
Guidance, outlook, commentary and risks
Management expected the second-quarter pattern to continue into the second half of 2019: sluggish European labor markets and results, with improving organic constant-currency trends in the Americas and APME. Management cited uncertainty related to trade wars and Brexit, weaker manufacturing demand, German temporary-staffing regulations and broader labor-market variability.
Management stated that available cash and existing credit facilities should be sufficient for foreseeable cash needs. The company had aggregate commitments of $2,172.4 million at June 30, 2019 and guarantees and standby letters of credit totaling approximately $211.6 million. It did not expect significant payments under those guarantee arrangements based on their nature and historical experience.
Restructuring costs were $41.4 million for the first six months, compared with $39.3 million in 2018. The remaining restructuring reserve was $25.0 million, with most expected to be paid, utilized or transferred by year-end 2019. The company also expects approximately $13.0 million of pension contributions during 2019.
ManpowerGroup Greater China Limited completed an initial public offering on July 10, 2019. The company’s ownership declined from 51% to 38.25%, subject to further dilution, and the joint venture will be deconsolidated and accounted for under the equity method beginning in the third quarter. The accounting treatment was not finalized at the filing date.
Other risks include economic and labor-market deterioration, foreign-exchange volatility, tax-law changes, challenges in European markets, execution of technology investments, regulatory changes, impairment of goodwill and intangible assets, and the effect of acquisitions, dispositions and restructuring activities.
Important facts for investors to verify
- Whether European revenue weakness, particularly in Germany, the Netherlands, Italy and the United Kingdom, persists and affects operating leverage.
- The valuation assumptions supporting the Germany and New Zealand goodwill balances after the $64.0 million impairment.
- The finalized third-quarter accounting and earnings impact of the Greater China IPO and deconsolidation.
- The sustainability of earnings excluding the one-time $80.4 million Manpower Switzerland gain and the effect of restructuring and impairment charges.
- Future cash requirements for the Swiss acquisition, debt maturities, operating leases, restructuring, dividends and share repurchases.
- Foreign-exchange effects and the comparability of reported results with constant-currency and organic constant-currency measures.
- Management’s forecast that covenant compliance will continue and that liquidity will remain sufficient for the next 12 months.