SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

_________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended:September 30, 2006 March 31, 2007

Commission File Number:1-10551

OMNICOM GROUP INC.

(Exact name of registrant as specified in its charter)

New York13-1514814

(State or other jurisdiction of incorporation or organization)		13-1514814
(IRS Employer Identification Number)
 
437 Madison Avenue, New York, New York10022

(Address of principal executive offices)		10022
(Zip Code)

(212) 415-3600
(Registrant’s telephone number, including area code)

Not Applicable
(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|      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 12b-2 of the Exchange Act).

YES |_|    NO |X|

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $0.15 par value — 170,900,000– 165,400,000 shares as of October 16, 2006.April 19, 2007.


 
  

OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX

PART I.FINANCIAL INFORMATION
Page No.
Item 1.Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2006 and December 31, 20051
Condensed Consolidated Statements of Income - Three Months
and Nine Months Ended September 30, 2006 and 20052
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2006 and 20053
Notes to Condensed Consolidated Financial Statements4
Item 2.Management’s Discussion and Analysis of Financial Condition
And Results of Operations11
Item 3.Quantitative and Qualitative Disclosures About Market Risk28
Item 4.Controls and Procedures29
PART II.OTHER INFORMATION  
    

Item 1.

Legal Proceedings

Financial Statements

30

    

Condensed Consolidated Balance Sheets -

Item 1A.

  March 31, 2007 and December 31, 2006

Risk Factors

30

1

    

Condensed Consolidated Statements of Income -

  Three Months Ended March 31, 2007

2

  

Condensed Consolidated Statements of Cash Flows -

  Three Months Ended March 31, 2007

3

Notes to Condensed Consolidated Financial Statements

4

Item 2.

Management’s Discussion and Analysis of Financial Condition

  and Results of Operations

11

    Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

    Item 4.

Controls and Procedures

23

PART II.OTHER INFORMATION

    Item 1.

Legal Proceedings

24

    Item 1A.

Risk Factors

24

    Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

24

    

Item 6.

Exhibits

30

24

    

Signatures

Signatures

32

25

    

Certifications

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, which are described in our 20052006 Annual Report on Form 10-K under Item 1A-Risk Factors and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations include, but are not limited to, our future financial condition and results of operations, changes in general economic conditions, competitive factors, changes in client communication requirements, the hiring and retention of human resourcespersonnel, our ability to attract new clients and retain clients, changes in government regulations impacting our advertising and marketing strategies, risks associated with assumptions we make in connection with our critical accounting estimates, and our international operations, which are subject to the risks of currency 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 BALANCE SHEETS
(Dollars in Millions)

(Unaudited)
March 31,
2007		December 31,
2006
ASSETS
ASSETS
(Unaudited)
September 30,
2006
December 31,
2005
   
CURRENT ASSETS:      
Cash and cash equivalents $      808.3 $      835.8  $      1,028.3$      1,739.5
Short-term investments at market, which approximates cost 40.5 374.1  36.7189.3
Accounts receivable, net of allowance for doubtful accounts  
of $51.5 and $53.9 5,455.4 5,366.1 
of $49.7 and $50.5 5,658.65,994.3
Billable production orders in process, at cost 661.8 542.0  712.1633.8
Prepaid expenses and other current assets 1,050.7 849.4  1,176.11,089.9
 
Total Current Assets 8,016.7 7,967.4  8,611.89,646.8
 
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,  
less accumulated depreciation and amortization of $972.1 and $873.1 617.6 608.7 
less accumulated depreciation and amortization of $998.8 and $992.6 634.1639.8
INVESTMENTS IN AFFILIATES 206.0 182.4  214.6214.1
GOODWILL 6,821.1 6,493.1  6,895.36,851.9
INTANGIBLE ASSETS, net of accumulated amortization of $201.5 and $176.3 116.3 121.4 
INTANGIBLE ASSETS, net of accumulated amortization of $217.3 and $207.8 138.7143.2
DEFERRED TAX BENEFITS 290.1 309.8  404.5408.5
OTHER ASSETS 258.1 237.1  245.4260.1
 
TOTAL ASSETS $ 16,325.9 $ 15,919.9  $     17,144.4$     18,164.4
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
CURRENT LIABILITIES: 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
CURRENT LIABILITIES: 
Accounts payable $   6,117.1 $   6,218.9  $      6,490.9$      7,332.6
Advance billings 1,013.7 908.7  1,111.81,117.5
Current portion of long-term debt 0.7 1.1  0.91.1
Bank loans 11.8 15.0  12.110.5
Accrued taxes 127.4 196.3  173.6215.8
Other liabilities 1,347.0 1,360.3  1,654.21,618.6
 
Total Current Liabilities 8,617.7 8,700.3  9,443.510,296.1
 
LONG-TERM DEBT 1,013.6 18.2  1,013.21,013.2
CONVERTIBLE NOTES 2,041.6 2,339.3  2,041.52,041.5
DEFERRED COMPENSATION AND OTHER LIABILITIES 275.8 298.4  358.1305.8
LONG-TERM DEFERRED TAX LIABILITY 509.6 442.7  445.5437.7
MINORITY INTERESTS 180.4 173.0  201.0198.8
 
SHAREHOLDERS’ EQUITY:  
Preferred stock — —  — — 
Common stock 29.8 29.8  29.829.8
Additional paid-in capital 1,657.4 1,675.1  1,668.21,662.1
Retained earnings 4,055.1 3,599.0  4,432.34,289.8
Accumulated other comprehensive income 205.8 59.8  286.4267.9
Treasury stock, at cost (2,260.9)(1,415.7) (2,775.1)(2,378.3)
 
Total Shareholders’ Equity 3,687.2 3,948.0  3,641.63,871.3
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,325.9 $ 15,919.9 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $     17,144.4$     18,164.4
 

The accompanying notes to the condensed
consolidated financial statements are an integral part of these statements.


 
 1 

OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
(Unaudited)

Three Months Ended September 30,
Nine Months Ended September 30,
2006
2005
2006
2005
REVENUE $    2,774.3 $    2,522.9 $    8,160.7 $    7,541.7 
  
OPERATING EXPENSES: 
      Salary and service costs 2,008.9 1,827.9 5,813.6 5,362.0 
      Office and general expenses 458.0 420.5 1,337.8 1,266.0 
  2,466.9 2,248.4 7,151.4 6,628.0 
OPERATING PROFIT 307.4 274.5 1,009.3 913.7 
  
NET INTEREST EXPENSE: 
      Interest expense 33.6 19.9 91.3 55.5 
      Interest income (6.9)(3.6)(23.9)(12.8)
  26.7 16.3 67.4 42.7 
INCOME BEFORE INCOME TAXES 280.7 258.2 941.9 871.0 
          
INCOME TAXES 92.9 86.9 315.5 297.4 
INCOME AFTER INCOME TAXES 187.8 171.3 626.4 573.6 
          
EQUITY IN EARNINGS OF AFFILIATES 6.3 6.9 17.5 17.2 
MINORITY INTERESTS (17.0)(16.5)(57.1)(52.7)
         NET INCOME $        177.1 $        161.7 $        586.8 $        538.1 
NET INCOME PER COMMON SHARE: 
         Basic $          1.05 $          0.90 $          3.41 $          2.97 
         Diluted $          1.04 $          0.90 $          3.38 $          2.95 
          
DIVIDENDS DECLARED PER COMMON SHARE $        0.250 $        0.225 $        0.750 $        0.675 
 Three Months Ended March 31,
 2007
2006
REVENUE$   2,840.6 $   2,562.9 
 
OPERATING EXPENSES:
     Salary and service costs2,050.6 1,844.8 
     Office and general expenses474.5 433.7 
 2,525.1 2,278.5 
OPERATING PROFIT315.5 284.4 
 
NET INTEREST EXPENSE:
     Interest expense27.8 23.4 
     Interest income(9.5)(8.3)
 18.3 15.1 
INCOME BEFORE INCOME TAXES297.2 269.3 
     
INCOME TAXES100.5 90.9 
INCOME AFTER INCOME TAXES196.7 178.4 
     
EQUITY IN EARNINGS OF AFFILIATES5.2 4.9 
     
MINORITY INTERESTS(18.9)(17.6)
NET INCOME$      183.0 $      165.7 
NET INCOME PER COMMON SHARE:
        Basic$        1.11 $        0.94 
        Diluted$        1.09 $        0.93 
     
DIVIDENDS DECLARED PER COMMON SHARE$        0.25 $        0.25 

The accompanying notes to the condensed
consolidated financial statements are an integral part of these statements.


