Manpowergroup Inc. quarterly report, Q2 FY2020

ManpowerGroup Inc. 2020 Q2 Form 10-Q Summary

Business context and reporting period

ManpowerGroup provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, talent solutions, outplacement and related workforce services through four geographic segments: Americas, Southern Europe, Northern Europe and APME. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with year-over-year comparisons to the corresponding 2019 periods.

Results were significantly affected by the COVID-19 pandemic, including lockdowns, sharply reduced labor-market demand, hiring freezes and economic uncertainty. Effective January 1, 2020, the company realigned reporting so that Right Management is included within the respective geographic segments; prior periods were restated accordingly.

Financial performance and key metrics

Metric	Three months ended June 30, 2020	Three months ended June 30, 2019	Six months ended June 30, 2020	Six months ended June 30, 2019
Revenue from services	$3,742.2 million	$5,373.1 million	$8,361.3 million	$10,418.0 million
Gross profit	$576.7 million	$870.4 million	$1,300.7 million	$1,675.2 million
Gross margin	15.4%	16.2%	15.6%	16.1%
Operating profit (loss)	$(50.0) million	$130.8 million	$(12.3) million	$236.3 million
Operating margin	(1.3)%	2.4%	(0.1)%	2.3%
Net earnings (loss)	$(64.4) million	$127.3 million	$(62.7) million	$180.8 million
Diluted EPS	$(1.11)	$2.11	$(1.07)	$2.98

Second-quarter revenue declined 30.4% reported, 28.0% in constant currency and 26.7% in organic constant currency. Six-month revenue declined 19.7% reported, 17.3% in constant currency and 16.6% in organic constant currency.
Permanent recruitment revenue declined 45.0% in the second quarter and 29.5% for the first half, substantially reducing gross margin.
Second-quarter selling and administrative expense, excluding goodwill impairment, declined 17.1%; however, expenses did not decline as quickly as revenue, causing significant operating deleveraging.
Second-quarter results included $66.8 million of goodwill impairment related to Germany and $6.0 million of capitalized software impairment in the United States. Total goodwill and other impairment charges were $72.8 million in the quarter and first half.
First-half restructuring costs were $48.2 million, primarily for severance and office closures or consolidations, compared with $41.4 million in the prior-year period.

Cash flow, liquidity and debt

Cash provided by operating activities was $596.1 million in the first six months of 2020, compared with $277.1 million in the prior-year period. The increase primarily reflected collections of accounts receivable, lower replacement of receivables due to reduced activity and government payment deferrals; management expects lower operating cash flow in the second half as these benefits mature.
Capital expenditures were $18.9 million, compared with $24.0 million in the first half of 2019. Acquisition-related cash consideration was $1.7 million.
Cash and cash equivalents were $1,438.6 million at June 30, 2020, compared with $1,025.8 million at December 31, 2019. Accounts receivable declined to $4,224.6 million from $5,273.1 million.
Total debt consisted of $40.5 million of short-term borrowings and current maturities and $1,014.3 million of long-term debt. The primary euro-denominated notes were $1,005.5 million at June 30, 2020, with maturities in 2022 and 2026.
The company had $599.5 million available under its $600.0 million revolving credit facility, subject to covenants, plus $250.7 million available under local credit lines. The facility also permits a potential $200 million increase at lenders’ discretion.
Net Debt-to-EBITDA was 0.03 to 1 and fixed-charge coverage was 3.88 to 1 at June 30, 2020, compared with covenant limits of no greater than 3.5 to 1 and no less than 1.5 to 1, respectively. Management expects compliance for the next 12 months.
The company paid a semi-annual dividend of $1.09 per share and repurchased 0.9 million shares for $63.8 million during the first half, with all repurchases occurring in the first quarter. Approximately 5.9 million shares remained authorized for repurchase at June 30, 2020.

Material changes versus the prior comparable period

COVID-19 drove substantial declines across nearly all markets. Second-quarter monthly revenue declines improved from approximately 31% in April to 26% in May and 24% in June after economies began reopening.
Second-quarter revenue declines were particularly severe in Southern Europe, down 38.6%, and Northern Europe, down 27.5%. France revenue fell 48.4%, Italy 31.9%, and Germany 33.5% on a reported basis.
Americas revenue declined 21.7% in the quarter, while APME declined 20.6% primarily because of the July 2019 deconsolidation of ManpowerGroup Greater China Limited. Japan was a relative positive, with revenue increasing 11.3% in the quarter.
Operating profit shifted to a $50.0 million loss from $130.8 million of profit, reflecting revenue contraction, lower gross margin, expense deleveraging and impairment charges.
Interest and other expenses were $5.8 million in the quarter versus $70.2 million of income in the prior-year quarter. The comparison was heavily affected by the absence of the $80.4 million noncash gain recorded in 2019 from the Manpower Switzerland transaction.
Six-month results also included a $10.2 million pension settlement loss in 2020, while the prior-year period included the Manpower Switzerland gain.
Goodwill declined to $1,178.2 million from $1,260.1 million at year-end 2019, primarily because of the $66.8 million Germany impairment and currency effects.

Guidance, outlook, management commentary and risks

The filing does not provide formal quantitative revenue or earnings guidance. Management expects labor-market recovery to be slow and gradual and expects the pandemic to continue adversely affecting financial condition, liquidity and future results.
Management reported gradual improvement as lockdowns eased but noted elevated COVID-19 conditions in parts of Latin America and the United States and the possibility of renewed restrictions.
Cost actions included reduced headcount, discretionary spending cuts, office reductions, government-supported unemployment programs and bill/pay initiatives. Management remains prepared to take further actions while preserving capacity to rebound.
Approximately 90% of full-time equivalent employees were working remotely at June 30, 2020. Management cited technology investments, geographic and industry diversification, relatively resilient MSP activity and the strategic potential of Experis and Talent Solutions as mitigating factors.
Germany remains a material risk: sustained losses and weakness in the manufacturing and automotive sectors led to the goodwill impairment. Further prolonged revenue declines or operating losses could result in additional material impairment charges.
Other key risks include the duration and severity of COVID-19, renewed lockdowns, macroeconomic and labor-market deterioration, foreign-currency movements, tax-law changes, challenges in European markets, execution of strategic technology investments, customer hiring freezes and expense deleveraging.
The remaining restructuring reserve was $23.4 million at June 30, 2020, and management expected most of it to be paid by year-end 2020.
Guarantees and standby letters of credit totaled approximately $902.6 million. Management does not expect significant payments under these arrangements based on their nature and historical experience.

Most important facts for investors to verify

Whether revenue declines continue to improve or worsen as government support expires and COVID-19 restrictions change.
Whether the company can sustain positive operating cash flow after working-capital benefits and payment deferrals mature.
Germany’s revenue, profitability and goodwill recoverability, as well as potential impairment exposure in other reporting units.
Compliance with the revolving-credit covenants if earnings weaken or debt increases.
The sustainability of the $1.09-per-share dividend and the pace of future share repurchases following the first-quarter 2020 repurchases.
The impact of permanent-recruitment weakness, customer hiring freezes, staffing mix changes and lower utilization on gross margins.
The company’s exposure to tax audits, $70.3 million of gross unrecognized tax benefits and approximately $2.15 billion of aggregate commitments.