SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
(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, 2006
--------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1514814
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
437 Madison Avenue, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 415-3600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer
----- -----
Non-accelerated filer
-----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 170,603,000 (as of April 24,
2006)
OMNICOM GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2006 and December 31, 2005.................................... 1
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2006 and 2005.............................. 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2006 and 2005.............................. 3
Notes to Condensed Consolidated 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................... 20
Item 4. Controls and Procedures...................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 22
Item 1A. Risk Factors................................................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................. 22
Item 6. Exhibits..................................................................... 22
Signatures ................................................................................... 24
Certifications
Forward-Looking Statements
Certain of the statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, from time to time, we or our
representatives have made or may make forward-looking statements, orally or in
writing. These statements relate to future events or future financial
performance and involve known and unknown risks and other factors that may cause
our actual or our industry's results, levels of activity or achievement to be
materially different from those expressed or implied by any forward-looking
statements. These risks and uncertainties, including those resulting from
specific factors identified under the captions "Market Risk" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
include, but are not limited to, our future financial condition and results of
operations, changes in general economic conditions, competitive factors, changes
in client communication requirements, the hiring and retention of human
resources and our international operations, which are subject to the risks of
currency fluctuations and exchange controls. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "could,"
"would," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential" or "continue" or the negative of those terms
or other comparable terminology. These statements are present expectations. We
undertake no obligation to update or revise any forward-looking statement.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
March 31, December 31,
2006 2005
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 1,822.9 $ 835.8
Short-term investments at market, which approximates cost................. 38.8 374.1
Accounts receivable, net of allowance for doubtful accounts
of $51.1 and $53.9..................................................... 5,142.4 5,366.1
Billable production orders in process, at cost............................ 610.6 542.0
Prepaid expenses and other current assets................................. 1,008.7 849.4
--------- ---------
Total Current Assets...................................................... 8,623.4 7,967.4
--------- ---------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $897.0 and $873.1....... 606.0 608.7
INVESTMENTS IN AFFILIATES...................................................... 180.8 182.4
GOODWILL ...................................................................... 6,578.6 6,493.1
INTANGIBLES, net of accumulated amortization of $185.4 and $176.3.............. 117.7 121.4
DEFERRED TAX BENEFITS.......................................................... 308.8 309.8
OTHER ASSETS................................................................... 245.5 237.1
--------- ---------
TOTAL ASSETS................................................. $16,660.8 $15,919.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 6,076.6 $ 6,218.9
Advance billings.......................................................... 957.5 908.7
Current portion of long-term debt......................................... 0.9 1.1
Bank loans................................................................ 21.5 15.0
Accrued taxes............................................................. 175.2 196.3
Other liabilities......................................................... 1,368.5 1,360.3
--------- ---------
Total Current Liabilities................................................. 8,600.2 8,700.3
--------- ---------
LONG-TERM DEBT................................................................. 1,013.1 18.2
CONVERTIBLE NOTES ............................................................. 2,339.3 2,339.3
DEFERRED COMPENSATION AND OTHER LIABILITIES.................................... 297.2 298.4
LONG TERM DEFERRED TAX LIABILITY............................................... 462.7 442.7
MINORITY INTERESTS............................................................. 178.8 173.0
SHAREHOLDERS' EQUITY:
Preferred stock........................................................... -- --
Common stock ............................................................. 29.8 29.8
Additional paid-in capital................................................ 1,685.2 1,675.1
Retained earnings......................................................... 3,720.0 3,599.0
Accumulated other comprehensive income.................................... 79.8 59.8
Treasury stock............................................................ (1,745.3) (1,415.7)
--------- ---------
Total Shareholders' Equity................................................ 3,769.5 3,948.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $16,660.8 $15,919.9
========= =========
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
1
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2006 2005
------------ -------------
REVENUE ...................................... $2,562.9 $2,403.0
OPERATING EXPENSES:
Salary and service costs ................ 1,844.8 1,731.0
Office and general expenses ............. 433.7 414.7
-------- --------
2,278.5 2,145.7
-------- --------
OPERATING PROFIT ............................. 284.4 257.3
NET INTEREST EXPENSE:
Interest expense ........................ 23.4 17.3
Interest income ......................... (8.3) (5.2)
-------- --------
15.1 12.1
-------- --------
INCOME BEFORE INCOME TAXES ................... 269.3 245.2
INCOME TAXES ................................. 90.9 86.1
-------- --------
INCOME AFTER INCOME TAXES .................... 178.4 159.1
EQUITY IN EARNINGS OF AFFILIATES ............. 4.9 5.2
MINORITY INTERESTS ........................... (17.6) (13.8)
-------- --------
NET INCOME ................................... $ 165.7 $ 150.5
======== ========
NET INCOME PER COMMON SHARE:
Basic ................................ $ 0.94 $ 0.82
Diluted .............................. $ 0.93 $ 0.82
DIVIDENDS DECLARED PER COMMON SHARE .......... $ 0.250 $ 0.225
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
2
OMNICOM GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended March 31,
------------------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income .................................................................... $ 165.7 $ 150.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of tangible assets........................... 35.3 32.7
Amortization of intangible assets.......................................... 8.9 9.0
Minority interests......................................................... 17.6 13.8
Earnings of affiliates in excess of dividends received..................... (1.1) (2.8)
