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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-10551
OMNICOM GROUP INC.
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(Exact name of registrant as specified in its charter)
New York 13-1514814
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
437 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
(212) 415-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). YES X NO ___
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 189,045,500 (as of April 30,
2004)
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2004 and December 31, 2003..................... 1
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2004 and 2003............... 2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003............... 3
Notes to Consolidated Condensed Financial Statements.......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 17
Item 4. Controls and Procedures....................................... 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities...........................................19
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures.................................................... 20
Certifications of Senior Executive Officers
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
March 31, December 31,
2004 2003
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 519.3 $ 1,528.7
Short-term investments at market, which approximates cost................. 25.0 20.2
Accounts receivable, less allowance for doubtful accounts
of $64.1 and $69.7..................................................... 4,722.9 4,530.0
Billable production orders in process, at cost............................ 546.6 440.4
Prepaid expenses and other current assets................................. 806.2 766.6
----------- -----------
Total Current Assets......................................... 6,620.0 7,285.9
----------- -----------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $842.4 and $817.1....... 619.2 596.8
INVESTMENTS IN AFFILIATES...................................................... 147.8 151.2
GOODWILL ...................................................................... 5,933.1 5,886.2
INTANGIBLES, net of accumulated amortization of $135.6 and $127.8.............. 115.9 121.4
DEFERRED TAX BENEFITS.......................................................... 256.5 264.6
OTHER ASSETS................................................................... 345.8 313.9
----------- -----------
TOTAL ASSETS................................................. $ 14,038.3 $ 14,620.0
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 4,977.3 $ 5,513.3
Advance billings.......................................................... 775.3 775.2
Current portion of long-term debt......................................... 5.1 12.4
Bank loans................................................................ 61.8 42.4
Accrued taxes............................................................. 131.6 221.7
Other liabilities......................................................... 1,171.7 1,197.5
----------- -----------
Total Current Liabilities.................................... 7,122.8 7,762.5
----------- -----------
LONG-TERM DEBT................................................................. 208.4 197.3
CONVERTIBLE NOTES ............................................................. 2,339.3 2,339.3
DEFERRED COMPENSATION AND OTHER LIABILITIES.................................... 332.6 342.9
LONG TERM DEFERRED TAX LIABILITY............................................... 234.8 204.1
MINORITY INTERESTS............................................................. 180.7 187.3
SHAREHOLDERS' EQUITY:
Common stock ............................................................. 29.8 29.8
Additional paid-in capital................................................ 1,809.2 1,815.7
Retained earnings......................................................... 2,512.6 2,419.0
Unamortized stock compensation............................................ (184.6) (216.4)
Accumulated other comprehensive income.................................... 135.4 109.7
Treasury stock............................................................ (682.7) (571.2)
----------- -----------
Total Shareholders' Equity................................... 3,619.7 3,586.6
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $ 14,038.3 $ 14,620.0
=========== ===========
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 Millions)
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
REVENUE ........................................ $2,231.4 $1,937.2
OPERATING EXPENSES:
Salary and service costs.................... 1,593.6 1,362.0
Office and general expenses................. 408.5 373.0
-------- --------
2,002.1 1,735.0
-------- --------
OPERATING PROFIT................................ 229.3 202.2
NET INTEREST EXPENSE:
Interest expense............................ 13.7 11.2
Interest income............................. (3.3) (2.9)
------- --------
10.4 8.3
------- --------
INCOME BEFORE INCOME TAXES...................... 218.9 193.9
INCOME TAXES.................................... 73.6 67.1
------- --------
INCOME AFTER INCOME TAXES....................... 145.3 126.8
EQUITY IN AFFILIATES............................ 2.5 2.5
MINORITY INTERESTS.............................. (12.2) (13.8)
-------- --------
NET INCOME.............................. $ 135.6 $ 115.5
======== ========
NET INCOME PER COMMON SHARE:
Basic................................... $ 0.72 $ 0.62
Diluted................................. $ 0.72 $ 0.62
DIVIDENDS DECLARED PER COMMON SHARE............. $ 0.225 $ 0.200
The accompanying notes to consolidated condensed financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income ............................................................. $ 135.6 $ 115.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of tangible assets..................................... 34.7 29.9
