ManpowerGroup 2008 Annual Report Download - page 36

34 Management’s Discussion & Analysis Manpower Annual Report 2008
Management’s Discussion & Analysis
of financial condition and results of operations
SFAS 142 requires a two-step method for determining goodwill impairment. In the first step, we determine the fair value of
each reporting unit, generally by utilizing an income approach derived from a discounted cash flow methodology and, for
certain larger reporting units, a combination of the income approach and the market approach derived from comparable
public companies. Significant assumptions used in this analysis include: expected future revenue growth rates, operating
unit profit margins, and working capital levels; a discount rate; and a terminal value multiple. The fair value of the reporting unit
is then compared to its carrying value. If the reporting unit’s fair value is less than its carrying value, we are required to perform
the second step. In this step, we allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting
unit, including any unrecognized intangible assets, in a “hypothetical” calculation to determine the implied fair value of the
goodwill. The impairment charge, if any, is measured as the difference between the implied fair value of the goodwill and its
carrying value.
Under SFAS 142, we are also required to test our indefinite-lived intangible assets for impairment by comparing the fair value
of the intangible asset with its carrying value. If the intangible asset’s fair value is less than its carrying value, an impairment
loss is recognized for the difference.
We completed our annual impairment review during the third quarter of 2008. In the first step, the fair value for each reporting
unit other than Right Management exceeded its carrying value. For Right Management, we were required to perform the
second step. As a result of deteriorating market conditions and general economic uncertainty, market comparables and
forecasted cash flows for the Right Management reporting unit were lower than in previous years, which led to a determination
that the goodwill recorded for Right Management was partially impaired. For the year ended December 31, 2008, we recognized
an impairment loss of $140.8 million related to goodwill. There was no tax benefit associated with this impairment loss.
At the same time, we also determined that the tradename intangible asset for Right Management was partially impaired as a
result of a decrease in forecasted royalties. As a result, we recognized an impairment loss of $22.3 million related to our
tradename intangible asset for the year ended December 31, 2008. We recognized a deferred tax benefit of $8.5 million
associated with this impairment loss.
The goodwill and intangible asset impairment charge is non-cash in nature and does not impact our liquidity, cash flows provided
by operating activities or future operations. (See Note 1 to the consolidated financial statements for further information.)
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 89% of our revenues and profits are generated outside of the U.S., with approximately 53% 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 monthly weighted-average exchange
rates 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 2008, the U.S. Dollar strengthened relative to many of the currencies of our major markets. Revenues from
Services and Operating Profit in constant currency were approximately 4.6% lower than reported. If the U.S. Dollar had
strengthened an additional 10% during 2008, Revenues from Services would have decreased by approximately 8.9% and
Operating Profit would have decreased by approximately 10.3% from the amounts reported.