MANPOWERGROUP INC. Financial Measures - Constant Currency And Organic Constant Currency
Changes in our financial results include the impact of changes in foreign currency exchange rates, acquisitions and dispositions. We provide "constant currency" and "organic constant currency" calculations in this report to remove the impact of these items. We express year-over-year variances that are calculated in constant currency and organic constant currency as a percentage. When we use the term "constant currency," it means that we have translated financial data for a period intoUnited States dollars using the same foreign currency exchange rates that we used to translate financial data for the previous period. We believe that this calculation is a useful measure, indicating the actual growth of our operations. We use constant currency results in our analysis of subsidiary or segment performance. We also use constant currency when analyzing our performance against that of our competitors. Substantially all of our subsidiaries derive revenues and incur expenses within a single country and, consequently, do not generally incur currency risks in connection with the conduct of their normal business operations. Changes in foreign currency exchange rates primarily impact reported earnings and not our actual cash flow unless earnings are repatriated. When we use the term "organic constant currency," it means that we have further removed the impact of acquisitions in the current period and dispositions from the prior period from our constant currency calculation. We believe that this calculation is useful because it allows us to show the actual growth of our ongoing business. The constant currency and organic constant currency financial measures are used to supplement those measures that are in accordance with United States Generally Accepted Accounting Principles ("GAAP"). These Non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies may calculate such financial results differently. These Non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to measures presented in accordance with GAAP. Constant currency and organic constant currency percent variances, along with a reconciliation of these amounts to certain of our reported results, are included on page 39.
Results of Operations - For Years of Operation Ending
The financial discussion that follows focuses on 2020 results compared to 2019. For a discussion of 2019 results compared to 2018, see the company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Our 2020 results were negatively impacted by the COVID-19 crisis, with revenues declining 13.7% compared to 2019. Our businesses experienced significant changes in revenue trends from 2019 reflecting the sudden drop of activity that started in March of 2020. Although the pandemic reduced demand for our services across almost all of our operations, the most significant portion of the year-over-year revenue decline occurred in our European markets during April and the first few weeks of May as governments put states of emergency and related lockdown requirements into place. The impact of the COVID-19 crisis stabilized in many parts of the world and economies slowly reopened as governments in some of our largest countries lifted lock-down requirements starting at the end of the second quarter. We saw some signs of a global recovery starting at the end of the third quarter that continued as a slow and steady recovery through the end of 2020, with our fourth quarter results reflecting a stronger market environment. However, a number of countries started to see increased cases of COVID-19 in the fourth quarter that led to the implementation of new restrictions in an effort to mitigate the spread. Unlike the country-wide lockdowns and restrictions experienced earlier in the year, the restrictions were more targeted and localized. Despite these restrictions, we experienced revenue growth and new opportunities in select markets as the year ended. Continued uncertainty remains as to the future impact of the pandemic on global and local economies. The ultimate impact may depend on multiple factors which cannot be predicted, including public health conditions and the possibility of local and national governments enforcing new restrictions on commerce, which could have an adverse 31
-------------------------------------------------------------------------------- impact on our business, or, conversely the prospect of additional fiscal stimulus packages, which could be beneficial. What started as a sudden and swift slowdown of the global economies and labor markets is expected to take longer to recover around the world than we had initially contemplated. We currently anticipate a two-tiered recovery with certain industries recovering quicker in the near term and other industries continuing to be impacted in the medium- to long-term. Compared to the impact from the COVID-19 crisis discussed above, the impact of currency on 2020 results was minimal. During 2020,the United States dollar was slightly weaker, on average, relative to the currencies in all of our markets, except in Other Americas, which therefore had a favorable impact on our reported results and generally may overstate the performance of our underlying business. The changes in the foreign currency exchange rates had a 0.2% favorable impact on revenues from services, a 0.3% favorable impact on operating profit, and an approximatelyone cent favorable impact on net earnings per share - diluted. Substantially all of our subsidiaries derive revenues from services and incur expenses within the same currency and generally do not have cross-currency transactions, and therefore, changes in foreign currency exchange rates primarily impact reported earnings and not our actual cash flow unless earnings are repatriated. To understand the performance of our underlying business, we utilize constant currency or organic constant currency variances for our consolidated and segment results. During 2020, we experienced the following quarterly changes to our consolidated revenues compared to 2019: first quarter revenue decrease of 8.4% reflecting the sudden drop of activity during March as our largest markets experienced COVID-19 related work restrictions, 30.4% revenue decrease in the second quarter due to the significant impact from COVID-19 especially in April and May, improvement in the rate of decline to 12.7% in the third quarter reflecting an increase in activity levels since the lifting of lock-down requirements and restrictions, and steady improvement in the fourth quarter with a decrease of 2.7% indicating continued signs of a global recovery. Although the most dramatic revenue declines occurred in the second quarter, as European governments imposed states of emergency and related lockdowns, we continued to experience revenue declines during the third quarter on a year-over-year basis as regional economies remained at reduced activity levels as a result of the COVID-19 crisis. We experienced a gradual improvement in the rates of decline throughout the third quarter of 2020 with monthly year-over-year revenue declines of 18% in July, 14% in August, and 5% in September. There was a slight increase in the rate of revenue decline in October at 9%, with gradual improvement in the remainder of the fourth quarter with a revenue decline of 3% in November and revenue growth of 5% in December. We experienced a 25.2% decrease in our permanent recruitment business in 2020 compared to 2019 as a result of the COVID-19 crisis. On an overall basis, our Talent Solutions business, which includes Recruitment Process Outsourcing (RPO),TAPFIN - Managed Service Provider (MSP) and our Right Management offerings, experienced a decline in 2020 compared to 2019, which was driven by RPO activity. We experienced a sharp reduction in RPO activity as many client programs initiated hiring freezes starting in the second quarter of 2020 due to the COVID-19 crisis, although we did see improvement in the rate of year-over-year revenue decline in the second half of the year. Our MSP business has been resilient during the crisis and experienced growth in 2020 as we assisted more clients to develop customized workforce solutions during the economic downturn. Our counter-cyclical career transition services within our Right Management business experienced an increase in demand in 2020. In 2020, most of our markets experienced revenue declines due to the COVID-19 crisis. We experienced a revenue decrease inSouthern Europe , mainly driven by revenue declines inFrance andItaly due to the impact from the crisis. We experienced a revenue decrease inNorthern Europe due to the declines in all of our key markets as a result of the COVID-19 crisis. Revenues decreased 11.4% in theAmericas driven by a decrease inthe United States related to the COVID-19 crisis. We experienced a 10.5% revenue decline in APME due to the deconsolidation ofManpowerGroup Greater China Limited ("Deconsolidation") in 2019 and the COVID-19 crisis, partially offset by an increase inJapan due to an increase in demand for our staffing/interim services. Our gross profit margin in 2020 compared to 2019 decreased due to the decline in our permanent recruitment business as a result of the COVID-19 crisis and the margin decrease in ourProservia managed services business. The decrease was also due the decline in our staffing/interim margins in theAmericas andSouthern Europe due primarily to the higher mix of our lower-margin enterprise client business. The overall gross margin decrease was partially offset by the growth in our higher-margin MSP offering and career transition services and increase in the staffing/interim margin in APME primarily due to the improvement inJapan . 32
-------------------------------------------------------------------------------- We recorded$110.7 million of restructuring costs in 2020, comprised of$29.5 million in theAmericas ,$24.5 million inSouthern Europe ,$52.4 million inNorthern Europe ,$4.1 million in APME, and$0.2 million in corporate expenses, compared to$39.8 million incurred in 2019, comprised of$9.8 million in theAmericas ,$5.4 million inSouthern Europe ,$18.7 million inNorthern Europe ,$4.4 million in APME, and$1.5 million in corporate expenses. Both the 2020 and 2019 restructuring costs were primarily related to our delivery channel and other front-office centralization and back-office optimization activities. The 2019 restructuring costs were also related to adjusting our cost-base for the slower market environment in many of our European operations in 2019. We recorded$72.8 million and$65.6 million in 2020 and 2019, respectively, of goodwill and other impairment charges primarily related to our investment inGermany . In 2020, we also recorded a loss of$5.8 million from the disposition of ourSerbia ,Slovenia ,Bulgaria , andCroatia businesses. Our operating profit decreased 70.9% in 2020 while our operating profit margin decreased 210 basis points compared to 2019. Excluding the restructuring costs, goodwill impairment and other charges, disposition loss and the$30.4 million gain related to the Deconsolidation in 2019, our operating profit was down 48.7% in organic constant currency with operating profit down 130 basis points compared to 2019. The decrease in operating profit margin reflects the material deleveraging that accompanied the decrease in revenues from the sustained impact of the COVID-19 crisis. We continue to monitor expenses closely to ensure we maintain the benefit of our efforts to optimize our organizational and cost structures, while investing appropriately to support the ability of the business to grow in the future and enhance our productivity, technology and digital capabilities. We took significant actions in late March and early April, which allowed us to reduce selling and administrative expenses in our business. These reductions remained in place during the remainder of 2020, which partially offset the revenue and gross profit declines in 2020. This included leveraging government unemployment related benefits, which allowed us to move unutilized staff and associates quickly onto these programs, with most of the benefits from these actions occurring in the second quarter. There were a few programs still in place, mostly inGermany andthe Netherlands , in the second half of 2020 from which we benefitted. This also included the short-term action of cutting discretionary costs and scaling operations back. In addition to these implemented initiatives, we are prepared to take further cost actions to optimize our business structure through this economic downturn with the intention of simultaneously preserving our ability to rebound when market conditions improve. We are focused on managing costs as efficiently as possible in the short-term while continuing to progress transformational actions aligned with our strategic priorities.
