ManpowerGroup Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
ManpowerGroup provides staffing and interim services, outcome-based solutions and consulting, permanent recruitment, outplacement and talent-management services through the Americas, Southern Europe, Northern Europe, APME and Right Management segments. The unaudited report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue from services | $5,248.9 million | $5,418.7 million | $15,666.9 million | $16,598.0 million |
| Gross profit | $840.3 million | $890.6 million | $2,515.5 million | $2,698.7 million |
| Gross profit margin | 16.0% | 16.4% | 16.1% | 16.3% |
| Operating profit | $217.0 million | $216.7 million | $453.3 million | $578.8 million |
| Operating profit margin | 4.1% | 4.0% | 2.9% | 3.5% |
| Net earnings | $146.1 million | $158.0 million | $326.9 million | $398.4 million |
| Diluted EPS | $2.42 | $2.43 | $5.40 | $6.03 |
- Q3 reported revenue declined 3.1%, but increased 0.3% in constant currency and 0.6% in organic constant currency. Nine-month revenue declined 5.6%, or 0.7% in constant currency and 0.8% in organic constant currency.
- Q3 operating profit increased 0.2% reported, 3.3% in constant currency and 5.6% in organic constant currency. The nine-month decline was 21.7% reported and 17.7% in constant currency.
- Cash provided by operating activities was $495.4 million for the nine months, versus $302.0 million in 2018. Capital expenditures were $36.2 million, compared with $39.8 million.
- Cash and cash equivalents were $807.1 million at September 30, 2019, compared with $591.9 million at December 31, 2018. Accounts receivable was $5,122.1 million.
- Total debt was approximately $1,030.2 million, comprising $47.0 million of short-term borrowings and current maturities and $983.2 million of long-term debt. Operating lease liabilities totaled $417.6 million after adoption of the new lease standard.
- The company had $599.5 million available under its $600.0 million revolving credit facility, subject to covenants. Net debt-to-EBITDA was 0.76-to-1 and fixed-charge coverage was 5.16-to-1, versus limits of 3.5-to-1 and 1.5-to-1, respectively.
Material changes versus the prior comparable period
- Revenue weakness was concentrated in Northern Europe, where Q3 revenue declined 10.1%, including declines in Germany, the Netherlands, Belgium and the Nordics. Nine-month Northern Europe revenue declined 13.9%.
- Southern Europe Q3 revenue increased 0.9%, primarily reflecting the acquisition of the remaining controlling interest in Manpower Switzerland, while France and Italy declined. Americas revenue increased 2.9%, and APME revenue declined 12.8% largely because of the Greater China deconsolidation and prior dispositions.
- Q3 gross margin fell 40 basis points due to mix, lower staffing margins in Northern Europe and weaker permanent recruitment. Nine-month gross margin fell 20 basis points.
- The company recorded $64.0 million of goodwill impairment during the first nine months, including $60.2 million for Germany and $3.8 million for New Zealand. The Germany impairment reflected weaker performance, regulatory changes affecting temporary staffing and a deferred-tax valuation allowance.
- ManpowerGroup completed the acquisition of the remaining interests in Manpower Switzerland and Experis AG for aggregate cash consideration of $219.5 million. It recognized an $80.4 million non-cash gain on the previously held Switzerland equity interest.
- ManpowerGroup Greater China Limited completed an IPO in July 2019. The company’s ownership fell from 51% to 36.87%, resulting in deconsolidation and a $30.4 million non-cash gain. The remaining investment is accounted for under the equity method.
- Share repurchases totaled $152.0 million for the first nine months, versus $299.2 million in 2018. The company authorized an additional 6.0 million shares for repurchase in August 2019.
- The effective tax rate increased to 28.6% in Q3 from 23.0% and to 34.5% for the nine months from 26.3%, reflecting French subsidy changes, the earnings mix and German valuation allowances.
Guidance, outlook, commentary and risks
- Management expects the uneven economic environment to continue into the fourth quarter, with sluggish European labor markets and improving or flat organic constant-currency trends in portions of the Americas and APME.
- Management cited slowing global economic growth, trade-related uncertainty, reduced manufacturing activity, labor-market volatility and talent shortages as key demand factors.
- The company expects most of the remaining $15.5 million restructuring reserve to be paid, utilized or transferred by the end of 2019. Nine-month restructuring costs were $42.5 million.
- Management believes cash, operating cash flow and existing credit facilities are sufficient for foreseeable needs and expects to remain compliant with debt covenants over the next 12 months.
- Principal risks include macroeconomic weakness, challenges in European markets, currency volatility, tax-law changes, impairment of goodwill, execution of technology investments and the ability to manage costs as revenue declines.
- The 2019 third-quarter goodwill test identified no additional impairment, but management noted that sustained deterioration in Germany could place its remaining $64.8 million of goodwill at risk.
- The filing reports no material change in market-risk disclosures and states that disclosure controls and procedures were effective as of September 30, 2019.
Important facts for investors to verify
- Whether European staffing demand, particularly in Germany and the Netherlands, stabilizes and whether the company can maintain cost reductions without impairing growth capacity.
- The recurring earnings impact of the $30.4 million Greater China gain and the $80.4 million Switzerland gain, which are non-recurring items.
- The sustainability of operating cash flow after considering working-capital movements, payroll-tax-credit proceeds, acquisitions and restructuring payments.
- Remaining goodwill exposure in Germany and other reporting units, including sensitivity to revenue growth, operating margins, discount rates and terminal values.
- Debt maturities, refinancing conditions for the euro-denominated notes due in 2022 and 2026, and continued compliance with revolving-credit covenants.
- The effect of currency movements, French subsidy changes, tax audits and the company’s $205.7 million of guarantees and standby letters of credit.