 
 2 

OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)

Nine Months Ended September 30,
 
Three Months Ended March 31,
2006
2005
 
2007
2006
Cash flows from operating activities:          
Net income $    586.8 $    538.1  $    183.0 $    165.7 
Adjustments to reconcile net income to net cash provided (used) 
by operating activities: 
Adjustments to reconcile net income to net cash provided (used) by 
operating activities: 
Depreciation and amortization of tangible assets 109.6 100.8  38.5 35.3 
Amortization of intangible assets 27.9 27.3  9.3 8.9 
Minority interests 57.1 52.7  18.9 17.6 
Earnings of affiliates in excess of dividends received (8.5)(8.4)
Net gain on investment activity (2.8)(7.0)
Windfall tax benefit on employee stock plans — 14.5 
Earnings of affiliates less than (in excess of) dividends received 0.5 (1.1)
Excess tax benefit on stock-based compensation (15.0)—  (9.6)(5.6)
Provision for losses on accounts receivable 5.6 4.4  1.2 1.0 
Amortization of stock-based compensation 52.7 67.5  18.4 15.7 
Changes in assets and liabilities providing (requiring) cash,  
net of acquisitions:  
Decrease (increase) in accounts receivable 54.1 (294.9)
Decrease in accounts receivable 362.7 273.0 
Increase in billable production orders in process (112.5)(132.5) (75.4)(67.3)
Increase in prepaid expenses and other current assets (187.5)(130.7) (76.5)(163.5)
Net change in other assets and liabilities (48.7)(138.6) 21.8 (26.1)
Increase in advanced billings 82.5 58.8 
Net increase in accrued and deferred taxes 21.4 50.4 
(Decrease) increase in advanced billings (10.1)44.8 
Net increase (decrease) in accrued and deferred taxes 41.4 (5.0)
Decrease in accounts payable (232.4)(506.8) (870.4)(192.4)
Net cash provided by (used in) operating activities 390.3 (304.4)
Net cash (used in) provided by operating activities (346.3)101.0 
Cash flows from investing activities:  
Capital expenditures (119.5)(102.4) (34.9)(33.5)
Net payments for purchases of equity interests in subsidiaries and  
affiliates, net of cash acquired (208.6)(192.2) (19.4)(31.1)
Proceeds from sale of businesses 31.4 29.3 
Purchases of short-term investments (96.7)(332.2) (19.5)(78.7)
Proceeds from sales of short-term investments 172.0 414.9 
Repayment of long-term notes receivable 13.4 61.8  — 11.2 
Proceeds from short-term investments 425.7 891.5 
Net cash provided by investing activities 45.7 355.8  98.2 282.8 
Cash flows from financing activities:  
(Decrease) increase in short-term borrowings (1.8)196.3 
Increase in short-term borrowings 1.5 6.2 
Proceeds from issuance of debt 996.0 0.7  0.1 995.2 
Repayments of principal of long-term debt obligations (299.2)(189.2) (0.2)(1.5)
Excess tax benefit on stock-based compensation 15.0 —  9.6 5.6 
Dividends paid (133.1)(123.8) (42.6)(45.2)
Purchase of treasury shares (1,082.2)(644.2) (451.3)(359.2)
Proceeds from employee stock plans 166.6 51.3  47.7 21.0 
Other, net (62.7)(91.8) (16.6)(15.2)
Net cash used in financing activities (401.4)(800.7)
Net cash (used in) provided by financing activities (451.8)606.9 
     
Effect of exchange rate changes on cash and cash equivalents (62.1)(20.7) (11.3)(3.6)
Net decrease in cash and cash equivalents (27.5)(770.0)
Net (decrease) increase in cash and cash equivalents (711.2)987.1 
Cash and cash equivalents at beginning of period 835.8 1,165.6  1,739.5 835.8 
Cash and cash equivalents at end of period $    808.3 $    395.6  $ 1,028.3 $ 1,822.9 
Supplemental disclosures:  
Income taxes paid $    281.9 $    199.6  $      48.1 $      97.6 
Interest paid $      80.1 $      58.6  $        0.6 $      45.3 

The accompanying notes to the condensed
consolidated financial statements are an integral part of these statements.


 
 3 

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Basis of Presentation

 The condensed consolidated financial statements were prepared without audit pursuant to Securities and Exchange Commission rules. Certain information and footnote disclosure required in financial statements prepared in accordance with U.S. generally accepted accounting principles in the United States of America (“U.S. GAAP” or “GAAP”) havehas been condensed or omitted pursuant to these rules.

2.TheIn our opinion, the accompanying financial statements reflect all adjustments, consisting of normally recurring accruals, which in the opinion of management areconsidered necessary for a fair presentation, in all material respects, of the information contained therein. Certain amounts in prior periods have been reclassified to conform to our current presentation. Results of operations for interim periods are not necessarily indicative of results that may be expected for the year. These statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 20052006 (the “2005“2006 Form 10-K”).

3.2. Results of operations for interim periods are not necessarily indicative of results that may be expected for the year.Earnings per Share

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, 1,500,0002.2 million and 1,200,0001.1 million common share equivalents were assumed to be outstanding for the three months ended September 30,March 31, 2007 and 2006, and 2005, respectively and 1,600,000 and 1,400,000 common share equivalents were assumed to be outstanding for the nine months ended September 30, 2006 and 2005, respectively. For the three months ended September 30,March 31, 2006, and 2005, respectively, 2,953,000 shares and 4,600,0006.2 million shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For the nine months ended September 30, 2006 and 2005, respectively, 2,973,000 and 4,600,000

The number of shares were excluded from the calculations of dilutedused in our earnings per share because their effect would have been anti-dilutive.computations were as follows (shares in millions):

The number of shares used in our earnings per share computations were:

Three Months Ended March 31,
Three Months
Ended September 30,
Nine Months
Ended September 30,
 2007
2006
2006
2005
2006
2005
Basic EPS Computation 169,400,000 179,300,000 172,200,000 181,100,000  165.6 176.7 
Diluted EPS Computation 170,900,000 180,500,000 173,800,000 182,500,000  167.8 177.8 

 
 4 

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.3.Comprehensive Income

 Total comprehensive income and its components were ($(dollars in millions):

Three Months
Ended September 30,
Nine Months
Ended September 30,
2006
2005
2006
2005
Net income for the period $177.1 $ 161.7 $586.8 $ 538.1 
  
Foreign currency translation adjustment, 
net of income taxes of $5.8 and $5.6 
and $78.6 and $84.4 for the three months 
and nine months ended September 30, 2006 
and 2005, respectively 10.8 (10.4)146.0 (156.7)
  
 
 
 
 
Comprehensive income for the period $187.9 $ 151.3 $732.8 $ 381.4 
  
 
 
 
 
Three Months Ended March 31,
 2007
2006
Net income for the period $183.0 $165.7 
  
Foreign currency translation adjustment, net of income 
taxes of $9.6 and $10.8 for the three months ended 
March 31, 2007 and 2006, respectively 17.8 20.0 
  
Defined benefit plans and postemployment 
arrangements adjustment, net of income taxes of 
$0.5 for the three months ended March 31, 2007 0.7 — 
  
 
 
      
Comprehensive income for the period $201.5 $185.7 
  
 
 

6.During the first quarter of 2007, we increased other comprehensive income by approximately $0.7 million net of tax as a result of the amortization of unrecognized prior service cost and actuarial gains and losses included in our first quarter 2007 net periodic benefit cost.

4.Segment Reporting

 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. 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.geographic regions. 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 Statement 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.


 5

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary by geographic area of our revenue, for the periods ended September 30, 2006 and 2005 and long-lived assets and goodwill by geographic area as of September 30,March 31, 2007 and 2006, and 2005, is presented below ($(dollars in millions):

Americas
EMEA
Asia/Australia
 Americas
EMEA
Asia/Australia
2006       
Revenue - three months ended $1,680.7 $   931.8 $  161.8 
Revenue - nine months ended 4,944.9 2,735.1 480.7 
2007    
Revenue $1,694.3 $   988.1 $  158.2 
Long-Lived Assets 419.9 151.6 46.2  374.5 211.3 48.3 
Goodwill 5,737.3 1,027.6 56.2  5,745.1 1,092.1 58.1 
      
2005   
Revenue - three months ended $1,561.3 $   808.2 $  153.4 
Revenue - nine months ended 4,533.6 2,554.1 454.0 
2006  
Revenue $1,573.7 $   835.0 $  154.2 
Long-Lived Assets 406.9 150.6 42.3  415.1 148.7 42.2 
Goodwill 5,447.2 968.1 52.3  5,571.8 954.4 52.4 

 The Americas is primarily composed of the U.S., Canada and Latin American countries. EMEA is primarily composed of various Euro currency countries, the United Kingdom,


5

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the Middle-East, and Africa and other non-EuroEuropean countries that have not adopted the Middle East and Africa.European Union Monetary standard. Asia/Australia is primarily composed of China, Japan, Korea, Singapore, Australia and other Asian countries.

