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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 1-10551
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OMNICOM GROUP INC.
(Exact name of registrant as specified in its charter)
New York 13-1514814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
437 Madison Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 415-3600
Securities Registered Pursuant to Section 12(b) of the Act:
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Name of each Exchange
Title of each class on which Registered
- ---------------------------- -----------------------
Common Stock, $.15 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
The registrant has (1) 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 and (2) been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is
not contained herein and will not be contained in the definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes [X] No [_]
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At March 1, 2004, 190,531,541 shares of Omnicom Common Stock, $.15 par
value, were outstanding; the aggregate market value of the voting stock held by
nonaffiliates as of the last business day of the registrant's most recently
completed second fiscal quarter was $13,173,641,000.
Certain portions of Omnicom's definitive proxy statement relating to its
annual meeting of shareholders scheduled to be held on May 25, 2004 are
incorporated by reference into Part III of this report.
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OMNICOM GROUP INC.
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ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 3
Item 3. Legal Proceedings.............................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............ 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 5
Item 6. Selected Financial Data........................................ 6
Items 7/7A. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Critical
Accounting Policies; and Quantitative and Qualitative
Disclosures about Market Risk................................ 8
Item 8. Financial Statements and Supplementary Data.................... 24
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 24
Item 9A. Controls and Disclosure........................................ 24
PART III
Item 10. Directors and Executive Officers of the Registrant............. 25
Item 11. Executive Compensation......................................... *
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... *
Item 13. Certain Relationships and Related Transactions................. *
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 26
Index to Financial Statements.................................. 26
Index to Financial Statements Schedules........................ 26
Exhibit Index.................................................. 26
Signatures.................................................................. 29
Management Report ........................................................ F-1
Independent Auditors' Report................................................ F-2
Consolidated Financial Statements........................................... F-4
Notes to Consolidated Financial Statements.................................. F-8
Certifications of Senior Executive Officers................................. S-7
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* The information called for by Items 10, 11, 12 and 13, to the extent not
included in this document, is incorporated herein by reference to the
information to be included under the captions "Election of Directors",
"Stock Ownership", "Director Compensation" and "Executive Compensation" in
Omnicom's definitive proxy statement, which is expected to be filed by
April 23, 2004.
PART I
Introduction
This report is both our 2003 annual report to shareholders and our 2003
annual report on Form 10-K required under federal securities laws.
We are a holding company. Our business is conducted through subsidiaries.
For simplicity, however, the terms "Omnicom", "we", "our" and "us" each refer to
Omnicom Group Inc. and our subsidiaries unless the context indicates otherwise.
Statements of our beliefs or expectations regarding future events are
"forward-looking statements" within the meaning of the federal securities laws.
These statements are subject to various risks and uncertainties, including as a
result of the specific factors identified under the captions "Risks and
Competitive Conditions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 3 and 7 and elsewhere in this
report. There can be no assurance that these beliefs or expectations will not
change or be affected by actual future events.
1. Business
Our Business: We are one of the largest advertising, marketing and
corporate communications companies in the world. Our company was formed through
a 1986 combination of three advertising, marketing and corporate communications
networks, BBDO, Doyle Dane Bernbach and Needham Harper.
Since then, we have grown our strategic holdings to over 1,500 subsidiary
agencies operating in all major markets worldwide. Our agencies provide an
extensive range of advertising, marketing and corporate communications services,
including:
advertising
brand consultancy
crisis communications
custom publishing
database management
digital and interactive marketing
direct marketing
directory advertising
entertainment marketing
environmental design
experiential marketing
field marketing
financial / corporate business-to-business advertising
graphic arts
healthcare communications
instore design
investor relations
marketing research
media planning and buying
multi-cultural marketing
non-profit marketing
organizational communications
package design
product placement
promotional marketing
public affairs
public relations
real estate advertising and marketing
recruitment communications
reputation consulting
retail marketing
sports and event marketing
1
Advertising, marketing and corporate communications services are provided
to clients through global, pan-regional and national independent agency brands.
Our brands include:
BBDO Worldwide
DDB Worldwide
TBWA Worldwide
OMD Worldwide
Adelphi Group
AGENCY.COM
Alcone Marketing Group
Anderson DDB
ARA Group
Arnell Group
Atmosphere BBDO
Auditoire
BDDP & Fils
Bernard Hodes Group
Brand Architecture International
Brodeur Worldwide
Carlson and Partners
Carre Bleu Marine
Changing Our World
Clark & Weinstock
Claydon Heeley Jones Mason
Clemenger Communications Limited
Cline, Davis & Mann
Cone
Corbett Accel Healthcare Group
CPM
Creative Juice
Davie-Brown Entertainment
del Rivero Messianu
Dieste, Harmel & Partners
Direct Partners
Doremus
Eigen Fabrikaat
Element 79 Partners
Etcetera Groep
European Communication Consultants
FitzGerald Communications
FKGB
Fleishman-Hillard
Full Circle Entertainment
G1
Gavin Anderson & Company
Goodby, Silverstein & Partners
Grizzard Communications
GSD&M
Hall & Partners Group
Harrison & Star Business Group
Health Science Communications
Heye & Partner
Horrow Sports Ventures
ICON
Integrated Merchandising Services
Integer Group
Interbrand
InterScreen
i\tec
Jump
Kaleidoscope
Ketchum
Ketchum Directory Advertising
KPR
Lieber Levett Koenig Farese Babcock
Lyons Lavey Nickel Swift
M/A/R/C Research
Marketing Advantage
MarketStar
Martin/Williams
Matthews Media Group
MBA
Mercury Public Affairs
Merkley & Partners
MicroMedia
Millsport
Moss Dragoti
Multi-M
National In-Store
New Solutions
Nouveau Monde
Novus
Organic
Paris Venise Design
Pentamark
PGC Advertising
PhD
Porter Novelli International
Proximity Worldwide
Radiate Sports & Entertainment Group
Rapp Collins Worldwide
Russ Reid Company
Salesforce
Screen
Sellbytel
Serino Coyne
Siegel & Gale
Spike DDB
Spot Plus
Staniforth
Steiner Sports Marketing
Targetbase
TARGIS
Tequila
Textuel
The Ant Farm
The Designory
The Marketing Arm
The Promotion Network
TPG
Tracy Locke Partnership
Tribal DDB
Washington Speakers Bureau
Wolff Olins
Zimmerman & Partners Advertising
2
The various components of our business and material factors that affected
us in 2003 are discussed in our "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" of this report. None of our
acquisitions in 2003, 2002 or 2001 were material to our consolidated financial
position or results of operations. For information concerning our acquisitions,
see note 2 to our consolidated financial statements.
Geographic Regions: Our total consolidated revenue is about evenly divided
between U.S. and non-U.S. operations. For financial information concerning
domestic and foreign operations and segment reporting, see note 5 to our
consolidated financial statements.
Our Clients: We had over 5,000 clients in 2003, many of which were served
by more than one of our agency brands. Our 10 largest and 250 largest clients in
the aggregate accounted for 18.7% and 53.8%, respectively, of our 2003
consolidated revenue. Our largest client was served by 50 of our agency brands.
This client accounted for 4.7% of our 2003 consolidated revenue. No other client
accounted for more than 2.9% of our 2003 consolidated revenue.
Our Employees: We employed approximately 58,500 people at December 31,
2003. We are not party to any significant collective bargaining agreements. See
our management discussion and analysis beginning on page 7 of this report for a
discussion of the effect of salary and service costs on our historical results
of operations.
Risks and Competitive Conditions: We face the risks normally associated
with global services businesses. The operational and financial performance of
our businesses are typically tied to overall economic and regional market
conditions, competition for client assignments and talented staff, new business
wins and losses and the risks associated with extensive international
operations. We do not believe that our international operations as a whole
present any material risk to our overall business because they invoice clients
and pay expenses in their local currency. However, there are some risks of doing
business abroad, including those of currency fluctuations, political instability
and exchange controls, which do not affect domestic-focused firms as discussed
in our management's discussion and analysis starting on page 7. For financial
information on our operations by geographic area, see note 5 to our consolidated
financial statements.
The particular businesses in which we participate are highly competitive.
Typically, the financial and technological barriers to entry are low, with the
key competitive considerations for keeping existing business and winning new
business being the quality and effectiveness of the services offered, including
our ability to efficiently serve clients, particularly large international
clients, on a broad geographic basis. While many of our client relationships are
long-standing, companies put their advertising, marketing services and public
and corporate communications businesses up for competitive review from time to
time. To the extent that we are not able to remain competitive or to keep key
clients, our business and financial results could be adversely affected.