Net gain on investment activity............................................ -- (7.0)
Windfall tax benefit on employee stock plans............................... -- 13.6
Excess tax benefit on stock-based compensation ............................ (5.6) --
Provision for losses on accounts receivable................................ 1.0 1.0
Amortization of stock-based compensation................................... 15.7 26.0
Changes in assets and liabilities providing (requiring) cash,
net of acquisitions:
Decrease (increase) in accounts receivable................................. 273.0 (185.8)
Increase in billable production orders in process.......................... (67.3) (87.7)
Increase in prepaid expenses and other current assets...................... (163.5) (97.4)
Net change in other assets and liabilities................................. (26.1) (54.1)
Increase in advanced billings.............................................. 44.8 40.5
Net decrease in accrued and deferred taxes................................. (5.0) (9.7)
Decrease in accounts payable............................................... (192.4) (559.6)
---------- ----------
Net cash provided by (used in) operating activities..................... 101.0 (717.0)
---------- ----------
Cash flows from investing activities:
Capital expenditures....................................................... (33.5) (30.1)
Payments for purchases of equity interests in subsidiaries and
affiliates, net of cash acquired........................................ (35.4) (23.1)
Proceeds from sale of businesses........................................... -- 29.3
Purchases of short-term investments........................................ (78.7) (324.9)
Proceeds from short-term investments and other ............................ 430.4 881.6
---------- ----------
Net cash provided by investing activities............................... 282.8 532.8
---------- ----------
Cash flows from financing activities:
Increase (decrease) in short-term borrowings............................... 6.2 (5.2)
Proceeds from issuance of debt............................................. 995.2 0.2
Repayments of principal of long-term debt obligations...................... (1.5) (2.6)
Excess tax benefit on stock-based compensation ............................ 5.6 --
Dividends paid............................................................. (45.2) (41.6)
Purchase of treasury shares................................................ (359.2) (377.9)
Other, net................................................................. 5.8 37.6
---------- ----------
Net cash provided by (used in) financing activities..................... 606.9 (389.5)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents.................... (3.6) (3.8)
---------- ----------
Net increase (decrease) in cash and cash equivalents.................... 987.1 (577.5)
Cash and cash equivalents at beginning of period................................ 835.8 1,165.6
---------- ----------
Cash and cash equivalents at end of period...................................... $ 1,822.9 $ 588.1
========== ==========
Supplemental disclosures:
Income taxes paid.......................................................... $ 97.6 $ 69.1
Interest paid.............................................................. $ 45.3 $ 11.7
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
3
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements were prepared without
audit pursuant to Securities and Exchange Commission rules. Certain
information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP" or "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 amounts in prior periods have been
reclassified to conform to the current 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, 2005 (the "2005 Form 10-K").
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
computed on the same basis, including if dilutive, common share
equivalents which include outstanding options and restricted shares. For
purposes of computing diluted earnings per share, 1,165,000 and 1,161,000
common share equivalents were assumed to be outstanding for the three
months ended March 31, 2006 and 2005, respectively. For the three months
ended March 31, 2006 and 2005, respectively, 6,187,000 shares and
4,360,000 shares attributable to outstanding stock options were excluded
from the calculation of diluted earnings per share because their inclusion
would have been anti-dilutive.
The number of shares used in our earnings per share computations were:
Three Months Ended March 31,
-------------------------------
2006 2005
----------- -----------
Basic EPS Computation 176,666,000 182,644,000
Diluted EPS Computation 177,831,000 183,805,000
4
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Total comprehensive income and its components were ($ in millions):
Three Months
Ended March 31,
---------------------------------
2006 2005
----------- -----------
Net income for the period............................ $ 165.7 $ 150.5
Foreign currency translation adjustment, net of
income taxes of $10.8 and $(24.8) for the three
months ended March 31, 2006 and 2005, respectively... 20.0 (46.1)
----------- -----------
Comprehensive income for the period.................. $ 185.7 $ 104.4
=========== ===========
6. Our wholly and partially owned agencies operate within the advertising,
marketing and corporate communications services industry. These agencies
are organized into agency networks, virtual client networks, regional
reporting units and operating groups. During 2005, we completed the
reorganization of our operating segments and the formation of a fifth
agency network. Consistent with the fundamentals of our business strategy,
our agencies serve similar clients, in similar industries, and in many
cases, the same clients across a variety of geographies. In addition, our
agency networks have similar economic characteristics and similar
long-term operating margins, as the main economic components of each
agency are the salary and service costs associated with providing
professional services, the office and general costs associated with office
space and occupancy, and the costs associated with the provision of
technology requirements which are generally limited to personal computers,
servers and off-the-shelf software. Therefore, given these similarities
and in accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 131, Disclosures about Segments of an Enterprise and
Related Information, most specifically paragraph 17, we aggregate our
operating segments, which are our five agency networks, into one reporting
segment.
A summary by geographic area of our revenue for the periods ended
March 31, 2006 and 2005 and long-lived assets and goodwill as of March 31,
2006 and 2005, is presented below ($ in millions):
Americas EMEA Asia/Australia
-------- ---- --------------
2006
Revenue $ 1,573.7 $ 835.0 $ 154.2
Long-Lived Assets 415.1 148.7 42.2
Goodwill 5,571.8 954.4 52.4
2005
Revenue $ 1,421.0 $ 842.2 $ 139.8
Long-Lived Assets 405.9 167.5 43.7
Goodwill 5,286.5 1,047.7 47.2
The Americas is primarily composed of the U.S., Canada and Latin
American countries. EMEA is primarily composed of various Euro countries,
the United Kingdom,
5
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
other non-Euro countries, the Middle East and Africa. Asia/Australia is
primarily composed of China, Japan, Korea, Singapore, Australia and other
Asian countries.
7. Short-term bank loans outstanding at March 31, 2006 of $21.5 million are
comprised of domestic borrowings and bank overdrafts of our international
subsidiaries which are treated as unsecured loans pursuant to our bank
agreements. There was no commercial paper outstanding as of March 31,
2006. We had unsecured committed revolving credit facilities totaling
$2,500.0 million as of March 31, 2006.
