SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X|[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2005March 31, 2006
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OR
|_|[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to
____________------------- --------------
Commission File Number: 1-10551
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OMNICOM GROUP INC.
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(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports and (2) has been subject to such
filing requirements for the past 90 days.
YES |X|X NO
|_|----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer
----- -----
Non-accelerated filer
-----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12 b-212b-2 of the Exchange Act).
YES |X| NO |_|X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 180,310,000170,603,000 (as of October 28,
2005)April 24,
2006)
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 2005 and December 31, 2004.............. 1
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended
September 30, 2005 and 2004........................... 2
Consolidated Condensed Statements of Cash Flows
- Nine Months Ended September 30, 2005
and 2004.............................................. 3
Notes to Consolidated Condensed
Financial Statements..................................
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005.................................... 1
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2006 and 2005.............................. 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2006 and 2005.............................. 3
Notes to Condensed Consolidated Financial Statements......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations.................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 20
Item 4. Controls and Procedures...................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 22
Item 1A. Risk Factors................................................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................. 22
Item 6. Exhibits..................................................................... 22
Signatures ................................................................................... 24
Certifications
Forward-Looking Statements
Certain of the statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, from time to time, we or our
representatives have made or may make forward-looking statements, orally or in
writing. These statements relate to future events or future financial
performance and involve known and unknown risks and other factors that may cause
our actual or our industry's results, levels of activity or achievement to be
materially different from those expressed or implied by any forward-looking
statements. These risks and uncertainties, including those resulting from
specific factors identified under the captions "Market Risk" and "Management's
Discussion and Analysis of Financial Condition Andand Results of Operations......... 9
Item 3. QuantitativeOperations,"
include, but are not limited to, our future financial condition and Qualitative Disclosures
About Market Risk..................................... 24
Item 4. Controlsresults of
operations, changes in general economic conditions, competitive factors, changes
in client communication requirements, the hiring and Procedures................................. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 26
Item 2. Unregistered Salesretention of Equity Securitieshuman
resources and Useour international operations, which are subject to the risks of
Proceeds................................... 26
Item 6. Exhibits................................................ 26
Signatures ........................................................ 27
Certificationscurrency fluctuations and exchange controls. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "could,"
"would," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential" or "continue" or the negative of those terms
or other comparable terminology. These statements are present expectations. We
undertake no obligation to update or revise any forward-looking statement.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
September 30,March 31, December 31,
2006 2005
2004
---- ----
ASSETS----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................................equivalents................................................. $ 395.61,822.9 $ 1,165.6835.8
Short-term investments at market, which approximates cost ............................. 14.4 574.0cost................. 38.8 374.1
Accounts receivable, lessnet of allowance for doubtful accounts
of $53.4$51.1 and $67.8 ................................................................. 4,995.9 4,916.7$53.9..................................................... 5,142.4 5,366.1
Billable production orders in process, at cost ........................................ 650.3 536.6cost............................ 610.6 542.0
Prepaid expenses and other current assets ............................................. 905.2 902.2assets................................. 1,008.7 849.4
--------- ---------
Total Current Assets ..................................................... 6,961.4 8,095.1Assets...................................................... 8,623.4 7,967.4
--------- ---------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $878.6$897.0 and $909.8 ................... 599.8 636.4$873.1....... 606.0 608.7
INVESTMENTS IN AFFILIATES .................................................................. 166.4 162.9AFFILIATES...................................................... 180.8 182.4
GOODWILL ................................................................................... 6,467.6 6,411.4...................................................................... 6,578.6 6,493.1
INTANGIBLES, net of accumulated amortization of $178.8$185.4 and $164.7 .......................... 90.7 110.0$176.3.............. 117.7 121.4
DEFERRED TAX BENEFITS ...................................................................... 292.6 303.4BENEFITS.......................................................... 308.8 309.8
OTHER ASSETS ............................................................................... 255.0 283.2ASSETS................................................................... 245.5 237.1
--------- ---------
TOTAL ASSETS ............................................................. $14,833.5 $16,002.4ASSETS................................................. $16,660.8 $15,919.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................................payable.......................................................... $ 5,326.16,076.6 $ 6,011.56,218.9
Advance billings ...................................................................... 906.3 874.0billings.......................................................... 957.5 908.7
Current portion of long-term debt ..................................................... 0.7 209.2debt......................................... 0.9 1.1
Bank loans and commercial paper ....................................................... 213.9 17.5loans................................................................ 21.5 15.0
Accrued taxes ......................................................................... 133.7 217.0taxes............................................................. 175.2 196.3
Other liabilities ..................................................................... 1,162.5 1,414.7liabilities......................................................... 1,368.5 1,360.3
--------- ---------
Total Current Liabilities ................................................ 7,743.2 8,743.9Liabilities................................................. 8,600.2 8,700.3
--------- ---------
LONG-TERM DEBT ............................................................................. 18.8 19.1DEBT................................................................. 1,013.1 18.2
CONVERTIBLE NOTES ....................................................................................................................................... 2,339.3 2,339.3
DEFERRED COMPENSATION AND OTHER LIABILITIES ................................................ 293.2 309.1LIABILITIES.................................... 297.2 298.4
LONG TERM DEFERRED TAX LIABILITY ........................................................... 421.3 317.4LIABILITY............................................... 462.7 442.7
MINORITY INTERESTS ......................................................................... 181.8 194.9INTERESTS............................................................. 178.8 173.0
SHAREHOLDERS' EQUITY:
Preferred stock........................................................... -- --
Common stock ....................................................................................................................................... 29.8 29.8
Additional paid-in capital ............................................................ 1,823.7 1,824.5capital................................................ 1,685.2 1,675.1
Retained earnings ..................................................................... 3,391.1 2,975.4
Unamortized stock compensation ........................................................ (163.5) (178.9)earnings......................................................... 3,720.0 3,599.0
Accumulated other comprehensive income ................................................ 111.8 268.5income.................................... 79.8 59.8
Treasury stock ........................................................................ (1,357.0) (840.6)stock............................................................ (1,745.3) (1,415.7)
--------- ---------
Total Shareholders' Equity ............................................... 3,835.9 4,078.7Equity................................................ 3,769.5 3,948.0
--------- ---------
Total Liabilities and Shareholders' Equity ............................... $14,833.5 $16,002.4TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $16,660.8 $15,919.9
========= =========
The accompanying notes to condensed consolidated condensed financial
statements are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions)millions, except per share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
---- ---- ---- ----
REVENUE ............................................ $ 2,522.9 $ 2,319.0 $ 7,541.7 $ 6,958.1
OPERATING EXPENSES:
Salary and service costs ...................... 1,827.9 1,659.5 5,362.0 4,906.7
Office and general expenses ................... 420.5 412.1 1,266.0 1,230.9
---------- ---------- ---------- ----------
2,248.4 2,071.6 6,628.0 6,137.6
---------- ---------- ---------- ----------
OPERATING PROFIT ................................... 274.5 247.4 913.7 820.5
NET INTEREST EXPENSE:
Interest expense .............................. 19.9 12.3 55.5 36.8
Interest income ............................... (3.6) (3.5) (12.8) (10.2)
---------- ---------- ---------- ----------
16.3 8.8 42.7 26.6
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ......................... 258.2 238.6 871.0 793.9
INCOME TAXES ....................................... 86.9 80.3 297.4 266.9
---------- ---------- ---------- ----------
INCOME AFTER INCOME TAXES .......................... 171.3 158.3 573.6 527.0
EQUITY IN AFFILIATES ............................... 6.9 3.2 17.2 10.5
MINORITY INTERESTS ................................. (16.5) (16.2) (52.7) (50.5)
---------- ---------- ---------- ----------
NET INCOME ................................. $ 161.7 $ 145.3 $ 538.1 $ 487.0
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic ...................................... $0.90 $0.79 $2.97 $2.61
Diluted .................................... $0.90 $0.79 $2.95 $2.60
DIVIDENDS DECLARED PER COMMON SHARE ................ $0.225 $0.225 $0.675 $0.675
Three Months Ended March 31,
----------------------------
2006 2005
------------ -------------
REVENUE ...................................... $2,562.9 $2,403.0
OPERATING EXPENSES:
Salary and service costs ................ 1,844.8 1,731.0
Office and general expenses ............. 433.7 414.7
-------- --------
2,278.5 2,145.7
-------- --------
OPERATING PROFIT ............................. 284.4 257.3
NET INTEREST EXPENSE:
Interest expense ........................ 23.4 17.3
Interest income ......................... (8.3) (5.2)
-------- --------
15.1 12.1
-------- --------
INCOME BEFORE INCOME TAXES ................... 269.3 245.2
INCOME TAXES ................................. 90.9 86.1
-------- --------
INCOME AFTER INCOME TAXES .................... 178.4 159.1
EQUITY IN EARNINGS OF AFFILIATES ............. 4.9 5.2
MINORITY INTERESTS ........................... (17.6) (13.8)
-------- --------
NET INCOME ................................... $ 165.7 $ 150.5
======== ========
NET INCOME PER COMMON SHARE:
Basic ................................ $ 0.94 $ 0.82
Diluted .............................. $ 0.93 $ 0.82
DIVIDENDS DECLARED PER COMMON SHARE .......... $ 0.250 $ 0.225
The accompanying notes to condensed consolidated condensed financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)millions)
(Unaudited)
NineThree Months Ended September 30,
-------------------------------March 31,
------------------------------
2006 2005
2004
---- -------------- ----------
Cash flows from operating activities:
Net income ..................................................................................................................................................... $ 538.1165.7 $ 487.0150.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of tangible assets ....................................................... 100.8 98.1assets........................... 35.3 32.7
