ManpowerGroup Inc. — Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides contingent staffing, permanent recruitment, workforce solutions, career management and talent management services through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. This unaudited filing covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue from services | $5,321.7 million | $5,040.7 million | $10,225.7 million | $9,809.6 million |
| Gross profit | $897.3 million | $836.4 million | $1,713.8 million | $1,626.5 million |
| Gross profit margin | 16.9% | 16.6% | 16.8% | 16.6% |
| Operating profit | $187.4 million | $128.1 million | $314.3 million | $182.5 million |
| Operating profit margin | 3.5% | 2.5% | 3.1% | 1.9% |
| Net earnings | $109.8 million | $68.2 million | $179.9 million | $92.1 million |
| Diluted EPS | $1.35 | $0.87 | $2.21 | $1.17 |
- Second-quarter revenue increased 5.6% reported, 3.7% in constant currency and 3.1% on an organic constant-currency basis. Six-month revenue increased 4.2% reported, 3.3% in constant currency and 2.8% organically.
- Second-quarter operating profit increased 46.3% reported and 43.2% in constant currency. Excluding $20.0 million of 2013 restructuring charges, operating profit increased 23.9% in constant currency.
- Six-month operating profit increased 72.3% reported and 70.5% in constant currency, assisted by the absence of $54.8 million of 2013 restructuring costs and lower operating expenses.
- The effective tax rate declined to 38.8% from 42.1% in the second quarter and to 39.5% from 42.7% for the six-month period, primarily reflecting a greater mix of non-U.S. earnings.
- Cash used in operating activities was $16.0 million in the first half of 2014, compared with $71.6 million used in the first half of 2013. Working-capital investment remained significant, including a $223.6 million increase in accounts receivable-related cash usage.
- Capital expenditures were $20.6 million and acquisition spending was $23.7 million in the first half of 2014. Dividends paid were $39.0 million and share repurchases totaled $16.7 million.
- Cash and cash equivalents were $638.5 million at June 30, 2014, versus $737.6 million at December 31, 2013. Accounts receivable increased to $4,501.0 million from $4,277.9 million.
- Total debt consisted of $47.5 million of short-term borrowings and current maturities plus $481.4 million of long-term debt. The principal €350.0 million notes mature in June 2018.
- The $600.0 million revolving credit facility had $599.1 million available after letters of credit. The company reported a debt-to-EBITDA ratio of 0.39 to 1 and a fixed-charge coverage ratio of 3.84 to 1, within covenant requirements.
Material changes versus the prior comparable period
- Revenue growth reflected improving conditions in Southern and Northern Europe and the United States. Southern Europe revenue rose 9.3% in the quarter, Northern Europe rose 9.2%, and U.S. revenue rose 3.7%.
- APME revenue declined 4.7% in the quarter and 7.0% for the first half, primarily due to Japan recruitment constraints, weaker Australian demand and Chinese legislative restrictions on temporary employment.
- Right Management revenue declined 1.4% in the quarter and 2.8% for the first half as outplacement demand weakened, although talent management revenue grew.
- Gross margin improved through stronger staffing/interim pricing, price discipline and increased French CICE payroll tax credits. These benefits were partly offset by weaker higher-margin outplacement demand and mix effects.
- Selling and administrative expenses increased 0.2% in the quarter but declined 3.1% for the first half. Savings from restructuring, office closures and cost recalibration outweighed higher incentive compensation, acquisition-related expenses and a $9.0 million U.S. legal accrual.
- The company closed more than 150 offices since the second quarter of 2013, contributing to lower lease and office-related costs.
- The company repaid the €200.0 million notes in June 2013, contributing to lower interest expense in 2014. First-half 2014 financing cash usage was $28.2 million versus $247.3 million in 2013.
Guidance, outlook, risks and unusual items
- Management described global economic conditions as stabilizing and expects continued demand improvement in several markets. It expects an annual effective tax rate similar to the 39.5% first-half rate.
- Management believes available cash and existing credit facilities are sufficient for foreseeable needs and expects to remain in compliance with debt covenants for the next 12 months.
- The remaining restructuring reserve was $24.9 million at June 30, 2014, with the majority expected to be paid by year-end 2014.
- The company accrued $9.0 million for a California wage-statement lawsuit settlement; final court approval was expected later in 2014.
- The French Supreme Court ruled in March 2014 in the company’s favor regarding claims for repayment of historical payroll tax subsidies. Management does not expect significant losses from those claims.
- Key operating risks include labor-market weakness, pricing pressure, foreign-currency movements, regional economic and regulatory changes, difficulty recruiting qualified candidates, working-capital requirements and demand declines in counter-cyclical outplacement services.
- Cash held by foreign subsidiaries totaled $445.0 million and was not available for domestic operations unless repatriated. Approximately $433.1 million of non-U.S. earnings had not been treated as permanently invested.
- Aggregate commitments were $1,552.1 million. Guarantees and standby letters of credit totaled approximately $182.3 million, although management does not expect significant payments under these arrangements.
- The company adopted accounting guidance on cumulative translation adjustments and unrecognized tax benefits without material impact. Revenue-recognition guidance effective in 2017 was under evaluation.
Most important facts for investors to verify
- Whether revenue growth and operating leverage continue after adjusting for currency, acquisitions, billing-day differences and the absence of 2013 restructuring charges.
- Whether APME weakness, Chinese regulatory restrictions and declining Right Management outplacement demand persist.
- The collectability and timing of the large accounts receivable balance and French CICE-related receivable, given negative operating cash flow.
- The final court approval and ultimate cost of the $9.0 million California wage-statement settlement.
- Progress in reducing the $24.9 million restructuring reserve and whether additional restructuring charges arise.
- Liquidity available for the €350.0 million notes due in June 2018 and continued compliance with revolving-credit covenants.
- The sustainability of gross-margin benefits from pricing discipline and French tax credits, as well as the impact of business mix and currency changes.