In March 2006, we issued $1.0 billion principal amount of 5.90%
senior notes due April 15, 2016 ("Senior Notes"). The gross proceeds from
the issuance were $995.1 million. The gross proceeds less fees resulted in
a 6.05% yield to maturity. The Senior Notes were issued by Omnicom Group
Inc. and two of our wholly-owned finance subsidiaries, Omnicom Capital
Inc. and Omnicom Finance Inc., as co-obligors, similar to our Convertible
Notes. The Senior Notes are senior unsecured notes that rank in equal
right of payment with all existing and future unsecured indebtedness and
as a joint and several liability of the issuer and the co-obligors.
8. In 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB No. 123 ("SFAS 148"). We adopted SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123") effective January 1,
2004. Pre-tax stock-based employee compensation expense for the three
months ended March 31, 2006 and 2005, was $15.7 million and $26.0 million,
respectively.
On January 1, 2006, we adopted SFAS No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R") which requires, among other things, that
we record stock-based compensation expense net of an estimate for awards
that are expected to be forfeited. For all unvested awards outstanding at
January 1, 2006, we recorded an adjustment to reflect the cumulative
effect of this change in accounting principle. The adjustment in the first
quarter of 2006 resulted in an increase in our operating profit and net
income of $3.6 million and $2.0 million, respectively. Because this
adjustment did not have a material affect on our results of operations and
financial condition, we did not present this adjustment on an after-tax
basis as a cumulative effect of accounting change in our income statement.
SFAS 123R also requires new awards issued to individuals that are,
or will become, retirement-eligible during the vesting period of the award
to be expensed over the lesser of the period from the date of grant
through the retirement-eligible date or the vesting date. This differs
from our previous policy for awards that were issued prior to adoption of
SFAS 123R with retirement eligibility provisions. For those awards, we
recognized compensation expense over the vesting period and we accelerated
compensation expense
6
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
upon the triggering of a retirement event. We estimate that for the full
year of 2006, $13.5 million of pre-tax amortization of stock-based
employee compensation expense will be recorded related to unvested awards
at December 31, 2005 that were issued prior to adoption of SFAS 123R to
individuals that were retirement eligible at December 31, 2005 and the
awards included retirement eligibility provisions. Had SFAS 123R been in
effect when these awards were issued, stock-based compensation expense in
2006 would have been less by $13.5 million.
SFAS 123R provides transition alternatives with respect to
calculating the pool of windfall tax benefits within our additional
paid-in capital (the "APIC Pool") that are available on the adoption date
to offset potential future shortfalls. The APIC Pool results from the
amount by which our prior year tax deductions for stock-based compensation
exceed the cumulative book stock-based compensation expense recognized in
our financial statements. We utilized the short-cut method as prescribed
by FASB Statement of Position 123R-3 to calculate the APIC Pool.
Finally, SFAS 123R requires that the benefits associated with the
tax deductions in excess of recognized stock-based employee compensation
expense be reported as a financing cash flow, rather than as an operating
cash flow, as previously required. For the three months ended March 31,
2006, net cash provided by operating activities was reduced by $5.6
million and recorded as an increase in cash provided by financing
activities.
9. Beginning on June 13, 2002, several putative class actions were filed
against us and certain senior executives in the United States District
Court for the Southern District of New York. The actions have since been
consolidated under the caption In re Omnicom Group Inc. Securities
Litigation, No. 02-CV4483 (RCC), on behalf of a proposed class of
purchasers of our common stock between February 20, 2001 and June 11,
2002. The consolidated complaint alleges, among other things, that our
public filings and other public statements during that period contained
false and misleading statements or omitted to state material information
relating to (1) our calculation of the organic growth component of
period-to-period revenue growth, (2) our valuation of and accounting for
certain internet investments made by our Communicade Group
("Communicade"), which we contributed to Seneca Investments LLC ("Seneca")
in 2001, and (3) the existence and amount of certain contingent future
obligations in respect of acquisitions. The complaint seeks an unspecified
amount of compensatory damages plus costs and attorneys' fees. Defendants
moved to dismiss the complaint and on March 28, 2005, the court dismissed
portions (1) and (3) of the complaint detailed above. The court's decision
denying the defendants' motion to dismiss the remainder of the complaint
did not address the ultimate merits of the case, but only the sufficiency
of the pleading. Defendants have answered the complaint, and fact
discovery is ongoing. Plaintiffs have moved to have the proposed class
certified and the defendants have opposed that motion, which is now fully
briefed.
7
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, on June 28, 2002, a derivative action was filed on
behalf of Omnicom in New York state court. On February 18, 2005, a second
shareholder derivative action, again purportedly brought on behalf of the
Company, was filed in New York state court. The derivative actions have
been consolidated before one New York State Justice and the plaintiffs
have filed an amended consolidated complaint. The consolidated derivative
complaint questions the business judgment of certain current and former
directors of Omnicom, by challenging, among other things, the valuation of
and accounting for the internet investments made by Communicade and the
contribution of those investments to Seneca. The consolidated complaint
alleges that the defendants breached their fiduciary duties of good faith.
The lawsuit seeks from the directors the amount of profits received from
selling Omnicom stock and other unspecified damages to be paid to the
Company, as well as costs and attorneys' fees. On September 1, 2005, the
defendants moved to dismiss the derivative complaint. The motion has now
been fully briefed and was argued before the court on January 12, 2006.
The court has not yet ruled on the motion.
The defendants in both cases believe that the allegations against
them are baseless and intend to vigorously oppose the lawsuits. Currently,
we are unable to determine the outcome of these cases and the effect on
our financial position or results of operations. The outcome of any of
these matters is inherently uncertain and may be affected by future
events. Accordingly, there can be no assurance as to the ultimate effect
of these matters.
