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

3.1 Overview

Overall, 2010 saw a good business environment and a growth in demand for staffing and human resource services. Revenues increased in 2010 compared to 2009 by 26% to EUR 18,656 or by 22% in constant currency. On an organic basis, revenues increased in 2010 by 12%.

Operating income before amortisation and impairment of goodwill and intangible assets increased by 142% from EUR 299 in 2009 to EUR 722 in 2010.

The 2009 selling, general and administrative expenses (“SG&A”) were negatively affected by restructuring costs of EUR 121 incurred in France, Italy, Iberia, Benelux, UK & Ireland, North America, Germany & Austria, and other countries (for further details refer to Note 6 to the consolidated financial statements), and the 2009 gross profit was positively affected due to favourable developments in France resulting in the reassessment of existing accruals of EUR 25 offset by a sales tax accrual in the UK related to prior years of EUR 7.

Effective as of January 2010, the French government introduced a new business tax law, which requires a portion of the business tax to be computed based on added value and consequently, under U.S. GAAP, this component previously reported as cost of services and SG&A is classified as income tax in 2010. Applying the new business tax law already for 2009 would have increased gross profit by EUR 60 and reduced SG&A by EUR 4.

Excluding in 2009, the items discussed in the above two paragraphs and organically, operating income before amortisation and impairment of goodwill and intangible assets increased by 34%.

Operating income increased to EUR 667 in 2010 compared to EUR 65 in 2009. The 2009 operating income included impairment charges to goodwill and intangible assets of EUR 192.

Net income attributable to Adecco shareholders increased to EUR 423 in 2010 compared to EUR 8 in 2009.

3.2 Revenues

Revenues increased by 26% to EUR 18,656 in 2010, by 22% in constant currency or by 12% organically. This increase was driven primarily by an increase in temporary staffing volume as temporary hours sold rose by 19% to 1,166 million. Permanent placement revenues were EUR 288 in 2010, which represents an increase of 65%, or 24% on an organic basis versus 2009. Outplacement revenues were EUR 223 in 2010 which represents a decrease of 25%, or 28% in constant currency.

In France, North America, Germany & Austria, Italy, Nordics, Australia & New Zealand, and Emerging Markets revenues increased organically by double digit percentages, but declined organically in UK & Ireland and Japan by single digit percentages.

Geographical performance

The geographical breakdown of revenues is presented below:

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[1]In 2010, revenues changed organically in North America by 14%, UK & Ireland by –4%, Germany & Austria by 19%, Benelux by 8%, Australia & New Zealand by 15%, and Adecco Group by 12%.

France

Revenues in France increased by 16% to EUR 5,588 in 2010. Temporary hours sold grew by 17% and temporary staffing services bill rates remained unchanged. In 2010, France accounted for 30% of the Company’s revenues.

North America

Revenues in North America increased by 56%, by 47% in constant currency or by 14% organically, to EUR 3,609 in 2010. Temporary hours sold grew by 26% and bill rates increased by 20% in constant currency, mainly due to acquisitions. The outplacement business revenues decreased by 41%, or by 43% in constant currency. North America contributed 19% to the Company’s revenues in 2010.

UK & Ireland

UK & Ireland’s revenues increased by 72% or by 65% in constant currency, to EUR 1,630 in 2010. Revenues declined by 4% on an organic basis versus 2009. Temporary hours sold increased by 23% and bill rates grew by 32% in constant currency, mainly due to acquisitions. UK & Ireland generated 9% of the Company’s revenues in 2010.

Japan

Business in the later cyclical office segment, accounting for almost 80% of Adecco's revenues in Japan, remained slow. This is the main reason for the decline in revenues of 3% or 12% in constant currency, to EUR 1,297. Temporary hours sold decreased by 13% and bill rates fell by 1% in constant currency. In 2010, 7% of the Company’s revenues were generated in Japan.

