ManpowerGroup Inc. — Form 10-Q Summary
Business Context and Reporting Period
ManpowerGroup provides staffing, workforce solutions, recruitment, career management and workforce consulting services globally. The filing covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. Operations are organized into Americas, Southern Europe, Northern Europe, APME and Right Management.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|
| Revenue from services | $5,022.1 million | $4,861.3 million | +3.3%; +4.5% constant currency |
| Gross profit | $860.7 million | $830.6 million | +3.6% |
| Gross profit margin | 17.1% | 17.1% | Flat |
| Operating profit | $196.0 million | $178.7 million | +9.7% |
| Operating margin | 3.9% | 3.7% | +20 basis points |
| Net earnings | $115.4 million | $105.7 million | +9.1% |
| Diluted EPS | $1.60 | $1.33 | +20.3% |
| Metric | Six Months 2016 | Six Months 2015 | Change |
|---|
| Revenue from services | $9,609.8 million | $9,403.5 million | +2.2%; +4.8% constant currency |
| Gross profit | $1,634.5 million | $1,592.6 million | +2.6% |
| Gross profit margin | 17.0% | 16.9% | +10 basis points |
| Operating profit | $327.7 million | $301.5 million | +8.7% |
| Operating margin | 3.4% | 3.2% | +20 basis points |
| Net earnings | $187.1 million | $171.4 million | +9.1% |
| Diluted EPS | $2.57 | $2.16 | +19.0% |
Cash Flow, Liquidity and Capital Structure
- Six-month cash provided by operating activities was $262.1 million, compared with $38.8 million in 2015. The improvement included proceeds from the sale of $143.1 million of French payroll tax credits and better working-capital performance.
- Capital expenditures were $30.8 million and acquisition spending was $41.2 million, compared with $20.1 million and $30.4 million, respectively, in 2015.
- Financing activities used $376.5 million, including $290.5 million for share repurchases, $60.8 million for dividends and $21.0 million of net debt repayments.
- Cash and cash equivalents were $546.3 million at June 30, 2016, down from $730.5 million at December 31, 2015. Foreign subsidiaries held $142.3 million that was not immediately available for domestic operations without repatriation.
- Debt included $24.2 million of short-term borrowings and current maturities and $829.8 million of long-term debt. Euro-denominated notes include €350.0 million due June 2018 and €400.0 million due September 2022.
- Under the $600.0 million revolving credit facility, $599.2 million remained available. The company reported a debt-to-EBITDA ratio of 0.87 to 1 and fixed-charge coverage ratio of 4.71 to 1, compared with covenant limits of 3.5 to 1 and not less than 1.5 to 1.
Material Changes Versus the Prior Comparable Period
- Reported revenue growth was reduced by foreign exchange, which had an unfavorable impact of 1.2% in the second quarter and 2.6% in the first half.
- Constant-currency revenue growth was strongest in APME, Northern Europe and selected Southern European markets. The United States declined 4.9% in the quarter and 4.0% for the first half, primarily from weaker staffing demand in industrial and IT markets.
- Italy declined 7.8% in constant currency in the quarter and 4.6% for the first half, partly because of the end of the Milan Expo comparison. Right Management revenue grew modestly as stronger outplacement activity offset substantial declines in talent management.
- Operating leverage and expense discipline improved profitability. Selling and administrative expense increased only 2.0% in the quarter and 1.2% for the first half, while reported operating profit rose more rapidly.
- Interest and other expenses increased to $10.3 million in the quarter and $23.0 million for the first half, primarily because of higher debt following the September 2015 issuance of €400.0 million notes, as well as foreign-exchange and miscellaneous expenses.
- Weighted-average diluted shares declined 8.9% in the quarter and 8.3% for the first half because of share repurchases, contributing to higher EPS growth than net earnings growth.
- The company repurchased 3.8 million shares for $290.5 million during the first half. In July 2016, the board authorized an additional 6.0 million shares for repurchase.
Outlook, Commentary, Risks and Unusual Items
- Management reported generally improving demand in the first half but described economic conditions in Europe and other major markets as uneven, with potentially volatile and slow recovery trends.
- Management identified the United Kingdom’s Brexit referendum and other geopolitical events as sources of additional uncertainty for the United Kingdom, Europe and the global economy.
- Management expects an annual effective tax rate of approximately 37% to 38%, compared with 38.6% for the first half of 2016. The rate is affected by the French business tax, expected repatriations, valuation allowances and other permanent items.
- Gross margin was pressured by staffing/interim business mix and higher direct costs, including complementary healthcare costs for French staffing associates following new legislation effective January 1, 2016.
- Management expects a majority of the remaining $9.8 million restructuring reserve to be paid by the end of 2016.
- Aggregate commitments for debt repayments, operating leases, severances, office closures and other commitments were $1,766.8 million. Guarantees and standby letters of credit totaled approximately $177.9 million; management does not expect significant payments under these arrangements.
- The company has tax audits in several jurisdictions and reported net unrecognized tax benefits of $39.3 million. Management does not expect a material earnings impact from current audits.
- Future accounting changes include revenue recognition guidance effective in 2018, lease guidance effective in 2019 and the current expected credit loss model effective in 2020. The filing states that the company was still assessing certain impacts.
Important Facts for Investors to Verify
- Whether weaker U.S. staffing demand and slower United Kingdom and Nordic activity persist, and whether growth in APME, France, Germany, the Netherlands and Spain offsets those declines.
- The sustainability of margin expansion after higher French labor-related costs, business-mix changes and acquisition-related expenses.
- The effect of Brexit, foreign-exchange movements and broader geopolitical or economic weakness on reported and constant-currency results.
- Cash conversion after the one-time benefit from the French payroll tax-credit sale, including accounts receivable growth and higher days sales outstanding.
- The effect of continued share repurchases on leverage, liquidity and future EPS, given $290.5 million of repurchases during the first half and the additional July authorization.
- Debt refinancing requirements for the €350.0 million notes due in June 2018 and compliance with credit-facility covenants.
- Potential outcomes of tax audits, guarantees, standby letters of credit and the remaining restructuring obligations.