As we manage through this crisis and prepare our business for future opportunities we would also like to emphasize the following points:
• Many of our leaders have experience managing through economic downturns, and
many of our senior operational leaders previously managed parts of our
business during the economic downturn in 2008-2009. We believe this is
valuable experience for the current economic environment. Additionally, we
have enhanced our enterprise risk management framework in recent years, and
we have business continuity plans which have been executed at a global,
regional and country level.
• The technology investments we have been making for the last few years as part
of our transformational activities have facilitated a rapid response to the
COVID-19 crisis. As of
equivalent employees were working remotely while mitigating potential
productivity losses. We have also extended our cyber and information security
capability to accelerate the ability for some of our associates and
consultants to work for our clients at home mitigating potential operational
or financial losses. Expectations of when our full-time equivalent employees
return to the workplace will depend on a number of factors including the
impact such a return would have on the safety, health and well-being of our
employees as well as the impact from any government mandates or restrictions.
• Our business has benefitted from our diversification across geographies,
industries, and offerings, that we believe position us well to endure the
COVID-19 crisis. We believe this diversification may likewise position us to
take advantage of market opportunities that present themselves. For example,
during 2020 compared to 2019, we have seen smaller declines within our
Experis business compared to the Manpower business, and we are positioned
with a large portion of our business focused on providing professional
services and Talent Solutions. Additionally, portions of our Talent Solutions
business are assisting our clients through this downturn with customized
solutions. Right Management has experienced increased demand for career
transition
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services and has historically been a counter-cyclical business that helps offset the impact of an economic downturn.
Consolidated Results - 2020 compared to 2019
The following table presents selected consolidated financial data for 2020 as
compared to 2019.
Variance in
Variance in Organic
(in millions, except per share Reported Constant Constant
data) 2020 2019 Variance Currency Currency
Revenues from services $ 18,001.0 $ 20,863.5 (13.7 )% (13.9 )% (13.5 )%
Cost of services 15,176.3 17,488.4 (13.2 ) (13.4 )
Gross profit 2,824.7 3,375.1 (16.3 ) (16.5 ) (15.9 )
Gross profit margin 15.7 % 16.2 %
Selling and administrative
expenses, excluding goodwill
impairment charges 2,570.3 2,666.2 (3.6 ) (3.8 )
Goodwill impairment charges 66.8 64.0 4.2 4.6Selling and administrative expenses 2,637.1 2,730.2 (3.4 )
(3.6 ) (2.9 )
Selling and administrative expenses
as a % of revenues 14.6 % 13.1 %
Operating profit 187.6 644.9 (70.9 ) (71.2 ) (71.2 )
Operating profit margin 1.0 % 3.1 %
Net interest expense 30.2 38.4
Other expenses (income), net 9.7 (79.0 )
Earnings before income taxes 147.7 685.5 (78.5 ) (78.7 )
Provision for income taxes 123.9 219.8 (43.7 )
Effective income tax rate 83.9 % 32.1 %
Net earnings $ 23.8 $ 465.7 (94.9 ) (94.9 )
Net earnings per share - diluted
(94.8 )
Weighted average shares - diluted 58.3 60.3 (3.4 )%
The year-over-year decrease in revenues from services of 13.7% (-13.9% in constant currency and -13.5% in organic constant currency) was attributed to:
• a revenue decrease in
-17.5% in organic constant currency). This included a revenue decrease in
decrease in our Manpower staffing services and a 23.4% decrease (-24.6% in
constant currency) in the permanent recruitment business, both due to the
impact of the COVID-19 crisis. The decrease also includes a decrease in
of 9.1% (-11.3% in constant currency), which was primarily due to the
decreased demand for our Manpower staffing services and a 28.4% decrease
(-29.8% in constant currency) in the permanent recruitment business, both due
to the impact of the COVID-19 crisis;
• decreased demand for services in most of our markets within
where revenues decreased 16.0% (-16.1% in constant currency; -15.9% in
organic constant currency), primarily due to reduced demand for our Manpower
staffing services and a 30.0% decrease (-30.2% in constant currency) in the
permanent recruitment business as a result of the impact of the COVID-19
crisis. We experienced revenue declines in the
Nordics,
respectively (-12.7%, -26.6%, -12.7%, -19.1%, and -27.0%, respectively, in
constant currency);
• a revenue decrease in
primarily driven by a decline in demand for our Manpower staffing services
and a 9.6% (-10.0% on an organic basis) decrease in the permanent recruitment
business, both due to the impact of the COVID-19 crisis, partially offset by
an increase in our Talent Solutions business, primarily within our MSP
offering and career transition services; and
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• a revenue decrease in APME of 10.5% (-10.5% in constant currency; -2.3% in
organic constant currency) due to the Deconsolidation and a 27.4% decrease
(-27.0% in constant currency; -13.5% in organic constant currency) in the
permanent recruitment business as a result of the impact of the COVID-19
crisis, partially offset by an increase in revenues in
in demand for our Talent-Based Outsourcing services within the Manpower
business; partially offset by
• a 0.2% increase due to the impact of changes in currency exchange rates.
The year-over-year 50 basis point decrease in gross profit margin was primarily attributed to:
• a 30 basis point unfavorable impact due to the decrease in our permanent
recruitment business of 25.2% (-25.1% in constant currency and -22.4% in
organic constant currency);
• a 20 basis point unfavorable impact due to the margin decrease in our
in Germany ; and
• a 20 basis point unfavorable impact from a deterioration in our
staffing/interim margin in the
mix of our lower-margin enterprise client business and higher rates of
sickness and absenteeism in certain countries and increased direct costs
associated with early termination of client contracts during the COVID-19
crisis. These unfavorable impacts were partially offset by reduced direct
costs in certain countries due to government crisis response programs, a
direct cost accrual adjustment in
recorded in 2020, and our execution of various bill/pay yield initiatives due
to the COVID-19 crisis; partially offset by
• a 20 basis point favorable impact by growth in our higher-margin MSP offering
and career transition services.
The 3.4% decrease in selling and administrative expenses in 2020 (-3.6% in constant currency and -2.9% in organic constant currency) was primarily attributed to:
• a 8.3% decrease (-8.5% in constant currency and -7.7% in organic constant
currency) in personnel costs due to a reduction of salary-related costs as a
result of lower headcount and a decrease in variable incentive costs due to a
decline in profitability in most markets, and the benefits related to the
transition of full-time equivalent employees onto government temporary
unemployment programs in 2020;
• a 6.7% decrease (-6.9% in constant currency and -5.6% in organic constant
currency) in non-personnel related costs, excluding goodwill and other
impairment charges, restructuring costs, loss on disposition of subsidiaries,
and gain related to Deconsolidation, due to cost management actions taken
across all segments as a result of revenue declines;
• the reduction in recurring selling and administrative costs of
as a result of the Deconsolidation in 2019 and other dispositions of
subsidiaries in 2019 and 2020; and
• a 0.2% increase due to the impact of changes in currency exchange rates;
partially offset by
• restructuring costs of
million incurred in 2019;
• the $30.4 million gain related to the Deconsolidation in 2019;
• the additional recurring selling and administrative costs of
incurred as a result of the acquisition of Manpower Switzerland in Southern
2019;
• the increase in goodwill and other impairment charges to
from $65.6 million in 2019; and
• the $5.8 million loss on the disposition of subsidiaries in 2020.
