ManpowerGroup Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing, interim, permanent recruitment, workforce solutions, career management and talent management 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, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue from services | $5,464.8 million | $5,088.2 million | $15,396.8 million | $14,698.0 million |
| Gross profit | $900.6 million | $858.3 million | $2,550.1 million | $2,492.8 million |
| Gross profit margin | 16.5% | 16.9% | 16.6% | 17.0% |
| Operating profit | $227.9 million | $211.1 million | $549.5 million | $538.8 million |
| Operating margin | 4.2% | 4.1% | 3.6% | 3.7% |
| Net earnings | $137.7 million | $129.2 million | $329.1 million | $316.3 million |
| Diluted EPS | $2.04 | $1.87 | $4.84 | $4.42 |
Q3 reported revenue increased 7.4%, operating profit increased 7.9% and diluted EPS increased 9.1%. On a constant-currency basis, revenue increased 4.3% and operating profit increased 4.4%. For the first nine months, reported revenue increased 4.8%, operating profit increased 2.0% and diluted EPS increased 9.5%; constant-currency revenue growth was 5.5%.
Cash provided by operating activities was $287.5 million for the first nine months, down from $402.5 million in 2016. Capital expenditures were $40.2 million, acquisitions used $27.3 million, dividends used $62.2 million and share repurchases used $178.0 million. Ending cash and cash equivalents were $666.9 million, compared with $598.5 million at December 31, 2016.
At September 30, 2017, accounts receivable were $5,181.0 million, up from $4,413.1 million at year-end, reflecting revenue growth, seasonality and approximately five additional days of sales outstanding. Total debt comprised $452.7 million of short-term borrowings and current maturities and $470.6 million of long-term debt.
Material changes versus the prior comparable period
- Southern Europe was the strongest growth region, with Q3 revenue up 12.0% in constant currency and nine-month revenue up 11.9% in constant currency.
- United States revenue declined 8.8% in Q3 and 7.4% for the first nine months, driven by weaker staffing demand, prolonged manufacturing weakness, lower Experis IT demand and reduced solutions project work.
- Right Management revenue declined 19.6% in Q3 and 16.7% for the first nine months in constant currency, reflecting weaker outplacement and talent management demand.
- Gross margin declined 40 basis points in both Q3 and the first nine months, primarily due to staffing business mix, pricing pressure and lower-margin large-client growth in parts of Europe.
- Q3 operating margin improved by 10 basis points due to operating leverage and expense discipline. Nine-month operating margin declined by 10 basis points, partly reflecting restructuring costs and the non-recurrence of 2016 gains.
- The company recorded $34.5 million of restructuring costs in the first nine months, primarily for severance, office closures, consolidations and optimization activities. The remaining restructuring reserve was $21.4 million at September 30, 2017.
- Foreign exchange movements increased Q3 reported revenue by 3.1% and diluted EPS by approximately $0.06. Weighted-average diluted shares declined 5.0% for the first nine months, largely due to share repurchases.
Guidance, outlook, risks and unusual items
- Management expected a 2017 annual effective tax rate of approximately 36% to 37%.
- The company expects the French payroll tax credit rate reduction from 7% to 6%, beginning in 2018, to reduce 2018 gross profit by approximately $30.6 million. Management plans to mitigate the impact through pricing and productivity initiatives. The proposed 2019 replacement subsidy remained subject to change.
- A €350 million note, approximately $413.2 million at September 30, 2017, was due in June 2018. Management expected to use cash, the revolving facility or replacement financing. The company reported $599.2 million of remaining availability under its $600 million revolving credit facility and expected to remain in compliance with debt covenants for the next 12 months.
- Net Debt-to-EBITDA was 0.75 to 1 and the fixed-charge coverage ratio was 5.13 to 1 at September 30, 2017, compared with covenant limits of 3.5 to 1 and 1.5 to 1, respectively.
- Sellers of the 2015 7S acquisition claimed an additional $24.6 million plus interest in contingent consideration. ManpowerGroup disputed the claim, recorded no amount and could not predict the outcome or timing.
- The company’s third-quarter goodwill and indefinite-lived intangible asset impairment tests identified no impairment. The tests used discount rates ranging from 10.7% to 13.3% and remain sensitive to revenue growth, margins, working capital and valuation assumptions.
- Key operating risks include labor-market conditions, business mix and pricing pressure, foreign exchange, working-capital requirements, tax audits, restructuring execution, demand weakness in the United States and Right Management, and potential obligations under guarantees and letters of credit.
- Management stated that available cash and existing credit facilities were sufficient for foreseeable needs. However, $383.8 million of cash held by foreign subsidiaries was not available for domestic operations unless repatriated.
Most important facts for investors to verify
- Whether revenue momentum in Southern Europe, APME and Northern Europe offsets continued weakness in the United States and Right Management.
- Whether staffing margins stabilize despite business-mix changes, competitive pricing and the French payroll-credit reduction.
- The conversion of earnings into cash, particularly as accounts receivable and days sales outstanding increase.
- The refinancing or repayment plan for the €350 million notes due in June 2018 and continued compliance with debt covenants.
- The final resolution of the 7S contingent-consideration dispute.
- The cash and earnings impact of the $21.4 million restructuring reserve and remaining restructuring payments.
- The effect of 2018 revenue-recognition, financial-instrument and pension-accounting standards, which management was still evaluating or preparing to adopt.