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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-10551
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OMNICOM GROUP INC.
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(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 187,076,062 (as of April 30,
2002)
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2002 and 2001 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 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 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, December 31,
2002 2001
----------- ------------
Assets
Current assets:
Cash and cash equivalents................................................. $ 501,711 $ 472,151
Short-term investments at market, which approximates cost................. 47,808 44,848
Accounts receivable, less allowance for doubtful accounts
of $71,189 and $79,183................................................. 3,752,013 3,720,790
Billable production orders in process, at cost............................ 487,529 382,750
Prepaid expenses and other current assets................................. 655,118 613,285
----------- -----------
Total Current Assets......................................... 5,444,179 5,233,824
----------- -----------
Furniture, equipment and leasehold improvements at cost,
less accumulated depreciation and amortization of
$627,062 and $618,661.................................................. 556,811 547,801
Investments in affiliates................................................. 185,176 186,156
Goodwill, net of accumulated amortization
of $490,425 and $495,715............................................... 3,956,545 3,859,162
Other intangibles, net of accumulated amortization
of $41,636 and $38,769................................................. 73,649 75,350
Deferred tax benefits..................................................... 95,509 100,418
Other assets ............................................................. 656,968 614,703
----------- -----------
Total Assets................................................. $10,968,837 $10,617,414
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable.......................................................... $ 3,819,643 $ 4,303,152
Advance billings.......................................................... 598,069 640,750
Current portion of long-term debt......................................... 77,259 40,444
Bank loans ............................................................. 205,187 169,056
Accrued taxes and other liabilities....................................... 1,295,730 1,490,385
----------- -----------
Total Current Liabilities.................................... 5,995,888 6,643,787
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Long-term debt................................................................. 859,771 490,105
Convertible notes ............................................................. 1,750,000 850,000
Deferred compensation and other liabilities.................................... 287,775 296,980
Minority interests............................................................. 160,799 158,123
Shareholders' equity:
Common stock ............................................................. 29,800 29,800
Additional paid-in capital................................................ 1,406,914 1,400,138
Retained earnings......................................................... 1,711,300 1,619,874
Unamortized restricted stock.............................................. (112,229) (125,745)
Accumulated other comprehensive loss...................................... (324,582) (295,358)
Treasury stock............................................................ (796,599) (450,290)
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Total Shareholders' Equity................................... 1,914,604 2,178,419
----------- -----------
Total Liabilities and Shareholders' Equity................... $10,968,837 $10,617,414
=========== ===========
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,
2002 2001
---- ----
REVENUE $1,732,426 $1,601,134
OPERATING EXPENSES:
Salaries and related costs.................. 1,013,691 944,865
Office and general expenses................. 489,876 464,985
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1,503,567 1,409,850
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OPERATING PROFIT................................ 228,859 191,284
NET INTEREST EXPENSE:
Interest expense............................ 13,852 23,908
Interest income............................. (2,529) (3,599)
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11,323 20,309
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INCOME BEFORE INCOME TAXES...................... 217,536 170,975
INCOME TAXES.................................... 79,858 67,723
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INCOME AFTER INCOME TAXES....................... 137,678 103,252
EQUITY IN AFFILIATES............................ 2,522 410
MINORITY INTERESTS.............................. (11,634) (8,382)
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NET INCOME.............................. $ 128,566 $ 95,280(a)
========== ==========
NET INCOME PER COMMON SHARE:
Basic................................... $ 0.69 $ 0.52(a)
Diluted................................. $ 0.68 $ 0.52(a)
DIVIDENDS DECLARED PER COMMON SHARE............. $ 0.200 $ 0.175
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(a) Three Months Ended March 31, 2001 adjusted to exclude goodwill
amortization:
Adjusted Net Income.................................... $ 115,330
Adjusted Net Income Per Common Share - basic......... $ 0.63
Adjusted Net Income Per Common Share - diluted....... $ 0.62
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, Except Per Share Data)
(Unaudited)
Three Months Ended March 31,
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2002 2001
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Cash flows from operating activities:
Net income ..................................................................... $ 128,566 $ 95,280
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on sale of long-term investments....................................... -- 3,500
Depreciation tangible assets................................................ 30,244 26,670
