UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010March 31, 2011
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-1024020 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
(212) 704-1200
(Registrant’s telephone number, including area code)
(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.
Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ | |||||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||||
| (Do not check if a smaller reporting company) | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
The number of shares of the registrant’s common stock outstanding as of OctoberApril 15, 20102011 was 488,735,381.488,694,439.
Page No. | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (Unaudited) | |||||
| 2 | ||||||
Consolidated Balance Sheets as of | 3 | |||||
| 4 | ||||||
| 5 | ||||||
| 7 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 | ||||
Item 4. | Controls and Procedures | 29 | ||||
| PART II. OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 30 | ||||
Item 1A. | Risk Factors | 30 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | ||||
Item 6. | Exhibits | 30 | ||||
| 31 | ||||||
| 32 | ||||||
INFORMATION REGARDING FORWARD-LOOKING DISCLOSURE
This quarterly report on Form 10-Q contains forward-looking statements. Statements in this report that are not historical facts, including statements about management’s beliefs and expectations, constitute forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or comparable terminology are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined under Item 1A, Risk Factors, in our most recent annual report on Form 10-K. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update publicly any of them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following:
potential effects of a challenging economy, for example, on the demand for our advertising and marketing services, on our clients’ financial condition and on our business or financial condition;
our ability to attract new clients and retain existing clients;
our ability to retain and attract key employees;
risks associated with assumptions we make in connection with our critical accounting estimates, including changes in assumptions associated with any effects of a weakened economy;
potential adverse effects if we are required to recognize impairment charges or other adverse accounting-related developments;
risks associated with the effects of global, national and regional economic and political conditions, including counterparty risks and fluctuations in economic growth rates, interest rates and currency exchange rates; and
developments from changes in the regulatory and legal environment for advertising and marketing and communications services companies around the world.
Investors should carefully consider these factors and the additional risk factors outlined in more detail under Item 1A, Risk Factors, in our most recent annual report on Form 10-K.
Part I – FINANCIAL INFORMATION
| Item 1. | Financial Statements (Unaudited) |
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
REVENUE | $ | 1,560.8 | $ | 1,426.7 | $ | 4,519.9 | $ | 4,226.4 | ||||||||
OPERATING EXPENSES: | ||||||||||||||||
Salaries and related expenses | 1,007.1 | 943.5 | 2,977.4 | 2,908.4 | ||||||||||||
Office and general expenses | 452.1 | 425.4 | 1,322.2 | 1,245.4 | ||||||||||||
Restructuring and other reorganization-related charges (reversals), net | 1.4 | (0.5 | ) | 2.3 | (0.7 | ) | ||||||||||
Total operating expenses | 1,460.6 | 1,368.4 | 4,301.9 | 4,153.1 | ||||||||||||
OPERATING INCOME | 100.2 | 58.3 | 218.0 | 73.3 | ||||||||||||
EXPENSES AND OTHER INCOME: | ||||||||||||||||
Interest expense | (34.7 | ) | (37.8 | ) | (102.3 | ) | (117.7 | ) | ||||||||
Interest income | 6.8 | 7.6 | 19.4 | 28.0 | ||||||||||||
Other (expense) income, net | (3.1 | ) | 1.0 | (4.7 | ) | (17.4 | ) | |||||||||
Total (expenses) and other income | (31.0 | ) | (29.2 | ) | (87.6 | ) | (107.1 | ) | ||||||||
Income (loss) before income taxes | 69.2 | 29.1 | 130.4 | (33.8 | ) | |||||||||||
Provision for (benefit of) income taxes | 24.4 | 3.7 | 72.4 | (18.0 | ) | |||||||||||
Income (loss) of consolidated companies | 44.8 | 25.4 | 58.0 | (15.8 | ) | |||||||||||
Equity in net income (loss) of unconsolidated affiliates | 0.8 | 0.5 | 0.4 | (0.5 | ) | |||||||||||
NET INCOME (LOSS) | 45.6 | 25.9 | 58.4 | (16.3 | ) | |||||||||||
Net (income) loss attributable to noncontrolling interests | (0.3 | ) | (1.8 | ) | 4.8 | 1.2 | ||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO IPG | 45.3 | 24.1 | 63.2 | (15.1 | ) | |||||||||||
Dividends on preferred stock | (2.9 | ) | (6.9 | ) | (12.7 | ) | (20.7 | ) | ||||||||
Benefit from preferred stock repurchased | 0.0 | 0.0 | 25.7 | 0.0 | ||||||||||||
NET INCOME (LOSS) AVAILABLE TO IPG COMMON STOCKHOLDERS | $ | 42.4 | $ | 17.2 | $ | 76.2 | $ | (35.8 | ) | |||||||
Earnings (loss) per share available to IPG common stockholders: | ||||||||||||||||
Basic | $ | 0.09 | $ | 0.04 | $ | 0.16 | $ | (0.08 | ) | |||||||
Diluted | $ | 0.08 | $ | 0.03 | $ | 0.11 | $ | (0.08 | ) | |||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||
Basic | 474.7 | 470.5 | 473.0 | 467.3 | ||||||||||||
Diluted | 533.6 | 513.8 | 526.4 | 467.3 | ||||||||||||
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
REVENUE | $ | 1,474.8 | $ | 1,337.0 | ||||
OPERATING EXPENSES: | ||||||||
Salaries and related expenses | 1,080.1 | 979.3 | ||||||
Office and general expenses | 439.2 | 416.8 | ||||||
Restructuring and other reorganization-related charges, net | 0.8 | 0.3 | ||||||
Total operating expenses | 1,520.1 | 1,396.4 | ||||||
OPERATING LOSS | (45.3 | ) | (59.4 | ) | ||||
EXPENSES AND OTHER INCOME: | ||||||||
Interest expense | (31.9 | ) | (32.6 | ) | ||||
Interest income | 8.3 | 6.5 | ||||||
Other (expense) income, net | (6.1 | ) | 0.5 | |||||
Total (expenses) and other income | (29.7 | ) | (25.6 | ) | ||||
Loss before income taxes | (75.0 | ) | (85.0 | ) | ||||
Benefit of income taxes | (21.5 | ) | (15.3 | ) | ||||
Loss of consolidated companies | (53.5 | ) | (69.7 | ) | ||||
Equity in net income (loss) of unconsolidated affiliates | 0.3 | (0.6 | ) | |||||
NET LOSS | (53.2 | ) | (70.3 | ) | ||||
Net loss attributable to noncontrolling interests | 8.0 | 5.7 | ||||||
NET LOSS ATTRIBUTABLE TO IPG | (45.2 | ) | (64.6 | ) | ||||
Dividends on preferred stock | (2.9 | ) | (6.9 | ) | ||||
NET LOSS AVAILABLE TO IPG COMMON STOCKHOLDERS | $ | (48.1 | ) | $ | (71.5 | ) | ||
Loss per share available to IPG common stockholders – basic and diluted | $ | (0.10 | ) | $ | (0.15 | ) | ||
Weighted-average number of common shares outstanding – basic and diluted | 476.0 | 471.3 | ||||||
Dividends declared per common share | $ | 0.06 | $ | 0.00 | ||||
The accompanying notes are an integral part of these unaudited financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Millions)
(Unaudited)
| September 30, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | |||||||||||||
ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 1,927.7 | $ | 2,495.2 | $ | 1,840.2 | $ | 2,675.7 | ||||||||
Marketable securities | 11.3 | 10.9 | 14.1 | 13.7 | ||||||||||||
Accounts receivable, net of allowance of $66.6 and $66.0 | 3,805.4 | 3,756.5 | ||||||||||||||
Accounts receivable, net of allowance of $63.4 and $63.1 | 3,995.4 | 4,317.6 | ||||||||||||||
Expenditures billable to clients | 1,329.4 | 1,100.1 | 1,357.8 | 1,217.1 | ||||||||||||
Other current assets | 242.0 | 275.0 | 266.6 | 229.4 | ||||||||||||
Total current assets | 7,315.8 | 7,637.7 | 7,474.1 | 8,453.5 | ||||||||||||
Furniture, equipment and leasehold improvements, net of accumulated depreciation of $1,167.5 and $1,119.1 | 441.1 | 490.1 | ||||||||||||||
Furniture, equipment and leasehold improvements, net of accumulated | ||||||||||||||||
depreciation of $1,181.8 and $1,147.1 | 445.5 | 454.3 | ||||||||||||||
Deferred income taxes | 396.5 | 398.3 | 398.9 | 334.2 | ||||||||||||
Goodwill | 3,350.4 | 3,321.0 | 3,407.7 | 3,368.5 | ||||||||||||
Other non-current assets | 446.8 | 416.0 | 451.0 | 460.3 | ||||||||||||
TOTAL ASSETS | $ | 11,950.6 | $ | 12,263.1 | $ | 12,177.2 | $ | 13,070.8 | ||||||||
LIABILITIES: | ||||||||||||||||
Accounts payable | $ | 3,967.8 | $ | 4,003.9 | $ | 4,010.6 | $ | 4,474.5 | ||||||||
Accrued liabilities | 2,549.9 | 2,593.1 | 2,733.6 | 3,112.7 | ||||||||||||
Short-term borrowings | 124.3 | 93.4 | 116.2 | 114.8 | ||||||||||||
Current portion of long-term debt | 231.0 | 215.2 | 452.4 | 38.9 | ||||||||||||
Total current liabilities | 6,873.0 | 6,905.6 | 7,312.8 | 7,740.9 | ||||||||||||
Long-term debt | 1,588.9 | 1,638.0 | 1,165.9 | 1,583.3 | ||||||||||||
Deferred compensation | 498.4 | 503.2 | 477.0 | 486.1 | ||||||||||||
Other non-current liabilities | 389.3 | 402.2 | 402.8 | 402.4 | ||||||||||||
TOTAL LIABILITIES | 9,349.6 | 9,449.0 | 9,358.5 | 10,212.7 | ||||||||||||
Redeemable noncontrolling interests (see Note 6) | 269.5 | 277.8 | ||||||||||||||
Redeemable noncontrolling interests (see Note 4) | 285.9 | 291.2 | ||||||||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Preferred stock | 221.5 | 525.0 | 221.5 | 221.5 | ||||||||||||
Common stock | 47.4 | 47.1 | 47.7 | 47.5 | ||||||||||||
Additional paid-in capital | 2,464.7 | 2,441.0 | 2,436.0 | 2,456.8 | ||||||||||||
Accumulated deficit | (261.6 | ) | (324.8 | ) | (108.9 | ) | (63.7 | ) | ||||||||
Accumulated other comprehensive loss, net of tax | (161.8 | ) | (176.6 | ) | (73.8 | ) | (119.0 | ) | ||||||||
| 2,310.2 | 2,511.7 | 2,522.5 | 2,543.1 | |||||||||||||
Less: Treasury stock | (14.1 | ) | (14.0 | ) | (24.6 | ) | (14.1 | ) | ||||||||
Total IPG stockholders’ equity | 2,296.1 | 2,497.7 | 2,497.9 | 2,529.0 | ||||||||||||
Noncontrolling interests | 35.4 | 38.6 | 34.9 | 37.9 | ||||||||||||
TOTAL STOCKHOLDERS’ EQUITY | 2,331.5 | 2,536.3 | 2,532.8 | 2,566.9 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 11,950.6 | $ | 12,263.1 | $ | 12,177.2 | $ | 13,070.8 | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
(Unaudited)
| Nine months ended September 30, | Three months ended March 31, | |||||||||||||||
| 2010 | 2009 | 2011 | 2010 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income (loss) | $ | 58.4 | $ | (16.3 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
Net loss | $ | (53.2 | ) | $ | (70.3 | ) | ||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization of fixed assets and intangible assets | 111.5 | 126.5 | 35.6 | 37.4 | ||||||||||||
Provision for uncollectible receivables | 8.6 | 13.6 | 3.5 | 1.1 | ||||||||||||
Amortization of restricted stock and other non-cash compensation | 38.5 | 37.7 | 15.7 | 13.7 | ||||||||||||
Net amortization of bond (premiums) discounts and deferred financing costs | (3.0 | ) | 13.0 | |||||||||||||
Loss on early extinguishment of debt | 0.1 | 25.8 | ||||||||||||||
Net amortization of bond premiums and deferred financing costs | (1.9 | ) | (1.0 | ) | ||||||||||||
Deferred income tax benefit | (7.5 | ) | (9.4 | ) | (53.0 | ) | (38.7 | ) | ||||||||
Other | 26.0 | 9.8 | 10.2 | 10.9 | ||||||||||||
Changes in assets and liabilities, net of acquisitions and dispositions, providing (using) cash: | ||||||||||||||||
Accounts receivable | (82.7 | ) | 812.9 | 369.4 | 271.6 | |||||||||||
Expenditures billable to clients | (225.8 | ) | (18.8 | ) | (123.2 | ) | (39.1 | ) | ||||||||
Other current assets | (14.9 | ) | 14.2 | (28.6 | ) | (26.5 | ) | |||||||||
Accounts payable | 0.7 | (863.4 | ) | (429.6 | ) | (347.8 | ) | |||||||||
Accrued liabilities | (53.6 | ) | (272.1 | ) | (523.8 | ) | (340.7 | ) | ||||||||
Other non-current assets and liabilities | (18.1 | ) | (72.0 | ) | (22.8 | ) | (26.1 | ) | ||||||||
Net cash used in operating activities | (161.8 | ) | (198.5 | ) | (801.7 | ) | (555.5 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (16.9 | ) | (9.4 | ) | ||||||||||||
Proceeds from sales of businesses and investments, net of cash sold | 31.0 | 5.0 | 2.4 | 30.1 | ||||||||||||
Acquisitions, including deferred payments, net of cash acquired | (63.0 | ) | (71.2 | ) | (2.1 | ) | (5.6 | ) | ||||||||
Capital expenditures | (49.7 | ) | (43.7 | ) | ||||||||||||
Net (purchases) sales and maturities of short-term marketable securities | (0.2 | ) | 157.9 | |||||||||||||
Other investing activities | (1.7 | ) | (0.7 | ) | (0.2 | ) | (2.1 | ) | ||||||||
Net cash (used in) provided by investing activities | (83.6 | ) | 47.3 | (16.8 | ) | 13.0 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Repurchase of preferred stock | (265.9 | ) | 0.0 | |||||||||||||
Proceeds from issuance of 10.00% Senior Notes due 2017 | 0.0 | 587.7 | ||||||||||||||
Purchase of long-term debt | (21.4 | ) | (770.7 | ) | ||||||||||||
Issuance costs and fees | (9.8 | ) | (19.2 | ) | ||||||||||||
Net increase (decrease) in short term bank borrowings | 25.9 | (12.1 | ) | |||||||||||||
Repurchase of common stock | (10.5 | ) | 0.0 | |||||||||||||
Common stock dividends | (28.5 | ) | 0.0 | |||||||||||||
Exercise of stock options | 8.4 | 0.0 | ||||||||||||||
Preferred stock dividends | (2.9 | ) | (6.9 | ) | ||||||||||||
Net decrease in short-term bank borrowings | (5.0 | ) | (7.8 | ) | ||||||||||||
Distributions to noncontrolling interests | (18.2 | ) | (21.1 | ) | (3.1 | ) | (4.5 | ) | ||||||||
Preferred stock dividends | (16.7 | ) | (20.7 | ) | ||||||||||||
Other financing activities | (21.6 | ) | (6.5 | ) | (3.8 | ) | 3.0 | |||||||||
Net cash used in financing activities | (327.7 | ) | (262.6 | ) | (45.4 | ) | (16.2 | ) | ||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | 5.6 | 68.1 | 28.4 | (7.7 | ) | |||||||||||
Net decrease in cash and cash equivalents | (567.5 | ) | (345.7 | ) | (835.5 | ) | (566.4 | ) | ||||||||
Cash and cash equivalents at beginning of period | 2,495.2 | 2,107.2 | 2,675.7 | 2,495.2 | ||||||||||||
Cash and cash equivalents at end of period | $ | 1,927.7 | $ | 1,761.5 | $ | 1,840.2 | $ | 1,928.8 | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)LOSS
(Amounts in Millions)
(Unaudited)
| Preferred Stock |
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss, Net of Tax | Treasury Stock | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | Preferred Stock | Common Stock | Additional Paid- In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss, Net of Tax | Treasury Stock | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | $ | 525.0 | 486.5 | $ | 47.1 | $ | 2,441.0 | $ | (324.8 | ) | $ | (176.6 | ) | $ | (14.0 | ) | $ | 2,497.7 | $ | 38.6 | $ | 2,536.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | $ | 221.5 | 489.5 | $ | 47.5 | $ | 2,456.8 | $ | (63.7 | ) | $ | (119.0 | ) | $ | (14.1 | ) | $ | 2,529.0 | $ | 37.9 | $ | 2,566.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 63.2 | 63.2 | (4.8 | ) | 58.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (45.2 | ) | (45.2 | ) | (8.0 | ) | (53.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax | 8.3 | 8.3 | 0.9 | 9.2 | 43.5 | 43.5 | 0.2 | 43.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in market value of securities available-for-sale, net of tax | 0.2 | 0.2 | 0.2 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of previously unrealized gain on securities available-for-sale, net of tax | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized losses, transition obligation and prior service cost, net of tax | 6.5 | 6.5 | 6.5 | 1.2 | 1.2 | 1.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | $ | 78.0 | $ | (3.9 | ) | $ | 74.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | $ | 0.0 | $ | (7.8 | ) | $ | (7.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassifications related to redeemable noncontrolling interests | 18.6 | 18.6 | 11.2 | 11.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest transactions | (26.0 | ) | (26.0 | ) | 1.1 | (24.9 | ) | (0.1 | ) | (0.1 | ) | (3.2 | ) | (3.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | (18.2 | ) | (18.2 | ) | (3.1 | ) | (3.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interests | (5.6 | ) | (5.6 | ) | (5.6 | ) | (9.4 | ) | (9.4 | ) | (9.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of preferred stock | (303.5 | ) | 35.9 | (267.6 | ) | (267.6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of common stock | (10.5 | ) | (10.5 | ) | (10.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock dividends | (28.5 | ) | (28.5 | ) | (28.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends | (12.7 | ) | (12.7 | ) | (12.7 | ) | (2.9 | ) | (2.9 | ) | (2.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 41.2 | 41.2 | 41.2 | 15.9 | 15.9 | 15.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 0.9 | 0.1 | 8.4 | 8.5 | 8.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock, net of forfeitures | 2.3 | 0.3 | (11.4 | ) | (11.1 | ) | (11.1 | ) | 0.4 | 0.1 | (6.3 | ) | (6.2 | ) | (6.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 0.3 | 0.0 | 2.3 | (0.1 | ) | 2.2 | (0.8 | ) | 1.4 | 0.1 | 0.0 | 2.1 | 2.1 | (0.1 | ) | 2.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2010 | $ | 221.5 | 489.1 | $ | 47.4 | $ | 2,464.7 | $ | (261.6 | ) | $ | (161.8 | ) | $ | (14.1 | ) | $ | 2,296.1 | $ | 35.4 | $ | 2,331.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2011 | $ | 221.5 | 490.9 | $ | 47.7 | $ | 2,436.0 | $ | (108.9 | ) | $ | (73.8 | ) | $ | (24.6 | ) | $ | 2,497.9 | $ | 34.9 | $ | 2,532.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)LOSS – (CONTINUED)
(Amounts in Millions)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss, Net of Tax | Treasury Stock | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | Preferred Stock | Common Stock | Additional Paid- In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss, Net of Tax | Treasury Stock | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | $ | 525.0 | 477.1 | $ | 46.4 | $ | 2,413.5 | $ | (446.1 | ) | $ | (318.5 | ) | $ | (14.0 | ) | $ | 2,206.3 | $ | 37.9 | $ | 2,244.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | $ | 525.0 | 486.5 | $ | 47.1 | $ | 2,441.0 | $ | (324.8 | ) | $ | (176.6 | ) | $ | (14.0 | ) | $ | 2,497.7 | $ | 38.6 | $ | 2,536.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (15.1 | ) | (15.1 | ) | (1.2 | ) | (16.3 | ) | (64.6 | ) | (64.6 | ) | (5.7 | ) | (70.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of tax | 109.0 | 109.0 | 2.7 | 111.7 | (15.2 | ) | (15.2 | ) | (0.1 | ) | (15.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in market value of securities available-for-sale, net of tax | 0.6 | 0.6 | 0.6 | 0.1 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recognition of previously unrealized loss on securities available-for-sale, net of tax | 0.0 | 0.0 | 0.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrecognized losses, transition obligation and prior service cost, net of tax | 9.5 | 9.5 | 9.5 | 1.0 | 1.0 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | $ | 104.0 | $ | 1.5 | $ | 105.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | $ | (78.7 | ) | $ | (5.8 | ) | $ | (84.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassifications related to redeemable noncontrolling interests | 12.1 | 12.1 | 12.8 | 12.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest transactions | (5.4 | ) | (5.4 | ) | 0.3 | (5.1 | ) | (0.2 | ) | (0.2 | ) | (0.1 | ) | (0.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | (21.1 | ) | (21.1 | ) | (4.5 | ) | (4.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in redemption value of redeemable noncontrolling interests | 12.8 | 12.8 | 12.8 | (2.3 | ) | (2.3 | ) | (2.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends | (20.7 | ) | (20.7 | ) | (20.7 | ) | (6.9 | ) | (6.9 | ) | (6.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 38.4 | 38.4 | 38.4 | 15.7 | 15.7 | 15.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock, net of forfeitures | 9.0 | 0.6 | (17.4 | ) | (16.8 | ) | (16.8 | ) | (0.4 | ) | 0.1 | (3.3 | ) | (3.2 | ) | (3.2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 0.4 | 0.0 | 3.3 | 3.3 | 0.8 | 4.1 | 0.1 | 0.0 | 1.9 | (0.1 | ) | 1.8 | (0.4 | ) | 1.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2009 | $ | 525.0 | 486.5 | $ | 47.0 | $ | 2,424.5 | $ | (461.2 | ) | $ | (199.4 | ) | $ | (14.0 | ) | $ | 2,321.9 | $ | 31.5 | $ | 2,353.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2010 | $ | 525.0 | 486.2 | $ | 47.2 | $ | 2,445.9 | $ | (389.4 | ) | $ | (190.7 | ) | $ | (14.1 | ) | $ | 2,423.9 | $ | 40.6 | $ | 2,464.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 1: Basis of Presentation
The unaudited Consolidated Financial Statements have been prepared by The Interpublic Group of Companies, Inc. and subsidiaries (“IPG,(the “Company,” “IPG,” “we,” “us” or “our”) in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, they do not include certain information and disclosures required for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with our 20092010 Annual Report on Form 10-K.