We are also involved from time to time in various legal proceedings
in the ordinary course of business. We do not presently expect that these
proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
10. On March 31, 2006, we entered into an agreement to purchase 5.5 million
shares of our outstanding common stock for $458.7 million. The shares were
repurchased under an accelerated share repurchase ("ASR") program with a
financial institution at $83.41 per share with an initial settlement date
of April 3, 2006. The purchase was funded using a portion of the proceeds
from our senior debt offering (see Note 7). Under the ASR agreement, the
financial institution will repurchase shares of our common stock in the
open market until it has acquired 5.5 million shares. At the end of that
period, but no later than December 10, 2006, we may receive or be required
to pay a settlement amount, referred to as the purchase price adjustment,
payable at our option, in either shares of our common stock or cash, based
upon the difference between the actual cost of the shares purchased by the
financial institution and the initial purchase price of $83.41 per share.
In accordance with Emerging Issues Task Force No. 99-7, Accounting for an
Accelerated Share Repurchase Program, the shares will be included in
treasury stock beginning in the second quarter of 2006 and the settlement
of the transactions will be classified in shareholders' equity. The final
purchase price adjustment will be reflected in the treasury stock
component of shareholders' equity.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Executive Summary
We are a strategic holding company. We provide professional services to
clients through multiple agencies around the world. On a global, pan-regional
and local basis, our agencies provide these services in the following
disciplines: traditional media advertising, customer relationship management,
public relations and specialty communications. Our business model was built and
evolves around clients. While our companies operate under different names and
frame their ideas in different disciplines, we organize our services around our
clients. The fundamental premise of our business is that our clients' specific
requirements should be the central focus in how we structure our business
offerings and allocate our resources. This client-centric business model results
in multiple agencies collaborating in formal and informal virtual networks that
cut across internal organizational structures to deliver consistent brand
messages for a specific client and execute against our clients' specific
marketing requirements. We continually seek to grow our business with our
existing clients by maintaining our client-centric approach, as well as
expanding our existing business relationships into new markets and new clients.
In addition, we pursue selective acquisitions of complementary companies with
strong entrepreneurial management teams that typically either currently serve or
have the ability to serve our existing client base.
Globally, during the past few years, the overall industry has continued to
be affected by geopolitical unrest, lagging economic conditions, lack of
consumer confidence and cautious client spending. All of these factors
contributed to a difficult business environment and industry-wide margin
contraction. Throughout this period, we continued to invest in our businesses
and our personnel, and took action to reduce costs at some of our agencies to
address the changing economic circumstances. In recent periods, improving
economic conditions, coupled with the business trends described below, have had
a positive impact on our business.
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 pan-regional and global markets. 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.
Given our size and breadth, we manage our business by monitoring several
financial indicators. The key indicators that we review focus on 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, growth from acquisitions and growth
from our largest clients.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In recent years, our revenue has been divided almost evenly between
domestic and international operations. For the three months ended March 31,
2006, our overall revenue growth was 6.7% as compared to the prior year period,
which was reduced by 2.7% related to changes in foreign exchange rates and
increased by 0.7% related to the acquisition of entities, net of entities
disposed. The remaining increase of 8.7% was organic growth.
We measure operating expenses in two distinct cost categories: salary and
service costs, and office and general expenses. Salary and service costs are
comprised primarily of employee compensation related costs. Office and general
expenses are comprised primarily of rent and occupancy costs, technology related
costs and depreciation and amortization. Each of our agencies requires service
professionals with a skill set that is common across our disciplines. At the
core of this skill set is the ability to understand a client's brand and its
selling proposition, and the ability to develop a unique message to communicate
the value of the brand to the client's target audience. The facility
requirements of our agencies are also similar across geographic regions and
disciplines, and their technology requirements are generally limited to personal
computers, servers and off-the-shelf software.
Because we are a service business, we monitor these costs on a percentage
of revenue 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 a percentage of revenue as
revenues increase because a significant portion of these expenses are relatively
fixed in nature. During the first quarter of 2006, as a percentage of revenue,
salary and service costs were 72.0%, which is the same level as the first
quarter of 2005. Office and general expenses declined to 16.9% of revenue in the
first quarter of 2006 from 17.3% in the first quarter of 2005, as a result of
period-over-period revenue growth and our continuing efforts to leverage fixed
costs and better align these costs with business levels on a
location-by-location basis.
Our net income for the first quarter of 2006 increased by 10.1% to $165.7
million from $150.5 million in the first quarter of 2005. Included in our 2006
first quarter net income is a $2.0 million benefit resulting from the cumulative
effect of the adoption of SFAS 123R and the requirement to provide an estimate
for forfeitures on all unvested stock-based compensation awards, as of January
1, 2006. In prior years, in accordance with SFAS 123, we recorded forfeitures
when they actually occurred. Our diluted earnings per share increased by 13.4%
to $0.93 from $0.82 in the first quarter of 2005 for the reasons described
above, as well as the impact of the reduction in our weighted average shares
outstanding. This reduction was the result of our purchases of treasury shares
net of option exercises and share issuances under our employee stock purchase
plan.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations: First Quarter 2006 Compared to First Quarter 2005
Revenue: Our first quarter of 2006 consolidated worldwide revenue
increased 6.7% to $2,562.9 million from $2,403.0 million in the comparable
period last year. The effect of foreign exchange impacts decreased worldwide
revenue by $65.3 million. Acquisitions, net of disposals, increased worldwide
revenue by $17.3 million in the first quarter of 2006 and organic growth
increased worldwide revenue by $207.9 million. The components of the first
quarter 2006 revenue growth in the U.S. ("domestic") and the remainder of the
world ("international") are summarized below ($ in millions):
Total Domestic International
-------------------- ------------------- ---------------------
$ % $ % $ %
---------- ----- ---------- ----- ---------- -----
Quarter ended March 31, 2005......... $ 2,403.0 -- $ 1,312.1 -- $ 1,090.9 --
Components of revenue changes:
Foreign exchange impact.............. (65.3) (2.7)% -- -- (65.3) (6.0)%
Acquisitions......................... 17.3 0.7% 16.9 1.3% 0.4 0.1%
Organic.............................. 207.9 8.7% 104.0 7.9% 103.9 9.5%
---------- ---- ---------- --- ---------- ----
Quarter ended March 31, 2006......... $ 2,562.9 6.7% $ 1,433.0 9.2% $ 1,129.9 3.6%
========== === ========== === ========== ===
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
$2,628.2 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period
revenue in U.S. dollars and the current period revenue in constant
currency (in this case $2,562.9 million less $2,628.2 million for
the Total column in the table).