Amortization of goodwill.................................................... -- 23,042
Amortization of intangible assets........................................... 3,309 2,933
Minority interests.......................................................... 11,634 8,382
Earnings of affiliates less than dividends received......................... 1,082 3,274
Tax benefit on employee stock plans......................................... 10,775 6,738
Provisions for losses on accounts receivable................................ 1,168 1,879
Amortization of restricted shares........................................... 15,554 10,027
(Increase) decrease in accounts receivable.................................. (33,976) 410,080
Increase in billable production orders in process........................... (105,538) (38,135)
Increase in prepaid expenses and other current assets....................... (46,150) (23,187)
Increase in other assets, net............................................... (41,377) (39,519)
Decrease in accounts payable................................................ (477,737) (1,021,226)
Decrease in accrued taxes, advance billings and other liabilities........... (255,742) (383,528)
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Net cash used for operating activities.................................. (758,188) (913,790)
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Cash flows from investing activities:
Capital expenditures........................................................ (32,266) (34,579)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired........................................ (106,892) (83,469)
Net (purchases) sales of short-term investments............................. (2,153) 32,157
Proceeds from sale of long-term investments................................. -- 31,090
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Net cash used for investing activities.................................. (141,311) (54,801)
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Cash flows from financing activities:
Net increase in short-term borrowings....................................... 36,625 80,120
Net proceeds from issuance of convertible debentures and
long-term debt obligations.............................................. 1,310,438 913,409
Repayments of principal of long-term debt obligations....................... (13,842) (11,954)
Dividends paid.............................................................. (36,810) (30,628)
Purchase of treasury shares................................................. (368,780) (60,149)
Other....................................................................... 9,666 (8,392)
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Net cash provided by financing activities............................... 937,297 882,406
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Effect of exchange rate changes on cash and cash equivalents.................... (8,238) (9,927)
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Net increase (decrease) in cash and cash equivalents.................... 29,560 (96,112)
Cash and cash equivalents at beginning of period................................ 472,151 516,817
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Cash and cash equivalents at end of period...................................... $ 501,711 $ 420,705
========= ==========
Supplemental disclosures:
Income taxes paid........................................................... $ 140,218 $ 113,592
========= ==========
Interest paid............................................................... $ 9,037 $ 24,604
========= ==========
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIARIES
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, 2001 and December 31, 2001 reported amounts to conform them
to the March 31, 2002 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,
2001.
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. No adjustments were
made for zero-coupon convertible notes because the conversion criteria
have not been met. For purposes of computing diluted earnings per share,
2,819,000 common share equivalents were assumed to be outstanding for the
three months ended March 31, 2002 and 1,967,000 common share equivalents
were assumed to have been outstanding for the comparable period last year.
In December 2001, our 2 1/4% convertible subordinated debentures were
called for redemption and subsequently converted by holders into shares of
common stock. The additional shares are included in shares outstanding at
March 31, 2002 and were assumed to have been converted for the March 31,
2001 computation.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was
$271,000 for the three months ended March 31, 2002 and the increase in net
income related to the after tax interest cost of the convertible
debentures and the after tax compensation expense related to dividends on
restricted shares was $2,088,000 for the three months ended March 31,
2001. The number of shares used in our EPS computations were:
Three Months
Ended March 31,
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2002 2001
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Basic EPS Computation 186,671,000 181,842,000
Diluted EPS Computation 189,490,000 188,423,000
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
5. Total comprehensive income and its components were:
Three Months Ended
March 31,
($ in 000's)
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2002 2001
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Net income for the period .......................... $ 128,566 $ 95,280
Unrealized loss on long-term investments,
net of income taxes of $6,314 in 2001 .............. 0 (9,471)
Reclassification to realized loss on sale of certain
marketable securities, net of income taxes
of $1,400 .......................................... 0 2,100
Foreign currency translation adjustment, net of
income taxes of $16,943 and $47,052
in 2002 and 2001, respectively ..................... (29,224) (70,578)
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Comprehensive income for the period ................ $ 99,342 $ 17,331
========= =========
6. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"), in June 2001 and Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), in August 2001.
