ManpowerGroup Inc. 2017 Form 10-K Summary
Business Context and Reporting Period
ManpowerGroup provides staffing, permanent recruitment, professional resourcing, outsourcing, training, career management and workforce consulting services through nearly 2,700 offices in 80 countries and territories. Reported segments are Americas, Southern Europe, Northern Europe, APME and Right Management. The filing covers the fiscal year ended December 31, 2017, with comparable results for 2016 and 2015. The fourth quarter of 2017 generated revenue of $5,637.5 million and net earnings of $216.3 million.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenues from services | $21,034.3 million | $19,654.1 million | 7.0% reported; 6.0% constant currency |
| Gross profit | $3,484.6 million | $3,333.8 million | 4.5% |
| Gross profit margin | 16.6% | 17.0% | Down 40 basis points |
| Operating profit | $788.2 million | $750.8 million | 5.0% reported; 3.1% constant currency |
| Operating profit margin | 3.7% | 3.8% | Down 10 basis points |
| Net earnings | $545.4 million | $443.7 million | 22.9% |
| Diluted earnings per share | $8.04 | $6.27 | 28.2% |
| Cash provided by operating activities | $400.9 million | $600.0 million | Down $199.1 million |
Accounts receivable increased to $5,370.5 million from $4,413.1 million, reflecting revenue growth, foreign exchange and approximately two additional days of sales outstanding. Cash and cash equivalents were $689.0 million at year-end. Capital expenditures were $54.7 million, and acquisition spending was $32.7 million, excluding $13.0 million of contingent consideration payments.
Total debt was $947.5 million, including $898.4 million of fixed-rate borrowings and $49.1 million of variable-rate borrowings. The company had $599.2 million available under its $600.0 million revolving credit facility, subject to covenants. The reported net debt-to-EBITDA ratio was 0.73 to 1 versus a maximum permitted ratio of 3.5 to 1; fixed-charge coverage was 5.22 to 1 versus a minimum required ratio of 1.5 to 1. Long-term debt had investment-grade ratings of Baa1 from Moody’s and BBB from Standard & Poor’s.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strongest in Southern Europe, where constant-currency revenue increased 12.7%, including 10.6% in France and 23.3% in Italy. APME revenue increased 6.4% in constant currency, while Northern Europe increased 3.4%.
- Americas revenue declined 1.7% in constant currency, driven principally by a 6.3% decline in the United States from weaker manufacturing staffing demand, lower Experis IT demand and the loss or completion of certain client projects.
- Right Management revenue declined 15.6% in constant currency, including a 14.9% decline in outplacement and an 18.0% decline in talent management, reflecting softer demand.
- Gross margin declined because of staffing business mix changes, pricing pressure and lower-margin large-account growth, partly offset by the higher French CICE payroll tax credit.
- Operating profit included $34.5 million of restructuring costs. Excluding restructuring costs, constant-currency operating profit increased 8.0% and operating margin improved 10 basis points.
- The effective tax rate fell to 26.0% from 36.7%, primarily because of a $73.7 million net discrete tax benefit related to the U.S. Tax Cuts and Jobs Act and French tax reform. Excluding these enactments, management estimated the 2017 rate at approximately 36.0%.
- Share repurchases declined to $203.9 million for 1.9 million shares from $482.2 million for 6.6 million shares in 2016. The annual dividend increased to $1.86 per share from $1.72.
- Operating cash flow declined as accounts receivable growth used $544.9 million of cash, compared with $317.2 million in 2016.
Guidance, Outlook, Risks and Unusual Items
Management described 2017 demand as supported by improving economic conditions in Europe and most major markets, but emphasized that staffing demand is cyclical, short-term assignments make forecasting difficult and profitability can decline rapidly when revenue weakens.
The French CICE credit rate decreased from 7% in 2017 to 6% in 2018. Management estimated an additional unfavorable 2018 gross-profit impact of approximately $34.2 million and plans to mitigate it through pricing and productivity actions. The company expected a 2018 effective tax rate of 27% to 28% and a 2019 rate of 33% to 34%, subject to tax developments.
The €350.0 million notes, reported at $420.0 million at year-end, mature in June 2018. Management expected to repay or refinance them using available cash, the revolving facility or new borrowings. The company had $2,074.5 million of aggregate commitments for debt, leases, severance and office closures, transition tax and other commitments.
Key risks include economic contraction, European concentration, foreign-currency volatility, pricing pressure, labor shortages, large-client losses, cybersecurity and data privacy incidents, regulatory and tax changes, employment-related litigation, competition-law investigations, acquisition integration, debt covenant compliance and access to credit. A German arbitration related to the 7S acquisition involves a seller claim for an additional $25.0 million plus interest; no amount was accrued because the outcome could not be predicted.
The company recorded a provisional $170.2 million transition tax liability under the Tax Act, payable over eight years beginning in April 2018. It also reported $66.5 million of gross unrecognized tax benefits, including interest and penalties. No goodwill or indefinite-lived intangible-asset impairment was recorded in 2017. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether staffing demand and pricing pressure improve sufficiently to restore gross and operating margins, particularly in France, Germany, Italy and the Nordics.
- The cash-flow effect of continued revenue growth, accounts receivable expansion and days-sales-outstanding trends.
- Refinancing or repayment of the €350.0 million notes due June 2018 and the resulting interest expense and liquidity impact.
- The actual 2018 effect of the French CICE reduction and the eventual replacement subsidy beginning in 2019.
- Final tax accounting for the Tax Act, including the provisional transition tax and the company’s eventual GILTI accounting policy.
- Resolution and potential exposure from the 7S contingent-consideration arbitration and other employment, tax and competition-law matters.
- The sustainability of earnings growth after removing the $73.7 million tax benefit, restructuring charges, currency effects and share-repurchase benefits.