SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-10551
OMNICOM GROUP INC.
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(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). YES X NO ___
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 188,520,800 (as of April 30,
2003)
OMNICOM GROUP INC. AND SUBSIDIAIRES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2003 and December 31, 2002..................... 1
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2003 and 2002............... 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002............... 3
Notes to Consolidated Condensed Financial Statements.......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 15
Item 4. Controls and Procedures....................................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures.................................................... 18
Certifications of Senior Executive Officers................... 19
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 354,563 666,951
Short-term investments at market, which approximates cost .... 26,085 28,930
Accounts receivable, less allowance for doubtful accounts
of $68,966 and $75,575 .................................... 4,027,396 3,966,550
Billable production orders in process, at cost ............... 492,023 371,816
Prepaid expenses and other current assets .................... 673,749 602,819
------------ ------------
Total Current Assets ............................ 5,573,816 5,637,066
------------ ------------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of
$731,292 and $717,294 ........................................ 559,371 557,735
INVESTMENTS IN AFFILIATES ......................................... 141,734 137,303
GOODWILL .......................................................... 4,900,160 4,850,829
INTANGIBLES, net of accumulated amortization of $92,377 and $88,132 103,316 97,730
DEFERRED TAX BENEFITS ............................................. 45,591 42,539
OTHER ASSETS ...................................................... 491,126 496,600
------------ ------------
TOTAL ASSETS .................................... $ 11,815,114 $ 11,819,802
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 4,260,470 $ 4,833,681
Advance billings ............................................. 670,820 648,577
Current portion of long-term debt ............................ 6,069 35,256
Bank loans ................................................... 95,906 50,394
Accrued taxes and other liabilities .......................... 1,221,008 1,271,616
------------ ------------
Total Current Liabilities ....................... 6,254,273 6,839,524
------------ ------------
LONG-TERM DEBT .................................................... 633,034 197,861
CONVERTIBLE NOTES ................................................. 1,747,037 1,747,037
DEFERRED COMPENSATION AND OTHER LIABILITIES ....................... 303,686 293,638
MINORITY INTERESTS ................................................ 179,049 172,815
SHAREHOLDERS' EQUITY:
Common stock ................................................. 29,790 29,790
Additional paid-in capital ................................... 1,415,345 1,419,910
Retained earnings ............................................ 2,205,801 2,114,506
Unamortized restricted stock ................................. (124,206) (136,357)
Accumulated other comprehensive loss ......................... (136,699) (154,142)
Treasury stock ............................................... (691,996) (704,780)
------------ ------------
Total Shareholders' Equity ...................... 2,698,035 2,568,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 11,815,114 $ 11,819,802
============ ============
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended March 31,
-------------------------------
2003 2002
---- ----
REVENUE .................................. $ 1,937,245 $ 1,732,426
OPERATING EXPENSES:
Salary and service costs ............. 1,340,759 1,172,538
Office and general expenses .......... 373,132 331,029
----------- -----------
1,713,891 1,503,567
----------- -----------
OPERATING PROFIT ......................... 223,354 228,859
NET INTEREST EXPENSE:
Interest expense ..................... 11,220 13,852
Interest income ...................... (2,952) (2,529)
----------- -----------
8,268 11,323
----------- -----------
INCOME BEFORE INCOME TAXES ............... 215,086 217,536
INCOME TAXES ............................. 75,211 79,858
----------- -----------
INCOME AFTER INCOME TAXES ................ 139,875 137,678
EQUITY IN AFFILIATES ..................... 2,486 2,522
MINORITY INTERESTS ....................... (13,777) (11,634)
----------- -----------
NET INCOME ....................... $ 128,584 $ 128,566
=========== ===========
NET INCOME PER COMMON SHARE:
Basic............................. $ 0. 69 $ 0.69
Diluted........................... $ 0. 69 $ 0.68
DIVIDENDS DECLARED PER COMMON SHARE....... $ 0.200 $ 0.200
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income ............................................................... $ 128,584 $ 128,566
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation tangible assets ........................................ 29,948 30,244
Amortization of intangible assets ................................... 7,613 3,309
Minority interests .................................................. 13,777 11,634
Earnings of affiliates less than dividends received ................. 1,251 1,082
