ManpowerGroup Inc. — 2018 Q3 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 and related workforce services through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue from services | $5,418.7 million | $5,464.8 million | $16,598.0 million | $15,396.8 million |
| Gross profit | $890.6 million | $900.6 million | $2,698.7 million | $2,550.1 million |
| Gross profit margin | 16.4% | 16.5% | 16.3% | 16.6% |
| Operating profit | $216.7 million | $228.7 million | $578.8 million | $551.8 million |
| Operating profit margin | 4.0% | 4.2% | 3.5% | 3.6% |
| Net earnings | $158.0 million | $137.7 million | $398.4 million | $329.1 million |
| Diluted EPS | $2.43 | $2.04 | $6.03 | $4.84 |
- Q3 reported revenue declined 0.8%, but increased 1.3% in constant currency; operating profit declined 5.2%, or 3.4% in constant currency.
- Nine-month revenue increased 7.8%, including 3.6% constant-currency growth; operating profit increased 4.9%, including 1.3% constant-currency growth.
- Net earnings benefited from lower taxes following the U.S. Tax Cuts and Jobs Act. The effective tax rate was 23.0% in Q3 and 26.3% for nine months, compared with 36.5% and 35.9%, respectively, in 2017.
- Cash provided by operating activities was $302.0 million for the first nine months, compared with $287.5 million in 2017. Capital expenditures were $39.8 million and acquisition-related cash consideration was $50.9 million.
- Cash and cash equivalents were $682.6 million at September 30, 2018, compared with $689.0 million at December 31, 2017. Net accounts receivable were $5,331.3 million, and the company reported approximately five additional days of DSO versus year-end.
- Debt consisted of $41.2 million of short-term borrowings and current maturities and $1,037.5 million of long-term debt. The company issued €500.0 million of 1.750% notes due 2026 and repaid €350.0 million of notes due June 2018.
- The company had $599.5 million available under its $600.0 million revolving credit facility. Net Debt-to-EBITDA was 0.86 to 1 and fixed-charge coverage was 5.31 to 1, versus covenant limits of 3.5 to 1 and 1.5 to 1, respectively.
- During the first nine months, the company repurchased 3.1 million shares for $299.2 million and paid $66.0 million of dividends. A further 5.7 million shares remained authorized for repurchase at September 30, 2018.
Material changes versus the prior comparable period
- Q3 performance weakened relative to the first half of 2018, with constant-currency revenue growth decelerating to 1.3% from 4.5% in Q2, primarily because of slower growth in Europe.
- Northern Europe revenue declined 5.9% as reported and 3.9% in constant currency. Germany was particularly weak, partly due to implementation problems with a new front-office system, delivery-channel changes that disrupted clients and softer manufacturing demand.
- U.S. revenue declined 4.0% in Q3, driven by weaker Experis IT interim demand and difficulty matching available talent with client requirements. Right Management revenue declined 8.9%, reflecting lower outplacement and talent-management demand.
- Growth remained strong in APME, where revenue increased 7.2% reported and 10.3% in constant currency, and in Italy and other Southern European markets.
- Q3 gross margin declined 10 basis points, primarily because of lower staffing/interim margins, the reduced French CICE payroll tax credit and lower MSP margins. Nine-month gross margin declined 30 basis points.
- Selling and administrative expenses increased 0.3% in Q3 and 6.1% for nine months, reflecting technology, delivery-model and back-office optimization investments, acquisitions and restructuring costs.
- Foreign exchange reduced Q3 revenue growth by 2.1%, operating profit by 1.8% and diluted EPS by approximately $0.04. The designation of Argentina as highly inflationary generated a $3.6 million translation loss and reduced nine-month diluted EPS by approximately $0.04.
Guidance, outlook, risks and unusual items
- Management expected fourth-quarter performance to be affected by current trends in key European markets, where economic indicators were becoming less favorable. The filing does not provide a specific fourth-quarter revenue or EPS forecast.
- Management expected a 2018 annual effective tax rate of approximately 26% to 27%.
- France’s CICE program was expected to be replaced by new subsidies in 2019. Management estimated an approximately 50-basis-point negative impact on French gross margin during the first three quarters of 2019, declining to approximately 15 basis points thereafter. The transition was expected to reduce French gross margin by approximately 120 basis points in December 2018, or approximately 30 basis points at the consolidated gross and operating profit margin level.
- The company recorded $39.3 million of restructuring costs during the first nine months, compared with $34.5 million in 2017. The remaining restructuring reserve was $23.5 million, most of which management expected to pay by year-end.
- The company completed its annual third-quarter goodwill and indefinite-lived intangible asset impairment testing and recorded no impairment. The tests used discount rates ranging from 10.6% to 14.2% and depend on revenue growth, operating margins, working capital and terminal-value assumptions.
- A former seller of 7S Group GmbH disputed contingent consideration and claimed an additional $24.1 million plus interest. ManpowerGroup believes no further amount is due and intends to contest the claim in arbitration; no additional liability was recorded because the outcome could not be predicted.
- Aggregate commitments for debt repayments, operating leases, severance, office closures and other commitments totaled $2,304.8 million. Guarantees and standby letters of credit totaled approximately $192.1 million, although management did not expect significant payments.
- Key risks include weaker labor-market demand, European economic deterioration, foreign-exchange volatility, changes in French tax subsidies and other tax legislation, execution of technology investments, client disruption from systems changes, restructuring execution and unresolved tax or acquisition-related contingencies.
- The company adopted revenue-recognition guidance in 2018 without a cumulative-effect adjustment. It expects the 2019 lease-accounting adoption to materially increase reported assets and liabilities, although it does not currently expect a material income-statement impact.
Important facts for investors to verify
- Whether European demand, especially in Germany and France, stabilized or continued to weaken after September 30, 2018.
- The actual financial effect of the French CICE replacement and the December 2018 transition.
- Progress and costs associated with the German front-office system, technology investments and delivery-model restructuring.
- Cash conversion, DSO and working-capital requirements given the large accounts-receivable balance.
- Debt maturities, refinancing plans for the €400.0 million 2022 notes, covenant headroom and continued share repurchases.
- Resolution of the 7S contingent-consideration arbitration and the company’s $78.9 million of gross unrecognized tax benefits.
- Implementation effects of the 2019 lease standard and whether goodwill reporting units remain sufficiently above carrying value under changing market assumptions.