Amortization of intangible assets................................... 10.5 7.6
Minority interests.................................................. 12.2 13.8
Earnings of affiliates less than dividends received................. 1.7 1.3
Net gain on investment activity..................................... (13.1) --
Tax benefit on employee stock plans................................. 5.1 1.1
Amortization of stock compensation.................................. 31.7 34.7
Provisions (reductions) for losses on accounts receivable........... 0.8 (0.9)
Changes in assets and liabilities providing (requiring)
cash net of acquisitions:
Increase in accounts receivable..................................... (192.1) (18.9)
Increase in billable production orders in process................... (106.5) (117.6)
Increase in prepaid expenses and other current assets............... (41.1) (65.1)
Net change in other assets and liabilities.......................... (78.0) (18.4)
(Decrease) increase in advanced billings............................ (2.0) 20.4
Net decrease in accrued taxes....................................... (42.3) (53.5)
Decrease in accounts payable........................................ (543.6) (613.7)
---------- ---------
Net cash used for operating activities........................... (786.4) (663.8)
---------- ---------
Cash flows from investing activities:
Capital expenditures................................................ (45.4) (29.0)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired................................. (31.6) (22.0)
Purchases of short-term investments................................. (6.9) (1.7)
Proceeds from sale of short-term investments........................ 2.8 5.0
--------- ---------
Net cash used in investing activities............................ (81.1) (47.7)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowings................................... 20.2 43.4
Proceeds from issuance of debt...................................... 1.7 427.4
Repayments of principal of long-term debt obligations............... (10.5) (29.7)
Dividends paid...................................................... (37.6) (37.2)
Purchase of treasury shares......................................... (141.1) --
Other, net.......................................................... 6.4 2.7
--------- ---------
Net cash (used) provided by financing activities................. (160.9) 406.6
--------- ---------
Effect of exchange rate changes on cash and cash equivalents............. 19.0 (7.5)
--------- ---------
Net decrease in cash and cash equivalents........................ (1,009.4) (312.4)
Cash and cash equivalents at beginning of period......................... 1,528.7 667.0
--------- ---------
Cash and cash equivalents at end of period............................... $ 519.3 $ 354.6
========= =========
Supplemental disclosures:
Income taxes paid................................................... $ 51.2 $ 115.5
Interest paid....................................................... $ 11.3 $ 33.6
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, 2003 and December 31, 2003 reported amounts to conform them
to the March 31, 2004 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,
2003.
3. Results of operations for interim periods are not necessarily indicative
of annual results.
4. In accordance with SFAS No. 123, "Accounting for Stock Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123", we elected, effective January 1, 2004, to account for
stock-based employee compensation using the fair value method. As a
result, the fair value of stock-based employee compensation, including
unvested employee stock options issued and outstanding, were recorded as
an expense in the current period utilizing the retroactive restatement
method as set forth in SFAS 148. Accordingly, our results for the quarter
ended March 31, 2003 have been restated as if we had used the fair value
method to account for stock-based employee compensation. Results for the
three months ended March 31, 2004 and 2003 included $31.6 million and
$34.7 million, respectively, of pre-tax stock-based employee compensation
costs. Also, in connection with the restatement, the December 31, 2003
balance sheet presented reflects an increase in the deferred tax benefit
of $120.5 million, an increase in additional paid-in capital of $434.7
million, an increase in unamortized stock compensation of $92.6 million
and a decrease in retained earnings of $221.6 million.
The table below presents a reconciliation of net income and earnings
per share, as reported to the restated results for the quarter ended March
31, 2003.
(Dollars in Millions,
Except Per Share Amounts)
-------------------------------
Earnings Per
Common Share
------------------
Net Income Basic Diluted
---------- ------ -------
As Reported, March 31, 2003........... $ 128.6 $ 0.69 $ 0.69
Less: fair value of stock
option issued per
common share, net of taxes............ 13.1 0.07 0.07
-------- ------- ------
Restated, March 31, 2003.............. $ 115.5 $ 0.62 $ 0.62
======== ======= ======
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
5. 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 any series of our zero-coupon convertible notes because the
conversion criteria have not been met. For purposes of computing diluted
earnings per share, 928,000 common share equivalents were assumed to be
outstanding for the three months ended March 31, 2004.
The assumed increase in net income related to the after tax
compensation expense related to dividends on restricted shares was $274.8
thousand and $240.0 thousand for the three months ended March 31, 2004 and
2003, respectively.