Germany & Austria

Germany & Austria’s revenues increased by 20% or by 19% organically, to EUR 1,238 in 2010, reflecting a 25% increase in temporary hours sold and a 3% decrease in bill rates. Revenues in Germany & Austria accounted for 7% of the Company’s revenues in 2010.

Benelux

In the Benelux countries, revenues increased by 12% or by 8% organically, to EUR 894 in 2010. Temporary hours sold increased by 12% and bill rates decreased by 1%. The Benelux revenues in 2010 accounted for 5% of the Company’s revenues.

Italy

In Italy, revenues increased by 24% to EUR 844 in 2010 as temporary hours sold increased by 22% and bill rates grew by 1%. Italy accounted for 4% of the Company’s revenues in 2010.

Iberia

In Iberia, revenues increased by 8% to EUR 733. The temporary hours sold increased by 10% and the bill rate remained unchanged. In 2010, Iberia contributed 4% to the Company’s revenues.

Nordics

Revenues in the Nordic countries increased by 23%, or by 13% in constant currency, to EUR 731. Temporary hours sold increased by 13% and the bill rates fell by 1% in constant currency. The Nordics revenues in 2010 accounted for 4% of the Company’s revenues.

Australia & New Zealand

In Australia & New Zealand, revenues increased by 51% or by 15% organically, to EUR 435 in 2010. Australia & New Zealand contributed 2% of the Company’s revenues in 2010.

Switzerland

In Switzerland, revenues increased by 17% or by 7% in constant currency, to EUR 399. Switzerland revenues represented 2% of the Company’s revenues in 2010.

Emerging Markets

In the Emerging Markets, revenues increased by 30% or by 23% in constant currency, to EUR 1,258. The Emerging Markets represented 7% of the Company’s revenues in 2010.

Business line performance

The business line breakdown of revenues is presented below:

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[1]Breakdown of revenues is based on dedicated branches.
The 2010, information includes certain changes in the allocation of branches to business lines. The 2009 information has been restated to conform to the current year presentation.

[2]In 2010 revenues changed organically in Office by –1%, Information Technology by 5%, Engineering & Technical by 17%, Finance & Legal by 3%, Medical & Science by 5%, Sales, Marketing & Events by 2%, Total Professional Business Lines by 3%, and Adecco Group by 12%.

Office & Industrial

The Company’s Office & Industrial businesses increased by 17% or by 13% in constant currency to EUR 12,697 in 2010, which represents 68% of the Company’s revenues.

In the Office business, revenues overall declined organically by 1%. In North America, Nordics and Iberia revenues in constant currency increased by double digit percentage figures, whereas in Japan, UK & Ireland, and France revenues in constant currency declined. Japan, North America, UK & Ireland, Nordics, and France generated more than 80% of the revenues in the Office business.

In the Industrial business, revenues increased in constant currency by double digit percentage figures in North America, Germany & Austria, Italy, France, and Benelux. France, North America, Germany & Austria, Italy, and Benelux accounted for over 80% of the revenues in the Industrial business.

Information Technology

In Information Technology, the Company’s revenues increased by 88%, or by 5% organically, compared to 2009. In UK & Ireland and Australia & New Zealand revenues increased organically by double digit percentage figures, whereas revenues declined organically in North America. UK & Ireland, North America, and Australia & New Zealand contributed over 80% of the business line’s revenues.

Engineering & Technical

Revenues in the Company’s Engineering & Technical business line increased by 54%, or by 17% organically, compared to 2009. In North America and Germany & Austria revenues increased organically. Over 75% of the business line’s revenues were generated in North America and Germany & Austria.

Finance & Legal

In Finance & Legal, the Company experienced a revenue expansion of 117%, or 3% organically. In North America organically revenues were at the same level and in UK & Ireland revenues increased organically compared to 2009. North America and UK & Ireland contributed over 75% of revenues of the business line Finance & Legal.

Medical & Science

Medical & Science revenues grew by 47% or by 5% organically. In North America and France revenues increased organically, whereas in the Nordics revenues declined in constant currency compared to 2009. France, North America, and the Nordics accounted for over 80% of the business line’s revenues.

