ManpowerGroup Inc. — Form 10-Q Summary
Business Context and Reporting Period
ManpowerGroup provides staffing, contingent workforce, recruitment, workforce solutions, career management and talent management services through the Americas, Southern Europe, Northern Europe, Asia Pacific Middle East (APME) and Right Management segments. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial Results and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue from services | $5,188.8 million | $5,172.3 million | $14,998.4 million | $15,475.4 million |
| Gross profit | $853.6 million | $856.2 million | $2,480.1 million | $2,565.3 million |
| Gross profit margin | 16.5% | 16.6% | 16.5% | 16.6% |
| Operating profit | $162.4 million | $118.6 million | $344.9 million | $306.8 million |
| Operating margin | 3.1% | 2.3% | 2.3% | 2.0% |
| Net earnings | $94.7 million | $63.1 million | $186.8 million | $144.3 million |
| Diluted EPS | $1.18 | $0.79 | $2.36 | $1.79 |
- Q3 revenue increased 0.3% reported but declined 0.3% in constant currency and 0.7% on an organic constant-currency basis. Management attributed part of the reported growth to one additional billing day.
- For the first nine months, revenue declined 3.1% reported, or 3.0% in constant currency and 3.3% organically in constant currency.
- Operating profit increased 37.1% in Q3 and 12.4% for the nine-month period, primarily because selling and administrative expenses declined faster than revenue.
- Q3 selling and administrative expenses declined 6.3% reported and 6.6% in constant currency; nine-month expenses declined 5.5% reported.
- Effective tax rates were 39.7% in Q3 2013 versus 41.9% in Q3 2012 and 41.2% for the first nine months versus 47.3% in the prior-year period. Management expects an annual effective rate of approximately 40%.
- Cash provided by operating activities was $111.7 million for the first nine months, compared with cash used of $14.6 million in 2012. Capital expenditures were $33.6 million, and acquisition spending was $18.2 million.
- Cash and cash equivalents were $488.7 million at September 30, 2013, versus $648.1 million at December 31, 2012. Accounts receivable were $4,294.1 million.
- Debt consisted of $40.3 million of short-term borrowings and current maturities and $476.2 million of long-term debt. The company repaid $268.7 million of long-term debt during the first nine months, including its €200 million 4.75% notes at maturity.
- As of September 30, 2013, the company reported a debt-to-EBITDA ratio of 0.74 to 1 and a fixed-charge coverage ratio of 3.04 to 1, compared with covenant limits of no greater than 3.5 to 1 and no less than 1.5 to 1, respectively.
- The company had $799.1 million of additional availability under its then-existing revolving credit agreement and $403.8 million of unused subsidiary credit lines. On October 15, 2013, the revolving commitment was amended from $800 million to $600 million and the maturity was extended to October 15, 2018.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite weaker year-to-date demand. Q3 net earnings rose 50.2% and nine-month net earnings rose 29.5%, supported by cost reductions, lower interest and other expenses, and a lower tax rate.
- The company closed more than 350 offices since Q3 2012 and reduced headcount and lease costs under its simplification and cost-recalibration program.
- Restructuring costs increased to $62.9 million for the first nine months from $22.2 million in 2012, including $8.1 million in Q3. The remaining restructuring reserve was $41.5 million at September 30, 2013.
- Q3 revenue trends improved from the first half, but staffing/interim demand and European permanent recruitment remained weak. ManpowerGroup Solutions continued to grow, including strong U.S. RPO and managed-service-provider activity.
- Year-to-date revenue weakness was concentrated in France, the United States, Northern Europe, APME and Right Management. Southern Europe benefited from reported growth in Italy and other Southern European markets but declined on a constant-currency basis.
- Accumulated other comprehensive income increased to $75.3 million from $34.4 million, largely reflecting favorable foreign-currency translation effects.
- The company corrected a $37.7 million understatement of its Swiss franchise equity investment. The adjustment increased other assets and accumulated other comprehensive income and did not affect operations or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expects more than $150 million of selling and administrative expense reductions in 2013 and annualized savings of more than $180 million in 2014, with additional restructuring costs expected during 2013.
- Management believes available cash and credit facilities are sufficient for foreseeable needs and expects compliance with debt covenants for the next 12 months.
- Demand remains dependent on labor-market conditions, economic growth and clients’ workforce-flexibility needs. Economic contraction could reduce staffing demand and cause operating deleverage.
- The French CICE payroll tax credit favorably reduced cost of services and supported margins, but future pricing concessions or market responses could reduce its net benefit.
- New German collective labor agreements effective between November 2013 and January 2014 are expected to increase temporary-worker wages and related costs, with an unfavorable effect on German gross margins, although management does not expect a significant consolidated impact.
- Implementation of the U.S. healthcare employer mandate was delayed to 2015. The company expects higher employment costs and intends to pass associate-related costs to U.S. clients, but may not recover them fully.
- French clients asserted claims for refunds of payroll-tax subsidies dating back to 2003. Management believes the claims lack merit and does not expect a material financial impact.
- Goodwill and indefinite-lived intangible asset impairment testing produced no impairment. The tests relied on projected revenue growth, operating margins, working-capital levels, discount rates of 11.7% to 16.5% and terminal-value assumptions.
- Gross unrecognized tax benefits were $29.0 million, with a net potential benefit of $26.5 million. The company does not expect a significant change over the next 12 months.
- The company declared a $0.46-per-share dividend payable December 13, 2013. No open-market share repurchases occurred during the first nine months, although 8.0 million shares remained authorized for repurchase.
Most Important Facts for Investors to Verify
- Whether improving Q3 demand represents a sustainable recovery or was materially influenced by the additional billing day and currency movements.
- Execution of the simplification plan, including the timing and durability of the projected 2014 savings and the remaining restructuring cash payments.
- Revenue and margin trends in France, Northern Europe, APME and Right Management, where demand remained pressured.
- The effect of German labor-cost increases, French CICE credits and U.S. healthcare requirements on gross margins and pricing.
- Availability and terms of the amended $600 million revolving credit facility, debt maturities and ongoing covenant compliance.
- Resolution of French subsidy claims, tax audits and the company’s ability to recover contingent employment-cost increases from clients.
- Sensitivity of goodwill valuations to weaker revenue growth, lower operating margins or higher discount rates.