The number of shares used in our EPS computations were:
Three Months
Ended March 31,
------------------------------
2004 2003
---- ----
Basic EPS Computation 187,852,000 186,556,000
Diluted EPS Computation 188,780,000 186,556,000
6. Total comprehensive income and its components were:
(Dollars in Millions)
---------------------
Three Months Ended
March 31,
---------------------
2004 2003
---- ----
Net income for the period.................. $135.6 $115.5
Foreign currency translation adjustment,
net of income taxes of $13.9 and $9.4
in 2004 and 2003, respectively............. 25.7 17.4
------ -----
Comprehensive income for the period........ $161.3 $132.9
====== ======
7. All of our wholly and partially owned businesses operate within the
advertising, marketing and corporate communications services industry.
These agencies are organized into strategic platforms, client centric
networks, geographic regions and operating groups. Our businesses provide
communications services to similar type clients on a global, pan-regional
and national basis. The businesses have similar cost structures, and are
subject to the same general economic and competitive risks. Given these
similarities, we have aggregated their results into one reporting segment.
A summary of our revenue and long-lived assets by geographic area for the
three months ended March 31, 2004 and 2003 is presented below:
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Dollars in Millions)
-----------------------------------------------------------------
United Euro United Other
States Denominated Kingdom International Consolidated
------ ----------- ------- ------------- ------------
2004
Revenue.................... $1,221.2 $455.8 $251.1 $303.3 $2,231.4
Long-Lived Assets.......... 335.2 101.0 93.0 90.0 619.2
2003
Revenue.................... $1,099.6 $388.1 $210.9 $238.6 $1,937.2
Long-Lived Assets.......... 317.1 80.9 82.6 78.8 559.4
8. Bank loans at March 31, 2004 of $61.8 million are primarily comprised of
bank overdrafts of our international subsidiaries which are treated as
unsecured loans pursuant to our bank agreements. In January 2004, in
connection with the purchase of an office building we assumed a mortgage
of $17.1 million which is included in our long-term debt. In addition, we
had unsecured committed revolving credit facilities of $2,035.0 million.
There were no drawings under the revolving credit facilities and no
commercial paper was outstanding as of March 31, 2004.
9. Included in operating income for the three months ended March 31, 2004 is
a pre-tax net gain of $13.1 million arising from investment activity
described below.
In March 2004, in connection with Seneca Investments LLC's
("Seneca") recapitalization, we agreed to exchange our remaining preferred
stock in Seneca for a $24.0 million senior secured note and 40% of
Seneca's outstanding common stock. The note, which is due in March 2007,
bears interest at a rate of 6.25% per annum. Prior to Seneca's
recapitalization, we were accounting for our investment under the cost
recovery method. We will now account for this investment using the equity
method. The recapitalization transaction was required to be recorded at
fair value and, accordingly, we recorded a net pre-tax gain of $24.0
million. This gain was partially offset by losses of $10.9 million on
other cost-based investments.
10. The following pronouncement was issued by the Financial Accounting
Standards Board ("FASB") in, or with effective dates in, 2004: Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB No. 123
(SFAS 148), which we adopted January 1, 2004, as discussed in Note 4.
In March 2004, the FASB issued for exposure a Proposed Statement of
Financial Accounting Standards entitled "Share-Based Payment - an
amendment of SFAS No. 123 and 95". The proposal requires that the fair
value of employee stock-based compensation be expensed. Although the
proposal differs from SFAS 123, as amended by SFAS 148, its requirements
will only apply to new grants of stock or options to employees. We will
continue to monitor the progress of the FASB with regard to the final
requirements of this new standard.
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
The following FASB Interpretation ("FIN") has an effective date in
2004: FIN 46, Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51, as amended by FIN 46R.
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
FASB subsequently issued FIN 46R in December 2003 that modified certain
provisions of FIN 46. FIN 46R must be applied to the first reporting
period after March 15, 2004 and did not have an impact on, or result in
additional disclosure in our financial statements.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Executive Summary
We are a holding company. We own industry-leading advertising, marketing
and corporate communications companies that span more than 30 marketing
disciplines, 100 countries, 1,500 subsidiary agencies and 5,000 clients. On a
global, pan-regional and local basis, our agencies provide traditional media
advertising services as well as marketing services including customer
relationship management, public relations and specialty communications.
Given our size and breadth, we manage the business by monitoring several
financial and non-financial performance indicators. The key indicators that we
review focus on the areas of revenues and operating expenses.
