ManpowerGroup 2007 Annual Report Download - page 31

Management’s Discussion & Analysis28 Manpower 2007 Annual Report
Management’s Discussion & Analysis
of financial condition and results of operations
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 signifi cantly
impact our estimate of the fair value of our reporting units. Such a change may result in an impairment charge, which could have
a signifi cant impact on the reportable segment that includes the related reporting unit and our consolidated fi nancial statements.
SIGNIFICANT MATTERS AFFECTING RESULTS OF OPERATIONS
Market Risks
We are exposed to the impact of foreign currency exchange rate fl uctuations 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 88% of our revenues and profi ts 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, fl uctuations in the value of foreign currencies
against the U.S. Dollar, particularly the Euro, may have a signifi cant 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 2007, the U.S. Dollar weakened relative to many of the currencies of our major markets. Revenues from Services
and Operating Profi t in constant currency were approximately 7.7% and 10.8%, respectively, lower than reported. If the U.S.
Dollar had weakened an additional 10% during 2007, Revenues from Services would have increased by approximately 8.8%
and Operating Profi t would have increased by approximately 7.7% 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, 2007 compared to December 31, 2006. Consequently,
Shareholders’ Equity increased by $106.3 million as a result of the foreign currency translation during the year. If the U.S. Dollar
had weakened an additional 10% during 2007, resulting translation adjustments recorded in Shareholders’ Equity would have
increased by approximately $127.9 million from the amounts reported.
Although currency fl uctuations impact our reported results and Shareholders’ Equity, such fl uctuations generally do not affect
our cash fl ow 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, 2007, there was a £5.5 million ($10.9 million) forward contract that relates to cash fl ows owed to our foreign
subsidiaries in March 2008. In addition, a €2.0 million ($2.9 million) forward contract is outstanding relating to cash fl ows owed
for interest due on our €200.0 million Notes and €300.0 million Notes in June 2008. All such contracts entered into during 2007
and 2006, whether designated as cash fl ow hedges or fair value hedges, were considered highly effective, as defi ned by SFAS
No. 133, as amended. The effective portions of the changes in the fair value of the cash fl ow 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, 2007, we had $873.0 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.