Amortization of intangible assets ..................................................... 27.3 30.7assets.......................................... 8.9 9.0
Minority interests .................................................................... 52.7 50.5interests......................................................... 17.6 13.8
Earnings of affiliates less (inin excess of) thanof dividends received .................... (8.4) (4.0)received..................... (1.1) (2.8)
Net gain on investment activity .......................................................activity............................................ -- (7.0)
(13.1)
TaxWindfall tax benefit on employee stock plans ................................................... 14.5 9.9plans............................... -- 13.6
Excess tax benefit on stock-based compensation ............................ (5.6) --
Provision for losses on accounts receivable ........................................... 4.4 8.7receivable................................ 1.0 1.0
Amortization of stock compensation .................................................... 67.5 89.6stock-based compensation................................... 15.7 26.0
Changes in assets and liabilities providing (requiring) cash,
net of acquisitions:
IncreaseDecrease (increase) in accounts receivable ....................................................... (294.9) (0.6)receivable................................. 273.0 (185.8)
Increase in billable production orders in process ..................................... (132.5) (211.0)process.......................... (67.3) (87.7)
Increase in prepaid expenses and other current assets ................................. (130.7) (113.1)assets...................... (163.5) (97.4)
Net change in other assets and liabilities ............................................ (138.6) (115.4)liabilities................................. (26.1) (54.1)
Increase in advanced billings ......................................................... 58.8 113.2billings.............................................. 44.8 40.5
Net increasedecrease in accrued and deferred taxes ............................................ 50.4 0.8taxes................................. (5.0) (9.7)
Decrease in accounts payable .......................................................... (506.8) (583.9)
-------- --------payable............................................... (192.4) (559.6)
---------- ----------
Net cash used forprovided by (used in) operating activities ............................................. (304.4) (152.6)
-------- --------activities..................... 101.0 (717.0)
---------- ----------
Cash flows from investing activities:
Capital expenditures .................................................................. (102.4) (103.3)expenditures....................................................... (33.5) (30.1)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired ................................................... (193.9) (241.3)acquired........................................ (35.4) (23.1)
Proceeds from sale of assets ..........................................................businesses........................................... -- 29.3 0.0
Purchases of short-term investments ................................................... (332.1) (663.6)investments........................................ (78.7) (324.9)
Proceeds from short-term investments and other ........................................ 954.9 946.4
-------- --------............................ 430.4 881.6
---------- ----------
Net cash provided by (used in) investing activities ................................ 355.8 (61.8)
-------- --------activities............................... 282.8 532.8
---------- ----------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings .......................................... 196.3 (8.6)borrowings............................... 6.2 (5.2)
Proceeds from issuance of debt ........................................................ 0.7 2.4debt............................................. 995.2 0.2
Repayments of principal of long-term debt obligations ................................. (189.2) (14.5)obligations...................... (1.5) (2.6)
Excess tax benefit on stock-based compensation ............................ 5.6 --
Dividends paid ........................................................................ (123.8) (121.6)paid............................................................. (45.2) (41.6)
Purchase of treasury shares ........................................................... (644.2) (446.5)shares................................................ (359.2) (377.9)
Other, net ............................................................................ (40.5) (27.2)
-------- --------net................................................................. 5.8 37.6
---------- ----------
Net cash used inprovided by (used in) financing activities .............................................. (800.7) (616.0)
-------- --------activities..................... 606.9 (389.5)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents ............................... (20.7) 16.0
-------- --------equivalents.................... (3.6) (3.8)
---------- ----------
Net decreaseincrease (decrease) in cash and cash equivalents .......................................... (770.0) (814.4)equivalents.................... 987.1 (577.5)
Cash and cash equivalents at beginning of period ...........................................period................................ 835.8 1,165.6
1,243.5
-------- ------------------ ----------
Cash and cash equivalents at end of period .................................................period...................................... $ 395.61,822.9 $ 429.1
======== ========588.1
========== ==========
Supplemental disclosures:
Income taxes paid .....................................................................paid.......................................................... $ 199.697.6 $ 168.469.1
Interest paid .........................................................................paid.............................................................. $ 58.645.3 $ 32.011.7
The accompanying notes to condensed consolidated condensed financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. We have prepared theThe condensed consolidated condensed interim financial statements included hereinwere prepared without
audit pursuant to Securities and Exchange Commission rules. Certain
information and footnote disclosuresdisclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP" or "GAAP") have
been condensed or omitted pursuant to these rules.
2. The accompanying financial statements reflect all adjustments, consisting
of normally recurring accruals, which in the opinion of management are
necessary for a fair presentation, in all material respects, of the
information contained therein. Certain amounts in prior periods have been
reclassified to conform them to the quarter ended September 30, 2005current presentation. These statements
should be read in conjunction with the consolidated financial statements
and related notes included in our annual
reportAnnual Report on Form 10-K for the year
ended December 31, 2004.2005 (the "2005 Form 10-K").
3. Results of operations for interim periods are not necessarily indicative
of annual results.
4. Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed on the same basis, including if dilutive, common share
equivalents which include outstanding options and restricted shares. For
purposes of computing diluted earnings per share, 1,276,0001,165,000 and 520,0001,161,000
common share equivalents were assumed to be outstanding for the three
months ended September 30,March 31, 2006 and 2005, and 2004, respectively, and 1,407,000 and
1,257,000 common share equivalents were assumed to be outstanding for the
nine months ended September 30, 2005 and 2004, respectively. For the three months
ended September 30,March 31, 2006 and 2005, and 2004, respectively, 4,633,0006,187,000 shares and
10,396,0004,360,000 shares attributable to outstanding stock options were excluded
from the calculation of diluted earnings per share because the
exercise prices of the stock options were greater than or equal to the
average price of our common shares and therefore their inclusion
would have been anti-dilutive.
For the nine months ended September 30, 2005 and
2004, respectively, 4,633,000 and 10,296,000The number of shares were excluded from the
calculation of dilutedused in our earnings per share because their effect would have
been anti-dilutive.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was $290.0
thousand and $318.0 thousand for the three month periods ended September
30,computations were:
Three Months Ended March 31,
-------------------------------
2006 2005
and 2004, respectively, and $870.0 thousand and $917.0 thousand
for the nine months ended September 30, 2005 and 2004, respectively.----------- -----------
Basic EPS Computation 176,666,000 182,644,000
Diluted EPS Computation 177,831,000 183,805,000
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
The number of shares used in our EPS computations were:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Basic EPS Computation 179,276,000 184,080,000 181,111,000 186,259,000
Diluted EPS Computation 180,552,000 184,600,000 182,518,000 187,516,000
5. Total comprehensive income and its components were:were ($ in millions):
(Dollars in Millions)
---------------------
Three Months
Nine Months
Ended September 30, Ended September 30,
------------------- -------------------March 31,
---------------------------------
2006 2005
2004 2005 2004
---- ---- ---- --------------- -----------
Net income for the period...................... $161.7 $145.3period............................ $ 538.1 $487.0165.7 $ 150.5
Foreign currency translation adjustment, net of
income taxes of $5.6$10.8 and $8.2
and $84.4 and $7.0$(24.8) for the three
months ended March 31, 2006 and nine months ended September 30, 2005, and 2004, respectively......................... (10.4) 15.2 (156.7) 13.1
------ ------ ------- ------respectively... 20.0 (46.1)
----------- -----------
Comprehensive income for the period............ $151.3 $160.5period.................. $ 381.4 $500.1
====== ====== ======= ======185.7 $ 104.4
=========== ===========
6. Our wholly and partially owned agencies operate within the advertising,
marketing and corporate communications services industry. These agencies
are organized into agency networks, virtual client networks, regional
reporting units and operating groups. During 2005, we completed the
reorganization of our operating segments and the formation of a fifth
agency network. Consistent with the fundamentals of our business strategy,
our agencies serve similar clients, in similar industries, and in many
cases, the same clients across a variety of geographies. In addition, our
agency networks have similar economic characteristics and similar
long-term operating margins, as the main economic components of each
agency are the salary and service costs associated with providing
professional services, the office and general costs associated with office
space and occupancy, and the costs associated with the provision of
technology requirements which are generally limited to personal computers,
servers and off-the-shelf software. Therefore, given these similarities
and in accordance with the provisions of SFASStatement of Financial Accounting
Standard ("SFAS") No. 131, - Disclosures about Segments of an Enterprise and
Related Information, most specifically paragraph 17, we aggregate our
operating segments, which are our five agency networks, into one reporting
segment.
A summary by geographic area of our revenue for the periods ended
March 31, 2006 and 2005 and long-lived assets and goodwill as of March 31,
2006 and 2005, is presented below ($ in millions):
Americas EMEA Asia/Australia
-------- ---- --------------
2006
Revenue $ 1,573.7 $ 835.0 $ 154.2
Long-Lived Assets 415.1 148.7 42.2
Goodwill 5,571.8 954.4 52.4
2005
Revenue $ 1,421.0 $ 842.2 $ 139.8
Long-Lived Assets 405.9 167.5 43.7
Goodwill 5,286.5 1,047.7 47.2
The Americas is primarily composed of the U.S., Canada and Latin
American countries. EMEA is primarily composed of various Euro countries,
the United Kingdom,
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
A summaryother non-Euro countries, the Middle East and Africa. Asia/Australia is
primarily composed of our revenueChina, Japan, Korea, Singapore, Australia and long-lived assets by geographic area as
of September 30, 2005 and 2004 is presented below:
(in millions of dollars)
-----------------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Consolidated
------ ----------- ------- ------------- ------------
Revenue
Three Months
Ended September 30,
2005 $1,428.6 $ 476.3 $260.1 $ 357.9 $2,522.9
2004 1,261.3 471.3 255.5 330.9 2,319.0
Revenue
Nine Months
Ended September 30,
2005 $4,168.4 $1,531.6 $795.1 $1,046.6 $7,541.7
2004 3,781.6 1,430.7 777.4 968.4 6,958.1
Long-lived Assets
at September 30,
2005 $ 329.6 $ 95.9 $ 81.9 $ 92.4 $ 599.8
2004 324.5 99.4 89.4 88.0 601.3
other
Asian countries.
7. Short-term bank loans and commercial paper outstanding at September 30,
2005March 31, 2006 of $213.9$21.5 million are
comprised of $54.2 million of domestic borrowings and bank overdrafts of our international
subsidiaries which are treated as unsecured loans pursuant to our bank
agreements and $159.7
million of commercial paper issued under our $2,100.0 million five-year
revolver.agreements. There was no commercial paper outstanding under the $400.0
million 364-day facility as of September 30, 2005.March 31,
2006. We had unsecured committed revolving credit facilities totaling
$2,500.0 million as of September 30, 2005.