Tax benefit on employee stock plans ................................. 1,065 10,775
(Reductions) provisions for losses on accounts receivable ........... (851) 1,168
Amortization of restricted shares ................................... 9,776 15,554
Increase in accounts receivable ..................................... (18,948) (33,976)
Increase in billable production orders in process ................... (117,565) (105,538)
Increase in prepaid expenses and other current assets ............... (65,050) (46,150)
Decrease (increase) in other assets, net ............................ 8,801 (41,377)
Net decrease in advance billings, accrued taxes and other liabilities (48,532) (255,742)
Decrease in accounts payable ........................................ (613,663) (477,737)
----------- -----------
Net cash used for operating activities ........................... (663,794) (758,188)
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................................ (28,988) (32,266)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired ................................. (22,044) (106,892)
Purchases of short-term investments ................................. (1,748) (12,553)
Proceeds from sale of short-term investments ........................ 5,043 10,400
----------- -----------
Net cash used in investing activities ............................ (47,737) (141,311)
----------- -----------
Cash flows from financing activities:
Net increase in short-term borrowings ............................... 43,448 36,625
Net proceeds from issuance of debt and convertible debentures ....... 427,354 1,310,438
Repayments of principal of long-term debt obligations ............... (29,677) (13,842)
Dividends paid ...................................................... (37,211) (36,810)
Purchase of treasury shares ......................................... -- (368,780)
Other, net .......................................................... 2,726 9,666
----------- -----------
Net cash provided by financing activities ........................ 406,640 937,297
----------- -----------
Effect of exchange rate changes on cash and cash equivalents ............. (7,497) (8,238)
----------- -----------
Net (decrease) increase in cash and cash equivalents ............. (312,388) 29,560
Cash and cash equivalents at beginning of period ......................... 666,951 472,151
----------- -----------
Cash and cash equivalents at end of period ............................... $ 354,563 $ 501,711
=========== ===========
Supplemental disclosures:
Income taxes paid ................................................... $ 115,483 $ 140,218
Interest paid ....................................................... $ 11,044 $ 9,037
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. We have prepared the consolidated condensed interim financial statements
included herein without audit pursuant to Securities and Exchange
Commission rules. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") have been condensed or omitted
pursuant to these rules.
2. The accompanying financial statements reflect all adjustments, consisting
of normally recurring accruals, which in the opinion of management are
necessary for a fair presentation, in all material respects, of the
information contained therein. Certain reclassifications have been made to
the March 31, 2002 and December 31, 2002 reported amounts to conform them
to the March 31, 2003 presentation. These statements should be read in
conjunction with the consolidated financial statements and related notes
included in our annual report on Form 10-K for the year ended December 31,
2002.
3. Results of operations for interim periods are not necessarily indicative of
annual results.
4. Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based on the above, plus, if dilutive, common share equivalents which
include outstanding options and restricted shares, some of which were not
dilutive for the periods presented. No adjustments were made for our
zero-coupon convertible notes because the conversion criteria have not been
met. For purposes of computing diluted earnings per share, 773,000 and
2,819,000 common share equivalents were assumed to be outstanding for the
three months ended March 31, 2003 and 2002, respectively.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was $240,000
and $271,000 for the three months ended March 31, 2003 and 2002,
respectively. The number of shares used in our EPS computations were:
Three Months
Ended March 31,
-------------------------------
2003 2002
---- ----
Basic EPS Computation 186,556,000 186,671,000
Diluted EPS Computation 187,329,000 189,490,000
4
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
5. Total comprehensive income and its components were:
(in thousands of dollars)
-------------------------
Three Months Ended
March 31,
-----------------------
2003 2002
---- ----
Net income for the period ........................... $ 128,584 $ 128,566
Foreign currency translation adjustment, net of
income taxes of $9,392 and $16,943
in 2003 and 2002, respectively ...................... 17,443 (29,224)
--------- ---------
Comprehensive income for the period ................. $ 146,027 $ 99,342
========= =========
6. The following pronouncements were issued by the Financial Accounting
Standards Board ("FASB") in 2002: Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146); and Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB No. 123 (SFAS 148).