o The acquisitions 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 $2,403.0 million
for the Total column in the table).
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The components of revenue and revenue growth in our primary geographic
markets for the first quarter of 2006 compared to the first quarter of 2005 are
summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States....................... $ 1,433.0 9.2%
Euro Markets........................ 483.8 (4.4)%
United Kingdom...................... 273.7 3.1%
Other............................... 372.4 16.7%
---------- ----
Total............................... $ 2,562.9 6.7%
========== ====
As indicated, foreign exchange impacts decreased our international revenue
by 6.0%, or $65.3 million during the quarter ended March 31, 2006. The most
significant impacts resulted from the decline of the Euro and the British Pound
against the U.S. Dollar, which was partially offset by the strength of the
Canadian Dollar and Brazilian Real against the U.S. Dollar.
Driven by our clients' continuous demand for more effective and efficient
branding activities, we strive to provide an extensive range of advertising,
marketing and corporate communications services through various client-centric
networks that are organized to meet specific client objectives. These services
include advertising, brand consultancy, crisis communications, custom
publishing, database management, digital and interactive marketing, direct
marketing, directory advertising, entertainment marketing, environmental design,
experiential marketing, field marketing, financial/corporate
business-to-business advertising, graphic arts, healthcare communications,
instore design, investor relations, marketing research, media planning and
buying, mobile marketing services, multi-cultural marketing, non-profit
marketing, organizational communications, package design, product placement,
promotional marketing, public affairs, public relations, real estate advertising
and marketing, recruitment communications, reputation consulting, retail
marketing, search engine marketing and sports and event marketing. In an effort
to monitor the changing needs of our clients and to further expand the scope of
our services to key clients, we monitor revenue across a broad range of
disciplines and group them into the following four categories as summarized
below: traditional media advertising, customer relationship management (referred
to as CRM), public relations and specialty communications ($ in millions).
1st Quarter % of 1st Quarter % of $ %
2006 Revenue 2005 Revenue Growth Growth
----------- ------- ----------- ------- --------- ------
Traditional media advertising $ 1,104.7 43.1% $ 1,049.7 43.7% $ 55.0 5.2%
CRM 892.1 34.8% 811.0 33.7% 81.1 10.0%
Public relations 259.8 10.1% 256.3 10.7% 3.5 1.4%
Specialty communications 306.3 12.0% 286.0 11.9% 20.3 7.1%
--------- --------- ---------
$ 2,562.9 $ 2,403.0 $ 159.9 6.7%
========= ========= =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Expenses: Our first quarter 2006 worldwide operating expenses
increased $132.8 million, or 6.2%, to $2,278.5 million from $2,145.7 million in
the first quarter of 2005, as shown below ($ in millions).
Three Months Ended March 31,
----------------------------------------------------------------------------------
2006 2005 2006 vs 2005
---------------------------- ----------------------------- -----------------
% of % of
% Total % Total
of Operating of Operating $ %
$ Revenue Expenses $ Revenue Expenses Growth Growth
-------- ------- --------- -------- ------- --------- ------ ------
Revenue ........................... $2,562.9 $2,403.0 $159.9 6.7%
Operating Expenses:
Salary and service costs....... 1,844.8 72.0% 81.0% 1,731.0 72.0% 80.7% 113.8 6.6%
Office and general expenses.... 433.7 16.9% 19.0% 414.7 17.3% 19.3% 19.0 4.6%
------- ---- ----- ------- ---- ----- ---
Total Operating Expenses........... 2,278.5 88.9% 2,145.7 89.3% 132.8 6.2%
Operating Profit................... $ 284.4 11.1% $ 257.3 10.7% $ 27.1 10.5%
======== ======== ======
Because we provide professional services, salary and service costs
represent the largest part of our operating expenses. During the first quarter
of 2006, we continued to invest in our businesses and their professional
personnel. As a percentage of total operating expenses, salary and service costs
were 81.0% in the first quarter of 2006 and 80.7% in the first quarter of 2005.
These costs are comprised of salary and related costs and direct service costs.
Most, or $113.8 million and 85.7%, of the $132.8 million increase in total
operating expenses in the first quarter of 2006 resulted from increases in
salary and service costs. This increase was attributable to the increase in our
revenue in the first quarter of 2006 and the required increases in the direct
costs necessary to deliver our services and pursue new business initiatives,
including direct salaries, salary related costs and direct service costs,
including freelance labor costs and direct administrative costs, such as travel.
In addition, incentive compensation expense increased in 2006 when compared to
2005. The increase in cash-based incentive compensation expense was partially
offset by a reduction in employee stock-based compensation expense including the
reduction resulting from the adjustment to record the cumulative effect of the
change in accounting principle required by our adoption of SFAS 123R. For
additional information, see Note 8 to our condensed consolidated financial
statements. Salary and service costs as a percentage of revenue was 72.0% in the
first quarter of 2006 and 2005.