Our ability to retain existing clients and to attract new clients may, in
some cases, be limited by clients' policies on, or perceptions of, conflicts of
interest arising out of other client relationships. In addition, an important
aspect of our competitiveness is our ability to retain key employee and
management personnel. Our continuing ability to attract and retain these
employees may have a material effect on our business and financial results.
Our revenue is dependent upon the advertising, marketing and corporate
communication requirements of our clients and tends to be lowest in the first
and third quarters of the calendar year as a result of the post-holiday slowdown
in client activity at the beginning of January and a slowdown in client activity
in August primarily as a result of the vacation season. See our management
discussion and analysis beginning on page 7 of this report for a discussion of
the effect of market conditions and other factors on our historical results of
operations.
Directly or indirectly, government agencies and consumer groups have from
time to time affected or attempted to affect the scope, content and manner of
presentation of advertising, marketing and corporate communications services
through regulations and other governmental action. We believe the total volume
of advertising, marketing and corporate communications services will not be
materially affected by future legislation or regulation, however the scope,
content and manner of presentation may continue to change.
2. Properties
We maintain office space in many major cities around the world. This space
is primarily used for office and administrative purposes by our employees in
performing professional services. Our principal corporate offices are at 437
Madison Avenue, New York, New York and One East Weaver Street, Greenwich,
Connecticut. We also maintain executive offices in London, England.
3
Our office space is utilized for performing professional services and is
in suitable and well-maintained condition for our current operations.
Substantially all of our office space is leased from third parties with varying
expiration dates ranging from one to 19 years. Certain of our leases are subject
to rent reviews or contain various escalation clauses and certain of our leases
require our payment of various operating expenses, which may also be subject to
escalation. In addition, leases are denominated in the local currency of the
operating entity and are therefore subject to changes in foreign exchange rates.
Our consolidated rent expense was $335.5 million in 2003, $311.3 million in 2002
and $305.4 million in 2001, after reduction for rents received from subleases of
$17.3 million, $15.5 million and $8.0 million, respectively. Our obligations for
future minimum base rents under terms of non-cancelable real estate leases and
other operating leases, which include primarily office furniture and computer
and technology equipment, reduced by rents receivable from non-cancelable
subleases are (in millions):
Net Rent
--------
2004 ................................................. $435.9
2005 ................................................. 362.7
2006 ................................................. 288.4
2007 ................................................. 231.3
2008 ................................................. 190.9
Thereafter............................................ 949.3
See note 10 to our consolidated financial statements of this report for a
discussion of our lease commitments and our management discussion and analysis
for the impact of leases on our operating expenses.
3. Legal Proceedings
Beginning on June 13, 2002, several proposed 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 certain internet
investments made by our Communicade Group, which we contributed to Seneca
Investments LLC 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 have moved to dismiss the complaint. The court has not yet decided
the motion. In addition to the proceedings described above, a shareholder
derivative action was filed on June 28, 2002 in New York State Court in New York
City by a plaintiff shareholder, purportedly on our behalf, alleging breaches of
fiduciary duty, disclosure failures, abuse of control and gross mismanagement in
connection with the formation of Seneca Investments LLC.
Management presently expects to defend these cases vigorously. 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, we
cannot assure investors as to the ultimate effect of these matters on our
financial position or results of operations.
We are also involved from time to time in various routine 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.
For additional information concerning our legal proceedings, including the
class action and derivative action described above, see note 14 to our
consolidated financial statements, which is incorporated into this section by
reference.
4. Submission of Matters to a Vote of Security Holders
Our annual shareholders meeting has historically been held in the second
quarter of the year. No matters were submitted to a vote of our shareholders
during the last quarter of 2003.
4
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common shares are listed on the New York Stock Exchange under the
symbol "OMC". On March 1, 2004, we had 3,633 holders of record of our common
shares. The table below shows the range of quarterly high and low sales prices
reported on the New York Stock Exchange Composite Tape for our common shares and
the dividends paid per share for these periods.
Dividends Paid
Period High Low Per Share
- ------ ---- ------ --------------
Q1 2002......................... $96.30 $82.76 $0.20
Q2 2002......................... 94.10 36.27 0.20
Q3 2002......................... 65.61 38.54 0.20
Q4 2002......................... 70.29 48.10 0.20
Q1 2003......................... $68.25 $46.50 $0.20
Q2 2003......................... 76.43 53.15 0.20
Q3 2003......................... 81.18 69.61 0.20
Q4 2003......................... 87.60 71.80 0.20
Q1 2004*........................ $88.50 $76.85 $0.20
* through March 1, 2004
5
6. Selected Financial Data
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes which begin on page F-1,
as well as our management's discussion and analysis which begins on page 7 of
this report.
(Dollars in thousands except per share amounts)
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
For the year:
Revenue ............................... $ 8,621,404 $ 7,536,299 $ 6,889,406 $ 6,154,230 $ 5,130,545
Operating Profit ...................... 1,164,675 1,104,115 968,184 878,090 724,130
Income After Income Taxes ............. 740,922 697,987 543,257 542,477 400,461
Net Income ............................ 675,883 643,459 503,142 498,795 362,882
Net Income per common share:
Basic .............................. 3.61 3.46 2.75 2.85 2.07
Diluted ............................ 3.59 3.44 2.70 2.73 2.01
Dividends declared per common
share .............................. 0.800 0.800 0.775 0.700 0.625
At year end:
Cash, cash equivalents and
short-term investments ............. $ 1,548,935 $ 695,881 $ 516,999 $ 576,539 $ 600,949
Total assets .......................... 14,499,456 11,819,802 10,617,414 9,853,707 9,017,637
Long-term obligations:
Long-term debt ..................... 197,291 197,861 490,105 1,015,419 263,149
Convertible notes .................. 2,339,304 1,747,037 850,000 229,968 448,483
Deferred compensation and
other liabilities ................ 342,894 293,638 296,980 296,921 300,746
As discussed in footnote 13 of the notes to our consolidated financial
statements, as required by statements of Financial Accounting Standards 142 --
"Goodwill and Other Intangibles" ("SFAS 142"), beginning with our 2002 results,
goodwill and other intangible assets that have indefinite lives due to a change
in generally accepted accounting principles ("GAAP") are not amortized. To make
our results for the periods prior to 2002 more directly comparable in the table
that follows, we adjusted our historical results for periods prior to 2002 to
eliminate goodwill amortization for all periods, as well as a non-recurring gain
on the sale of Razorfish shares in 2000, and the related tax impacts. As a
result of these exclusions, this presentation is a non-GAAP financial measure.
We believe that by excluding the items noted above, the table below presents
selected financial data using amounts that are more comparable year-to-year and
thus more meaningful for purposes of this analysis.
(Dollars in thousands except per share amounts)
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net Income, as adjusted:
Net Income, as reported, GAAP .............. $675,883 $643,459 $503,142 $498,795 $362,882
Add-back goodwill amortization,
net of income taxes ..................... -- -- 83,065 76,518 66,490
Less: gain on sale of Razorfish
shares, net of income taxes ............. -- -- -- 63,826 --
-------- -------- -------- -------- --------
Net Income, excluding goodwill
amortization and Razorfish gain ......... $675,883 $643,459 $586,207 $511,487 $429,372
======== ======== ======== ======== ========
Basic Net Income per share:
as reported, GAAP ....................... $3.61 $3.46 $2.75 $2.85 $2.07
as adjusted ............................. $3.61 $3.46 $3.21 $2.93 $2.45
Diluted Net Income per share:
as reported, GAAP ....................... $3.59 $3.44 $2.70 $2.73 $2.01
as adjusted ............................. $3.59 $3.44 $3.13 $2.80 $2.36
6
The following is a reconciliation of the "as reported" to "as adjusted"
Net Income per share on a basic and diluted basis.
(Dollars in thousands except per share amounts)
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Basic Net Income per share, as adjusted:
Net Income per common share:
Basic, as reported, GAAP ............................. $ 3.61 $ 3.46 $ 2.75 $ 2.85 $ 2.07
Add-back goodwill amortization
per common share, net of
income taxes ...................................... -- -- 0.46 0.44 0.38
Less: gain on sale of Razorfish
shares, per common share, net
of income taxes ................................... -- -- -- 0.36 --
-------- -------- -------- -------- --------
Net Income per common share,
excluding goodwill amortization
and Razorfish gain:
Basic ........................................... $ 3.61 $ 3.46 $ 3.21 $ 2.93 $ 2.45
======== ======== ======== ======== ========
Diluted Net Income per share, as adjusted:
Net Income per common share:
Diluted, as reported, GAAP ........................ $ 3.59 $ 3.44 $ 2.70 $ 2.73 $ 2.01
Add-back goodwill amortization
per common share, net of
income taxes ...................................... -- -- 0.43 0.41 0.35
Less: gain on sale of Razorfish
shares, per common share, net
of income taxes ................................... -- -- -- 0.34 --
-------- -------- -------- -------- --------
Net Income per common share,
excluding goodwill amortization
and Razorfish gain:
Diluted ......................................... $ 3.59 $ 3.44 $ 3.13 $ 2.80 $ 2.36
======== ======== ======== ======== ========
7
7/7A. Management's Discussion and Analysis of Financial Condition and Results of
Operations; Critical Accounting Policies; and Quantitative and Qualitative
Information about Market Risk
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. We
continually seek to grow our business with our existing clients by maintaining a
client-centered 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 either currently serve or have the ability to serve our existing
client base.
