ManpowerGroup Inc. — 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing, permanent recruitment, workforce solutions, career management, and workforce consulting services globally. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Operations span 80 countries and territories and are reported through Americas, Southern Europe, Northern Europe, APME, and Right Management segments.
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 | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenues from services | $4,587.7 million | $4,542.2 million | 1.0% reported; 5.2% constant currency |
| Gross profit | $773.8 million | $762.0 million | 1.5% |
| Gross profit margin | 16.9% | 16.8% | Up 10 basis points |
| Selling and administrative expenses | $642.1 million | $639.2 million | 0.5% |
| Operating profit | $131.7 million | $122.8 million | 7.2% reported; 11.2% constant currency |
| Operating profit margin | 2.9% | 2.7% | Up 20 basis points |
| Earnings before income taxes | $119.0 million | $112.2 million | 6.1% |
| Net earnings | $71.7 million | $65.7 million | 9.2% |
| Diluted earnings per share | $0.98 | $0.83 | 18.1% |
| Effective income tax rate | 39.8% | 41.5% | Down 170 basis points |
| Cash provided by operating activities | $164.6 million | $22.3 million | Increase of $142.3 million |
Net margin was approximately 1.6% in Q1 2016 versus 1.4% in Q1 2015. Diluted weighted-average shares declined to 73.5 million from 79.6 million, principally due to share repurchases, which amplified the increase in diluted EPS.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $747.6 million at March 31, 2016, compared with $730.5 million at December 31, 2015.
- Accounts receivable were $4,308.3 million, up from $4,243.0 million, primarily reflecting currency effects.
- Total debt was approximately $879.6 million, consisting of $29.6 million of short-term borrowings and current maturities and $850.0 million of long-term debt.
- The company had $599.2 million available under its $600.0 million revolving credit facility, with $0.8 million of letters of credit outstanding.
- Debt-to-EBITDA was 0.67 to 1, versus a covenant maximum of 3.5 to 1; fixed-charge coverage was 4.60 to 1, versus a minimum covenant requirement of 1.5 to 1.
- Cash held by foreign subsidiaries that was not available for domestic operations unless repatriated totaled $155.2 million.
- Separate subsidiary bank lines totaled $293.3 million, with $262.8 million of additional borrowing capacity.
Cash flow and capital allocation
- Operating cash flow benefited from the sale of French payroll tax credits. In March 2016, the company sold a portion of its 2015 French payroll tax credits for net proceeds of $143.1 million.
- Investing cash outflows were $30.0 million, including $16.6 million of capital expenditures and $13.8 million for acquisitions.
- Financing cash outflows were $134.3 million, including $117.7 million for repurchases of approximately 1.5 million shares and $5.9 million of long-term debt repayments.
- The board declared a semiannual dividend of $0.86 per share on May 3, 2016, payable June 15, 2016.
- Remaining share-repurchase authorization was approximately 3.8 million shares at March 31, 2016.
Material changes versus the prior comparable period
- Reported revenue growth was limited to 1.0% because the stronger U.S. dollar reduced revenue by approximately 4.2%; constant-currency revenue growth was 5.2%.
- Operating profit increased faster than revenue, reflecting improved expense leverage, productivity initiatives, acquisitions, and favorable business mix.
- Gross margin improved modestly, supported by acquisitions and permanent recruitment growth, but staffing/interim margins declined organically because of business mix and higher French healthcare costs following new legislation effective January 1, 2016.
- Interest and other expenses increased to $12.7 million from $10.6 million, primarily because of higher debt following the issuance of €400 million of notes in September 2015.
- The effective tax rate benefited from the U.S. Work Opportunity Tax Credit and declined to 39.8% from 41.5%.
- Segment trends were mixed: Americas revenue declined 3.6% reported but increased 4.2% in constant currency; Southern Europe increased 2.7%; Northern Europe declined 0.3% reported but increased 4.1% in constant currency; APME increased 8.1% reported; and Right Management declined 0.6% reported but increased 2.3% in constant currency.
- Right Management operating unit margin improved to 14.9% from 8.8%, while APME margin declined to 3.3% from 3.5%.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that demand was supported by improving labor-market conditions and trends toward workforce flexibility, but economic conditions in Europe and certain major markets remained uneven and recovery could be slow or volatile.
- Management expected an annual effective tax rate of approximately 37% to 38% for 2016.
- Management believed available cash and existing credit facilities were sufficient to meet cash needs for the foreseeable future and expected to remain in compliance with debt covenants over the next 12 months.
- The €350 million notes mature in June 2018 and the €400 million notes mature in September 2022. Management expects to use available cash, revolving borrowings, or replacement debt when the notes mature.
- The remaining restructuring reserve was $12.9 million at March 31, 2016; the company expected to pay most of it by year-end 2016.
- Aggregate commitments for debt repayments, operating leases, severance and office-closure costs, and other commitments totaled $1,823.1 million. Guarantees and standby letters of credit totaled approximately $173.8 million, although management did not expect significant payments under those arrangements.
- Gross unrecognized tax benefits were $39.4 million, with a net potential favorable effect on the effective tax rate of $38.4 million. The company was subject to tax audits in several jurisdictions but did not expect their resolution to materially affect earnings.
- Foreign exchange remains a significant reporting risk. Currency movements primarily affect reported earnings rather than local operating cash flow, unless earnings are repatriated.
- The company adopted new business-combination measurement-period guidance without financial statement impact and was assessing the future effects of new revenue, financial-instrument, lease, and share-based-payment standards.
Most important facts for investors to verify
- Whether constant-currency growth continues to translate into reported growth amid foreign-exchange volatility.
- Whether staffing/interim gross-margin pressure, including French healthcare costs and pricing or mix changes, persists.
- The sustainability of the unusually strong operating cash flow, which was materially aided by the $143.1 million payroll-tax-credit sale.
- Progress in repaying or refinancing the €350 million notes due in 2018 and the company’s future interest expense.
- Compliance with revolving-credit covenants and availability of liquidity, particularly with $155.2 million of cash restricted from domestic use unless repatriated.
- The pace and return on acquisitions, recruiting-center capital expenditures, and share repurchases.
- Performance in weaker markets, including U.S. industrial staffing, Italy, the United Kingdom, the Nordics, and Right Management’s talent-management business.