Office and general expenses represented 19.0% and 19.3% of our operating
expenses in the first quarter of 2006 and 2005, respectively. These costs are
comprised of office and equipment rent, technology costs and depreciation,
amortization of identifiable intangibles, professional fees and other overhead
expenses. As a percentage of revenue, office and general expenses decreased from
17.3% in the first quarter of 2005 to 16.9% in the first quarter of 2006 because
these costs are relatively fixed in nature and decrease as a percentage of
revenue as revenue increases. In addition, this quarter-over-quarter decrease
resulted from our continuing efforts to better align these costs with business
levels on a location-by-location basis.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Included in operating profit and net income for the quarter ended March
31, 2006 is a benefit of $3.6 million and $2.0 million, respectively, resulting
from the cumulative effect of the adoption of SFAS 123R and the requirement to
provide an estimate for forfeitures on all unvested stock-based compensation
awards, as of January 1, 2006. Additionally, included in operating profit and
net income in the first quarter of 2005 was a gain of $6.9 million and $0.4
million, respectively, related to the sale of a majority-owned business located
in Australia and New Zealand. The impact of these transactions on our operating
income, margins, income taxes and net income is summarized below:
First Quarter 2006 First Quarter 2005
-------------------------------------- -------------------------------------
Reported Adjustments Adjusted Reported Adjustments Adjusted % Change
-------- ----------- -------- -------- ----------- -------- --------
Revenue $2,562.9 $ -- $2,562.9 $2,403.0 $ -- $2,403.0 6.7%
Operating Profit 284.4 (3.6) 280.8 257.3 (6.9) 250.4 12.1%
% Margin 11.1% (0.1)% 11.0% 10.7% (0.3)% 10.4%
Net Interest Expense 15.1 -- 15.1 12.1 -- 12.1
-------- ------- -------- -------- ------- --------
Income Before Income Tax 269.3 (3.6) 265.7 245.2 (6.9) 238.3 11.5%
% Margin 10.5% (0.1)% 10.4% 10.2% (0.3)% 9.9%
Income Taxes 90.9 (1.6) 89.3 86.1 (6.1) 80.0
% Tax Rate 33.8% 44.4% 33.6% 35.1% 88.4% 33.6%
-------- ------- -------- -------- ------- --------
Income After Income Tax 178.4 (2.0) 176.4 159.1 (0.8) 158.3 11.4%
Equity in Earnings
of Affiliates 4.9 -- 4.9 5.2 -- 5.2
Minority Interests (17.6) -- (17.6) (13.8) 0.4 (13.4)
-------- ------- -------- -------- ------- --------
Net Income $ 165.7 $ (2.0) $ 163.7 $ 150.5 $ (0.4) $ 150.1 9.1%
======== ======= ======== ======== ======= ========
The table above is intended to facilitate the above discussion regarding
the results of our operations. As a result of the adjustments above, the
"Adjusted" numbers are non-GAAP measures. We believe that by making the
adjustments above, the "Adjusted" numbers are more comparable to previous
quarters and thus more meaningful for the purpose of this analysis.
Net Interest Expense: Our net interest expense increased in the first
quarter of 2006 to $15.1 million, as compared to $12.1 million in the first
quarter of 2005. Our gross interest expense increased by $6.1 million to $23.4
million. This increase was primarily impacted by $5.7 million of additional
interest costs resulting from the amortization of payments we made during the
third quarter of 2005 and the first quarter of 2006 to holders of certain of our
convertible notes. In August 2005, we paid $33.5 million to holders of our Zero
Coupon Zero Yield Convertible Notes due 2032 ("2032 Notes") not to exercise
certain put rights and in February 2006, we paid $39.2 million to holders of our
Liquid Yield Option Notes due 2031 ("2031 Notes") as an incentive to the holders
not to exercise their February 2006 put right.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Substantially all of the quarter-over-quarter increases in these payments were
due to market increases in short-term interest rates. These increases were
partially offset by interest expense savings relative to our Euro-denominated
("(euro)") 152.4 million 5.20% Notes that were redeemed upon their maturity in
June 2005. The increase in interest income is the result of increased levels of
cash and short-term investments on hand during the quarter as well as increases
in short-term rates.
As a result of interest related payments made in the second half of 2005
and a payment we made to holders of the 2031 Notes in February 2006, we expect
interest expense to increase by $11.3 million in 2006 compared to 2005, as these
payments are amortized ratably through their next put dates. Also, we expect
interest expense for the remainder of the year to be further increased by
additional payments we may make during the third quarter of 2006 on our Zero
Coupon Zero Yield Convertible Notes due 2033, as well as interest expense
related to our $1.0 billion Senior Notes we issued in late March 2006. At this
time, we do not anticipate making an additional payment during the third quarter
of 2006 related to our 2032 Notes.
Income Taxes: Our consolidated effective income tax rate was 33.8% in the
first quarter of 2006, which is lower than our reported tax rate of 35.1% for
the first quarter of 2005. However, as set forth in the table above, excluding
the effect of the net gain and the unusually high book-tax rate on that gain
resulting from the sale of a majority-owned business located in Australia and
New Zealand in the first quarter of 2005, our first quarter 2005 rate was 33.6%.
This rate is similar to the first quarter of 2006 tax rate of 33.6%, as adjusted
for the adoption of SFAS 123R.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the
first quarter of 2006 increased $15.2 million, or 10.1%, to $165.7 million from
$150.5 million in the first quarter of 2005. Diluted earnings per share
increased 13.4% to $0.93 in the first quarter of 2006, as compared to $0.82 in
the prior year period for the reasons described above, as well as the impact of
the reduction in our weighted average shares outstanding. This reduction was the
result of our purchases of treasury shares, net of shares issued upon option
exercises and shares issued under our employee stock purchase plan. As described
in Note 10 to our condensed consolidated financial statements, on April 3, 2006,
we purchased 5.5 million shares of our outstanding common stock, which will be
included in treasury stock and will reduce our future weighted average common
shares outstanding.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies
For a more complete understanding of all of our accounting policies, 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 2005 Form 10-K, as well as our consolidated financial
statements and the related notes included in our 2005 Form 10-K.
