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: September 30, 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
incorporation or organization) Identification Number)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 190,000,900 (as of October 31,
2003)
OMNICOM GROUP INC. AND SUBSIDIAIRES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 2003 and December 31, 2002.................... 1
Consolidated Condensed Statements of Income - Three Months
and Nine Months Ended September 30, 2003 and 2002........... 2
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 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.................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 21
Item 4. Controls and Procedures....................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signatures.................................................... 24
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2003 2002
---- ----
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 563,890 $ 666,951
Short-term investments at market, which approximates cost .......... 23,822 28,930
Accounts receivable, less allowance for doubtful accounts
of $71,374 and $75,575 .......................................... 4,034,880 3,966,550
Billable production orders in process, at cost ..................... 596,821 371,816
Prepaid expenses and other current assets .......................... 695,846 602,819
----------- -----------
Total Current Assets .................................. 5,915,259 5,637,066
----------- -----------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of
$809,817 and $717,294 .............................................. 572,378 557,735
INVESTMENTS IN AFFILIATES ............................................... 145,374 137,303
GOODWILL ................................................................ 5,581,450 4,850,829
INTANGIBLES, net of accumulated amortization of $110,652 and $88,132 .... 88,696 97,730
DEFERRED TAX BENEFITS ................................................... 42,216 42,539
OTHER ASSETS ............................................................ 335,324 496,600
----------- -----------
TOTAL ASSETS .......................................... $12,680,697 $11,819,802
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................................... $ 4,468,728 $ 4,833,681
Advance billings ................................................... 707,374 648,577
Current portion of long-term debt .................................. 11,810 35,256
Bank loans ......................................................... 52,873 50,394
Accrued taxes and other liabilities ................................ 1,280,590 1,271,616
----------- -----------
Total Current Liabilities ............................. 6,521,375 6,839,524
----------- -----------
LONG-TERM DEBT .......................................................... 185,014 197,861
CONVERTIBLE NOTES ....................................................... 2,339,310 1,747,037
DEFERRED COMPENSATION AND OTHER LIABILITIES ............................. 328,525 293,638
MINORITY INTERESTS ...................................................... 189,056 172,815
SHAREHOLDERS' EQUITY:
Common stock ....................................................... 29,790 29,790
Additional paid-in capital ......................................... 1,382,025 1,419,910
Retained earnings .................................................. 2,456,938 2,114,506
Unamortized restricted stock ....................................... (139,868) (136,357)
Accumulated other comprehensive loss ............................... (10,089) (154,142)
Treasury stock ..................................................... (601,379) (704,780)
----------- -----------
Total Shareholders' Equity ............................ 3,117,417 2,568,927
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $12,680,697 $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 September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE ................................ $2,028,603 $1,768,459 $6,115,356 $5,417,454
OPERATING EXPENSES:
Salary and service costs .......... 1,394,888 1,195,574 4,143,652 3,589,962
Office and general expenses ....... 399,304 361,494 1,177,293 1,056,752
---------- ---------- ---------- ----------
1,794,192 1,557,068 5,320,945 4,646,714
---------- ---------- ---------- ----------
OPERATING PROFIT ....................... 234,411 211,391 794,411 770,740
NET INTEREST EXPENSE:
Interest expense .................. 15,418 10,365 42,803 34,874
Interest income ................... (3,885) (4,801) (10,049) (12,045)
---------- ---------- ---------- ----------
11,533 5,564 32,754 22,829
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ............. 222,878 205,827 761,657 747,911
INCOME TAXES ........................... 75,510 69,696 261,276 271,568
---------- ---------- ---------- ----------
INCOME AFTER INCOME TAXES .............. 147,368 136,131 500,381 476,343
EQUITY IN AFFILIATES ................... 3,996 2,436 8,348 8,412
MINORITY INTERESTS ..................... (16,095) (12,463) (54,128) (42,770)
---------- ---------- ---------- ----------
NET INCOME ..................... $ 135,269 $ 126,104 $ 454,601 $ 441,985
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic .......................... $0.72 $0.68 $2.43 $2.37
Diluted ........................ $0.72 $0.68 $2.42 $2.36
DIVIDENDS DECLARED PER COMMON SHARE .... $0.20 $0.20 $0.60 $0.60
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)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income .................................................................... $ 454,601 $ 441,985