7.5.Bank Loans, Long-Term Debt and Convertible Notes

 Short-term bank loans outstanding at September 30, 2006March 31, 2007 of $11.8$12.1 million are comprised of bank overdrafts of our international subsidiaries thatsubsidiaries. These loans are treated as unsecured loans pursuant to our bank agreements. There was no commercial paper outstanding as of September 30, 2006.March 31, 2007.

         In March 2006, we issued $1.0We have a $2.5 billion principal amount of 5.90% Senior Notescredit facility that is due April 15, 2016 (“5.90% Senior Notes”). The gross proceeds fromto expire on June 23, 2011. We have the issuance were $995.1 million. The gross proceeds less fees resultedability to classify borrowings, if any, under this facility as long-term debt. Our credit facility provides credit support for commercial paper, as well as providing back-up liquidity in a 6.05% yield to maturity. The Senior Notes were issued by Omnicom Group Inc. and twothe event any of our wholly-owned finance subsidiaries, Omnicom Capital Inc. and Omnicom Finance Inc., as co-obligors, similarconvertible notes are put back to our Convertible Notes (defined below). The 5.90% Senior Notes are senior unsecured notes that rank in equal right of payment with all existing and future unsecured indebtedness and as a joint and several liability of the issuer and the co-obligors.us.

         On June 23, 2006, we amended and extended our five-year credit facility to June 23, 2011 and increased the amount available from $2.1 billion to $2.4 billion with substantially the same bank consortium. In conjunction with this amendment and extension, we terminated our $400.0 million 364-day revolving credit facility that was due to expire on June 29, 2006. Subsequently in September 2006, the facility was increased from $2.4 billion to $2.5 billion.

In February 2006,2007, we offered todid not pay a supplemental interest payment of $46.25 per $1,000 principal amount of notes to holdersnoteholders of our Liquid Yield Option Notes due 2031 (“2031 Notes”) asand none of February 2, 2006 to notthe 2031 Notes were put their notes back to us. The noteholders were paid $39.2 million on February 8, 2006. This payment is being amortized ratably over a 12-month periodus for repayment under the provision that allows the holders to put the next put date in accordance with EITF No. 96-19.notes to us annually.

         In June 2006, we offered to pay a supplemental interest paymentDuring the first quarter of $27.50 per $1,0002007, substantially all of ourthe holders of the Zero Coupon Zero Yield Convertible Notes due 2033 to holders that did not put(“2033 Notes”) exchanged their notes back to us and consented tofor Zero Coupon Zero Yield Convertible Notes due 2038 (“2038 Notes”) reducing the amendments to the notes and related indenture as of June 27, 2006. Theaggregate principal amendment extended the maturityamount of the notes from June 15, 2033 Notes outstanding to July 1, 2038. The additional amendments conformed other terms of the notes for the extension of the maturity date, as well as amending the comparable yield. On June 21, 2006, we repurchased $132.5 million of notes that were put to us. With respect to the remaining $467.5 million of notes, noteholders holding a combined amount of $428.1 million of notes consented to the amendments, were paid $27.50 per $1,000 note and their notes were amended. The total$0.2 million. No supplemental interest payment of $11.7 million will be amortized ratably over a 24-month periodor fee was paid to the next put date in accordance with Emerging Issues Task Force (“EITF”) No. 96-19 — Debtor’snoteholders.


 
 6 

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.Accounting for a Modification or Exchange of Debt Instruments (“EITF 96-19”). The next put date for these notes is June 15, 2008. The remaining noteholders, comprising $39.4 million aggregate principal amount of notes, did not consent to the amendments. As a result, these notes are still outstanding and were not amended, and these noteholders were not paid the supplemental interest payment.Income Taxes

 In JulyJune 2006, we offeredthe FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), that clarifies the accounting and recognition for income tax positions taken or expected to paybe taken in our tax returns. We adopted FIN 48 on January 1, 2007, and recorded the cumulative effect of a supplemental interest paymentchange in accounting principle by recording a decrease in the liability for uncertain tax positions of $32.50 per $1,000 principal amount of notes$1.3 million, that was accounted for as a credit to holders ofopening retained earnings. At January 1, 2007, the total liability for uncertain tax positions recorded in our 2032 Notes as of August 1, 2006 to not put their notes back to us. On August 4, 2006, we repurchased $165.2balance sheet in non-current Other Liabilities was $62.5 million. Approximately $43.5 million of the consolidated worldwide liability for uncertain tax positions would affect our 2032 Notes thateffective tax rate upon resolution of the uncertain tax positions. There were putno significant changes to us. With respect tothis amount during the remaining $727.0 million of notes, noteholders were paid a total supplemental interest payment of $23.6 million on August 2, 2006 that will be amortized ratably over a 12-month period to the next put date in accordance with EITF No. 96-19.first quarter 2007.

8.Included in operating income for the three months ended September 30, 2006 isWe file a pre-tax net loss of $0.5 million arising from the disposal of aconsolidated U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reductionreturn and tax returns in various state and local jurisdictions. Our subsidiaries also file tax returns in various foreign jurisdictions. In addition to the U.S., our major taxing jurisdictions include the United Kingdom, Germany and France. The Internal Revenue Service (“IRS”) has completed its examination of our federal income tax expense fromreturns through 2002 and has commenced an examination of our federal income tax returns for 2003 and 2004. In addition, examinations of our subsidiaries’ tax returns have been completed in the resolution of uncertainties related to changes in certain foreign tax laws. The aggregate impact of these events on the 2006 third quarterUnited Kingdom, Germany and year-to-date period was a decrease in profit before tax of $0.5 million, a decrease in tax expense of $1.8 millionFrance through 2002, 2001 and an increase in net income of $1.3 million.

9.In 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB No. 123 (“SFAS 148”). We adopted SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) effective January 1, 2004 utilizing the retroactive restatement method as set forth in SFAS 148. Pre-tax stock-based employee compensation expense for the nine months ended September 30, 2006 and 2005, was $52.7 million and $67.5 million,2003, respectively.

         OnInterest and penalties related to tax positions taken in our tax returns are recorded in income tax expense in our consolidated statement of income. At January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”) that requires, among other things, that we record stock-based compensation expense net2007, the combined amount of an estimate for awards that are expectedaccrued interest and penalties related to be forfeited. For all unvested awards outstanding at January 1, 2006, wetax positions taken on our tax returns and recorded an adjustmentin non-current Other Liabilities was $5.6 million. There was no significant change to reflect the cumulative effect of this change in accounting principle. The adjustment inamount during the first quarter of 2006 resulted in an increase in our operating profit and 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 this2007.


 
 7 

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.adjustment on an after-tax basis as a cumulative effect of accounting change in our income statement.Employee Stock Based Compensation and Retirement Plans

         SFAS 123R also requires new awards issued to individuals that are, or will become, retirement-eligible during the vesting period of the 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 were issued prior to adoption of SFAS 123R with retirement eligibility provisions. For those awards, we recognized compensation expense over the vesting period and we accelerated compensation expense 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 reduced by $13.5 million.Stock Based Compensation Plans

         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 forPre-tax stock-based compensation exceed the cumulative book stock-basedemployee compensation expense recognized in our financial statements. We utilizedfor the short-cut method as prescribed by FASB Statement of Position 123R-3 to calculate the APIC Pool.three months ended March 31, 2007 and 2006, was $18.4 million and $15.7 million, respectively.