SFAS 146 requires costs associated with exit or disposal activities be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal costs that are
initiated after December 31, 2002. We adopted SFAS 146 effective January 1,
2003. The adoption did not have an impact on our consolidated results of
operations or financial position.
SFAS 148 was issued as an amendment to FASB No. 123, Accounting for
Stock-Based Compensation, and provides alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation (in accordance with SFAS
123). We have applied the accounting provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and we have made the annual pro
forma disclosures of the effect of adopting the fair value method of
accounting for employee stock options and similar instruments as required
under SFAS 123 and SFAS 148. We have adopted the quarterly disclosure
requirement as required under SFAS 148 during the first quarter of 2003 as
set forth in note 7 below. This disclosure requirement did not have an
impact on our consolidated results of operations or financial position. The
FASB recently indicated that they will issue a new accounting standard that
will require stock-based employee compensation to be recorded as a charge
to earnings beginning in 2004. We will continue to monitor the progress of
the FASB with regard to the issuance of this standard.
FIN 45 sets forth the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair
5
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
value of the obligation undertaken. The application of FIN 45 did not have
an impact on, or result in additional disclosure, in our March 31, 2003
consolidated results of operations or financial position.
FIN 46 addresses the consolidation by business enterprises of variable
interest entities, as defined in FIN 46 and is based on the concept that
companies that control another entity through interests, other than voting
interests, should consolidate the controlled entity. The consolidation
requirements apply immediately to FIN 46 interests held in variable
interest entities created after January 31, 2003, and to interests held in
variable interest entities that existed prior to February 1, 2003 and
remain in existence as of July 1, 2003. The application of FIN 46 did not
have an impact on, or result in additional disclosure in, our March 31,
2003 consolidated results of operations or financial position.
7. The table below summarizes the quarterly pro forma effect of adopting the
fair value method of accounting for employee stock options and similar
instruments.
(in thousands of dollars,
except per share amounts)
-------------------------
1st Quarter 1st Quarter
2003 2002
----------- -----------
Net income, as reported ............................ $128,584 $128,566
Net income, pro forma .............................. 115,154 102,441
Stock-based employee compensation cost,
net of tax, as reported ..................... 8,095 7,554
Additional stock-based employee compensation cost,
net of tax, pro forma ....................... 13,430 26,125
Basic net income per share, as reported ............ 0.69 0.69
Basic net income per share, pro forma .............. 0.62 0.55
Diluted net income per share, as reported .......... 0.69 0.68
Diluted net income per share, pro forma ............ 0.62 0.55
6
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
8. All of our wholly and partially owned businesses operate within the
marketing and corporate communications services industry. These agencies
are organized into strategic platforms, client centric networks, geographic
regions and operating groups. Our businesses provide communications
services to similar type clients on a global, pan-regional and national
basis. The businesses have similar cost structures, and are subject to the
same general economic and competitive risks. Given these similarities, we
aggregate their results into one reportable segment.
A summary of our revenue and long-lived assets by geographic area for
the three months ended March 31, 2003 and 2002 is summarized in the
following table.
(in thousands of dollars)
---------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Consolidated
------ ----------- ------- ------------- ------------
2003
Revenue ........... $1,099,575 $388,051 $210,911 $238,708 $1,937,245
Long-Lived Assets . 317,125 80,839 82,633 78,774 559,371
2002
Revenue ........... $1,022,129 $319,894 $182,903 $207,500 $1,732,426
Long-Lived Assets . 329,468 63,248 89,375 74,720 556,811
9. Amounts outstanding under our revolving credit facilities at March 31, 2003
include loans of $100.0 million. Additionally, $350.4 million of commercial
paper was outstanding. Both are classified as long-term debt.