Sales, Marketing & Events

In Sales, Marketing & Events revenues increased by 8%, or by 2% organically, compared to 2009. Iberia, Japan, and France accounted for over 85% of the business line’s revenues.

Human Capital Solutions

The Company’s Human Capital Solutions revenues declined by 22% or by 24% in constant currency, reflecting the counter-cyclical nature of the outplacement business. In North America, revenues declined by double digit in constant currency, whereas in France revenues increased moderately. Over 80% of the Human Capital Solutions business line’s revenues were generated in North America and France.

3.3 Gross profit

Gross profit increased by 26%, or by 21% in constant currency, to EUR 3,329 in 2010. Excluding acquisitions and divestitures, which had a positive impact of 50 basis points (“bps”), and the French and UK impact [1], gross margin was down 90 bps. Lower gross margins in the temporary staffing business (–50 bps) and the lower contribution of outplacement (–60 bps) were the main drivers behind this decline.

The change in gross margin in 2010 compared to 2009 is as follows:

[1]Excluding in 2009, the French business tax of EUR 60 and the positive impact of EUR 25 for the reassessment of existing accruals in France, as well as the negative impact of the sales tax accrual in the UK related to prior years of EUR 7.

3.4 Selling, general and administrative expenses

During 2010, the Company maintained its emphasis on cost control. Selling, general and administrative expenses (“SG&A”) increased by 11%, or by 7% in constant currency, reflecting a decrease in SG&A as a percentage of revenues of 190 bps to 14.0% from 15.9% in 2009. SG&A in 2009 included restructuring expenses of EUR 121 associated with headcount reductions and branch optimisation in France, Italy, Iberia, Benelux, UK & Ireland, North America, Germany & Austria, and other countries. SG&A, on an organic basis and adjusted for the restructuring expenses as well as the French business tax in 2009 (EUR 4), were at the same level in 2010 as in 2009.

Personnel expenses, which comprised approximately 71% of total SG&A, increased by 14%, or 10% in constant currency to EUR 1,842 in 2010. The average FTE employees during 2010 increased by 5% (organically –5%) to over 31,000 and the average number of branches during 2010 decreased by 5% (organically –10%) to over 5,500. At year end 2010, the number of FTE employees and the number of branches exceeded 32,000 and 5,500, respectively.

The following table shows the average FTE employees and the average branches by geographical areas:

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Marketing expenses were EUR 68 in 2010, compared to EUR 58 in 2009. Bad debt expense decreased by EUR 4 to EUR 12 in 2010.

3.5 Amortisation of intangible assets and impairment of goodwill and intangible assets

Amortisation of intangible assets increased to EUR 55 in 2010 from EUR 42 in 2009.

In 2009, the Company recorded an impairment charge to goodwill and indefinite-lived and definite-lived intangible assets of EUR 192. The goodwill impairment charge of EUR 125 related to the German operations and the intangible assets impairment charge of EUR 67 mainly related to the write-down of the Tuja customer base intangible assets and the Tuja trade names in Germany.

3.6 Operating income

The geographical breakdown of operating income is presented in the following table:

 

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France

France’s operating income increased by 214% to EUR 212 in 2010. The operating income margin increased by 240 bps to 3.8% in 2010. The 2010 operating income was positively impacted as a result of the change in the French business tax. The 2009 operating income included restructuring expenses of EUR 49, net of lower profit sharing expenses as a result of the restructuring charges, partly offset by the positive impact of the reassessment of existing accruals of EUR 25.

North America

North America’s operating income increased by 55%, or by 49% in constant currency, to EUR 174 in 2010. The operating income margin was 4.8% in 2010, unchanged compared to 2009, positively impacted by the MPS Group (“MPS”) acquisition and negatively impacted by the declining outplacement business and integration costs of EUR 20 in 2010 related to MPS.