         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 nine months ended September 30, 2006, net cash provided by operating activities was reduced by $15.0 million which was recorded as an increase in cash provided by financing activities.Defined Benefit Plans

         In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretationThe components of FASB Statement No. 109 (“FIN 48”), effective for fiscal years ending after December 31, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive modelnet periodic benefit cost for the financial statement recognition, measurement, presentationthree months ended March 31, 2007 and disclosure of uncertain tax positions taken or expected to be taken2006, are as follows (dollars in income tax returns. We will adopt FIN 48 in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We have begun the process of evaluating the expected impact of FIN 48 on our Consolidated Financial Statements. However, we are not yet in a position to assess the full impact and related disclosure.millions):

 2007
2006
Service cost $ 1.7 $ 1.6 
Interest cost 1.5 1.1 
Expected return on plan assets (1.2)(1.1)
Amortization of prior service cost 0.6 — 
Amortization of actuarial (gains) losses 0.3 0.3 
Other 0.2 — 
  
 
 
Total $ 3.1 $ 1.9 
  
 
 

From January 1, 2007 to March 31, 2007, we contributed approximately $2.2 million to our defined benefits plans.

Postemployment Arrangements

The components of net periodic benefit cost for the three months ended March 31, 2007 and 2006, are as follows (dollars in millions):

 2007
2006
Service cost $0.6 $0.5 
Interest cost 1.1 0.8 
Expected return on plan assets N/A N/A 
Amortization of prior service cost 0.1 0.1 
Amortization of actuarial (gains) losses 0.2 0.1 
  
 
 
Total $2.0 $1.5 
  
 
 

 
 8 

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. In September 2006, the FASB released SFAS No. 157 Fair Value Measurements (“SFAS 157”), effective for fiscal years ending after December 31, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurement. We will adopt SFAS 157 in the first quarter of 2008 and have begun the process of evaluating the expected impact of SFAS 157 on our Consolidated Financial Statements. However, we are not yet in a position to assess the full impact and related disclosure.Contingencies

        In September 2006, the FASB released SFAS No. 158 Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”), effective for fiscal years ending after December 15, 2006. This statement requires the full recognition of the over-funded or under-funded status of a defined benefit postretirement plan in the balance sheet. This statement also requires that subsequent changes in that funded status be recognized during the year of the change through comprehensive income. We will adopt SFAS 158 as of December 31, 2006 and have begun the process of evaluating the expected impact of SFAS 158 on our Consolidated Financial Statements. However, we are not yet in a position to assess the full impact and related disclosures.

10. 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 captionInre Omnicom Group Inc. Securities Litigation, No. 02-CV-4483 (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 discovery is currently expected to conclude in the first quarterhalf of 2007. Plaintiffs have moved to have the proposed class certified and the defendants have opposed that motion, which is now fully briefed.


 9

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. The defendants moved to dismiss the derivative complaint on the procedural ground that plaintiffs had failed to make a demand on the board. On June 27, 2006, the Courttrial court entered a decision denying the motion to dismiss. The decision did not address the merits of the allegations, but rather accepted the allegations as true for the purposes of the motion (as the Court was required to do) and excused plaintiffs from making a demand on the board. The defendants intend tofiled an appeal of the Court’s decision on the motion to dismiss. InThe appeal has been fully briefed and oral argument before the meantime, underAppellate Division, First Department occurred on February 9, 2007. Additionally, the current schedule, defendants are requiredmoved for a stay of the proceedings in this litigation pending


9

OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

a decision being issued by the Appellate Division. The trial court granted the motion staying the matter until February 28, 2007. The trial court extended the stay through April 30, 2007. The parties have agreed to answer, move against or otherwise respond tojointly request an additional 30-day extension of the complaint by November 30, 2006.stay from the trial court since the Appellate Division has not yet issued a decision.

 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.

11.9. On MarchAccounting Changes

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (“SFAS 157”), effective for fiscal years ending after December 31, 2006, we entered into an agreement to purchase 5.5 million shares of our outstanding common stock2007. SFAS 157 defines fair value, establishes a framework for $458.7 million.measuring fair value in GAAP, and expands disclosure about fair value measurement. We repurchasedwill adopt SFAS 157 in the shares 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 5.90% Senior Notes offering (see Note 7).During the secondfirst quarter of 2006,2008 and have begun the process of evaluating the expected impact of SFAS 157 on our Consolidated Financial Statements. However, we are not yet in a position to assess the full impact and related disclosure.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure most financial institution purchased the 5.5 million sharesinstruments and certain other items at fair value that are currently required to be measured at historical cost. Adoption of our common stock in the open marketand we paid a settlement amount of $45.1 million, referredSFAS 159 is optional. We currently do not expect to as the purchase price adjustment, based upon the difference between the actual cost of the shares purchased by the financial institution of $91.61 per share and the initial purchase price of $83.41 per share. In accordance with EITF No. 99-7, Accounting for an Accelerated Share Repurchase Program, the 5.5 million shares were included in treasury stock at the initial settlement date. The final purchase price adjustment was also reflected in treasury stock upon final settlement.adopt SFAS 159.


 
 10 

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 (“CRM”), public relations and specialty communications. Our business model was built and evolves around our 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 offerings 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 with 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 fewIn prior years, the overallour industry has continued to bewas affected by several factors, including geopolitical unrest and lagging economic conditions lack of consumer confidence and cautious client spending. All of these factorsthat contributed to a difficult business environment and industry-wide margin contraction. ThroughoutDuring this period, we continued to invest in our businesses and our personnel and took 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.business and our industry.

        Several long-term trends continue to positively affect our business, including our clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets.markets and from traditional marketing channels to non-traditional channels and new media outlets. 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 indicators that we review focus on our revenues and operating expenses.

        RevenueWe analyze revenue growth is analyzed by reviewing the components and mix of the growth, including growth by major geographic location, growth by major marketing discipline, growth from currency changes,fluctuations, growth from acquisitions and growth from our largest clients.


 
 11 
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, 2006,March 31, 2007, our overall revenue growth was 10.0% as compared10.8%, of which 3.4% was related to the comparable prior year period. The effect ofchanges in foreign exchange impacts increased worldwide revenue by 1.9%. Therates and 0.1% was related to the acquisition of entities, net of entities disposed, decreased worldwide revenue by 0.1% and the remaining increase of 8.2% was the result of organic growth. For the nine months ended September 30, 2006, our overall revenue growth was 8.2% as compared to the comparable prior year period. The effect of foreign exchange impacts decreased worldwide revenue by 0.2%. The acquisition of entities, net of entities disposed, increased worldwide revenue by 0.4%.disposed. The remaining increase of 8.0%7.3% was organic growth.

        We measure operating expenses in two distinct cost categories:categories, salary and service costs, and office and general expenses. Salary and service costs are primarily comprised primarily of employee compensation related costs. Officecosts and office and general expenses are primarily 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 the ability to understand a client’s brand and its selling proposition, and the ability to develop a unique message to communicate the value of the brand to the client’s target audience. The facility requirements of our agencies are also similar across geographic 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 revenue, whereas office and general expenses, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenue increases because a significant portion of these expenses are relatively fixed in nature. During the thirdfirst quarter of 2006, as a percentage of revenue,2007, salary and service costs decreasedincreased slightly to 72.4%72.2% from 72.5%72.0% of revenue during the thirdfirst quarter of 2005, as2006. This increase is primarily attributed to increased revenue levels and the related costnecessary increases were in line with the increase in revenue.direct salaries, salary-related costs and freelance labor necessary to deliver our services and pursue new business initiatives. Office and general expenses declined to 16.5%16.7% of revenue in the thirdfirst quarter of 20062007 from 16.7%16.9% in the thirdfirst quarter of 2005,2006, 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. During the first nine months of 2006, salary and service costs increased slightly to 71.2% of revenue from 71.1% of revenue in the first nine months of 2005, and office and general expenses declined to 16.4% of revenue in the first nine months of 2006 from 16.8% in the first nine months of 2005.

        Our net income forin the thirdfirst quarter of 20062007 increased by 9.5%$17.3 million, or 10.4%, to $177.1$183.0 million from $161.7 million in the third quarter of 2005. Our net income for the first nine months of 2006 increased by 9.1% to $586.8 million from $538.1$165.7 million in the first nine monthsquarter of 2005. Included2006. Diluted earnings per share increased 17.2% to $1.09 in the first quarter of 2007, as compared to $0.93 in the prior year period. This period-over-period increase resulted from the 10.4% increase in net income and the reduction in our 2006 first nine months net income is a $2.0 million benefit resulting fromweighted average common shares outstanding. The reduction in our weighted average common shares outstanding was the cumulative effectresult of the adoption of SFAS 123Rour purchases throughout 2006 and the requirement to provide an estimate for forfeitures on all unvested stock-based compensation awards asfirst quarter of January 1, 2006. In prior years, in accordance with SFAS 123, we recorded forfeitures when they actually occurred. Our2007 of treasury shares, net of shares issued upon stock option exercises and shares issued under our employee stock purchase plan.