During the past few years, overall industry and margin growth 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. Our diversified portfolio of companies, both from a geographical
and a service offerings perspective, has allowed us to perform ahead of the
industry in general. During this period we have continued to invest in our
businesses and our personnel, and have taken action to reduce costs at some of
our companies to deal with the changing economic circumstances.
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.
Although the overall business environment has been difficult, as a result
of the diversity and balance of our portfolio of companies and service
offerings, we continued to grow our revenues. However, as a result of changes in
our business mix, increased severance costs incurred, under-utilization of
staff, increased professional fees and increased amortization of other
intangible assets, our margins were lower in 2003 and in 2002 than our
historical performance. We are hopeful that with continuing improvements in the
U.S. economy, combined with the cost-reduction actions taken by our companies,
margins should begin to stabilize.
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; growth from acquisition and
growth from our largest clients.
In recent years, our revenue has been divided almost evenly between
domestic and international operations. In 2003, our overall revenue growth was
14.4%, of which 6.2% was related to changes in foreign exchange rates and 3.6%
was related to acquired entities. The remainder, 4.6%, was organic growth.
In 2003, traditional media advertising represented about 44% of the total
revenue and grew by 14.1%. Marketing services represented about 56% of total
revenue and grew by 14.6% over the previous year.
We believe that our ability to increase revenues as a result of our
client-centered approach to the business is demonstrated most clearly in our
relationships with our largest clients. While consolidated revenues on a U.S.
dollar basis increased 14.4% in 2003, revenue from our ten largest clients
increased 19.3%. By expanding the breadth of our relationships with these
clients we not only increase revenues, but we also enhance the overall
consistency and stability of our operations, which in turn drives our financial
performance.
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. 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
8
significant portion of these expenses are relatively fixed in nature. Over the
past three years, salary and service costs have grown from 64.2% of revenue to
67.7% of revenue, while office and general expenses have declined from 21.8% of
revenue to 18.8% of revenue.
Our net income for 2003 increased by 5.0% to $675.9 million from $643.5
million in 2002 and our diluted EPS increased by 4.4% to $3.59 from $3.44.
The following year-over-year analysis gives further details and insight
into the changes in our financial performance.
Financial Results from Operations -- 2003 Compared with 2002
(Dollars in millions,
except per share amounts)
Twelve Months Ended December 31, 2003 2002
--------- ---------
Revenue ...................................... $ 8,621.4 $ 7,536.3
Operating expenses:
Salary and service costs .................. 5,839.0 4,952.9
Office and general expenses ............... 1,617.7 1,479.3
--------- ---------
7,456.7 6,432.2
--------- ---------
Operating profit ............................. 1,164.7 1,104.1
Net interest expense:
Interest expense .......................... 57.9 45.5
Interest income ........................... (15.1) (15.0)
--------- ---------
42.8 30.5
--------- ---------
Income before income taxes ................... 1,121.9 1,073.6
Income taxes ................................. 380.9 375.6
--------- ---------
Income after income taxes .................... 741.0 698.0
Equity in earnings of affiliates ............. 15.1 13.8
Minority interests ........................... (80.2) (68.3)
--------- ---------
Net income ................................ $ 675.9 $ 643.5
========= =========
Net Income Per Common Share:
Basic ..................................... $ 3.61 $ 3.46
Diluted ................................... 3.59 3.44
Dividends Declared Per Common Share .......... $ 0.80 $ 0.80
Revenue: When comparing performance between years, we discuss non-GAAP
financial measures such as the impact that foreign currency rate changes,
acquisitions/dispositions and organic growth have on reported revenues. As we
derive significant revenue from international operations, changes in foreign
currency rates between the years impact reported results. Reported results are
also impacted by our acquisition and disposition activity and organic growth.
Accordingly, we provide this information to supplement the discussion of changes
in revenue period-to-period.
9
Our 2003 consolidated worldwide revenue increased 14.4% to $8,621.4
million from $7,536.3 million in 2002. The effect of acquisitions, net of
disposals, increased 2003 worldwide revenue by $271.7 million. Organic growth
increased worldwide revenue by $347.8 million, and foreign exchange impacts
increased worldwide revenue by $465.6 million. The components of total 2003
revenue growth in the U.S. ("domestic") and the remainder of the world
("international") are summarized below ($ in millions):
Total Domestic International
-------------------- -------------------- --------------------
$ % $ % $ %
-------- ---- -------- ---- -------- ----
December 31, 2002 ........................... $7,536.3 -- $4,284.6 -- $3,251.7 --
Components of Revenue Changes:
Foreign exchange impact ..................... 465.6 6.2% -- -- 465.6 14.3%
Acquisitions ................................ 271.7 3.6% 174.7 4.1% 97.0 3.0%
Organic ..................................... 347.8 4.6% 261.5 6.1% 86.2 2.7%
-------- ---- -------- ---- -------- ----
December 31, 2003 ........................... $8,621.4 14.4% $4,720.9 10.2% $3,900.5 20.0%
======== ==== ======== ==== ======== ====
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
$8,155.8 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 $8,621.4 million less $8,155.8 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 $7,536.3 million
for the Total column in the table).
During the past few years, geopolitical unrest, lagging economic
conditions, lack of consumer confidence and cautious client spending have
continued to affect overall industry growth. However, our diversified portfolio
of companies, both from a geographical and service offerings perspective, has
allowed us to perform ahead of the industry in general and we have continued to
grow our revenues.
The components of revenue and revenue growth for 2003 compared to 2002, in
our primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States ..................... $4,720.9 10.2%
Euro Markets ...................... 1,789.9 22.6%
United Kingdom .................... 941.9 15.9%
Other ............................. 1,168.7 19.4%
-------- ----
Total ............................. $8,621.4 14.4%
======== ====
As indicated, foreign exchange impacts increased our international revenue
by $465.6 million for 2003. The most significant impacts resulted from the
continued 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. Additional geographic information relating to our
business is contained in note 5 to our consolidated financial statements.
Due to a variety of factors, in the normal course, our agencies both gain
and lose business from clients each year. The net result in 2003, and
historically each year for Omnicom as a whole, was an overall gain in new
business. Due to our multiple independent agency structure and the breadth of
our service offerings and
10
geographic reach, our agencies have more than 5,000 active client relationships
in the aggregate. Revenue from our single largest client in 2003 increased by
7.9%. This client represented 4.7% of worldwide revenue in 2003 and 5.0% in 2002
and no other client represented more than 2.9% in 2003 or 2002. Revenue from our
ten largest and 250 largest clients grew by more than 19.0% and 15.0%,
respectively. Our ten largest and 250 largest clients represented 18.7% and
53.8% of our 2003 worldwide revenue, respectively and 17.9% and 53.4% of our
2002 worldwide revenue.
Driven by 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, 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)
----------------------------------------------------------------------------
Twelve Months Ended December 31,
2003 2002 2003 vs 2002
-------------------- ----------------------- ------------------
% of % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising ............ $3,739.7 43.4% $3,276.4 43.5% $ 463.3 14.1%
CRM ...................................... 2,918.6 33.8% 2,421.8 32.1% 496.8 20.5%
Public relations ......................... 955.1 11.1% 921.0 12.2% 34.1 3.7%
Specialty communications ................. 1,008.0 11.7% 917.1 12.2% 90.9 9.9%
-------- -------- -------- ----
$8,621.4 $7,536.3 $1,085.1 14.4%
======== ======== ======== ====
Operating Expenses: Our 2003 worldwide operating expense increased
$1,024.5 million, or 15.9%, to $7,456.7 million from $6,432.2 million in 2002,
as shown below.
