ManpowerGroup 2009 Annual Report Download - page 37

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Management’s Discussion & Analysis Manpower 2009 Annual Report
We performed our annual impairment test of our goodwill and indefi nite-lived intangible assets during the third quarter of
2009 and 2008, which resulted in non-cash impairment charge of $61.0 million in 2009 for goodwill associated with our
Jefferson Wells reporting unit and $163.1 million in 2008 for goodwill ($140.8 million) and tradename ($22.3 million) associated
with our Right Management reporting unit. We also recorded an $8.5 million deferred tax asset related to the tradename
impairment in 2008.
The 2009 impairment was due in part to continued deterioration in market conditions, which has resulted in Jefferson
Wells experiencing a signifi cant revenue decline during the current year as compared to the prior year. The discount rate was
also impacted unfavorably by a 1% increase to our equity risk premium as a result of current market conditions and
economic uncertainty.
The 2008 impairment was a result of deteriorating market conditions and general economic uncertainty. Market comparables
and forecasted cash fl ows for the Right Management reporting unit were lower than in previous years, which led to a
determination that the goodwill and tradename recorded for Right Management was impaired.
The accounting guidance requires a two-step method for determining goodwill impairment. In the fi rst step, we determined
the fair value of each reporting unit, generally by utilizing an income approach derived from a discounted cash fl ow
methodology. For certain of our reporting units, a combination of the income approach (weighted 75%) and the market
approach (weighted 25%) derived from comparable public companies was utilized. The income approach is developed from
management’s forecasted cash fl ow data. Therefore, it represents an indication of fair market value refl ecting management’s
internal outlook for the reporting unit. The market approach utilizes the Guideline Public Company Method to quantify the
respective reporting unit’s fair value based on revenue and earnings multiples realized by similar public companies. The
market approach is more volatile as an indicator of fair value as compared to the income approach. We believe that each
approach has its merits. However in the instances where we have utilized both approaches, we have weighted the income
approach more heavily than the market approach because we believe that management’s assumptions generally provide
greater insight into the reporting unit’s fair value.
Signifi cant assumptions used in our annual goodwill impairment test during the third quarter of 2009 included: expected
revenue growth rates, operating unit profi t margins, and working capital levels; discount rates ranging from 10.7% to 22.2%;
and a terminal value multiple. The discount rate was impacted unfavorably by a 1% increase to our equity risk premium as a
result of current market conditions and economic uncertainty. The expected future revenue growth rates were determined
after taking into consideration our historical revenue growth rates, our assessment of future market potential, our expectations
of future business performance as well as an assumed modest economic recovery beginning in the middle of 2010.
The table below provides select reporting units’ estimated fair values and carrying values, which were determined as part of
our annual goodwill impairment test performed in the third quarter ended September 30, 2009. Only those reporting units
that have a signifi cant amount of goodwill have been included. As noted in the table below, a 1% reduction in earnings and
revenue growth rates would result in two of our reporting units, U.S. and Elan, having projected fair values less than their
respective carrying values. Hence, if we were to experience further economic contraction within these reporting units or other
reporting units, we may have to record a material impairment charge in future periods. We have also included the sensitivity
analysis of the estimated fair values as follows:
(in millions)
Right
Management United States Elan
Netherlands
(Vitae) Jefferson Wells
Estimated fair values $ 614.3 $ 444.2 $ 343.1 $ 206.0 $ 148.8
Carrying values 475.5 340.2 252.1 58.1 92.9
Sensitivity of estimated fair values:
Estimated fair values in the event of a 1%
reduction in earnings and revenue growth rates 522.8 285.2 220.1 165.8 124.1
Estimated fair value in the event of a 1% increase in
the market participant discount rate 558.4 393.6 304.7 181.6 136.3
If the reporting unit’s fair value is less than its carrying value, as was the case for Jefferson Wells in 2009 and Right Management
in 2008, we are required to perform a second step. In the second step, we allocate the fair value of the reporting unit to all of
the assets and liabilities of the reporting unit, including any unrecognized intangibles 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.