ManpowerGroup Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
ManpowerGroup reported unaudited results for the three months ended March 31, 2018. The company provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, outplacement, talent management, training and related workforce solutions across the Americas, Southern Europe, Northern Europe, APME and Right Management.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue from services | $5,522.4 million | $4,757.2 million | 16.1% reported; 5.4% constant currency |
| Gross profit | $885.4 million | $787.8 million | 12.4% |
| Gross margin | 16.0% | 16.6% | Down 60 basis points |
| Operating profit | $153.8 million | $127.9 million | 20.2% reported; 8.4% constant currency |
| Operating margin | 2.8% | 2.7% | Up 10 basis points |
| Net earnings | $97.0 million | $74.4 million | 30.4% |
| Diluted EPS | $1.45 | $1.09 | 33.0% |
| Cash flow from operations | $(58.4) million | $191.0 million | Declined $249.4 million |
Net earnings benefited from a lower effective tax rate of 29.6%, compared with 33.6% in the prior-year quarter, primarily reflecting the U.S. Tax Cuts and Jobs Act. Foreign exchange translation favorably affected reported revenue, operating profit and diluted EPS by approximately 10.7%, 11.8% and $0.14 per share, respectively.
At March 31, 2018, cash and cash equivalents were $552.2 million, compared with $689.0 million at December 31, 2017. Total debt was approximately $970.0 million, consisting of $478.9 million of short-term borrowings and current maturities and $491.1 million of long-term debt. The company had $599.5 million available under its $600.0 million revolving credit facility and $252.0 million available under subsidiary credit lines. Net Debt-to-EBITDA was 0.88 to 1, versus a covenant maximum of 3.5 to 1.
Investing cash outflows were $15.0 million, including $12.7 million of capital expenditures and $8.2 million of initial acquisition payments. Financing cash outflows were $77.1 million, including $50.1 million of share repurchases. The company repurchased 0.4 million shares during the quarter, with 2.4 million shares remaining under the authorization.
Material changes versus the prior comparable period
- Constant-currency revenue growth was 5.4%, or 4.9% on an organic constant-currency basis, reflecting improved demand in most European markets and APME.
- Southern Europe revenue increased 11.5% in constant currency, while APME increased 8.2%. Northern Europe increased 1.2% and the Americas declined 0.6%.
- U.S. revenue declined 6.8%, primarily from lower Experis IT interim volumes, lower Manpower staffing demand and the non-recurrence of certain low-margin MSP business.
- Right Management revenue declined 15.1% in constant currency, including an 18.5% decline in outplacement services.
- Permanent recruitment revenue increased 11.8% in constant currency, helping offset weaker staffing/interim and Right Management margins.
- Gross margin declined because of the lower French CICE payroll tax credit, pricing pressure in Italy, business-mix changes and higher sickness rates in parts of Northern Europe.
- Selling and administrative expense increased 10.9% as reported but only 1.8% in constant currency, reflecting technology and optimization investments and acquisition-related costs, partly offset by expense leverage.
- Operating cash flow shifted to an outflow, primarily because of working-capital timing, the absence of the prior-year $143.5 million sale of French payroll tax credits and $24.1 million of contingent-consideration payments classified as operating cash flow.
Guidance, outlook, risks and unusual items
- Management expects a 2018 annual effective tax rate of approximately 27% to 28%, although accounting for certain Tax Act provisions remains incomplete and could change materially.
- Management expects approximately $5 million to $10 million of additional restructuring costs in Q2 2018. The restructuring reserve was $29.9 million at March 31, 2018, with most expected to be paid by year-end.
- The company expects to repay or refinance its €350 million notes maturing in June 2018 using available cash, the revolving facility or new borrowing. Management does not currently anticipate difficulty accessing credit markets.
- On April 4, 2018, the company sold substantially all of its 2017 French payroll tax credits for net proceeds of $234.5 million; this transaction occurred after quarter-end.
- The sellers of the 2015 7S acquisition dispute contingent consideration and claim an additional $25.6 million plus interest. ManpowerGroup believes no further amount is due, is contesting the claim in arbitration and has recorded no additional liability.
- Aggregate commitments were $2.18 billion at March 31, 2018. Guarantees and standby letters of credit totaled approximately $210.1 million; management does not expect significant payments under these arrangements.
- Principal operating risks include labor-market conditions, client demand, foreign-exchange movements, pricing and wage pressure, restructuring execution, tax-law interpretation, acquisition-related obligations and refinancing requirements.
Most important facts for investors to verify
- Whether constant-currency demand remains strong after the one-fewer-billing-day effect and whether U.S. and Right Management weakness persists.
- Progress on restoring gross margin amid the French tax-credit reduction, European pricing pressure and higher operating costs.
- Actual cash generation and working-capital trends, particularly accounts receivable and days sales outstanding.
- Completion and funding of the June 2018 €350 million debt maturity and continued compliance with credit covenants.
- Final accounting impact of the Tax Act, including GILTI, transition-tax estimates and the company’s effective tax rate.
- Additional restructuring spending, expected benefits from optimization programs and the outcome of the 7S contingent-consideration arbitration.
- Impact of acquisitions, foreign-exchange movements and the April 2018 French payroll-tax-credit sale on subsequent results.