In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments of a normal and recurring nature necessary for a fair presentationstatement of the information for each period contained therein. Certain reclassifications have been made to prior periodsperiod financial statements to conform to the current period presentation.
Note 2: Earnings (Loss) Per Share
Earnings (loss) per basic common share availableDuring the first quarter of 2011, we changed the classification of taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions from a gross to IPG common stockholders equalsa net income (loss) available to IPG common stockholders dividedbasis in a country. This change, which was applied retrospectively and does not change previously reported operating loss or net loss, decreased revenue and office and general expense by the weighted-average number of common shares outstanding$6.6 and $4.3 for the applicable period. Diluted earnings (loss) per share available to IPG common stockholders equals net income (loss) available to IPG common stockholders adjusted to exclude, if dilutive, preferred stock dividends, allocation to participating securities, interest expense related to potentially dilutive securities calculated usingquarters ended March 31, 2011 and 2010, respectively. We believe this presentation better aligns the effective interest rateCompany’s internal financial and benefit from preferred stock repurchased, divided byoperational management reporting as well as increases consistency in our external reporting across the weighted-average number of common shares outstanding, plus any additional common shares that would have been outstanding if potentially dilutive shares had been issued.
We may be required to calculate earnings (loss) per basic share using the two-class method, pursuant to authoritative guidance for earnings per share, as a result of our redeemable noncontrolling interests. Each reporting period, redeemable noncontrolling interests are reported at their estimated redemption value, but not less than their initial fair value. Any adjustment to the redemption value will also impact additional paid-in capital, but will not impact net income (loss). Adjustments as a result of currency translation will affect the redeemable noncontrolling interest balance, but do not impact additional paid-in capital. To the extent that the redemption value increases and exceeds the then-current fair value of a redeemable noncontrolling interest, net income (loss) available to IPG common stockholders (used to calculate earnings (loss) per share) could be negatively impacted by that increase, subject to certain limitations. The partial or full recovery of these reductions to net income (loss) available to IPG common stockholders (used to calculate earnings (loss) per share) is limited to cumulative prior-period reductions. For the three and nine months ended September 30, 2010 and 2009, there was no impact to earnings (loss) per share for adjustments related to our redeemable noncontrolling interests.
Notes to Consolidated Financial Statements – (continued)
(Amountscountries in Millions, Except Per Share Amounts)which we operate.
(Unaudited)
The following sets forth basic and diluted earnings (loss) per common share available to IPG common stockholders.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) available to IPG common stockholders – basic | $ | 42.4 | $ | 17.2 | $ | 76.2 | $ | (35.8 | ) | |||||||
Adjustments: Effect of dilutive securities | ||||||||||||||||
Interest on 4.25% Notes | 0.3 | 0.3 | 1.0 | 0.0 | ||||||||||||
Interest on 4.75% Notes | 1.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Benefit from preferred stock repurchased1 | 0.0 | 0.0 | (21.7 | ) | 0.0 | |||||||||||
Net income (loss) available to IPG common stockholders – diluted | $ | 43.7 | $ | 17.5 | $ | 55.5 | $ | (35.8 | ) | |||||||
Weighted-average number of common shares outstanding – basic | 474.7 | 470.5 | 473.0 | 467.3 | ||||||||||||
Add: Effect of dilutive securities | ||||||||||||||||
Restricted stock, stock options and other equity awards | 10.6 | 11.1 | 9.3 | 0.0 | ||||||||||||
4.25% Notes | 32.2 | 32.2 | 32.2 | 0.0 | ||||||||||||
4.75% Notes | 16.1 | 0.0 | 0.0 | 0.0 | ||||||||||||
Preferred stock repurchased | 0.0 | 0.0 | 11.9 | 0.0 | ||||||||||||
Weighted-average number of common shares outstanding – diluted | 533.6 | 513.8 | 526.4 | 467.3 | ||||||||||||
Earnings (loss) per share available to IPG common stockholders – basic | $ | 0.09 | $ | 0.04 | $ | 0.16 | $ | (0.08 | ) | |||||||
Earnings (loss) per share available to IPG common stockholders – diluted | $ | 0.08 | $ | 0.03 | $ | 0.11 | $ | (0.08 | ) | |||||||
Basic and diluted shares outstanding and loss per share are equal for the nine months ended September 30, 2009 because our potentially dilutive securities are antidilutive as a result of the net loss available to IPG common stockholders.
The following table presents the potential shares excluded from diluted earnings (loss) per share calculation because the effect of including these potential shares would be antidilutive.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Restricted stock, stock options and other equity awards | 0.0 | 0.0 | 0.0 | 7.7 | ||||||||||||
4.75% Notes | 0.0 | 16.1 | 16.1 | 16.1 | ||||||||||||
4.25% Notes | 0.0 | 0.0 | 0.0 | 32.2 | ||||||||||||
4.50% Notes | 0.0 | 0.7 | 0.0 | 0.7 | ||||||||||||
Preferred stock outstanding | 16.2 | 38.4 | 16.2 | 38.4 | ||||||||||||
Total | 16.2 | 55.2 | 32.3 | 95.1 | ||||||||||||
Securities excluded from the diluted earnings (loss) per share calculation because the exercise price was greater than the average market price: | ||||||||||||||||
Stock options1 | 16.6 | 21.6 | 19.5 | 21.6 | ||||||||||||
Warrants2 | 0.0 | 0.0 | 0.0 | 67.9 | ||||||||||||
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 3:2: Debt and Credit Arrangements
Long-Term Debt
A summary of the carrying amounts and fair values of our long-term debt is as follows.listed below.
| Effective Interest Rate | September 30, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||||||||||||||
| Book Value | Fair Value2 | Book Value | Fair Value2 | Effective Interest Rate | Book Value | Fair Value2 | Book Value | Fair Value2 | ||||||||||||||||||||||||||||||||
Floating Rate Senior Unsecured Notes due 2010 (less unamortized discount of $0.4) | 8.65 | % | $ | 192.1 | $ | 192.3 | $ | 211.7 | $ | 210.5 | ||||||||||||||||||||||||||||||
7.25% Senior Unsecured Notes due 2011 | 7.25 | % 1 | 36.3 | 36.3 | 36.3 | 36.2 | 7.25 | %1 | $ | 36.3 | $ | 36.6 | $ | 36.3 | $ | 37.0 | ||||||||||||||||||||||||
6.25% Senior Unsecured Notes due 2014 (less unamortized discount of $0.4) | 6.29 | % 1 | 353.5 | 374.5 | 351.5 | 332.5 | 6.29 | %1 | 352.7 | 382.4 | 353.3 | 378.0 | ||||||||||||||||||||||||||||
10.00% Senior Unsecured Notes due 2017 (less unamortized discount of $10.9) | 10.38 | % | 589.1 | 703.5 | 588.3 | 666.0 | ||||||||||||||||||||||||||||||||||
4.75% Convertible Senior Notes due 2023 (plus unamortized premium of $5.5) | 3.50 | % | 205.5 | 226.1 | 207.2 | 213.3 | ||||||||||||||||||||||||||||||||||
4.25% Convertible Senior Notes due 2023 (plus unamortized premium of $21.1) | 0.58 | % | 421.1 | 433.8 | 431.9 | 416.4 | ||||||||||||||||||||||||||||||||||
10.00% Senior Unsecured Notes due 2017 (less unamortized discount of $10.3) | 10.38 | % | 589.7 | 714.0 | 589.4 | 705.0 | ||||||||||||||||||||||||||||||||||
4.75% Convertible Senior Notes due 2023 (plus unamortized premium of $4.4) | 3.50 | % | 204.4 | 252.9 | 205.0 | 235.0 | ||||||||||||||||||||||||||||||||||
4.25% Convertible Senior Notes due 2023 (plus unamortized premium of $13.8) | 0.58 | % | 413.8 | 461.6 | 417.4 | 444.4 | ||||||||||||||||||||||||||||||||||
Other notes payable and capitalized leases | 22.3 | 26.3 | 21.4 | 20.8 | ||||||||||||||||||||||||||||||||||||
Total long-term debt | 1,819.9 | 1,853.2 | 1,618.3 | 1,622.2 | ||||||||||||||||||||||||||||||||||||
Less: current portion3 | 231.0 | 215.2 | 452.4 | 38.9 | ||||||||||||||||||||||||||||||||||||
Long-term debt, excluding current portion | $ | 1,588.9 | $ | 1,638.0 | $ | 1,165.9 | $ | 1,583.3 | ||||||||||||||||||||||||||||||||
| 1 | Excludes the effect of related gains/losses on interest rate swaps. |
| 2 | Fair values are derived from trading quotes by institutions making a market in the securities and estimations of value by those institutions using proprietary models. |
| 3 | On |
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Interest Rate Swaps
In April 2010,March 2011, we repurchased $21.4 aggregate principalentered into an interest rate swap agreement related to our 6.25% Senior Unsecured Notes due 2014 (the “2014 Notes”) to convert $100.0 notional amount of our 2010$350.0 2014 Notes that were scheduledfrom fixed rate to floating rate debt. In April 2011, we entered into an additional interest rate swap agreement related to the 2014 Notes to convert an additional $100.0 notional amount of our 2014 Notes from fixed rate to floating rate debt.
We enter into interest rate swaps for risk management purposes to manage our exposure to changes in interest rates. The interest rate swap agreements mature on November 15, 20102014, coinciding with the maturity of the 2014 Notes. We pay a variable interest rate based upon the three-month U.S. LIBOR rate plus a fixed spread and receive a fixed interest rate of 6.25%. The variable interest rate is reset quarterly, and we make our interest payments semi-annually on May 15th and November 15th. We receive fixed payments semi-annually on May 15th and November 15th. These interest rate swap agreements qualify for $21.5hedge accounting as fair value hedges. We evaluate the appropriateness of hedge accounting at inception and throughout the hedge period.
The following table presents the fair value of our interest rate swap agreement and related debt and the associated gains/(losses) recognized in cash, which includes accruednet loss due to changes in fair value of our interest rate swap agreement and unpaid interest.the underlying debt.
Consolidated Balance Sheet | ||||||
| March 31, 2011 | Caption | Fair value | ||||
Interest rate swap agreements | Other non-current liabilities | $ | 0.3 | |||
Hedged debt | Long-term debt | (0.3 | ) | |||
Consolidated Statement of Operations | ||||||
Three months ended March 31, 2011 | Caption | Gains / (losses) recognized in net loss | ||||
Interest rate swap agreements | Other (expense) income, net | $ | (0.3 | ) | ||
Hedged debt | Other (expense) income, net | 0.3 | ||||
Credit Facilities
In April 2010, we amended and restatedWe maintain a committed corporate credit facility to increase our financial flexibility. The credit agreement originally dated as of July 18, 2008, (the “Credit Agreement”), which increased commitments of the lenders to $650.0 from $335.0, added five new lenders and extended the Credit Agreement’s expiration. The Credit Agreementfacility is a revolving facility expiring July 18, 2013, under which amounts borrowed by us or any of our subsidiaries designated under the Credit Agreementcredit facility may be repaid and reborrowed, subject to an aggregate lending limit of $650.0 or the equivalent in other currencies. The aggregate available amount of letters of credit outstanding may decrease or increase, subject to a limit on letters of credit of $200.0 or the equivalent in other currencies. Our obligations under the Credit Agreementcredit facility are unsecured. We have not drawn on any of our corporate credit facilities since 2003, although we use them for letters of credit primarily to support obligations of our subsidiaries.
We were in compliance with all of our covenants in the credit facility as of March 31, 2011.
Note 3:Loss Per Share
The following sets forth basic and diluted loss per common share available to IPG common stockholders.
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Net loss available to IPG common stockholders | $ | (48.1 | ) | $ | (71.5 | ) | ||
Weighted-average number of common shares outstanding – basic and diluted | 476.0 | 471.3 | ||||||
Loss per share available to IPG common stockholders – basic and diluted | $ | (0.10 | ) | $ | (0.15 | ) | ||
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
We were in compliance with all applicable restrictiveBasic and financial covenants indiluted shares outstanding and loss per share are equal for the Credit Agreementthree months ended March 31, 2011 and 2010 because our potentially dilutive securities are antidilutive as of September 30, 2010. The financial covenants in the Credit Agreement require that we maintain, asa result of the endnet loss available to IPG common stockholders in each period presented. The following table presents the potential shares excluded from the diluted loss per share calculation because the effect of each fiscal quarter listed below,including these potential shares would be antidilutive.