We also had short-term bank loans of $95.9 million at March 31, 2003,
comprised of domestic borrowings and bank overdrafts of our international
subsidiaries which are unsecured loans.
At March 31, 2003, we had committed unsecured credit lines aggregating
$1,893.0 million. The unused portion of our credit lines was $1,410.0
million at March 31, 2003.
10. On February 3, 2003, we offered to pay holders of our Liquid Yield Option
Notes due in 2031, $30 per $1,000 principal amount of notes as an incentive
to the holders not to exercise their put right. We paid $25.4 million to
qualified noteholders on February 21, 2003, which is being amortized
ratably over the next year. In addition, on February 7, 2003, we
repurchased for cash, notes from holders who exercised their put right for
$2.9 million, reducing the aggregate amount outstanding of the notes due
2031 to $847.0 million.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
First Quarter 2003 Compared to First Quarter 2002
Revenue: Our first quarter of 2003 consolidated worldwide revenue increased
11.8% to $1,937.2 million from $1,732.4 million in 2002. The effect of
acquisitions, net of disposals, increased worldwide revenue by $52.7 million in
the first quarter of 2003. Internal/organic growth increased worldwide revenue
by $44.8 million, and foreign exchange impacts increased worldwide revenue by
$107.3 million. The components of the first quarter 2003 revenue growth in the
U.S. ("domestic") and the remainder of the world ("international") are
summarized below ($ in millions):
Total Domestic International
----------------- ----------------- ---------------
$ % $ % $ %
-------- --- -------- --- ------ ---
March 31, 2002....................... $1,732.4 -- $1,022.2 -- $710.2 --
Components of Revenue Changes:
Foreign exchange impact.............. 107.3 6.2% -- -- 107.3 15.1%
Acquisitions......................... 52.7 3.0% 33.4 3.3% 19.3 2.7%
Organic.............................. 44.8 2.6% 44.0 4.3% 0.8 0.1%
------- --- ------- --- ------ ---
March 31, 2003....................... $1,937.2 11.8% $1,099.6 7.6% $837.6 17.9%
======== ==== ======== === ====== ====
The components and percentages are calculated as follows:
o The foreign exchange impact component shown in the table is calculated
by first converting the current period's local currency revenue using
the average exchange rates from the equivalent prior period to arrive
at a constant currency revenue (in this case $1,829.9 million for the
Total column in the table). The foreign exchange impact equals the
difference between the current period revenue in U.S. dollars and the
current period revenue in constant currency (in this case $1,937.2
million less $1,829.9 million for the Total column in the table).
o The acquisition component shown in the table is calculated by
aggregating the applicable prior period revenue of the acquired
businesses. Netted against this number is the revenue of any business
included in the prior period reported revenue that was disposed of
subsequent to the prior period.
o The organic component shown in the table is calculated by subtracting
both the foreign exchange and acquisition revenue components from
total revenue growth.
o The percentage change shown in the table of each component is
calculated by dividing the individual component amount by the prior
period revenue base of that component (in this case $1,732.4 million
for the Total column in the table).
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
The components of revenue and revenue growth for the first quarter of 2003
compared to the first quarter of 2002, in our primary geographic markets are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $1,099.6 7.6%
Euro Markets........................ 388.1 21.3%
United Kingdom...................... 210.9 15.3%
Other............................... 238.6 15.0%
------- ----
Total............................... $1,937.2 11.8%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $107.3 million during the quarter ended March 31, 2003. The most significant
impacts resulted from the continued strength of the Euro and the British Pound
against the U.S. dollar, as our operations in these markets represented
approximately 70.0% of our international revenue.
The current geopolitical uncertainty combined with the prolonged weak
economic conditions have created a challenging business climate. As a result,
management believes that the overall demand for advertising and other marketing
and corporate communications services in the near term will continue to be
difficult to predict.
Several long-term trends continue to positively affect our business,
including our clients increasingly expanding the focus of their brand strategies
from national markets to the global market. Additionally, in an effort to gain
greater efficiency and effectiveness from their marketing dollars, clients are
increasingly requiring greater coordination of their traditional advertising and
marketing activities and concentrating these activities with a smaller number of
service providers.