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation tangible assets ............................................. 92,050 89,965
Amortization of intangible assets ........................................ 22,819 15,441
Minority interests ....................................................... 54,128 42,770
Earnings of affiliates less than dividends received ...................... 1,440 4,174
Tax benefit on employee stock plans ...................................... 8,946 12,235
Provisions for losses on accounts receivable ............................. 6,349 7,634
Amortization of restricted shares ........................................ 38,087 45,378
Decrease in accounts receivable .......................................... 117,978 152,801
Increase in billable production orders in process ........................ (211,807) (136,566)
Increase in prepaid expenses and other current assets .................... (73,739) (42,728)
Decrease in other assets, net ............................................ 9,142 42,954
Net decrease in advance billings, accrued taxes and other liabilities .... (83,812) (535,135)
Decrease in accounts payable ............................................. (551,309) (373,580)
--------- ----------
Net cash used for operating activities ................................ (115,127) (232,672)
--------- ----------
Cash flows from investing activities:
Capital expenditures ..................................................... (95,576) (91,281)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired ...................................... (271,095) (342,523)
Purchases of short-term investments ...................................... (4,196) (11,669)
Proceeds from sale of short-term investments ............................. 11,656 24,276
--------- ----------
Net cash used in investing activities ................................. (359,211) (421,197)
--------- ----------
Cash flows from financing activities:
Decrease in short-term borrowings ........................................ (2,315) (100,764)
Net proceeds from issuance of new convertibles and long-term debt ........ 602,074 1,190,456
Repayments of principal of long-term debt obligations .................... (67,165) (73,802)
Dividends paid ........................................................... (111,812) (110,958)
Purchase of treasury shares .............................................. (25,928) (368,819)
Other, net ............................................................... (18,313) (1,622)
--------- ----------
Net cash provided by financing activities ............................. 376,541 534,491
--------- ----------
Effect of exchange rate changes on cash and cash equivalents .................. (5,264) 4,876
--------- ----------
Net Decrease in cash and cash equivalents ............................. (103,061) (114,502)
Cash and cash equivalents at beginning of period .............................. 666,951 472,151
--------- ----------
Cash and cash equivalents at end of period .................................... $ 563,890 $ 357,649
========= ==========
Supplemental disclosures:
Income taxes paid ........................................................ $ 229,556 $ 280,513
Interest paid ............................................................ $ 53,712 $ 32,358
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO UNAUDITED 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 September 30, 2002 and December 31, 2002 reported amounts to conform
them to the September 30, 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 $2.3
billion aggregate principal amount of convertible notes because the
conversion criteria have not been met. For purposes of computing diluted
earnings per share, 1,821,000 and 786,000 common share equivalents were
assumed to be outstanding for the three months ended September 30, 2003
and 2002, respectively, and 1,101,000 and 1,816,000 common share
equivalents were assumed to be outstanding for the nine months ended
September 30, 2003 and 2002, respectively.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was
$281,000 and $252,000 for the three months ended September 30, 2003 and
2002, respectively and $843,000 and $757,000 for the nine months ended
September 30, 2003 and 2002, respectively.
The number of shares used in our EPS computations were:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic EPS Computation 187,499,000 185,865,000 187,076,000 186,107,000
Diluted EPS Computation 189,320,000 186,652,000 188,177,000 187,923,000
4
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
5. Total comprehensive income and its components were:
(in thousands of dollars)
-------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income for the period .............................. $135,269 $126,104 $454,601 $441,985
Foreign currency translation adjustment, net of
income taxes of $7,119 and $3,275 and
$77,567 and $48,107 for the three months and
nine months ended September 30, 2003 and 2002,
respectively ........................................... 13,222 (4,913) 144,053 72,160
-------- -------- -------- --------
Comprehensive income for the period .................... $148,491 $121,191 $598,654 $514,145
======== ======== ======== ========
6. The following pronouncements were issued by the Financial Accounting
Standards Board ("FASB") in 2002 with effective dates in 2003: Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146); Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB No. 123 (SFAS 148);
Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liability and
Equity (SFAS 150).
