ManpowerGroup Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing, recruitment, workforce solutions, career management and consulting services globally. The filing covers the three months ended March 31, 2015. Operations are reported through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. Financial statements are unaudited.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenues from services | $4,542.2 million | $4,904.0 million | -7.4% reported; +6.6% constant currency |
| Gross profit | $762.0 million | $816.5 million | -6.7% |
| Gross profit margin | 16.8% | 16.7% | +10 basis points |
| Selling and administrative expenses | $639.2 million | $689.6 million | -7.3% reported; +4.9% constant currency |
| Operating profit | $122.8 million | $126.9 million | -3.2% reported; +16.5% constant currency |
| Operating margin | 2.7% | 2.6% | +10 basis points |
| Net earnings | $65.7 million | $70.1 million | -6.3% reported; +12.8% constant currency |
| Diluted EPS | $0.83 | $0.86 | -3.5% reported; +16.3% constant currency |
| Effective tax rate | 41.5% | 40.4% | +110 basis points |
The stronger U.S. dollar reduced reported revenue by approximately 14.0%, operating profit by 19.7% and diluted EPS by approximately $0.17 per share. Management stated that currency primarily affected reported earnings rather than underlying cash flow because subsidiaries generally earn revenue and incur expenses in the same currency.
Cash flow, liquidity and debt
- Cash provided by operating activities was $22.3 million, compared with cash used of $15.5 million in Q1 2014.
- Capital expenditures were $9.9 million, and acquisitions, net of cash acquired, used $10.1 million.
- Cash used in financing activities was $32.7 million, including $39.6 million for share repurchases.
- Cash and cash equivalents declined to $627.6 million from $699.2 million at December 31, 2014, including a $41.5 million unfavorable foreign-exchange effect.
- Accounts receivable declined to $3,903.0 million from $4,134.5 million, primarily because of currency translation; at constant exchange rates, the March 31 balance would have been approximately $283.0 million higher.
- Short-term borrowings and current maturities were $45.6 million; long-term debt was $376.1 million. The principal long-term obligation includes €350.0 million of notes due June 2018.
- The $600.0 million revolving credit facility had $599.1 million available, subject to covenants. The Debt-to-EBITDA ratio was 0.24 to 1 versus a maximum of 3.5 to 1, and fixed-charge coverage was 4.35 to 1 versus a minimum of 1.5 to 1.
- Foreign subsidiaries held $408.0 million of cash that was not available for domestic operations unless repatriated. Approximately $574.1 million of non-U.S. earnings were identified as not permanently invested.
Material changes versus the prior comparable period
- Underlying performance improved despite weaker reported results: consolidated revenue increased 6.0% on an organic constant-currency basis and operating profit increased 14.7% on the same basis.
- Southern Europe and Northern Europe reported constant-currency revenue growth of 8.4% and 7.6%, respectively, supported by improved demand in France, Italy, Spain, the United Kingdom and Germany.
- Americas revenue increased 5.7% in constant currency, including U.S. growth in permanent recruitment, MSP and RPO services.
- Right Management revenue declined 4.8% in constant currency, including a 5.5% decline in outplacement and a 2.6% decline in talent management.
- Gross margin improved because of growth in permanent recruitment and ManpowerGroup Solutions, favorable currency mix and improved pricing discipline, partly offset by staffing pricing pressure and lower-margin business mix.
- Operating unit profit margins improved in the Americas and Southern Europe, were flat in APME, and declined in Northern Europe and Right Management.
- The diluted share count declined 2.0% to 79.6 million, primarily because of share repurchases. The company repurchased approximately 0.5 million shares for $39.6 million during the quarter.
- Accumulated other comprehensive loss increased to $274.8 million from $155.2 million, primarily due to a $156.1 million foreign-currency translation loss.
Guidance, outlook, risks and unusual items
- Management expected an annual effective tax rate of approximately 38%, compared with 41.5% in the first quarter, subject to French business taxes, expected repatriations, valuation allowances and permanent items.
- Management expected available cash and credit facilities to be sufficient for foreseeable cash needs and anticipated compliance with debt covenants over the next 12 months.
- Management described client demand as dependent on labor-market conditions and workforce-flexibility trends. European recovery remained uneven and potentially volatile.
- Key operating risks included foreign-exchange volatility, staffing pricing pressure, changing business mix, weaker demand for counter-cyclical outplacement services, and softness in oil- and-gas-related markets, including Norway, Australia and parts of the United States.
- The company had $9.3 million remaining in restructuring reserves at March 31, 2015 and expected most of the reserve to be paid by year-end.
- A $9.0 million U.S. legal cost related to a California wage-statement lawsuit was recorded in Q2 2014. The settlement was preliminarily approved in January 2015, with a final ruling expected in June 2015.
- Aggregate commitments were $1,323.8 million. Guarantees and standby letters of credit totaled approximately $182.6 million; management did not expect significant payments under these arrangements.
- The company declared a semiannual cash dividend of $0.80 per share on April 28, 2015, payable June 15, 2015.
- New accounting guidance adopted for discontinued operations had no impact. The company was evaluating the future revenue-recognition standard and did not provide a quantified expected impact.
Important facts for investors to verify
- Whether constant-currency revenue and operating-profit growth persists as foreign-exchange comparisons normalize.
- Progress in staffing pricing, gross-margin recovery and operational leverage, particularly in Europe and Other Americas.
- Demand trends in Right Management’s outplacement and talent-management businesses.
- Cash conversion, working-capital requirements and the effect of foreign-currency movements on reported cash balances and equity.
- Future refinancing or repayment plans for the €350.0 million notes due June 2018.
- Compliance with revolving-credit covenants and availability of domestic liquidity given cash held by foreign subsidiaries.
- The final resolution and financial consequences, if any, of the California wage-statement settlement.
- Actual full-year tax rate, restructuring cash payments, share repurchases and dividend funding.