Driven by clients' continuous demand for more effective and efficient
branding activities, we strive to provide an extensive range of marketing and
corporate communications services through various client centric networks that
are organized to meet specific client objectives. These services include
advertising, brand consultancy, crisis communications, custom publishing,
database management, digital and interactive marketing, direct marketing,
directory advertising, entertainment marketing, environmental design,
experiential marketing, field marketing, financial/corporate business to
business advertising, graphic arts, healthcare communications, instore design,
investor relations, marketing research, media planning and buying,
multi-cultural marketing, non-profit marketing, organizational communications,
package design, product placement, promotional marketing, public affairs, public
relations, real estate advertising and marketing, recruitment communications,
reputation consulting, retail marketing and sports and event marketing. In an
effort to monitor the changing needs of our clients and to further expand the
scope of our services to key clients, we monitor revenue across a broad range of
disciplines and group them into the following four categories: traditional media
advertising, customer relationship management referred to as CRM, public
relations and specialty communications as summarized below.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
(Dollars in millions)
-------------------------------------------------------------------
1st Quarter % of 1st Quarter % of $ %
2003 Revenue 2002 Revenue Growth Growth
--------- ------- -------- ------- ------ ------
Traditional media advertising $ 859.7 44.4% $ 777.8 44.9% $ 81.9 10.5%
CRM 631.3 32.6% 522.7 30.2% 108.6 20.8%
Public relations 225.0 11.6% 227.4 13.1% (2.4) (1.1)%
Specialty communications 221.2 11.4% 204.5 11.8% 16.7 8.2%
-------- -------- ------
$1,937.2 $1,732.4 $204.8
======== ======== ======
Operating Expenses: Our first quarter of 2003 worldwide operating
expense increased $210.3 million, or 14.0%, to $1,713.9 million from $1,503.6
million in the first quarter of 2002, as described below.
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $168.2 million, or 14.3%, and represented
78.2% of total operating expenses in the first quarter of 2003 versus 78.0% in
the first quarter of 2002. These expenses increased as a percentage of revenue
to 69.2% in the first quarter of 2003 from 67.7% in the first quarter of 2002.
Salary related costs including incentive compensation and bonuses, decreased as
a percentage of revenue in the first quarter of 2003 primarily as a result of
reductions in incentive compensation and our continuing efforts to align
permanent staffing with current work levels on a location by location basis, as
well as our continued attempts to increase the variability of our cost structure
by relying more upon freelance labor. This was offset by increased direct
service costs including greater utilization of freelance labor, increased
severance related costs and changes in the mix of our revenues.
Office and general expenses increased by $42.1 million, or 12.7%, in the
first quarter of 2003. Office and general expenses represented 21.8% of our
total operating costs in the first quarter of 2003 versus 22.0% in the first
quarter of 2002. Additionally, as a percentage of revenue office and general
expenses increased marginally in the first quarter of 2003 to 19.3% from 19.1%.
This relatively consistent year-over-year performance results from our continued
efforts to better align costs with business levels on a location-by-location
basis.
For the foregoing reasons, our operating margin decreased by $5.5 million,
or 2.4% to $223.4 million or 11.5% of revenue in the first quarter of 2003, from
$228.9 million or 13.2% of revenue in the first quarter of 2002.
Net Interest Expense: Our net interest expense decreased in the first
quarter of 2003 to $8.3 million as compared to $11.3 million in the same period
in 2002. Our gross interest expense decreased by $2.6 million to $11.2 million.
This decrease resulted from the issuance in March 2002 of the $900.0 million
Zero Coupon Zero Yield Convertible Notes, generally lower short-term interest
rates and cash management efforts during the quarter. This was partially offset
by additional interest costs associated with our payment of $30 per $1,000
principal amount of our Liquid Yield Option Notes due 2031 as an incentive to
the holders not to exercise their put right. We paid $25.4 million to qualified
noteholders on February 21, 2003, which is being amortized ratably over the next
year. As a result of the payment made, we expect interest
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
expense to increase by $23.3 million for the full-year 2003 compared to 2002. In
addition, depending on future market conditions, we may make a similar offer to
holders of the Zero Coupon Zero Yield Convertible Notes due 2032 in July 2003.