SFAS 142 addresses the financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS 142 supersedes APB
Opinion No. 17, Intangible Assets. Effective January 1, 2002, companies
are no longer required to amortize goodwill and other intangibles that
have indefinite lives, but these assets will be subject to periodic
testing for impairment. The required test for impairment is to be
completed no later than June 30, 2002. We stopped amortizing goodwill in
accordance with SFAS 142 effective January 1, 2002, and expect to complete
the required impairment testing by the end of the second quarter of 2002.
At this time, we do not expect that the results of the impairment testing
will be material to our 2002 results of operations and financial position.
Had we stopped recording amortization of goodwill as of January 1,
2001, net income for the three months ended March 31, 2001 would have
increased from $95.3 million to $115.3 million as shown in the following
table.
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
As Reported Adjusted
Three Months Ended March 31, 2002 2001 2001(a)
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Revenue ........................................ $ 1,732,426 $1,601,134 $ 1,601,134
Operating expenses:
Salaries and related costs..................... 1,013,691 944,865 944,865
Office and general expenses.................... 489,876 464,985 442,314
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1,503,567 1,409,850 1,387,179
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Operating profit................................... 228,859 191,284 213,955
Net interest expense:
Interest expense............................... 13,852 23,908 23,908
Interest income................................ (2,529) (3,599) (3,599)
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11,323 20,309 20,309
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Income before income taxes......................... 217,536 170,975 193,646
Income taxes....................................... 79,858 67,723 71,536
----------- ---------- -----------
Income after income taxes.......................... 137,678 103,252 122,110
Equity in affiliates............................... 2,522 410 1,895
Minority interests................................. (11,634) (8,382) (8,675)
----------- ---------- -----------
Net income................................. $ 128,566 $ 95,280 $ 115,330
=========== ========== ===========
Net Income Per Common Share:
Basic...................................... $ 0.69 $ 0.52 $ 0.63
Diluted.................................... $ 0.68 $ 0.52 $ 0.62
Dividends Declared Per Common Share................ $ 0.200 $ 0.175 $ 0.175
(a) Excludes amortization of goodwill and related tax impact.
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. We adopted SFAS 144 effective January 1, 2002. The adoption
had no material impact on our consolidated results of operations and
financial position.
In July 2000, the Emerging Issues Task Force of the FASB ("EITF") released
Issue 99-19 - Reporting Revenue Gross as a Principal versus Net as an
Agent. This Issue summarized the EITF's views on when revenue should be
recorded at the gross amount billed because it has earned revenue from the
sale of goods or services, or the net amount retained because it has
earned a fee or commission. Additionally, in January 2002, the EITF
released Issue 01-14 - Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred. This Issue summarized the
EITF's views on when out-of-pocket expenses should be characterized as
revenue. The Company's revenue recognition policies are in compliance with
EITF 99-19 and 01-14. In substantially all of our businesses we act as an
agent and record revenue for reimbursements when the fee or commission is
earned.
7. Our wholly and partially owned businesses operate within the marketing and
corporate communications services operating segment. These businesses
provide a variety of communications services to clients on a global,
pan-regional and national basis. By
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
geographic location, the businesses have similar cost structures and are
subject to the same general economic and competitive risks.
Our revenue and long-lived assets by geographic area for the three
months ended March 31, 2002 and 2001 is summarized in the following table.
(Dollars in Thousands)
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United United Euro Other
States Kingdom Denominated International Consolidated
----------- --------- --------- --------- -----------
2002
Revenue....................... $ 1,022,129 $ 182,903 $ 319,894 $ 207,500 $ 1,732,426
Long-Lived Assets............. 329,468 89,375 63,248 74,720 556,811
2001
Revenue....................... $ 896,597 $ 195,655 $ 320,396 $ 188,486 $ 1,601,134
Long-Lived Assets............. 250,990 97,368 53,564 80,398 482,320
8. On April 26, 2002, we extended our 364-day revolving credit facility with
a consortium of banks for which Citibank N.A. acts as administrative agent
and Salomon Smith Barney Inc. acts as lead arranger. The consortium
consists of 23 banks, with Salomon Smith Barney Inc. acting as lead
arranger. The other significant lending institutions include The Bank of
Nova Scotia, JPMorgan Chase Bank, Fleet National Bank, HSBC Bank USA and
San Paolo IMI S.p.A. The facility was increased from $1.0 billion to $1.6
billion under substantially the same terms as had previously been in
effect, including a provision which allows us to convert all amounts
outstanding at expiration on April 25, 2003, into a one-year term loan.