New Accounting Pronouncements
Effective January 1, 2006, we adopted SFAS 123R using the modified
prospective application transition method. Because the fair value recognition
provisions of SFAS 123 and SFAS 123R were materially consistent under our equity
plans, the adoption of SFAS 123R did not have a significant impact on our
financial position or our results of operations. See Note 8 to our condensed
consolidated financial statements for additional information.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Contingent Acquisition Obligations
Certain of our acquisitions are structured with contingent purchase price
obligations, often referred to as earn-outs. 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. These payments are not contingent
upon future employment. The aggregate amount of future contingent purchase price
payments that we would be required to pay for prior acquisitions, assuming that
the businesses perform over the relevant future periods at their current profit
levels, is approximately $442 million as of March 31, 2006. The ultimate amounts
payable cannot be predicted with reasonable certainty because they are dependent
upon future results of operations of subject businesses and are subject to
changes in foreign currency exchange rates. In accordance with U.S. GAAP, we
have not recorded a liability for these items on our balance sheet since the
definitive amount is not determinable or distributable. Actual results can
differ from these estimates and the actual amounts that we pay are likely to be
different from these estimates. Our obligations change from period to period
primarily as a result of payments made during the current period, changes in the
acquired entities' performance and changes in foreign currency exchange rates.
These differences could be significant. The contingent purchase price
obligations as of March 31, 2006, calculated assuming that the acquired
businesses perform over the relevant future periods at their current profit
levels, are as follows ($ in millions):
Remainder
2006 2007 2008 2009 Thereafter Total
--------- ---- ---- ---- ---------- -----
$ 120 $ 136 $ 92 $ 49 $ 45 $ 442
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 those companies. Assuming that the subsidiaries
and affiliates perform over the relevant periods at their current profit levels,
the aggregate amount we could be required to pay in future periods is
approximately $269 million, $158 million of which relates to obligations that
are currently exercisable. If these rights are exercised, there would be an
increase in our net income as a result of our increased ownership and the
reduction of minority interest expense. The ultimate amount payable relating to
these transactions will vary because it is primarily dependent on the future
results of operations of the subject businesses, the timing of the exercise of
these rights and changes in foreign currency exchange rates. The actual amount
that we pay is likely to be different from this estimate and the difference
could be significant. The obligations that exist for these agreements as of
March 31, 2006, calculated using the assumptions above, are as follows ($ in
millions):
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies $ 114 $ 105 $ 219
Affiliated agencies 44 6 50
----- ----- -----
Total $ 158 $ 111 $ 269
===== ===== =====
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
Historically, substantially all of our non-discretionary cash requirements
have been funded from operating cash flow and cash on hand. However, during the
year we manage liquidity by utilizing our credit facilities discussed below. Our
principal non-discretionary funding requirement is our working capital. 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, repurchases of our common stock, payments for strategic
acquisitions and capital expenditures. Typically, our discretionary spending is
also funded from operating cash flow and cash on hand. However, in any given
year, depending on the level of discretionary activity, we may use other sources
of available funding, such as the liquidation of short-term investments, the
issuance of commercial paper to finance these activities or accessing the
capital markets. The repurchases of our stock during the first quarter of 2006
are summarized in Part II, Item 2 "Unregistered Sales of Equity Securities and
Use of Proceeds" of this Quarterly Report on Form 10-Q.
We have a seasonal working capital cycle. Working capital requirements are
lowest at year-end. The fluctuation in working capital requirements between the
lowest and highest points during the course of the year can be more than $1.5
billion. This cycle occurs because our businesses incur costs on behalf of our
clients, including when we place media and incur production costs. We generally
require collection from our clients prior to our payment for the media and
production cost obligations.
Liquidity: We had cash and cash equivalents totaling $1,822.9 million and
$835.8 million at March 31, 2006 and December 31, 2005, respectively. The
increase in cash is primarily the result of changes in the components of working
capital and the issuance of our Senior Notes in March 2006. We also had
short-term investments totaling $38.8 million and $374.1 million at March 31,
2006 and December 31, 2005, respectively. For the first three months of 2006, we
generated $101.0 million of cash flow from operations. As discussed in Note 10
to our condensed consolidated financial statements, on April 3, 2006, we
purchased 5.5 million shares of our outstanding common stock for $458.7 million.
Capital Resources: We have a $2,100.0 million revolving credit facility
which matures May 23, 2010. We also have a $400.0 million 364-day revolving
credit facility with a maturity date of June 29, 2006. The 364-day facility
includes a provision that allows us to convert all amounts outstanding at
expiration of the facility into a one-year term loan.
In funding our day-to-day liquidity, we are an active participant in the
commercial paper market with a $1,500.0 million program. Both of our revolving
credit facilities provide credit support for commercial paper issued under this
program, as well as to provide back-up liquidity
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
in the event any of our convertible notes are put back to us. As of March 31,
2006, we had no commercial paper outstanding. Accordingly, we have the ability
to classify outstanding borrowings, if any, under these facilities as long-term
debt.
Our revolving credit facilities are provided by bank syndicates, which
include large global banks such as Citibank, JP Morgan Chase, HSBC, ABN Amro,
Societe Generale, Barclays, Bank of America and BBVA. We also include large
regional banks in the U.S. such as Wachovia, US Bancorp, Northern Trust, PNC and
Wells Fargo. We also include banks that have a major presence in countries where
we conduct business such as Sumitomo in Japan, Fortis in Belgium, San Paolo in
Italy, Scotia in Canada and Westpac in Australia.