We cannot determine at this time if such an offer will be made or, if one is
made, the amount that may be offered or actually paid. If an offer is made and a
payment results, our interest expense would further increase in the second-half
of 2003 compared to 2002.
Income Taxes: Our consolidated effective income tax rate was 35.0% in the
first quarter of 2003, which is consistent with our full year rate for 2002, but
is less than the 36.7% rate in the first quarter of 2002. This reduction
reflects the realization of our ongoing focus on tax planning.
Minority Interests: In the first quarter of 2003, minority interest expense
increased slightly to $13.8 million from $11.6 million in the first quarter of
2002, primarily due to higher earnings by companies where minority interests
exist.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first quarter of 2003, increased marginally to $128.6 million. Diluted earnings
per share increased 1.4% to $0.69 in the first quarter of 2003, as compared to
$0.68 in the prior year period.
Critical Accounting Policies and New Accounting Pronouncements
To assist in better understanding our financial statements and the related
management's discussion and analysis of those results, readers are encouraged to
consider this information together with our discussion of critical accounting
policies in the MD&A in our 2002 10-K, as well as our consolidated financial
statements and the related notes included in our 2002 10-K for a more complete
understanding of all of our accounting policies.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Contingent Acquisition Obligations
Certain of our acquisitions are structured with additional contingent
purchase price obligations. We utilize contingent purchase price structures in
an effort to minimize the risk to the Company associated with potential future
negative changes in the performance of the acquired entity. We estimate that the
amount of future contingent purchase price payments, assuming that the acquired
businesses perform over the relevant future periods at their current profit
levels, that we will be required to make for prior acquisitions is $490.2
million as of March 31, 2003. The ultimate amounts payable are dependent upon
future results, are subject to changes in foreign currency exchange rates and,
in accordance with GAAP, we have not recorded a liability for these items on our
balance sheet since the definitive amount is not determinable or distributable.
Actual results can differ from these estimates and the actual amounts that we
pay are likely to be different from these estimates. Our obligations change from
period to period as a result of payments made during the current period, changes
in the previous estimate of the acquired entities' performance, changes in
foreign currency exchange rates and other factors. These differences could be
material. We estimate these contingent purchase price obligations as of March
31, 2003, are as follows:
($ in millions)
----------------------------------------------------------------
Remainder There-
2003 2004 2005 2006 after Total
---- ---- ---- ---- ----- -----
$231.5 $129.2 $82.6 $28.7 $18.2 $490.2
In addition, owners of interests in certain of our subsidiaries or
affiliates have the right in certain circumstances to require us to purchase
additional ownership stakes in these subsidiaries or affiliates which we
estimate, assuming that the subsidiaries and affiliates perform over the
relevant periods at their current profit levels, could require us in future
periods to pay an additional aggregate of $242.2 million, $124.5 million of
which are currently exercisable. The ultimate amount payable in the future
relating to these transactions will vary because it is dependent on the future
results of operations of the subject businesses and the timing of when these
rights are exercised. The actual amounts that we pay are likely to be different
from these estimates. These differences could be material. We estimate the
obligations that exist for these agreements as of March 31, 2003 are as follows:
($ in millions)
----------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ------------- ------
Subsidiary agencies $111.6 $102.8 $214.4
Affiliated agencies 12.9 14.9 27.8
------ ------ ------
Total $124.5 $117.7 $242.2
====== ====== ======
If these rights were to be exercised, there would be an increase in our net
income as a result of our increased ownership and the corresponding reduction in
minority interest expense.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Liquidity and Capital Resources
Liquidity: We had cash and cash equivalents totaling $354.6 million and
$667.0 million and short-term investments totaling $26.1 million and $28.9
million at March 31, 2003 and December 31, 2002, respectively. Consistent with
our historical trends in the first quarter of the year, we had negative cash
flow from operations of $663.8 million, including tax payments and payments to
vendors and to the media on behalf of clients. This resulted in a significant
reduction in our year-end current liabilities. We funded these liabilities with
cash on hand and by drawing down on available credit facilities.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks, a three-year revolving credit facility which increased from
$800.0 million to $835.0 million and matures November 14, 2005 and a $1,025.0
million 364-day revolving credit facility with a maturity date of November 13,
2003. We are also an active participant in the commercial paper market with a
$1,500.0 million program. Each of our bank credit facilities provide credit
support for issuances under this program. As of March 31, 2003, we had $450.4
million borrowings outstanding under these credit facilities. The 364-day
facility includes a provision which allows us to convert all amounts outstanding
at expiration of the facility into a one-year term loan. The consortium of banks
under the 364-day credit facility consists of 19 banks for which Citibank N.A.
