Group sales for the third quarter of 2006 were EUR 5.3 billion, an 11% increase compared to the same quarter last year (also 11% organically). Organic growth excludes the impact of currency and acquisitions. Revenues in the professional business grew 15% (11% organically), while Office and Industrial added 10% on a reported and organic basis.
Gross margin improved 40 bps to 17.2% versus the third quarter of 2005 mainly due to the acquisition of DIS AG as well as the positive impact from the permanent placement business. In the Office and Industrial business, Adecco enhanced gross margin by 30 bps to 15.7% compared to the same period last year, while in the professional business gross margin was raised by 70 bps to 24.9%.
Selling, General and Administrative Expenses (SG&A)
On a reported basis SG&A increased by 9% for the quarter. SG&A as a percentage of sales dropped 30 bps to 12.6% (Q3 2005: 12.9%) and by 50 bps organically. On an organic basis SG&A grew 7%, the office network 5% (+340 offices) and FTEs 4% (+1,200 FTEs) compared to the same quarter last year. At the end of the third quarter Adecco had over 35,000 FTEs and over 6,700 offices.
Operating income for the third quarter 2006 was EUR 243 million, an increase of 31% (25% organically). Operating income margin improved 70bps to 4.6% versus 3.9% for the same period last year.
Interest Expense and Other Income / (Expenses), net
Interest expense was EUR 14 million in the period, which is EUR 2 million more than in the third quarter 2005 mainly due to a higher gross debt position. Interest expenses are expected to be approximately EUR 52 million for the full year 2006. Other Income / (Expenses), net were EUR 5 million. This is a EUR 4 million improvement versus the same quarter last year mainly due to lower hedging expenses.
Provision for Income Taxes
The effective tax rate in the third quarter was 29% compared with 32% in the same period last year. For the full year 2006, Adecco continues to expect an underlying effective tax rate of approximately 29%.
Net Income and EPS
Net income was up 38% to EUR 164 million in the third quarter of the year (Q3 2005: EUR 119 million), which represents a net income margin improvement of 60 bps to 3.1%. Basic EPS was EUR 0.88 (Q3 2005: EUR 0.64).
Balance Sheet, Cash-flow, and Net Debt
The Group generated EUR 480 million of operating cash flow in the first nine months of 2006, compared with EUR 158 million in the first nine months of 2005. The main reasons for this increase are a higher net income as well as the timing of cash payments due to an additional trading week in previous periods. Net debt increased by EUR 316 million to EUR 740 million at the end of September 2006 compared to the year end of 2005. This increase was mainly due to the purchase of DIS AG (EUR 552 million net of cash acquired) and treasury shares (EUR 43 million), capital expenditures (EUR 58 million) as well as the payment of dividends (EUR 120 million including withholding tax), partially compensated by the operating cash flow. In the first nine months of 2006 DSO improved 1 day to 59 days compared to same period last year.
Currency fluctuations had a 2% negative impact on the third quarter's revenues and operating income mainly due to the weakness of the US dollar and the Japanese yen.