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 a significant 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 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.
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that
5
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). We adopted SFAS 150
effective July 1, 2003. The adoption did not have an impact on, or result
in additional disclosure in, our September 30, 2003 consolidated results
of operations or financial position.
The following FASB Interpretations ("FINs") were issued in 2002 and
2003: FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others - an
Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34; and FIN 46, Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51.
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 value of
the obligation undertaken. The application of FIN 45 did not have an
impact on, or result in additional disclosure, in our September 30, 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. For interests
held in variable interest entities that existed prior to February 1, 2003,
implementation has been delayed to December 31, 2003. The application of
FIN 46 did not have an impact on, or result in additional disclosure in,
our September 30, 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 for the three months and nine months ended September 30, 2003
and 2002.
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands of dollars, except per share amounts)
---------------------------------------------------
Net income, as reported ............................... $135,269 $126,104 $454,601 $441,985
Net income, pro forma ................................. 124,729 110,508 419,861 385,104
Stock-based employee compensation cost,
net of tax, as reported ........................... 9,483 7,900 26,608 24,074
Additional stock-based employee compensation cost,
net of tax, pro forma ............................. 10,538 15,584 34,732 56,883
Basic net income per share, as reported ............... 0.72 0.68 2.43 2.37
Basic net income per share, pro forma ................. 0.67 0.59 2.24 2.07
Diluted net income per share, as reported ............. 0.72 0.68 2.42 2.36
Diluted net income per share, pro forma ............... 0.67 0.59 2.24 2.07
6
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO UNAUDITED 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. We believe that 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 as
of September 30, 2003 and 2002 is set forth in the following table.
(in thousands of dollars)
---------------------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Total
------ ----------- ------- ------------- -----
Revenue
3 Months Ended September 30,
2003 $1,111,099 $ 411,551 $223,471 $282,482 $2,028,603
2002 991,446 346,455 205,336 225,222 1,768,459
Revenue
9 Months Ended September 30,
2003 $3,392,877 $1,245,782 $667,150 $809,547 $6,115,356
2002 3,131,124 1,026,621 583,512 676,197 5,417,454
Long-lived Assets
at September 30,
2003 $ 308,119 $ 88,259 $ 86,030 $ 89,970 $ 572,378
2002 311,177 69,426 87,225 79,205 547,033
9. At September 30, 2003, we had unsecured committed credit lines of $52.9
million, which were fully drawn and are reflected as short-term bank
loans. These unsecured loans were comprised of local borrowings and bank
overdrafts of our international subsidiaries. In addition, we had
unsecured committed revolving credit facilities of $1,875.0 million. There
were no drawings under the revolving credit facilities and no commercial
paper outstanding as of September 30, 2003.
10. In June 2003, we issued $600.0 million aggregate principal amount of Zero
Coupon Zero Yield Convertible Notes due 2033. The notes are senior
unsecured obligations that are convertible into 5.8 million common shares,
implying a conversion price of $103.00 per common share, subject to normal
anti-dilution adjustments. These notes are convertible at the 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 from their current level
to Ba1 or lower by Moody's Investors Services, Inc. ("Moody's") or BBB- or
lower by Standard & Poor's Ratings Services ("S&P"). The occurrence of
these events will not result in an adjustment of the number of shares
issuable upon conversion. Holders of these notes have the right to put the
notes back to us for, at our election, cash, stock or a combination of
both on June 15, 2006, 2008, 2010, 2013, 2018, 2023 and on each June 15
annually thereafter through June 15, 2032 and we have a right to redeem
the notes for cash beginning on June 15, 2010. There are no events that
accelerate the noteholders' put rights. Beginning in June 2010, if the
market
7
OMNICOM GROUP INC. AND SUBSIDIAIRES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
price of the notes exceeds certain thresholds, we may be required to pay
contingent cash interest on the notes.
The net proceeds of the issuance of these notes were $586.5 million which
was used to pay down short-term bank loans and our outstanding commercial
paper. The issuance costs of $13.5 million are being amortized over a
period through the first put date of June 2006.