Selling and administrative expenses as a percent of revenues increased 150 basis points in 2020 compared to 2019. The change in selling and administrative expenses as a percent of revenues consisted of:
• 80 basis point unfavorable impact from expense deleveraging, excluding
goodwill and other impairment charges, restructuring costs, and gain related
to Deconsolidation, as we were unable to decrease selling and administrative
expenses at the same rate as our revenue decline;
• a 40 basis point unfavorable impact from the increase in restructuring costs
in 2020 compared to 2019;
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• a 20 basis point unfavorable impact from the gain related to the
Deconsolidation in 2019; and
• a 10 basis point unfavorable impact from the increase in goodwill and other
impairment charges.
Interest and other expenses (income), net is comprised of interest, foreign exchange gains and losses and other miscellaneous non-operating income and expenses, including noncontrolling interests. Interest and other expenses (income), net was expenses of$39.9 million in 2020 compared to income of$40.6 million in 2019. Net interest expense decreased$8.2 million in 2020 to$30.2 million from$38.4 million in 2019 primarily due to an increase in interest income as a result of higher cash balances. Miscellaneous expense (income), net was an expense$4.8 million in 2020 compared to income of$85.7 million in 2019. The change is primarily due to the$80.4 million gain from the acquisition of Manpower Switzerland in 2019, the pension settlement expenses of$10.2 million recorded in 2020 related to one of ourUnited States plans and the decrease in noncontrolling interest expense as a result of a decrease in earnings in a joint venture inGermany . We recorded income tax expense at an effective rate of 83.9% in 2020, as compared to an effective rate of 32.1% in 2019. The 2020 rate was unfavorably impacted by the relatively low level and mix of pre-tax earnings, the recognition of discrete valuation allowances inGermany andthe Netherlands , the non-deductible goodwill impairment charge inGermany , and the French business tax. The French business tax had a more significant unfavorable impact in 2020 due to French pre-tax earnings decreasing at a greater rate than revenues, which is the primary basis for the tax calculation. The effective tax rate of 83.9% for 2020 was significantly higher than the United States Federal statutory rate of 21% primarily due to the factors noted above. In 2021, we expect our effective tax rate to be approximately 35%. The 2021 rate considers the previously scheduled reduction in the French corporate tax rate to 27.5%, the recently enacted 50% reduction in the French business tax rate, and the extension of the Work Opportunity Tax Credit. Net earnings per share - diluted was$0.41 in 2020 compared to$7.72 in 2019. Foreign currency exchange rates favorably impacted net earnings per share - diluted by approximately$0.01 in 2020. Restructuring costs recorded in 2020 and 2019 negatively impacted net earnings per share - diluted by approximately$1.56 and$0.52 per share, net of tax, in 2020 and 2019, respectively.Goodwill and other impairment charges recorded in 2020 and 2019 negatively impacted net earnings per share - diluted by approximately$1.14 and$1.08 per share in 2020 and 2019, respectively. The pension settlement expense recorded in 2020 related to one of ourUnited States plans negatively impacted net earnings per share - diluted by approximately$0.11 , net of tax, in 2020. The loss from the disposition of subsidiaries in 2020 negatively impacted net earnings per share - diluted by approximately$0.09 , net of tax, in 2020. The gain from the acquisition of Manpower Switzerland recorded in 2019 positively impacted net earnings per share - diluted by approximately$1.32 per share in 2019. The gain from the Deconsolidation recorded in 2019 positively impacted net earnings per share - diluted by$0.50 per share in 2019. Weighted average shares - diluted decreased 3.4% to 58.3 million in 2020 from 60.3 million in 2019. This decrease was due to the impact of share repurchases completed in 2020 and the full weighting of the repurchases completed in 2019, partially offset by shares issued as a result of exercises and vesting of share-based awards in 2020.
Segment Results
We evaluate performance based on operating unit profit ("OUP"), which is equal
to segment revenues less direct costs and branch and national headquarters
operating costs. This profit measure does not include goodwill and intangible
asset impairment charges or amortization of intangible assets related to
acquisitions, corporate expenses, interest and other income and expense amounts
or income taxes.
Effective January 2020 , our segment reporting was realigned due to our Right
Management business being combined with each of our respective country business
units. Accordingly, our former reportable segment, Right Management, is now
reported within each of our respective reportable segments. We began reporting
on the new realigned segments in the first quarter of 2020. All previously
reported results have been restated to conform to the new presentation.
In the
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organic basis) in 2020 compared to 2019, primarily driven by decreased demand
for our Manpower staffing services and a decrease in our permanent recruitment
business of 9.6% (-10.0% on an organic basis), both due to the impacts of the
COVID-19 crisis. These decreases in the United States were partially offset by
increased demand for our MSP offering and career transition services. In Other
Americas , revenues from services decreased 13.2% (-3.7% in constant currency) in
2020 compared to 2019 primarily due to the impacts of the COVID-19 crisis. This
decline was driven by decreases in Mexico , Canada , Peru , Colombia and Brazil of
15.3%, 5.6%,16.7%, 32.8% and 17.2%, respectively (-6.3%, -4.7%, -12.8%, -24.7%
and increase of 7.8%, respectively, in constant currency). These decreases were
partially offset by the increase in Argentina of 5.7% (55.9% in constant
currency) primarily due to inflation.
Gross profit margin increased in 2020 compared to 2019 primarily due to gross
profit margin increase in the United States from the increase in revenues from
our higher-margin career transition services and MSP offering. This increase was
partially offset by the decrease in our permanent recruitment business of 13.6%
(-12.3% in constant currency) and a decline in the staffing/interim margin due
to client mix changes, as a higher percentage of revenues came from our lower
margin enterprise clients.
In 2020, selling and administrative expenses increased 0.4% (2.9% in constant
currency and 1.9% in organic constant currency), primarily due to the increase
in restructuring costs to $29.5 million in 2020 compared to $9.8 million in
2019, the impairment charge of $6.0 million recorded in the United States
related to capitalized software in 2020, a bad debt expense and a state sales
tax related charge incurred 2020, and the additional recurring selling and
administrative costs incurred as a result of the franchise acquisitions in the
United States . These increases were partially offset by decreases in
salary-related costs, due to lower headcount, and discretionary expenses.
OUP margin in the Americas was 3.1% and 4.8% for 2020 and 2019, respectively. In
the United States , OUP margin decreased to 2.6% for 2020 from 4.9% in 2019
primarily due to the increase in restructuring costs, the software impairment
charge and expense deleveraging. These decreases were partially offset by the
increase in the gross profit margin. Other Americas OUP margin decreased to 3.8%
in 2020 from 4.5% in 2019 primarily due to a decline in the gross profit margin
and expense deleveraging.
Southern Europe
In Southern Europe , which includes operations in France and Italy , revenues from
services decreased 14.6% (-16.7% in constant currency) in 2020 compared to 2019.
In 2020, revenues from services decreased 20.8% (-22.8% in constant currency) in
France and decreased 9.1% (-11.3% in constant currency) in Italy . The decrease
in France is due to decreased demand for our Manpower staffing services and a
23.4% (-24.6% in constant currency) decrease in our permanent recruitment
business, both due to the impact of the COVID-19 crisis. The decrease in Italy
was primarily due to decreased demand for our Manpower staffing services and a
28.4% (-29.8% in constant currency) decrease in our permanent recruitment
business, both due to the impact of the COVID-19 crisis. In Other Southern
Europe, revenues from services decreased 2.7% (-5.2% in constant currency)
during 2020 compared to 2019, due to decreased demand for our Manpower staffing
services and a decrease in our permanent recruitment business of 32.5% (-33.1%
in constant currency), both due to the impact of the COVID-19 crisis.
