Adecco Group –
Operating and financial review and prospects
in millions, except share and per share information

5. Liquidity and capital resources

Currently, cash needed to finance the Company’s existing business activities is primarily generated through operating activities, bank overdrafts, commercial paper, the existing multicurrency credit facility, and, when necessary, the issuance of bonds and capital instruments.

The principal funding requirements of the Company’s business include financing working capital and capital expenditures. Capital expenditures mainly comprise the purchase of computer equipment, capitalised software, and the cost of leasehold improvements.

Within the Company’s working capital, trade accounts receivable, net of allowance for doubtful accounts, comprise approximately 80% of total current assets. Accounts payable, accrued salaries and wages, payroll taxes and employee benefits and sales and value added taxes comprise approximately 74% of total current liabilities. Working capital financing needs increase as business grows.

Management believes that the ability to generate cash from operations combined with additional capital resources available is sufficient to support the expansion of existing business activities and to meet short- and medium-term financial commitments. The Company may utilise available cash resources, secure additional financing, or issue additional shares to finance acquisitions.

5.1 Analysis of cash flow statements

Cash and cash equivalents decreased by a total of EUR 909 to EUR 549 at the end of 2010. The decrease was mainly due to the acquisition of MPS in January 2010 for EUR 831, net of cash acquired, the repayment of EUR 478 long-term debt, the EUR 91 payment of dividends, and capital expenditures of EUR 105. This was partly offset by the generation of EUR 455 in operating cash flow and the net increase of EUR 156 in short-term borrowings.

Cash flows from operations are generally derived from receipt of cash from customers less payments to temporary personnel, regulatory authorities, employees, and other operating disbursements. Cash receipts are dependent on general business trends, foreign currency fluctuations, and cash collection trends measured by DSO. DSO varies significantly within the various countries in which the Company has operations, due to the various market practices within these countries. In general, an improvement in DSO reduces the balance of trade accounts receivable resulting in cash inflows from operating activities. Cash disbursement activity is predominantly associated with scheduled payroll payments to the temporary personnel. Given the nature of these liabilities, the Company has limited flexibility to adjust its disbursement schedule. Also, the timing of cash disbursements differs significantly amongst various countries.

The following table illustrates cash from or used in operating, investing, and financing activities:

in EUR

2010

2009

 

 

 

Summary of cash flows information

 

 

Net cash from operating activities

455

477

Net cash from/(used in) investing activities

(1,020)

(278)

Net cash from/(used in) financing activities

(385)

652

Cash flows from operating activities decreased by EUR 22 to EUR 455 in 2010 compared to 2009. This decrease is primarily attributable to the additions to working capital as a result of better business conditions partly offset by higher net income, net of non-cash items mainly related to tax benefits and impairment charges. DSO increased to 54 days for the full year 2010 compared to 53 days for the full year 2009.

Cash flows used in investing activities increased by EUR 742 to EUR 1,020 in 2010 compared to 2009. In 2010 the Company acquired MPS for a consideration, net of cash acquired, of EUR 831 while in 2009 Spring was acquired for a consideration, net of cash acquired, of EUR 94. The Company’s capital expenditures amounted to EUR 105 in 2010 and EUR 92 in 2009.

Cash flows used in financing activities totalled EUR 385 which compares to cash flows from financing activities of EUR 652 in 2009. In 2010 and 2009, the Company repaid long-term debt of EUR 478 and EUR 223, respectively. The debt repayments in both years consisted primarily of the repurchase of the guaranted zero-coupon convertible bond. In addition, in 2010, the Company’s net increase in short-term debt amounted to EUR 156, whereas in 2009 short-term debt decreased by EUR 43. In 2009, the Company issued EUR 500 guaranteed Euro medium-term notes. In addition, in 2009 the Company received EUR 587 (CHF 887) in connection with the prepaid forward sale of Adecco S.A. shares and EUR 116 (CHF 176) for the loan granted by Adecco Investment and paid EUR 108 (CHF 164) for the purchase of the call spread option on Adecco S.A. shares. Additionally, the Company paid dividends of EUR 91 and EUR 173 in 2010 and 2009, respectively.

5.2 Additional capital resources

As of December 31, 2010, the Company’s total capital resources amounted to EUR 5,402 comprising EUR 1,305 in debt and EUR 4,097 in equity, excluding treasury shares and noncontrolling interests. Long-term debt, including current maturities, was EUR 1,137 as of December 31, 2010 and EUR 1,556 as of December 31, 2009 and includes long-term notes, and medium-term loans. In 2009, the long-term debt also included a convertible bond. The borrowings, which are unsecured, are denominated in Euros and Swiss Francs. The majority of the borrowings outstanding as of December 31, 2010 mature in 2013 and in 2014. During 2010, the Company decreased its short- and long-term debt including foreign currency effect by EUR 265.

In 2010, the Company established a French commercial paper programme (“Billet de Trésorerie programme”). Under the programme, the Company may issue short-term commercial paper up to a maximum amount of EUR 400, with maturity of individual paper of 365 days or less. As of December 31, 2010, EUR 151 was outstanding under the programme, with maturities of up to three months. The weighted-average interest rate on commercial paper outstanding was 1.09% as of December 31, 2010.