On May 23, 2005,March 31, 2006.
In March 2006, we amended and extended our existing $1,500.0
million revolving credit facility with a consortium of banks, resulting in
a five-year $2,100.0 million revolving credit facility which matures May
23, 2010. On June 30, 2005, we entered into a new $400.0 million 364-day
revolving credit facility with a maturity date of June 29, 2006. This
facility replaced our previous $500.0 million 364-day revolving credit
facility that expired May 24, 2005. This facility includes a provision
that allows us to convert all amounts outstanding at expiration of the
facility into a one-year term loan.
In funding our day-to-day liquidity, we are an active participant in
the commercial paper market with a $1,500.0 million program. Both our
$2,100.0 million five-year revolving credit facility and our $400.0
million 364-day revolving credit facility provide credit support for
commercial paper issued under this program.
The bank syndicate for the five-year facility consists of 27 banks.
Citibank N.A. acts as administrative agent, ABN Amro acts as syndication
agent and JPMorgan Chase Bank and HSBC Bank USA act as co-documentation
agents for the facility. Other significant
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
lending institutions include Societe Generale, Bank of America, Wachovia
and Sumitomo Mitsui.
The bank syndicate for the 364-day facility consists of eight banks.
Citibank N.A. acts as administrative agent. ABN Amro acts as syndication
agent and JPMorgan Chase Bank, Bank of America, and Banco Bilbao Vizcaya
Argentaria act as co-documentation agents for the facility.
These revolving credit facilities provide us with the ability to
classify our borrowings that could come due within one year as long-term
debt, when it is our intention to keep the borrowings outstanding on a
long-term basis.
On August 2, 2005, we paid holders of our Zero Coupon Zero Yield
Convertible Notes due 2032, $37.50 per $1,000$1.0 billion principal amount of 5.90%
senior notes due April 15, 2016 ("Senior Notes"). The gross proceeds from
the issuance were $995.1 million. The gross proceeds less fees resulted in
a 6.05% yield to maturity. The Senior Notes were issued by Omnicom Group
Inc. and two of our wholly-owned finance subsidiaries, Omnicom Capital
Inc. and Omnicom Finance Inc., as an incentiveco-obligors, similar to the holders not to exercise theirour Convertible
Notes. The Senior Notes are senior unsecured notes that rank in equal
right to put their notes
to us for repurchase. Noneof payment with all existing and future unsecured indebtedness and
as a joint and several liability of the notes were put to us for repurchase. The
total payment of $33.5 million is being amortized ratably over a
twelve-month period to the next put date.
8. Included in operating income for the nine months ended September 30, 2005
is a pre-tax net gain of $6.9 million arising from the sale in the first
quarter of a majority owned business located in Australia and New Zealandissuer and the disposal of a non-strategic business located in the United States.
Due to an unusually high book tax rate caused by the non-deductibility of
goodwill, the book tax cost of the transactions was $6.1 million. After
deducting minority interest expense, the impact of these transactions
increased net income by $0.4 million.
9.co-obligors.
8. In 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting StandardsSFAS No.
148, (SFAS 148),
"AccountingAccounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB No. 123"123 ("SFAS 148"). We adopted Statement of Financial Accounting
StandardsSFAS No. 123,
(SFAS 123), "AccountingAccounting for Stock-Based Compensation"Compensation ("SFAS 123") effective January 1,
2004. Pre-tax stock-based employee compensation costsexpense for the ninethree
months ended September 30,March 31, 2006 and 2005, and 2004, were $67.5was $15.7 million and $89.6$26.0 million,
respectively.
In 2004, the FASB issuedOn January 1, 2006, we adopted SFAS No. 123R123 (Revised 2004),
Share-Based Payment ("SFAS 123R") which is effectiverequires, among other things, that
we record stock-based compensation expense net of an estimate for annual
reporting periods beginning after December 15, 2005awards
that are expected to be forfeited. For all unvested awards outstanding at
January 1, 2006, we recorded an adjustment to reflect the cumulative
effect of this change in accounting principle. The adjustment in the first
quarter of 2006 resulted in an increase in our operating profit and generally applies
to grants made after adoption.net
income of $3.6 million and $2.0 million, respectively. Because this
adjustment did not have a material affect on our results of operations and
financial condition, we did not present this adjustment on an after-tax
basis as a cumulative effect of accounting change in our income statement.
SFAS 123R is a revisionalso requires new awards issued to individuals that are,
or will become, retirement-eligible during the vesting period of SFAS 123.
Because we previously adopted SFAS 123, as amended by SFAS 148, on January
1, 2004, we believethe award
to be expensed over the lesser of the period from the date of grant
through the retirement-eligible date or the vesting date. This differs
from our previous policy for awards that thewere issued prior to adoption of
SFAS 123R will not have a
material impact on our consolidated results of operations or financial
position. However,with retirement eligibility provisions. For those awards, we
are inrecognized compensation expense over the process of assessing the full impactvesting period and related disclosure requirements of this revision.
7we accelerated
compensation expense
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
10.upon the triggering of a retirement event. We estimate that for the full
year of 2006, $13.5 million of pre-tax amortization of stock-based
employee compensation expense will be recorded related to unvested awards
at December 31, 2005 that were issued prior to adoption of SFAS 123R to
individuals that were retirement eligible at December 31, 2005 and the
awards included retirement eligibility provisions. Had SFAS 123R been in
effect when these awards were issued, stock-based compensation expense in
2006 would have been less by $13.5 million.
SFAS 123R provides transition alternatives with respect to
calculating the pool of windfall tax benefits within our additional
paid-in capital (the "APIC Pool") that are available on the adoption date
to offset potential future shortfalls. The APIC Pool results from the
amount by which our prior year tax deductions for stock-based compensation
exceed the cumulative book stock-based compensation expense recognized in
our financial statements. We utilized the short-cut method as prescribed
by FASB Statement of Position 123R-3 to calculate the APIC Pool.
Finally, SFAS 123R requires that the benefits associated with the
tax deductions in excess of recognized stock-based employee compensation
expense be reported as a financing cash flow, rather than as an operating
cash flow, as previously required. For the three months ended March 31,
2006, net cash provided by operating activities was reduced by $5.6
million and recorded as an increase in cash provided by financing
activities.
9. Beginning on June 13, 2002, several putative class actions were filed
against us and certain senior executives in the United States District
Court for the Southern District of New York. The actions have since been
consolidated under the caption In re Omnicom Group Inc. Securities
Litigation, No. 02-CV4483 (RCC), on behalf of a proposed class of
purchasers of our common stock between February 20, 2001 and June 11,
2002. The consolidated complaint alleges, among other things, that our
public filings and other public statements during that period contained
false and misleading statements or omitted to state material information
relating to (1) our calculation of the organic growth component of
period-to-period revenue growth, (2) our valuation of and accounting for
certain internet investments made by our Communicade Group
("Communicade"), which we contributed to Seneca Investments LLC ("Seneca")
in 2001, and (3) the existence and amount of certain contingent future
obligations in respect of acquisitions. The complaint seeks an unspecified
amount of compensatory damages plus costs and attorneys' fees. Defendants
moved to dismiss the complaint and on March 28, 2005, the court dismissed
portions (1) and (3) of the complaint detailed above. The court's decision
denying the defendants' motion to dismiss the remainder of the complaint
did not address the ultimate merits of the case, but only the sufficiency
of the pleading. Defendants have answered the complaint, and fact
discovery is ongoing. Plaintiffs have moved to have the proposed class
certified and the defendants have opposed that motion, which is now fully
briefed.
7
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, on June 28, 2002, a derivative action was filed on
behalf of Omnicom in New York state court. On February 18, 2005, a second
shareholder derivative action, again purportedly brought on behalf of the
Company, was filed in New York state court. The derivative actions have
been consolidated before one New York State Justice and the plaintiffs
have filed an amended consolidated complaint. The consolidated derivative
complaint questions the business judgment of certain current and former
directors of Omnicom, by challenging, among other things, the valuation of
and accounting for the internet investments made by Communicade and the
contribution of those investments to Seneca. The consolidated complaint
alleges that the defendants breached their fiduciary duties of good faith.
The lawsuit seeks from the directors the amount of profits received from
selling Omnicom stock and other unspecified damages to be paid to the
Company, as well as costs and attorneys' fees. On September 1, 2005, the
defendants moved to dismiss the derivative complaintcomplaint. The motion has now
been fully briefed and pursuant to an
agreed schedule, briefingwas argued before the court on January 12, 2006.
The court has not yet ruled on the motion to dismiss should be complete in
November 2005.motion.
The defendants in both cases believe that the allegations against
them are baseless and intend to vigorously oppose the lawsuits. Currently,
we are unable to determine the outcome of these cases and the effect on
our financial position or results of operations. The outcome of any of
these matters is inherently uncertain and may be affected by future
events. Accordingly, there can be no assurance as to the ultimate effect
of these matters.
We are also involved from time to time in various legal proceedings
in the ordinary course of business. We do not presently expect that these
proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
10. On March 31, 2006, we entered into an agreement to purchase 5.5 million
shares of our outstanding common stock for $458.7 million. The shares were
repurchased under an accelerated share repurchase ("ASR") program with a
financial institution at $83.41 per share with an initial settlement date
of April 3, 2006. The purchase was funded using a portion of the proceeds
from our senior debt offering (see Note 7). Under the ASR agreement, the
financial institution will repurchase shares of our common stock in the
open market until it has acquired 5.5 million shares. At the end of that
period, but no later than December 10, 2006, we may receive or be required
to pay a settlement amount, referred to as the purchase price adjustment,
payable at our option, in either shares of our common stock or cash, based
upon the difference between the actual cost of the shares purchased by the
financial institution and the initial purchase price of $83.41 per share.