11. On February 21, 2003, we paid $25.4 million to qualified noteholders of
our Liquid Yield Option Notes due in 2031, equal to $30 per $1,000
principal amount of notes as an incentive to the holders not to exercise
their put right. This payment is being amortized over the 12-month period
ended February 2004. 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.
12. In June 2003, we acquired all of the common stock of AGENCY.COM from
Seneca Investments LLC ("Seneca"). The transaction was effected by the
redemption of our preferred stock in Seneca, including cumulative
dividends, with a value of $181.0 million and the assumption of $15.8
million of liabilities. The redemption of the preferred stock was applied
against our remaining carrying value in the preferred stock using the cost
recovery method. The remaining shares of preferred stock are entitled to
cumulative dividends at a rate of 8.5% compounded semiannually. Unpaid
dividends accrue on a cumulative basis. No cash dividends have been paid
by Seneca or accrued by the Company in 2003 and prior. Any future
dividends will not be recognized until they are realized.
Substantially all of the purchase price was allocated to goodwill. We are
currently performing a valuation of the intangible assets of AGENCY.COM,
and upon completion, some portion of the purchase price may be assigned to
intangible assets other than goodwill. We do not believe that any amounts
that may be allocated to other intangibles would have had a material
impact on our September 30, 2003 interim results of operations and
financial position had the allocation been completed.
13. On August 6, 2003, we paid $6.7 million to qualified noteholders of our
Zero Coupon Zero Yield Convertible Notes due in 2032, equal to $7.50 per
$1,000 principal amount of notes as an incentive to the holders not to
exercise their put right. This payment is being amortized over the
12-month period ended August 2004. In addition, on August 1, 2003, we
repurchased for cash, notes from holders who exercised their put right for
$7.7 million, reducing the aggregate amount outstanding of the notes due
2032 to $892.3 million. For those holders who did not exercise their put
right, the no call period on the notes was extended from July 31, 2007 to
July 31, 2009.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations
Third Quarter 2003 Compared to Third Quarter 2002
Revenue: Our third quarter of 2003 consolidated worldwide revenue
increased 14.7% to $2,028.6 million from $1,768.5 million in the third quarter
of 2002. The effect of acquisitions, net of disposals, increased worldwide
revenue by $87.2 million in the third quarter of 2003. Internal/organic growth
increased worldwide revenue by $92.7 million, and foreign exchange impacts
increased worldwide revenue by $80.2 million. The components of the third
quarter 2003 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
----------------- ----------------- ---------------
$ % $ % $ %
-------- ---- -------- ---- ------ ----
Third Quarter ended September 30, 2002 ...... $1,768.5 -- $ 991.5 -- $777.0 --
Components of Revenue Changes:
Foreign exchange impact ..................... 80.2 4.6% -- -- 80.2 10.4%
Acquisitions ................................ 87.2 4.9% 53.5 5.4% 33.7 4.3%
Organic ..................................... 92.7 5.2% 66.1 6.7% 26.6 3.4%
-------- ---- -------- ---- ------ ----
Third Quarter ended September 30, 2003 ...... $2,028.6 14.7% $1,111.1 12.1% $917.5 18.1%
======== ==== ======== ==== ====== ====
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
$1,948.4 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $2,028.6 million less $1,948.4 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 $1,768.5 million
for the "Total" column in the table).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
The components of revenue and revenue growth for the third quarter of 2003
compared to the third quarter of 2002, in our primary geographic markets are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States.......... $1,111.1 12.1%
Euro Markets........... 411.6 18.8%
United Kingdom......... 223.5 8.8%
Other.................. 282.4 25.4%
-------- ----
Total.................. $2,028.6 14.7%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $80.2 million during the quarter ended September 30, 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.