Gross profit margin decreased in 2020 compared to 2019 primarily due to the
decline of 28.2% (-29.3% in constant currency) in the permanent recruitment
business and a decrease in the staffing/interim gross profit margin in France ,
Italy and certain countries within Other Southern Europe primarily due to the
higher mix of our lower-margin enterprise client business, partially offset by a
direct cost accrual adjustment in France recorded in 2020.
Selling and administrative expenses decreased 4.4% (-6.4% in constant currency)
in 2020 compared to 2019. In 2020, we took significant actions in France and
Italy in March and April to reduce our costs to help offset the materially
reduced revenues. In both France and Italy , we transitioned full-time equivalent
employees onto government temporary unemployment programs and other initiatives
and eliminated a significant amount of discretionary spend to manage through the
COVID-19 crisis. The decrease in selling and administrative expenses in 2020 was
primarily due to the decrease in personnel costs, as a result of a reduction in
headcount, a decrease in variable incentive costs due to a decline in
profitability in most markets, and the benefits related to the transition of
full-time equivalent employees onto government temporary unemployment programs
in certain markets that mostly
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occurred in the second quarter of 2020. The decrease is also due to the
reduction of our discretionary expenses. These decreases were offset by the
increase in restructuring costs to $24.5 million in 2020 compared to $5.4
million in 2019, the loss on the disposition of subsidiaries and the additional
recurring selling and administrative costs from our acquisition of the remaining
interest in Manpower Switzerland.
OUP margin in Southern Europe was 3.0% for 2020 compared to 5.0% in 2019. In
France , the OUP margin decreased to 3.4% in 2020 compared to 5.2% in 2019. In
Italy , the OUP margin decreased to 4.7% in 2020 compared to 6.8% in 2019. The
decreases in France and Italy were primarily due to the decline in the gross
profit margin and expense deleveraging. Other Southern Europe's OUP margin
decreased to 1.1% in 2020 compared to 3.1% in 2019, due to the decrease in the
gross profit margin, the increase in restructuring costs to $24.5 million in
2020 from $3.1 million in 2019, the loss from the disposition of subsidiaries in
2020 and expense deleveraging.
InNorthern Europe , which includes operations in theUnited Kingdom ,Germany , the Nordics,the Netherlands andBelgium (comprising 35%, 15%, 21%, 11%, and 8%, respectively, ofNorthern Europe's revenues), revenues from services decreased 16.0% (-16.1% in constant currency) in 2020 compared to 2019. We experienced revenue declines in theUnited Kingdom ,Germany , the Nordics,the Netherlands andBelgium of 12.2%, 25.4%, 14.3%, 17.5% and 25.5% (-12.7%, -26.6%, -12.7%, -19.1% and -27.0%, respectively, in constant currency). TheNorthern Europe revenue decrease is primarily due to reduced demand for our Manpower staffing services and a 30.0% decrease (-30.2% in constant currency) in the permanent recruitment business, both primarily due to the impact of the COVID-19 crisis. Gross profit margin decreased in 2020 compared to 2019 due to the decrease in our permanent recruitment business in 2020 compared to 2019, and the decline in the Experis interim margins due to client mix changes, as a higher percentage of revenues consisted of revenues from our lower-margin enterprise clients, and the margin decrease in ourProservia business primarily related to the lower utilization of consultants inGermany . Selling and administrative expenses decreased 8.2% (-8.8% in constant currency) in 2020 compared to 2019 primarily due to the decrease in personnel costs, as a result of a reduction in headcount, a decrease in variable incentive costs due to decline in profitability in most markets, and the benefits related to the transition of full-time equivalent employees onto government temporary unemployment programs in certain markets, mostly in the second quarter of 2020. The decrease is also due to the decline in office-related expenses driven by a decrease in the number of offices, and a reduction of our discretionary expenses. These decreases were partially offset by increase of restructuring costs to$52.4 million in 2020 from$18.7 million in 2019.Northern Europe experienced a decrease to an operating unit loss margin of (0.7%) in 2020 from an OUP margin of 1.6% in 2019. The decrease was primarily due to the decline in the gross profit margins, the increase in restructuring costs, and expense deleveraging.
APME
Revenues from services decreased 10.5% (-10.5% in constant currency and -2.3% in organic constant currency) in 2020 compared to 2019. InJapan (which represents 45% of APME's revenues), revenues from services increased 8.8% (6.5% in constant currency) due to increased demand for our staffing/interim services, an increase in our Talent Solutions business and the favorable impact of approximately one additional billing day in 2020 compared to 2019. These increases were partially offset by a 5.7% decrease (-7.7% in constant currency) in our permanent recruitment business. InAustralia (which represents 16% of APME's revenues), revenues from services decreased 14.6% (-13.9% in constant currency) due to the decrease in our staffing/interim revenues, as a result of our decision to exit certain low margin businesses to improve profitability and the impact of the COVID-19 crisis, and the 9.4% (-8.2% in constant currency) decline in our permanent recruitment business due to the COVID-19 crisis. These decreases were partially offset by the favorable impact of approximately one additional billing day. The revenue decrease in the remaining markets in APME is due to the Deconsolidation, and the decline in demand for our staffing/interim services and the decrease in our permanent recruitment business, both due to the COVID-19 crisis, partially offset by the increase in demand for our Talent-Based Outsourcing services within our Manpower business. 38 -------------------------------------------------------------------------------- Gross profit margin decreased in 2020 compared to 2019 due to the decrease in our permanent recruitment business of 27.4% (-27.0% in constant currency and -13.5% in organic constant currency), partially offset by the increase in our staffing/interim margin, mostly inJapan . Selling and administrative expenses increased 2.2% (1.9% in constant currency and 15.5% in organic constant currency) in 2020 compared to 2019 primarily due to the gain from the Deconsolidation in 2019 and an increase in costs to support the increase in revenues in certain markets. These increases were partially offset by the reduction of recurring selling and administrative costs as a result of the Deconsolidation and the decrease of restructuring costs to$4.1 million in 2020 compared to$4.4 million in 2019.
OUP margin decreased to 2.9% in 2020 from 4.8% in 2019 due to the gain from the Deconsolidation in the third quarter of 2019, a decline in the gross profit margin and expense deleveraging.
