ManpowerGroup Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
ManpowerGroup provides contingent staffing, permanent recruitment, workforce solutions, career management, outplacement, and workforce consulting 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, 2016, compared with the corresponding 2015 periods.
Effective January 1, 2016, the company realigned its European organizational structure and restated prior-period segment results to conform to the new presentation.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenues from services | $5,088.2 million | $4,972.5 million | $14,698.0 million | $14,376.0 million |
| Gross profit | $858.3 million | $852.1 million | $2,492.8 million | $2,444.7 million |
| Gross profit margin | 16.9% | 17.1% | 17.0% | 17.0% |
| Operating profit | $211.1 million | $206.3 million | $538.8 million | $507.8 million |
| Operating profit margin | 4.1% | 4.1% | 3.7% | 3.5% |
| Net earnings | $129.2 million | $123.9 million | $316.3 million | $295.3 million |
| Diluted EPS | $1.87 | $1.61 | $4.42 | $3.75 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $402.5 million | $282.8 million |
- Reported Q3 revenue increased 2.3%; constant-currency revenue increased 3.8% and organic constant-currency revenue increased 1.4%.
- Reported nine-month revenue increased 2.2%; constant-currency revenue increased 4.5% and organic constant-currency revenue increased 1.6%.
- Q3 net earnings increased 4.3%, while diluted EPS increased 16.1%, supported substantially by share repurchases that reduced diluted weighted-average shares by 10.3%.
- Nine-month net earnings increased 7.1% and diluted EPS increased 17.9%, with diluted weighted-average shares down 9.0%.
- Q3 gross margin declined 20 basis points due primarily to lower staffing/interim margins, pricing pressure, business mix, and higher direct costs in certain markets. The nine-month gross margin was unchanged.
Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $503.1 million at September 30, 2016, compared with $730.5 million at December 31, 2015.
- Nine-month operating cash flow was $402.5 million, compared with $282.8 million in the prior-year period. Accounts receivable increased to $4,581.9 million, and days sales outstanding increased 3.6 days from year-end, primarily due to seasonality and collection timing.
- Investing cash outflows were $96.0 million, including $42.6 million of capital expenditures and $56.9 million for acquisitions, primarily in the Netherlands and Norway.
- Financing cash outflows were $537.6 million, including $462.6 million of common-stock repurchases and $60.8 million of dividends.
- Debt consisted of $36.0 million of short-term borrowings and current maturities and $839.7 million of long-term debt at September 30, 2016. The primary debt instruments were €400 million of notes due September 2022 and €350 million of notes due June 2018.
- The company had $599.2 million available under its $600.0 million revolving credit facility, with $0.8 million of letters of credit outstanding. Its net debt-to-EBITDA ratio was 0.94 to 1, versus a maximum permitted ratio of 3.5 to 1; its fixed-charge coverage ratio was 4.78 to 1, versus a minimum requirement of 1.5 to 1.
- Management stated that available cash and existing credit facilities are sufficient for foreseeable cash needs and expects compliance with financial covenants for the next 12 months. Cash of $255.3 million held by foreign subsidiaries was not available for domestic operations unless repatriated.
Material Changes Versus the Prior Comparable Period
- Operating profit increased 2.3% in Q3 and 6.1% for the first nine months; nine-month operating margin improved from 3.5% to 3.7%.
- Interest and other expenses increased to $11.4 million from $9.4 million in Q3 and to $34.4 million from $27.2 million for the first nine months, reflecting higher debt-related interest, foreign-exchange losses, noncontrolling-interest expenses, and lower equity-investment income.
- The effective tax rate declined to 35.3% from 37.1% in Q3 and to 37.3% from 38.6% for the first nine months. The decrease was favorably affected by the U.S. Work Opportunity Tax Credit. Management expected an annual effective tax rate of approximately 37%.
- Q3 revenue trends were mixed by market. U.S. revenue declined 6.0%, Italy declined 7.8%, and Right Management declined 5.0% as reported. APME increased 14.1%, Southern Europe increased 1.8%, and Northern Europe increased 2.6%.
- The company repurchased 6.4 million shares for $462.6 million during the first nine months, compared with 6.0 million shares for $523.2 million in the prior-year period. The July 2016 authorization added 6.0 million shares; 5.0 million shares remained available at September 30.
- Acquisition spending declined to $56.9 million from $240.7 million in the prior-year period, which included the $140.4 million acquisition of 7S Group GmbH.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management reported improving labor-market demand in many markets but noted uneven economic conditions, slow recovery, and potentially volatile revenue trends.
- The company cited uncertainty following the June 2016 Brexit referendum and other geopolitical events, with unknown potential effects on the United Kingdom, Europe, and the global economy.
- Staffing/interim margin pressure remained a key risk because of business mix, pricing pressure, and direct-cost increases, including complementary health-care costs for associates in France following new legislation.
- Management continued to emphasize expense control, productivity, simplification, and cost recalibration while adding recruiters and other personnel to support growth.
- Q3 selling and administrative expenses benefited from an $8.1 million non-recurring pension curtailment and favorable lease-termination gains in Northern Europe.
- Effective July 1, 2016, the company terminated a Northern European defined-benefit plan and transitioned employees to a defined-contribution plan, producing a $6.8 million curtailment and settlement gain.
- The remaining restructuring reserve was $7.9 million at September 30, 2016; management expected most of it to be paid by year-end.
- The company’s annual goodwill and indefinite-lived intangible asset impairment testing produced no impairment charge. The testing relied on estimated growth, margins, working capital, discount rates of 10.8% to 15.3%, and terminal-value assumptions.
- Unrecognized tax benefits, including interest and penalties, totaled $44.6 million gross, or $43.6 million net of offsetting tax benefits. The company was subject to tax audits in multiple jurisdictions but did not expect their resolution to materially affect earnings.
- Aggregate commitments for debt repayments, operating leases, severances, office closures, and other commitments were $1,791.8 million. Guarantees and standby letters of credit totaled approximately $189.1 million, although management did not expect significant payments under those arrangements.
Important Facts for Investors to Verify
- Whether U.S. staffing and Experis demand stabilizes, particularly in manufacturing and information technology, and whether growth in MSP, RPO, permanent recruitment, and other solutions offsets weakness.
- Whether staffing/interim pricing, business mix, and higher direct costs continue to pressure gross margins.
- The effect of Brexit-related uncertainty, foreign-exchange movements, and economic weakness in the United Kingdom, Italy, the Nordics, and energy-related markets.
- Whether increased accounts receivable and higher days sales outstanding normalize and convert reported earnings into operating cash flow.
- The company’s ability to refinance or repay the €350 million of notes due June 2018 and maintain compliance with revolving-credit covenants.
- The sustainability of earnings-per-share growth given the significant contribution from share repurchases.
- The assumptions underlying goodwill impairment testing and the potential impact of changes in revenue growth, operating margins, discount rates, and terminal values.