Revenue growth is analyzed by reviewing the components and mix of the
growth, including growth by major geographic location, growth by major marketing
discipline, growth from currency changes and growth from acquisition.
Our revenue has been divided almost evenly between our domestic and
international operations. In the first quarter of 2004, our overall revenue
growth was 15.2%, of which 6.7% was related to changes in foreign exchange rates
and 2.7% was related to acquired entities. The remainder, 5.8%, was organic
growth.
In the first quarter of 2004, traditional media advertising represented
about 44% of the total revenue and grew by 13.9%. Marketing services represented
about 56% of total revenue and grew by 16.2%.
We measure operating expenses in two distinct cost categories, salary and
service costs, and office and general expenses. Because we are a service
business, we monitor these costs on a percentage of revenue basis. On an annual
basis, salary and service costs tend to fluctuate in conjunction with changes in
revenues, whereas office and general expenses, which are not directly related to
servicing clients, tend to decrease as revenues increase because a significant
portion of these expenses are relatively fixed in nature. During the first
quarter of 2004, salary and service costs increased from 70.3% of revenue to
71.4% of revenue. Office and general expenses decreased from 19.3% of revenue to
18.3% of revenue. Included in office and general expenses was a pre-tax net gain
of $13.1 million related to investment activity during the quarter. Excluding
this gain, office and general expenses were 18.9% of revenue. This gain was also
offset by $9.9 million of costs incurred in connection with the disposal of two
non-strategic businesses.
Our net income for the first quarter of 2004 increased by 17.4% to $135.6
million from $115.5 million in the first quarter of 2003, and our diluted EPS
increased by 16.1% to $0.72 from $0.62.
In accordance with SFAS No. 123, "Accounting for Stock Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Disclosure, an amendment of FASB Statement No. 123", we elected, effective
January 1, 2004, to account for stock-based employee compensation using the fair
value method. As a result, the fair value of stock-based employee compensation,
including unvested employee stock options issued and outstanding, were recorded
as an expense in the current period utilizing the retroactive restatement method
as set forth in SFAS 148. Accordingly, our results for the quarter ended March
31, 2003 have been restated as if we had used the fair value method to account
for stock-based employee compensation. Results for the three months ended March
31, 2004 and 2003 included $31.6 million and $34.7 million, respectively, of
pre-tax stock-based employee compensation costs. Also, in connection with the
restatement, the December 31, 2003 balance sheet presented reflects an increase
in the deferred tax benefit of $120.5 million, an increase in additional paid-in
capital of $434.7 million, an increase in unamortized stock compensation of
$92.6 million and a decrease in retained earnings of $221.6 million.
The following quarter-over-quarter analysis gives further information
about the changes in our financial performance.
Results of Operations: First Quarter 2004 Compared to First Quarter 2003
Revenue: Our first quarter of 2004 consolidated worldwide revenue
increased 15.2% to $2,231.4 million from $1,937.2 million in the comparable
period last year. The effect of foreign exchange impacts increased worldwide
revenue by $129.8 million. Acquisitions, net of disposals, increased worldwide
revenue by $52.2 million in the first quarter of 2004 and organic growth
increased worldwide revenue by $112.2 million. The components of the first
quarter 2004 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
----------------- ----------------- ----------------
$ % $ % $ %
-------- --- -------- --- -------- ---
March 31, 2003....................... $1,937.2 -- $1,099.6 -- $ 837.6 --
Components of Revenue Changes:
Foreign exchange impact.............. 129.8 6.7% -- -- 129.8 15.5%
Acquisitions......................... 52.2 2.7% 43.6 4.0% 8.6 1.0%
Organic.............................. 112.2 5.8% 78.0 7.1% 34.2 4.1%
-------- ---- -------- ---- -------- ----
March 31, 2004....................... $2,231.4 15.2% $1,221.2 11.1% $1,010.2 20.6%
======== ==== ======== ==== ======== ====
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
$2,101.6 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
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
revenue in constant currency (in this case $2,231.4 million less
$2,101.6 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 $1,937.2 million
for the Total column in the table).