 
 12 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

diluted earnings per share increased by 15.6% to $1.04 from $0.90 in the third quarter of 2006 and it increased by 14.6% to $3.38 from $2.95 in the first nine months of 2005. The increases in our diluted earnings per share were impacted by the reduction during 2006 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.


13
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations: ThirdFirst Quarter 20062007 Compared to ThirdFirst Quarter 20052006

        Revenue: When comparing performance between quarters and years, we discuss non-GAAP financial measures such as the impact that foreign currency rate changes, acquisitions / dispositions and organic growth have on reported revenue. We derive significant revenue from international operations and changes in foreign currency rates between the years impact our reported results. Our thirdreported results are also impacted by our acquisitions and disposition activity and organic growth. Accordingly, we provide this information to supplement the discussion of changes in revenue period-to-period.

        Our first quarter of 20062007 consolidated worldwide revenue increased 10.0%10.8% to $2,774.3$2,840.6 million from $2,522.9$2,562.9 million in the comparable period last year. The effect of foreign exchange impacts increased worldwide revenue by $47.9$87.3 million. Acquisitions, net of disposals, decreasedincreased worldwide revenue by $4.4$2.1 million in the thirdfirst quarter of 20062007 and organic growth increased worldwide revenue by $207.9$188.3 million. The components of the thirdfirst quarter 20062007 revenue growth in the U.S. (“domestic”) and the remainder of the world (“international”) are summarized below ($(dollars in millions):

Total
Domestic
International
 Total
Domestic
International
$
%
$
%
$
%
 $
%
$
%
$
%
Quarter ended September 30, 2005 $ 2,522.9 — $ 1,428.6 — $ 1,094.3 — 
 
Quarter ended March 31, 2006 $2,562.9 — $1,433.0 — $1,129.9 — 
  
Components of revenue changes:  
Foreign exchange impact 47.9 1.9%— — 47.9 4.4% 87.3 3.4%— — 87.3 7.7%
Acquisitions (4.4)(0.1)%(0.1)— (4.3)(0.5)%
Acquisitions, net of dispositions 2.1 0.1%0.4 0.0%1.7 0.2%
Organic 207.9 8.2%112.0 7.8%95.9 8.8% 188.3 7.3%110.5 7.7%77.8 6.9%
Quarter ended September 30, 2006 $ 2,774.3 10.0%$ 1,540.5 7.8%$ 1,233.8 12.7%
             
Quarter ended March 31, 2007 $2,840.6 10.8%$1,543.9 7.7%$1,296.7 14.8%

The components and percentages are calculated as follows:

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 $2,726.4$2,753.3 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 $2,774.3$2,840.6 million less $2,726.4$2,753.3 million for the Total column in the table).
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.
The organic component shown in the table is calculated by subtracting both the foreign exchange and acquisition revenue components from total revenue growth.

13
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 $2,522.9$2,562.9 million for the Total column in the table).

14
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

        The components of revenue for the first quarter of 2007 and revenue growth compared to the first quarter of 2006 in our primary geographic markets for the third quarter of 2006 compared to the third quarter of 2005 are summarized below ($(dollars in millions):

 Revenue
% Growth
Revenue
% Growth
United States $1,540.5   7.8% $1,543.9 7.7%
Euro Markets 542.4 13.9% 575.2 18.7%
United Kingdom 307.2 18.1% 326.0 19.1%
Other 384.2   7.3% 395.5 6.4%
Total $2,774.3 10.0% $2,840.6 10.8%

        As indicated, foreign exchange impacts increased our international revenue by 1.9%7.7%, or $47.9$87.3 million during the quarter ended September 30, 2006.March 31, 2007. The most significant impacts resulted from the strengthstrengthening of the Euro, British Pound, CanadianAustralian Dollar and Brazilian Real against the U.S. Dollar, which was partially offset primarily by the decline of the Canadian Dollar and Japanese Yen and New Zealand Dollar 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 as summarized below: traditional media advertising, customer relationship management (referred to as CRM),CRM, public relations and specialty communications ($(dollars in millions).

3rd Quarter
2006
% of
Revenue
3rd Quarter
2005
% of
Revenue
$
Growth
%
Growth
1st Quarter
2007
% of
Revenue
1st Quarter
2006
% of
Revenue
$
Growth
%
Growth
Traditional media advertising $1,149.9 41.4%$1,080.0 42.8%$  69.9 6.5% $1,225.7 43.1%$1,107.8 43.2%$ 117.9 10.6%
CRM 1,023.4 36.9%876.7 34.7%146.7 16.7% 1,016.7 35.8%889.9 34.7%126.8 14.2%
Public relations 290.9 10.5%257.2 10.2%33.7 13.1% 294.2 10.4%258.9 10.1%35.3 13.6%
Specialty communications 310.1 11.2%309.0 12.3%1.1 0.4% 304.0 10.7%306.3 12.0%(2.3)(0.8)%
 
 
 
   
   
   
 $2,774.3   $2,522.9   $251.4 10.0%$2,840.6$2,562.9 $277.710.8%
 
 
 
 

 
 1514 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

        Operating Expenses: Our thirdfirst quarter 20062007 worldwide operating expenses increased $218.5$246.6 million, or 9.7%10.8%, to $2,466.9$2,525.1 million from $2,248.4$2,278.5 million in the thirdfirst quarter of 2005,2006, as shown below ($(dollars in millions):

Three Months Ended September 30,
 Three Months Ended March 31,
2006
2005
2006 vs 2005
 2007
2006
2007 vs 2006
$
%
of
Revenue
% of
Total
Operating
Expenses
$
%
of
Revenue
% of
Total
Operating
Expenses
$
Growth
%
Growth
 $
%
of
Revenue
% of
Total
Operating
Expenses
$
%
of
Revenue
% of
Total
Operating
Expenses
$
Growth
%
Growth
Revenue $2,774.3     $2,522.9     $251.4 10.0% $2,840.6     $2,562.9     $277.7 10.8%
  
Operating Expenses:  
                 
Salary and service costs 2,008.9 72.4%81.4%1,827.9 72.5%81.3%181.0 9.9% 2,050.6 72.2%81.2%1,844.8 72.0%81.0%205.8 11.2%
Office and general expenses 458.0 16.5%18.6%420.5 16.7%18.7%37.5 8.9% 474.5 16.7 %18.8%433.7 16.9%19.0%40.8 9.4%
 
 
 
 
 
 
 
 
 
Total Operating Expenses 2,466.9 88.9%  2,248.4 89.1%  218.5 9.7% 2,525.1 88.9   2,278.5 88.9%  246.6 10.8%
                 
Operating Profit $   307.4 11.1%  $   274.5 10.9%  $  32.9 12.0% $   315.5 11.1%  $   284.4 11.1%  $ 31.1 10.9%
  
  
  
 
   
 
   
 
 

        Because we provide professional services, salary and service costs represent the largest part of our operating expenses. During the thirdfirst quarter of 2006,2007, we continued to invest in our businesses and their professional personnel. As a percentage of total operating expenses, salary and service costs were 81.4%81.2% in the thirdfirst quarter of 20062007 and 81.3%81.0% in the thirdfirst quarter of 2005.2006. These costs are comprised of salary and related costs and direct service costs. Most, or $181.0$205.8 million and 82.8%83.5%, of the $218.5$246.6 million increase in total operating expenses in the thirdfirst quarter of 20062007 resulted from increases in salary and service costs. This increase was attributable to the increase in our revenue in the thirdfirst quarter of 20062007 and the requirednecessary increases in the direct costs necessaryrequired 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. This increase was partially offset by reductions in severance expense and employee stock-based compensation expense. SalaryAs a result, salary and service costs as a percentage of revenue was 72.4%increased from 72.0% in the thirdfirst quarter of 2006 which was slightly lower than 72.5%compared to 72.2% in the thirdfirst quarter of 2005.2007.

        Office and general expenses represented 18.6%18.8% and 18.7%19.0% of our operating expenses in the thirdfirst quarter of 20062007 and 2005,2006, respectively. These costs are comprised of office and equipment rent,rents, technology costs and depreciation, amortization of identifiable intangible assets, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased from 16.9% in the first quarter of 2006 to 16.7% in the thirdfirst quarter of 2005 to 16.5% in the third quarter of 2006 because these costs are relatively fixed in nature and decrease2007 as a percentageresult of revenue as revenue increases. In addition, this quarter-over-quarter decrease resulted from our continuing efforts to better align these costs with business levels on a location-by-location basis. These costs are less directly linked to changes in our revenues than our salary and service costs. Although they tend to increase as our revenues increase, the rate of increase could be more, or less than the rate of increase in our revenues.