In accordance with Emerging Issues Task Force No. 99-7, Accounting for an
Accelerated Share Repurchase Program, the shares will be included in
treasury stock beginning in the second quarter of 2006 and the settlement
of the transactions will be classified in shareholders' equity. The final
purchase price adjustment will be reflected in the treasury stock
component of shareholders' equity.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Executive Summary
We are a strategic holding company. We provide professional services to
clients through multiple agencies around the world. On a global, pan-regional
and local basis, our agencies provide these services in the following
disciplines: traditional media advertising, customer relationship management,
public relations and specialty communications. Our business model was built and
evolves around clients. While our companies operate under different names and
frame their ideas in different disciplines, we organize our services around our
clients. The fundamental premise of our business is that our clients' specific
requirements should be the central focus in how we structure our business
offeringofferings and allocate our resources. This client-centric business model results
in multiple agencies collaborating in formal and informal virtual networks that
cut across internal organizational structures to deliver consistent brand
messages for a specific client and execute against our clients' specific
marketing requirements. We continually seek to grow our business with our
existing clients by maintaining our client-centric approach, as well as
expanding our existing business relationships into new markets and new clients.
In addition, we pursue selective acquisitions of complementary companies with
strong entrepreneurial management teams that typically either currently serve or
have the ability to serve our existing client base.
Globally, during the past few years, the overall industry has continued to
be affected by geopolitical unrest, lagging economic conditions, lack of
consumer confidence and cautious client spending. All of these factors
contributed to a difficult business environment and industry-wide margin
contraction. Throughout this period, we have continued to invest in our businesses
and our personnel, and have taken actionstook action to reduce costs at some of our agencies to
address the changing economic circumstances. In recent periods, improving
economic conditions, coupled with the business trends described below, have had
a positive impact on our business.
Several long-term trends continue to have a positive impact onpositively affect our business,
including our clients increasingly expanding the focus of their brand strategies
from national markets to pan-regional and global markets. Additionally, in an
effort to gain greater efficiency and effectiveness from their marketing
dollars, clients are increasingly requiring greater coordination of their
traditional advertising and marketing activities and concentrating these
activities with a smaller number of service providers.
Given our size and breadth, we manage our business by monitoring several
financial indicators. The key financial performance indicators that we review focus on the areas of revenues and
operating expenses.
Revenue growth is analyzed by reviewing the components and mix of the
growth, including:including growth by major geographic location;location, growth by major marketing
discipline;discipline, growth from currency changes, growth from acquisitions and growth
from acquisitions.our largest clients.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In recent years, our revenue has been divided almost evenly between
domestic and international operations. For the three months ended September 30,
2005,March 31,
2006, our overall revenue growth was 8.8%6.7% as compared to the prior year period,
of
which 0.5% was reduced by 2.7% related to changes in foreign exchange rates and
(0.3)% wasincreased by 0.7% related to the disposalacquisition of entities, net of entities
acquired.disposed. The remaining 8.6% was organic growth. For the nine months ended September 30, 2005, our
overall revenue growth was 8.4% compared to the prior year period,increase of which 1.6%
was related to changes in foreign exchange rates, (0.4)% was related to the
disposal of entities, net of entities acquired and the remaining 7.1%8.7% was organic growth.
We measure operating expenses in two distinct cost categories: salary and
service costs, and office and general expenses. Salary and service costs are
comprised primarily of employee compensation related costs. Office and general
expenses are comprised primarily of rent and occupancy costs, technology related
costs and depreciation and amortization. Each of our agencies requires service
professionals with a skill set that is common across our disciplines. At the
core of this skill set is theirthe ability to understand a client's brand and its
selling proposition, and theirthe ability to develop a unique message to communicate
the value of the brand to the client's target audience. The office spacefacility
requirements of our agencies are also similar across geographiesgeographic regions and
disciplines, and their technology requirements are generally limited to personal
computers, servers and off-the-shelf software.
Because we are a service business, we monitor these costs on a percentage
of revenue basis. Salary and service costs tend to fluctuate in conjunction with
changes in revenues, whereas office and general expenses, which are not directly
related to servicing clients, tend to decrease as a percentage of revenue as
revenues increase because a significant portion of these expenses are relatively
fixed in nature. During the thirdfirst quarter of 2005,2006, as a percentage of revenue,
salary and service costs increased slightly to 72.5% of revenue from 71.6% of revenue inwere 72.0%, which is the thirdsame level as the first
quarter of 2004, as these costs increased in line with the increase in revenues.2005. Office and general expenses declined to 16.7%16.9% of revenue in the
thirdfirst quarter of 2006 from 17.3% in the first quarter of 2005, from 17.8% in the third quarter of 2004, as a result of
period-over-period revenue growth and our continuing efforts to leverage fixed
costs and better align these costs with business levels on a
location-by-location basis.
Similarly, during the first nine months
of 2005, salary and service costs increased marginally to 71.1% of revenue from
70.5% of revenue in the first nine months of 2004, and office and general
expenses declined to 16.8% of revenue in the first nine months of 2005 from
17.7% in the first nine months of 2004.
Our net income for the third quarter of 2005 increased by 11.3% to $161.7
million from $145.3 million in the third quarter of 2004, and our diluted EPS
increased by 13.9% to $0.90 from $0.79. Our net income for the first nine monthsquarter of 20052006 increased by 10.5%10.1% to $538.1$165.7
million from $487.0$150.5 million in the first nine monthsquarter of 2004,2005. Included in our 2006
first quarter net income is a $2.0 million benefit resulting from the cumulative
effect of the adoption of SFAS 123R and ourthe requirement to provide an estimate
for forfeitures on all unvested stock-based compensation awards, as of January
1, 2006. In prior years, in accordance with SFAS 123, we recorded forfeitures
when they actually occurred. Our diluted EPSearnings per share increased by 13.5%13.4%
to $2.95$0.93 from $2.60.$0.82 in the first quarter of 2005 for the reasons described
above, as well as the impact of the reduction in our weighted average shares
outstanding. This reduction was the result of our purchases of treasury shares
net of option exercises and share issuances under our employee stock purchase
plan.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations: ThirdFirst Quarter 2006 Compared to First Quarter 2005
Compared to Third Quarter 2004
Revenue: Our thirdfirst quarter of 20052006 consolidated worldwide revenue
increased 8.8%6.7% to $2,522.9$2,562.9 million from $2,319.0$2,403.0 million in the comparable
period last year. The effect of foreign exchange impacts increaseddecreased worldwide
revenue by $11.6$65.3 million. Acquisitions, net of disposals, decreasedincreased worldwide
revenue by $6.8$17.3 million in the thirdfirst quarter of 20052006 and organic growth
increased worldwide revenue by $199.1$207.9 million. The components of the thirdfirst
quarter 20052006 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
--------------- ---------------- ------------------------------------- ------------------- ---------------------
$ % $ % $ %
-------- --- -------- ---- -------- ------------- ----- ---------- ----- ---------- -----
Third Quarter ended September 30, 2004 .......... $2,319.0March 31, 2005......... $ 2,403.0 -- $1,261.3$ 1,312.1 -- $1,057.7$ 1,090.9 --
Components of Revenue Changes:revenue changes:
Foreign exchange impact ......................... 11.6 0.5%impact.............. (65.3) (2.7)% -- -- 11.6 1.1%
Acquisitions .................................... (6.8) (0.3)(65.3) (6.0)%
13.7 1.1% (20.5) (1.9)%
Organic ......................................... 199.1 8.6% 153.6 12.2% 45.5 4.3%
--------Acquisitions......................... 17.3 0.7% 16.9 1.3% 0.4 0.1%
Organic.............................. 207.9 8.7% 104.0 7.9% 103.9 9.5%
---------- ---- ---------- --- ------------------ ---- -------- ---
Third
Quarter ended September 30, 2005 .......... $2,522.9 8.8% $1,428.6 13.3% $1,094.3 3.5%
========March 31, 2006......... $ 2,562.9 6.7% $ 1,433.0 9.2% $ 1,129.9 3.6%
========== === ======== ==== ================== === ========== ===
The components and percentages are calculated as follows:
o The foreign exchange impact component shown in the table is
calculated by first converting the current period's local currency
revenue using the average exchange rates from the equivalent prior
period to arrive at a constant currency revenue (in this case
$2,511.3$2,628.2 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $2,522.9$2,562.9 million less $2,511.3$2,628.2 million for
the Total column in the table).
o The acquisitions component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any
business included in the prior period reported revenue that was
disposed of subsequent to the prior period.
o The organic component shown in the table is calculated by
subtracting both the foreign exchange and acquisition revenue
components from total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base of that component (in this case $2,319.0$2,403.0 million
for the Total column in the table).
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The components of revenue and revenue growth in our primary geographic
markets for the thirdfirst quarter of 20052006 compared to the thirdfirst quarter of 20042005 are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $1,428.6 13.3%$ 1,433.0 9.2%
Euro Denominated Markets............ 476.3 1.3%Markets........................ 483.8 (4.4)%
United Kingdom...................... 260.1 1.7%273.7 3.1%
Other............................... 357.9 7.8%
-------- ---372.4 16.7%
---------- ----
Total............................... $2,522.9 8.8%
======== ===$ 2,562.9 6.7%
========== ====
As indicated, foreign exchange impacts increaseddecreased our international revenue
marginally by 0.5%6.0%, or $11.6$65.3 million during the quarter ended September 30,
2005.March 31, 2006. The most
significant impacts resulted from the decline of the Euro and the British Pound
against the U.S. Dollar, which was partially offset by the strength of the
Canadian Dollar and Brazilian Real against the U.S. Dollar, which was substantially
offset by the decline of the Euro and the British Pound against the U.S. Dollar.