Financial Measures
Constant Currency And Organic Constant Currency Reconciliation
Certain constant currency and organic constant currency percent variances are discussed throughout this report. A reconciliation of these Non-GAAP percent variances to the percent variances calculated based on our annual GAAP financial results is provided below. (SeeConstant Currency and Organic Constant Currency on page 31 for information.) Impact of Amounts represent 2020 Acquisitions and Organic Reported Variance in Dispositions Constant Percentages represent 2020 compared Amount Reported Impact of Constant (in Constant Currency to 2019 (in millions) Variance Currency Currency Currency) Variance Revenues from Services Americas: United States$ 2,327.2 (10.2 )% - % (10.2 )% 1.8 % (12.0 )% Other Americas 1,465.2 (13.2 ) (9.5 ) (3.7 ) - (3.7 ) 3,792.4 (11.4 ) (3.8 ) (7.6 ) 1.2 (8.8 ) Southern Europe: France 4,338.1 (20.8 ) 2.0 (22.8 ) - (22.8 ) Italy 1,370.7 (9.1 ) 2.2 (11.3 ) - (11.3 ) Other Southern Europe 2,146.4 (2.7 ) 2.5 (5.2 ) 3.4 (8.6 ) 7,855.2 (14.6 ) 2.1 (16.7 ) 0.8 (17.5 ) Northern Europe 3,976.7 (16.0 ) 0.1 (16.1 ) (0.2 ) (15.9 ) APME 2,376.7 (10.5 ) 0.0 (10.5 ) (8.2 ) (2.3 ) ManpowerGroup$ 18,001.0 (13.7 )% 0.2 % (13.9 )% (0.4 )% (13.5 )% Gross Profit - ManpowerGroup$ 2,824.7 (16.3 )% 0.2 % (16.5 )% (0.6 )% (15.9 )% Operating Unit Profit (Loss) Americas: United States $ 60.9 (52.4 )% - % (52.4 )% 1.0 % (53.4 )% Other Americas 55.1 (26.9 ) (6.9 ) (20.0 ) - (20.0 ) 116.0 (43.0 ) (2.6 ) (40.4 ) 0.5 (40.9 ) Southern Europe: France 149.0 (47.7 ) 2.1 (49.8 ) - (49.8 ) Italy 64.2 (37.4 ) 1.7 (39.1 ) - (39.1 ) Other Southern Europe 23.8 (65.0 ) 1.8 (66.8 ) 0.5 (69.3 ) 237.0 (48.0 ) 2.0 (50.0 ) 0.3 (50.3 ) Northern Europe (27.6 ) N/A N/A N/A APME 70.1 (45.0 ) 0.4 (45.4 ) (5.0 ) (40.4 )
Operating Profit -
0.3 % (71.2 )% - % (71.2 )%
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Cash Sources and Uses Cash used to fund our operations is primarily generated through operating activities and provided by our existing credit facilities. We believe our available cash and existing credit facilities are sufficient to cover our cash needs for the foreseeable future. We assess and monitor our liquidity and capital resources globally. We use a global cash pooling arrangement, intercompany lending, and some local credit lines to meet funding needs and allocate our capital resources among our various entities. As ofDecember 31, 2020 , we had$1,425.1 million of cash held by foreign subsidiaries. We have historically made and anticipate future cash repatriations tothe United States from certain foreign subsidiaries to fund corporate activities. With the enactment of the Tax Act inDecember 2017 , we have no longer recordedUnited States federal income taxes on unremitted earnings of non-United States subsidiaries. However, we do record deferred tax liabilities related to non-United States withholding and other taxes on unremitted earnings that are not considered permanently invested. As ofDecember 31, 2020 , deferred taxes related to non-United States withholding and other taxes were provided on$2,077.6 million of unremitted earnings of non-United States subsidiaries that may be remitted tothe United States . As ofDecember 31, 2020 and 2019, we have recorded a deferred tax liability of$10.0 million and$8.8 million , respectively, related to these non-United States earnings that may be remitted. We have an additional$439.0 million of unremitted earnings of non-United States subsidiaries for which we have not currently provided deferred taxes as amounts are deemed indefinitely reinvested. We have not estimated the deferred tax liability on these earnings as such estimation is not practicable to determine. Our principal ongoing cash needs are to finance working capital, capital expenditures, debt payments, interest expense, dividends, share repurchases and acquisitions. Working capital is primarily in the form of trade receivables, which generally increase as revenues increase. The amount of financing necessary to support revenue growth depends on receivables turnover, which differs in each market where we operate. Cash provided by operating activities was$936.4 million ,$814.4 million and$483.1 million for 2020, 2019 and 2018, respectively. Changes in operating assets and liabilities generated$703.6 million and$313.2 million of cash in 2020 and 2019, respectively, compared to$198.3 million utilized in 2018. The change in 2020 from 2019 was primarily attributable to a decrease in accounts receivable, due to collections and the receivables not being replaced at the same level as a result of a decrease in demand for our services, and the benefit of certain government payment deferral measures introduced as part of the COVID-19 crisis. These improvements in our cash flows were partially offset by the decrease in our payroll-related liabilities due to lower activity. The change in 2019 from 2018 was primarily attributable to the timing of collections and payments, a decrease in CICE receivables resulting from the transition from the CICE program to a new subsidy program inJanuary 2019 , and the contingent consideration of$24.1 million paid in 2018 in excess of the original liability recorded at acquisition date for the acquisitions inthe Netherlands . The increase was partially offset by lower net proceeds from the sale of our CICE payroll tax credits. The CICE payroll tax credits are creditable against our current French income tax payable, with any remaining amount being paid after three years. InApril 2019 , we sold a portion of our CICE earned in 2018 for net proceeds of$103.5 million (€92.0 million) with the remaining amount to be used against future tax payments. InApril 2018 , we sold substantially all of our CICE earned in 2017 for net proceeds of$234.5 million (€190.9 million). We derecognized these receivables upon the sale as the terms of the agreement are such that the transaction qualifies for sale treatment according to the accounting guidance on the transfer and servicing of assets. The discount on the sale of these receivables was recorded as a reduction of the payroll tax credits earned in the respective years in cost of services. Accounts receivable decreased to$4,901.7 million as ofDecember 31, 2020 from$5,273.1 million as ofDecember 31, 2019 . This decrease is primarily due to successful collection efforts and the revenue decline, partially offset by the impact of changes in currency exchange rates. Days Sales Outstanding ("DSO") decreased by approximately three days fromDecember 31, 2019 to approximately 54 days as ofDecember 31, 2020 due to successful collection efforts and favorable mix changes, as a higher percentage of our consolidated revenues were generated in countries with a lower average DSO. Capital expenditures were$50.7 million ,$52.9 million and$64.7 million during 2020, 2019 and 2018, respectively. These expenditures were primarily comprised of purchases of computer equipment, office furniture and other costs 40 -------------------------------------------------------------------------------- related to office openings and refurbishments, as well as capitalized software costs of$14.0 million in 2020,$2.0 million in 2019 and$5.6 million in 2018. The lower expenditures in 2020 compared to 2019 are primarily due to overall scale-back of activities in 2020 due to the COVID-19 crisis, completion of a software development project in 2019, and the timing of capital expenditures, partially offset by additional technology investments. The higher expenditures in 2018 compared to 2019 was primarily due to additional technology investment and the timing of capital expenditures. OnSeptember 30, 2020 we disposed of four businesses (Serbia ,Croatia ,Slovenia ,Bulgaria ) in ourSouthern Europe segment for$5.8 million , subject to normal post close working capital adjustments, and simultaneously entered into franchise agreements with the new ownership of these businesses. In connection with the disposition, we recognized a one-time loss on disposition of$5.8 million , which was included in the selling and administrative expenses in the Consolidated Statement of Operations for the year endedDecember 31, 2020 . Occasionally, we dispose of parts of our operations to optimize our global strategic and geographic footprint and synergies. OnApril 3, 2019 , we acquired the remaining 51% controlling interest in our Swiss franchise ("Manpower Switzerland") to obtain full ownership of the entity. Additionally, as part of the purchase agreement we acquired the remaining 20% interest inExperis AG . ManpowerSwitzerland provides contingent staffing services under our Manpower brand in the four main language regions inSwitzerland . BothManpower Switzerland and Experis AG are reported in ourSouthern Europe segment. The aggregate cash consideration paid was$219.5 million and was funded through cash on hand. Of the total consideration paid,$58.3 million was for the acquired interests and the remaining$161.2 million was for cash and cash equivalents. The aggregate cash consideration paid reflects a post-closing settlement of net debt and net working capital adjustments of$6.8 million , which we paid out during the third quarter of 2019. The acquisition of the remaining interest ofExperis AG was accounted for as an equity transaction as we previously consolidated the entity. Our investment in Manpower Switzerland prior to the acquisition was accounted for under the equity method of accounting and we recorded our share of equity income or loss in interest and other expenses (income), net on the Consolidated Statements of Operations. The acquisition of the remaining controlling interest in Manpower Switzerland was accounted for as a business combination, and the assets and liabilities of Manpower Switzerland were included in the Consolidated Balance Sheets as of the acquisition date and the results of its operations have been included in the Consolidated Statements of Operations subsequent to the acquisition date. The aggregate of the consideration paid and the fair value of previously held equity interest totaled$415.1 million , or$97.6 million net of