Annual Report 2011

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

1. Introduction

The information in this discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto that are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are included elsewhere in this Annual Report and with the disclosure concerning forward-looking statements at the end of this section.

Statements throughout this discussion and analysis using the term “the Company” refer to the Adecco Group, which comprises Adecco S.A., a Swiss corporation, its consolidated subsidiaries, as well as variable interest entities for which Adecco is considered the primary beneficiary (for further details refer to section “Principles of consolidation” in Note 1 to the consolidated financial statements).

1.1 Business and industry background

The Company is the world’s leading provider of human resource solutions including temporary staffing, permanent placement, outsourcing, career transition (outplacement), and other services. The Company had a network of over 5,500 branches and over 33,000 full-time equivalent (“FTE”) employees in over 60 countries and territories at the end of 2011. In 2011, the Company connected on average on a daily basis over 700,000 associates with over 100,000 clients. Registered and headquartered in Switzerland and managed by a multinational team with expertise in markets worldwide, the Company delivers a broad range of human resource services to meet the needs of small, medium, and large business clients as well as those of associates.

The HR industry is fragmented and highly competitive. Customer demand is dependent upon the overall strength of the labour market as well as an established trend towards greater workforce flexibility. More liberal labour market laws, particularly for temporary staffing, are beneficial for the industry and have been a driver for greater workforce flexibility. The business is also strongly influenced by the macroeconomic cycle, which typically results in growing demand for employment services during periods of economic expansion, and conversely, contraction of demand during periods of economic downturn. Due to the sensitivity to the economic cycle and the low visibility in the temporary staffing sector, forecasting demand for HR services is difficult. Typically, customers are not able to provide much advance notice of changes in their staffing needs. Responding to the customers’ fluctuating staffing requirements in a flexible way is a key element of the Company’s strategy, which it addresses through its diverse HR services network.

Anticipating trends in demand is also important in managing the Company’s internal cost structure. This coupled with the ability to maximise overall resources and to enhance competitive advantage through the Company’s wide variety of services and locations while maintaining high standards of quality to both clients and associates are key components in achieving profitability targets during any part of the economic cycle.

1.2 Organisational structure

Since January 1, 2011, the Company is organised in a geographical structure plus the global business Lee Hecht Harrison (“LHH”). This structure is complemented by business lines. The geographies consist of France, North America, UK & Ireland, Japan, Germany & Austria, Benelux, Italy, Nordics, Iberia, Australia & New Zealand, Switzerland, and Emerging Markets. The business lines consist of Office, Industrial, Information Technology, Engineering & Technical, Finance & Legal, Medical & Science, and Solutions. The classification of a specific branch into a business line is determined by the business line generating the largest revenue share in that specific branch.

1.3 Service lines

Revenues and gross profit derived from temporary staffing totalled 91% and 76% in 2011 and 92% and 77% in 2010 of the respective consolidated totals. Temporary staffing billings are generally negotiated and invoiced on an hourly basis. Temporary associates record the hours they have worked and these hours, at the rate agreed with the customer, are then accumulated and billed according to the agreed terms. Temporary staffing service revenues are recognised upon rendering the services. The temporary associate is paid the net hourly amount after statutory deductions on a daily, weekly, or monthly basis. Certain other employer payroll-related costs are incurred and the net difference between the amounts billed and payroll costs incurred is reported as gross profit.

Revenues and gross profit derived from permanent placement, outsourcing, career transition (outplacement), and other services totalled 9% and 24% in 2011 and 8% and 23% in 2010 of the respective consolidated totals. The terms of outsourcing and outplacement services are negotiated with the client on a project basis and revenues are recognised upon rendering the services. For permanent placement services, the placement fee is directly negotiated with the client and revenues are recognised at the time the candidate begins full-time employment, or as the fee is earned. Allowance provisions are established based on historical information for any non-fulfilment of permanent placement obligations. Career transition (outplacement) and permanent placement services provide significantly higher gross margins than temporary staffing.

1.4 Key performance indicators

The Company monitors operational results through a number of additional key performance indicators besides revenues, gross profit, selling, general, and administrative expenses, and operating income before amortisation and impairment of goodwill and intangible assets and uses these measures of operational performance along with qualitative information and economic trend data to direct the Company’s strategic focus.

These indicators include the following:

  • Service line mix – the split between temporary staffing, permanent placement, outsourcing, career transition (outplacement), and other services.
  • Business line mix – the split between General Staffing (Office, Industrial), Professional Staffing (Information Technology, Engineering & Technical, Finance & Legal, Medical & Science), and Solutions.
  • Bill rate – an average hourly billing rate for temporary staffing services indicating current price levels.
  • Pay rate – an average hourly payroll rate including social charges for temporary staffing services indicating current costs.
  • Temporary hours sold – the volume of temporary staffing services sold.
  • Temporary associates – the number of temporary associates at work.
  • Clients – the number of active clients.
  • Permanent placements – the number of candidates placed in permanent job positions.
  • Average fee per placement – the average amount received for job placement services.
  • Days sales outstanding (“DSO”) – accounts receivable turnover.
  • Full-time equivalent (“FTE”) employees.
  • Retention rate of employees, associates, and clients.
  • Branches – the number of locations from which the Company offers HR services.
  • Conversion ratio – operating income before amortisation and impairment of goodwill and intangible assets as a percentage of gross profit.
  • Economic Value Added – residual income after cost of capital.

1.5 Seasonality

The Company’s quarterly operating results are affected by the seasonality of the Company’s customers’ businesses. Demand for temporary staffing services historically has been lowest during the first quarter of the year.

1.6 Currency

The financial results of the Company are presented in Euro, which the Company uses as its reporting currency in recognition of the significance of the Euro to the Company’s operations. In 2011, 52% of total revenues were generated in the Euro zone. Amounts shown in the consolidated statements of operations and consolidated statements of cash flows are translated using average exchange rates for the period or at transaction exchange rates. In 2011, the average exchange rate for the Japanese Yen, Swiss Franc, Australian Dollar, and Norwegian Krone which comprised 7%, 2%, 2%, and 2% of total revenues, respectively, strengthened against the Euro, whereas the US Dollar and the British Pound which comprised 16% and 8% of total revenues, respectively, weakened against the Euro when compared to 2010. The Canadian Dollar which comprised 2% of total revenues was stable. The Company’s consolidated balance sheets are translated using the year end exchange rates. At year end 2011, the Japanese Yen, Australian Dollar, US Dollar, Swiss Franc, British Pound, Canadian Dollar, and Norwegian Krone all strengthened against the Euro when compared to 2010.