Driven by our clients' continuous demand for more effective and efficient
branding activities, we strive to provide an extensive range of advertising,
marketing and corporate communications services through various client-centric
networks that are organized to meet specific client objectives. These services
include advertising, brand consultancy, crisis communications, custom
publishing, database management, digital and interactive marketing, direct
marketing, directory advertising, entertainment marketing, environmental design,
experiential marketing, field marketing, financial/corporate
business-to-business advertising, graphic arts, healthcare communications,
instore design, investor relations, marketing research, media planning and
buying, mobile marketing services, multi-cultural marketing, non-profit
marketing, organizational communications, package design, product placement,
promotional marketing, public affairs, public relations, real estate advertising
and marketing, recruitment communications, reputation consulting, retail
marketing, search engine marketing and sports and event marketing. In an effort
to monitor the changing needs of our clients and to further expand the scope of
our services to key clients, we monitor revenue across a broad range of
disciplines and group them into the following four categories:categories as summarized
below: traditional media advertising, customer relationship management (referred
to as CRM), public relations and specialty communications as
summarized below.($ in millions).
(Dollars in Millions)
--------------------------------------------------------------------------------------
3rd1st Quarter % of 3rd1st Quarter % of $ %
20052006 Revenue 20042005 Revenue Growth Growth
----------- ------- ----------- ------- ----------------- ------
Traditional media advertising ........... $1,079.5 42.8% $ 967.8 41.8%1,104.7 43.1% $ 111.7 11.6%1,049.7 43.7% $ 55.0 5.2%
CRM ..................................... 875.6 34.7% 826.3 35.6% 49.3 6.0%892.1 34.8% 811.0 33.7% 81.1 10.0%
Public relations ........................ 257.2 10.2% 257.8 11.1% (0.6) (0.2)%259.8 10.1% 256.3 10.7% 3.5 1.4%
Specialty communications ................ 310.6 12.3% 267.1 11.5% 43.5 16.3%
-------- -------- -------- ---
$2,522.9 $2,319.0306.3 12.0% 286.0 11.9% 20.3 7.1%
--------- --------- ---------
$ 203.9 8.8%
======== ======== ======== ===2,562.9 $ 2,403.0 $ 159.9 6.7%
========= ========= =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Expenses: Our thirdfirst quarter 20052006 worldwide operating expenses
increased $176.8$132.8 million, or 8.5%6.2%, to $2,248.4$2,278.5 million from $2,071.6$2,145.7 million in
the thirdfirst quarter of 2004,2005, as shown below.below ($ in millions).
(Dollars in Millions)
----------------------------------------------------------------------------------
Three Months Ended September 30,March 31,
----------------------------------------------------------------------------------
2006 2005 20042006 vs 2005
vs 2004
------------------------------ ------------------------------ ----------------
%---------------------------- ----------------------------- -----------------
% of % of
% Total % Total
of Operating of Total Op. of Total Op.Operating $ %
$ Revenue CostsExpenses $ Revenue CostsExpenses Growth Growth
-------- ------- --------- -------- ------- --------- ------ ------
Revenue ....................................... $2,522.9 $2,319.0 $203.9 8.8%........................... $2,562.9 $2,403.0 $159.9 6.7%
Operating expenses:Expenses:
Salary and service costs .................. 1,827.9 72.5% 81.3% 1,659.5 71.6% 80.1% 168.4 10.1%costs....... 1,844.8 72.0% 81.0% 1,731.0 72.0% 80.7% 113.8 6.6%
Office and general expenses ............... 420.5 16.7% 18.7% 412.1 17.8% 19.9% 8.4 2.0%expenses.... 433.7 16.9% 19.0% 414.7 17.3% 19.3% 19.0 4.6%
------- ---- --------- ------- ---- ---- ----- -------
Total Operating Costs ......................... 2,248.4 89.1% 2,071.6Expenses........... 2,278.5 88.9% 2,145.7 89.3% 176.8 8.5%132.8 6.2%
Operating profit ..............................Profit................... $ 274.5 10.9%284.4 11.1% $ 247.4257.3 10.7% $ 27.1 11.0%10.5%
======== ======== ======
SalaryBecause we provide professional services, salary and service costs
whichrepresent the largest part of our operating expenses. During the first quarter
of 2006, we continued to invest in our businesses and their professional
personnel. As a percentage of total operating expenses, salary and service costs
were 81.0% in the first quarter of 2006 and 80.7% in the first quarter of 2005.
These costs are comprised of direct service costs and salary and related costs increased by $168.4and direct service costs.
Most, or $113.8 million or 10.1%and 85.7%, and represented
81.3% of the $132.8 million increase in total
operating expenses in the thirdfirst quarter of 2005 versus 80.1% in
the third quarter of 2004. Most, or $168.4 million and 95.2%, of the $176.8
million total increase in operating expenses in the third quarter of 20052006 resulted from increases in
salary and service costs. This increase was primarily
attributable to increasedthe increase in our
revenue levelsin the first quarter of 2006 and the required increases in the direct
salaries, salary related costs and freelance labor
costs necessary to deliver our services and pursue new business initiatives,
including direct salaries, salary related costs and direct service costs,
including freelance labor costs and direct administrative costs, such as travel.
In addition, incentive compensation expense increased in 2006 when compared to
2005. The increase in cash-based incentive compensation expense was partially
offset by a reduction in employee stock-based compensation expense including the
third
quarterreduction resulting from the adjustment to record the cumulative effect of 2004. As a result, salarythe
change in accounting principle required by our adoption of SFAS 123R. For
additional information, see Note 8 to our condensed consolidated financial
statements. Salary and service costs as a percentage of revenues increased slightly from 71.6%revenue was 72.0% in the
thirdfirst quarter of 2004 to 72.5% in
the third quarter of2006 and 2005.
Office and general expenses whichrepresented 19.0% and 19.3% of our operating
expenses in the first quarter of 2006 and 2005, respectively. These costs are
comprised of office and equipment rent, technology costs and depreciation,
and amortization of identifiable intangibles, professional fees and other overhead
expenses, increased by $8.4
million, or 2.0%, in the third quarter of 2005 compared to the same period in
2004. Office and general expenses decreased as a percentage of our total
operating costs in the third quarter of 2005 to 18.7% versus 19.9% in the prior
period. Additionally, asexpenses. As a percentage of revenue, office and general expenses decreased from
17.3% in the thirdfirst quarter of 2005 to 16.7% from 17.8%16.9% in the thirdfirst quarter of 2004 primarily as a result of our higher utilization of our fixed cost base
stemming in part from leveraging our real estate commitments and other occupancy
and office related2006 because
these costs over a higher revenue base. These expenses are relatively fixed in nature and do not necessarily change relative to ourdecrease as a percentage of
revenue growth.
Net Interest Expense: Our net interest expense in the third quarter of
2005 was $16.3 million, up from $8.8 million in the same period in 2004. The
increaseas revenue increases. In addition, this quarter-over-quarter decrease
resulted from $7.1 million of additional interestour continuing efforts to better align these costs associated with the amortization of payments we made to holders of certain of our convertible
notes not to exercise certain put rights and to consent to certain amendments to
our indentures. In August 2005, we paid $33.5 million in the aggregate to
holders of our Zero Coupon Zero Yield Convertible Notes due 2032, and in
November 2004, we paid $14.8 million and $1.5 million in the aggregate,
respectively, to consenting holders of our Liquid Yieldbusiness
levels on a location-by-location basis.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Option Notes due 2031Included in operating profit and net income for the quarter ended March
31, 2006 is a benefit of $3.6 million and $2.0 million, respectively, resulting
from the cumulative effect of the adoption of SFAS 123R and the requirement to
provide an estimate for forfeitures on all unvested stock-based compensation
awards, as of January 1, 2006. Additionally, included in operating profit and
net income in the first quarter of 2005 was a gain of $6.9 million and $0.4
million, respectively, related to the sale of a majority-owned business located
in Australia and New Zealand. The impact of these transactions on our operating
income, margins, income taxes and net income is summarized below:
First Quarter 2006 First Quarter 2005
-------------------------------------- -------------------------------------
Reported Adjustments Adjusted Reported Adjustments Adjusted % Change
-------- ----------- -------- -------- ----------- -------- --------
Revenue $2,562.9 $ -- $2,562.9 $2,403.0 $ -- $2,403.0 6.7%
Operating Profit 284.4 (3.6) 280.8 257.3 (6.9) 250.4 12.1%
% Margin 11.1% (0.1)% 11.0% 10.7% (0.3)% 10.4%
Net Interest Expense 15.1 -- 15.1 12.1 -- 12.1
-------- ------- -------- -------- ------- --------
Income Before Income Tax 269.3 (3.6) 265.7 245.2 (6.9) 238.3 11.5%
% Margin 10.5% (0.1)% 10.4% 10.2% (0.3)% 9.9%
Income Taxes 90.9 (1.6) 89.3 86.1 (6.1) 80.0
% Tax Rate 33.8% 44.4% 33.6% 35.1% 88.4% 33.6%
-------- ------- -------- -------- ------- --------
Income After Income Tax 178.4 (2.0) 176.4 159.1 (0.8) 158.3 11.4%
Equity in Earnings
of Affiliates 4.9 -- 4.9 5.2 -- 5.2
Minority Interests (17.6) -- (17.6) (13.8) 0.4 (13.4)
-------- ------- -------- -------- ------- --------
Net Income $ 165.7 $ (2.0) $ 163.7 $ 150.5 $ (0.4) $ 150.1 9.1%
======== ======= ======== ======== ======= ========
The table above is intended to facilitate the above discussion regarding
the results of our operations. As a result of the adjustments above, the
"Adjusted" numbers are non-GAAP measures. We believe that by making the
adjustments above, the "Adjusted" numbers are more comparable to previous
quarters and thus more meaningful for the purpose of this analysis.
Net Interest Expense: Our net interest expense increased in the first
quarter of 2006 to $15.1 million, as compared to $12.1 million in the first
quarter of 2005. Our gross interest expense increased by $6.1 million to $23.4
million. This increase was primarily impacted by $5.7 million of additional
interest costs resulting from the amortization of payments we made during the
third quarter of 2005 and the first quarter of 2006 to holders of certain of our
convertible notes. In August 2005, we paid $33.5 million to holders of our Zero
Coupon Zero Yield Convertible Notes due 2033. In
addition, part2032 ("2032 Notes") not to exercise
certain put rights and in February 2006, we paid $39.2 million to holders of our
Liquid Yield Option Notes due 2031 ("2031 Notes") as an incentive to the holders
not to exercise their February 2006 put right.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Substantially all of the increase wasquarter-over-quarter increases in these payments were
due to market increases in short-term interest rates. These increases were
partially offset by interest expense savings relative to our Euro-denominated
("(euro)") 152.4 million 5.20% Euro notesNotes that were redeemed upon their maturity in
June 2005. The increase in interest income is the result of increased levels of
cash and short-term investments on hand during the quarter as well as increases
in short-term rates.
