ManpowerGroup 2006 Annual Report Download - page 31

฀ 27Management’s฀Discussion฀&฀Analysis Manpower฀2006฀Annual฀Report
We฀may฀be฀required฀to฀perform฀an฀impairment฀review฀prior฀to฀our฀scheduled฀annual฀review฀if฀certain฀events฀occur,฀including฀
lower-than-forecasted฀earnings฀levels฀for฀certain฀reporting฀units.฀In฀addition,฀changes฀to฀other฀assumptions฀could฀significantly฀
impact฀our฀estimate฀of฀the฀fair฀value฀of฀our฀reporting฀units.฀Such฀a฀change฀may฀result฀in฀an฀impairment฀charge,฀which฀could฀have฀
a฀significant฀impact฀on฀the฀reportable฀segment฀that฀includes฀the฀related฀reporting฀unit฀and฀our฀consolidated฀financial฀statements.
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฀85%฀of฀our฀revenues฀and฀profits฀are฀generated฀outside฀of฀the฀U.S.,฀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.
Throughout฀2006,฀the฀U.S.฀Dollar฀weakened฀relative฀to฀many฀of฀the฀currencies฀of฀our฀major฀markets.฀Revenues฀from฀Services฀
and฀Operating฀Profit฀in฀constant฀currency฀were฀approximately฀0.8%฀and฀2.2%,฀respectively,฀lower฀than฀reported.฀If฀the฀U.S.฀
Dollar฀had฀weakened฀an฀additional฀10%฀during฀2006,฀Revenues฀from฀Services฀would฀have฀increased฀by฀approximately฀8.5%฀
and฀Operating฀Profit฀would฀have฀increased฀by฀approximately฀6.3%฀from฀the฀amounts฀reported.
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,฀2006฀compared฀to฀December฀31,฀2005.฀Consequently,฀
Shareholders’฀Equity฀increased฀by฀$131.8฀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฀2006,฀resulting฀translation฀adjustments฀recorded฀in฀
Shareholders’฀Equity฀would฀have฀increased฀by฀approximately฀$124.4฀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฀to฀the฀U.S.฀for฀payment฀
of฀license฀fees฀and฀interest฀expense฀on฀intercompany฀loans,฀working฀capital฀loans฀made฀between฀the฀U.S.฀and฀our฀foreign฀฀
subsidiaries,฀dividends฀from฀our฀foreign฀subsidiaries,฀and฀payments฀between฀certain฀countries฀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฀of฀December฀31,฀2006,฀there฀was฀a฀£4.5฀million฀($8.8฀million)฀forward฀contract฀that฀relates฀to฀cash฀flows฀owed฀to฀our฀foreign฀
subsidiaries฀in฀March฀2007.฀In฀addition,฀a฀3.5฀million฀($4.7฀million)฀forward฀contract฀is฀outstanding฀relating฀to฀cash฀flows฀owed฀
for฀interest฀due฀on฀our฀200฀million฀Notes฀and฀300฀million฀Notes฀in฀June฀2007.฀All฀such฀contracts฀entered฀into฀during฀2006,฀
whether฀designated฀as฀cash฀flow฀hedges฀or฀fair฀value฀hedges,฀were฀considered฀highly฀effective,฀as฀defined฀by฀SFAS฀No.฀133,฀as฀
amended.฀The฀effective฀portions฀of฀the฀changes฀in฀the฀fair฀value฀of฀the฀cash฀flow฀hedges฀are฀recorded฀as฀a฀component฀of฀
Accumulated฀Other฀Comprehensive฀Income฀and฀recognized฀in฀the฀consolidated฀statements฀of฀operations฀when฀the฀hedged฀
item฀affects฀earnings.฀For฀a฀fair฀value฀hedge฀the฀gain฀or฀loss฀attributable฀to฀the฀change฀in฀fair฀value฀of฀the฀derivative฀as฀well฀as฀the฀
hedged฀item฀is฀recognized฀in฀earnings฀in฀the฀period฀of฀change.
As฀of฀December฀31,฀2006,฀we฀had฀$789.0฀million฀of฀long-term฀borrowings฀denominated฀in฀Euros฀(600.0฀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฀increased฀by฀
$50.2฀million,฀net฀of฀tax,฀due฀to฀changes฀in฀Accumulated฀Other฀Comprehensive฀Income฀during฀the฀year฀due฀to฀the฀currency฀฀
impact฀on฀these฀borrowings.฀