The facility allows for the issuance of up to $1.6 billion of commercial
paper. We may increase the amount of the facility up to $1.8 billion,
subject to obtaining additional commitments. We also have a $500 million
5-year revolving credit facility, which expires on June 30, 2003, with a
similar consortium of 13 banks of which ABN AMRO Bank acts as agent.
Amounts outstanding under the revolving credit facilities at March
31, 2002 include loans of $300.0 million and $404.3 million of commercial
paper, both classified as long-term debt.
We also had short-term bank loans of $205.2 million at March 31,
2002, primarily comprised of bank overdrafts of international subsidiaries
which are treated as unsecured loans pursuant to bank agreements.
At March 31, 2002, we had committed unsecured credit lines
aggregating $2,243.4 million. The unused portion of our credit lines was
$1,334.0 million at March 31, 2002.
9. In March 2002, we issued $900.0 million aggregate principal amount of
zero-coupon, zero-accretion convertible notes due 2032. The notes are
senior unsecured securities that are convertible into 8.2 million common
shares, implying a conversion price of $110.01 per common share, subject
to normal anti-dilution adjustments. These notes are convertible at
7
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
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
at least three notches from their current level to Baa3 or lower by
Moody's Investors Services, Inc. or BBB or lower by Standard & Poor's
Ratings Services. These events would not, however, 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 in July of each year beginning in July 2003
and we have the right to redeem the notes for cash beginning in 2007.
There are no events that accelerate the noteholders' put rights. Beginning
in August 2007, if the market price of our common shares exceeds certain
thresholds, we may be required to pay contingent cash interest on the
notes equal to the amount of dividends that would be paid on the common
shares into which the notes are contingently convertible.
The net proceeds of the issuance of these notes were $905.0 million.
We used $280.6 million of these proceeds to repurchase 3.0 million of our
common shares. We applied the balance of the net proceeds to reduce our
short-term borrowings pending use for working capital and other general
corporate purposes.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
As discussed and presented in footnote 6 to our first quarter financial
statements, beginning in 2002, due to a change in generally accepted accounting
principles, we are no longer required to amortize goodwill and other intangible
assets that have indefinite lives. To make the discussion of periods below
comparable, 2001 net income information has been adjusted to eliminate goodwill
amortization.
First Quarter 2002 Compared to First Quarter 2001
Revenue: Our consolidated worldwide revenue in the first quarter of 2002
increased 8.2% to $1,732.4 million from $1,601.1 million in the first quarter of
2001. The effect of acquisitions, net of divestitures, increased worldwide
revenue by 5.6%. Internal growth increased worldwide revenue by 3.7% and foreign
exchange negatively impacted worldwide growth by 1.1%.
Our domestic operations grew 14.0% to $1,022.1 million from $896.6 million
in the first quarter of 2001. The effect of acquisitions, net of divestitures,
increased domestic revenue by 7.4%. The balance of the increase in domestic
revenue of 6.6% represents additional revenue from expanding the scope of
services provided to existing clients, as well as revenue generated as a result
of our net new business wins.
Revenue from our international operations grew 0.8% to $710.3 million from
$704.5 million in the first quarter of 2001. The effect of acquisitions, net of
divestitures, increased international revenue by 3.3% for the quarter. The
primary driver of this acquisition growth resulted from our acquisition in the
second quarter of 2001 of an additional equity interest in one of our affiliates
located in Japan. As a result, our ownership increased to a majority position.
Foreign exchange impacts further reduced our international revenue by
$17.5 million during the quarter ended March 31, 2002, reducing our
international growth by 2.5%. The most significant impacts resulted from the
strengthening of the US dollar against the Euro, the Japanese Yen and the
British Pound, as our operations in these markets represented over 75.0% of our
international revenue.