The components of revenue and revenue growth in our primary geographic
markets for the first quarter of 2004 compared to the first quarter of 2003 are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $ 1,221.2 11.1%
Euro Denominated Markets............ 455.8 17.7%
United Kingdom...................... 251.1 18.7%
Other............................... 303.3 27.1%
--------- ----
Total............................... $ 2,231.4 15.2%
========= ====
As indicated, foreign exchange impacts increased our international revenue
by $129.8 million during the quarter ended March 31, 2004. The most significant
impacts resulted from the continued period-over-period strengthening 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 advertising,
marketing and corporate communications services through various client centric
networks that are organized to meet specific client objectives. These services
include advertising, brand consultancy, crisis communications, custom
publishing, database management, digital and interactive marketing,
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
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.
(Dollars in Millions)
-------------------------------------------------------------------
1st Quarter % of 1st Quarter % of $ %
2004 Revenue 2003 Revenue Growth Growth
--------- ------- -------- ------- ------ ------
Traditional media advertising $ 977.3 43.8% $ 858.1 44.3% $119.2 13.9%
CRM 750.1 33.6% 630.2 32.5% 119.9 19.0%
Public relations 239.2 10.7% 221.9 11.5% 17.3 7.8%
Specialty communications 264.8 11.9% 227.0 11.7% 37.8 16.6%
-------- -------- ------
$2,231.4 $1,937.2 $294.2 15.2%
======== ======== ======
Certain reclassifications have been made to the first quarter 2003 amounts
in the table above to conform the numbers to the first quarter 2004 amounts
presented.
Operating Expenses: Our first quarter of 2004 worldwide operating expense
increased $267.1 million, or 15.4%, to $2,002.1 million from $1,735.0 million in
the first quarter of 2003, as shown below.
(Dollars in Millions)
------------------------------------------------------------------------------------------
Three Months Ended March 31,
------------------------------------------------------------------------------------------
2004 2003 2004 vs 2003
------------------------------- ----------------------------- -----------------
% % of % % of
of Total Op. of Total Op. $ %
Revenue Revenue Costs Revenue Revenue Costs Growth Growth
------- ------- ----- ------- ------- ----- ------ ------
Revenue ........................... $ 2,231.4 $1,937.2 $ 294.2 15.2%
Operating expenses:
Salary and service costs....... 1,593.6 71.4% 79.6% 1,362.0 70.3% 78.5% 231.6 17.0%
Office and general expenses.... 408.5 18.3% 20.4% 373.0 19.3% 21.5% 35.5 9.5%
--------- ---- ---- -------- ----- ---- --------- ----
Total Operating Costs.............. 2,002.1 89.7% 1,735.0 89.6% 267.1 15.4%
Operating profit................... $ 229.3 10.2% $ 202.2 10.4% $ 27.1 13.4%
========= ======== =========
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $231.6 million, or 17.0%, and represented
79.6% of total operating expenses in the first quarter of 2004 versus 78.5% in
the first quarter of 2003. These expenses also increased as a percentage of
revenue to 71.4% in the first quarter of 2004 from 70.3% in the first quarter of
2003 as a result of increased incentive compensation costs and increases in
direct service costs, including increases in costs relating to new business
initiatives
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
and recruitment costs, as well as changes in the mix of our revenues. This was
partially offset by our continued efforts to increase the variability of our
cost structure on a location-by-location basis and the positive impact in the
first quarter of 2004 of previous severance actions.
Office and general expenses increased by $35.5 million, or 9.5%, in the
first quarter of 2004 compared to the same period in 2003. Office and general
expenses decreased as a percentage of our total operating costs in the first
quarter of 2004 to 20.4% versus 21.5% in the prior period. Additionally, as a
percentage of revenue, office and general expenses decreased in the first
quarter of 2004 to 18.3% from 19.3%.
Included in office and general expense was a net gain of $13.1 million
related to investment activity during the quarter. In March 2004, in connection
with Seneca's recapitalization, we agreed to exchange our remaining preferred
stock in Seneca for a $24.0 million senior secured note and 40% of Seneca's
outstanding common stock. The note, which is due in March 2007, bears interest
at a rate of 6.25% per annum. The recapitalization transaction was required to
be recorded at fair value and accordingly, we recorded a pre-tax net gain of
$24.0 million. This gain was offset by losses of $10.9 million on other
cost-based investments.
Excluding the net gain of $13.1 million, office and general expenses were
18.9% of revenue in the first quarter of 2004 and operating margin decreased to
9.7% of revenue compared to 10.4% of revenue in the first quarter of 2003. This
decrease in operating margin resulted primarily from $9.9 million of costs
incurred in connection with the disposal of two non-strategic businesses.