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 our 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
(Dollars in millions)
-----------------------------------------------------------------------
Three Months Ended September 30,
2003 % of 2002 % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising $ 844.5 41.6% $ 749.4 42.4% $ 95.1 12.7%
CRM 717.7 35.4% 599.0 33.9% 118.7 19.8%
Public relations 232.1 11.4% 220.7 12.4% 11.4 5.2%
Specialty communications 234.3 11.6% 199.4 11.3% 34.9 17.5%
-------- -------- ------
$2,028.6 $1,768.5 $260.1 14.7%
======== ======== ====== =====
Operating Expenses: Our 2003 third quarter worldwide operating expenses
increased $237.1 million, or 15.2%, to $1,794.2 million from $1,557.1 million in
the third quarter of 2002. As a percentage of revenue, operating expenses
increased marginally to 88.4% in the third quarter of this year, compared to
88.0% in the comparable period last year.
Salary and service costs represent the largest part of operating expenses.
As a percentage of operating expenses, they were 77.7% in the third quarter of
2003 and 76.8% in the third quarter of 2002. These costs are comprised of direct
service costs and salary and related costs. Most of, or 84.1% of the $237.1
million increase in operating expenses this quarter resulted from increases in
salary and service costs. This $199.3 million increase in salary and service
costs was attributable to increased revenue levels, greater utilization of
freelance labor, continued investment in new and key personnel, increased
severance costs, as well as an increase in incentive compensation. As a result,
salary and service costs as a percentage of revenues increased period-to-period
from 67.6% in the third quarter of 2002 to 68.8% in the third quarter of 2003.
The increased costs in salary and service costs have been partially offset
by certain benefits achieved from our continuing efforts to align permanent
staffing with current work levels on a location-by-location basis.
Office and general expenses represented 22.3% and 23.2% of our operating
expenses in the third quarter of 2003 and 2002, respectively. These costs are
comprised of office and equipment rent, depreciation and amortization,
professional fees and other overhead expenses. As a percentage of revenue,
office and general expenses decreased in the third quarter of 2003 to 19.7% from
20.4%. This year-over-year decrease resulted from our continuing efforts to
better align these costs with business levels on a location-by-location basis,
as well as from increased revenue levels.
We expect our efforts to control operating expenses will continue, but we
anticipate that it will remain difficult. Accordingly, we continue to look for
ways to increase the variability of our cost structure.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
For the foregoing reasons, our operating margin decreased to 11.6% in the
third quarter of 2003, from 12.0% in the third quarter of 2002.
Net Interest Expense: Our net interest expense increased in the third
quarter of 2003 to $11.5 million compared to $5.6 million in the same period in
2002. Our gross interest expense increased by $5.1 million to $15.4 million.
This increase resulted from additional interest costs associated with our
payments, on February 21, 2003, of $30 per $1,000 principal amount of our Liquid
Yield Option Notes due 2031 and, on August 6, 2003, of $7.50 per $1,000
principal amount of our Zero Coupon Zero Yield Convertible Notes due 2032 as
incentives to the holders not to exercise their put rights. These payments to
qualified noteholders due 2031 of $25.4 million and to noteholders due 2032 of
$6.7 million are being amortized ratably over 12-month periods. This increase
was partially offset by marginally lower short-term interest rates and cash
management efforts during the quarter.
The amortization of the February and August payments impacts interest
expense by $22.9 million for the full-year 2003 compared to 2002.
Income Taxes: Our consolidated effective income tax rate was 33.9% in the
third quarter of 2003, which is similar to the rate in the third quarter of
2002.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
third quarter of 2003, increased 7.3% to $135.3 million. Diluted earnings per
share increased 5.9% to $0.72 in the third quarter of 2003, as compared to $0.68
in the prior year period.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Nine Months 2003 Compared to Nine Months 2002
Revenue: Our consolidated worldwide revenue in the first nine months of
2003 increased 12.9% to $6,115.4 million from $5,417.5 million in 2002. The
effect of acquisitions, net of disposals, increased worldwide revenue by $196.6
million. Internal/organic growth increased worldwide revenue by $187.5 million,
and foreign exchange impacts increased worldwide revenue by $313.8 million. The
components of total 2003 revenue growth in the U.S. ("domestic") and the
remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International
----------------- ----------------- -----------------
$ % $ % $ %
-------- ---- -------- --- -------- ----
Nine Months ended September 30, 2002.... $5,417.5 -- $3,131.1 -- $2,286.4 --
Components of Revenue Changes:
Foreign exchange impact................. 313.8 5.8% -- -- 313.8 13.7%
Acquisitions............................ 196.6 3.6% 119.0 3.8% 77.6 3.4%
Organic................................. 187.5 3.5% 142.8 4.6% 44.7 2.0%
-------- ---- -------- --- -------- ----
Nine Months ended September 30, 2003. $6,115.4 12.9% $3,392.9 8.4% $2,722.5 19.1%
======== ==== ======== === ======== ====
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
$5,801.6 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 $6,115.4 million less $5,801.6 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 $5,417.5 million
for the "Total" column in the table).
