Manpowergroup Inc. annual report, FY2018

ManpowerGroup Inc. 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018, including fourth-quarter results. ManpowerGroup is a global workforce-solutions provider operating nearly 2,600 offices in 80 countries and territories under the Manpower, Experis, Right Management and ManpowerGroup Solutions brands.

Business Context and Reporting Period

Services include temporary and contract staffing, permanent recruitment, professional resourcing, recruitment-process outsourcing, managed-service programs, training, consulting, outplacement and talent management.
Approximately 88% of 2018 revenue was generated outside the United States; Europe represented approximately 67% of consolidated revenue.
Demand strengthened in the first half of 2018 but softened materially in the second half, particularly in France, Germany and Italy. Management expected the European slowdown to continue at least through the first quarter of 2019.

Financial Results and Key Metrics

Metric	2018	2017	Change
Revenue from services	$21,991.2 million	$21,034.3 million	4.5% reported; 2.5% constant currency
Gross profit	$3,579.0 million	$3,484.6 million	2.7%
Gross margin	16.3%	16.6%	Down 30 basis points
Operating profit	$796.7 million	$789.2 million	0.9% reported; down 0.4% constant currency
Operating margin	3.6%	3.8%	Down 20 basis points
Net earnings	$556.7 million	$545.4 million	2.1%
Diluted earnings per share	$8.56	$8.04	6.5%
Cash flow from operations	$483.1 million	$400.9 million	Increase of $82.2 million

Fourth-quarter 2018 revenue was $5,393.2 million, gross profit was $880.3 million, operating profit was $217.9 million and diluted EPS was $2.54. Fourth-quarter 2017 diluted EPS included a $1.10 per-share benefit from the Tax Act and French tax reform.
The reported results benefited from foreign currency translation, which increased revenue by approximately 2.0%, operating profit by approximately 1.3% and diluted EPS by approximately $0.08.
Operating cash flow was affected by a $198.3 million use of cash from operating assets and liabilities, including timing of collections and payments and contingent consideration payments.
Accounts receivable declined to $5,276.1 million from $5,370.5 million, while days sales outstanding increased approximately two days.
Capital expenditures were $64.7 million, acquisitions used $51.8 million including contingent consideration, dividends paid were $127.3 million, and share repurchases totaled $500.7 million.

Liquidity, Debt and Capital Allocation

Total debt was $1,075.4 million at December 31, 2018, compared with $478.1 million of long-term debt at year-end 2017. Debt represented 28% of total capitalization.
The increase primarily reflects issuance of €500.0 million of 1.750% notes due 2026, used principally to repay €350.0 million notes due in June 2018 and for general corporate purposes.
The company had $591.9 million of cash, including $331.2 million held by foreign subsidiaries.
No borrowings were outstanding under the $600.0 million revolving credit facility, with approximately $599.5 million available at year-end. The facility runs through June 2023.
Leverage and fixed-charge coverage were well within covenant limits: net debt-to-EBITDA was 0.97 to 1 versus a maximum of 3.5 to 1, and fixed-charge coverage was 5.35 to 1 versus a minimum of 1.5 to 1.
In 2018, the company repurchased 5.7 million shares for $500.7 million and paid dividends of $2.02 per share. Remaining repurchase authorization was 3.1 million shares at year-end.

Material Changes Versus the Prior Comparable Period

Reported revenue increased, but underlying constant-currency growth slowed to 2.5%, with organic constant-currency growth of 2.2%.
Revenue growth was strongest in APME, Southern Europe and permanent recruitment. Americas revenue declined 1.4% reported, including a 5.1% decline in the United States. Northern Europe revenue increased 1.2% reported but declined 2.0% in constant currency.
Right Management revenue declined 8.5% reported and 9.4% in constant currency, primarily due to lower outplacement and talent-management demand.
Gross margin declined due primarily to lower staffing/interim margins, the reduced French CICE payroll tax credit and business-mix changes. Permanent recruitment partially offset the pressure.
Restructuring costs increased to $39.3 million from $34.5 million, mainly related to delivery-model changes, front-office centralization and back-office optimization, particularly in Northern Europe.
Selling and administrative expenses increased 3.2%, including higher consulting costs related to technology, delivery-model and optimization initiatives.
Weighted-average diluted shares declined 4.1% to 65.1 million because of share repurchases, supporting EPS growth despite modest operating-profit growth.
Cash flow from operations improved, although cash used in financing increased to $484.9 million because of share repurchases, dividends and debt refinancing activity.

Guidance, Outlook, Risks and Unusual Items

Management expected the European economic slowdown to continue at least through the first quarter of 2019 but could not predict whether conditions would subsequently improve or deteriorate.
The replacement of France’s CICE program with new subsidies was expected to reduce French gross margin by approximately 50 basis points during the first three quarters of 2019 and approximately 15 basis points thereafter. Management also expected the 2019 effective tax rate to increase to approximately 34%, primarily because the new subsidies are taxable.
Germany’s equal-pay requirements after nine months and the 18-month assignment limit created additional cost, margin and client-retention risks.
Key risks include global economic cyclicality, European exposure, foreign-currency volatility, labor shortages, pricing pressure, client concentration, regulatory changes, cybersecurity and data privacy, technology execution, litigation, tax audits, acquisitions and debt covenant compliance.
The Argentine economy became highly inflationary for accounting purposes on July 1, 2018, producing a $2.5 million translation loss and approximately $0.04 of negative diluted EPS impact.
Management recorded $3.8 million of after-tax gain from the sale of a Netherlands business unit. No goodwill or indefinite-lived intangible impairment was recorded in the 2018 annual tests.
A German arbitration related to the 2015 7S acquisition involved a seller claim for an additional $23.9 million plus interest. No amount was accrued because the outcome was not predictable and management believed no further amount was due.
Operating lease accounting adopted January 1, 2019 was expected to add approximately $450 million to $500 million of right-of-use assets and lease liabilities, with no significant income-statement effect.
Management and Deloitte & Touche reported effective internal control over financial reporting and issued unqualified audit opinions.

Most Important Facts for Investors to Verify

Whether European demand and revenue trends stabilized after the second-half 2018 slowdown, particularly in Germany, France and Italy.
The actual 2019 impact of the French subsidy transition on gross margin and the effective tax rate.
Progress and costs associated with technology investments, delivery-model optimization and Northern European restructuring.
Cash conversion, days sales outstanding and working-capital requirements as staffing demand changes.
Debt maturities, foreign-currency exposure to the euro and compliance with revolving-credit covenants.
The outcome of the 7S acquisition arbitration and any other employment, regulatory, tax or competition-law matters.
Whether continued share repurchases and dividends remain appropriate given economic conditions, debt levels and liquidity needs.