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Restricted stock, stock options and other equity awards | 13.3 | 10.8 | ||||||
4.75% Notes | 16.1 | 16.1 | ||||||
4.25% Notes | 32.2 | 32.2 | ||||||
Preferred stock outstanding | 16.2 | 38.4 | ||||||
Total | 77.8 | 97.5 | ||||||
Also excluded from the following financial covenants, as defined,diluted loss per share calculation for the four quarters then ended.
| Q3 2010 | Q4 2010 | Q1 2011 | Q2 2011 | Q3 2011 | Q4 2011 | Q1 2012 | Q2 2012 | Q3 2012 & Thereafter | ||||||||||||||||||||||||||||
(i) Interest coverage ratio (not less than): 1 | 3.75x | 4.00x | 4.25x | 4.50x | 5.00x | 5.00x | 5.50x | 5.50x | 5.75x | |||||||||||||||||||||||||||
(ii) Leverage ratio (not greater than): 2 | 3.75x | 3.25x | 3.25x | 3.25x | 3.00x | 2.75x | 2.75x | 2.50x | 2.50x | |||||||||||||||||||||||||||
(iii) Minimum EBITDA (not less than): | $ | 550.0 | $ | 550.0 | $ | 550.0 | $ | 550.0 | $ | 550.0 | $ | 600.0 | $ | 600.0 | $ | 600.0 | $ | 600.0 | ||||||||||||||||||
For purposesthree months ended March 31, 2011 and 2010 were 8.1 and 20.7, respectively, of outstanding stock options whose exercise price was greater than the average market price. In any period in which the exercise price is less than the average market price, these options have the potential to be dilutive, though the application of the leverage ratio and interest coverage ratio calculated for any date in 2010, we may exclude from our total debt up to $300.0 of any new senior notes we issue in 2010 with a minimum maturity of five years, less the amount of proceeds of such new indebtedness that are applied totreasury stock method would reduce the principal amount of certain of our debt that is currently outstanding. Under certain circumstances, up to $85.0 in principal amount of such new senior notes may be permanently excluded from total debt for purposes of such covenant calculations.this amount.
Interest Rate Swaps
In February 2010, we terminated all of the interest rate swaps related to our 6.25% Senior Unsecured Notes due 2014. We received a total of $5.4 in cash, which included accrued and unpaid interest. The related gain of $3.9 will be amortized as a reduction to interest expense over the remaining term of the notes, resulting in an annual effective interest rate of 6.0%.
Note 4: Convertible Preferred Stock
In April 2010, we launched a tender offer to purchase for cash up to 370,000 shares (actual number) of our outstanding 525,000 shares (actual number) 5 1/4% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”).
In May 2010, we purchased 303,526 shares (actual number) of our Series B Preferred Stock that were validly tendered for cash for an aggregate purchase price of $267.6. The aggregate purchase price was calculated as the number of shares tendered multiplied by the purchase price of $869.86 per share plus unpaid dividends of $1.9, which were prorated for the period the tendered shares were outstanding and transaction costs directly associated with the repurchase. The carrying value of the tendered shares was $293.3 and was determined based on the number of shares tendered multiplied by the $1,000 per share liquidation preference less $10.2, which is the pro-rata amount of issuance costs associated with the original issuance of the preferred stock. The benefit of $25.7 represents the excess carrying value of the tendered shares over consideration from the repurchase, which was recorded as an adjustment to additional paid-in capital. Additionally, we recorded an adjustment to additional paid-in capital of $10.2 for the pro-rata amount of issuance costs.
As of September 30, 2010, 221,474 shares (actual number) of our Series B Preferred Stock remain outstanding.
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 5:4: Supplementary Data
Accrued Liabilities
The following table presents the components of accrued liabilities.
| September 30, 2010 | December 31, 2009 | |||||||
Media and production expenses | $ | 1,986.6 | $ | 1,936.1 | ||||
Salaries, benefits and related expenses | 356.1 | 405.7 | ||||||
Office and related expenses | 56.0 | 59.5 | ||||||
Acquisition obligations | 27.8 | 16.6 | ||||||
Interest | 25.2 | 46.6 | ||||||
Professional fees | 20.4 | 20.4 | ||||||
Other | 77.8 | 108.2 | ||||||
Total accrued liabilities | $ | 2,549.9 | $ | 2,593.1 | ||||
| March 31, 2011 | December 31, 2010 | |||||||
Media and production expenses | $ | 2,115.0 | $ | 2,332.2 | ||||
Salaries, benefits and related expenses | 326.4 | 470.0 | ||||||
Office and related expenses | 56.3 | 62.0 | ||||||
Acquisition obligations | 69.6 | 63.5 | ||||||
Interest | 24.4 | 41.5 | ||||||
Professional fees | 22.2 | 24.6 | ||||||
Other | 119.7 | 118.9 | ||||||
Total accrued liabilities | $ | 2,733.6 | $ | 3,112.7 | ||||
2004 Restatement Liabilities
As part of the restatement we presented in our 2004 Annual Report on Form 10-K (the “2004 Restatement”), we recognized liabilities related to vendor discounts and credits where we had a contractual or legal obligation to rebate such amounts to our clients or vendors. Reductions to these liabilities are achieved through settlements with clients and vendors, but also may occur if the applicable statute of limitations in a jurisdiction has lapsed. As of September 30, 2010March 31, 2011 and December 31, 2009,2010, we had vendor discounts and credit liabilities of $96.4$85.6 and $106.4,$82.5, respectively, related to the 2004 Restatement.
Other (Expense) Income, net
Results of operations for the three and nine months ended September 30, 2010 and 2009 include certain items which are not directly associated with our revenue-producing operations.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss on early extinguishment of debt | $ | 0.0 | $ | (1.2 | ) | $ | (0.1 | ) | $ | (25.8 | ) | |||||
Gains (losses) on sales of businesses and investments | 0.3 | 0.7 | (2.8 | ) | (2.1 | ) | ||||||||||
Vendor discounts and credit adjustments | 0.3 | 1.5 | 2.4 | 7.7 | ||||||||||||
Other (expense) income, net | (3.7 | ) | 0.0 | (4.2 | ) | 2.8 | ||||||||||
Total other (expense) income, net | $ | (3.1 | ) | $ | 1.0 | $ | (4.7 | ) | $ | (17.4 | ) | |||||
Net Loss on Early Extinguishment of Debt – During the first nine months of 2009, we recorded a net charge of $25.8 primarily related to the settlement of our tender offers for the 5.40% Senior Unsecured Notes due 2009, the 2011 Notes and the 2010 Notes.
Vendor Discounts and Credit Adjustments – We are in the process of settling our liabilities related to vendor discounts and credits established as part of the 2004 Restatement. These adjustments reflect the reversal of certain of these liabilities as a result of settlements with clients or vendors or where the statute of limitations has lapsed.
Note 6: Acquisitions
We continue to evaluate strategic opportunities to grow and to increase our ownership interests in current investments, particularly in our digital and marketing services offerings, and to expand our presence in high-growth and key strategic world markets. Our acquisitions provide for an initial payment at the time of closing, and certain of these acquisitions include
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
additional contingent purchase payments based onOther (Expense) Income, net
Results of operations for the future performancethree months ended March 31, 2011 and 2010 include certain items which are not directly associated with our revenue-producing operations.
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
(Losses) gains on sales of businesses and investments | $ | (6.6 | ) | $ | 0.2 | |||
Other income, net | 0.5 | 0.3 | ||||||
Total other (expense) income, net | $ | (6.1 | ) | $ | 0.5 | |||
Sales of Businesses and Investments – During the acquired entity. Duethree months ended March 31, 2011, we recognized a loss relating to the characteristicssale of advertising, specialized marketing and communication services companies, our acquisitions typically do not have significant amounts of tangible assets, as the principal asset we typically acquire is creative talent. As a result, a substantial portion of the purchase price of these acquisitions is allocated to identifiable intangible assets, primarily customer lists, trade names and goodwill.
In July 2010, we purchased Delaney Lund Knox Warren for a total payment of approximately $43.0 in cash. During the first nine months of 2010, we completed five additional acquisitions, including a new media and digital marketing service company in Brazil. During the first nine months of 2010, we recorded approximately $58.0 of goodwill and intangible assets related to our acquisitions. Of our six acquisitions, five are includedbusiness in the domestic market within our Integrated Agency Networks (��(“IAN”) operating segment and one is included in the Constituency Management Group (“CMG”segment.
Share Repurchase Program
On February 24, 2011 our Board of Directors (the “Board”) operating segment. The results of operationsauthorized a program to repurchase from time to time up to $300.0 of our acquired companies were includedcommon stock. We may effect such repurchases through open market purchases, trading plans established in accordance with SEC rules, derivative transactions or other means. The timing and amount of repurchases under the authorization will depend on market conditions and our consolidated resultsother funding requirements. The share repurchase program has no expiration date. During the period from the closing dateBoard’s authorization through March 31, 2011, we repurchased 0.9 shares at an average price of each acquisition. Details$12.36 per share and an aggregate cost of cash paid for current and prior years’ acquisitions are listed below.$10.5.
Redeemable Noncontrolling Interests
| Nine months ended September 30, | ||||||||
| 2010 | 2009 | |||||||
Cash paid for current year acquisitions: | ||||||||
Cost of investment | $ | 47.1 | $ | 3.8 | ||||
Operating expense | 3.3 | 0.0 | ||||||
Cash paid for prior-year acquisitions: | ||||||||
Cost of investment | 40.0 | 73.3 | ||||||
Operating expense | 3.0 | 0.0 | ||||||
Less: cash acquired | (3.1 | ) | (0.1 | ) | ||||
Total cash paid for acquisitions 1 | $ | 90.3 | $ | 77.0 | ||||
Many of our acquisitions also include provisions under which the noncontrolling equity owners can require us to purchase additional interests in a subsidiary at their discretion. The following table presents changes in our redeemable noncontrolling interests.
| Nine months ended September 30, | Three months ended March 31, | |||||||||||||||
| 2010 | 2009 | 2011 | 2010 | |||||||||||||
Balance at beginning of period | $ | 277.8 | $ | 288.4 | $ | 291.2 | $ | 277.8 | ||||||||
Noncontrolling interest balance related to redeemable noncontrolling interests | (18.6 | ) | (12.1 | ) | (11.2 | ) | (12.8 | ) | ||||||||
Changes in redemption value of redeemable noncontrolling interests: | ||||||||||||||||
Additions | 31.7 | 0.5 | 3.6 | 2.4 | ||||||||||||
Redemptions and reclassifications | (28.5 | ) | (5.3 | ) | (7.4 | ) | (16.7 | ) | ||||||||
Redemption value adjustments 1 | 7.1 | (9.1 | ) | 9.7 | 4.4 | |||||||||||
Balance at end of period | $ | 269.5 | $ | 262.4 | $ | 285.9 | $ | 255.1 | ||||||||
| 1 | Redeemable noncontrolling interests are reported at their estimated redemption value in each reporting period, but not less than their initial fair value. Any adjustment to the redemption value impacts additional paid-in capital, except adjustments as a result of currency translation. |
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 7:5: Income Taxes
For the three months ended September 30, 2010, theMarch 31, 2011, our effective tax rate is comparable to the statutory rate of 35% primarily due to28.7% was negatively impacted by losses in certain foreign locations for which we receive no benefit due to 100% valuation allowances and an increasethe establishment of a valuation allowance in unrecognized tax benefits offset by the reversal of valuation allowances in Europe and tax benefits from the exercise of stock options. For the nine months ended September 30, 2010, the difference between theUnited Kingdom. Our effective tax rate was positively impacted due to tax efficiencies from entity consolidation in the Asia Pacific region and the statutory rateloss relating to the sale of 35% was primarily due to factors similar to those noted above as well asa business in the impact of state and local taxes.
In September 2010, we effectively settled our New York State examination for the 1999-2001 tax years. The settlement resulted in a cash payment of $11.7 consisting of $5.4 of tax and $6.3 of interest, which was previously reserved.domestic market.
We have various tax years under examination by tax authorities in various countries, such as the United Kingdom, and in various states, such as New York, in which we have significant business operations. It is not yet known whether these
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
examinations will, in the aggregate, result in our paying additional taxes. We believe our tax reserves are adequate in relation to the potential for additional assessments in each of the jurisdictions in which we are subject to taxation. We regularly assess the likelihood of additional tax assessments in those jurisdictions and, if necessary, adjust our reserves as additional information or events require.
With respect to all tax years open to examination by U.S. federal and various state, local and non-U.S. tax authorities, we currently anticipate that total unrecognized tax benefits will decrease by an amount between $20.0$5.0 and $30.0$15.0 in the next twelve months, a portion of which will affect the effective tax rate, primarily as a result of the settlement of tax examinations and the lapsing of statutes of limitations. This net decrease is related to various items of income and expense, includingprimarily transfer pricing adjustments and adjustments in various state and local jurisdictions.adjustments.
We are effectively settled with respect to U.S. federal income tax audits for years prior to 2007. With limited exceptions, we are no longer subject to state and local income tax audits for years prior to 1999, or non-U.S. income tax audits for years prior to 2000.
On August 10, 2010, the Education Jobs and Medicaid Assistance Act was signed into law. The Act contains various provisions that could limit our ability to use foreign tax credits. There was no material impact on us in the third quarter of 2010. While we continue to assess the future impact of this Act on us, we do not expect a material impact to our effective or cash tax rates in the near future.
Note 8: Comprehensive Income
| Three months ended September 30, | ||||||||
| 2010 | 2009 | |||||||
Net income | $ | 45.6 | $ | 25.9 | ||||
Foreign currency translation adjustment, net of tax | 77.1 | 62.6 | ||||||
Adjustments to pension and other postretirement plans, net of tax | 3.0 | 3.3 | ||||||
Net unrealized holding losses on securities, net of tax | (0.1 | ) | (0.2 | ) | ||||
Total comprehensive income | 125.6 | 91.6 | ||||||
Comprehensive income attributable to noncontrolling interests | 1.3 | 3.0 | ||||||
Comprehensive income attributable to IPG | $ | 124.3 | $ | 88.6 | ||||
Comprehensive income (loss) for the nine months ended September 30, 2010 and 2009 is displayed in the unaudited Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss).
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 9:6: Incentive Compensation Plans
We issue stock-based compensation and cash awards to our employees under a plan established by the Compensation and Leadership Talent Committee of the Board of Directors (the “Compensation Committee”) and approved by our shareholders.
Stock-Based Compensation
We issued the following stock-based awards under the 2009 Performance Incentive Plan (the “2009 PIP”) during the ninethree months ended September 30, 2010.March 31, 2011.
| Awards | Weighted-average grant-date fair value (per award) | |||||||
Stock options | 0.5 | $ | 3.88 | |||||
Stock-settled awards | 3.7 | $ | 8.46 | |||||
Cash-settled awards | 0.6 | $ | 8.47 | |||||
Performance-based awards | 0.1 | $ | 11.01 | |||||
Total stock-based compensation awards1 | 4.9 | |||||||
Cash Awards
| Awards | Weighted-average grant-date fair value (per award) | |||||||
Stock options | 0.7 | $ | 4.73 | |||||
Stock-settled awards | 0.6 | $ | 12.94 | |||||
Performance-based awards | 1.4 | $ | 11.87 | |||||
Total stock-based compensation awards | 2.7 | |||||||
During the ninethree months ended September 30, 2010,March 31, 2011, the Compensation Committee granted cash awards under the Interpublic Restricted Cash Plan and performance cash awards of $70.6 under the 2009 PIPPIP. Of this amount, awards with a total target value of $30.9 and $18.5, respectively,$31.6 will be settled in shares upon vesting, which is three years from the grant date. The number of shares to be settled on the vesting date will be calculated as the cash value adjusted for performance divided by our stock price on the vesting date. The remaining awards will be amortized over the vesting period, typically three years.
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 10:7: Employee Benefits
We have a defined benefitdomestic pension plan which covers substantially all regularcertain U.S. employees employed through March 31, 1998. Some of our agencies have additional domestic plans, which are closed to new participants.employees. We also have numerous foreign pension plans outside of the U.S., some of which are funded, while others provide payments at the time of retirement or termination under applicable labor laws or agreements. Some of our domestic and foreign subsidiariesagencies also provide postretirement health benefits to eligible employees and their dependents. Additionally, some of our domestic subsidiaries provide postretirement life insurance to eligible employees. Certain immaterial foreign pension and postretirement plans have been excluded from the table below. The components of net periodic cost for the domestic pension plans,plan, the principal foreign pension plans and the postretirement benefit plansplan are listed below.
| Domestic Pension Plans | Foreign Pension Plans | Postretirement Benefit Plans | ||||||||||||||||||||||
Three months ended September 30, | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
Service cost | $ | 0.0 | $ | 0.0 | $ | 3.2 | $ | 2.8 | $ | 0.1 | $ | 0.1 | ||||||||||||
Interest cost | 1.9 | 1.9 | 5.7 | 6.0 | 0.7 | 0.7 | ||||||||||||||||||
Expected return on plan assets | (1.8 | ) | (1.7 | ) | (4.3 | ) | (3.7 | ) | 0.0 | 0.0 | ||||||||||||||
Amortization of: | ||||||||||||||||||||||||
Prior service cost (credit) | 0.0 | 0.0 | 0.1 | 0.1 | 0.0 | 0.0 | ||||||||||||||||||
Unrecognized actuarial losses | 2.1 | 2.1 | 0.5 | 0.6 | 0.0 | 0.0 | ||||||||||||||||||
Net periodic cost | $ | 2.2 | $ | 2.3 | $ | 5.2 | $ | 5.8 | $ | 0.8 | $ | 0.8 | ||||||||||||
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Domestic Pension Plans | Foreign Pension Plans | Postretirement Benefit Plans | Domestic Pension Plan | Foreign Pension Plans | Postretirement Benefit Plan | |||||||||||||||||||||||||||||||||||||||||||
Nine months ended September 30, | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||||||||
Three months ended March 31, | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 0.0 | $ | 0.0 | $ | 8.8 | $ | 8.1 | $ | 0.2 | $ | 0.3 | $ | 0.0 | $ | 0.0 | $ | 2.2 | $ | 3.2 | $ | 0.1 | $ | 0.1 | ||||||||||||||||||||||||
Interest cost | 5.5 | 6.0 | 17.3 | 17.0 | 2.1 | 2.3 | 1.7 | 1.8 | 5.8 | 5.9 | 0.7 | 0.8 | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (5.2 | ) | (5.5 | ) | (12.8 | ) | (10.2 | ) | 0.0 | 0.0 | (1.8 | ) | (1.6 | ) | (4.7 | ) | (4.4 | ) | 0.0 | 0.0 | ||||||||||||||||||||||||||||
Settlement losses | 0.0 | 0.0 | 1.0 | 1.5 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.4 | 0.0 | 0.0 | ||||||||||||||||||||||||||||||||||||
Amortization of: | ||||||||||||||||||||||||||||||||||||||||||||||||
Transition obligation | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
Prior service cost (credit) | 0.0 | 0.0 | 0.2 | 0.2 | 0.0 | (0.1 | ) | |||||||||||||||||||||||||||||||||||||||||
Prior service cost | 0.0 | 0.0 | 0.0 | 0.1 | 0.0 | 0.0 | ||||||||||||||||||||||||||||||||||||||||||
Unrecognized actuarial losses | 6.5 | 7.3 | 1.4 | 1.8 | 0.0 | 0.0 | 1.7 | 2.3 | 0.2 | 0.5 | 0.0 | 0.0 | ||||||||||||||||||||||||||||||||||||
Net periodic cost | $ | 6.8 | $ | 7.8 | $ | 15.9 | $ | 18.4 | $ | 2.4 | $ | 2.6 | $ | 1.6 | $ | 2.5 | $ | 3.5 | $ | 5.7 | $ | 0.8 | $ | 0.9 | ||||||||||||||||||||||||
During the ninethree months ended September 30, 2010,March 31, 2011, we contributed $20.5$11.7 of cash to our domestic pension plan and $5.8 of cash to our foreign pension plans and $9.6 to our domestic pension plans. InFor the fourth quarterremainder of 2010,2011, we expect to contribute approximately $8.0$2.4 and $19.0 of cash to our domestic and foreign pension plans, and we do not expect to make any contributions to our domestic pension plans. A significant portion of our contributions to the foreign pension plans relates to the Interpublic Pension Plan in the U.K.respectively.
