ManpowerGroup Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; filed October 30, 2015. The company provides staffing, recruitment, workforce solutions, consulting, outplacement and talent-management services across 80 countries and territories.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue from services | $4,972.5 million | $5,416.0 million | $14,376.0 million | $15,641.7 million |
| Gross profit | $852.1 million | $905.6 million | $2,444.7 million | $2,619.4 million |
| Gross margin | 17.1% | 16.7% | 17.0% | 16.7% |
| Operating profit | $206.3 million | $212.3 million | $507.8 million | $526.6 million |
| Operating margin | 4.1% | 3.9% | 3.5% | 3.4% |
| Net earnings | $123.9 million | $130.5 million | $295.3 million | $310.4 million |
| Diluted EPS | $1.61 | $1.61 | $3.75 | $3.82 |
Reported Q3 revenue declined 8.2% and operating profit declined 2.8%, primarily because currency translation reduced revenue by 14.0% and operating profit by 15.5%. On a constant-currency basis, revenue increased 5.8% and operating profit increased 12.7%. For the first nine months, reported revenue decreased 8.1%, while constant-currency revenue increased 6.3%.
The Q3 effective tax rate was 37.1%, compared with 35.5% in the prior-year quarter. Management expects an annual effective tax rate of approximately 38%. The nine-month effective tax rate was 38.6%, compared with 37.9% in 2014.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $282.8 million for the first nine months, versus $104.9 million in 2014. The improvement included approximately $130.0 million of proceeds from selling French payroll tax credits and better accounts-receivable collections.
- Cash and cash equivalents were $652.5 million at September 30, 2015, compared with $699.2 million at December 31, 2014.
- Investing cash outflows were $269.2 million, including $240.7 million for acquisitions and $33.3 million of capital expenditures.
- Financing cash outflows were $39.7 million, including $523.2 million of share repurchases and $62.1 million of dividends, partially offset by $453.9 million of long-term debt proceeds.
- Total debt comprised $37.9 million of short-term borrowings and current maturities and $840.8 million of long-term debt at September 30, 2015.
- The company issued €400.0 million of 1.875% senior unsecured notes due September 2022, receiving net proceeds of €397.4 million. The five-year revolving credit facility was extended to September 2020.
- Available borrowing capacity under the $600.0 million revolving facility was $599.1 million. The reported Debt-to-EBITDA ratio was 0.80 to 1 and fixed-charge coverage was 4.49 to 1, within covenant requirements.
- Moody’s upgraded the company’s long-term debt rating to Baa1 with a stable outlook in July 2015.
Material changes versus the prior comparable period
- Foreign exchange was the principal driver of the reported revenue and operating-profit declines. Management stated that currency reduced diluted EPS by approximately $0.25 in Q3 and $0.64 for the first nine months.
- Gross margins improved by 40 basis points in Q3 and 30 basis points for the nine-month period, supported by permanent recruitment, ManpowerGroup Solutions and currency-related mix effects. Staffing margins faced pricing and mix pressure in certain markets.
- Operating leverage improved despite additional recruiting and support staff. Selling and administrative expenses increased on a constant-currency basis because of higher headcount, incentive costs and acquisition-related expenses.
- Share repurchases reduced diluted weighted-average shares by 5.1% in Q3 and 3.3% for the first nine months. The company repurchased 6.0 million shares for $523.2 million, exhausting the prior authorization as of September 30.
- The company completed the $140.4 million acquisition of Germany-based 7S Group GmbH on September 3, 2015. Other acquisitions totaled $100.3 million during the first nine months, compared with $25.1 million in 2014.
- A Greater China joint venture was formed, with ManpowerGroup retaining a controlling financial interest. Noncontrolling interests were $65.0 million at September 30, 2015.
- Accumulated other comprehensive loss increased to $267.8 million from $155.2 million at year-end, primarily reflecting foreign-currency translation losses.
Outlook, commentary and risks
Management reported continued constant-currency growth in most markets but characterized economic conditions in Europe and certain major markets as uneven, with recovery potentially slow or volatile. Q3 growth was supported by staffing, permanent recruitment and ManpowerGroup Solutions. The United States experienced softer staffing demand in industrial, engineering and finance markets. Norway remained pressured by weakness in oil and gas, Australia by commodity-market conditions, and Brazil by recessionary conditions.
Right Management showed modest Q3 constant-currency revenue growth as outplacement demand improved, although talent-management revenue declined. Management continued to emphasize cost control, organizational simplification and calibrated investment to support growth.
- The company had $1,823.5 million of aggregate commitments related to debt repayments, leases, severances, office closures and other obligations at September 30, 2015.
- Guarantees and standby letters of credit totaled approximately $180.3 million. Management does not expect significant payments under these arrangements based on historical experience.
- Tax audits were pending in multiple jurisdictions. Net unrecognized tax benefits were $31.3 million; management did not expect a significant change during the following 12 months.
- The remaining restructuring reserve was $6.8 million, with most payments expected by the end of 2016.
- The annual goodwill and indefinite-lived intangible-asset impairment test produced no impairment charge. Results depend on assumptions including revenue growth, operating margins, discount rates of 11.8% to 17.1% and terminal-value multiples.
- Key ongoing risks include labor-market and economic conditions, foreign-exchange volatility, pricing pressure, exposure to weaker regional economies, acquisition integration, tax matters, and access to financing markets.
Investor verification points
- Reconcile reported results with constant-currency and organic constant-currency measures, which are non-GAAP metrics and materially change the interpretation of growth.
- Assess whether permanent recruitment and ManpowerGroup Solutions growth can offset softer staffing demand and regional weakness.
- Review the 7S acquisition purchase accounting, integration progress and resulting goodwill, which remained preliminary at quarter-end.
- Monitor debt levels, the 2022 euro notes, the 2018 euro notes and compliance with revolving-credit covenants.
- Evaluate the sustainability of cash generation after unusually significant proceeds from the French payroll-tax-credit sale and substantial share repurchases.
- Review foreign-currency exposure and the sensitivity of reported earnings, equity and debt-related measures to further currency movements.