acts as agent. Other significant lending institutions include JPMorgan Chase
Bank, HSBC Bank USA, San Paolo IMI S.p.A., Barclays, Wachovia and Societe
Generale. A similar consortium of 16 banks provides support under the three-year
revolving credit facility for which Citibank N.A. acts as administrative agent
and ABN AMRO Bank acts as syndication agent. Other significant lending
institutions include HSBC Bank USA, JPMorgan Chase Bank, Wachovia and Societe
Generale. These facilities provide us with the ability to classify up to
$1,860.0 million of our borrowings due within one year as long-term debt, as it
is our intention to keep the borrowings outstanding on a long-term basis.
We had short-term bank loans of $95.9 million and $50.4 million at March
31, 2003, and December 31, 2002, respectively comprised of domestic borrowings
and bank overdrafts of our international subsidiaries which are unsecured loans.
At March 31, 2003, we had a total of $1,747.0 million aggregate principal
amount of convertible notes outstanding, including $847.0 million Liquid Yield
Option Convertible Notes due 2031, which were issued in February 2001 and $900.0
million Zero Coupon Zero Yield Convertible Notes due 2032, which were issued in
March 2002. The holders of our Liquid Yield Option notes have the right to cause
us to repurchase up to the entire aggregate face amount of the notes then
outstanding for par value in February of each year and the holders of our Zero
Coupon Zero Yield Convertible Notes have the right to cause us to repurchase up
to the entire aggregate face amount of the notes then outstanding for par value
in August of each year. Both series of notes are convertible, at a specified
ratio, only upon the occurrence of certain events, including if our common
shares trade above certain levels, if we effect extraordinary transactions or if
our long-term debt ratings are downgraded by at least two notches from their
March 31, 2003 level of A- to BBB or lower by Standard & Poor's Investors
Services, Inc., and Baa1 to
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (Continued)
Baa3 or lower by Moody's Investors Services, Inc. These events would not,
however, result in an adjustment of the number of shares issuable upon
conversion. On February 3, 2003, we offered to pay holders of the Liquid Yield
Option Notes due in 2031, $30 in cash per $1,000 principal amount of notes. On
February 7, 2003, we repurchased for cash, $2.9 million of these notes from
holders who tendered their notes in lieu of the cash payment, reducing the
outstanding aggregate face amount of the Liquid Yield Option Notes to $847.0
million. We paid $25.4 million to qualified noteholders who did not tender their
notes on February 21, 2003.
At March 31, 2003, we had approximately $166.4 million of Euro-denominated
bonds outstanding. The bonds pay a fixed rate of 5.2% to maturity in June 2005.
The bonds serve as a hedge of our investment in Euro-denominated net assets.
While an increase in the value of the euro against the dollar will result in a
greater liability for interest and principal, there will be a corresponding
increase in the dollar value of our euro-denominated net assets.