In addition, the Company maintains a committed multicurrency revolving credit facility issued by a syndicate of banks which permits borrowings up to a maximum of EUR 550 and is used for general corporate purposes including refinancing of advances and outstanding letters of credit. The interest rate is based on LIBOR, or EURIBOR for drawings denominated in Euro, plus a margin between 0.4% and 0.7% per annum depending on certain debt-to-EBITDA ratios. The letter of credit fee equals the applicable margin, and the commitment fee equals 33% of the applicable margin. As of December 31, 2010 and December 31, 2009, there were no outstanding borrowings under the credit facility. As of December 31, 2010, the Company had EUR 470 available under the credit facility after utilising EUR 80 in the form of letters of credit.

Furthermore, as of December 31, 2010, the Company had uncommitted lines of credit amounting to EUR 452, of which EUR 17 was used.

Net debt increased by EUR 641 to EUR 751 as of December 31, 2010. Net debt is reconciled to the most comparable financial measures calculated in accordance with U.S. GAAP on page 94.

Under the terms of the various short- and long-term credit agreements, the Company is subject to covenants requiring, among other things, compliance with certain financial tests and ratios. As of December 31, 2010, the Company was in compliance with all financial covenants.

For further details regarding financing arrangements refer to Note 7 to the consolidated financial statements.

The Company manages its cash position to ensure that contractual commitments are met and reviews cash positions against existing obligations and budgeted cash expenditures. The Company’s policy is to invest excess funds primarily in investments with maturities of 12 months or less, and in money market and fixed income funds with sound credit ratings, limited market risk and high liquidity.

The Company’s current cash and cash equivalents and short-term investments are invested primarily within Europe and the USA. In most cases, there are no restrictions on the transferability of these funds among entities within the Company.

5.3 Contractual obligations

The Company’s contractual obligations are presented in the following table:

in EUR

2011

2012

2013

2014

2015

Thereafter

Total

 

Contractual obligations by year

 

 

 

 

 

 

 

Short-term debt obligations

168

 

 

 

 

 

168

Long-term debt obligations

49

70

516

500

1

1

1,137

Interest on debt obligations

63

62

45

12

 

 

182

Operating leases

190

130

98

72

58

79

627

Purchase and service contractual obligations

31

49

4

3

2

 

89

Total

501

311

663

587

61

80

2,203

Short-term debt obligations consist of bank overdrafts and borrowings outstanding under the lines of credit and the commercial paper programme. Long-term debt obligations consist primarily of the EUR 500 fixed rate notes due in 2013 and the EUR 500 medium-term notes due in 2014. These debt instruments were issued in part for acquisitions, to refinance existing debt, optimise available interest rates, and increase the flexibility of cash management.

Future minimum rental commitments under non-cancellable leases comprise the majority of the operating lease obligations of EUR 627 presented above. The Company expects to fund these commitments with existing cash and cash flows from operations. Operating leases are employed by the Company to maintain the flexible nature of the branch network.

As of December 31, 2010, the Company had future purchase and service contractual obligations of approximately EUR 89, primarily related to IT development and maintenance agreements, earn-out agreements related to acquisitions, marketing sponsorship agreements, equipment purchase agreements, and other vendor commitments.

5.4 Additional funding requirements

The Company plans to invest approximately EUR 100 in property, equipment, and leasehold improvements for existing operations in 2011. The focus of these investments will be on information technology.

Further planned cash outflows include distribution of dividends for 2010 in the amount of CHF 1.10 per share to shareholders of record on the date of payment. The maximum amount of dividends payable based on the total number of outstanding shares (excluding treasury shares) as of December 31, 2010 of 174,702,026 is EUR 154 (CHF 192 – based on CHF/EUR exchange rate of 1.25 as of December 31, 2010). Payment of dividends is subject to approval by shareholders at the Annual General Meeting. In addition, the Company has announced that it intends to acquire up to an additional 2% of issued shares of Adecco S.A., if and when opportune.

The Company has entered into certain guarantee contracts and standby letters of credit that total EUR 746, including the letters of credit issued under the multicurrency revolving credit facility (EUR 80). The guarantees primarily relate to government requirements for operating a temporary staffing business in certain countries and are generally renewed annually. Other guarantees relate to operating leases and credit lines. The standby letters of credit mainly relate to workers compensation in the USA. If the Company is not able to obtain and maintain letters of credit and/or guarantees from third parties, then the Company would be required to collateralise its obligations with cash. Due to the nature of these arrangements and historical experience, the Company does not expect to be required to collateralise its obligations with cash.

5.5 Income taxes

The Company has reserves for taxes that may become payable in future periods as a result of tax audits. At any given time, the Company is undergoing tax audits in different tax jurisdictions, which cover multiple years. Ultimate outcomes of these audits could, in a future period, have a material impact on cash flows.

Based upon information currently available, the Company is not able to determine if it is reasonably possible that the final outcome of tax audits will result in a materially different outcome than that assumed in its tax reserves.

5.6 Credit ratings

As of December 31, 2010, the Company’s long-term credit rating was Baa3 with stable outlook from Moody’s and BBB- stable outlook from Standard & Poor’s.