Annual Report 2011

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 other 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 17 to EUR 532 as of December 31, 2011. The decrease was mainly due to the acquisition of DBM in August 2011 for EUR 148, net of cash acquired, the repayment of EUR 214 of long-term debt, the EUR 149 payment of dividends, purchase of treasury shares of EUR 178, settlement of derivatives of EUR 57, and capital expenditures of EUR 109. This was mostly offset by the generation of EUR 524 in operating cash flows and the EUR 330 net proceeds from borrowings of long-term debt.

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

2011

2010

 

 

 

Summary of cash flows information

 

 

Cash flows from operating activities

524

455

Cash used in investing activities

(317)

(1,020)

Cash used in financing activities

(224)

(385)

Cash flows from operating activities increased by EUR 69 to EUR 524 in 2011 compared to 2010. This increase is primarily attributable to the increase in net income, net of non-cash items mainly related to tax benefits. DSO increased to 55 days for the full year 2011 compared to 54 days for the full year 2010.

Cash used in investing activities decreased by EUR 703 to EUR 317 in 2011 compared to 2010. In 2011, the Company acquired DBM for a consideration, net of cash acquired of EUR 148 while in 2010 MPS was acquired for a consideration, net of cash acquired, of EUR 831. The Company’s capital expenditures amounted to EUR 109 in 2011 and EUR 105 in 2010.

Cash used in financing activities totalled EUR 224, a decrease of EUR 161 when compared to 2010. In 2011, the Company issued long-term debt of EUR 330, net of issuance costs and repaid long-term debt of EUR 214, whereas in 2010 long-term debt repayments amounted to EUR 478. The debt repayments in 2011 primarily consisted of the partial repayments of the 5-year Euro medium-term notes due in 2014 and the fixed rate notes due in 2013 resulting from the exchange and tender offers for outstanding notes in April 2011. In 2010 debt repayments primarily consisted of repayment of the guaranteed zero-coupon convertible bond. In addition in 2011, the Company’s net decrease in short­-term debt amounted to EUR 9, whereas in 2010 short­-term debt increased by EUR 156. Additionally, the Company paid dividends of EUR 149 and EUR 91 in 2011 and 2010, respectively. Furthermore, in 2011, the Company acquired treasury shares in the amount of EUR 178 while in 2010 net cash inflows from treasury shares transactions amounted to EUR 28.

5.2 Additional capital resources

As of December 31, 2011, the Company’s total capital resources amounted to EUR 5,940 comprising EUR 1,426 in debt and EUR 4,514 in equity, excluding treasury shares and noncontrolling interests. Long-term debt, including current maturities, was EUR 1,266 as of December 31, 2011 and EUR 1,137 as of December 31, 2010 and includes long- and medium-term notes, and medium-term loans. The borrowings, which are unsecured, are denominated in Euros and Swiss Francs. The majority of the borrowings outstanding as of December 31, 2011 mature in 2013, 2014, and 2018. During 2011, the Company increased its short- and long-term debt including foreign currency effect by EUR 121.

The Company maintains 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, 2011 and December 31, 2010 EUR 145 and EUR 151, respectively was outstanding under the programme, with maturities of up to six months. The weighted-average interest rate on commercial paper outstanding was 1.31% and 1.09% as of December 31, 2011 and December 31, 2010, respectively.

In addition, the Company maintains a committed multicurrency revolving credit facility. The five-year revolving credit facility, which was renewed in October 2011 and contains two 1-year extension options at the discretion of the lender, has been issued by a syndicate of banks, permits borrowings up to a maximum of EUR 600 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 0.6% and 1.3% per annum depending on certain debt-to-EBITDA ratios. Utilisation fee of 0.25% and 0.5% applies on top of the interest rate, if drawings exceed 33.33% and 66.67% of total commitment, respectively. The letter of credit fee equals the applicable margin, and the commitment fee equals 35% of the applicable margin. As of December 31, 2011 and December 31, 2010, there were no outstanding borrowings under the credit facility. As of December 31, 2011, the Company had EUR 529 available under the credit facility after utilising EUR 71 in the form of letters of credit.

Furthermore, as of December 31, 2011, the Company had uncommitted lines of credit amounting to EUR 477, of which EUR 15 was used.

Net debt increased by EUR 141 to EUR 892 as of December 31, 2011. The calculation of net debt based upon financial measures in accordance with U.S. GAAP is presented on page 42.

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, 2011, 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:

Download xls sheet

in EUR

2012

2013

2014

2015

2016

Thereafter

Total

 

Contractual obligations by year

 

 

 

 

 

 

 

short­-term debt obligations

160

 

 

 

 

 

160

Long-term debt obligations

76

342

358

1

 

489

1,266

Interest on debt obligations

67

56

32

24

24

30

233

Operating leases

199

136

105

79

97

51

667

Purchase and service contractual obligations

161

6

3

3

 

 

173

Total

663

540

498

107

121

570

2,499

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 333 fixed rate notes due in 2013, the EUR 356 5-year Euro medium-term notes due in 2014, and the EUR 500 7-year Euro medium-term notes due in 2018. These debt instruments were issued partly 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 667 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, 2011, the Company had future purchase and service contractual obligations of approximately EUR 173, primarily related to acquisitions (refer to Note 19 to the consolidated financial statements for further details), IT development and maintenance agreements, marketing sponsorship agreements, equipment purchase agreements, and other vendor commitments.

5.4 Additional funding requirements

The Company plans to invest approximately EUR 110 in property, equipment, and leasehold improvements for existing operations in 2012. The focus of these investments will be on information technology.

Further planned cash outflows include distribution of dividends for 2011 in the amount of CHF 1.80 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, 2011 of 170,448,401 is EUR 252 (CHF 307 – based on CHF/EUR exchange rate of 1.22 as of December 31, 2011). Payment of dividends is subject to approval by shareholders at the Annual General Meeting.

The Company has entered into certain guarantee contracts and standby letters of credit that total EUR 661, including the letters of credit issued under the multicurrency revolving credit facility (EUR 71). 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, 2011, the Company’s long-term credit rating was Baa3 with positive outlook from Moody’s and BBB stable outlook from Standard & Poor’s.