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 11:8: Segment Information
We have two reportable segments: IAN, which is comprised of McCann Worldgroup, Draftfcb, Lowe, Mediabrands Lowe and our domestic integrated agencies, and CMG,Constituency Management Group (“CMG”), which is comprised of a number of our specialist marketing serviceservices offerings. We also report results for the “Corporate and other” group. The profitability measure employed by our chief operating decision maker for allocating resources to operating divisions and assessing operating division performance is operating income (loss), excluding the impact of restructuringofrestructuring and other reorganization-related charges, (reversals), net andnetand long-lived asset impairment and other charges, if applicable. SegmentOther than certain reclassifications, the segment information is presented consistently with the basis described in our 20092010 Annual Report on Form 10-K. Summarized financial information concerning our reportable segments is shown in the following table.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue: | ||||||||||||||||
IAN | $ | 1,299.3 | $ | 1,191.9 | $ | 3,794.6 | $ | 3,555.0 | ||||||||
CMG | 261.5 | 234.8 | 725.3 | 671.4 | ||||||||||||
Total | $ | 1,560.8 | $ | 1,426.7 | $ | 4,519.9 | $ | 4,226.4 | ||||||||
Segment operating income: | ||||||||||||||||
IAN | $ | 113.6 | $ | 78.7 | $ | 270.1 | $ | 135.7 | ||||||||
CMG | 21.7 | 18.2 | 51.4 | 43.5 | ||||||||||||
Corporate and other | (33.7 | ) | (39.1 | ) | (101.2 | ) | (106.6 | ) | ||||||||
Total | 101.6 | 57.8 | 220.3 | 72.6 | ||||||||||||
Restructuring and other reorganization-related (charges) reversals, net | (1.4 | ) | 0.5 | (2.3 | ) | 0.7 | ||||||||||
Interest expense | (34.7 | ) | (37.8 | ) | (102.3 | ) | (117.7 | ) | ||||||||
Interest income | 6.8 | 7.6 | 19.4 | 28.0 | ||||||||||||
Other (expense) income, net | (3.1 | ) | 1.0 | (4.7 | ) | (17.4 | ) | |||||||||
Income (loss) before income taxes | $ | 69.2 | $ | 29.1 | $ | 130.4 | $ | (33.8 | ) | |||||||
Depreciation and amortization of fixed assets andintangible assets: | ||||||||||||||||
IAN | $ | 29.5 | $ | 32.7 | $ | 87.3 | $ | 98.8 | ||||||||
CMG | 3.6 | 3.6 | 10.2 | 10.8 | ||||||||||||
Corporate and other | 4.2 | 5.7 | 14.0 | 16.9 | ||||||||||||
Total | $ | 37.3 | $ | 42.0 | $ | 111.5 | $ | 126.5 | ||||||||
Capital expenditures: | ||||||||||||||||
IAN | $ | 18.0 | $ | 9.5 | $ | 42.3 | $ | 30.4 | ||||||||
CMG | 1.8 | 1.6 | 3.7 | 3.8 | ||||||||||||
Corporate and other | 1.6 | 4.9 | 3.7 | 9.5 | ||||||||||||
Total | $ | 21.4 | $ | 16.0 | $ | 49.7 | $ | 43.7 | ||||||||
| September 30, 2010 | December 31, 2009 | |||||||||||||||
Total assets: | ||||||||||||||||
IAN | $ | 9,931.0 | $ | 9,763.9 | ||||||||||||
CMG | 890.5 | 897.8 | ||||||||||||||
Corporate and other | 1,129.1 | 1,601.4 | ||||||||||||||
Total | $ | 11,950.6 | $ | 12,263.1 | ||||||||||||
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Summarized financial information concerning our reportable segments is shown in the following table.
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Revenue: | ||||||||
IAN | $ | 1,235.9 | $ | 1,109.2 | ||||
CMG | 238.9 | 227.8 | ||||||
Total | $ | 1,474.8 | $ | 1,337.0 | ||||
Segment operating income (loss): | ||||||||
IAN | $ | (21.4 | ) | $ | (33.3 | ) | ||
CMG | 10.7 | 7.7 | ||||||
Corporate and other | (33.8 | ) | (33.5 | ) | ||||
Total | (44.5 | ) | (59.1 | ) | ||||
Restructuring and other reorganization-related charges, net | (0.8 | ) | (0.3 | ) | ||||
Interest expense | (31.9 | ) | (32.6 | ) | ||||
Interest income | 8.3 | 6.5 | ||||||
Other (expense) income, net | (6.1 | ) | 0.5 | |||||
Loss before income taxes | $ | (75.0 | ) | $ | (85.0 | ) | ||
Depreciation and amortization of fixed assets and intangible assets: | ||||||||
IAN | $ | 29.3 | $ | 28.7 | ||||
CMG | 3.1 | 3.6 | ||||||
Corporate and other | 3.2 | 5.1 | ||||||
Total | $ | 35.6 | $ | 37.4 | ||||
Capital expenditures: | ||||||||
IAN | $ | 14.0 | $ | 8.6 | ||||
CMG | 1.3 | 0.3 | ||||||
Corporate and other | 1.6 | 0.5 | ||||||
Total | $ | 16.9 | $ | 9.4 | ||||
| March 31, 2011 | December 31, 2010 | |||||||
Total assets: | ||||||||
IAN | $ | 10,271.3 | $ | 10,481.7 | ||||
CMG | 930.3 | 930.5 | ||||||
Corporate and other | 975.6 | 1,658.6 | ||||||
Total | $ | 12,177.2 | $ | 13,070.8 | ||||
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 12:9: Fair Value Measurements
Authoritative guidance for fair value measurements establishes a fair value hierarchy whichthat requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We primarily apply the market approach for recurring fair value measurements. There are three levels of inputs that may be used to measure fair value:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | |
There were no changes to our valuation techniques used to measure the fair value of assets and liabilities on a recurring basis during the ninethree months ended September 30, 2010.March 31, 2011. The following tables present information about our assets and liabilities measured at fair value on a recurring basis as of September 30,March 31, 2011 and March 31, 2010, and September 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| September 30, 2010 | Balance Sheet Classification | March 31, 2011 | ||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Balance Sheet Classification | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash equivalents | $ | 1,205.7 | $ | 0.0 | $ | 0.0 | $ | 1,205.7 | Cash and cash equivalents | $ | 1,100.2 | $ | 0.0 | $ | 0.0 | $ | 1,100.2 | Cash and cash equivalents | ||||||||||||||||||
Short-term marketable securities | 11.3 | 0.0 | 0.0 | 11.3 | Marketable securities | 14.1 | 0.0 | 0.0 | 14.1 | Marketable securities | ||||||||||||||||||||||||||
Long-term investments | 1.3 | 13.7 | 0.0 | 15.0 | Other assets | 1.4 | 13.9 | 0.0 | 15.3 | Other assets | ||||||||||||||||||||||||||
Foreign currency derivatives1 | 0.0 | 0.0 | 0.2 | 0.2 | Other assets | |||||||||||||||||||||||||||||||
Total | $ | 1,115.7 | $ | 13.9 | $ | 0.0 | $ | 1,129.6 | ||||||||||||||||||||||||||||
As a percentage of total assets | 9.2 | % | 0.1 | % | 0.0 | % | 9.3 | % | ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Interest rate swap agreements1 | $ | 0.0 | $ | 0.3 | $ | 0.0 | $ | 0.3 | Other non-current liabilities | |||||||||||||||||||||||||||
Mandatorily redeemable noncontrolling interests2 | 0.0 | 0.0 | 57.9 | 57.9 | ||||||||||||||||||||||||||||||||
| March 31, 2010 | ||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Balance Sheet Classification | ||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash equivalents | $ | 1,239.1 | $ | 0.0 | $ | 0.0 | $ | 1,239.1 | Cash and cash equivalents | |||||||||||||||||||||||||||
Short-term marketable securities | 12.7 | 0.0 | 0.0 | 12.7 | Marketable securities | |||||||||||||||||||||||||||||||
Long-term investments | 1.3 | 13.8 | 0.0 | 15.1 | Other assets | |||||||||||||||||||||||||||||||
Foreign currency derivatives3 | 0.0 | 0.0 | 0.6 | 0.6 | Other assets | |||||||||||||||||||||||||||||||
Total | $ | 1,218.3 | $ | 13.7 | $ | 0.2 | $ | 1,232.2 | $ | 1,253.1 | $ | 13.8 | $ | 0.6 | $ | 1,267.5 | ||||||||||||||||||||
As a percentage of total assets | 10.2 | % | 0.1 | % | 0.0 | % | 10.3 | % | 11.0 | % | 0.1 | % | 0.0 | % | 11.1 | % | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Mandatorily redeemable noncontrolling interests2 | $ | 0.0 | $ | 0.0 | $ | 48.1 | $ | 48.1 | $ | 0.0 | $ | 0.0 | $ | 63.5 | $ | 63.5 | ||||||||||||||||||||
| September 30, 2009 | Balance Sheet Classification | |||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Cash equivalents | $ | 1,106.0 | $ | 0.0 | $ | 0.0 | $ | 1,106.0 | Cash and cash equivalents | |||||||||||||||||||||||||||
Short-term marketable securities | 10.6 | 0.0 | 0.0 | 10.6 | Marketable securities | |||||||||||||||||||||||||||||||
Long-term investments3 | 15.7 | 0.0 | 6.7 | 22.4 | Other assets | |||||||||||||||||||||||||||||||
Foreign currency derivatives1 | 0.0 | 0.0 | 0.7 | 0.7 | Other assets | |||||||||||||||||||||||||||||||
Total | $ | 1,132.3 | $ | 0.0 | $ | 7.4 | $ | 1,139.7 | ||||||||||||||||||||||||||||
As a percentage of total assets | 10.3 | % | 0.0 | % | 0.1 | % | 10.4 | % | ||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Mandatorily redeemable noncontrolling interests2 | $ | 0.0 | $ | 0.0 | $ | 42.3 | $ | 42.3 | ||||||||||||||||||||||||||||
| 1 |
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| 2 | Relates to unconditional obligations to purchase additional noncontrolling equity shares of consolidated subsidiaries. Fair value measurement of the obligation was based upon the amount payable as if the forward contracts were settled. The amount redeemable within the next twelve months is classified in accrued liabilities; any interests redeemable thereafter are classified in other non-current liabilities. |
| 3 | Fair value |
The following tables present additional information about assets and liabilities measured at fair value on a recurring basis and for which we utilize Level 3 inputs to determine fair value.
| Three months ended September 30, 2010 | Three months ended September 30, 2009 | Three months ended March 31, 2011 | Three months ended March 31, 2010 | |||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||||
| Foreign currency derivatives | Mandatorily redeemable noncontrolling interests | Auction-rate securities | Foreign currency derivatives | Mandatorily redeemable noncontrolling interests | Mandatorily redeemable noncontrolling interests | Foreign currency derivatives | Mandatorily redeemable noncontrolling interests | |||||||||||||||||||||||||
Balance at beginning of period | $ | 0.3 | $ | 61.8 | $ | 6.7 | $ | 0.8 | $ | 37.2 | $ | 52.0 | $ | 0.6 | $ | 47.8 | ||||||||||||||||
Level 3 (reductions) additions | 0.0 | (14.0 | ) | 0.0 | 0.0 | 2.4 | ||||||||||||||||||||||||||
Realized losses included in net income | (0.1 | ) | (0.3 | ) | 0.0 | (0.1 | ) | (2.7 | ) | |||||||||||||||||||||||
Level 3 additions | 7.4 | 0.0 | 15.8 | |||||||||||||||||||||||||||||
Level 3 reductions | (1.5 | ) | 0.0 | 0.0 | ||||||||||||||||||||||||||||
Realized gains included in net loss | 0.1 | 0.0 | 0.1 | |||||||||||||||||||||||||||||
Foreign currency translation | 0.1 | 0.0 | 0.0 | |||||||||||||||||||||||||||||
Balance at end of period | $ | 0.2 | $ | 48.1 | $ | 6.7 | $ | 0.7 | $ | 42.3 | $ | 57.9 | $ | 0.6 | $ | 63.5 | ||||||||||||||||
| Nine months ended September 30, 2010 | Nine months ended September 30, 2009 | |||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
| Foreign currency derivatives | Mandatorily redeemable noncontrolling interests | Auction-rate securities | Foreign currency derivatives | Mandatorily redeemable noncontrolling interests | ||||||||||||||||||||||||||||
Balance at beginning of period | $ | 0.6 | $ | 47.8 | $ | 6.7 | $ | 0.8 | $ | 21.6 | ||||||||||||||||||||||
Level 3 (reductions) additions | 0.0 | (0.8 | ) | 0.0 | 0.0 | 22.5 | ||||||||||||||||||||||||||
Realized (losses) gains included in net income (loss) | (0.4 | ) | (1.1 | ) | 0.0 | (0.1 | ) | 1.8 | ||||||||||||||||||||||||
Balance at end of period | $ | 0.2 | $ | 48.1 | $ | 6.7 | $ | 0.7 | $ | 42.3 | ||||||||||||||||||||||
Level 3 reductions relate to payments made related to unconditional obligations to purchase additional equity interests in previous acquisitions for cash. Level 3 additions relate to unconditional obligations to purchase additional equity interests in previous acquisitions for cash in future periods. Level 3 reductions relate to cash payments made for unconditional obligations to purchase additional equity interests in previous acquisitions. Realized (losses) gains included in net income (loss)loss for foreign currency derivatives and mandatorily redeemable noncontrolling interests are reported as a component of other (expense) income, net and interest expense respectively, in the unaudited Consolidated Statements of Operations.
Note 13:10: Commitments and Contingencies
Legal Matters
We are involved in legal proceedings, and administrative proceedingssubject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the normal course of various types.our business. While any litigation or such governmental proceeding contains an element of uncertainty, we do not believe that the outcome of such proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Guarantees
As discussed in our 20092010 Annual Report on Form 10-K, we have guarantees of certain obligations of our subsidiaries relating principally to credit facilities, certain media payables and operating leases of certain subsidiaries. The amount of such parent company guarantees on lease obligations was $798.5$364.0 and $769.3$376.8 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, and the amount of parent company guarantees primarily relating to credit facilities was $332.0 and $395.0 as of March 31, 2011 and December 31, 2010, respectively.
Note 14:11: Recent Accounting Standards
Goodwill
In December 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance for performing goodwill impairment tests, which was effective for us January 1, 2011. The amended guidance requires reporting units with zero or negative carrying amounts to be assessed to determine if it is more likely than not that goodwill impairment exists. As part of this assessment, entities should consider all qualitative factors that could impact the carrying value. The adoption of this amended guidance did not have a significant impact on our unaudited Consolidated Financial Statements.
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Revenue Recognition – Milestone Method
In March 2010, the Emerging Issues Task Force (“EITF”) reached a consensus related to guidance when applying the milestone method of revenue recognition. The consensus was issued by the Financial Accounting Standards Board (“FASB”)FASB as an update to authoritative guidance for revenue recognition and will bewas effective for us beginning January 1, 2011. The amended guidance provides criteria for identifying those deliverables in an arrangement that meet the definition of a milestone. In addition, the amended guidance includes enhanced quantitative and qualitative disclosures about the arrangements when an entity recognizes revenue using the milestone method. We do not expect theThe adoption of this amended guidance todid not have a significant impact on our unaudited Consolidated Financial Statements.
In February 2010, the FASB issued amended guidance for subsequent events, which was effective for us in February 2010. In accordance with the revised guidance, an SEC filer no longer is required to disclose the date through which subsequent events have been evaluated in issued and revised financial statements. The adoption of the revised guidance did not have a material impact on our unaudited Consolidated Financial Statements.Fair Value Measurements
In January 2010, the FASB issued amended guidance to enhance disclosure requirements related to fair value measurements. The amended guidance for Level 1 and Level 2 fair value measurements was effective for us January 1, 2010. The amended guidance for Level 3 fair value measurements will bewas effective for us January 1, 2011. The guidance requires disclosures of amounts and reasons for transfers in and out of Level 1 and Level 2 recurring fair value measurements as well as additional information related to activities in the reconciliation of Level 3 fair value measurements. The guidance expanded the disclosures related to the level of disaggregation of assets and liabilities and information about inputs and valuation techniques. The adoption of the guidance for Level 1 and Level 2 fair value measurements did not have a material impact on our unaudited Consolidated Financial Statements. We do not expect the adoption of the guidance related to Level 3 fair value measurements to have a significant impact on our Consolidated Financial Statements.