In an effort to monitor the changing needs of our clients and to aide in
our efforts to expand the scope of our services to key clients, we monitor
revenue across a broad range of disciplines and group them into the following
four categories: traditional media advertising, CRM, public relations and
specialty communications. Traditional media advertising revenue represented
44.9%, or $777.8 million, of our worldwide revenue during the first quarter of
2002. The remainder of our revenue, 55.1%, or $954.6 million was related to our
other marketing and corporate communications services. The breakdown of this
revenue was 30.2% CRM, 13.1% public relations and 11.8% specialty
communications. Revenue for these services in the first
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (Continued)
quarter of 2002 increased when compared to the first quarter of 2001 by 14.6%
for CRM, decreased by 9.3% for public relations and increased by 12.8% for
specialty communications.
Operating Expenses: Our March 31, 2002 worldwide operating expenses
increased $116.4 million or 8.4% to $1,503.6 million from $1,387.2 million in
the first quarter of 2001.
Salary and related costs increased by $68.8 million or 7.3% in the first
quarter of 2002. Salary and related costs represented about 67.4% of our total
operating costs in the first quarter of 2002. These costs function as a
semi-variable component of our cost structure due to our ability to adjust
workforce levels and incentive compensation to mitigate fluctuations in the
performance of our individual agencies. As a result, these expenses decreased as
a percentage of revenue to 58.5% in the first quarter of 2002 from 59.0% in the
first quarter of 2001. The decrease in cost as a percentage of revenue was
primarily the result of reduced staffing levels and reduced incentive
compensation.
Office and general expenses increased by $47.6 million or 10.8% in the
first quarter of 2002. Office and general expenses primarily consist of
occupancy costs, general office service costs, technology costs, depreciation
and bad debt expense. These costs represented about 32.5% of our total operating
costs in the first quarter of 2002. These costs are generally less variable than
salary and related costs and generally take longer to adjust in response to
changes in the level of business at each agency. Primarily as a result of a
greater than normal amount of change in individual agency business levels, both
positive and negative, these expenses increased as a percentage of revenue to
28.3% in the first quarter of 2002 from 27.6% in the first quarter of 2001.
Our operating margin was 13.2% in the first quarter of 2002, slightly
lower than our 13.4% margin in the same period in 2001.
Net Interest Expense: Our net interest expense decreased in the first
quarter of 2002 to $11.3 million as compared to $20.3 million in the same period
in 2001. Our gross interest expense decreased by $10.1 million to $13.8 million.
Of this decrease $3.2 million was attributable to the conversion of our 2 1/4%
convertible notes in December of 2001; the balance of the reduction was
attributable to the issuance in February 2001 of the $850 million zero-coupon
notes and the general lowering of short-term interest rates as compared to the
prior year. The decrease in our interest income is the result of lower interest
rates earned on cash balances during the first quarter of 2002.
Income Taxes: Our consolidated effective income tax rate was 36.7% in the
first quarter of 2002 as compared to 36.9% in the first quarter of 2001. This
decrease was attributable to the continued implementation of various planning
and restructuring initiatives designed to reduce the tax inefficiency of our
holding company structure, as well as lower statutory rates in several
international markets.
Equity in Affiliates and Minority Interests: In the first quarter of 2002,
our equity in affiliates increased to $2.5 million from $1.9 million in the
first quarter of 2001. This increase is
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (Continued)
primarily the result of higher profits earned and reduced losses by certain
companies in which we own less than a 50% equity interest.
In the first quarter of 2002, minority interest expense increased to $11.6
million from $8.4 million in the first quarter of 2001, primarily due to higher
earnings by companies where minority interests exist and the acquisition of
additional entities in which there is a third party minority interest.
Earnings Per Share (EPS): Our net income in the first quarter of 2002,
increased 11.5% to $128.6 million from $115.3 million in the first quarter of
2001 and diluted earnings per share increased 9.7% to $0.68 in the first quarter
of 2002, as compared to $0.62 in the prior year period.