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
The components of revenue and revenue growth for the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002, in our
primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States................... $3,392.9 8.4%
Euro Markets.................... 1,245.8 21.3%
United Kingdom.................. 667.2 14.3%
Other........................... 809.5 19.7%
------- ----
Total........................... $6,115.4 12.9%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $313.8 million during the nine months ended September 30, 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.
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 our 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
(Dollars in millions)
-----------------------------------------------------------------------
Nine Months Ended September 30,
2003 % of 2002 % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising $2,648.4 43.3% $2,349.1 43.4% $299.3 12.7%
CRM 2,042.2 33.4% 1,710.6 31.6% 331.6 19.4%
Public relations 706.5 11.6% 694.0 12.8% 12.5 1.8%
Specialty communications 718.3 11.7% 663.8 12.2% 54.5 8.2%
-------- -------- ------
$6,115.4 $5,417.5 $697.9 12.9%
======== ======== ====== =====
Operating Expenses: During the first nine months of 2003 worldwide
operating expenses increased $674.2 million, or 14.5%, to $5,320.9 million from
$4,646.7 million in the first nine months of 2002. As a percentage of revenue,
operating expenses were 87.0% in the first nine months of this year, compared to
85.8% in the comparable nine months last year.
Salary and service costs represent the largest part of operating expenses.
As a percentage of operating expenses, they were 77.9% in the first nine months
of 2003 and 77.3% in the first nine months of 2002. These costs are comprised of
direct service costs and salary and related costs. The majority, or 82.1% of the
$674.2 million increase in operating expenses during the first nine months
resulted from increases in salary and service costs. This $553.7 million
increase in salary and service costs was attributable to increased revenue
levels, greater utilization of freelance labor, continued investment in new and
key personnel and increased severance costs. As a result, salary and service
costs as a percentage of revenues increased period-to-period from 66.3% in the
first nine months of 2002 to 67.8% in the first nine months of 2003.
The increased costs in salary and service costs have been partially offset
by certain benefits achieved from our continuing efforts to align permanent
staffing with current work levels on a location-by-location basis.
Office and general expenses represented 22.1% and 22.7% of our operating
expenses in the first nine months of 2003 and 2002, respectively. These costs
are comprised of office and equipment rent, depreciation and amortization,
professional fees and other overhead expenses. As a percentage of revenue,
office and general expenses decreased in the first nine months of 2003 to 19.3%
from 19.5%. This year-over-year improvement in performance resulted from our
continuing efforts to better align these costs with business levels on a
location-by-location basis, as well as from increased revenue levels.
We expect our efforts to control operating expenses will continue, but we
anticipate that it will remain difficult. Accordingly, we continue to look for
ways to increase the variability of our cost structure.
For the foregoing reasons, our operating margin decreased to 13.0% in the
first nine months of 2003, from 14.2% in the first nine months of 2002.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Net Interest Expense: Our net interest expense increased in the first nine
months of 2003 to $32.8 million compared to $22.8 million in the same period in
2002. Our gross interest expense increased by $42.8 million to $34.9 million.
This increase resulted from the additional interest costs associated with our
payments, on February 21, 2003, of $30 per $1,000 principal amount of our Liquid
Yield Option Notes due 2031 and, on August 6, 2003 of $7.50 per $1,000 principal
amount of our Zero Coupon Zero Yield Convertible Notes due 2032 as incentives to
the holders not to exercise their put rights. These payments to qualified
noteholders amounted to $25.4 million and $6.7 million, respectively, and are
being amortized ratably over 12-month periods. This increase was partially
offset by marginally lower short-term interest rates and cash management efforts
during the first nine months.