cash acquired. In connection with the business combination, we recognized a one-time, non-cash gain on the disposition of our previously held equity interest in ManpowerSwitzerland of$80.4 million , which is included within interest and other expenses (income), net on the Consolidated Statements of Operations. Of the$80.4 million ,$32.5 million represented the reclassification of foreign currency translation adjustments related to the previously held equity interest, from accumulated other comprehensive loss. As ofDecember 31, 2019 , the carrying value of intangible assets and goodwill resulting from the Manpower Switzerland acquisition was$44.5 million and$34.2 million , respectively. From time to time, we acquire and invest in companies throughout the world, including franchises. The total cash consideration paid for acquisitions excludingManpower Switzerland and Experis AG , net of cash acquired, for the years endedDecember 31, 2020 , 2019 and 2018 was$2.6 million ,$47.7 million and$51.8 million , respectively. The 2020 balance includes consideration payments for franchises inthe United States and contingent consideration payments related to previous acquisitions, of which$1.9 million had been recognized as a liability at the acquisition date. The 2020 and 2019 balances include consideration payments for franchises inthe United States and contingent consideration payments related to previous acquisitions, of which$1.9 million and$13.0 million , respectively, had been recognized as a liability at the acquisition date. The 2018 balance includes initial acquisition payments of$9.1 million and contingent consideration payments of$42.7 million , of which$18.6 million had been recognized as a liability at the acquisition date. As ofDecember 31, 2020 , no goodwill and intangible assets were recognized from the 2020 acquisitions. As ofDecember 31, 2019 , goodwill and intangible assets resulting from the 2019 acquisitions, excluding Manpower Switzerland, were$14.2 million and$9.0 million , respectively. 41
-------------------------------------------------------------------------------- OnJuly 10, 2019 , our joint venture inGreater China ,ManpowerGroup Greater China Limited , became listed on the Main Board of theStock Exchange of Hong Kong Limited through an initial public offering. Prior to the initial public offering, we owned a 51% controlling interest in the joint venture and consolidated the financial position and results of its operations into our Consolidated Financial Statements as part of our APME segment. As a result of the offering, in whichManpowerGroup Greater China Limited issued new shares representing 25% of the equity of the company, our ownership interest was diluted to 38.25%, and then further diluted to 36.87% as the underwriters exercised their overallotment option in full onAugust 7, 2019 . As a result, we deconsolidated the joint venture as of the listing date and account for our remaining interest under the equity method of accounting and record our share of equity income or loss in interest and other expenses (income), net in the Consolidated Statement of Operations. In connection with the deconsolidation of the joint venture, we recognized a one-time non-cash gain of$30.4 million , which was included in selling and administrative expenses in the Consolidated Statement of Operations in the year endedDecember 31, 2019 . Included in the$30.4 million was foreign currency translation adjustment losses of$6.2 million related to the joint venture from accumulated other comprehensive loss. Net debt payments were$38.5 million in 2020 compared to cash provided by net debt borrowings of$19.5 million and$178.2 million in 2019 and 2018, respectively. InJune 2018 , we offered and sold €500.0 million aggregate principal amount of the Company's 1.750% notes dueJune 22, 2026 , with the net proceeds of €495.7 million predominantly used to repay our €350.0 million notes dueJune 22, 2018 . (See the "Euro Notes" section below for further information.) The Board of Directors authorized the repurchase of 6.0 million shares of our common stock inAugust 2019 ,August 2018 andJuly 2016 . Share repurchases may be made from time to time through a variety of methods, including open market purchases, block transactions, privately negotiated transactions or similar facilities. During 2020, we repurchased a total of 3.4 million shares comprised of 0.8 million shares under the 2018 authorization and 2.6 million shares under the 2019 authorization, at a total cost of$264.7 million . The repurchases in 2020 occurred within the first quarter and fourth quarter of 2020. In 2019, we repurchased a total of 2.4 million shares at a total cost of$203.0 million under the 2018 authorization. In 2018, we repurchased a total of 5.7 million shares, comprised of 2.9 million shares under the 2018 authorization and 2.8 million shares under the 2016 authorization, at a total cost of$500.7 million . As ofDecember 31, 2020 , there were 3.4 million shares remaining authorized for repurchase under the 2019 authorization and no shares remaining authorized for repurchase under either the 2018 or 2016 authorizations. During 2020, 2019 and 2018, the Board of Directors declared total cash dividends of$2.26 ,$2.18 and$2.02 per share, respectively, resulting in total dividend payments of$129.1 million ,$129.3 million and$127.3 million , respectively. We have aggregate commitments of$2,140.8 million related to debt, operating leases, severances and office closure costs, transition tax resulting from the Tax Act and certain other commitments, as follows: (in millions) Total 2021 2022-2023 2024-2025 Thereafter Long-term debt including interest$ 1,132.4 $ 19.9 $ 524.6 $ 21.4 $ 566.5 Short-term borrowings 20.4 20.4 - - - Operating leases 461.3 129.6 169.8 84.6 77.3 Severance and other costs 43.8 39.8 3.6 0.4 - Transition tax resulting from the Tax Act 113.4 11.9 34.3 67.2 - Other 369.5 151.0 148.6 28.4 41.5$ 2,140.8 $ 372.6 $ 880.9 $ 202.0 $ 685.3
Our liability for unrecognized tax benefits, including related interest and
penalties, of
We recorded net restructuring costs of$110.7 million and$42.0 million during 2020 and 2019, respectively, in selling and administrative expenses, primarily related to severances and office closures and consolidations in multiple countries and territories. As a result of the adoption of the new accounting guidance on leases as of 42
--------------------------------------------------------------------------------January 1, 2019 , the office closure costs of$27.3 million during 2020 were recorded as an impairment to the operating lease right-of-use asset and, thus, are not included in the restructuring reserve balance as ofDecember 31, 2020 . The costs paid, utilized or transferred out of our restructuring reserve were$71.9 million during 2020. We have entered into guarantee contracts and stand-by letters of credit that total$890.0 million as ofDecember 31, 2020 ($838.4 million for guarantees and$51.6 million for stand-by letters of credit). The guarantees primarily relate to staffing license requirements, operating leases and indebtedness. The stand-by letters of credit mainly relate to workers' compensation inthe United States . If certain conditions were met under these arrangements, we would be required to satisfy our obligation in cash. Due to the nature of these arrangements and our historical experience, we do not expect to make any significant payments under these arrangements. Therefore, they have been excluded from our aggregate commitments identified above. The cost of these guarantees and letters of credit was$1.9 million for 2020. Total capitalization as ofDecember 31, 2020 was$3,577.4 million , comprised of$1,123.9 million in debt and$2,453.5 million in equity. Debt as a percentage of total capitalization was 31% as ofDecember 31, 2020 and 28% as of bothDecember 31, 2019 and 2018. Euro Notes OnJune 22, 2018 , we offered and sold €500.0 million aggregate principal amount of the Company's 1.750% notes dueJune 22, 2026 (the "€500.0 million notes"). The net proceeds from the €500.0 million notes of €495.7 million were used to repay our €350.0 million notes dueJune 22, 2018 , with the remaining balance used for general corporate purposes, which included share repurchases. The €500.0 million notes were issued at a price of 99.564% to yield an effective interest rate of 1.809%. Interest on the €500.0 million notes is payable in arrears onJune 22 of each year. The €500.0 million notes are unsecured senior obligations and rank equally with all of the Company's existing and future senior unsecured debt and other liabilities. Our €400.0 million aggregate principal amount 1.875% notes (the "€400.0 million notes") are dueSeptember 2022 . When the notes mature, we plan to repay the amounts with available cash, borrowings under our$600.0 million revolving credit facility or a new borrowing. The credit terms, including interest rate and facility fees, of any replacement borrowings will be dependent upon the condition of the credit markets at that time. We currently do not anticipate any problems accessing the credit markets should we decide to replace either the €500.0 million notes or the €400.0 million notes. Both the €500.0 million notes and €400.0 million notes contain certain customary non-financial restrictive covenants and events of default and are unsecured senior obligations and rank equally with all of our existing and future senior unsecured debt and other liabilities. A portion of these notes has been designated as a hedge of our net investment in our foreign subsidiaries with Euro-functional currency as ofDecember 31, 2020 . For this portion of the Euro-denominated notes, since our net investment in these subsidiaries exceeds the respective amount of the designated borrowings, both net of taxes, the related translation gains or losses are included as a component of accumulated other comprehensive loss. (See the Significant Matters Affecting Results of Operations section and Notes 8 and 12 to the Consolidated Financial Statements found in Item 8. "Financial Statements and Supplementary Data" for further information.)