In January 2010, the FASB issued amended authoritative guidance related to consolidations when there is a decrease in ownership. The guidance was effective for us January 1, 2010. Specifically, the amendment clarifies the scope of the existing guidance and increases the disclosure requirements when a subsidiary is deconsolidated or when a group of assets is de-recognized. The adoption of the amended guidance did not have a significant impact on our unaudited Consolidated Financial Statements.
In December 2009, the FASB amended authoritative guidance related to accounting for transfers and servicing of financial assets and extinguishments of liabilities. The guidance was effective for us January 1, 2010. The guidance eliminates the concept of a qualifying special-purpose entity and changes the criteria for derecognizing financial assets. In addition, the guidance requires additional disclosures related to a company’s continued involvement with financial assets that have been transferred. The adoption of this amended guidance did not have a significant impact on our unaudited Consolidated Financial Statements.
In December 2009, the FASB amended authoritative guidance for consolidating variable interest entities. The guidance was effective for us January 1, 2010. Specifically, the guidance revises factors that should be considered by a reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also includes revised financial statement disclosures regarding the reporting entity’s involvement, including significant risk exposures as a result of that involvement, and the impact the relationship has on the reporting entity’s financial statements. The adoption of this amended guidance did not have a significant impact on our unaudited Consolidated Financial Statements.
Notes to Consolidated Financial StatementsRevenue Recognition – (continued)Multiple Deliverables
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
In September 2009, the EITF reached a consensus related to revenue arrangements with multiple deliverables. The consensus was issued by the FASB as an update to authoritative guidance for revenue recognition and will bewas effective for us January 1, 2011. The updated guidance revises how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value. In addition, the guidance requires additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements. We do not expect theThe amended guidance todid not have a significant impact on our unaudited Consolidated Financial Statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand The Interpublic Group of Companies, Inc. and its subsidiaries (“IPG,” “we,” “us” or “our”). MD&A should be read in conjunction with our unaudited Consolidated Financial Statements and the accompanying notes included in this report, our 20092010 Annual Report on Form 10-K, as well as our other reports on Form 8-K and other Securities and Exchange Commission (“SEC”) filings. Our Annual Report includes additional information about our significant accounting policies and practices as well as details about our most significant risks and uncertainties associated with our financial and operating results. Our MD&A includes the following sections:
EXECUTIVE SUMMARY provides a discussion about our strategic outlook, factors influencing our business and an overview of our results of operations and liquidity.
RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, funding requirements, financing and sources of funds and debt credit ratings.
CRITICAL ACCOUNTING ESTIMATES provides an update to the discussion of our accounting policies that require critical judgment, assumptions and estimates in our 20092010 Annual Report on Form 10-K.
RECENT ACCOUNTING STANDARDS, by reference to Note 1411 to the unaudited Consolidated Financial Statements, provides a discussion of certain accounting standards that have been adopted during 2010 and certain accounting standards2011 or that we have not yet been required to implementbe implemented and may be applicable to our future operations.
EXECUTIVE SUMMARY
We are one of the world’s premier global advertising and marketing services companies. Our agenciescompanies specialize in consumer advertising, digital marketing, media planning and buying, public relations and specialized communications disciplines, and create customized marketing programs for clients acrossmany of the full spectrum of marketing disciplines around the world.world’s largest advertisers. Comprehensive global services are critical to effectively serving our multinational clients, as well as ourand local clients in markets throughout the world, as they seek to build brands, increase sales of their products and services and gain market share in an increasingly complex and fragmented media landscape.share.
Our business objective is to continue to strengthen our full range of marketing expertise and competitive positioning. We develop and invest in a range of talent, tools and businesses that are highly relevant to the needs of our clients and offer us strong financial returns. These include investments in fast-growthrapidly growing marketing channels and geographic regions as well as key strategic world markets. Our long-term financial goals include maintaining organic revenue growth at competitive levels while expanding our operating margin.We operate in a media landscape that is constantly changing. Accordingly, we remain focused on meeting the evolving needs of our clients while carefully managingin an increasingly complex consumer environment.
Our financial priorities include maintaining competitive organic growth, improving our cost structure.operating margins, continuing to strengthen our capital structure and increasing value to shareholders, which includes our recently initiated common stock dividend and share repurchase program. We continually seek greater efficiency in the delivery of our services, focusing on more effective resource utilization, including the productivity of our employees, real estate and information technology. The improvements we have madeImprovements in our financial reporting and business information systems during recent years provideprovided us with more timely and actionable insights from our global operations. Our conservative approach to our balance sheet and liquidity provideprovides us with a solid financial foundation and financial flexibility.
During the first nine months of 2010, we have seen economic improvement in many of our key markets and an increase in spending from many of our clients across multiple business sectors. As a result, we have experienced growth across our marketing disciplines. We are continuing to invest to support growth and where we see strategic opportunity. We have achieved improved operating leverage in 2010 as a result of higher revenues and our ongoing cost discipline. There still remains a degree of caution on the part of marketers that continues to have an effect on the demand for advertising and marketing services, particularly in light of uncertainty about the prospects for continued improvements in the global economy. However, we continue to derive benefits from our diversified client base, global footprint and the broad range and strength of our professional offerings. As a result, we believe we are well-positioned to benefit from a renewed focus on growth.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Third Quarter and First Nine MonthsThe following tables present a summary of 2010 and 2009 Highlightsfinancial performance for the three months ended March 31, 2011 as compared with the same period in 2010.
| Three months ended September 30, 2010 | Nine months ended September 30, 2010 | Three months ended March 31, 2011 | ||||||||||||||||||||||
| % Increase | Total | Organic | Total | Organic | Total | Organic | ||||||||||||||||||
Revenue | 9.4 | % | 9.4 | % | 6.9 | % | 5.2 | % | 10.3 | % | 9.3 | % | ||||||||||||
Salaries and related expenses | 6.7 | % | 7.4 | % | 2.4 | % | 1.0 | % | 10.3 | % | 9.3 | % | ||||||||||||
Office and general expenses | 6.3 | % | 6.5 | % | 6.2 | % | 4.2 | % | 5.4 | % | 4.2 | % | ||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
Operating margin | 6.4 | % | 4.1 | % | 4.8 | % | 1.7 | % | (3.1 | )% | (4.4 | )% | ||||||||||||
Expenses as % of revenue: | ||||||||||||||||||||||||
Salaries and related expenses | 64.5 | % | 66.1 | % | 65.9 | % | 68.8 | % | 73.2 | % | 73.2 | % | ||||||||||||
Office and general expenses | 29.0 | % | 29.8 | % | 29.3 | % | 29.5 | % | 29.8 | % | 31.2 | % | ||||||||||||
Net income (loss) available to IPG common stockholders | $ | 42.4 | $ | 17.2 | $ | 76.2 | $ | (35.8 | ) | |||||||||||||||
Net loss available to IPG common stockholders | $ | (48.1 | ) | $ | (71.5 | ) | ||||||||||||||||||
Earnings (loss) per share available to IPG common stockholders: | ||||||||||||||||||||||||
Basic | $ | 0.09 | $ | 0.04 | $ | 0.16 | $ | (0.08 | ) | |||||||||||||||
Diluted | $ | 0.08 | $ | 0.03 | $ | 0.11 | $ | (0.08 | ) | |||||||||||||||
Loss per share available to IPG common stockholders – basic and diluted | $ | (0.10 | ) | $ | (0.15 | ) | ||||||||||||||||||
When we analyze period-to-period changes in our operating performance we determine the portion of the change that is attributable to foreign currency rates and the net effect of acquisitions and divestitures, and the remainder we call organic change, which indicates how our underlying business performed. The performance metrics that we use to analyze our results include the organic change in revenue, salaries and related expenses and office and general expenses, and the components of operating expenses, expressed as a percentage of total consolidated revenue. Additionally, in certain of our discussions we analyze revenue by business sector, where we focus on our top 100 clients, which typically constitute 50%-55%approximately 55%-60% of our annual consolidated revenues. We also analyze revenue by geographic region.
The change in our operating performance attributable to foreign currency rates is determined by converting the prior-period reported results using the current periodcurrent-period exchange rates and comparing thethese prior-period adjusted amounts to the prior-period reported results. Although the U.S. Dollar is our reporting currency, a substantial portion of our revenues and expenses are generated in foreign currencies. Therefore, our reported results are affected by fluctuations in the currencies in which we conduct our international businesses. We do not use derivative financial instruments to manage this translation risk. As a result, both positive and negative currency fluctuations against the U.S. Dollar affect our consolidated results of operations, and the magnitude of the foreign currency impact on us related to each geographic region depends on the significance and operating performance of the region. The primary foreign currencies that impacted our results during the first nine monthsquarter of 20102011 include the Australian Dollar, Brazilian Real, Canadian Dollar and Euro. During the first quarter of 2011, the U.S. Dollar weakened against several foreign currencies as compared to the prior-year period, which had a net negative impact on our consolidated results of operations. This effect was partially offset as the U.S. Dollar strengthened against the Euro during the first quarter of 2011. For the thirdfirst quarter of 2010,2011, foreign currency fluctuations resulted in net decreasesincreases of approximately 1% in revenues, salaries and related expenses and office and general expenses, which contributed on a net basis to an increase in our operating incomeloss of approximately 6%1% compared to the prior-year period. For the first nine months of 2010, foreign currency fluctuations resulted in net increases of approximately 2% in revenues and office and general expenses and approximately 1% in salaries and related expenses, which contributed on a net basis to an increase in operating income of approximately 6% compared to the prior-year period. During the first nine months of 2010, the U.S. Dollar weakened against several foreign currencies compared to the prior-year periods, which had a net positive impact on our consolidated results of operations. However, over the past several months, this effect was partially offset by the strengthening of the U.S. Dollar against the Euro and Pound Sterling.
For purposes of analyzing changes in our operating performance attributable to the net effect of acquisitions and divestitures, transactions are treated as if they occurred on the first day of the quarter during which the transaction occurred. During the past few years we have acquired companies that we believe will enhance our offering and disposed of businesses that are not consistent with our strategic plan. For the first quarter of 2011, the net effect of acquisitions and divestitures had a minimal impact on revenue and operating expenses compared to the respective prior-year period.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
that are not consistent with our strategic plan. For the third quarter and first nine months of 2010, the net effect of acquisitions and divestitures was a slight increase to revenue and operating expenses compared to the respective prior-year period.
RESULTS OF OPERATIONS
Consolidated Results of Operations – Three and Nine Months Ended September 30, 2010March 31, 2011 Compared to Three and Nine Months Ended September 30, 2009March 31, 2010
REVENUE
| Three months ended September 30, 2009 | Components of change | Three months ended September 30, 2010 | Change | Components of Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | Three months ended March 31, 2010 | Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Three months ended March 31, 2011 | Organic | Total | |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 1,426.7 | $ | (9.3 | ) | $ | 9.2 | $ | 134.2 | $ | 1,560.8 | 9.4 | % | 9.4 | % | $ | 1,337.0 | $ | 13.2 | $ | (0.3 | ) | $ | 124.9 | $ | 1,474.8 | 9.3 | % | 10.3 | % | ||||||||||||||||||||||||||
Domestic | 834.1 | 0.0 | (0.8 | ) | 83.4 | 916.7 | 10.0 | % | 9.9 | % | 803.1 | 0.0 | (8.5 | ) | 70.7 | 865.3 | 8.8 | % | 7.7 | % | ||||||||||||||||||||||||||||||||||||
International | 592.6 | (9.3 | ) | 10.0 | 50.8 | 644.1 | 8.6 | % | 8.7 | % | 533.9 | 13.2 | 8.2 | 54.2 | 609.5 | 10.2 | % | 14.2 | % | |||||||||||||||||||||||||||||||||||||
United Kingdom | 104.2 | (6.8 | ) | 6.7 | 4.1 | 108.2 | 3.9 | % | 3.8 | % | 102.3 | 1.4 | 5.7 | 9.4 | 118.8 | 9.2 | % | 16.1 | % | |||||||||||||||||||||||||||||||||||||
Continental Europe | 190.9 | (18.0 | ) | (1.2 | ) | (1.9 | ) | 169.8 | (1.0 | )% | (11.1 | )% | 179.0 | (1.9 | ) | 0.0 | 6.9 | 184.0 | 3.9 | % | 2.8 | % | ||||||||||||||||||||||||||||||||||
Asia Pacific | 140.9 | 8.7 | 0.0 | 4.9 | 154.5 | 3.5 | % | 9.7 | % | 112.6 | 7.4 | 0.0 | 20.4 | 140.4 | 18.1 | % | 24.7 | % | ||||||||||||||||||||||||||||||||||||||
Latin America | 73.3 | 3.1 | 3.5 | 21.1 | 101.0 | 28.8 | % | 37.8 | % | 64.9 | 3.1 | 0.3 | 8.8 | 77.1 | 13.6 | % | 18.8 | % | ||||||||||||||||||||||||||||||||||||||
Other | 83.3 | 3.7 | 1.0 | 22.6 | 110.6 | 27.1 | % | 32.8 | % | 75.1 | 3.2 | 2.2 | 8.7 | 89.2 | 11.6 | % | 18.8 | % | ||||||||||||||||||||||||||||||||||||||
During the thirdfirst quarter of 2010,2011, our revenue increased by $134.1,$137.8, or 9.4%10.3%, compared to the thirdfirst quarter of 2009,2010, primarily consisting of an organic revenue increase of $134.2,$124.9, or 9.4%9.3%. Our organic increase was primarily attributable to higher spending from existing clients and net client wins in mostnearly all sectors of our business and in nearlythroughout all geographic regions. The sectors that primarilywhich contributed the most to the organic revenue increase were auto and transportation and financial services. Our technology and telecom, sector also contributed to the organic increase in the third quarter of 2010 as the impact of certain lost assignments in this sector on prior-period comparisons has diminished.health and personal care, and auto and transportation. Regionally, the largest organic revenue increase was in our domestic market, primarily related to the factors noted above. InAll of our international market, theregions had organic revenue increase occurred in nearly all regions,increases, most notably in the Latin AmericaAsia Pacific region, primarily in Brazil,India and China. Revenue also increased in Japan during the first quarter of 2011. The extent to which recent natural disasters in Japan will impact our Other region, which included increases in South Africa. In Continental Europe, wherebusiness for the impactfull year remains unclear, but we do not expect to experience a material effect on our consolidated results of a weakened economic climate continues to be felt, we had organic decreases in most countries which were partially offset by organic increases in certain other European countries.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
operations.
Our revenue is directly impacted bydependent upon our ability to win new clients and the retentionadvertising, marketing and spending levelscorporate communications requirements of our existing clients. Most of our expenses are recognized ratably throughout the year and are therefore less seasonal than revenue. Our revenue is typically lowest in the first quarter and highest in the fourth quarter. This reflects the seasonal spending of our clients, incentives earned at year endyear-end on various contracts and project work completed that is typically recognized during the fourth quarter. Additionally, revenues can fluctuate due to the timing of completed projects in the events marketing business, as revenue is typically recognized when the project is complete. We generally act as principal for these projects and as such record the gross amount billed to the client as revenue and the related costs incurred as pass-through costs in office and general expenses. For the third quarter of 2010, our organic revenue increase includes higher revenue attributable to certain projects where we act as principal.
| Nine months ended September 30, 2009 | Components of change | Nine months ended September 30, 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Consolidated | $ | 4,226.4 | $ | 63.2 | $ | 8.8 | $ | 221.5 | $ | 4,519.9 | 5.2 | % | 6.9 | % | ||||||||||||||
Domestic | 2,462.6 | 0.0 | (3.8 | ) | 222.0 | 2,680.8 | 9.0 | % | 8.9 | % | ||||||||||||||||||
International | 1,763.8 | 63.2 | 12.6 | (0.5 | ) | 1,839.1 | (0.0 | )% | 4.3 | % | ||||||||||||||||||
United Kingdom | 317.0 | 0.5 | 6.7 | (23.1 | ) | 301.1 | (7.3 | )% | (5.0 | )% | ||||||||||||||||||
Continental Europe | 605.0 | (8.7 | ) | (2.8 | ) | (34.3 | ) | 559.2 | (5.7 | )% | (7.6 | )% | ||||||||||||||||
Asia Pacific | 389.4 | 30.9 | 3.2 | 4.5 | 428.0 | 1.2 | % | 9.9 | % | |||||||||||||||||||
Latin America | 206.3 | 18.5 | 4.5 | 31.3 | 260.6 | 15.2 | % | 26.3 | % | |||||||||||||||||||
Other | 246.1 | 22.0 | 1.0 | 21.1 | 290.2 | 8.6 | % | 17.9 | % | |||||||||||||||||||
During the first nine months of 2010, our revenue increased by $293.5, or 6.9%, compared to the first nine months of 2009, primarily consisting of an organic revenue increase of $221.5, or 5.2%, and a favorable foreign currency rate impact of $63.2. Consistent with the third quarter, the organic increase was primarily attributable to higher spending from existing clients and net client wins in nearly all sectors of our business and in several regions, most notably the domestic market. The sectors that primarily contributed to the organic revenue increase were auto and transportation, financial services and retail. Our slight international organic revenue decline was due to the Continental Europe region, where the impact of a weakened economic climate continues to be felt in certain European countries, and the United Kingdom, which was primarily attributable to decreases in the technology and telecom sector, most notably in the first half of 2010. The decreases in these two regions were nearly offset by organic increases in the Latin America region, primarily in Brazil.
Refer to the segment discussion later in this MD&A for information on changes in revenue by segment.