Net Interest Expense: Our net interest expense in the first quarter of
2004 was $10.4 million, up slightly from $8.3 million in the same period in
2003. The increase in our gross interest expense of $13.7 million was attributed
to incurring additional amortization expense primarily related to the two
interest payments made in 2003 on certain of our convertible notes. In addition,
interest expense relative to the (euro)152.4 million 5.20% Euro note increased
due to the foreign currency change of the Euro relative to the U.S. dollar in
the first quarter of 2004. These increases were partially offset by increased
levels of cash on hand over the prior period and continued cash management
efforts during the course of the quarter.
Income Taxes: Our consolidated effective income tax rate was 33.6% in the
first quarter of 2004, which is consistent with our full year rate for 2003, but
is less than the 34.6% rate in the first quarter of 2003. This reduction from
the first quarter of 2003 reflects the realization of our ongoing focus on tax
planning initiatives, including a reduction of the inefficiencies of our
international and state tax structures.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first quarter of 2004, increased $20.1 million, or by 17.4% to $135.6 million
from $115.5 million in the first quarter of 2003. Diluted earnings per share
increased 16.1% to $0.72 in the first quarter of 2004, as compared to $0.62 in
the prior year period.
Critical Accounting Policies
To assist in better understanding our financial statements and the related
management's discussion and analysis of those results, readers are encouraged to
consider this information together with our discussion of our critical
accounting policies under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended December 31, 2003 (the "2003 Form 10-K"), as well as our
consolidated financial statements and the related notes included in our 2003
Form 10-K, for a more complete understanding of all of our accounting policies.
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 during the post-acquisition
transition period. 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 $435.0 million as of March 31, 2004. The ultimate
amount payable cannot be predicted with reasonable certainty because it is
dependent upon future results of operations of subject businesses and 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 significant. The contingent
purchase price obligations as of March 31, 2004, calculated assuming that the
acquired businesses perform over the relevant future periods at their current
profit levels, are as follows:
(Dollars in Millions)
---------------------------------------------------------------------
Remainder There-
2004 2005 2006 2007 after Total
---- ---- ---- ---- ----- -----
$ 162 $ 155 $ 47 $ 42 $ 29 $ 435
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
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
their current profit levels, the aggregate amount we could be required to pay in
future periods is approximately $258.0 million, $159.0 million of which relate
to obligations that are currently exercisable. The ultimate amount payable
relating to these transactions will vary because it is dependent on the future
results of operations of the subject businesses, the timing of the exercise of
these rights, changes in foreign currency exchange rates and other factors. The
actual amount that we pay is likely to be different from this estimates, and the
difference could be significant. The obligations that exist for these agreements
as of March 31, 2004, calculated using the assumptions above, are as follows:
(Dollars in Millions)
--------------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $ 135 $ 92 $ 227
Affiliated agencies 24 7 31
----- ----- -----
Total $ 159 $ 99 $ 258
===== ===== =====
If these rights are exercised, there would likely be an increase in our net
income as a result of our increased ownership and a reduction of minority
interest expense.
Liquidity and Capital Resources
Our principal non-discretionary funding requirement is our working capital
requirement. In addition, we have contractual obligations related to our debt
and convertible notes, our recurring business operations primarily related to
lease obligations, as well as certain contingent acquisition obligations related
to acquisitions made in prior years.
Our principal discretionary cash requirements include dividend payments to
our shareholders, purchases of treasury stock, payments for strategic
acquisitions and capital expenditures.
We have a seasonal working capital cycle. Working capital requirements are
lowest at year-end and higher during the quarters. This occurs because in the
majority of our businesses we act as agent on behalf of our clients, including
when we place media and incur production costs on their behalf. We generally
require collection from our clients prior to our payment for the media and
production costs obligations and these obligations are greatest at the end of
the year.
Historically, on an annual basis, our discretionary and non-discretionary
spending has been funded from operating cash flow. However, during the year we
manage liquidity by utilizing our credit facilities discussed below.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Liquidity: We had cash and cash equivalents totaling $519.3 million and
$1,528.7 million and short-term investments totaling $25.0 million and $20.2
million at March 31, 2004 and December 31, 2003, respectively. Consistent with
our historical trends in the first quarter of the year, we had negative cash
flow from operations of $786.4 million, including tax payments and payments to
vendors and to the media on behalf of clients. This resulted in a significant
reduction in our year-end current liabilities. We funded these liabilities with
cash on hand and by drawing down on available credit facilities.