Debt: We had short-term bank loans of $21.5 million and $15.0 million,
respectively, as of March 31, 2006 and December 31, 2005. The short-term bank
loans consisted of local borrowings and bank overdrafts of our international
subsidiaries and are treated as unsecured loans pursuant to our bank agreements.
In March 2006, we issued $1.0 billion principal amount of 5.90% Senior
Notes due April 15, 2016. The gross proceeds from the issuance were $995.1
million. The gross proceeds less fees resulted in a 6.05% yield to maturity. The
Senior Notes were issued by Omnicom Group Inc. and two of our wholly-owned
finance subsidiaries, Omnicom Capital Inc. and Omnicom Finance Inc., as
co-obligors, similar to our Convertible Notes. The Senior Notes are senior
unsecured notes that rank in equal right of payment with all existing and future
unsecured indebtedness and as a joint and several liability of the issuer and
the co-obligors.
Our outstanding debt and amounts available under our credit facilities as
of March 31, 2006 were as follows ($ in millions):
Debt Available
Outstanding Credit
----------- ------
Current Debt (due in less than 1 year)................................. $ 22.4 --
Commercial Paper issued under
$2,100.0 Million Revolver - due May 23, 2010...................... -- $2,100.0
$400.0 Million Facility - due June 29, 2006............................ -- 400.0
Senior Notes - due April 15, 2016...................................... 995.1 --
Liquid Yield Option Notes - due February 7, 2031....................... 847.0 --
Zero Coupon Zero Yield Convertible Notes - due July 31, 2032........... 892.3 --
Zero Coupon Zero Yield Convertible Notes - due June 15, 2033........... 600.0 --
Other Debt............................................................. 18.0 --
-------- --------
Total...................................................................... $3,374.8 $2,500.0
======== ========
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 arising from working capital, outstanding debt,
capital expenditures, dividends and acquisitions.
19
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 our net income.
During the first quarter of 2006, we entered into Japanese Yen-based
cross-currency interest rate swaps, with an aggregate notional principal amount
of 22.0 billion Yen that mature in 2013. These swaps effectively hedge our net
investment in certain Japanese Yen based denominated assets.
Our 2005 Form 10-K provides a more detailed discussion of the market risks
affecting our operations. As of March 31, 2006, no material change had occurred
in our market risks from the disclosure contained in our 2005 Form 10-K.
20
ITEM 4. CONTROLS AND PROCEDURES
We have established and continue to maintain disclosure controls and
procedures and internal control over financial reporting designed to ensure that
information required to be disclosed in our SEC reports is recorded, processed,
summarized and reported within applicable time periods. We conducted an
evaluation of the effectiveness of our disclosure controls and procedures as of
March 31, 2006. Based on that evaluation, our CEO and CFO concluded that as of
March 31, 2006, our disclosure controls and procedures are effective to ensure
that decisions can be made timely with respect to required disclosures, as well
as ensuring that the recording, processing, summarization and reporting of
information required to be included in our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006 is appropriate. KPMG LLP, an independent registered
public accounting firm that audited our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2005,
has issued an attestation report on management's assessment of Omnicom's
internal control over financial reporting as of December 31, 2005, dated
February 24, 2006. There have not been any changes in our internal control over
financial reporting that occurred during our first fiscal quarter that have
materially affected or are reasonably likely to materially affect our internal
controls over financial reporting.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information regarding legal proceedings described in Note 9 to the condensed
consolidated financial statements set forth in Part I of this Report is
incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed in Item 1A in
our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table presents information with respect to purchases of our
common stock made during the three months ended March 31, 2006 by us or any of
our "affiliated purchasers."
(c)
Total Number (d)
(a) (b) of Shares Purchased Maximum Number
Total Average As Part of Publicly of Shares that May
Number of Price Paid Announced Plans Yet Be Purchased Under
During the month in 2006: Shares Purchased (1) Per Share or Programs the Plans or Programs
- ------------------------- -------------------- --------- ------------------- ----------------------
January 591,000 $ 83.46 -- --
February 2,082,400 $ 82.35 -- --
March 1,660,000 $ 83.34 -- --
--------- ------- ---------- ----------
Total 4,333,400 $ 82.88 -- --
========= ======= ========== ==========
(1) The shares were purchased in the open market for general corporate
purposes.
Item 6. Exhibits
(a) Exhibits
4.1 Form of Senior Debt Securities Indenture (Exhibit 4.1 to our
Registration Statement on Form S-3 (Registration No.333-132625) and
incorporated herein by reference).
4.2 First Supplemental Indenture, dated as of March 29, 2006, among
Omnicom Group Inc., Omnicom Capital Inc., Omnicom Finance Inc. and
JPMorgan Chase Bank, N.A., as trustee, in connection with our
issuance of $1.0 billion 5.90% Notes due 2016 (Exhibit 4.2 to the
Form 8-K (Registration No. 1-10551) dated March 29, 2006 (the
"3-29-06 8-K") and incorporated herein by reference).
22
4.3 Form of 5.90% Notes due 2016 (Exhibit 4.3 to the 3-29-06 8-K and
incorporated herein by reference).
31.1 Certification of the Chief Executive Officer and President required
by Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of the 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 required
by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. ss.1350.
32.2 Certification of the Executive Vice President and Chief Financial
Officer required by Rule 13a-14(b) under the Securities Exchange Act
of 1934, as amended and 18 U.S.C. ss.1350.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNICOM GROUP INC.
Dated: May 1, 2006 /s/ Randall J. Weisenburger
-----------------------------------
Randall J. Weisenburger
Executive Vice President
and Chief Financial Officer
(on behalf of Omnicom Group Inc.
and as Principal Financial Officer)
24