OPERATING EXPENSES
| Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
Salaries and related expenses | $ | 1,007.1 | $ | 943.5 | $ | 2,977.4 | $ | 2,908.4 | $ | 1,080.1 | $ | 979.3 | ||||||||||||
Office and general expenses | 452.1 | 425.4 | 1,322.2 | 1,245.4 | 439.2 | 416.8 | ||||||||||||||||||
Restructuring and other reorganization-related charges (reversals), net | 1.4 | (0.5 | ) | 2.3 | (0.7 | ) | ||||||||||||||||||
Restructuring and other reorganization-related charges, net | 0.8 | 0.3 | ||||||||||||||||||||||
Total operating expenses | $ | 1,460.6 | $ | 1,368.4 | $ | 4,301.9 | $ | 4,153.1 | $ | 1,520.1 | $ | 1,396.4 | ||||||||||||
Operating income | $ | 100.2 | $ | 58.3 | $ | 218.0 | $ | 73.3 | ||||||||||||||||
Operating loss | $ | (45.3 | ) | $ | (59.4 | ) | ||||||||||||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Salaries and Related Expenses
| 2009 | Components of change | 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Three months ended September 30, | $ | 943.5 | $ | (9.8 | ) | $ | 3.2 | $ | 70.2 | $ | 1,007.1 | 7.4 | % | 6.7 | % | |||||||||||||
Nine months ended September 30, | 2,908.4 | 37.7 | 2.1 | 29.2 | 2,977.4 | 1.0 | % | 2.4 | % | |||||||||||||||||||
| Components of Change | Change | |||||||||||||||||||||||||||
| 2010 | Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | 2011 | Organic | Total | ||||||||||||||||||||||
Three months ended March 31, | $ | 979.3 | $ | 9.3 | $ | 0.1 | $ | 91.4 | $ | 1,080.1 | 9.3 | % | 10.3 | % | ||||||||||||||
Salaries and related expenses in the third quarter of 2010 increased by $63.6 compared to the third quarter of 2009, primarily consisting of an organic increase of $70.2, partially offset by a favorable foreign currency rate impact of $9.8. However,Our staff cost ratio, defined as salaries and related expenses as a percentage of total consolidated revenue, decreasedremained unchanged in the thirdfirst quarter of 2011 at 73.2% when compared to the prior-year period. Salaries and related expenses in the first quarter of 2011 increased by $100.8 compared to the first quarter of 2010, to 64.5% from 66.1% in the prior-year period.primarily consisting of an organic increase of $91.4 and an adverse foreign currency rate impact of $9.3. The organic increase was primarily due to higher base salaries and benefits of $31.3$56.2 and higher temporary help of $16.7$11.1 incurred to support revenuebusiness growth (organic revenue increase of $134.2),$124.9). The organic increase occurred across all regions, primarily in our domestic market and certain international regions. In regions where we had organic revenue decreases, such as various countries in the Continental Europe region, we continue to realize lower salaries, benefits and temporary help related to the work force reductions taken during 2009. In regions where we have revenue growth, we may need to continue to add resources to support this growth, which would result in additional increases in salaries and related expenses. Severance expense decreased by $6.5 compared to the prior-year period.market. Also contributing to the organic increase was higher incentive awardseverance expense of $28.1, primarily due to improved operating results in the current year. This is in contrast to the third quarter of 2009, where we had lower incentive award expense due to lower performance, primarily as a result of difficult economic conditions.
Salaries and related expenses in the first nine months of 2010 increased by $69.0 compared to the first nine months of 2009, primarily consisting of an adverse foreign currency rate impact of $37.7 and an organic increase of $29.2. However, salaries and related expenses as a percentage of total consolidated revenue decreased in the first nine months of 2010 to 65.9% from 68.8% in the prior-year period. The organic increase was primarily due to higher temporary help of $43.4 to support business growth, primarily in the domestic market, partially offset by lower base salaries and benefits of $29.0, primarily related to work force reductions during 2009. Severance expense decreased by $52.6 compared to the prior-year period. The organic increase also included higher incentive award expense of $50.3 due to factors similar to those noted above for the third quarter of 2010.
Changes in our incentive awards mix can impact future-period expense, as annual bonus awards are expensed during the year they are earned and long-term incentive awards are expensed over the performance period, generally three years. Factors impacting long-term incentive awards are the actual number of awards vesting, the change in our stock price and changes to our projected results, which could impact the achievement of certain performance targets. See Note 9 to the unaudited Consolidated Financial Statements for further information on our incentive compensation plans.$12.6.
The following table details our salaries and related expenses as a percentage of total consolidated revenue.
| Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
Salaries and related expenses | 64.5 | % | 66.1 | % | 65.9 | % | 68.8 | % | 73.2 | % | 73.2 | % | ||||||||||||
Base salaries, benefits and tax | 53.1 | % | 56.3 | % | 54.8 | % | 58.6 | % | 60.5 | % | 61.9 | % | ||||||||||||
Incentive expense | 4.2 | % | 2.7 | % | 3.9 | % | 2.9 | % | 4.4 | % | 4.0 | % | ||||||||||||
Severance expense | 1.0 | % | 1.6 | % | 1.0 | % | 2.2 | % | 1.6 | % | 0.8 | % | ||||||||||||
Temporary help | 3.8 | % | 2.9 | % | 3.6 | % | 2.7 | % | 4.1 | % | 3.6 | % | ||||||||||||
All other salaries and related expenses | 2.4 | % | 2.6 | % | 2.6 | % | 2.4 | % | 2.6 | % | 2.9 | % | ||||||||||||
Management’s DiscussionOffice and Analysis of Financial Condition and Results of Operations – (continued)General Expenses
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Components of Change | Change | |||||||||||||||||||||||||||
| 2010 | Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | 2011 | Organic | Total | ||||||||||||||||||||||
Three months ended March 31, | $ | 416.8 | $ | 4.4 | $ | 0.4 | $ | 17.6 | $ | 439.2 | 4.2 | % | 5.4 | % | ||||||||||||||
Our staff costoffice and general expense ratio, defined as salariesoffice and relatedgeneral expenses as a percentage of total consolidated revenue, decreased in the thirdfirst quarter of 20102011 to 64.5%29.8% from 66.1%, and decreased31.2% in the first nine monthsquarter of 2010 to 65.9% from 68.8% from the comparable prior-year periods, primarily driven by higher revenues, and, to a lesser extent, lower severance expense, partially offset by an increase in temporary help and incentive expense.
Office and General Expenses
| 2009 | Components of change | 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Three months ended September 30, | $ | 425.4 | $ | (3.1 | ) | $ | 2.0 | $ | 27.8 | $ | 452.1 | 6.5 | % | 6.3 | % | |||||||||||||
Nine months ended September 30, | 1,245.4 | 21.1 | 3.4 | 52.3 | 1,322.2 | 4.2 | % | 6.2 | % | |||||||||||||||||||
2010. Office and general expenses in the thirdfirst quarter of 20102011 increased by $26.7$22.4 compared to the thirdfirst quarter of 2009,2010, primarily consisting of an organic increase of $27.8. Approximately eighty percent$17.6 and an adverse foreign currency rate impact of the$4.4. The organic increase was attributableprimarily due to higher production expenses related to pass-through costs for certain projects where we acted as a principal that increased in size or were new during the thirdfirst quarter of 2010. The remainder of2011. Also contributing to the organic increase is due towas higher discretionary spending to support business growth. Production expenses can vary significantly between periods depending on the timing of completion of certain projects where we act as principal, which could impact trends between various periods in the future.
Officegrowth and general expenses in the first nine months of 2010 increased by $76.8 compared to the first nine months of 2009, primarily consisting of an organic increase of $52.3 and an adverse foreign currency rate impact of $21.1. The organic increase was due to factors similar to those noted above for the third quarter of 2010, as well as a foreign currency exchange translation loss of approximately $5.0 in the first quarter of 2010 related to our Venezuela agencies transitioning to inflationary accounting as of January 1, 2010. The organic increase was partially offset by lower occupancy costs, which was partly due to lease terminations we initiated in 2009.costs.
The following table details our office and general expenses as a percentage of total consolidated revenue. All other office and general expenses primarily include production expenses, and, to a lesser extent, depreciation and amortization, bad debt expense, foreign currency gains (losses) and other expenses.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Office and general expenses | 29.0 | % | 29.8 | % | 29.3 | % | 29.5 | % | ||||||||
Professional fees | 1.6 | % | 1.9 | % | 1.8 | % | 2.0 | % | ||||||||
Occupancy expense (excluding depreciation and amortization) | 8.0 | % | 9.0 | % | 8.2 | % | 9.0 | % | ||||||||
Travel & entertainment, office supplies and telecommunications | 3.7 | % | 3.5 | % | 3.8 | % | 3.6 | % | ||||||||
All other office and general expenses | 15.7 | % | 15.4 | % | 15.5 | % | 14.9 | % | ||||||||
Our office and general expense ratio, defined as office and general expenses as a percentage of total consolidated revenue, decreased in the third quarter of 2010 to 29.0% from 29.8%, and decreased in the first nine months of 2010 to 29.3% from 29.5%, in each case compared to the respective prior-year period, primarily driven by higher revenues and lower occupancy expenses, partially offset by higher production expenses.
Restructuring and Other Reorganization-Related Charges (Reversals), net
During the third quarter of 2010 we initiated plans to integrate our recent acquisition of Delaney Lund Knox Warren (“DLKW”) into our Lowe London operations. We expect to incur approximately $4.0 of other reorganization-related charges associated with this alignment as we finish implementing our plan through the remainder of 2010 and into 2011. As a result
| Three months ended March 31, | ||||||||
| 2011 | 2010 | |||||||
Office and general expenses | 29.8 | % | 31.2 | % | ||||
Professional fees | 2.0 | % | 2.1 | % | ||||
Occupancy expense (excluding depreciation and amortization) | 8.5 | % | 9.3 | % | ||||
Travel & entertainment, office supplies and telecommunications | 4.0 | % | 4.1 | % | ||||
All other office and general expenses | 15.3 | % | 15.7 | % | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
of the alignment, Lowe will be strengthened by the addition of a premier full-service communications agency in its London operations, and DLKW will benefit from the multinational reach of Lowe. The agency will be called DLKW Lowe, and will serve as the United Kingdom hub for Lowe and Partners Worldwide. These charges relate to severance and termination costs and lease termination and other exit costs as we execute these plans. The charges will be separated from the rest of our operating expenses within the unaudited Consolidated Statements of Operations because they did not occur in the normal course of business.
EXPENSES AND OTHER INCOME
| Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||||
Cash interest on debt obligations | $ | (35.5 | ) | $ | (34.9 | ) | $ | (104.2 | ) | $ | (105.4 | ) | $ | (33.9 | ) | $ | (33.5 | ) | ||||||||
Non-cash interest | 0.8 | (2.9 | ) | 1.9 | (12.3 | ) | 2.0 | 0.9 | ||||||||||||||||||
Interest expense | (34.7 | ) | (37.8 | ) | (102.3 | ) | (117.7 | ) | (31.9 | ) | (32.6 | ) | ||||||||||||||
Interest income | 6.8 | 7.6 | 19.4 | 28.0 | 8.3 | 6.5 | ||||||||||||||||||||
Net interest expense | (27.9 | ) | (30.2 | ) | (82.9 | ) | (89.7 | ) | (23.6 | ) | (26.1 | ) | ||||||||||||||
Other (expense) income, net | (3.1 | ) | 1.0 | (4.7 | ) | (17.4 | ) | (6.1 | ) | 0.5 | ||||||||||||||||
Total (expenses) and other income | $ | (31.0 | ) | $ | (29.2 | ) | $ | (87.6 | ) | $ | (107.1 | ) | $ | (29.7 | ) | $ | (25.6 | ) | ||||||||
Net Interest Expense
For the three and nine months ended September 30, 2010,March 31, 2011, net interest expense decreased by $2.3 and $6.8, respectively,$2.5 as compared to the respective prior-year periods,period, primarily due to a decrease in non-cash interest expense, partially offset by a decreasean increase in interest income. The change in non-cash interest expense for the three and nine months ended September 30, 2010 was due to changes in the value of obligations to purchase noncontrolling equity shares of consolidated subsidiaries. The value of these obligations may fluctuate depending on projected future operating performance of these subsidiaries. See Note 12 to the unaudited Consolidated Financial Statements for further information. Additionally, for the nine months ended September 30, 2010, the decrease in non-cash interest expense was due to a decrease in deferred warrant costs and amortization of debt issuance costs in connection with the expiration in June 2009 of our $750.0 Three-Year Credit Agreement dated as of June 13, 2006. The decrease in interestInterest income for the nine months ended September 30, 2010 wasincreased primarily due to lower interest ratesan increase in average cash and cash equivalent balances in various countries around the world includingfor the United States.three months ended March 31, 2011 compared to the prior-year period. Non-cash interest expense benefitted from no longer amortizing the discount on our Floating Rate Senior Unsecured Notes due 2010, which matured in the prior year. Cash interest expense remainedwas virtually unchanged foras lower interest expense resulting from prior year debt repayments was offset by higher interest expense related to increasing the threesize of our credit facility in the second quarter of 2010 and nine months ended September 30,a favorable impact from interest rate swaps realized in the first quarter of 2010.
Other (Expense) Income, net
Results of operations for the three and nine months ended September 30,March 31, 2011 and 2010 and 2009 include certain items which are not directly associated with our revenue-producing operations.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss on early extinguishment of debt | $ | 0.0 | $ | (1.2 | ) | $ | (0.1 | ) | $ | (25.8 | ) | |||||
Gains (losses) on sales of businesses and investments | 0.3 | 0.7 | (2.8 | ) | (2.1 | ) | ||||||||||
Vendor discounts and credit adjustments | 0.3 | 1.5 | 2.4 | 7.7 | ||||||||||||
Other (expense) income, net | (3.7 | ) | 0.0 | (4.2 | ) | 2.8 | ||||||||||
Total other (expense) income, net | $ | (3.1 | ) | $ | 1.0 | $ | (4.7 | ) | $ | (17.4 | ) | |||||
| Three months ended March 31, | ||||||||||
| 2011 | 2010 | |||||||||
(Losses) gains on sales of businesses and investments | $ | (6.6 | ) | $ | 0.2 | |||||
Other income, net | 0.5 | 0.3 | ||||||||
Total other (expense) income, net | $ | (6.1 | ) | $ | 0.5 | |||||
Sales of Businesses and Investments – During the three months ended March 31, 2011, we recognized a loss relating to the sale of a business in the domestic market within our Integrated Agency Networks (“IAN”) segment.
INCOME TAXES
| ||||||||||
| Three months ended March 31, | ||||||||||
| 2011 | 2010 | |||||||||
Loss before income taxes | $ | (75.0 | ) | $ | (85.0 | ) | ||||
Benefit of income taxes | $ | (21.5 | ) | $ | (15.3 | ) | ||||
Effective tax rate | 28.7 | % | 18.0 | % | ||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Net Loss on Early Extinguishment of Debt –During the first nine months of 2009, we recorded a net charge of $25.8 primarily related to the settlement of our tender offers for our 5.40% Senior Unsecured Notes due 2009, our 7.25% Senior Unsecured Notes due 2011 (the “2011 Notes”) and our Floating Rate Senior Unsecured Notes due 2010 (the “2010 Notes”).
Vendor Discounts and Credit Adjustments – We are in the process of settling our liabilities related to vendor discounts and credits established during the restatement we presented in our 2004 Annual Report on Form 10-K. These adjustments reflect the reversal of certain of these liabilities as a result of settlements with clients or vendors or where the statute of limitations has lapsed.
INCOME TAXES
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Income (loss) before income taxes | $ | 69.2 | $ | 29.1 | $ | 130.4 | $ | (33.8 | ) | |||||||
Provision for (benefit of) income taxes | $ | 24.4 | $ | 3.7 | $ | 72.4 | $ | (18.0 | ) | |||||||
Effective tax rate | 35.3 | % | 12.7 | % | 55.5 | % | 53.3 | % | ||||||||
Our tax rates are affected by many factors, including our worldwide earnings from various countries, changes in legislation and tax characteristics of our income. Specifically, for the three months ended September 30, 2010,March 31, 2011, the effective tax rate is comparable to the statutory rate of 35% primarily due to28.7% was negatively impacted by losses in certain foreign locations for which we receive no benefit due to 100% valuation allowances and an increasethe establishment of a valuation allowance in unrecognizedthe United Kingdom. Our effective tax benefits offset byrate was positively impacted due to tax efficiencies from entity consolidation in the reversalAsia Pacific region and the loss relating to the sale of valuation allowancesa business in Europe and tax benefits from the exercise of stock options. domestic market.
For the ninethree months ended September 30,March 31, 2010, the difference between the effective tax rate and the statutory rate of 35% was primarily due to factors similar to those noted above as well as the impact of state and local taxes.
On August 10, 2010, The Education Jobs and Medicaid Assistance Act was signed into law. The Act contains various provisions that could limit our ability to use foreign tax credits. There was no material impact on us in the third quarter of 2010. While we continue to assess the future impact of this Act on us, we do not expect a material impact to our effective or cash tax rates in the near future.
For the three and nine months ended September 30, 2009, the difference between the effective tax rate and the statutory rate of 35% was primarily due to the recognition of previously unrecognized tax benefits and the recognition of tax benefits on partially worthless securities, partially offset by losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances, and the establishment of valuation allowances in the Asia Pacific region. For the nine months ended September 30, 2009, the difference between the effective tax rateEurope and the statutoryloss from the devaluation of the Venezuelan currency, for which we receive no tax rate is also due to the write-off of deferred tax assets related to restricted stock.benefit.
EARNINGS (LOSS) PER SHARESegment Results of Operations – Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Basic earnings (loss) per share available to common stockholders for the three and nine months ended September 30, 2010 was $0.09 and $0.16, respectively, compared to $0.04 and ($0.08) for the three and nine months ended September 30, 2009, respectively. Diluted earnings (loss) per share was $0.08 and $0.11 for the three and nine months ended September 30, 2010, respectively, compared to $0.03 and ($0.08) for the three and nine months ended September 30, 2009, respectively.
Basic earnings per share for the nine months ended September 30, 2010, includes a benefit from the repurchase of a portion of our 5 1/4% Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”). For the three months ended September 30, 2010, we paid quarterly dividends of $2.9 on our Series B Preferred Stock that remains outstanding. SeeAs discussed in Note 48 to the unaudited Consolidated Financial Statements, we have two reportable segments as of March 31, 2011: IAN and Constituency Management Group (“CMG”). We also report results for further information.the Corporate and other group.