Liquidity and Capital Resources
Liquidity: Consistent with our historical trends in the first quarter of
the year, we had negative cash flow from operations of $758.2 million including
payments of accrued incentive compensation, tax payments and payments to the
media on behalf of clients. This occurred primarily as a result of a significant
reduction in our year-end current liabilities. We funded these liabilities by
drawing down on available credit facilities.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks. In the second quarter 2002, we extended our 364-day
revolving credit facility increasing the amount from $1.0 billion to $1.6
billion. Six banks, Citibank N.A., JPMorgan Chase Bank, Fleet National Bank, The
Bank of Nova Scotia, HSBC Bank USA and San Paolo IMI S.p.A. provide over half of
the lending capacity on this facility. Refer to Exhibit 10.1 of this filing for
the 364-day agreement and complete list of participating banks. This facility,
which supports the issuance of commercial paper, was renewed under substantially
the same terms as had previously been in effect, including a provision that
allows us to convert all amounts outstanding at its expiration on April 25,
2003, into a one-year term loan. We also have a $500 million 5-year revolving
credit facility, which expires on June 30, 2003, with a similar consortium of 13
banks of which ABN AMRO Bank acts as agent.
We had short-term bank loans of $205.2 million and $169.1 million at March
31, 2002, and December 31, 2001, respectively primarily comprised of bank
overdrafts by our international subsidiaries which are treated as unsecured
loans pursuant to the subsidiaries' bank agreements.
In March 2002, we issued $900 million aggregate principal amount of
zero-coupon, zero-accretion convertible notes due 2032. The notes are senior
unsecured securities that are convertible into 8.2 million common shares,
implying a conversion price of $110.01 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 at least three notches from their current
level to Baa3 or lower by Moody's
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (Continued)
Investors Services, Inc., or BBB or lower by Standard & Poor's Ratings Services.
These events would not, however, result in an adjustment of the number of shares
issuable upon conversion. Holders of the notes due 2032 have the right to put
the notes back to us for, at our election, cash, stock or a combination of both
in July of each year beginning in July 2003 and we have the right to redeem the
notes for cash beginning in 2007. There are no events that accelerate the
noteholders' put rights. Beginning in August 2007, if the market price of our
common shares exceeds certain thresholds, we may be required to pay contingent
cash interest on the notes equal to the amount of dividends that would be paid
on the common shares into which the notes are contingently convertible.
The net proceeds of the issuance of these notes were $905.0 million. We
used $280.6 million of these proceeds to repurchase 3.0 million of our common
shares. We applied the balance of the net proceeds to reduce our short-term
borrowings pending use for working capital and other general corporate purposes.
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,
acquisitions and dividends.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market Risk
Our results of operations are subject to the risk of currency exchange
rate fluctuations related to our international operations. 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 fluctuation on our first quarter operations is
discussed above. We do not hedge these exposures 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. While our agencies operate
in more than 100 countries and invoice clients in more than 70 different
currencies, our major international markets are the E.U., the United Kingdom,
Japan, Brazil and Canada.
Our 2001 Form 10-K provides a more detailed discussion of the market risks
affecting our operations. As of March 31, 2002, no material change had occurred
in our market risks, as compared to the disclosure in our Form 10-K for the year
ending December 31, 2001.
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 no 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 in
Item 3 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.
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PART II. OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
10.1 364-Day Credit Agreement, dated as of April 30, 1999, amended
and restated April 25, 2002, among Omnicom Finance Inc.,
Omnicom Finance PLC, Omnicom Capital Inc., the financial
institutions party thereto, Citibank N.A., as Administrative
Agent, Salomon Smith Barney Inc., as Lead Arranger, The Bank
of Nova Scotia, as Documentation Agent, and JPMorgan Chase
Bank, Fleet National Bank and San Paolo IMI S.p.A. as
Syndication Agents.
10.2 Omnicom Group Inc. Guaranty for the 364-day Credit Facility.
10.3 Amendment No. 2, dated April 25, 2002, to $500,000,000 Amended
and Restated Credit Agreement, dated February 25, 1998 among
Omnicom Finance Inc., Omnicom Finance PLC, Omnicom Capital
Inc., Omnicom Group Inc., ABN AMRO Bank N.V., New York Branch,
and the financial institutions party thereto.
10.4 Guaranty for the $500 million credit agreement.
(b) Reports on Form 8-K
During the first quarter of 2002, we filed a report on Form 8-K dated,
March 1, 2002, reporting under Item 5 information about our sale of
zero-coupon, zero-accretion convertible notes due 2032.
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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, 2002 /s/ Randall J. Weisenburger
---------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
May 15, 2002 /s/ Philip J. Angelastro
------------------------------------
Philip J. Angelastro
Senior Vice President of Finance
and Controller
(Principal Accounting Officer)
15