The amortization of the February and August payments impacts interest
expense by $22.9 million for the full-year 2003 compared to 2002.
Income Taxes: Our consolidated effective income tax rate was 34.3% in the
first nine months of 2003, which is slightly less than our full year rate for
2002 of 35.0%. This reduction reflects the realization of our ongoing focus on
tax planning.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first nine months of 2003, increased 2.9% to $454.6 million. Diluted earnings
per share increased 2.5% to $2.42 in the first nine months of 2003, as compared
to $2.36 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 our discussion of critical accounting policies in the MD&A section of
our 2002 Form 10-K, as well as our consolidated financial statements and the
related notes included in our 2002 Form 10-K for a more complete understanding
of all of our accounting policies. There have been no material changes in them
since then.
16
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 us associated with potential future negative
changes in the performance of the acquired entity. The amount of future
contingent purchase price payments that we would be required to pay for prior
acquisitions, assuming that the acquired businesses perform over the relevant
future periods at their current profit levels, is approximately $324 million as
of September 30, 2003. The ultimate amounts payable cannot be predicted with
reasonable certainty because they are dependent upon future results and are
subject to changes in foreign currency exchange rates. In accordance with GAAP,
we have not recorded a liability for these items on our balance sheet since the
definitive amount is not determinable or distributable. Actual results can
differ from these estimates and the actual amounts that we pay are likely to be
different from these estimates. Our obligations change from period to period as
a result of payments made during the current period, changes in the previous
estimate of the acquired entities' performance, changes in foreign currency
exchange rates and other factors. These differences could be material. The
contingent purchase price obligations as of September 30, 2003, calculated using
the assumptions above, are as follows:
($ in millions)
------------------------------------------------------------------
Remainder There-
2003 2004 2005 2006 after Total
---- ---- ---- ---- ----- -----
$29 $114 $104 $41 $36 $324
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. Assuming that
the subsidiaries and affiliates perform over the relevant periods at their
current profit levels, the aggregate amount we could be required to pay in
future periods is approximately $257 million, $119 million of which are
currently exercisable. The ultimate amount payable in the future relating to
these transactions will vary because it is dependent on the future results of
operations of the subject businesses and the timing of when these rights are
exercised. The actual amounts that we pay are likely to be different from these
estimates. These differences could be material. The obligations that exist for
these agreements as of September 2003, calculated using the assumptions above,
are as follows:
($ in millions)
---------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $111 $128 $239
Affiliated agencies 8 10 18
---- ---- ----
Total $119 $138 $257
==== ==== ====
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.
17
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 $563.9 million and
$667.0 million and short-term investments totaling $23.8 million and $28.9
million at September 30, 2003 and December 31, 2002, respectively. Consistent
with our historical trends in the first nine months of the year, we had negative
cash flow from operations of $115.1 million, as a result of a significant
reduction in our year-end current liabilities, primarily due to tax payments,
payments to vendors and to the media on behalf of clients. We funded these
liabilities with cash on hand and by drawing down on available credit
facilities. As discussed below, during June 2003 we issued $600.0 million of
Zero Coupon Zero Yield Convertible Notes. The net proceeds of which were used to
pay down our outstanding credit facilities prior to June 30, 2003.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks, a three-year revolving $835.0 million credit facility with a
maturity date of November 14, 2005 and a $1,040.0 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 September 30, 2003, we had no borrowings outstanding under these
credit facilities. The 364-day revolving credit 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 20 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 $1,875.0 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 have received written commitments from a consortia of banks to renew
the 364-day revolving credit facility. The renewal will be effective November
13, 2003. The facility will be renewed under the same terms as the current
facility, however, the amount of the facility has been increased to $1,200.0
million.
We had short-term bank loans of $52.9 million and $50.4 million at
September 30, 2003 and December 31, 2002, respectively, comprised of local
borrowings and bank overdrafts of our international subsidiaries which are
unsecured loans.