 
 1615 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

        During the third quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense from the resolution of uncertainties related to changes in certain foreign tax laws. The aggregate impact of these events as presented below was a decrease in profit before tax of $0.5 million, a decrease in tax expense of $1.8 million and an increase in net income of $1.3 million ($ in millions):

Third Quarter 2006
Third Quarter 2005
Reported
Disposal
Activity
Adjusted
Reported
% Delta
Revenue $ 2,774.3 $   — $ 2,774.3 $ 2,522.9 10.0%
            
Operating Profit 307.4 0.5 307.9 274.5 12.2%
            
     % Margin 11.1% 11.1%10.9%  
            
Net Interest Expense 26.7 — 26.7 16.3   
 
Income Before Income Tax 280.7 0.5 281.2 258.2 8.9%
            
     % Margin 10.1% 10.1%10.2%  
            
Income Taxes 92.9 1.8 94.7 86.9   
            
     % Tax Rate 33.1% 33.7%33.7%  
 
Income After Income Tax 187.8 (1.3)186.5 171.3 8.9%
            
Equity in Affiliates 6.3 — 6.3 6.9   
            
Minority Interests (17.0)— (17.0)(16.5)  
 
Net Income $    177.1 $(1.3)$    175.8 $    161.7 8.7%
 

        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. The impact on revenue of this disposal activity is included in our discussion of changes in the Revenue section on page 14.

        Net Interest Expense: Our net interest expense increased in the thirdfirst quarter of 20062007 to $26.7$18.3 million, as compared to $16.3$15.1 million in the thirdfirst quarter of 2005. Our gross interest expense increased by $13.7 million to $33.6 million.2006. This increase was primarily impacted by $15.1$14.7 million of additional interest costs related to the issuance of our 5.90% Senior Notes and $6.7 million of incremental interest cost related to the amortization, in accordance with EITF No. 96-19, of supplemental interest payments we made during first quarter of 2006 to holders of our Liquid Yield Option Notes due 2031 (“2031 Notes”) who did not put their notes back to us. These increases wereMarch 2006. This increase was partially offset by interest expense savings relative to our Euro-denominated (“€”) 152.4 million 5.20% Notes that were redeemed upon their maturity in June


17
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

2005, as well as interest expense savings under our commercial paper program compared to the prior year. The increase inyear as we had less commercial paper outstanding during 2007. In addition, we also had 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 interest rates.

        We expect interest expense resulting from the amortization, in accordance with EITF 96-16, of the supplemental interest payments made with respectsavings related to our 2031 Notes and our 2032 Notes to increase by $4.2 million inwhich did not receive a supplemental interest payment during the fourthfirst quarter of 2006 compared to the fourth quarter of 2005. We also expect interest expense for the remainder of the year to be increased by interest expense related to our $1.0 billion 5.90% Senior Notes that we issued in late March 2006.2007.

        Income Taxes: Our consolidated effective income tax rate was 33.1%33.8% in the thirdfirst quarter of 2006,2007, which is slightly lower thanconsistent with our tax rate of 33.7%33.8% for the thirdfirst quarter of 2005. The decrease2006. In connection with our adoption of FIN 48, there was no significant change to our effective tax rate in the tax rate is the result of the following activity. During the thirdfirst quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense resulting from the resolution of uncertainties related to changes in foreign tax laws. Excluding this activity, our tax rate for the quarter would have been 33.7%, which is in line with our reported tax rate of 33.7% for the third quarter of 2005.2007.

        Earnings Per Share (EPS): For the foregoing reasons, our net income in the thirdfirst quarter of 20062007 increased $15.4$17.3 million, or 9.5%10.4%, to $177.1$183.0 million from $161.7$165.7 million in the thirdfirst quarter of 2005.2006. Diluted earnings per share increased 15.6%17.2% to $1.04$1.09 in the thirdfirst quarter of 2006,2007, as compared to $0.90$0.93 in the prior year period. This period-over-period increase resulted from the 9.5%10.4% increase in net income and the reduction in our weighted average common shares outstanding. The reduction in our weighted average common shares outstanding was the result of our purchases duringthroughout 2006 and the first quarter of 2007 of treasury shares, net of shares issued upon stock option exercises and shares issued under our employee stock purchase plan.


 
 1816 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations: First Nine Months 2006 Compared to First Nine Months 2005

Revenue: Our consolidated worldwide revenue for the first nine months of 2006 increased 8.2% to $8,160.7 million from $7,541.7 million in the comparable period last year. The effect of foreign exchange impacts decreased worldwide revenue by $13.4 million. Acquisitions, net of disposals, increased worldwide revenue by $29.2 million in the first nine months of 2006 and organic growth increased worldwide revenue by $603.2 million. The components of the first nine months of 2006 revenue growth in the U.S. (“domestic”) and the remainder of the world (“international”) are summarized below ($ in millions):

Total
Domestic
International
$
%
$
%
$
%
Nine months ended September 30, 2005 $ 7,541.7 — $4,168.4 — $ 3,373.3 — 
  
Components of revenue changes: 
Foreign exchange impact (13.4)(0.2)%— — (13.4)(0.4)%
Acquisitions 29.2 0.4%33.4 0.8%(4.2)— 
Organic 603.2 8.0%307.1 7.4%296.1 8.7%
Nine months ended September 30, 2006 $ 8,160.7 8.2%$4,508.9 8.2%$ 3,651.8 8.3%

The components and percentages are calculated as follows:

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 $8,174.1 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 $8,160.7 million less $8,174.1 million for the Total column in the table).
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.
The organic component shown in the table is calculated by subtracting both the foreign exchange and acquisition revenue components from total revenue growth.
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 $7,541.7 million for the Total column in the table).

19
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 first nine months of 2006 compared to the first nine months of 2005 are summarized below ($ in millions):

Revenue
% Growth
United States $4,508.9 8.2%
Euro Markets 1,596.2 4.2%
United Kingdom 884.9 11.3%
Other 1,170.7 11.9%
Total $8,160.7 8.2%

        As indicated, foreign exchange impacts decreased our international revenue by 0.2%, or $13.4 million, during the nine months ended September 30, 2006. The most significant impacts resulted from the decline of the Euro, the British Pound and the Japanese Yen against the U.S. Dollar, which was partially offset by the strength of the Canadian Dollar and Brazilian Real against the U.S. Dollar.

        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 as summarized below: traditional media advertising, CRM, public relations and specialty communications ($ in millions).

Nine Months
2006
% of
Revenue
Nine Months
2005
% of
Revenue
$
Growth
%
Growth
Traditional media advertising $3,474.2 42.6%$3,283.4 43.6%$190.8 5.8%
CRM 2,893.8 35.4%2,580.2 34.2%313.6 12.2%
Public relations 839.3 10.3%778.4 10.3%60.9 7.8%
Specialty communications 953.4 11.7%899.7 11.9%53.7 6.0%
 
 
 
  $8,160.7   $7,541.7   $619.0 8.2%
 
 
 

Operating Expenses: Our worldwide operating expenses for the first nine months of 2006 increased $523.4 million, or 7.9%, to $7,151.4 million from $6,628.0 million in the first nine months of 2005, as shown below ($ in millions).

Nine Months Ended September 30,
2006
2005
2006 vs 2005
$
%
of
Revenue
% of
Total
Operating
Expenses
$
%
of
Revenue
% of
Total
Operating
Expenses
$
Growth
%
Growth
Revenue $8,160.7     $7,541.7     $619.0 8.2%
  
Operating Expenses: 
     Salary and service costs 5,813.6 71.2%81.3%5,362.0 71.1%80.9%451.6 8.4%
     Office and general expenses 1,337.8 16.4%18.7%1,266.0 16.8%19.1%71.8 5.7%
Total Operating Expenses 7,151.4 87.6%  6,628.0 87.9%  523.4 7.9%
                  
Operating Profit $1,009.3 12.4%  $   913.7 12.1%  $  95.6 10.5%
  
  
 

20
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

        Because we provide professional services, salary and service costs represent the largest part of our operating expenses. During the first nine months 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 81.3% in the first nine months of 2006 and 80.9% in the first nine months of 2005. These costs are comprised of salary and related costs and direct service costs. Most, or $451.6 million and 86.3%, of the $523.4 million increase in total operating expenses in the first nine months of 2006 resulted from increases in salary and service costs. This increase was attributable to the increase in our revenue in the first nine months of 2006 and the required increases in the direct 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, cash-based incentive compensation expense increased as compared to the prior year period which was partially offset by a decrease in stock-based compensation expense. As a result, salary and service costs as a percentage of revenue was 71.2% in the first nine months of 2006 and 71.1% in the first nine months of 2005.