(Dollars in millions)
---------------------------------------------------------------------------------
2003 2002 2003 vs 2002
---------------------------- ---------------------------- ----------------
% of % of
% of Total Op. % of Total Op. $ %
Revenue Revenue Costs Revenue Revenue Costs Growth Growth
------- ------- -------- ------- ------- --------- ------ ------
Revenue .............................. $8,621.4 $7,536.3 $1,085.1 14.4%
Operating expenses:
Salary and service costs ........... 5,839.0 67.7% 78.3% 4,952.9 65.7% 77.0% 886.1 17.9%
Office and general expenses ........ 1,617.7 18.8% 21.7% 1,479.3 19.6% 23.0% 138.4 9.4%
-------- ---- ---- -------- ---- ---- ----- ----
Total Operating Costs ................ 7,456.7 86.5% 6,432.2 85.3% 1,024.5 15.9%
Operating profit ..................... $1,164.7 13.5% $1,104.1 14.7% $ 60.6 5.5%
======== ======== ========
Salary and service costs represent the largest part of operating expenses.
During 2003, we have continued to invest in our businesses and their personnel,
and have taken action to reduce costs at some of our companies to deal with the
changing economic circumstances. As a percentage of operating expenses, salary
and service costs were 78.3% in 2003 and 77.0% in 2002. These costs are
comprised of direct service costs and salary and related costs. Most, or 86.5%,
of the $1,024.5 million increase in operating expenses in 2003 resulted from
increases in salary and service costs. The $886.1 million increase in salary and
service costs was attributable to increased revenue levels, including changes in
the mix of our revenues which resulted in greater utilization of freelance
labor. In addition, although we incurred increased severance costs and did not
reach optimal utilization
11
levels for our staff, we continued to make investments in new key personnel.
Furthermore, we increased incentive compensation where performance dictated. As
a result, salary and service costs as a percentage of revenues increased
year-to-year from 65.7% in 2002 to 67.7% in 2003.
Office and general expenses represented 21.7% and 23.0% of our operating
expenses in 2003 and 2002, respectively. These costs are comprised of office and
equipment rent, depreciation and amortization of other intangibles, professional
fees and other overhead expenses. As a percentage of revenue, office and general
expenses decreased in 2003 from 19.6% to 18.8%. This year-over-year decrease,
which was offset by increases in professional fees and amortization of other
intangible assets, resulted from our continuing efforts to better align these
costs with business levels on a location-by-location basis, as well as from
increased revenue levels.
For the foregoing reasons, as well as changes in our business mix, our
operating margin decreased from 14.7% in 2002 to 13.5% in 2003.
We expect our efforts to control operating expenses will continue, but we
anticipate that it will remain difficult. Accordingly, we continue to look for
ways to increase the variability of our cost structure. We are hopeful that with
the continuing improvements in the U.S. economy combined with the cost reduction
actions taken by our companies, margins should begin to stabilize.
Net Interest Expense: Our net interest expense increased in 2003 to $42.8
million, as compared to $30.5 million in 2002. Our gross interest expense
increased by $12.4 million to $57.9 million. This increase resulted from the
additional interest costs associated with our payments on February 21, 2003, of
$30 per $1,000 principal amount of our Liquid Yield Option Notes due 2031 and,
on August 6, 2003, of $7.50 per $1,000 principal amount of our Zero Coupon Zero
Yield Convertible Notes due 2032 as incentives to the holders not to exercise
their put rights. These payments to qualified noteholders amounted to $25.4
million and $6.7 million, respectively, and are being amortized ratably over
12-month periods. In addition, interest expense relative to the (Euro)152.4
million 5.20% Euro note increased by $2.2 million due to the change in the value
of the Euro relative to the U.S. dollar in 2003. These increases were partially
offset by marginally lower short-term interest rates and cash management efforts
during the course of the year.
The amortization of the February and August 2003 payments increased
interest expense by $25.4 million for the full-year 2003 compared to 2002. These
payments will also impact 2004 by approximately $6.7 million.
See "Liquidity and Capital Resources" for a discussion of our indebtedness
and related matters.
Income Taxes: Our consolidated effective income tax rate was 34.0% in 2003
as compared to 35.0% in 2002. This reduction 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
Financial Results from Operations -- 2002 Compared with 2001
Certain reclassifications have been made to the 2002 and 2001 reported
amounts to conform them to the 2003 presentation. In addition, as discussed in
footnote 13 of the notes to our consolidated financial statements, as required
by SFAS 142, beginning with our 2002 results goodwill and other intangible
assets that have indefinite lives are not amortized. In addition to discussing
2002 and 2001 on a reported basis and to make the discussion of periods
comparable, our 2001 income statement information in the discussion that follows
has been adjusted to eliminate goodwill amortization as presented in the
following table. As a result of these adjustments, this presentation is a
non-GAAP financial measure. We believe that the table below presents selected
financial data that is more comparable year-to-year and thus more meaningful for
purposes of analysis.
(Dollars in millions, except per share amounts)
2001
-------------------------------------------------
GAAP Non-GAAP
As Goodwill As
Twelve Months Ended December 31, 2002 Reported Amortization Adjusted(a)
---------- ---------- ------------ -----------
Revenue .............................................. $ 7,536.3 $ 6,889.4 $ -- $ 6,889.4
Operating expenses:
Salary and service costs .......................... 4,952.9 4,420.9 -- 4,420.9
Office and general expenses ....................... 1,479.3 1,500.3 94.8 1,405.5
---------- ---------- ---------- ----------
6,432.2 5,921.2 94.8 5,826.4
---------- ---------- ---------- ----------
Operating profit ..................................... 1,104.1 968.2 94.8 1,063.0
Net interest expense:
Interest expense .................................. 45.5 90.9 -- 90.9
Interest income ................................... (15.0) (18.1) -- (18.1)
---------- ---------- ---------- ----------
30.5 72.8 -- 72.8
---------- ---------- ---------- ----------
Income before income taxes ........................... 1,073.6 895.4 94.8 990.2
Income taxes ......................................... 375.6 352.1 13.0 365.1
---------- ---------- ---------- ----------
Income after income taxes ............................ 698.0 543.3 81.8 625.1
Equity in earnings of affiliates ..................... 13.8 12.6 2.8 15.4
Minority interests ................................... (68.3) (52.8) (1.5) (54.3)
---------- ---------- ---------- ----------
Net income ........................................ $ 643.5 $ 503.1 $ 83.1 $ 586.2
========== ========== ========== ==========
Net Income Per Common Share:
Basic ............................................. $3.46 $2.75 0.46 $3.21
Diluted ........................................... 3.44 2.70 0.43 3.13
Dividends Declared Per Common Share .................. $0.800 $0.775 -- $0.775
- ----------
(a) Excludes amortization of goodwill and related tax impact.
Revenue: Our 2002 consolidated worldwide revenue increased 9.4% to
$7,536.3 million from $6,889.4 million in 2001. The effect of acquisitions, net
of disposals, increased 2002 worldwide revenue by $362.5 million.
Internal/organic growth increased worldwide revenue by $193.1 million, and
foreign exchange impacts increased worldwide revenue by $91.3 million. The
components of total 2002 revenue growth in the U.S. ("domestic") and the
remainder of the world ("international") are summarized below ($ in millions):
Total Domestic International
-------------------- -------------------- ---------------------
$ % $ % $ %
-------- ---- -------- ---- -------- ----
December 31, 2001 ........................ $6,889.4 -- $3,717.0 -- $3,172.4 --
Components of Revenue Changes:
Foreign exchange impact .................. 91.3 1.3% -- -- 91.3 2.9%
Acquisitions ............................. 362.5 5.3% 269.1 7.3% 93.4 2.9%
Organic .................................. 193.1 2.8% 298.5 8.0% (105.4) (3.4)%
-------- ---- -------- ---- -------- ----
December 31, 2002 ........................ $7,536.3 9.4% $4,284.6 15.3% $3,251.7 2.4%
======== ==== ======== ==== ======== ====
13
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
$7,445.0 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 $7,536.3 million less $7,445.0 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 $6,889.4 million
for the Total column in the table).
The components of revenue and revenue growth for 2002 compared to 2001, in
our primary geographic markets are summarized below ($ in millions):
$ Revenue % Growth
--------- --------
United States ........................... $4,284.6 15.3%
Euro Markets ............................ 1,458.6 3.2%
United Kingdom .......................... 814.1 1.1%
Other ................................... 979.0 2.7%
-------- ------
Total ................................... $7,536.3 9.4%
======== ======
As indicated, foreign exchange impacts increased our international revenue
by $91.3 million for 2002. The most significant impacts resulted from the
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. This was partially offset by the strengthening of the U.S. dollar
against the Brazilian Real. Additional geographic information relating to our
business is contained in note 5 to our consolidated financial statements at page
F-15 of this report.
Comparisons of 2002 results to the prior year needs to be made in the
context of the events of September 11, 2001, which had a significant adverse
impact on our business in the third quarter of 2001. The adverse impact of
September 11, 2001, was less significant in the fourth quarter of 2001 and
management believes that the fourth quarter of 2001 also benefited from other
short-term economic stimuli and delayed spending from the third quarter of 2001.
