Business Context and Reporting Period
ManpowerGroup Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company provides staffing, workforce solutions, recruitment, talent management, outplacement, and related services through the Americas, Southern Europe, Northern Europe, APME, and Right Management segments. Results are substantially exposed to labor-market conditions, business mix, foreign-currency movements, and working-capital requirements.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Revenue from services | $5,174.8 million | $5,022.1 million | $9,932.0 million | $9,609.8 million |
| Gross profit | $861.7 million | $860.7 million | $1,649.5 million | $1,634.5 million |
| Gross margin | 16.7% | 17.1% | 16.6% | 17.0% |
| Operating profit | $194.6 million | $196.0 million | $321.6 million | $327.7 million |
| Operating margin | 3.8% | 3.9% | 3.2% | 3.4% |
| Net earnings | $117.0 million | $115.4 million | $191.4 million | $187.1 million |
| Diluted EPS | $1.72 | $1.60 | $2.80 | $2.57 |
Second-quarter reported revenue increased 3.0%, while constant-currency revenue increased 5.6%. Six-month reported revenue increased 3.4%, or 6.1% in constant currency. Management reported organic constant-currency growth of 5.0% for the quarter and 5.6% for the first half.
Operating cash flow for the first half was $148.0 million, down from $262.1 million in the prior-year period. The decline primarily reflected a $135.0 million use of cash from changes in operating assets and liabilities, including higher accounts receivable. Capital expenditures were $25.5 million, and cash used for acquisitions was $21.2 million.
Cash and cash equivalents were $573.1 million at June 30, 2017, compared with $598.5 million at December 31, 2016. Accounts receivable increased to $4,927.4 million from $4,413.1 million, with days sales outstanding up 2.8 days from year-end. Cash held by foreign subsidiaries that was not available for domestic operations without repatriation totaled $317.3 million.
Short-term borrowings and current maturities were $435.8 million, including euro-denominated notes due June 2018. Long-term debt was $454.8 million. The company had $599.2 million available under its $600.0 million revolving credit facility, subject to covenants. Net debt-to-EBITDA was 0.84 to 1 and fixed-charge coverage was 5.09 to 1 at June 30, 2017. Management expects covenant compliance for the following 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strongest in Southern Europe, including reported growth of 8.3% in France and 22.2% in Italy during the quarter; APME revenue increased 4.7%.
- United States revenue declined 7.4% in the quarter and 6.7% for the first half, primarily because of weaker manufacturing demand, lower Experis IT interim demand, and lost or completed Solutions projects.
- Right Management revenue declined 21.6% in the quarter and 17.3% for the first half, reflecting lower outplacement and talent-management demand.
- Northern Europe revenue declined 3.1% as reported in the quarter, principally because United Kingdom revenue declined 19.9%; constant-currency Northern Europe revenue increased 2.3%.
- Gross margin declined 40 basis points in both the quarter and first half, primarily because of staffing-business mix changes, lower-margin growth in certain European markets, weaker Right Management demand, and lower Proservia margins.
- Operating profit declined 0.7% in the quarter and 1.9% for the first half on a reported basis. Excluding restructuring costs, second-quarter operating profit increased 6.9% in constant currency and operating margin improved 10 basis points.
- Restructuring costs totaled $10.5 million in the second quarter and $34.5 million in the first half, primarily related to severances, office closures, acquisitions, and back-office or delivery-model optimization. These costs reduced second-quarter diluted EPS by approximately $0.10 and first-half diluted EPS by approximately $0.41 after tax.
- The effective tax rate improved to 36.5% from 37.8% in the quarter and to 35.4% from 38.6% for the first half. Benefits included valuation-allowance releases, a favorable tax-audit settlement, and adoption of new share-based-payment accounting.
- Diluted weighted-average shares declined 5.8% in the quarter and 6.4% for the first half because of share repurchases. The company repurchased 1.1 million shares for $115.8 million during the first half.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects an annual effective tax rate of approximately 36% to 37% for 2017. It expects most of the remaining $29.5 million restructuring reserve to be paid by year-end. The company expects higher capital expenditures later in 2017 and believes existing cash, credit facilities, and operating cash flows are sufficient for foreseeable needs.
The euro-denominated notes of €350.0 million are due in June 2018 and the €400.0 million notes are due in September 2022. Management expects to repay or refinance the 2018 maturity using available cash, the revolving facility, or new borrowings and does not currently anticipate difficulty accessing credit markets.
Sellers of 7S Group GmbH, acquired in 2015, are disputing contingent consideration and claim an additional $23.8 million plus interest. ManpowerGroup believes no further amount is due, intends to contest the claim, and has recorded no liability because the outcome and timing cannot be predicted.
Key operating risks include labor-market weakness, customer concentration or project losses, lower demand for Right Management services, competitive pricing and adverse business mix, foreign-currency volatility, higher working-capital needs, acquisition integration, restructuring execution, tax audits, and refinancing requirements. The company stated that its disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
The company plans to adopt the revenue-recognition standard beginning January 1, 2018, presently expects the modified-retrospective method, and preliminarily believes the effect on the financial statements will not be material. Lease accounting is effective in 2019; expected credit-loss guidance is effective in 2020. The company adopted simplified goodwill-impairment guidance on April 1, 2017, with no second-quarter or year-to-date impact.
Important Facts for Investors to Verify
- Whether United States and United Kingdom revenue weakness persists and whether Southern Europe and APME growth offsets those declines.
- Whether staffing-margin pressure and the decline in Right Management stabilize or continue to reduce consolidated gross margin.
- The timing and cash cost of the remaining $29.5 million restructuring reserve and the sustainability of reported earnings excluding restructuring benefits and costs.
- Conversion of earnings to cash, particularly accounts-receivable growth, days sales outstanding, and the seasonal working-capital profile.
- Refinancing or repayment plans for the €350.0 million notes due June 2018 and continued compliance with credit-facility covenants.
- The resolution and potential financial exposure from the 7S contingent-consideration dispute.
- The durability of the lower tax rate, including the nonrecurring tax-audit settlement, valuation-allowance releases, and share-based-payment accounting benefit.
- The effect of foreign-currency movements and the company’s constant-currency and organic constant-currency non-GAAP measures.