UK & Ireland

UK & Ireland’s operating income improved from an operating loss in 2009 of EUR 13 to operating income of EUR 22 in 2010. The better results were achieved by a more favourable business mix, increased scale and synergies from the integration of the acquired businesses, Spring and MPS. This was offset by integration costs in 2010 of EUR 13 related to the acquisitions. The 2009 operating loss included restructuring expenses of EUR 9 and a EUR 7 sales tax accrual related to prior years. The operating income margin was 1.4% in 2010.

Japan

Business in the later cyclical office segment, accounting for close to 80% of Adecco’s revenues in Japan, remained slow. This is the main reason for the operating income decrease in 2010 of 27%, or 34% in constant currency to EUR 69 and the operating income margin decline of 180 bps to 5.3% compared to 2009.

Germany & Austria

Germany & Austria’s operating income increased by 166% to EUR 84 in 2010 and the operating income margin was 6.8%, an increase of 380 bps compared to 2009, mainly due to increasing revenues and lower SG&A as a percentage of revenues.

Benelux

In the Benelux countries, operating income increased to EUR 43 in 2010. The operating income margin increased by 410 bps to 4.8% in 2010 compared to 2009, partly due to restructuring expenses in 2009 of EUR 14.

Italy

In Italy, operating income grew to EUR 37 in 2010 and the operating income margin expanded by 370 bps to 4.4% compared to 2009, mainly due to strongly increasing revenues and lower SG&A as a percentage of revenues. In 2009, SG&A included restructuring expenses of EUR 19.

Iberia

In Iberia, operating income increased to EUR 27 in 2010. The operating income margin increased by 330 bps to 3.8% in 2010 compared to 2009, partly caused by restructuring expenses of EUR 15 in 2009.

Nordics

Operating income in the Nordics grew to EUR 38 in 2010. The operating income margin increased by 440 bps to 5.1% in 2010 compared to 2009, due to increasing revenues, a higher gross margin and lower SG&A as a percentage of revenues.

Australia & New Zealand

In Australia & New Zealand, operating income increased by 190% or by 142% in constant currency to EUR 12 in 2010 compared to 2009. The operating income margin increased by 130 bps to 2.8% in 2010 compared to 2009.

Switzerland

In Switzerland, operating income increased by 90% or by 72% in constant currency to EUR 42 in 2010 compared to 2009. The operating income margin grew by 400 bps to 10.4% due to increasing revenues, a higher gross margin and lower SG&A as a percentage of revenues.

Emerging Markets

In the Emerging Markets, the Company experienced an increase in operating income of 29% or 26% in constant currency to EUR 36 in 2010. The operating income margin was 2.9% in 2010 and 2009.

3.7 Interest expense

Interest expense increased by EUR 8 to EUR 63 in 2010 compared to EUR 55 in 2009.

3.8 Other income/(expenses), net

Other income/(expenses), net, which include interest income, foreign exchange gains and losses, and other non-operating income/(expenses), net, were expenses of EUR 1 in 2010 unchanged from 2009.

3.9 Provision for income taxes

The provision for income taxes was EUR 179 in 2010 compared to EUR 1 in 2009. The effective tax rate for 2010 was 30% compared to 5% in the prior year.

The Company’s effective tax rate is impacted by recurring items, such as tax rates in the different jurisdictions where the Company operates and the income mix within jurisdictions. Furthermore, it is also affected by discrete items which may occur in any given year, but are not consistent from year to year.

The 2010 effective tax rate includes the negative impact from the change in the French business tax law. This was partly offset by the positive impact from the successful resolution of prior years’ audits and the expiration of statutes of limitation. The 2009 effective tax rate was positively impacted by the change in the mix of earnings and the successful resolution of prior years’ audits, which was partly offset by impairment charges with no tax benefit.

3.10 Net income attributable to Adecco shareholders

Net income attributable to Adecco shareholders for 2010 increased to EUR 423 compared to EUR 8 in 2009. Basic earnings per share (“EPS”) was EUR 2.20 in 2010 compared to EUR 0.04 in 2009.