At September 30, 2003, we had a total of $2,339.3 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, $892.3 million Zero Coupon Zero Yield Convertible Notes due 2032, which
were issued in March 2002, and $600.0 million Zero Coupon Zero Yield Convertible
Notes due 2033, which were issued in June 2003. The holders of our
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Liquid Yield Option Convertible Notes due 2031 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. The holders of our Zero Coupon Zero
Yield Convertible Notes due 2032 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. The holders of our Zero Coupon Zero Yield Convertible Notes
due 2033 have the right to cause us to repurchase up to the entire aggregate
face amount of the notes then outstanding for par value on June 15, 2006, 2008,
2010, 2013, 2018, 2023 and on each June 15 annually thereafter through June 15,
2032. The Liquid Yield Option Convertible Notes due 2031, the Zero Coupon Zero
Yield Convertible Notes due 2032 and the Zero Coupon Zero Yield Notes due 2033
are convertible, at specified ratios, only upon the occurrence of certain
events, including if our common shares trade above certain levels, if we effect
extraordinary transactions or, in the case of the Liquid Yield Option
Convertible Notes due 2031 and the Zero Coupon Zero Yield Convertible Notes due
2032, if our long-term debt ratings are downgraded to BBB or lower by S&P, and
to Baa3 or lower by Moody's or, in the case of the Zero Coupon Zero Yield Notes
due 2033, to BBB- or lower by S&P and Ba1 or lower by Moody's. These events
would not, however, result in an adjustment of the number of shares issuable
upon conversion and would not accelerate the holder's right to cause us to
repurchase the notes.
On February 21, 2003, we paid $25.4 million to qualified noteholders of
our Liquid Yield Option Notes due in 2031, equal to $30 per $1,000 principal
amount of notes as an incentive to the holders not to exercise their put right.
This payment is being amortized over the 12-month period ended February 2004. 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.
On August 6, 2003, we paid $6.7 million to qualified noteholders of our
Zero Coupon Zero Yield Convertible Notes due in 2032, equal to $7.50 per $1,000
principal amount of notes as an incentive to the holders not to exercise their
put right. This payment is being amortized over the 12-month period ended August
2004. On August 1, 2003, we repurchased for cash, notes from holders who
exercised their put right for $7.7 million, reducing the aggregate amount
outstanding of the notes due 2032 to $892.3 million.
At September 30, 2003, we had Euro-denominated bonds outstanding equal to
(euro)152.4 million or $177.7 million. The bonds pay a fixed rate of 5.2% to
maturity in June 2005. The bonds serve as a hedge of our investment in
Euro-denominated net assets. While an increase in the value of the euro against
the dollar will result in a greater liability for interest and principal, there
will be a corresponding increase in the dollar value of our euro-denominated net
assets.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Our debt as of September 30, 2003 ($ in millions) was as follows:
Debt:
Bank loans (due in less than 1 year).................... $ 52.9
$835.0 Million Revolver - due November 14, 2005....... --
Commercial paper issued under 364-day Facility.......... --
5.20% Euro notes - due June 24, 2005 ((euro)152.4).... 177.7
Convertible notes - due February 7, 2031.............. 847.0
Convertible notes - due July 31, 2032................. 892.3
Convertible notes - due June 15, 2033................. 600.0
Loan notes and sundry - various through 2012.......... 19.1
--------
Total Debt.................................................. $2,589.0
========
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.
20
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 nine months of 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 Annual Report on Form 10-K for the year ended December 31, 2002
provides a more detailed discussion of the market risks affecting our
operations. As of September 30, 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.
21
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.
22
PART II. OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer and President required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Executive Vice President and Chief Financial
Officer required by Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended.
32.1 Certification of the Chief Executive Officer and President and
the Executive Vice President and Chief Financial Officer required
by Rule 13a-14(b) under the Exchange Act of 1934, as amended, and
18 U.S.C. ss. 1350.
(b) Reports on Form 8-K
On July 29, 2003, we filed a Current Report on Form 8-K to furnish under
Item 9 (Regulation FD Disclosure) and Item 12, our press release
announcing our operating results for the second quarter of 2003 and the
text of materials used in the related call at which such results were
discussed.
23
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.
November 7, 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)
24