IAN
REVENUE
| Components of Change | Change | |||||||||||||||||||||||||||
| Three months ended March 31, 2010 | Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Three months ended March 31, 2011 | Organic | Total | ||||||||||||||||||||||
Consolidated | $ | 1,109.2 | $ | 11.7 | $ | 7.9 | $ | 107.1 | $ | 1,235.9 | 9.7 | % | 11.4 | % | ||||||||||||||
Domestic | 637.1 | 0.0 | 0.0 | 64.1 | 701.2 | 10.1 | % | 10.1 | % | |||||||||||||||||||
International | 472.1 | 11.7 | 7.9 | 43.0 | 534.7 | 9.1 | % | 13.3 | % | |||||||||||||||||||
During the first quarter of 2011, IAN revenue increased by $126.7 compared to the first quarter of 2010, primarily consisting of an organic revenue increase of $107.1. The increase in revenue at our IAN segment represented approximately 86% of the total organic revenue increase and was attributable to the reasons described in the consolidated revenue discussion.
SEGMENT OPERATING LOSS
| Three months ended March 31, | ||||||||||||
| 2011 | 2010 | Change | ||||||||||
Segment operating loss | $ | (21.4 | ) | $ | (33.3 | ) | (35.7 | )% | ||||
Operating margin | (1.7 | )% | (3.0 | )% | ||||||||
Operating loss improved during the first quarter of 2011 when compared to the first quarter of 2010 due to an increase in revenue of $126.7, partially offset by increases in salaries and related expenses of $91.8 and office and general expenses of $23.0. The increase in salaries and related expenses was primarily due to higher base salaries, benefits and temporary help across most of the agencies within IAN to support business growth. Also contributing to the increase in salaries and related expenses was higher severance expense and incentive award expense compared to the prior-year period. Office and general expenses increased primarily due to higher production expenses.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Segment Results of Operations – Three and Nine Months Ended September 30, 2010 Compared to Three and Nine Months Ended September 30, 2009
As discussed in Note 11 to the unaudited Consolidated Financial Statements, we have two reportable segments as of September 30, 2010: Integrated Agency Networks (“IAN”) and Constituency Management Group (“CMG”). We also report results for the Corporate and other group.
IAN
REVENUE
| Three months ended September 30, 2009 | Components of change | Three months ended September 30, 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Consolidated | $ | 1,191.9 | $ | (7.1 | ) | $ | 9.1 | $ | 105.4 | $ | 1,299.3 | 8.8 | % | 9.0 | % | |||||||||||||
Domestic | 664.5 | 0.0 | (0.8 | ) | 63.4 | 727.1 | 9.5 | % | 9.4 | % | ||||||||||||||||||
International | 527.4 | (7.1 | ) | 9.9 | 42.0 | 572.2 | 8.0 | % | 8.5 | % | ||||||||||||||||||
During the third quarter of 2010, IAN revenue increased by $107.4 compared to the third quarter of 2009, primarily consisting of an organic revenue increase of $105.4. The organic revenue increase was primarily attributable to higher spending from existing clients and net client wins in nearly all sectors of our business and in most regions, at various of our advertising and media businesses. The sectors that primarily contributed to the organic increase were auto and transportation and financial services. The largest increase was in the domestic market. The international organic increase occurred throughout most regions, most notably in the Latin America region, primarily in Brazil, as well as South Africa. The Continental Europe region had a slight organic decrease.
| Nine months ended September 30, 2009 | Components of change | Nine months ended September 30, 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Consolidated | $ | 3,555.0 | $ | 57.8 | $ | 8.7 | $ | 173.1 | $ | 3,794.6 | 4.9 | % | 6.7 | % | ||||||||||||||
Domestic | 1,998.5 | 0.0 | (3.8 | ) | 159.6 | 2,154.3 | 8.0 | % | 7.8 | % | ||||||||||||||||||
International | 1,556.5 | 57.8 | 12.5 | 13.5 | 1,640.3 | 0.9 | % | 5.4 | % | |||||||||||||||||||
During the first nine months of 2010, IAN revenue increased by $239.6 compared to the first nine months of 2009, primarily consisting of an organic increase of $173.1 and a favorable foreign currency impact of $57.8. The domestic organic increase was driven by factors similar to those noted above for the third quarter of 2010. The international organic increase was at various of our advertising and media businesses and primarily in the Latin America region, mostly in Brazil. The international organic increase was partially offset by organic decreases in the Continental Europe region, which includes the effect of a weakened economic climate, and impacted by spending declines and lost assignments, primarily in 2009, in the technology and telecom sector across several regions.
SEGMENT OPERATING INCOME
| Three months ended September 30, | Change | Nine months ended September 30, | Change | |||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
Segment operating income | $ | 113.6 | $ | 78.7 | 44.3 | % | $ | 270.1 | $ | 135.7 | 99.0 | % | ||||||||||||
Operating margin | 8.7 | % | 6.6 | % | 7.1 | % | 3.8 | % | ||||||||||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Operating income increased during the third quarter of 2010 when compared to the third quarter of 2009 due to an increase in revenue of $107.4, partially offset by increases in salaries and related expenses of $56.8 and increases in office and general expenses of $15.7. The increase in salaries and related expenses was primarily due to higher base salaries, benefits and temporary help to support our increase in revenue, as well as higher incentive award expense due to improved operating results. These increases were partially offset by lower severance expense resulting from work force reductions in 2009 across all agencies within IAN. Office and general expenses increased primarily due to higher production expenses and, to a lesser extent, higher discretionary spending to support business growth.
Operating income increased during the first nine months of 2010 when compared to the first nine months of 2009 due to an increase in revenue of $239.6, partially offset by increases in salaries and related expenses of $59.0 and office and general expenses of $46.2, driven by factors similar to those noted above for the third quarter of 2010, as well as a foreign currency exchange translation loss of approximately $5.0 in the first quarter of 2010 related to our Venezuela agencies transitioning to inflationary accounting as of January 1, 2010. Operating income was benefitted by lower occupancy costs, which were partly due to lease terminations we initiated in 2009.
CMG
REVENUE
| Three months ended September 30, 2009 | Components of change | Three months ended September 30, 2010 | Change | Components of Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | Three months ended March 31, 2010 | Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Three months ended March 31, 2011 | Organic | Total | |||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 234.8 | $ | (2.2 | ) | $ | 0.1 | $ | 28.8 | $ | 261.5 | 12.3 | % | 11.4 | % | $ | 227.8 | $ | 1.5 | $ | (8.2 | ) | $ | 17.8 | $ | 238.9 | 7.8 | % | 4.9 | % | ||||||||||||||||||||||||||
Domestic | 169.8 | 0.0 | 0.0 | 19.8 | 189.6 | 11.7 | % | 11.7 | % | 166.0 | 0.0 | (8.5 | ) | 6.6 | 164.1 | 4.0 | % | (1.1 | )% | |||||||||||||||||||||||||||||||||||||
International | 65.0 | (2.2 | ) | 0.1 | 9.0 | 71.9 | 13.8 | % | 10.6 | % | 61.8 | 1.5 | 0.3 | 11.2 | 74.8 | 18.1 | % | 21.0 | % | |||||||||||||||||||||||||||||||||||||
During the thirdfirst quarter of 2010,2011, CMG revenue increased by $26.7$11.1 compared to the thirdfirst quarter of 2009,2010, primarily due to an organic revenue increase of $28.8.$17.8, partially offset by the effect of net divestitures of $8.2. The organic revenue increase was primarily due to an increaseincreases in client spending in most disciplines, primarily our public relations and net client wins in all major disciplines. The organic revenue increase includes higher revenue attributable to certain projects where we act as principal.events marketing businesses. The international organic increase occurredwas most notably in all regions,the Asia Pacific region, primarily in Australia and China, and in the United Kingdom and Asia Pacific regions.Kingdom. Revenues in the events marketing business can fluctuate due to the timing of completed projects where we act as principal, as revenue is typically recognized when the project is complete.
| Nine months ended September 30, 2009 | Components of change | Nine months ended September 30, 2010 | Change | |||||||||||||||||||||||||
| Foreign currency | Net acquisitions/ (divestitures) | Organic | Organic | Total | ||||||||||||||||||||||||
Consolidated | $ | 671.4 | $ | 5.4 | $ | 0.1 | $ | 48.4 | $ | 725.3 | 7.2 | % | 8.0 | % | ||||||||||||||
Domestic | 464.1 | 0.0 | 0.0 | 62.4 | 526.5 | 13.4 | % | 13.4 | % | |||||||||||||||||||
International | 207.3 | 5.4 | 0.1 | (14.0 | ) | 198.8 | (6.8 | )% | (4.1 | )% | ||||||||||||||||||
During the first nine months of 2010, CMG The reduction in revenue increased by $53.9 compareddue to net divestitures primarily relate to the first nine monthssale of 2009, due to an organic revenue increase of $48.4 and a favorable foreign currency rate impact of $5.4. Thebusiness in our domestic organic increase was driven by factors similar to those noted above formarket in the thirdfourth quarter of 2010. The international organic decrease was primarily due to the completion of several projects with existing clients in the first nine months of 2009 that did not recur in the first nine months of 2010 in our events marketing business, predominantly in the United Kingdom, partially offset by growth in the Asia Pacific region.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
SEGMENT OPERATING INCOME
| Three months ended September 30, | Change | Nine months ended September 30, | Change | Three months ended March 31, | ||||||||||||||||||||||||||||||||
| �� 2010 | 2009 | 2010 | 2009 | 2011 | 2010 | Change | ||||||||||||||||||||||||||||||
Segment operating income | $ | 21.7 | $ | 18.2 | 19.2 | % | $ | 51.4 | $ | 43.5 | 18.2 | % | $ | 10.7 | $ | 7.7 | 39.0 | % | ||||||||||||||||||
Operating margin | 8.3 | % | 7.8 | % | 7.1 | % | 6.5 | % | 4.5 | % | 3.4 | % | ||||||||||||||||||||||||
Operating income increased during the thirdfirst quarter of 20102011 when compared to the thirdfirst quarter of 20092010 due to an increase in revenue of $26.7$11.1, partially offset by increases in salaries and related expenses of $6.2 and office and general expenses of $13.8 and salaries$1.9. Salaries and related expenses of $9.4.increased across all disciplines due to higher base salaries, benefits and temporary help primarily to support business growth. Office and general expenses increased primarily due to higher production expenses and salaries and related expenses increased primarily due to higher base salaries, benefits and temporary help to support growth, as well as an increase in incentive awards.
Operating income increased during the first nine months of 2010 when compared to the first nine months of 2009 due to an increase in revenue of $53.9, partially offset by increases in office and general expenses of $29.9, and salaries and related expenses of $16.1, driven by factors similar to those noted above for the third quarter of 2010.discretionary spending.
CORPORATE AND OTHER
Certain corporate and other charges are reported as a separate line item within total segment operating incomeloss and include corporate office expenses and shared service center expenses, as well as certain other centrally managed expenses that are not fully allocated to operating divisions. Salaries and related expenses include salaries, long-term incentives, annual bonuses and other miscellaneous benefits for corporate office employees. Office and general expenses primarily include professional fees related to internal control compliance, financial statement audits and legal, information technology and other consulting services, which are engaged and managed through the corporate office. In addition, office and general expenses also include rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. A portion of these expenses are allocated to operating divisions based on a formula that uses the planned revenues of each of the operating units. Amounts allocated also include specific charges for information technology-related projects, which are allocated based on utilization.
Corporate and other expenses decreasedof $33.8 during the thirdfirst quarter of 2010 by $5.4 to $33.72011 were essentially flat compared to the third quarter of 2009, and decreased by $5.4 to $101.2 during the first nine months of 2010 compared to the first nine months of 2009, primarily due to lower base salaries, benefits and temporary help and a decline in professional fees. During the first nine months of 2010, the decrease in corporate and other expensesprior-year period as higher severance expense was partially offset by an increase in incentive award expense. The decrease in base salaries, benefits and temporary help was primarily related to work force reductions in 2009. The increase in incentive award expense is primarily due to improved operating results.lower occupancy costs.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
Our key liquidity metrics are operating cash flow and changes in working capital. The following tables summarize key financial data relating to our liquidity, capital resources and uses of capital.
| Nine months ended September 30, | ||||||||
Cash Flow Data | 2010 | 2009 | ||||||
Net cash used in operating activities | $ | (161.8 | ) | $ | (198.5 | ) | ||
Net cash (used in) provided by investing activities | (83.6 | ) | 47.3 | |||||
Net cash used in financing activities | (327.7 | ) | (262.6 | ) | ||||
Net working capital usage (included in operating activities) | $ | (376.3 | ) | $ | (327.2 | ) | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Balance Sheet Data | September 30, 2010 | December 31, 2009 | September 30, 2009 | |||||||||
Cash, cash equivalents and marketable securities | $ | 1,939.0 | $ | 2,506.1 | $ | 1,772.1 | ||||||
Short-term borrowings | $ | 124.3 | $ | 93.4 | $ | 85.0 | ||||||
Current portion of long-term debt | 231.0 | 215.2 | 3.2 | |||||||||
Long-term debt | 1,588.9 | 1,638.0 | 1,866.9 | |||||||||
Total debt | $ | 1,944.2 | $ | 1,946.6 | $ | 1,955.1 | ||||||
Operating ActivitiesLIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the first nine monthsCASH FLOW OVERVIEW
The following tables summarize key financial data relating to our liquidity, capital resources and uses of 2010 was $161.8, which is an improvement of $36.7 as compared to the first nine months of 2009, primarily the result of an increase in net income $74.7 partially offset by higher working capital usage of $49.1. Net cash used in operating activities primarily reflects working capital cash usage of $376.3, partially offset by net adjustments to reconcile net income of $174.2. Net adjustments to reconcile net income primarily include depreciation and amortization of fixed assets and intangible assets, amortization of restricted stock and other non-cash compensation and deferred income tax benefits. Cash generated or used by working capital reflectscapital.
| Three months ended March 31, | ||||||||
Cash Flow Data | 2011 | 2010 | ||||||
Net loss, adjusted to reconcile net loss to net cash used in operating activities1 | $ | (43.1 | ) | $ | (46.9 | ) | ||
Net cash used in working capital2 | (735.8 | ) | (482.5 | ) | ||||
| Changes in other non-current assets and liabilities using cash | (22.8 | ) | (26.1 | ) | ||||
| Net cash used in operating activities | $ | (801.7 | ) | $ | (555.5 | ) | ||
| Net cash (used in) provided by investing activities | (16.8 | ) | 13.0 | |||||
| Net cash used in financing activities | (45.4 | ) | (16.2 | ) | ||||
| 1 | Reflects net loss adjusted primarily for depreciation and amortization of fixed assets and intangible assets, amortization of restricted stock and other non-cash compensation and deferred income taxes. |
| 2 | Reflects changes in accounts receivable, expenditures billable to clients, other current assets, accounts payable and accrued liabilities. |
Balance Sheet Data | March 31, 2011 | December 31, 2010 | March 31, 2010 | |||||||||
| Cash, cash equivalents and marketable securities | $ | 1,854.3 | $ | 2,689.4 | $ | 1,941.5 | ||||||
| Short-term borrowings | $ | 116.2 | $ | 114.8 | $ | 86.3 | ||||||
| Current portion of long-term debt | 452.4 | 38.9 | 215.5 | |||||||||
| Long-term debt | 1,165.9 | 1,583.3 | 1,634.5 | |||||||||
Total debt | $ | 1,734.5 | $ | 1,737.0 | $ | 1,936.3 | ||||||
Operating Activities
Net cash used in operating activities during the first three months of 2011 was $801.7, which is an increase of $246.2 as compared to the first three months of 2010, primarily as a result of an increase in working capital usage of $253.3. Due to the seasonality of our business, we typically generate cash from working capital in the second half of a year and use cash from working capital in the first half of a year, with the largest impacts in the first and fourth quarters. The net working capital usage in the first ninethree months of 20102011 was primarily attributable to certain of our advertising and marketing services businesses, partially offsetimpacted by our media businesses.
The timing of media buying on behalf of our clients affects our working capital and operating cash flow. In most of our businesses, our agencies enter into commitments to pay production and media costs on behalf of clients. To the extent possible we pay production and media charges after we have received funds from our clients. The amounts involved substantially exceed our revenues, and primarily affect the level of accounts receivable, expenditures billable to clients, accounts payable and accrued media and production liabilities. Our assets include both cash received and accounts receivable from clients for these pass-through arrangements, while our liabilities include amounts owed on behalf of clients to media and production suppliers.
Our accrued liabilities are also affected by the timing of certain other payments. For example, while annual cash incentive awards are accrued throughout the year, they are generally paid during the first quarter of the subsequent year.
Investing Activities
Net cash used in investing activities during the first ninethree months of 20102011 primarily reflects payments for acquisitions and capital expenditures partially offset by net proceeds from the sales of investments. Payments for acquisitions of $63.0 relate to new acquisitions, primarily DLKW, as well as deferred payments on prior acquisitions.$16.9. Capital expenditures of $49.7 relate primarily to leasehold improvements, computer software and hardware and furnitureleasehold improvements.
Management’s Discussion and fixtures.Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Financing Activities
Net cash used in financing activities during the first ninethree months of 20102011 primarily reflects the repurchase of a portion of our Series B Preferred Stock of $265.9 and our 2010 Notes of $21.4, distributionsrelate to noncontrolling interests of $18.2 and dividend payments of $16.7$28.5 on our Series B Preferred Stock.common stock.
Foreign Exchange Rate Changes
The effect of foreign exchange rate changes on cash and cash equivalents included in the unaudited Consolidated Statements of Cash Flows resulted in an increase of $5.6$28.4 during the first ninethree months of 2010.2011. This increase primarily reflects the weakeningstrengthening of the Euro, as well as several other foreign currencies, against the U.S. Dollar against several foreign currencies during this period.
