ManpowerGroup 2004 Annual Report Download - page 55

MANPOWER INC. 2004 Annual Report53
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 impact the U.S. Dollar value of our
reported earnings, our investments in the subsidiaries and the intercompany transactions with the subsidiaries.
Approximately 80% of our revenues and profits are generated outside of the United States, with approximately 50%
generated from our European operations that use the Euro as their functional currency. As a result, fluctuations in the
value of foreign currencies against the U.S. Dollar, particularly the Euro, may have a significant impact on our reported
results. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the weighted-
average exchange rate for the year. Consequently, as the value of the U.S. Dollar changes relative to the currencies of
our major markets, our reported results vary.
During 2004 and 2003, the U.S. Dollar weakened relative to many of the currencies of our major markets. In constant
currency, 2004 Revenues from Services and Operating Profit were approximately 8.5% and 10.5% lower than reported,
respectively. If the U.S. Dollar had weakened an additional 10% during 2004, Revenue would have further increased by
approximately 8.3% and Operating Profits would have increased by approximately 8.1%.
Fluctuations in currency exchange rates also impact the U.S. Dollar amount of our Shareholders’ Equity. The assets
and liabilities of our non-U.S. subsidiaries are translated into U.S. 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 Income. The U.S. Dollar weakened relative to many foreign currencies as of December 31, 2004
compared to December 31, 2003. Consequently, Shareholders’ Equity increased by $86.3 million as a result of the
change in Accumulated Other Comprehensive Income during the year. If the U.S. Dollar had weakened an additional 10%
during 2004, resulting translation adjustments recorded in Shareholders’ Equity would have increased by approximately
$120.0 million.
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 to the United States for payment of license fees and interest expense on intercompany loans, working capital
loans made between the United States and our foreign subsidiaries, dividends from our foreign subsidiaries, and payments
between our EMEA countries and our EMEA headquarters 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. Foreign exchange gains and losses recognized on any forward
contracts are included in the consolidated statements of operations. As of December 31, 2004, there were no forward
contracts outstanding.
As of December 31, 2004, we had $406.6 million of long-term borrowings denominated in Euros (300.0 million), which
have been designated as a hedge of our net investment in subsidiaries with the Euro functional currency. Since our net
investment in these subsidiaries exceeds the respective amount of the designated borrowings, all translation gains or
losses related to these borrowings are included as a component of Accumulated Other Comprehensive Income.
Shareholders’ Equity decreased by $28.8 million due to changes in Accumulated Other Comprehensive Income during
the year due to the currency impact on these borrowings.
MANAGEMENT’S DISCUSSION AND ANALYSIS
of financial condition and results of operations