Revolving Credit Agreement
OnJune 18, 2018 , we amended and restated our Five-Year Credit Agreement with a syndicate of commercial banks, principally to revise the termination date of the facility fromSeptember 16, 2020 toJune 18, 2023 . The remaining material terms and conditions of the Agreement are substantially similar to the previous agreement. The Credit Agreement allows for borrowing of$600.0 million in various currencies, and up to$150.0 million may be used for the issuance of stand-by letters of credit, with an option to request an increase to the total availability by an additional$200 million and each lender may participate in the requested increase at their discretion. We had no borrowings under this facility as of bothDecember 31, 2020 and 2019. Outstanding letters of credit issued under the Credit Agreement totaled$0.5 million as of bothDecember 31, 2020 and 2019. Additional borrowings of$599.5 million were available to us under the facility as of bothDecember 31, 2020 and 2019. 43 -------------------------------------------------------------------------------- Under the Credit Agreement, a credit ratings-based pricing grid determines the facility fee and the credit spread that we add to the applicable interbank borrowing rate on all borrowings. At our current credit rating, the annual facility fee is 12.5 basis points paid on the entire facility and the credit spread is 100.0 basis points on any borrowings. A downgrade from both credit agencies would unfavorably impact our facility fees and result in additional costs ranging from approximately$0.2 million to$0.8 million annually. The Credit Agreement contains customary restrictive covenants pertaining to our management and operations, including limitations on the amount of subsidiary debt that we may incur and limitations on our ability to pledge assets, as well as financial covenants requiring, among other things, that we comply with a leverage ratio (Net Debt-to-Net Earnings before interest and other expenses, provision for income taxes, intangible asset amortization expense, depreciation and amortization expense ("EBITDA")) of not greater than 3.5 to 1 and a fixed charge coverage ratio of not less than 1.5 to 1. In the Credit Agreement, Net Debt is defined as total debt less cash in excess of$400 million . The Credit Agreement also contains customary events of default, including, among others, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy or involuntary proceedings, certain monetary and non-monetary judgments, change of control and customary ERISA defaults. As defined in the Credit Agreement, we had a net Debt-to-EBITDA ratio of (0.12) to 1 (compared to the maximum allowable ratio of 3.5 to 1) and a Fixed Charge Coverage ratio of 3.04 to 1 (compared to the minimum required ratio of 1.5 to 1) as ofDecember 31, 2020 .
Other
In addition to the previously mentioned facilities, we maintain separate bank credit lines with financial institutions to meet working capital needs of our subsidiary operations. As ofDecember 31, 2020 , such uncommitted credit lines totaled$340.3 million , of which$310.9 million was unused. Under the Credit Agreement, total subsidiary borrowings cannot exceed$300.0 million in the first, second and fourth quarters, and$600.0 million in the third quarter of each year. Due to these limitations, additional borrowings of$270.6 million could have been made under these lines as ofDecember 31, 2020 . Our long-term debt has a rating of Baa1 fromMoody's Investor Services and BBB from Standard and Poor's, both with a stable outlook. Both of the credit ratings are investment grade. Rating agencies use proprietary methodology in determining their ratings and outlook which includes, among other things, financial ratios based upon debt levels and earnings performance.
COVID-19
We have assessed what impact the COVID-19 crisis has had or may have on our liquidity position as ofDecember 31, 2020 and for the near future. As ofDecember 31, 2020 , our cash and cash equivalents balance was$1,567.1 million . We also have access to the previously mentioned revolving credit facility that could immediately provide us with up to$600 million of additional cash, which remains unused as ofDecember 31, 2020 , and we have an option to request an increase to the total availability under the revolving credit facility by an additional$200 million and each lender may participate in the requested increase at their discretion. In addition, we have access to the previously mentioned credit lines of up to$300 million ($600 million in the third quarter) to meet the working capital needs of our subsidiaries, of which$270.6 million was available to use as ofDecember 31, 2020 . Our €500.0 million notes and €400.0 million notes that total$1,094.5 million as ofDecember 31, 2020 mature in 2022 and 2026, thus, there are no payments due in the very near term except for annual interest payments. Based on the above, we believe we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations currently and in the near future should the COVID-19 crisis cause any additional cash flow needs.
Application of Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in
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Defined Benefit Pension Plans We sponsor several qualified and nonqualified pension plans covering permanent employees. The most significant plans are located inSwitzerland , theUnited Kingdom ,the Netherlands ,Germany andFrance . Annual expense relating to these plans was$34.1 million ,$17.2 million and$13.9 million in 2020, 2019 and 2018, respectively, and is estimated to be approximately$22.0 million in 2021. The increase in 2020 pension expense is primarily due to the settlement of aU.S. pension plan in the first quarter of 2020. The calculations of annual pension expense and the pension liability required at year-end include various actuarial assumptions such as discount rates, expected rate of return on plan assets, compensation increases and employee turnover rates. We review the actuarial assumptions on an annual basis and make modifications to the assumptions as necessary. We review market data and historical rates, on a country-by-country basis, to check for reasonableness in setting both the discount rate and the expected return on plan assets. We determine the discount rate based on an index of high-quality corporate bond yields and matched-funding yield curve analysis as of the end of each fiscal year. The expected return on plan assets is determined based on the expected returns of the various investment asset classes held in the plans. We estimate compensation increases and employee turnover rates for each plan based on the historical rates and the expected future rates for each respective country. Changes to any of these assumptions will impact annual expense recorded related to the plans. In determining the estimated 2021 pension expense for non-United States plans, we used a weighted-average discount rate of 0.6% compared to 1.1% for 2020, reflecting the current interest rate environment. We have selected a weighted-average expected return on plan assets of 1.5% for the non-United States plans in determining the 2021 estimated pension expense compared to 2.2% used for the calculation of the 2020 pension expense. Absent any other changes, a 25 basis point increase and decrease in the weighted-average discount rate would impact our 2021 consolidated pension expense by a decrease of$0.9 million and an increase of$3.3 million , respectively. Absent any other changes, a 25 basis point increase or decrease in the weighted-average expected return on plan assets would correspondingly decrease or increase our 2021 consolidated pension expense by$1.7 million . Changes to these assumptions have historically not been significant in any jurisdiction for any reporting period, and no significant adjustments to the amounts recorded have been required in the past or are expected in the future. (See Note 9 to the Consolidated Financial Statements found in Item 8. "Financial Statements and Supplementary Data" for further information.)
Income Taxes
We account for income taxes in accordance with the accounting guidance on income
taxes. The accounting guidance related to uncertain tax positions requires an
evaluation process for all tax positions taken that involves a review of
probability for sustaining a tax position. If the probability for sustaining a
tax position is more likely than not, which is a 50% threshold, then the tax
position is warranted and the largest amount, based on cumulative probability,
that is greater than 50% likely of being realized upon settlement is recognized.
An uncertain tax position, one which does not exceed the 50% threshold, will not
be recognized in the financial statements.
We provide for income taxes on a quarterly basis based on an estimated annual
tax rate. In determining this rate, we make estimates about taxable income for
each of our largest locations worldwide, as well as the tax rate that will be in
effect for each location. To the extent these estimates change during the year,
or actual results differ from these estimates, our estimated annual tax rate may
change between quarterly periods and may differ from the actual effective tax
rate for the year.
Goodwill Impairment
In accordance with the accounting guidance on goodwill, we perform an annual
impairment test of goodwill at our reporting unit level during the third
quarter, or more frequently if events or circumstances change that would more
likely than not reduce the fair value of our reporting units below their
carrying value.
We evaluate the recoverability of goodwill utilizing an income approach that
estimates the fair value of the future discounted cash flows to which the
goodwill relates. This approach reflects management's internal outlook of the
reporting units, which is believed to be the best determination of value due to
management's insight and
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experience with the reporting units. Significant assumptions used in our goodwill impairment tests include: expected future revenue growth rates, operating unit profit margins, working capital levels, discount rates, and a terminal value multiple.