The impact of these factors on our business and our 2002 and 2001 results of
operations is more fully discussed below.
Due to our multiple independent agency structure and the breadth of our
service offerings and geographic reach, our agencies have more than 5,000 active
client relationships in the aggregate. Revenue from our single largest client in
2002 increased by 2.4%. This client represented 5.0% of worldwide revenue in
2002 and 5.4% in 2001 and no other client represented more than 2.5% in 2002 and
2001. Our ten largest and 250 largest clients represented 17.9% and 53.4% of our
2002 worldwide revenue, respectively and 17.0% and 50.6% of our 2001 worldwide
revenue.
14
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)
-----------------------------------------------------------------
Twelve Months Ended December 31,
2002 2001 2002 vs 2001
----------------- ----------------- ---------------
% of % of $ %
Revenue Revenue Revenue Revenue Growth Growth
------- ------- ------- ------- ------ ------
Traditional media advertising.......... $3,276.4 43.5% $3,006.3 43.6% $270.1 9.0%
CRM ................................. 2,421.8 32.1% 2,121.0 30.8% 300.8 14.2%
Public relations....................... 921.0 12.2% 982.1 14.3% (61.1) (6.2)%
Specialty communications............... 917.1 12.2% 780.0 11.3% 137.1 17.6%
-------- -------- ------
$7,536.3 $6,889.4 $646.9 9.4%
======== ======== ======
Operating Expenses: Our 2002 worldwide operating expense increased $511.0
million, or 8.6% to $6,432.2 million from $5,921.2 million, or on an as adjusted
basis by $605.8 million, or 10.4%, from $5,826.4 million in 2001, as described
below.
(Dollars in millions)
--------------------------------------------------------------------------
2002 2001 - GAAP - as reported 2002 vs 2001
-------------------------- -------------------------- ----------------
% of % of
% of Total Op. % of Total Op. $ %
Revenue Revenue Costs Revenue Revenue Costs Growth Growth
------- ------- -------- ------- ------- -------- ------ ------
Revenue............................. $7,536.3 $6,889.4 $646.9 9.4%
Operating expenses:
Salary and service costs.......... 4,952.9 65.7% 77.0% 4,420.9 64.2% 74.7% 532.0 12.0%
Office and general expenses....... 1,479.3 19.6% 23.0% 1,500.3 21.8% 25.3% (21.0) (1.4)%
-------- ---- ---- -------- ---- ---- ------ ----
Total Operating Costs............... 6,432.2 85.3% 5,921.2 85.9% 511.0 8.6%
Operating profit.................... $1,104.1 14.7% $968.2 14.1% $135.9 14.0%
======== ====== ======
Salary and service costs, which are comprised of direct service costs and
salary related costs, increased by $532.0 million, or 12.0%, and represented
77.0% of total operating expenses in 2002 versus 74.7% in 2001. These expenses
increased as a percentage of revenue to 65.7% in 2002 from 64.2% in 2001.
Salaries and incentive compensation costs, which include bonuses, decreased as a
percentage of revenue in 2002 primarily as a result of continuing efforts to
align permanent staffing with current work levels on a location-by-location
basis, as well as our attempts to increase the variability of our cost structure
by relying more upon freelance labor for project work as necessary. This was
offset by increased direct service costs resulting in greater utilization of
freelance labor, changes in the mix of our revenues and increased severance
related costs.
Office and general expenses decreased by $21.0 million, or 1.4%, in 2002.
Office and general expenses represented 23.0% of our total operating costs in
2002 versus 25.3% in 2001. Additionally, as a percentage of revenue, office and
general expenses decreased in 2002 to 19.6% from 21.8%. This decrease was the
result of our efforts to better align costs with business levels on a
location-by-location basis and the elimination of goodwill amortization in 2002,
as a result of adopting SFAS 142 which represented $94.8 million in 2001.
On an as adjusted, non-GAAP basis, office and general expenses increased
by $73.8 million, or 5.3%, in 2002. Office and general expenses represented
23.0% of our total operating costs in 2002 versus 24.1% in 2001. Additionally,
as a percentage of revenue, office and general expenses decreased in 2002 to
19.6% from 20.4%. These decreases were primarily the result of our efforts to
better align costs with business levels on a location-by-location basis.
For the foregoing reasons, our operating margin increased to 14.7% in
2002, from 14.1% on an as reported basis in 2001. However, on an as adjusted,
non-GAAP basis, excluding goodwill amortization expense in 2001 our margins
decreased from 15.4%.
Net Interest Expense: Our net interest expense decreased in 2002 to $30.5
million, as compared to $72.8 million in 2001. Our gross interest expense
decreased by $45.4 million to $45.5 million. Of this decrease in gross interest
expense, $12.4 million was attributable to the conversion of our $230.0 million
aggregate
15
principal amount 2.25% convertible notes in December of 2001. The balance of the
reduction was attributable to generally lower short-term interest rates as
compared to the prior year, the issuance in February 2001 of $850.0 million
Liquid Yield Option notes as to which substantially all of the related debt
issuance costs were amortized in prior periods and the issuance in March 2002 of
the $900.0 million aggregate principal amount of Zero Coupon Zero Yield
Convertible notes of which $530.0 million was used to reduce existing interest
bearing bank debt thereby reducing interest expense. The reduction in gross
interest expense was partially offset by increased daily average outstanding
debt levels resulting from our repurchase of common stock in the first quarter
of 2002.
See "Liquidity and Capital Resources" for a discussion of our indebtedness
and related matters.
Income Taxes: Our consolidated effective income tax rate was 35.0% in 2002
as compared to 39.3% in 2001. The rate declined by 2.4% directly as a result of
the cessation of the amortization of goodwill in 2002. The remainder of
reduction in the tax rate reflects the realization of our ongoing focus on tax
planning initiatives.
Earnings Per Share (EPS): For the foregoing reasons, our net income for
2002 increased by 27.9% to $643.5 million from $503.1 million in 2001 and our
diluted EPS increased by 27.4% to $3.44 from $2.70. While our net income in 2002
was positively impacted by the conversion of the 2.25% Convertible Subordinated
Debentures at the end of 2001, the conversion of these debentures were included
in computing basic and diluted EPS in 2002 and diluted EPS in 2001.
On an as adjusted, non-GAAP basis, our net income for 2002 increased by
9.8% to $643.5 million from $586.2 million in 2001 and our diluted EPS increased
by 9.9% to $3.44 from $3.13.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies: We have prepared the following supplemental
summary of accounting policies to assist in better understanding our financial
statements and the related management discussion and analysis. Readers are
encouraged to consider this supplement together with our consolidated financial
statements and the related notes to our consolidated financial statements for a
more complete understanding of accounting policies discussed below.
Estimates: The preparation of our financial statements in conformity with
generally accepted accounting principles in the United States of America, or
"GAAP", requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities including
valuation allowances for receivables and deferred tax assets, accruals for bonus
compensation and the disclosure of contingent liabilities at the date of the
financial statements, as well as the reported amounts of revenue and expenses
during a reporting period. We evaluate these estimates on an ongoing basis and
we base our estimates on historical experience, current conditions and various
other assumptions we believe are reasonable under the circumstances. Actual
results can differ from those estimates, and it is possible that the differences
could be material.
A fair value approach is used in testing goodwill for impairment under
SFAS 142 and when evaluating cost based investments, which consist of ownership
interests in non-public companies, to determine if an other than temporary
impairment has occurred. The primary approach utilized to determine fair values
is a discounted cash flow methodology. When available and as appropriate, we
also use comparative market multiples to supplement the discounted cash flow
analysis. Numerous estimates and assumptions necessarily have to be made when
completing a discounted cash flow valuation, including estimates and assumptions
regarding interest rates, appropriate discount rates and capital structure.
Additionally, estimates must be made regarding revenue growth, operating
margins, tax rates, working capital requirements and capital expenditures.
Estimates and assumptions also need to be made when determining the appropriate
comparative market multiples to be used. Actual results of operations, cash
flows and other factors used in a discounted cash flow valuation will likely
differ from the estimates used and it is possible that differences and changes
could be material. Additional information about impairment testing under SFAS
142 and valuation of cost based investments appears in notes 2 and 13, and notes
1 and 6, respectively to our consolidated financial statements.
Acquisitions and Goodwill: We have historically made and expect to
continue to make selective acquisitions. In making acquisitions, the price we
pay is determined by various factors, including service offerings, competitive
position, reputation and geographic coverage, as well as our prior experience
and judgment. The amount we paid for acquisitions, including cash, stock and
assumption of net liabilities totaled $472.3 million in 2003 and $680.1 million
in 2002.