As a result of interest related payments made in the second half of 2005
and a payment we made to holders of the 2031 Notes in February 2006, we expect
interest expense to increase by $11.3 million in 2006 compared to 2005, as these
payments are amortized ratably through their next put dates. Also, we expect
interest expense for the remainder of the year to be further increased by
additional payments we may make during the third quarter of 2006 on our Zero
Coupon Zero Yield Convertible Notes due 2033, as well as interest expense
related to our $1.0 billion Senior Notes we issued in late March 2006. At this
time, we do not anticipate making an additional payment during the third quarter
of 2006 related to our 2032 Notes.
Income Taxes: Our consolidated effective income tax rate was 33.7%33.8% in the
thirdfirst quarter of 2006, which is lower than our reported tax rate of 35.1% for
the first quarter of 2005. However, as set forth in the table above, excluding
the effect of the net gain and the unusually high book-tax rate on that gain
resulting from the sale of a majority-owned business located in Australia and
New Zealand in the first quarter of 2005, whichour first quarter 2005 rate was 33.6%.
This rate is slightly higher than our thirdsimilar to the first quarter 2004of 2006 tax rate and our full year rateof 33.6%, as adjusted
for 2004the adoption of 33.6%.SFAS 123R.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
thirdfirst quarter of 20052006 increased $16.4$15.2 million, or by 11.3%10.1%, to $161.7$165.7 million from
$145.3$150.5 million in the thirdfirst quarter of 2004.2005. Diluted earnings per share
increased 13.9%13.4% to $0.90$0.93 in the thirdfirst quarter of 2005,2006, as compared to $0.79$0.82 in
the prior year period for the reasons described above, as well as the impact of
the reduction in our weighted average shares outstanding foroutstanding. This reduction was the
third quarter
which resulted fromresult of our purchasepurchases of treasury shares, net of shares issued upon option
exercises and share issuancesshares issued under our employee stock purchase plan. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ResultsAs described
in Note 10 to our condensed consolidated financial statements, on April 3, 2006,
we purchased 5.5 million shares of Operations: First Nine Months 2005 Compared to First Nine Months 2004
Revenue: Our first nine months of 2005 consolidated worldwide revenue
increased 8.4% to $7,541.7 million from $6,958.1 million in the comparable
period last year. The effect of foreign exchange impacts increased worldwide
revenue by $113.2 million. Acquisitions, net of disposals, decreased worldwide
revenue by $25.9 million in the first nine months of 2005 and organic growth
increased worldwide revenue by $496.3 million. The components of the first nine
months of 2005 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
------------------ ----------------- -------------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
Nine months ended September 30, 2004 ............ $6,958.1 -- $3,781.6 -- $3,176.5 --
Components of Revenue Changes:
Foreign exchange impact ......................... 113.2 1.6% -- -- 113.2 3.6%
Acquisitions .................................... (25.9) (0.4)% 35.7 0.9% (61.6) (1.9)%
Organic ......................................... 496.3 7.1% 351.2 9.3% 145.1 4.6%
-------- --- -------- ---- -------- ---
Nine months ended September 30, 2005 ............ $7,541.7 8.4% $4,168.4 10.2% $3,373.3 6.2%
======== === ======== ==== ======== ===
The components and percentages are calculated as follows:
o The foreign exchange impact component shown in the table is
calculated by first converting the current period's local currency
revenue using the average exchange rates from the equivalent prior
period to arrive at a constant currency revenue (in this case
$7,428.5 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $7,541.7 million less $7,428.5 million for
the Total column in the table).
o The acquisitions component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any
businessour outstanding common stock, which will be
included in the prior period reported revenue that was
disposed of subsequent to the prior period.
o The organic component shown in the table is calculated by
subtracting both the foreign exchangetreasury stock and acquisition revenue
components from total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base of that component (in this case $6,958.1 million
for the Total column in the table).
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The components of revenue and revenue growth inwill reduce our primary geographic
markets for the first nine months of 2005 compared to the first nine months of
2004 are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $4,168.4 10.2%
Euro Denominated Markets............ 1,531.6 7.1%
United Kingdom...................... 795.1 2.3%
Other............................... 1,046.6 8.1%
-------- ---
Total............................... $7,541.7 8.4%
======== ===
As indicated, foreign exchange impacts increased our international revenue
by $113.2 million during the first nine months of 2005. The most significant
impacts resulted from the strength of the Euro and the British Pound against the
U.S. dollar, as our operations in these markets represented approximately 70% of
our international revenue.
In an effort to monitor the changing needs of our clients and to further
expand the scope of our services to key clients, we monitor revenue across a
broad range of disciplines and group them into the following four categories:
traditional media advertising, CRM, public relations and specialty
communications, as summarized below.
(Dollars in Millions)
--------------------------------------------------------------------
Nine Months % of Nine Months % of $ %
2005 Revenue 2004 Revenue Growth Growth
----------- ------- ----------- ------- ------- ------
Traditional media advertising $3,283.4 43.6% $3,004.9 43.2% $ 278.5 9.3%
CRM 2,580.2 34.2% 2,385.1 34.3% 195.1 8.2%
Public relations 778.4 10.3% 760.1 10.9% 18.3 2.4%
Specialty communications 899.7 11.9% 808.0 11.6% 91.7 11.3%
-------- -------- ------- ----
$7,541.7 $6,958.1 $ 583.6 8.4%
======== ======== ======= ====
Operating Expenses: Our first nine months of 2005 worldwide operating
expenses increased $490.4 million, or 8.0%, to $6,628.0 million from $6,137.6
million in the first nine months of 2004, as shown below.
(Dollars in Millions)
------------------------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------------------------------------------------------------
2005 2004 2005 vs 2004
----------------------------- ----------------------------- -------------------
% % of % % of
of Total Op. of Total Op. $ %
$ Revenue Costs $ Revenue Costs Growth Growth
-------- ------- --------- -------- ------- --------- -------- -------
Revenue ........................... $7,541.7 $6,958.1 $ 583.6 8.4%
Operating expenses:
Salary and service costs....... 5,362.0 71.1% 80.9% 4,906.7 70.5% 79.9% 455.3 9.3%
Office and general expenses.... 1,266.0 16.8% 19.1% 1,230.9 17.7% 20.1% 35.1 2.9%
------- ---- ---- ------- ---- ---- ---- ---
Total Operating Costs.............. 6,628.0 87.9% 6,137.6 88.2% 490.4 8.0%
Operating profit................... $ 913.7 12.1% $ 820.5 11.8% $ 93.2 11.4%
======== ======== =======
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Salary and service costs, which are comprised of direct service costs and
salary and related costs, increased by $455.3 million, or 9.3%, and represented
80.9% of total operating expenses in the first nine months of 2005 versus 79.9%
in the first nine months of 2004. Most, or $455.3 million and 92.8%, of the
$490.4 million total increase in operating expenses in the first nine months of
2005 resulted from increases in salary and service costs. This increase was
primarily attributable to increased revenue levels and the required increases in
direct salaries, salary related costs and freelance labor costs necessary to
deliver our services and pursue new business initiatives. As a result, salary
and service costs as a percentage of revenues increased marginally from 70.5% in
the first nine months of 2004 to 71.1% in the first nine months of 2005.
Office and general expenses, which are comprised of office and equipment
rent, technology costs and depreciation and amortization of identifiable
intangibles, professional fees and other overhead expenses, increased by $35.1
million, or 2.9%, in the first nine months of 2005 compared to the same period
in 2004. Office and general expenses decreased as a percentage of our total
operating costs in the first nine months of 2005 to 19.1% versus 20.1% in the
prior period. Additionally, as a percentage of revenue, office and general
expenses decreased in the first nine months of 2005 to 16.8% from 17.7% in the
first nine months of 2004, as a result of our higher utilization of our fixed
cost base stemming in part from leveraging our real estate commitments and other
occupancy and office related costs over a higher revenue base. These expenses
are relatively fixed in nature and do not necessarily change relative to our
revenue growth. Included in office and general expenses in the first quarter of
2005 was a pre-tax $6.9 million net gain related to the sale of a majority owned
business located in Australia and New Zealand and the disposal of a
non-strategic business located in the United States. Additionally, included in
office and general expenses in the first quarter of 2004 was a $3.2 million
pre-tax net gain arising from Seneca Investment LLC's recapitalization,
partially offset by losses from the disposal of other cost-based investments and
costs incurred in connection with the disposal of two non-strategic businesses.
Net Interest Expense: Our net interest expense in the first nine months of
2005 was $42.7 million, up from $26.6 million in the same period in 2004. The
increase resulted from $20.2 million of additional interest costs associated
with the amortization of payments we made to holders of certain of our
convertible notes during the first nine months of 2005 and the fourth quarter of
2004. In August 2005, we paid $33.5 million to holders of our Zero Coupon Zero
Yield Convertible Notes due 2032 to not exercise certain put rights and, in
November 2004, we paid $14.8 million and $1.5 million in the aggregate,
respectively, to consenting holders of our Liquid Yield Option Notes due 2031
and Zero Coupon Zero Yield Convertible Notes due 2033, as incentives to consent
to certain amendments to our indentures and not exercise certain put rights. In
addition, part of the increase was due to market increases in short-term
interest rates. These increases were partially offset by interest expense
savings relative to our (euro)152.4 million 5.20% Euro notes that were redeemed
upon their maturity in June 2005.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes: Our consolidated effective income tax rate was 34.1% in the
first nine months of 2005. Excluding the impact related to the net gain, as
described above in our discussion of operating expenses, our tax rate was 33.7%
in the first nine months of 2005, which is comparable to our first nine months
of 2004 and full year rate for 2004 of 33.6%.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first nine months of 2005 increased $51.1 million, or by 10.5%, to $538.1
million from $487.0 million in the first nine months of 2004. Diluted earnings
per share increased 13.5% to $2.95 in the first nine months of 2005, as compared
to $2.60 in the prior year period for the reasons described above, as well as
the impact of the reduction in ourfuture weighted average common
shares outstanding for the
first nine months of 2005 which resulted from our purchase of treasury shares
net of option exercises and share issuances under our employee stock purchase
plan.