        Office and general expenses represented 18.7% and 19.1% of our operating expenses in the first nine months of 2006 and 2005, respectively. These costs are comprised of office and equipment rent, technology costs and depreciation, amortization of identifiable intangible assets, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased from 16.8% in the first nine months of 2005 to 16.4% in the first nine months of 2006 because these costs are relatively fixed in nature and decrease as a percentage of revenue as revenue increases. In addition, this period-over-period decrease resulted from our continuing efforts to better align these costs with business levels on a location-by-location basis.

Net Interest Expense: Our net interest expense increased in the first nine months of 2006 to $67.4 million, as compared to $42.7 million in the first nine months of 2005. Our gross interest expense increased by $35.8 million to $91.3 million. This increase was primarily impacted by $30.4 million of additional interest costs related to the recent issuance of our 5.90% Senior Notes and $17.2 million of incremental interest expense related to the amortization, in accordance with EITF 96-19, of supplemental interest payments made with respect to our 2031 Notes. These increases were partially offset by interest expense savings relative to our Euro-denominated (“€”) 152.4 million 5.20% Notes that were redeemed upon their maturity in June 2005, as well as interest expense savings under our commercial paper program compared to the prior year. The increase in interest income is the result of increased levels of cash and short-term investments on hand during the first nine months as well as increases in short-term interest rates.

Income Taxes: Our consolidated effective income tax rate was 33.5% in the first nine months of 2006, which is lower than our tax rate of 34.1% for the first nine months of 2005. The 33.5% tax rate for the nine months of 2006 was impacted by the following activity. During the third quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense resulting from the resolution of uncertainties


21
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

related to changes in foreign tax laws. Excluding this activity our tax rate for the 2006 quarter and first nine months would have been 33.7%. The 34.1% tax rate for the first nine months of 2005 was high as it was impacted by the sale in the first quarter of 2005 of a majority-owned business in Australia and New Zealand that resulted in a gain and an unusually high book tax rate on that gain. Excluding the effect of the gain and the related tax impact, our first nine months 2005 tax rate would also have been 33.7%.

Earnings Per Share (EPS): For the foregoing reasons, our net income in the first nine months of 2006 increased $48.7 million, or 9.1%, to $586.8 million from $538.1 million in the first nine months of 2005. Diluted earnings per share increased 14.6% to $3.38 in the first nine months of 2006, as compared to $2.95 in the prior year period. This period-over-period increase resulted from the 9.1% increase in net income and the reduction in our weighted average common shares outstanding. The reduction in our weighted average common shares outstanding was the result of our purchases of treasury shares, net of shares issued upon stock option exercises and shares issued under our employee stock purchase plan. A substantial portion of our treasury share repurchases were made in connection with the ASR program described in Note 11 to our condensed consolidated financial statements.


22
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, investors 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 20052006 Form 10-K, as well as our consolidated financial statements and the related notes included in our 20052006 Form 10-K.

New Accounting Pronouncements

        Effective January 1, 2006, we adopted SFAS 123R using the modified prospective application transition method. In JulyJune 2006, the FASB releasedissued FIN 48 which we will adoptadopted in the first quarter of 2007. In September 2006, the FASB released SFAS 157, whichthat we will adopt in the first quarter of 20082008. In February 2007, the FASB issued SFAS No. 159. Adoption of SFAS 159 is optional. We currently do not expect to adopt SFAS 159. See Notes 6 and SFAS 158 which we will adopt as of December 31, 2006. See Note 9 to our condensed consolidated financial statements for additional information.


23
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 $443$450 million as of September 30, 2006.March 31, 2007. The ultimate amounts payable cannot be predicted with reasonable certainty because they are dependent upon future results of operations of the subject businesses and are subject to changes in foreign currency exchange rates. In accordance with U.S. GAAP, we have not recorded a liability for these items on our balance sheet since the definitive amount is not determinable or distributable. Actual results can differ from these estimates and the actual amounts that we pay are likely to be different from these estimates. Our obligations change from period to period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. These differences could be significant. The contingent purchase price obligations as of September 30, 2006,March 31, 2007, calculated assuming that the acquired businesses perform over the relevant future periods at their current profit levels, are as follows ($(dollars in millions):

Remainder
2006
2007
2008
2009
Thereafter
Total
$13 $156 $110 $72 $92 $443 
Remainder
2007
2008
2009
2010
Thereafter
Total
            
$166 $112 $69 $81 $22 $450 

17
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

        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 $273$291 million, $183$209 million of which relates to obligations that are currently exercisable. If these rights are exercised, there would be an increase in our net income as a result of our increased ownership and the reduction of minority interest expense. The ultimate amount payable relating to these transactions will vary because it is primarily dependent on the future results of operations of the subject businesses, the timing of the exercise of these rights and changes in foreign currency exchange rates. The actual amount that we pay is likely to be different from this estimate and the difference could be significant. The obligations that exist for these agreements as of September 30, 2006,March 31, 2007, calculated using the assumptions above, are as follows ($(dollars in millions):

 Currently
Exercisable
Not Currently
Exercisable
Total
        
Subsidiary agencies $147 $75 $222 
Affiliated agencies 62 7 69 
  Total $209 $82 $291 

Currently
Exercisable
Not Currently
Exercisable
Total
Subsidiary agencies $131 $83 $214 
Affiliated agencies 52    7 59 
     Total $183 $90 $273 

24
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, as discussed below, during the year we manage liquidity by utilizing our credit facilities. Our principal non-discretionary funding requirement is our working capital. In addition, we have contractual obligations related to our debt, senior notes 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.

        Our principal discretionary cash requirements include dividend payments to our shareholders, repurchases of our common stock, payments for strategic acquisitions and capital expenditures. Typically, ourOur 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 to finance these activities, such as the liquidation of short-term investments, the issuance of commercial paper or accessing the capital markets.markets, as we did in the first quarter of 2006 when we issued our Senior Notes. The repurchases of our stock during the thirdfirst quarter of 20062007 are summarized in Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” of this report.

        We have a seasonal working capital cycle. Working capital requirements are lowest at year-end. The fluctuation in working capital requirements between the lowest and highest points during the course of the year can be more than $1.5 billion. This cycle occurs because our businesses incur costs on behalf of our clients, including when we place media and incur


18
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

production costs. We generally require collection from our clients prior to our payment for the media and production cost obligations.

        Liquidity:Our cash and cash equivalents were $808.3$1,028.3 million at September 30, 2006,March 31, 2007, a decrease of $27.5$711.2 million from the balance at December 31, 2005.2006. We also had short-term investments of $40.5$36.7 million at September 30, 2006,March 31, 2007, a decrease of $333.6$152.6 million from the balance at December 31, 2005.2006.

        DuringConsistent with our historical trends, during the first ninethree months of 2006,2007, we generated $390.3used $346.3 million of cash flow from operations and in March 2006 we issued $1.0 billion principal amount of 5.90% Senior Notes providing $995.1 million in gross proceeds.primarily due to changes from our year-end working capital components. Our additional spending during the period was comprised primarily of: repurchases of our stock amounting to $915.6$403.6 million, net of proceeds received from employee stock compensation plans; repurchases of our convertible debt, as discussed below, of $299.2 million; purchases of equity interests in subsidiaries, encompassing net payments for new acquisitions as well as obligations related to existing subsidiaries, of $208.6$19.4 million; dividend payments of $133.1$42.6 million; and capital expenditures of $119.5$34.9 million. Consistent with prior year patterns, we expect our cash and short-term investment balances to increase during the fourth quarter of 2006.


 
 2519 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

        Capital Resources:On June 23, 2006, we amended and extended our five-year We have a $2.5 billion credit facility to June 23, 2011 and increased the amount available from $2.1 billion to $2.4 billion with substantially the same bank consortium. In conjunction with this amendment and extension, we terminated our $400.0 million 364-day revolving credit facility that waswhich is due to expire on June 29, 2006. Subsequently in September 2006,23, 2011. We have the ability to classify outstanding borrowings, if any, under our credit facility was increased from $2.4 billion to $2.5 billion.as long-term debt.

