ManpowerGroup Inc. 2018 Q2 Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, outplacement, talent management, training, and related workforce services. The filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. Operations are reported across the Americas, Southern Europe, Northern Europe, APME, and Right Management.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $5,656.9 million, up 9.3% | $11,179.3 million, up 12.6% |
| Gross profit | $922.7 million, up 7.1% | $1,808.1 million, up 9.6% |
| Gross margin | 16.3%, versus 16.7% | 16.2%, versus 16.6% |
| Operating profit | $208.3 million, up 6.7% | $362.1 million, up 12.0% |
| Operating margin | 3.7%, versus 3.8% | 3.2%, versus 3.3% |
| Net earnings | $143.4 million, up 22.6% | $240.4 million, up 25.6% |
| Diluted EPS | $2.17, versus $1.72 | $3.62, versus $2.80 |
| Effective tax rate | 27.5%, versus 36.5% | 28.3%, versus 35.4% |
Cash provided by operating activities was $175.6 million in the first half of 2018, compared with $148.0 million in the prior-year period. Capital expenditures were $26.8 million, acquisition spending was $47.4 million including contingent consideration, and cash used in financing activities was $41.2 million. Cash and cash equivalents increased to $767.5 million from $689.0 million at December 31, 2017.
At June 30, 2018, accounts receivable were $5,363.9 million and total assets were $8,812.8 million. Short-term borrowings and current maturities of long-term debt were $43.4 million, long-term debt was $1,045.2 million, and shareholders’ equity was $2,847.5 million. The company had $599.5 million available under its $600.0 million revolving credit facility and reported a net debt-to-EBITDA ratio of 0.77 to 1 and a fixed-charge coverage ratio of 5.29 to 1.
Material changes versus the prior comparable period
- Reported revenue growth benefited substantially from foreign currency translation: currency contributed 4.8 percentage points in the quarter and 7.7 percentage points in the first half. Organic constant-currency revenue growth was 4.2% and 4.5%, respectively.
- Southern Europe and APME were major growth contributors. Second-quarter constant-currency revenue increased 5.8% in Southern Europe and 10.4% in APME; Northern Europe increased 2.2%.
- United States revenue declined 4.6% in the quarter and 5.7% in the first half, primarily due to weaker Experis IT interim demand, lower Manpower staffing demand, and reduced solutions activity.
- Right Management revenue declined 10.5% in constant currency in the quarter and 12.8% in the first half, reflecting weaker outplacement and talent-management demand.
- Gross margins declined 40 basis points in both comparison periods. Drivers included a lower French CICE payroll tax credit, staffing business mix, pricing pressure, and the non-recurrence of certain U.S. workers’ compensation and health-care cost reductions.
- Operating profit growth was partly offset by $15.3 million of second-quarter restructuring costs and $39.3 million for the first half, compared with $34.5 million in the first half of 2017.
- The lower tax rate, resulting primarily from the U.S. Tax Act, materially supported net earnings and EPS growth. Share repurchases also reduced diluted weighted-average shares by 2.8% in both the quarter and first half.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects a 2018 annual effective tax rate of approximately 27% to 28%, primarily because of French business tax. Accounting for certain Tax Act provisions remained provisional, and the ultimate impact could differ materially.
- Management reported stronger labor-market demand in the second quarter but noted slower European growth, particularly in France, and profitability challenges in Northern Europe. Cost optimization, technology investment, and productivity initiatives remain priorities.
- The remaining restructuring reserve was $32.5 million at June 30, 2018; management expects most of it to be paid by year-end.
- The company issued €500.0 million of 1.750% notes due June 2026. Proceeds repaid €350.0 million of notes due June 2018, with the balance available for general corporate purposes, including potential repurchases or acquisitions. The revolving credit facility maturity was extended to June 2023.
- Aggregate commitments for debt, leases, severance, office closures, and other items were $2,353.8 million. Guarantees and standby letters of credit totaled approximately $195.3 million; management does not expect significant payments under these arrangements.
- Sellers of 7S Group GmbH claim an additional $24.3 million plus interest in contingent consideration arbitration. ManpowerGroup believes no further amounts are due, but the outcome and timing are uncertain; no additional amount was recorded.
- The company expects the 2019 lease-accounting adoption to materially increase reported assets and liabilities, although it does not currently expect a material income-statement impact.
- Foreign exchange remains a material reporting risk. Argentina was designated highly inflationary effective July 1, 2018, although management does not expect a material consolidated financial-statement impact.
Most important facts for investors to verify
- Whether reported growth continues after removing currency translation and acquisitions, particularly amid slowing European organic growth.
- Recovery or further deterioration in U.S. staffing and Experis IT demand and in Right Management outplacement activity.
- Progress and cash costs of the restructuring program, including the $32.5 million remaining reserve.
- Impact of the French payroll-tax-credit reduction and staffing mix on gross margins.
- Finalization of Tax Act accounting and sustainability of the approximately 27%–28% tax-rate outlook.
- Debt maturity planning, covenant compliance, use of the new €500.0 million notes, and capital allocation among dividends, repurchases, and acquisitions.
- Resolution and potential exposure from the 7S contingent-consideration arbitration.