18outstanding.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies
For a more complete understanding of all of our accounting policies, our
financial statements and the related management's discussion and analysis of
those results, readers are encouraged to consider this information together with
our discussion of our critical accounting policies under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on2005 Form 10-K, for the year ended December 31,
2004 (the "2004 Form 10-K"), as well as our consolidated financial
statements and the related notes included in our 20042005 Form 10-K.
New Accounting Pronouncements
In 2004 the FASB issued SFAS No. 123R which is effective for annual
reporting periods beginning after December 15, 2005 and generally applies to
grants made after adoption.Effective January 1, 2006, we adopted SFAS 123R is a revisionusing the modified
prospective application transition method. Because the fair value recognition
provisions of SFAS 123. Because we
previously adopted123 and SFAS 123, as amended by SFAS 148, on January 1, 2004, we
believe that123R were materially consistent under our equity
plans, the adoption of SFAS 123R willdid not have a materialsignificant impact on our
consolidatedfinancial position or our results of operations or financial position. However, we are still
in the process of assessing the full impact and related disclosure requirements
of this revision.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"), which replaces APB Opinion No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.
SFAS 154 requires retrospective applications of a voluntary change in accounting
principleoperations. See Note 8 to prior periodour condensed
consolidated financial statements presented on the new accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires
accounting for a change in method of depreciating or amortizing a long-lived
non-financial asset as a change in accounting estimate (prospectively) affected
by a change in accounting principle. Additionally, SFAS 154 requires that
corrections of errors in previously issued financial statements be termed a
"restatement". SFAS 154 is effective for accounting changes and error
corrections made in fiscal years beginning after December 15, 2005. We do not
believe that the adoption of SFAS 154 will have a material impact on our
consolidated results of operations or financial position.
The FASB issued two staff proposals on accounting for income taxes to
address recent changes enacted by the United States Congress. Proposed Staff
Position FAS 109-a, Application of FASB Statement No. 109, Accounting for Income
Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the
American Jobs Creation Act of 2004, and Proposed Staff Position FAS 109-b,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provisions within the American Jobs Creation Act of 2004. We believe that
Proposed Staff Position FAS 109-a does not apply to our business and we are
currently assessing the impact of Proposed Staff Position FAS 109-b; however, we
do not believe it will have a material impact on our consolidated results of
operations or financial position.
19additional information.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Contingent Acquisition Obligations
Certain of our acquisitions are structured with contingent purchase price
obligations, often referred to as earn-outs. We utilize contingent purchase
price structures in an effort to minimize the risk to us associated with
potential future negative changes in the performance of the acquired entity
during the post-acquisition transition period. These payments are not contingent
upon future employment. The aggregate amount of future contingent purchase price
payments that we would be required to pay for prior acquisitions, assuming that
the businesses perform over the relevant future periods at their current profit
levels, is approximately $369$442 million as of September 30, 2005.March 31, 2006. The ultimate amounts
payable cannot be predicted with reasonable certainty because it isthey are dependent
upon future results of operations of subject businesses and isare subject to
changes in foreign currency exchange rates. In accordance with U.S. GAAP, we
have not recorded a liability for these items on our balance sheet since the
definitive amount is not determinable or distributable. Actual results can
differ from these estimates and the actual amounts that we pay are likely to be
different from these estimates. Our obligations change from period to period
primarily as a result of payments made during the current period, changes in the
acquired entities' performance and changes in foreign currency exchange rates.
These differences could be significant. The contingent purchase price
obligations as of September 30, 2005,March 31, 2006, calculated assuming that the acquired
businesses perform over the relevant future periods at their current profit
levels, are as follows:
(Dollarsfollows ($ in Millions)
--------------------------------------------------------------------------millions):
Remainder There-
2005
2006 2007 2008 after2009 Thereafter Total
--------- ---- ---- ---- ---- --------------- -----
$ 41120 $ 98136 $ 10992 $ 7449 $ 4745 $ 369442
In addition, owners of interests in certain of our subsidiaries or
affiliates have the right in certain circumstances to require us to purchase
additional ownership stakes in those companies. Assuming that the subsidiaries
and affiliates perform over the relevant periods at their current profit levels,
the aggregate amount we could be required to pay in future periods is
approximately $255$269 million, $127$158 million of which relaterelates to obligations that
are currently exercisable. If these rights are exercised, there would be an
increase in our net income as a result of our increased ownership and the
reduction of minority interest expense. The ultimate amount payable relating to
these transactions will vary because it is primarily dependent on the future
results of operations of the subject businesses, the timing of the exercise of
these rights and changes in foreign currency exchange rates. The actual amount
that we pay is likely to be different from this estimate and the difference
could be significant. The obligations that exist for these agreements as of
September 30,
2005,March 31, 2006, calculated using the assumptions above, are as follows:
(Dollarsfollows ($ in
Millions)
-----------------------------------------millions):
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $ 100114 $ 115105 $ 215219
Affiliated agencies 27 13 4044 6 50
----- ----- -----
Total $ 127158 $ 128111 $ 255269
===== ===== =====
2017
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Historically, substantially all of our non-discretionary cash requirements
have been funded from operating cash flow and cash on hand. However, during the
year we manage liquidity by utilizing our credit facilities discussed below. Our
principal non-discretionary funding requirement is our working capital. In
addition, we have contractual obligations related to our debt and convertible
notes, our recurring business operations primarily related to lease obligations,
as well as certain contingent acquisition obligations related to acquisitions
made in prior years.
Historically, substantially all of our
non-discretionary cash requirements have been funded from operating cash flow.
Our principal discretionary cash requirements include dividend payments to
our shareholders, repurchases of our common stock, payments for strategic
acquisitions and capital expenditures. Typically, our discretionary spending is
also funded from operating cash flow and cash on hand. However, in any given
year, depending on the level of discretionary activity, we may use other sources
of available funding, such as the liquidation of short-term investments, the
issuance of commercial paper to finance these activities or accessing the
capital markets. The repurchases of our stock during the thirdfirst quarter of 20052006
are summarized in Part II, Item 2 "Unregistered Sales of Equity Securities and
Use of Proceeds" of this Quarterly Report on Form 10-Q.
We have a seasonal working capital cycle. Working capital requirements are
lowest at year-endyear-end. The fluctuation in working capital requirements between the
lowest and higherhighest points during the first, second and third quarters.course of the year can be more than $1.5
billion. This cycle occurs because in the majority of our businesses we act as agentincur costs on behalf of our
clients, including when we place media and incur production costs on
their behalf.costs. We generally
require collection from our clients prior to our payment for the media and
production cost obligations and these obligations are
greatest at the end of the year.
Historically, on an annual basis, our discretionary and non-discretionary
spending has been funded from operating cash flow. However, during the year we
manage liquidity by utilizing our credit facilities discussed below.obligations.
Liquidity: We had cash and cash equivalents totaling $395.6$1,822.9 million and
$1,165.6$835.8 million at September 30, 2005March 31, 2006 and December 31, 2004,2005, respectively. The
increase in cash is primarily the result of changes in the components of working
capital and the issuance of our Senior Notes in March 2006. We also had
short-term investments totaling $14.4$38.8 million and $574.0$374.1 million at September 30, 2005March 31,
2006 and December 31, 2004,2005, respectively. Consistent with our
historical trends inFor the first ninethree months of the year,2006, we
had negativegenerated $101.0 million of cash flow from operationsoperations. As discussed in Note 10
to our condensed consolidated financial statements, on April 3, 2006, we
purchased 5.5 million shares of $304.4our outstanding common stock for $458.7 million. We funded this deficit primarily with
cash on hand, liquidation of short-term investments, working capital management
and through issuance of commercial paper.
Capital Resources: On May 23, 2005, we amended and extended our existing
revolving credit facilities withWe have a consortium of banks, resulting in a five-year $2,100.0 million revolving credit facility
which matures May 23, 2010. On June
30, 2005, we entered intoWe also have a new $400.0 million 364-day revolving
credit facility with a maturity date of June 29, 2006. The five-year facility amended our
previous five-year, $1,500.0 million facility. The 364-day facility replaced our
364-day facility that expired May 24, 2005. The new 364-day facility
includes a provision that allows us to convert all amounts outstanding at
expiration of the facility into a one-year term loan.
In funding our day-to-day liquidity, we are an active participant in the
commercial paper market with a $1,500.0 million program. Both of our $2,100.0
million five-year revolving
credit facility
21facilities provide credit support for commercial paper issued under this
program, as well as to provide back-up liquidity
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
andin the event any of our $400.0 million 364-dayconvertible notes are put back to us. As of March 31,
2006, we had no commercial paper outstanding. Accordingly, we have the ability
to classify outstanding borrowings, if any, under these facilities as long-term
debt.
Our revolving credit facility provide credit support
for commercial paper issued under this program. As of September 30, 2005, $159.7
million of commercial paper was outstanding. We allocated these outstanding
commercial paper issuances to our five-year facility. We had no borrowings
outstanding under the 364-day credit facility.
Thefacilities are provided by bank syndicate for the five-year facility consists of 27 banks.syndicates, which
include large global banks such as Citibank, N.A. acts as administrative agent,JP Morgan Chase, HSBC, ABN Amro,
acts as syndication agent
and JPMorgan Chase Bank and HSBC Bank USA act as co-documentation agents for the
facility. Other significant lending institutions include Societe Generale, Bank
of America, Wachovia and Sumitomo Mitsui.
The bank syndicate for the 364-day facility consists of eight banks.