16
Our acquisition strategy is to continue to build upon the core
capabilities of our various strategic business platforms and agency brands
through the expansion of their service capabilities and/or their geographic
reach. In executing our acquisition strategy, one of the primary drivers in
identifying and executing a specific transaction is the existence of, or the
ability to, expand our existing client relationships. As a result, a significant
portion of an acquired company's revenues are often derived from existing
clients. Additional key factors we consider include the competitive position,
reputation and specialized know-how of acquisition targets. In addition, due to
the nature of advertising, marketing and corporate communications services
companies, the companies we acquire frequently have minimal tangible net assets
and identifiable intangible assets which primarily consist of customer
relationships. Accordingly, a substantial portion of the purchase price is
allocated to goodwill. We perform an annual impairment test in order to assess
that the fair value of our reporting units exceeds their carrying value,
inclusive of goodwill.
A summary of our contingent purchase price obligations, sometimes referred
to as earn-outs, and obligations to purchase additional interests in certain
subsidiary and affiliate companies is set forth in the "Liquidity and Capital
Resources" section of this report. The contingent purchase price obligations and
obligations to purchase additional interests in certain subsidiary and affiliate
companies are based on future performance. Contingent purchase price obligations
are accrued, in accordance with GAAP, when the contingency is resolved and
payment is certain.
Additional information about acquisitions and goodwill appears in notes 1
and 2 to our consolidated financial statements of this report and information
about changes in GAAP relative to accounting for acquisitions and goodwill is
described below in the "New Accounting Pronouncements" section and in note 13 to
our consolidated financial statements.
Revenue: Substantially all revenue is derived from fees for services.
Additionally, we earn commissions based upon the placement of advertisements in
various media. Revenue is realized when the service is performed, in accordance
with terms of the arrangement with our clients and upon completion of the
earnings process. This includes when services are rendered, generally upon
presentation date for media, when costs are incurred for radio and television
production and when print production is completed and collection is reasonably
assured.
In the majority of our businesses, we record revenue at the net amount
retained when the fee or commission is earned. In the delivery of certain
services to our clients, we incur costs on their behalf for which we are
reimbursed. Substantially all of our reimbursed costs relate to purchases on
behalf of our clients of media and production services. We normally have no
latitude in establishing the reimbursement price for these expenses and invoice
our clients for these expenses in an amount equal to the amount of costs
incurred. These reimbursed costs, which are a multiple of our revenue, are
significant. However, the majority of these costs are incurred on behalf of our
largest clients and we have not historically experienced significant losses in
connection with the reimbursement of these costs by clients.
A small portion of our contractual arrangements with clients includes
performance incentive provisions designed to link a portion of our revenue to
our performance relative to both quantitative and qualitative goals. We
recognize this portion of revenue when the specific quantitative goals are
achieved, or when our performance against qualitative goals is determined by our
clients. Additional information about revenue appears in note 1 to our
consolidated financial statements.
Employee Stock-based Compensation: In accordance with SFAS No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), we have elected to account
for employee stock option grants in accordance with Accounting Principles Board
Opinion 25 -- "Accounting for Stock Issued to Employees" ("APB 25") and make
annual pro forma disclosures (see note 7 to our consolidated financial
statements) of the effect on our reported net income and earnings per share as
if we adopted the fair value method of accounting for stock options for the
relevant periods. Also in accordance with APB 25 we issue stock option awards
with an exercise price equal to the quoted market price on the grant date and
therefore we historically have not recorded any expense in our income statement.
SFAS 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- An Amendment of FASB Statement No. 123" ("SFAS 148"), was issued
as an amendment to FASB No. 123, and provides alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. We continue to apply the
accounting provisions of APB 25.
17
We adopted the quarterly disclosure requirement as required under SFAS 148 as
set forth in our Form 10-Q filings during the 2003 year. Adopting this
disclosure requirement did not have an impact on our consolidated results of
operations or financial position. The FASB recently concluded that the fair
value of stock options will need to be expensed and indicated that they will
limit the transition methods for implementing SFAS 123 to the modified
prospective method. The FASB is also considering alternative valuation
methodologies. We will continue to monitor the progress of the FASB with regard
to their guidance and the adoption of these standards.
We plan to adopt the fair value method of accounting for stock-based
compensation during the first quarter of 2004 utilizing the modified prospective
method and the restatement approach. We expect the effect will be to reduce net
income and earnings per share in future periods. The impact on our net income
and earnings per share for prior periods will be consistent with the pro forma
disclosures included in note 7 to our financial statements.
New Accounting Pronouncements:
SFAS 146 -- Accounting for Costs Associated with Exit or Disposal
Activities requires costs associated with exit or disposal activities be
recognized and measured initially at fair value only when the liability is
incurred. SFAS 146 is effective for exit or disposal costs that are initiated
after December 31, 2002. We adopted SFAS 146 effective January 1, 2003. The
adoption did not have a significant impact on our consolidated results of
operations or financial position.
SFAS 150 -- Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). The provisions of SFAS 150 are effective for
instruments entered into or modified after May 31, 2003 and pre-existing
instruments as of July 1, 2003. On October 29, 2003, the FASB voted to
indefinitely defer the effective date of SFAS 150 through the issuance FASB
Staff Position 150-3 for mandatorily redeemable instruments as they relate to
minority interests in consolidated entities. We adopted SFAS 150 in the third
quarter of 2003, as modified by FSP 150-3. The adoption did not have a material
impact on our consolidated results of operations or financial position. We will
continue to closely monitor developments in the area of accounting for certain
financial investments with characteristics of both liabilities and equity.
FASB Interpretation No. 45 -- Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others (FIN 45). FIN 45 sets forth the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. If
the initial recognition and measurement issues were in effect at December 31,
2002, we would have recorded both an asset and a liability equal to $11.3
million related to certain real estate lease guarantees and letters of credit.
Additional information appears in note 11 to our consolidated financial
statements.
FASB Interpretation No. 46 -- Consolidation of Variable Interest Entities
(FIN 46). FIN 46 addresses the consolidation by business enterprises of variable
interest entities, as defined in FIN 46, and is based on the concept that
companies that control another entity through interests, other than voting
interests, should consolidate the controlled entity. The consolidation
requirements apply immediately to FIN 46 interests held in variable interest
entities created after January 31, 2003, and to interests held in variable
interest entities that existed prior to February 1, 2003 and remain in existence
as of July 1, 2003. The FASB subsequently issued FIN 46R in December 2003 which
modified certain provisions of FIN 46. The effective date of FIN 46R applies to
the first reporting period after March 15, 2004. The application of FIN 46 as
originally issued and as revised by the issuance of FIN 46R are not expected to
have an impact on, or result in additional disclosure in our consolidated
results of operations or financial position.
The Emerging Issues Task Force ("EITF") of the FASB also released
interpretive guidance covering several topics that impact our financial
statements. These topics include revenue arrangements with multiple deliverables
(EITF 00-21), customer relationship intangible assets acquired (EITF 02-17) and
vendor rebates (EITF 02-16). The application of this guidance did not have a
material impact on our consolidated results of operations or financial position.
18
Liquidity and Capital Resources
Cash Requirements, including contractual obligations
Our principal non-discretionary funding requirement is our working capital
requirement. In addition, as discussed below, 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.
Historically, substantially all of our non-discretionary cash requirements have
been funded from operating cash flow.
Our principal discretionary cash requirements include dividend payments to
our shareholders, purchases of treasury stock, payments for strategic
acquisitions and capital expenditures. In 2003 and 2002, our discretionary
spending was funded from operating cash flow. However, in any given year,
depending on the level of discretionary activity, we may use other sources of
funding available to finance these activities.
We have a seasonal working capital cycle. Working capital requirements are
lowest at year-end and highest during the second and third quarters, the
difference being approximately $1.0 billion during these periods in 2003 and
2002. 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 cost obligations and these obligations are
greatest at the end of the year. This pattern was similar during the past three
years. During the year we manage liquidity through our credit facilities as
discussed below under "Cash Management".
Contractual Obligations and Other Commercial Commitments: We enter into
numerous contractual and commercial undertakings in the normal course of our
business. The following table summarizes information about certain of our
obligations as of December 31, 2003 and should be read together with note 3
(bank loans and lines of credit), note 4 (long-term debt and convertible notes),
note 10 (commitments and contingent liabilities), note 11 (fair value of
financial instruments) and note 12 (financial instruments and market risk) to
our consolidated financial statements.