        In funding our day-to-day liquidity, we are an active participant in the commercial paper market with a $1.5 billion program. As of March 31, 2007, we had no commercial paper outstanding. Our credit facility provides credit support for commercial paper, issued under this program, as well as providing back-up liquidity in the event any of our convertible notes are put back to us. As of September 30, 2006, we had no commercial paper outstanding. Accordingly, we have the ability to classify outstanding borrowings, if any, under our five-year credit facility as long-term debt.

        Our five-year credit facility is provided by a bank syndicate which includes large global banks such as Citibank, JP Morgan Chase, HSBC, ABN Amro, Deutsche, Bank of America, Societe Generale Deutsche and BBVA. We also include large regional banks in the U.S. such as Wachovia, US Bancorp, Northern Trust, PNC and Wells Fargo. Additionally, weWe also include banks that have a major presence in countries where we conduct business such as Sumitomo in Japan, Fortis in Belgium, Intesa San Paolo in Italy, Scotia in Canada and Westpac in Australia.

        Debt:We had short-term bank loans of $11.8$12.1 million and $15.0$10.5 million, as of September 30, 2006March 31, 2007 and December 31, 2005,2006, respectively. The short-term bank loans consisted of bank overdrafts of our international subsidiaries and are treated as unsecured loans pursuant to our bank agreements.

        In March 2006,February 2007, we issued $1.0 billion principal amount of 5.90% Senior Notes due April 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 5.90% 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 5.90% Senior Notes are senior unsecured notes that rank in equal right of payment with all existing and future unsecured indebtedness and as a joint and several liability of the issuer and the co-obligors.

        In February 2006, we offered todid not pay a supplemental interest payment of $46.25 per $1,000 principal amount of notes to holders of our Liquid Yield Option2031 Notes dueas we had in past years, and none of the 2031 (“2031 Notes”) asNotes were put back to us for repayment.

        During the first quarter of February 2, 2006 to not put2007, substantially all of the holders of our 2033 Notes exchanged their notes backfor 2038 Notes reducing the aggregate principal amount of our 2033 Notes outstanding to us. The noteholders were paid $39.2 million on February 8, 2006. This payment is being amortized ratably over a 12-month period to the next put date in accordance with EITF No. 96-19.

        In June 2006, we offered to pay a$0.2 million. No supplemental interest payment of $27.50 per $1,000 of our Zero Coupon Zero Yield Convertible Notes due 2033 to holders that did not put their notes back to us and consentedor fee was paid to the amendments to the notes and related indenture as of June 27, 2006. The principal amendment extended the maturity of the notes from June 15, 2033 to July 1,noteholders.


 
 2620 
ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

2038. The additional amendments conformed other terms of the notes for the extension of the maturity date, as well as amending the comparable yield. On June 21, 2006, we repurchased $132.5 million of notes that were put to us. With respect to the remaining $467.5 million of notes as of June 30, 2006, noteholders holding a combined amount of $428.1 million of notes consented to the amendments, were paid $27.50 per $1,000 note and their notes were amended. The total supplemental interest payment of $11.7 million is being amortized ratably over a 24-month period to the next put date in accordance with EITF No. 96-19. The next put date for these notes is June 15, 2008. The remaining noteholders, comprising $39.4 million aggregate principal amount of notes, did not consent to the amendments. As a result, these notes are still outstanding and were not amended and these noteholders were not paid the supplemental interest payment.

        In July 2006, we offered to pay a supplemental interest payment of $32.50 per $1,000 principal amount of notes to holders of our 2032 Notes as of August 1, 2006 to not put their notes back to us. On August 4, 2006, we repurchased $165.2 million of our 2032 Notes that were put to us. With respect to the remaining $727.0 million of notes, noteholders were paid a total of $23.6 million on August 2, 2006, that is being amortized ratably over a 12-month period to the next put date in accordance with EITF No. 96-19.

        Our outstanding debt and amounts available under our credit facilities as of September 30, 2006March 31, 2007 were as follows ($(dollars in millions):

 Debt
Outstanding
Available
Credit

 

Bank loans (due in less than 1 year)

$13.0

 

 

 

 

Commercial paper issued under
   $2.5 billion Revolver due June 23, 2011

—

 

$2,500.0

 

 

Senior notes due April 15, 2016

995.6

 

—

 

 

Convertible notes due February 7, 2031

847.0

 

—

 

 

Convertible notes due July 31, 2032

727.0

 

—

 

 

Convertible notes due June 15, 2033

0.2

 

—

 

 

Convertible notes due July 1, 2038

467.3

 

—

 

 

Other debt

17.6

 

—

 
  
 
 

Total

 

$ 3,067.7

 

$2,500.0

 
  
 
 

Debt
Outstanding
Available
Credit
     Current Debt (due in less than 1 year) $     12.5 — 
     Commercial Paper issued under 
       $2,500.0 Million Revolver - due June 23, 2011 — $2,500.0 
     5.90% Senior Notes - due April 15, 2016 995.3 — 
     Liquid Yield Option Notes - due February 7, 2031 847.0 — 
     Zero Coupon Zero Yield Convertible Notes - due July 31, 2032 727.0 — 
     Zero Coupon Zero Yield Convertible Notes - due June 15, 2033 39.4 — 
     Zero Coupon Zero Yield Convertible Notes - due July 1, 2038 428.1 — 
     Other Debt 18.3 — 
Total $3,067.6 $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.


 
 2721 
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. Dollar 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 revenuesthat revenue are denominated in the same currency. This minimizes the impact that fluctuations in exchange rates will have on our net income.

        During the first quarter ofOur 2006 we entered into Japanese Yen-based cross-currency interest rate swaps, with an aggregate notional principal amount of 22.0 billion Yen that mature in 2013. These swaps effectively hedge our net investment in certain Japanese Yen based denominated assets.

        Our 2005 Form 10-K provides a more detailed discussion of the market risks affecting our operations. Except as discussed above, as of September 30, 2006, noNo material change had occurred in our market risks from the disclosure contained in our 20052006 Form 10-K.


 
 2822 
ITEM4.CONTROLS AND PROCEDURES

        We have established and continue to maintain disclosure controls and procedures and internal control 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2006.March 31, 2007. Based on that evaluation, our CEO and CFOwe concluded that as of September 30, 2006March 31, 2007 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, 2006March 31, 2007 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, 2005,2006, has issued an attestation report on management’s assessment of Omnicom’s internal control over financial reporting as of December 31, 2005,2006, dated February 24, 2006.26, 2007. There have not been any changes in our internal control over financial reporting that occurred during our thirdfirst fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.


 
 2923 
PART II.OTHER INFORMATION

Item 1. Legal Proceedings

        The information regarding legal proceedings described in Note 108 to the condensed consolidated financial statements set forth in Part I of this Report 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, 2005.2006.

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, 2006March 31, 2007 by us or any of our “affiliated purchasers.”purchasers”.

During the month in 2006:
(a)
Total
Number of
Shares Purchased (1)
(b)
Average
Price Paid
Per Share
(c)
Total Number
of Shares Purchased
As Part of Publicly
Announced Plans
or Programs
(d)
Maximum Number
of Shares that May
Yet Be Purchased Under
the Plans or Programs
July 195,500 $87.71 — — 
August 1,197,000 $88.93 — — 
September — $     — — — 
Total 1,392,500 $88.75 — — 
During the month in 2007:
(a)
Total
Number of
Shares
Purchased (1)
(b)
Average
Price Paid
Per Share
(c)
Total Number
of Shares Purchased
As Part of Publicly
Announced Plans
or Programs
(d)
Maximum
Number of
Shares that May
Yet Be Purchased
Under the
Plans or Programs
January2,773,501 $103.34 — — 
February556,400 $103.25 — — 
March1,032,800 $103.85 — — 
 
 
 
 
 
Total4,362,701 $103.45 — — 
 
 
 
 
 

(1)The shares were purchased in the open market for general corporate purposes.

Item 6. Exhibits

(a) Exhibits

10.1Instrument of Resignation, Appointment and Acceptance, dated as of October 5, 2006, among Omnicom Group Inc., Omnicom Capital Inc., Omnicom Finance Inc., JPMorgan Chase Bank, N.A. and Deutsche Bank Trust Company Americas (Exhibit 10.1 to the Form 8-K (File No. 1-10551) dated October 11, 2006 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.


 30
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. § 1350.§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. § 1350.§1350.


 
 3124 

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.



Dated: October 27, 2006		OMNICOM GROUP INC.
 
Dated: April 27, 2007

OMNICOM GROUP INC.

/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)



 
 3225