Below is a summary of our debt position as of March 31, 2003 ($ in
millions):
Debt:
Bank loans (due in less than 1 year)........................ $ 95.9
$835.0 Million Revolver - due November 14, 2005........... 100.0
Commercial paper issued under 364-day Facility.............. 350.4
5.20% Euro notes - due June 24, 2005...................... 166.4
Convertible notes - due February 7, 2031.................. 847.0
Convertible notes - due July 31, 2032..................... 900.0
Loan notes and sundry - various through 2012.............. 22.3
--------
Total Debt...................................................... $2,482.0
========
We believe that our operating cash flow combined with our available lines
of credit and our access to the capital markets are sufficient to support our
foreseeable cash requirements, including working capital, capital expenditures,
dividends and acquisitions.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our operations are subject to the risk of currency exchange rate
fluctuations related to our international operations. While our agencies conduct
business in more than 70 different currencies, our major non-U.S. currency
markets are the European Monetary Union (EMU), the United Kingdom, Japan, Brazil
and Canada. Our net income is subject to risk from the translation of the
revenue and expenses of our foreign operations, which are generally denominated
in the local currency. The effects of currency exchange rate fluctuations on our
first quarter operations were positive as discussed above.
We do not hedge our exposure against the US dollar in the normal course of
our business. We do, however, conduct global treasury operations to improve
liquidity and manage third-party interest expense centrally. As an integral part
of these operations, we enter into short-term forward foreign exchange contracts
to hedge intercompany cash movements between subsidiaries operating in different
currency markets. To the extent that our treasury centers require liquidity,
they can access local currency lines of credit, our committed bank facilities or
dollar-denominated commercial paper. A foreign treasury center borrowing U.S.
dollar-denominated commercial paper will generally enter into a short-term
exchange contract to hedge its position.
Outside of major markets, our subsidiaries generally borrow funds directly
in their local currency. In addition, we periodically enter into cross-currency
interest rate swaps to hedge our net yen investments.
Our 2002 Form 10-K provides a more detailed discussion of the market risks
affecting our operations. As of March 31, 2003, no material change had occurred
in our market risks from the disclosure contained in that 10-K.
Forward-Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk" set
forth in this report contain disclosures which are forward-looking statements
within the meaning of the federal securities laws. Forward-looking statements
include all statements that do not relate solely to historical or current facts,
and can be identified by the use of words such as "may," "will," "expect,"
"project," "estimate," "anticipate," "envisage," "plan" or "continue." These
forward-looking statements are based upon our current plans or expectations and
are subject to a number of uncertainties and risks that could significantly
affect current plans and anticipated actions and our future financial condition
and results. The uncertainties and risks include, but are not limited to,
changes in general economic conditions, competitive factors, client
communication requirements, the hiring and retention of human resources and
other factors. In addition, our international operations are subject to the risk
of currency fluctuations, exchange controls and similar risks discussed above.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by us or on our behalf, and those differences could be material.
15
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be included in our SEC reports is recorded, analyzed and
reported within applicable time periods. During the 90-day period prior to the
filing of this report, we conducted an evaluation, under the supervision and
with the participation of our management, including our CEO and CFO, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our CEO and CFO concluded that they believe that our disclosure
controls and procedures are effective to ensure recording, analysis and
reporting of information required to be included in our SEC reports on a timely
basis. There have been no significant changes in our internal controls or other
factors that could be reasonably expected to significantly affect the
effectiveness of these controls since that evaluation was completed.
16
PART II. OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. ss.1350, as adopted pursuant
to ss.906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On February 25, 2003, we filed a Current Report on Form 8-K to furnish
under Item 9 (Regulation FD Disclosure) our press release announcing our
operating results for 2002 and the fourth quarter of 2002 and the text of
materials used in the related call at which such results were discussed.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNICOM GROUP INC.
May 15, 2003 /s/ Randall J. Weisenburger
---------------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(on behalf of Omnicom Group Inc.
and as Principal Financial Officer)
18
CERTIFICATION
I, John Wren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omnicom Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ John D. Wren
-----------------------------------------
John D. Wren
Chief Executive Officer and President
19
CERTIFICATION
I, Randall Weisenburger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omnicom Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Randall J. Weisenburger
---------------------------------------
Randall J. Weisenburger
Executive Vice President and
Chief Financial Officer
20