Management’s Discussion and Analysisas of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
March 31, 2011 as compared to December 31, 2010.
LIQUIDITY OUTLOOK
We expect our cash flow from operations, cash and cash equivalents to be sufficient to meet our anticipated operating requirements at a minimum for the next twelve months. We also have a committed corporate credit facility available to support our operating needs. While we believe the economic climate has improved in certain regions, we believe macroeconomic conditions remain uncertain and could challenge our level of cash generation from operations. We continue to maintain a conservative approach to liquidity, which provides us with maximum flexibility over significant uses of cash, including our capital expenditures, and cash used for new acquisitions. We are closely managingacquisitions, our spendingcommon stock repurchase program and will defer or limit discretionary spending where appropriate, while continuing to position ourselves for growth.our common stock dividends.
From time to time we evaluate market conditions and financing alternatives for opportunities to raise additional financing or otherwise improve our liquidity profile, and enhance our financial flexibility.flexibility and manage market risk. Our ability to access the capital markets depends on a number of factors, which include those specific to us, such as our credit rating, and those related to the financial markets, such as the amount or terms of available credit. There can be no guarantee that we would be able to access new sources of liquidity on commercially reasonable terms.terms, or at all.
Funding Requirements
Our most significant funding requirements include: our operations, non-cancelable operating lease obligations, capital expenditures, acquisitions, dividends, taxes, debt service acquisitions, taxes and contributions to pension and postretirement plans. Additionally, we may be required to make payments to minority ownersshareholders in certain subsidiaries if they exercise puttheir options relatedarising from prior acquisitions to prior acquisitions.sell us their interests. Notable funding requirements include:
Debt service – Our $192.3 aggregate principal amount of 2010 Notes outstanding mature on November 15, 2010, and our $36.3 aggregate principal amount of 2011 Notes outstanding mature on August 15, 2011. We expect to use available cash to retire the outstanding 2010 Notes and the 2011 Notes. The remainder of our outstanding debt is primarily long-term, with maturities scheduled through 2023.
Acquisitions – We expect to pay approximately $89.8 for the remainder of 2011 related to prior year acquisitions, of which $87.3 is expected to be paid in the second quarter of 2011. We may also be required to pay approximately $36.2 related to put options held by minority shareholders that are exercisable during 2011. We will continue to evaluate strategic opportunities to grow and to increase our ownership interests in current investments, particularly in our digital and marketing services offerings, and to expand our presence in high-growth and key strategic world markets. In addition
Dividends – On February 24, 2011 our Board of Directors (“Board”) declared a dividend of $0.06 per share on our common shares, payable on March 25, 2011 to cash expenditures for new acquisitions,holders of record at the close of business on March 11, 2011, and we intend to continue quarterly common stock dividend payments. As of March 11, 2011 we had 475.4 shares outstanding (excluding restricted shares), which corresponded to an aggregate dividend payment of $28.5. Assuming a quarterly dividend of $0.06 per share and no significant change in the number of outstanding shares, we expect to pay approximately $1.0 in$85.0 for the fourth quarterremainder of 2010 and approximately $47.0 in 2011 related to acquisitions we completed in previous periods.2011. We may also be required to pay approximately $37.0 related to put options that are exercisable over the next twelve months.regular quarterly dividends of $2.9, or $11.6 annually, on our Series B Preferred Stock.
Contributions to pension and postretirement plansDebt service – Our funding policy regarding our pension plans is to contribute amounts necessary to satisfy minimum pension funding requirements, plus such additional amounts as7.25% Senior Unsecured Notes due 2011 (the “2011 Notes”) mature on August 15, 2011. As of March 31, 2011 we consider appropriate to improvehad $36.3 aggregate principal amount of the plans’ funded status. For the nine months ended September 30, 2010, we contributed $20.5 to our foreign pension plans2011 Notes outstanding, and $9.6 to our domestic pension plans. In the fourth quarter of 2010, we expect to contribute approximately $8.0use available cash to our foreign pension plans, and we do not expect to make any contributions to our domestic pension plans. A significant portionretire these outstanding notes. On March 15, 2012 holders of our contributions$400.0 4.25% Convertible Senior Notes due 2023 may require us to the foreign pension plans relates to the Interpublic Pension Plan in the U.K.repurchase their notes for cash at par. The remainder of our debt is primarily long-term, with maturities scheduled through 2023.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Contributions to pension plans – Our funding policy regarding our pension plan is to contribute amounts necessary to satisfy minimum pension funding requirements, plus such additional amounts as we consider appropriate to improve the plans’ funded status. During the three months ended March 31, 2011, we contributed $11.7 of cash to our domestic pension plan and $5.8 of cash to our foreign pension plans. For the remainder of 2011, we expect to contribute approximately $2.4 and $19.0 of cash to our domestic and foreign pension plans, respectively.
Share Repurchase Program
On February 24, 2011 our Board authorized a program to repurchase from time to time up to $300.0 of our common stock. We may effect such repurchases through open market purchases, trading plans established in accordance with SEC rules, derivative transactions or other means. The share repurchase program has no expiration date. During the period from the Board’s authorization through March 31, 2011, we repurchased 0.9 shares at an average price of $12.36 per share and an aggregate cost of $10.5. We expect to continue to repurchase our common stock during 2011, although the timing and amount of the repurchases will depend on market conditions and our other funding requirements.
FINANCING AND SOURCES OF FUNDS
Substantially all of our operating cash flow is generated by our agencies. Our cash balances are held in numerous jurisdictions throughout the world, primarily at the holding company level and at our largest subsidiaries. Below is a summary of our sources of liquidity.
| September 30, 2010 | March 31, 2011 | |||||||||||||||||||||||||||||||
| Total Facility | Amount Outstanding | Letters of Credit 1 | Total Available | Total Facility | Amount Outstanding | Letters of Credit1 | Total Available | |||||||||||||||||||||||||
Cash, cash equivalents and marketable securities | $ | 1,939.0 | $ | 1,854.3 | ||||||||||||||||||||||||||||
Committed credit agreement | $ | 650.0 | $ | 0.0 | $ | 16.4 | $ | 633.6 | $ | 650.0 | $ | 0.0 | $ | 15.7 | $ | 634.3 | ||||||||||||||||
Uncommitted credit arrangements | $ | 450.5 | $ | 124.3 | $ | 0.1 | $ | 326.1 | ||||||||||||||||||||||||
Uncommitted facilities | $ | 464.7 | $ | 116.2 | $ | 0.1 | $ | 348.4 | ||||||||||||||||||||||||
| 1 | We are required from time to time to post letters of credit, primarily to support obligations of our subsidiaries. These letters of credit have historically not been drawn upon. |
Credit Facilities
We maintain a committed corporate credit facility to increase our financial flexibility. In April 2010, we amended and restated ourThe credit agreement originally dated as of July 18, 2008 (the “Credit Agreement”), which increased commitments of the lenders to $650.0 from $335.0, added five new lenders and extended the Credit Agreement’s expiration. We have not drawn on any of our corporate credit facilities since 2003, although we use them for letters of credit primarily to support obligations of our subsidiaries. The Credit Agreementfacility is a revolving facility expiring July 18, 2013, under which amounts borrowed by us or any of our subsidiaries designated under the Credit Agreementcredit facility may be repaid and reborrowed, subject to an aggregate lending limit of $650.0 or the equivalent in other currencies. The aggregate available amount of letters of credit outstanding may decrease or increase, subject to a limit on letters of credit of $200.0 or the equivalent in other currencies. Our obligations under the Credit Agreementcredit facility are unsecured. See Note 3We have not drawn on any of our corporate credit facilities since 2003, although we use them for letters of credit primarily to the unaudited Consolidated Financial Statements for further information.support obligations of our subsidiaries.
We were in compliance with all applicable restrictive and financialof our covenants in the Credit Agreementcredit facility as of September 30, 2010,March 31, 2011. The table below sets forth the financial covenants applicable as seen in the table below.of March 31, 2011.
Financial Covenants | Four Quarters Ended September 30, 2010 | EBITDA Reconciliation | Four Quarters Ended September 30, 2010 | Four Quarters Ended March 31, 2011 | EBITDA Reconciliation | Four Quarters Ended March 31, 2011 | ||||||||||||||||
Interest coverage ratio (not less than) | 3.75x | Operating income | $ | 485.9 | 4.25x | Operating income | $ | 562.9 | ||||||||||||||
Actual interest coverage ratio | 5.47x | Add: | 6.58x | Add: | ||||||||||||||||||
Depreciation and amortization | 198.5 | |||||||||||||||||||||
| Depreciation and amortization | 205.3 | |||||||||||||||||||||
Leverage ratio (not greater than) | 3.75x | Non-cash charges | 1.7 | 3.25x | Other non-cash amounts | (0.5 | ) | |||||||||||||||
Actual leverage ratio | 2.81x | EBITDA | $ | 692.9 | 2.28x | EBITDA | $ | 760.9 | ||||||||||||||
EBITDA (not less than) | $ | 550.0 | $ | 550.0 | ||||||||||||||||||
Actual EBITDA | $ | 692.9 | $ | 760.9 | ||||||||||||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
If we were unable to comply with our financial covenants in the future, we would seek an amendment or waiver from our lenders, but there is no assurance that our lenders would grant an amendment or waiver. If we do not comply with these financial covenants and were unable to obtain the necessary amendment or waiver, the Credit Agreementcredit facility could be terminated and our lenders could accelerate payments of any outstanding principal. In addition, under those circumstances we could be required to deposit funds with one of our lenders in an amount equal to any outstanding letters of credit under the Credit Agreement.
In December 2009, we entered into a letter of credit agreement (the “2009 LC Agreement”). The face amount of letters of credit outstanding under the 2009 LC Agreement is subject to an aggregate limit at any one time of £45.0 (equivalent as of
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
September 30, 2010 to $71.1). As of September 30, 2010, we have the equivalent of $66.4 of letters of credit outstanding under the 2009 LC Agreement. IPG has guaranteed any obligations of our subsidiaries under this facility.
We also have uncommitted credit facilities with various banks that permit borrowings at variable interest rates. We use our uncommitted credit lines for working capital needs at some of our operations outside the United States, and the amount outstanding as of September 30, 2010 was $124.3.States. We have guaranteed the repayment of some of these borrowings made by certain subsidiaries. If we were to lose access to these credit lines, we would have to provide funding directly to some of our international operations. The weighted-average interest rate on outstanding balances under the uncommitted credit facilities as of September 30, 2010March 31, 2011 was approximately 1.0%5.0%.
Cash Pooling
We aggregate our net domestic cash position on a daily basis. Outside the United States we use cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, several IPG agencies agree with a single bank that the cash balances of any of the agencies with the bank will be subject to a full right of setoff against amounts the other agencies owe the bank, and the bank provides for overdrafts as long as the net balance for all the agencies does not exceed an agreed-upon level. Typically, each agency pays interest on outstanding overdrafts and receives interest on cash balances. Our unaudited Consolidated Balance Sheets reflect cash, net of bank overdrafts, under all of our pooling arrangements, and as of September 30, 2010,March 31, 2011 the amount netted was $908.4.$1,011.7.
DEBT CREDIT RATINGS
Our long-term debt credit ratings as of OctoberApril 15, 20102011 are listed below.
| Moody’s Investor Service | Standard and Poor’s | Fitch Ratings | ||||
Rating | Ba2 | BB | ||||
Outlook | Positive |
The most recent changes inupdate to our credit ratings occurred in May 2010March 2011 when Standard and Poor’s placed our credit rating on positive credit watch. Previously, in November 2010, Standard and Poor’s changed our outlook from stable to positive. Additionally, in October 2010 Fitch Ratings upgraded our rating from B+BB+ to BBBBB, which is an investment grade rating, and changed our outlook from positive to stable. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning credit rating agency. The rating of each credit rating agency should be evaluated independently of any other rating. Credit ratings could have an impact on liquidity, either adverse or favorable, including, among other things, because they could affect funding costs in the capital markets or otherwise. For example, our Credit Agreementcredit facility fees and borrowing rates are based on a credit ratings grid.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 20092010 included in our 20092010 Annual Report on Form 10-K. As summarized in Item 7,Management’s Discussionand Analysis of Financial Condition and Results of Operations, in our Annual Report, we believe that certain of these policies are critical because they are important to the presentation of our financial condition and results of operations, and they require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. These critical estimates relate to revenue recognition, income taxes, goodwill and other intangible assets, and pension and postretirement benefits. We base our estimates on historical experience and various other factors that we believe to be relevant under the circumstances. Estimation methodologies are applied
Management’s Discussion and Analysis of Financial Condition and Results of Operations – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
consistently from year to year, and there have been no significant changes in the application of critical accounting estimates since December 31, 2009.2010. Actual results may differ from these estimates under different assumptions or conditions.
RECENT ACCOUNTING STANDARDS
See Note 1411 to the unaudited Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2010 and certain accounting standards2011 or that we have not yet been required to implementbe implemented and may be applicable to our future operations.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
In the normal course of business, we are exposed to market risks related to interest rates, foreign currency rates and certain balance sheet items. There has been no significant changeDuring the first quarter of 2011, we entered into an interest rate swap agreement. We entered into an additional interest rate swap agreement in April 2011. We use interest rate swap agreements to manage our exposure to changes in interest rates. We do not expect these swap agreements to materially alter our exposure to market risk duringrisk. See Note 2 to the nine months ended September 30, 2010.unaudited Consolidated Financial Statements for further information on our interest rate swap agreements. For a further discussion of our exposure to market risk, refer to Item 7A,Quantitative and Qualitative Disclosures About Market Risk, in our 20092010 Annual Report on Form 10-K.
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2010,March 31, 2011, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
There has been no change in internal control over financial reporting in the quarter ended September 30, 2010March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal Proceedings |
Information about our current legal proceedings is set forth in Note 1310 to the unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
| Item 1A. | Risk Factors |
In the thirdfirst quarter of 2010,2011, there have been no material changes in the risk factors we have previously disclosed in Item 1A,Risk Factors, in our 20092010 Annual Report on Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| (c) | The following table provides information regarding our purchases of our equity securities during the period from |
| Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) 2 | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
July 1 – 31 | 15,466 | $ | 8.99 | — | — | |||||||||||
August 1 – 31 | 2,470 | $ | 8.50 | — | — | |||||||||||
September 1 – 30 | 968 | $ | 10.06 | — | — | |||||||||||
Total1 | 18,904 | $ | 8.98 | — | — | |||||||||||
| Total Number of Shares (or Units) Purchased1 | Average Price Paid per Share (or Unit)2 | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs3 | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
January 1-31 | 39,821 | $ | 10.74 | 0 | $ | 0 | ||||||||||
February 1-28 | 0 | 0.00 | 0 | 0 | ||||||||||||
March 1-31 | 1,238,797 | 12.39 | 851,300 | $ | 289,473,831 | |||||||||||
Total | 1,278,618 | $ | 12.34 | 851,300 | ||||||||||||
| 1 | Includes shares of our common stock, par value $0.10 per share, withheld under the terms of grants under employee stock-based compensation plans to offset tax withholding obligations that occurred upon vesting and release of restricted shares (the “Withheld Shares”). We repurchased 39,821 Withheld Shares in January 2011 and 387,497 Withheld Shares in March 2011, for a total of 427,318 Withheld Shares during the three-month period. |
| 2 | The average price per |
| 3 | On February 24, 2011 our Board of Directors approved a program to repurchase from time to time up to $300 million of our common stock. There is no expiration date associated with the program. |
Working Capital Restrictions and Other Limitations on the Payment of Dividends
The Credit Agreementcredit facility contains certain covenants that, among other things, and subject to certain exceptions, restrict us from making cash acquisitions, making capital expenditures, repurchasing our common stock and declaring or paying cash dividends on our common stock, in excess of an aggregate basket of $600.0 million in any fiscal year, of which we may carry forward unused amounts of up to $200.0 million to the next fiscal year, provided that (a) if we have a leverage ratio of greater than 2.75 to 1 at the end of any fiscal year, we may not carry forward unused amounts, and cash common stock dividends and net share repurchases not otherwise permitted will be restricted to $400.0 million for the next fiscal year, and (b) if we have a leverage ratio of 2.75 to 1 or less at the end of any fiscal year, in the next fiscal year the aggregate basket will be $800.0 million and cash common stock dividends and net share repurchases not otherwise permitted may not exceed $600.0 million. In addition, the aggregate basket in any fiscal year, but not the amount for cash common stock and net share repurchases, may be increased, subject to certain limitations, by up to $100.0 million of net cash proceeds from dispositions made during such fiscal year.
In addition, the terms of our outstanding series of preferred stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends on our preferred stock have been or contemporaneously are declared and paid or provision for the payment thereof has been made.
| Item 6. | Exhibits |
All exhibits required pursuant to Item 601 of Regulation S-K to be filed as part of this report or incorporated herein by reference to other documents, are listed in the Exhibit Index that immediately precedes the exhibits filed with this Report on Form 10-Q and the exhibits transmitted to the Securities and Exchange Commission as part of the electronic filing of this report.
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.
| THE INTERPUBLIC GROUP OF COMPANIES, INC. | ||
| By | /s/ Michael I. Roth | |
| Michael I. Roth | ||
| Chairman and Chief Executive Officer | ||
Date: April 28, 2011
| By | /s/ Christopher F. Carroll | |
| Christopher F. Carroll | ||
| Senior Vice President, Controller and | ||
| Chief Accounting Officer | ||
| (Principal Accounting Officer) | ||
Date: April 28, 2011
EXHIBIT NO. | DESCRIPTION | |
| 10(iii)(A)(1) | Retirement Agreement, effective as of March 24, 2011, between The Interpublic Group of Companies, Inc. (“Interpublic”) and Timothy Sompolski is incorporated by reference to Exhibit 10.1 to Interpublic’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 25, 2011. | |
| 12.1 | Computation of Ratios of Earnings to Fixed Charges. | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 32 | Certification of the Chief Executive Officer and the Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. | |
| 101 | Interactive Data File for the period ended | |
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.
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Date: October 29, 2010
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Date: October 29, 2010
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