Citibank N.A. acts as administrative agent, ABN Amro acts as syndication agent
and JPMorgan Chase Bank,Barclays, Bank of America and Banco Bilbao Vizcaya Argentaria
actBBVA. We also include large
regional banks in the U.S. such as co-documentation agents for the facility.
These facilities areWachovia, US Bancorp, Northern Trust, PNC and
Wells Fargo. We also include banks that have a critical componentmajor presence in our analysis of the liquiditycountries where
we conduct business such as Sumitomo in Japan, Fortis in Belgium, San Paolo in
Italy, Scotia in Canada and capital resources that provide us with the ability to classify up to
$2,500.0 million of our borrowings that could come due within one year as
long-term debt, when it is our intention to keep the borrowings outstanding on a
long-term basis.Westpac in Australia.
Debt: We had short-term bank loans and commercial paper outstanding of $213.9$21.5 million and $17.5$15.0 million,
respectively, as of September 30, 2005March 31, 2006 and December 31, 2004.2005. The short-term bank
loans consisted of $54.2 million and
$17.5 million at September 30, 2005 and December 31, 2004, respectively, which
are comprised of domesticlocal borrowings and bank overdrafts of our international
subsidiaries and are treated as unsecured loans pursuant to our bank agreements.
The commercial paper outstanding of $159.7 million as of September 30, 2005 is
discussed above under the caption Capital Resources.
At September 30, 2005,In March 2006, we also had a total of $2,339.3 million aggregateissued $1.0 billion principal amount of convertible notes outstanding, including $847.0 million
Liquid Yield Option5.90% Senior
Notes due 2031, whichApril 15, 2016. The gross proceeds from the issuance were $995.1
million. The gross proceeds less fees resulted in a 6.05% yield to maturity. The
Senior Notes were issued by Omnicom Group Inc. and two of our wholly-owned
finance subsidiaries, Omnicom Capital Inc. and Omnicom Finance Inc., as
co-obligors, similar to our Convertible Notes. The Senior Notes are senior
unsecured notes that rank in February 2001, $892.3
million Zero Coupon Zero Yield Convertible Notes due 2032, which were issued in
March 2002,equal right of payment with all existing and $600.0 million Zero Coupon Zero Yield Convertible Notes due
2033, which were issued in June 2003.
Upon their maturity, in June 2005, we redeemed our Euro-denominated bonds
for $185.1 million. The bonds paidfuture
unsecured indebtedness and as a fixed ratejoint and several liability of 5.2% to maturity.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)the issuer and
the co-obligors.
Our outstanding debt and amounts available under our credit facilities as
of September 30, 2005March 31, 2006 were as follows ($ in millions) were as follows:
Debt Available
Outstanding Credit
----------- ---------
Bank loans (due in less than 1 year)............... $ 54.2 --
Commercial Paper issued under
$2,100.0 Million Revolver - due May 23, 2010..... 159.7 $ 1,940.3
$400.0 Million Facility - due June 29, 2006........ -- 400.0
Convertible notes - due February 7, 2031......... 847.0 --
Convertible notes - due July 31, 2032............ 892.3 --
Convertible notes - due June 15, 2033............ 600.0 --
Other debt......................................... 19.5 --
--------- ---------
Total.................................................. $ 2,572.7 $ 2,340.3
========= =========:
Debt Available
Outstanding Credit
----------- ------
Current Debt (due in less than 1 year)................................. $ 22.4 --
Commercial Paper issued under
$2,100.0 Million Revolver - due May 23, 2010...................... -- $2,100.0
$400.0 Million Facility - due June 29, 2006............................ -- 400.0
Senior Notes - due April 15, 2016...................................... 995.1 --
Liquid Yield Option Notes - due February 7, 2031....................... 847.0 --
Zero Coupon Zero Yield Convertible Notes - due July 31, 2032........... 892.3 --
Zero Coupon Zero Yield Convertible Notes - due June 15, 2033........... 600.0 --
Other Debt............................................................. 18.0 --
-------- --------
Total...................................................................... $3,374.8 $2,500.0
======== ========
We believe that our operating cash flow combined with our available lines
of credit and our access to the capital markets are sufficient to support our
foreseeable cash requirements arising from working capital, outstanding debt,
capital expenditures, dividends and acquisitions.
2319
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our results of operations are subject to risk from the translation to the
U.S. dollarDollar of the revenue and expenses of our foreign operations, which are
generally denominated in the local currency. For the most part, our revenues and
the expenses incurred related to those revenues are denominated in the same
currency. This minimizes the impact that fluctuations in exchange rates will
have on our profit margins.net income.
During the thirdfirst quarter of 2005, our2006, we entered into Japanese Yen basedYen-based
cross-currency interest rate swaps, matured and were not replaced. Also, during the third quarter we entered
into a (euro)30.0 million (Euro)with an aggregate notional principal amount
cross-currency interest rate swap which maturesof 22.0 billion Yen that mature in 2010. This swap2013. These swaps effectively hedgeshedge our net
investment in certain Euro-denominatedJapanese Yen based denominated assets.
Our Annual Report on2005 Form 10-K for the year ended December 31, 2004 provides a more detailed discussion of the market risks
affecting our operations. As of September 30, 2005,March 31, 2006, no material change had occurred
in our market risks from the disclosure contained in thatour 2005 Form 10-K.
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
and other information set forth in, or incorporated by reference into or
referenced in, this report contain disclosures which are forward-looking
statements within the meaning of the federal securities laws. Forward-looking
statements include all statements that do not relate solely to historical or
current facts, and can be identified by the use of words such as "may," "will,"
"expect," "project," "estimate," "anticipate," "envisage," "plan" or "continue."
These forward-looking statements are based upon our current plans or
expectations and are subject to a number of uncertainties and risks that could
significantly affect current plans and anticipated actions and our future
financial condition and results. The uncertainties and risks include, but are
not limited to, changes in general economic conditions, competitive factors,
client communication requirements, the hiring and retention of human resources
and other factors. In addition, our international operations are subject to the
risk of currency fluctuations, exchange controls and similar risks discussed
above. As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by us or on our behalf, and those differences could be material.
2420
ITEM 4. CONTROLS AND PROCEDURES
We have established and continue to maintain disclosure controls and
procedures and internal controlscontrol over financial reporting designed to ensure that
information required to be disclosed in our SEC reports is recorded, processed,
summarized and reported within applicable time periods. We conducted an
evaluation under
the supervision and with the participation of our management, including our CEO
and CFO, of the effectiveness of our disclosure controls and procedures as of
September 30, 2005.March 31, 2006. Based on that evaluation, our CEO and CFO concluded that as of
September 30, 2005,March 31, 2006, our disclosure controls and procedures are effective to ensure
that decisions can be made timely with respect to required disclosures, as well
as ensuring that the recording, processing, summarization and reporting of
information required to be included in our Quarterly Report on Form 10-Q for the
quarter ended September 30,March 31, 2006 is appropriate. KPMG LLP, an independent registered
public accounting firm that audited our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2005,
has issued an attestation report on management's assessment of Omnicom's
internal control over financial reporting as appropriate to allow timely decisions regarding
required disclosure.of December 31, 2005, dated
February 24, 2006. There have not been any changes in our internal controlscontrol over
financial reporting that occurred during our first second and third fiscal quarter that hashave
materially affected or isare reasonably likely to materially affect our internal
controls over financial reporting.
Our independent
registered public accounting firm, KPMG LLP, has audited our financial
statements for the year ended December 31, 2004 and issued an attestation
report, dated March 11, 2005, on our assessment of our internal control over
financial reporting.
2521
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information regarding legal proceedings described in note 10Note 9 to the condensed
consolidated financial statements set forth in Part I of this reportReport is
incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed in Item 1A in
our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table presents information with respect to purchases of our
common stock made during the three months ended September 30, 2005March 31, 2006 by us or any of
our "affiliated purchasers".purchasers."
(c)
Total Number (d)
(a) (b) of Shares Purchased Maximum Number
Total Average As Part of Publicly of Shares that May
Number of Price Paid Announced Plans Yet Be Purchased Under
During the month in 2005:2006: Shares Purchased (1) Per Share or Programs the Plans or Programs
- ------------------------- -------------------- ------------------- ------------------- ----------------------
July 310,900January 591,000 $ 80.1383.46 -- --
August 1,051,000February 2,082,400 $ 84.4082.35 -- --
September 93,025March 1,660,000 $ 80.6683.34 -- --
--------- ------- --------- ----------------- ----------
Total 1,454,9254,333,400 $ 83.2582.88 -- --
========= ======= ========= ================= ==========
(1) The shares were purchased in the open market for general corporate
purposes.
Item 6. Exhibits
(a) Exhibits
4.1 Form of Senior Debt Securities Indenture (Exhibit 4.1 to our
Registration Statement on Form S-3 (Registration No.333-132625) and
incorporated herein by reference).
4.2 First Supplemental Indenture, dated as of March 29, 2006, among
Omnicom Group Inc., Omnicom Capital Inc., Omnicom Finance Inc. and
JPMorgan Chase Bank, N.A., as trustee, in connection with our
issuance of $1.0 billion 5.90% Notes due 2016 (Exhibit 4.2 to the
Form 8-K (Registration No. 1-10551) dated March 29, 2006 (the
"3-29-06 8-K") and incorporated herein by reference).
22
4.3 Form of 5.90% Notes due 2016 (Exhibit 4.3 to the 3-29-06 8-K and
incorporated herein by reference).
31.1 Certification of the Chief Executive Officer and President required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of the Executive Vice President and Chief Financial
Officer required by Rule 13a-14(a) under the Securities Exchange Act
of 1934, as amended.
32.1 Certification of the Chief Executive Officer and President required
by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. ss.1350.
32.2 Certification of the Executive Vice President and Chief Financial
Officer required by Rule 13a-14(b) under the Securities Exchange Act
of 1934, as amended and 18 U.S.C. ss.1350.
2623
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNICOM GROUP INC.
NovemberDated: May 1, 20052006 /s/ Randall J. Weisenburger
-------------------------------------------------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(on behalf of Omnicom Group Inc.
and as Principal Financial Officer)
27
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