Capital Resources: We maintain two revolving credit facilities with two
consortia of banks, a three-year $835.0 million revolving credit facility which
matures November 14, 2005, and a $1,200.0 million 364-day revolving credit
facility with a maturity date of November 12, 2004. We are also an active
participant in the commercial paper market with a $1,500.0 million program. Each
of our bank credit facilities provide credit support for issuances under this
program. As of March 31, 2004, we had no borrowings outstanding under these
credit facilities. The 364-day facility includes a provision which allows us to
convert all amounts outstanding at expiration of the facility into a one-year
term loan. The consortium under the 364-day credit facility consists of 24 banks
for which Citibank N.A. acts as agent. Other significant lending institutions
include HSBC Bank USA, JPMorgan Chase Bank, Wachovia, Societe Generale and
Barclays. 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. These facilities provide us with
the ability to classify up to $2,035.0 million of our borrowings due within one
year as long-term debt, as it is our intention to keep the borrowings
outstanding on a long-term basis.
We had short-term bank loans of $61.8 million and $42.4 million at March
31, 2004 and December 31, 2003, respectively, which are comprised of domestic
borrowings and bank overdrafts of our international subsidiaries and are treated
as unsecured loans pursuant to our bank agreements.
At March 31, 2004, we had a total of $2,339.3 million aggregate principal
amount of convertible notes outstanding, including $847.0 million Liquid Yield
Option 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.
At March 31, 2004, we had Euro-denominated bonds outstanding of
(euro)152.4 million or $187.7 million. The bonds pay a fixed rate of 5.2% to
maturity in June 2005. While an increase in the value of the Euro against the
U.S. dollar will result in a greater liability for interest and principal, there
will be a corresponding increase in the dollar value of our Euro-denominated net
assets.
Our outstanding debt and amounts available under these facilities as of
March 31, 2004 ($ in millions) were as follows:
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS (Continued)
Debt Available
Outstanding Credit
----------- ---------
Bank loans (due in less than 1 year)................. $ 61.8 --
$835.0 Million Revolver - due November 14, 2005...... -- $ 835.0
Commercial paper issued under 364-day Facility....... -- 1,200.0
(euro)152.4 million 5.20% Euro
notes - due June 24, 2005.......................... 187.7 --
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......... 25.8 --
-------- --------
Total.................................................... $2,614.6 $2,035.0
======== ========
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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our results of operations are subject to risk from the translation to the
U.S. dollar of the revenue and expenses of our foreign operations, which are
generally denominated in the local currency. For the most part, our revenues and
the expenses incurred related to those revenues are denominated in the same
currency. This minimizes the impact that fluctuations in exchange rates will
have on profit margins.
Our 2003 Form 10-K provides a more detailed discussion of the market risks
affecting our operations. As of March 31, 2004, 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.
17
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.
18
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table presents information with respect to purchases of
common stock of the Company made during the three months ended March 31,
2004 by Omnicom Group Inc. or any "affiliated purchaser" of Omnicom Group
Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.
(c) Total Number
of Shares Purchased (d) Maximum Number
(a) Total (b) Average As Part of Publicly of of Shares that May
Number of Price Paid Announced Plans Yet Be Purchased Under
Shares Purchased(1) Per Share or Programs the Plans or Programs
------------------- --------- --------------- -----------------------
January 1, 2004 through
January 31, 2004 435,000 $83.44 -- --
February 1, 2004 through
February 29, 2004 1,243,100 $81.00 -- --
March 1, 2004 through
March 31 2004 53,500 $76.31 -- --
--------- ------ -------- --------
Total 1,731,600 $81.47 -- --
========= ====== ======== ========
(1) The shares purchased below have been purchased in the open market for
general corporate purposes.
Item 6. Exhibit and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Office 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 February 17, 2004, we furnished a Current Report on Form 8-K to furnish
under Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition, our earnings release reporting our financial
results and the fiscal quarter and twelve months ended December 31, 2003
and the text of materials used in the related call at which such results
were discussed.
On March 15, 2004, we furnished a Current Report on Form 8-K to furnish
under Item 9. Regulation FD Disclosure and Item 12. Results of Operations
and Financial Condition, the effect of the adoption of SFAS 123 on our
historical financial statements for the years ended December 31, 2003 and
2002, and for each of our fiscal quarters ended in 2003.
19
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 7, 2004 /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)
20