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
-------- -------- -------- --------
Contractual Obligations at
December 31, 2003 (in millions)
Long-term debt ............................... $ 12.4 $ 195.7 $ 1.6 $ 209.7
Convertible notes ............................ -- -- 2,339.3 2,339.3
Lease obligations ............................ 435.9 1,073.3 949.3 2,582.5
-------- -------- -------- --------
Total ........................................ $ 448.3 $1,269.0 $3,290.2 $5,131.5
======== ======== ======== ========
As more fully described on pages 21 and 22, the holders of the convertible
notes included in the table above have the right to cause us to repurchase up to
the entire aggregate face amount of the notes then outstanding for par value at
certain dates in the future. If these rights were exercised at the earliest
possible future date, as set forth in note 4 to our consolidated financial
statements, $1,739.3 million of the convertible notes could be due in less than
one year, and $600.0 million could be due in the "1 to 5 Years" category above.
Due in Due in Due
Less than 1 1 to 5 after 5 Total
Year Years Years Due
----------- ------ ------- -----
Other Commercial Commitments at
December 31, 2003 (in millions)
Lines of Credit ................ $ -- $ -- $ -- $ --
Guarantees and letters of credit 0.1 0.7 0.1 0.9
---- ---- ---- ----
Total .......................... $0.1 $0.7 $0.1 $0.9
==== ==== ==== ====
In the normal course of business, our agencies enter into various
contractual media commitments on behalf of our clients at levels substantially
exceeding our revenue. These commitments are included in our accounts payable
balance when the media services are delivered by the providers. Historically, we
have not experienced significant losses for media commitments entered into on
behalf of our clients and we believe that we do not
19
have any substantial exposure to potential losses of this nature in the future
as we receive payment in advance and we monitor the credit worthiness of our
clients. In the event that we are committed to the media services and our client
has not paid us, we believe that the risk of material loss is minimal because we
believe that we have reasonable options available to substantially mitigate any
potential losses.
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 $462 million as of December 31, 2003. The ultimate
amounts payable cannot be predicted with reasonable certainty because they are
dependent upon future results and are subject to changes in foreign currency
exchange rates. In accordance with GAAP, we have not recorded a liability for
these items on our balance sheet since the definitive amount is not determinable
or distributable. Actual results can differ from these estimates and the actual
amounts that we pay are likely to be different from these estimates. Our
obligations change from period to period as a result of payments made during the
current period, changes in the previous estimate of the acquired entities'
performance, changes in foreign currency exchange rates and other factors. These
differences could be significant. The contingent purchase price obligations as
of December 31, 2003, calculated assuming that the acquired businesses perform
over the relevant future periods at their current profit levels, are as follows:
($ in millions)
- ------------------------------------------------------------------------------
There-
2004 2005 2006 2007 after Total
- ------ ------ ------ ------ ------- -------
$175 $152 $54 $37 $44 $462
In addition, owners of interests in certain of our subsidiaries or
affiliates have the right in certain circumstances to require us to purchase
additional ownership stakes in these subsidiaries or affiliates. Assuming that
the subsidiaries and affiliates perform over the relevant periods at their
current profit levels, the aggregate amount we could be required to pay in
future periods is approximately $294 million, $178 million of which relate to
obligations that are currently exercisable. The ultimate amount payable in the
future relating to these transactions will vary because it is dependent on the
future results of operations of the subject businesses, the timing of when these
rights are exercised and changes in foreign currency exchange rates and other
factors. The actual amounts that we pay are likely to be different from these
estimates. These differences could be significant. The obligations that exist
for these agreements as of December 31, 2003, calculated using the assumptions
above, are as follows:
($ in millions)
----------------------------------------
Currently Not Currently
Exercisable Exercisable Total
----------- ----------- -----
Subsidiary agencies ........... $154 $105 $259
Affiliated agencies ........... 24 11 35
---- ---- ----
Total ......................... $178 $116 $294
==== ==== ====
If these rights are exercised, there would likely be an increase in our
net income as a result of our increased ownership and the reduction of minority
interest expense.
Sources and Uses of Cash
Although our cash requirements in 2003 and 2002 were funded by operating
cash flow, during the past three years, we have opportunistically accessed the
capital markets by issuing convertible debt of $600 million, $900 million and
$850 million in 2003, 2002 and 2001, respectively. The proceeds were used for
general corporate purposes, including the repayment of maturing debt, the
purchase of treasury shares and the funding of selected investing activities.
At year-end 2003, we had $1,528.7 million in cash and cash equivalents. In
addition, we had $2.0 billion in unused committed credit facilities available
for immediate use to fund our cash needs. These credit facilities are more fully
described in note 3 in the accompanying financial statements.
20
Our operating cash flow and access to the capital markets could be
impacted by macroeconomic factors outside our control. Additionally, liquidity
could be impaired by short and long-term debt ratings assigned by independent
rating agencies, which are based on our performance as measured by credit
ratios.
Standard and Poor's Rating Service currently rates our long-term debt A-,
Moody's Investor Service rates our long-term debt Baa1 and Fitch Rating rates
our long-term debt A-. Our short-term ratings are A2, P2 and F2 by the
respective agencies. Neither our outstanding convertible bonds nor our bank
credit facilities contain provisions that require acceleration of cash payments
should our ratings be downgraded.
Our committed bank facilities, described in detail in note 3, contain only
two financial covenants, relating to cash flow and interest coverage, which the
company met by a significant margin as of December 31, 2003.
We believe that our financial condition is strong and that our cash
balances, operational cash flows, unused committed borrowing capacity and access
to capital markets, taken together, are sufficient to support our foreseeable
cash requirements, including working capital, capital expenditures, dividends
and acquisitions.
Cash Management
We manage our cash and liquidity centrally through treasury centers in
North America, Europe and Asia/Pacific. Each day, operations with excess funds
invest these funds with their regional treasury center. Likewise, operations
that require funding will borrow funds from their regional treasury center. The
treasury centers then aggregate the net position of all of our operating
companies. The net position is either invested with or borrowed from third party
providers. To the extent that our treasury centers require liquidity, they have
the ability to access local currency lines of credit, our $2.0 billion committed
bank facilities, or our U.S. dollar-denominated commercial paper. This enables
us to reduce our consolidated debt levels and minimize interest expense as well
as centrally manage our exposure to foreign exchange.
While our cash on hand balance at December 31, 2003 increased $861.8
million from the prior year, we manage our net debt position, which we define as
total debt outstanding less cash on hand, centrally through our treasury centers
as discussed above. Our net debt outstanding at December 31, 2003 decreased
$292.2 million as compared to the prior year-end.
Debt Instruments, Guarantees and Related Covenants
We maintain two revolving credit facilities with two consortia of banks
totaling $2,035.0 million as described in note 3 to our consolidated financial
statements. These credit facilities are available to provide credit support for
issuances under our $1,500.0 million commercial paper program. We fund our daily
borrowing needs by issuing commercial paper. During 2003, we issued and redeemed
$19.6 billion and the average term was 5.9 days. As of December 31, 2003, we had
no commercial paper or bank loans outstanding under these credit facilities. We
had short-term bank loans of $42.4 million at December 31, 2003, primarily
comprised of bank overdrafts by our international subsidiaries, which are
treated as unsecured loans pursuant to the subsidiaries' bank agreements.
Our credit facilities contain financial covenants that restrict our
ability to incur indebtedness as defined in the agreements. The credit
facilities contain financial covenants limiting the ratio of total consolidated
indebtedness to total consolidated EBITDA (EBITDA for these purposes being
defined as earnings before interest, taxes, depreciation and amortization) to
3.0 times. In addition, we are required to maintain a minimum ratio of EBITDA to
interest expense of 5.0 times. At December 31, 2003, we were in compliance with
these covenants, as our ratio of debt to EBITDA was 2.0 times and our ratio of
EBITDA to interest expense was 22.9 times.
At December 31, 2003, 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 dues
2033, which were issued in June 2003.
The holders of our Liquid Yield Option Notes due 2031 have the right to
cause us to repurchase up to the entire aggregate face amount of the notes then
outstanding for par value in February of each year. The holders of our Zero
Coupon Zero Yield Convertible Notes due 2032 have the right to cause us to
repurchase up to the entire aggregate face amount of the notes then outstanding
for par value in August of each year. The holders of our
21
Zero Coupon Zero Yield Convertible Notes due 2033 have the right to cause us to
repurchase up to the entire aggregate face amount of the notes then outstanding
for par value on June 15, 2006, 2008, 2010, 2013, 2018, 2023 and on each June 15
annually thereafter through June 15, 2032. The Liquid Yield Option Notes due
2031, the Zero Coupon Zero Yield Convertible Notes due 2032 and the Zero Coupon
Zero Yield Convertible Notes due 2033 are convertible, at specified ratios, only
upon the occurrence of certain events, including if our common shares trade
above certain levels, if we effect extraordinary transactions or, in the case of
the Liquid Yield Option Notes due 2031 and the Zero Coupon Zero Yield
Convertible Notes due 2032, if our long-term debt ratings are downgraded to BBB
or lower by Standard & Poor's Ratings Services, or Baa3 or lower by Moody's
Investors Services, Inc. or in the case of the Zero Coupon Zero Yield
Convertible Notes due 2033, to BBB- or lower by S&P, and Ba1 or lower by
Moody's. These events would not, however, result in an adjustment of the number
of shares issuable upon conversion and would not accelerate the holder's right
to cause us to repurchase the notes. For additional information about the terms
of these notes, see note 4 to our consolidated financial statements.
