ManpowerGroup Inc. 2017 Q1 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 quarterly report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Results were affected by a stronger U.S. dollar and one additional billing day.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue from services | $4,757.2 million | $4,587.7 million | 3.7% reported; 6.7% constant currency |
| Gross profit | $787.8 million | $773.8 million | 1.8% |
| Gross profit margin | 16.6% | 16.9% | Down 30 basis points |
| Operating profit | $127.0 million | $131.7 million | Down 3.6% reported; down 1.1% constant currency |
| Operating margin | 2.7% | 2.9% | Down 20 basis points |
| Net earnings | $74.4 million | $71.7 million | 3.8% |
| Diluted EPS | $1.09 | $0.98 | 11.2% |
| Cash provided by operating activities | $191.0 million | $164.6 million | Up $26.4 million |
The reported revenue increase reflected growth in most European markets and APME, acquisitions and an additional billing day, partly offset by lower U.S. and Right Management revenue. Foreign exchange reduced reported revenue growth by 3.0%, operating profit by 2.5% and diluted EPS by approximately $0.03.
Operating profit excluding $24.0 million of restructuring costs increased 18.5% in constant currency, with the related operating margin improving 30 basis points. The effective tax rate declined to 33.6% from 39.8%, aided by the adoption of share-based payment accounting and a favorable tax-audit settlement. Management expects an annual effective tax rate of approximately 36% to 37%.
Cash and cash equivalents were $724.4 million at March 31, 2017, compared with $598.5 million at December 31, 2016. Net accounts receivable were $4,430.6 million. Total debt was approximately $833.6 million, consisting of $37.6 million of current borrowings and maturities and $796.0 million of long-term debt. The company had $599.2 million available under its $600.0 million revolving credit facility and reported a net debt-to-EBITDA ratio of 0.60 to 1 and fixed-charge coverage ratio of 5.06 to 1.
Investing cash outflows were $21.8 million, including $10.8 million of capital expenditures and $11.7 million for acquisitions. Financing cash outflows were $55.6 million, including $57.0 million of share repurchases and $12.9 million of contingent acquisition consideration payments. The company repurchased approximately 0.6 million shares during the quarter and had authorization remaining for approximately 4.2 million shares.
Material changes versus the prior comparable period
- Constant-currency revenue growth accelerated to 6.7%, compared with 3.2% in the fourth quarter of 2016, although billing-day effects contributed materially.
- Southern Europe revenue increased 10.4% in constant currency, while APME increased 7.8%.
- U.S. revenue declined 5.9%, primarily because of weaker manufacturing staffing demand and lower Experis IT interim demand.
- Right Management revenue declined 10.5% in constant currency, including lower outplacement and talent management demand.
- Northern Europe operating unit margin declined to 0.9% from 2.7%, principally because of $22.6 million of restructuring costs.
- Gross margin declined because of staffing mix changes in France, Italy and the United Kingdom, weaker higher-margin Right Management services and lower Proservia margins.
- Diluted weighted-average shares declined 6.9% to 68.4 million, primarily because of share repurchases.
Outlook, commentary, risks and unusual items
- Management described economic conditions in Europe and most major markets as improving but still relatively slow, with continued demand growth in staffing, permanent recruitment and ManpowerGroup Solutions.
- Approximately $11.0 million of additional restructuring costs are expected in the second quarter of 2017, related to U.S. and Right Management back-office and delivery-model optimization. The remaining restructuring reserve was $21.9 million at March 31, 2017, with most expected to be paid by year-end.
- The sellers of 7S Group GmbH disputed contingent consideration and claimed an additional $22.7 million plus interest. ManpowerGroup believes no further amount is due, intends to contest the claim and recorded no liability because the outcome and timing were not predictable.
- The company expects to fund the €350.0 million notes due June 2018 and €400.0 million notes due September 2022 with cash, revolver borrowings or refinancing. Management does not currently anticipate difficulty accessing credit markets.
- Cash of $395.7 million held by foreign subsidiaries was not available for domestic operations unless repatriated. Aggregate commitments were $1,760.6 million, and guarantees and standby letters of credit totaled approximately $183.1 million.
- Management expects to comply with debt covenants for the next 12 months. Key ongoing risks include labor-market conditions, client demand, foreign exchange, restructuring execution, acquisitions, tax audits, credit access and regulatory changes.
- The company expects to adopt new revenue-recognition guidance on January 1, 2018, presently using the modified retrospective method, and preliminarily expects no material financial-statement impact. The filing does not provide completed impact assessments for other pending accounting standards.
Important facts for investors to verify
- Whether revenue growth remains positive after normalizing for billing days, acquisitions and currency movements.
- Whether U.S. staffing demand and Right Management demand recover, and whether Northern Europe restructuring improves margins.
- The amount and timing of the expected second-quarter restructuring costs and remaining reserve payments.
- The ultimate resolution and potential cash exposure from the 7S contingent-consideration dispute.
- Refinancing or repayment plans for the €350.0 million notes due in June 2018.
- The effect of future foreign exchange movements on reported earnings, debt and accumulated other comprehensive loss.
- The company’s effective tax rate after the non-recurring audit settlement and share-based payment accounting benefit.
- Management’s preliminary conclusions regarding adoption of revenue, lease, financial-instrument and pension-cost accounting standards.