For the second quarter of 2020, in connection with the preparation of our quarterly financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair value of any reporting unit was below its carrying amount. We identified several factors related to ourGermany reporting unit that led us to conclude that it was more likely than not that the fair value of the reporting unit was below its carrying amount. These factors included sustained operating losses resulting from the ongoing decline and increased uncertainty in the outlook of the manufacturing sector, particularly the automotive sector inGermany , coupled with the significant implications of the COVID-19 crisis. As we determined that it was more likely than not that the fair value of theGermany reporting unit was below its carrying amount, we performed an interim impairment test on this reporting unit as ofJune 30, 2020 . As a result of our interim test, we recognized a non-cash impairment loss of$66.8 million , which resulted in full impairment of the remaining goodwill in theGermany reporting unit. TheGermany reporting unit is included in theNorthern Europe segment. The goodwill impairment charge resulted from reductions in the estimated fair value for ourGermany reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to the expectations of the 2019 annual goodwill impairment test and our quarterly assessments in the intervening periods due to the factors discussed above.
We performed our annual impairment test of our goodwill during the third quarter of 2020 and determined that there was no impairment.
The table below provides our reporting units' estimated fair values and carrying values, determined as part of our annual goodwill impairment test performed in the third quarter, representing approximately 80% of our consolidated goodwill balance as ofSeptember 30, 2020 . Right (in millions) France United States Management United Kingdom Canada Netherlands Estimated fair values$ 2,367.8 $ 1,194.0 $ 383.3 $ 360.9$ 153.2 $ 84.5 Carrying values 1,320.7 758.2 117.9 321.5 84.9 81.8 The fair value of each reporting unit was at least 20% in excess of the respective reporting unit's carrying value with the exception of theUnited Kingdom andNetherlands reporting units. TheUnited Kingdom reporting unit had a fair value exceeding carrying value of approximately 12%. Key assumptions included in theUnited Kingdom (Northern Europe Segment) discounted cash flow valuation performed during the third quarter of 2020 were a discount rate of 11.5%, a terminal value revenue growth rate of 1.0%, and a terminal value OUP margin of 3.1%.The Netherlands reporting unit fair value exceeded its carrying value by less than 10%, approximating 3.3%.The Netherlands is part of the Northern Europe Segment. Key assumptions included inthe Netherlands discounted cash flow valuation performed during the third quarter of 2020 included a discount rate of 10.9%, a terminal value revenue growth rate of 2.0%, and a terminal value OUP margin of 3.5%. Should the operations of theUnited Kingdom andNetherlands businesses incur further decreases in the operating results, including declines in profitability and cash flow due to continued deterioration in macroeconomic, industry and market conditions, including uncertainty of the financial impacts from COVID-19, some or all of the recorded goodwill forthe Netherlands orUnited Kingdom reporting units, which were$119.3 million and$100.2 million , respectively, as ofDecember 31, 2020 could be subject to impairment. While our other reporting units fair values exceeded 20% or more of their respective carrying values, given the uncertainty of the financial impacts from the COVID-19 pandemic, there could be significant further decreases in the operating results of our reporting units for a sustained period, which may result in a recognition of goodwill impairment that could be material to the Consolidated Financial Statements. 46 --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Significant Matters Affecting Results of Operations
Market Risks
We are exposed to the impact of foreign currency exchange rate fluctuations and interest rate changes.
Exchange Rates Our exposure to foreign currency exchange rates relates primarily to our foreign subsidiaries and our Euro-denominated borrowings. For our foreign subsidiaries, exchange rates impactthe United States dollar value of our reported earnings, our investments in the subsidiaries and the intercompany transactions with the subsidiaries. Approximately 87% of our revenues and profits are generated outside ofthe United States , with 46% generated from our European operations with a Euro-functional currency. As a result, fluctuations in the value of foreign currencies againstthe United States dollar, particularly the Euro, may have a significant impact on our reported results. Revenues and expenses denominated in foreign currencies are translated intoUnited States dollars at the average exchange rates each month. Consequently, as the value ofthe United States dollar changes relative to the currencies of our major markets, our reported results vary.The United States dollar strengthened in the first half of 2020 and weakened in the second half of 2020 against many of the currencies of our major markets during 2020, whereas it generally strengthened in 2019. Revenues from services in constant currency were 0.2% lower and 4.2% higher than reported revenues in 2020 and 2019, respectively. A change in the strength ofthe United States dollar by an additional 10% would have impacted our revenues from services by approximately 8.7% from the amounts reported in both 2020 and 2019. Fluctuations in currency exchange rates also impactthe United States dollar amount of our shareholders' equity. The assets and liabilities of our non-United States subsidiaries are translated intoUnited States dollars at the exchange rates in effect at year-end. The resulting translation adjustments are recorded in shareholders' equity as a component of accumulated other comprehensive loss.The United States dollar weakened relative to many foreign currencies as ofDecember 31, 2020 compared toDecember 31, 2019 , particularly in Euro- and GBP-functional currencies. Consequently, shareholders' equity increased by$82.3 million as a result of the foreign currency translation as ofDecember 31, 2020 . Ifthe United States dollar had weakened an additional 10% as ofDecember 31, 2020 , resulting translation adjustments recorded in shareholders' equity would have increased by approximately$124.0 million from the amounts reported. As ofDecember 31, 2019 ,the United States dollar strengthened relative to many foreign currencies compared toDecember 31, 2018 . Consequently, shareholders' equity decreased by$22.5 million as a result of the foreign currency translation as ofDecember 31, 2019 . Ifthe United States dollar had strengthened an additional 10% as ofDecember 31, 2019 , resulting translation adjustments recorded in shareholders' equity would have decreased by approximately$186.2 million from the amounts reported. Although currency fluctuations impact our reported results and shareholders' equity, such fluctuations generally do not affect our cash flow or result in actual economic gains or losses. Substantially all of our subsidiaries derive revenues and incur expenses within a single country and, consequently, do not generally incur currency risks in connection with the conduct of their normal business operations. We generally have few cross-border transfers of funds, except for transfers tothe United States for payment of license fees and interest expense on intercompany loans, working capital loans made betweenthe United States and our foreign subsidiaries, dividends from our foreign subsidiaries, and payments between certain countries and territories for services provided. To reduce the currency risk related to these transactions, we may borrow funds in the relevant foreign currency under our revolving credit agreement or we may enter into a forward contract to hedge the transfer. As ofDecember 31, 2020 , we had outstanding$1,094.5 million in principal amount of Euro-denominated notes (€900.0 million). These notes have been designated as a hedge of our net investment in subsidiaries with a Euro-functional currency as ofDecember 31, 2020 . Since our net investment in these subsidiaries exceeds the respective amount of the designated borrowings, both net of tax, the related translation gains or losses are 47 -------------------------------------------------------------------------------- included as a component of accumulated other comprehensive loss. Shareholders' equity decreased by$69.9 million , net of tax, due to changes in accumulated other comprehensive loss during 2020, due to the currency impact on these designated borrowings.
The hypothetical impact of the stated change in rates on 2020 total other comprehensive income (loss) for the Euro Notes is as follows:
2020 (in millions) 10% Depreciation 10% Appreciation Market Sensitive Instrument in Exchange Rates in Exchange Rates Euro Notes: €500.0, 1.81% Notes due June 2026 $ 61.1 $ (61.1 ) €400.0, 1.91% Notes due September 2022 48.9 (48.9 ) Forward contracts: £0.6 to$0.8 $ (0.1 ) $ 0.1 €(130.3) to$(159.0) 16.0 (16.0 ) ¥182.4 to$1.8 (0.2 ) 0.2 Interest Rates
Our exposure to market risk for changes in interest rates relates primarily to
our variable rate long-term debt obligations. We have historically managed
interest rates through the use of a combination of fixed- and variable-rate
borrowings. As of
Weighted-
Average
(in millions) Amount Interest Rate(1)
Variable-rate borrowings $ 20.4 7.9 %
Fixed-rate borrowings 1,103.5 1.9 %
Total debt $ 1,123.9 (1) The rates are impacted by currency exchange rate movements.
Impact of Economic Conditions
One of the principal attractions of using workforce solutions and service providers is to maintain a flexible supply of labor to meet changing economic conditions. Therefore, the industry has been and remains sensitive to economic cycles. To help minimize the effects of these economic cycles, we offer clients a continuum of services to meet their needs throughout the business cycle. We believe that the breadth of our operations and the diversity of our service mix cushion us against the impact of an adverse economic cycle in any single country or industry. However, adverse economic conditions in any of our largest markets, or in several markets simultaneously, would have a material impact on our consolidated financial results.
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements found in Item 8. "Financial Statements and Supplementary Data."
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