On February 21, 2003, we paid $25.4 million to qualified noteholders of
our Liquid Yield Option Notes due 2031, equal to $30 per $1,000 principal amount
of notes, as an incentive to the holders not to exercise their put right. This
payment is being amortized over the 12-month period ended February 2004. On
February 7, 2003, we repurchased for cash, notes from holders who exercised
their put right for $2.9 million, reducing the aggregate amount outstanding of
the notes due 2031 to $847.0 million.
On August 6, 2003, we paid $6.7 million to qualified noteholders of our
Zero Coupon Zero Yield Convertible Notes dues 2032, equal to $7.50 per $1,000
principal amount of notes, as an incentive to the holders not to exercise their
put right. This payment is being amortized over the 12-month period ended August
2004. On August 1, 2003, we repurchased for cash, notes from holders who
exercised their put right for $7.7 million, reducing the aggregate amount
outstanding of the notes due 2032 to $892.3 million.
On February 6, 2004, we repurchased for cash, notes from holders who
exercised their put right for $0.006 million principal amount of Liquid Yield
Option Notes due 2031.
At December 31, 2003, we had Euro-denominated bonds outstanding of
(Euro)152.4 million or $192.0 million. The bonds pay a fixed rate of 5.2% to
maturity in June 2005. The bonds serve as a hedge of our investment in
Euro-denominated net assets. While an increase in the value of the euro against
the dollar will result in a greater liability for interest and principal, there
will be a corresponding increase in the dollar value of our Euro-denominated net
assets.
Our outstanding debt and amounts available under these facilities as of
December 31, 2003 ($ in millions) were as follows:
Debt Available
Outstanding Credit
----------- --------
Bank loans (due in less than 1 year) ..................... $ 42.4 --
$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 192.0 --
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 ............ 17.7 --
-------- --------
Total .................................................... $2,591.4 $2,035.0
======== ========
Additional information about our indebtedness is included in notes 3 and 4
of our consolidated financial statements.
Quantitative and Qualitative Disclosures Regarding Market Risk
Foreign Exchange: 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. The effects
of currency exchange rate fluctuation on the translation of our results of
operations are discussed in note
22
12 of our consolidated financial statements. 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.
While our agencies conduct business in more than 70 different currencies,
our major-non-U.S. currency markets are the European Monetary Union (EMU), the
United Kingdom, Japan, Brazil and Canada. Outside of major markets, our
subsidiaries generally borrow funds directly in their local currency. As an
integral part of our treasury operations, we enter into short-term forward
foreign exchange contracts which hedge the intercompany cash movements between
subsidiaries operating in different currency markets from that of our treasury
centers from which they borrow or invest. In the limited number of instances
where operating expenses and revenues are not denominated in the same currency,
amounts are promptly settled or hedged in the foreign currency market with
forward contracts. At December 31, 2003, we had foreign exchange contracts
outstanding with an aggregate notional principal of $1,251.0 million, most of
which were denominated in our major international market currencies with
maturities ranging from 2 to 365 days with an average duration of less than 30
days.
Additionally, at December 31, 2003 we had cross-currency interest rate
swaps in place with an aggregate notional principal amount of 19,100.0 million
Yen maturing in 2005. See note 12 to our consolidated financial statements for
information about the fair value of each type of derivative instrument.
The forward foreign exchange and swap contracts discussed above were
entered into for the purpose of hedging certain specific currency risks. As a
result of these financial instruments, we reduced financial risk in exchange for
foregoing any gain (reward) which might have occurred if the markets moved
favorably. In using these contracts, we exchanged the risks of the financial
markets for counterparty risk. To minimize counterparty risk, we only enter into
these contracts with major well-known banks and financial institutions that have
credit ratings equal to or better than our credit rating.
These hedging activities are confined to risk management activities
related to our international operations. We have established a centralized
reporting system to evaluate the effects of changes in interest rates, currency
exchange rates and other relevant market risks. We periodically determine the
potential loss from market risk by performing a value-at risk computation.
Value-at-risk analysis is a statistical model that utilizes historic currency
exchange and interest rate data to measure the potential impact on future
earnings of our existing portfolio of derivative financial instruments. The
value-at-risk analysis we performed on our December 31, 2003 portfolio of
derivative financial instruments indicated that the risk of loss was immaterial.
This overall system is designed to enable us to initiate remedial action, if
appropriate.
Debt Instruments: Our bank credit facilities mentioned above are available
to provide credit support, including issuances of commercial paper. We currently
have a 364-day facility with a one-year term out option and a 3-year facility.
Accordingly we classify outstanding borrowings under these facilities as
long-term debt. We normally replace our 364-day facility each year with a new
364-day facility with similar provisions. We also plan to renew the 3-year
facility with a new multi-year facility with similar terms. Our ability to
obtain the required bank syndication commitments depends in part on conditions
in the bank market at the time of syndication.
Our bank syndicates typically 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, Fleet,
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, San Paolo in Italy, Scotia in Canada and Westpac in Australia.
Our other long-term debt consists principally of convertible notes. The
holders of these convertible notes have the right to cause us to repurchase up
to the entire aggregate face amount. We may offer the holders of our notes a
cash payment or other incentives, such as extending the no-call period of the
note to induce them to not put the notes to us in advance of a put date. If we
were to decide to pay a cash incentive, our interest expense could increase
based on market factors at the time.
Since our existing convertible notes do not pay or accrue interest, our
interest expense could increase if notes are put. The extent, if any, of the
increase in interest expense will depend on the portion of the amount
repurchased that was refinanced, when we refinance, the type of instrument we
use to refinance and the term of the instrument.
23
The one-time payments made in 2003 to qualified noteholders, as described
above under "Debt Instruments, Guarantees and Related Covenants", are one method
of keeping the convertible notes outstanding and preserving our liquidity. We
can also preserve liquidity by satisfying some of or the entire put obligation
with common equity, provided we notify the noteholders in advance of their put
that we intend to do so. If a put were to be satisfied in cash, we expect to
have sufficient unused credit commitments to fund the put, while still
preserving ample capacity under these commitments to meet cash requirements for
the normal course of our business operations after the put event.
Our credit commitments support either the issuance of commercial paper or
bank loans, and we would likely fund the put initially using some combination of
these instruments. We would then evaluate all funding alternatives available to
us to restore our credit capacity and liquidity to the level prior to any such
put. We believe the funding alternatives would include substantially all forms
of debt, equity and convertible instruments available to us by accessing the
public or private capital markets. Our evaluation would likely include the
expected cash flows from the normal course of our business operations and the
credit capacity to fund additional potential puts on the remaining outstanding
convertible notes.
If we were to replace the convertible notes with another form of debt on a
dollar-for-dollar basis, it would have no impact on either our debt to capital
ratios or our debt to EBITDA ratio. However, an increase in interest expense
would negatively impact our coverage ratios, such as EBITDA to interest expense,
if the replacement debt were to be interest bearing. Currently our coverage
ratios applicable to our current rating levels are well above the thresholds
since the majority of our long-term debt does not pay or accrue interest. Based
on present expectations of our future operating cash flows and expected access
to debt and equity capital markets, we believe any increase in interest expense
and reduction in coverage ratios would still place us comfortably within an
acceptable range. Thus, we do not expect any negative impact on our credit
ratings if the convertible notes are put in the near future.
8. Financial Statements and Supplementary Data
Our financial statements and supplementary data are included at the end of
this report beginning on page F-1 of this report. See the index appearing on
page 26 of this report.
9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
9A. Controls and Disclosure
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 others
factors that could be reasonably expected to significantly affect the
effectiveness of these controls since the date that evaluation was completed.
24
PART III
10. Executive Officers
The executive officers of Omnicom Group Inc. as of March 1, 2004 are:
Name Position Age
---- -------- ---
Bruce Crawford................ Chairman 75
John D. Wren.................. President and Chief Executive Officer 51
Randall J. Weisenburger.......