INTERPUBLIC GROUP OF COMPANIES, INC. - Quarter Report: 2007 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended March 31, 2007 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number: 1-6686
THE INTERPUBLIC GROUP OF
COMPANIES, INC.
(Exact name of registrant as
specified in its charter)
| Delaware | 13-1024020 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer Identification No.) |
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive
offices) (Zip Code)
(212) 704-1200
(Registrant’s telephone number, including area code)
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares of the registrant’s common stock
outstanding as of April 30, 2007 was 468,887,871.
INDEX
INFORMATION
REGARDING FORWARD-LOOKING DISCLOSURE
This quarterly report on
Form 10-Q
contains forward-looking statements. Statements in this report
that are not historical facts, including statements about
management’s beliefs and expectations, constitute
forward-looking statements. These statements are based on
current plans, estimates and projections, and are subject to
change based on a number of factors, including those outlined in
our 2006 Annual Report on
Form 10-K
under Item 1A, Risk Factors. Forward-looking statements
speak only as of the date they are made, and we undertake no
obligation to update publicly any of them in light of new
information or future events.
Forward-looking statements involve inherent risks and
uncertainties. A number of important factors could cause actual
results to differ materially from those contained in any
forward-looking statement. Such factors include, but are not
limited to, the following:
| • | risks arising from material weaknesses in our internal control over financial reporting, including material weaknesses in our control environment; | |
| • | our ability to attract new clients and retain existing clients; | |
| • | our ability to retain and attract key employees; | |
| • | risks associated with assumptions we make in connection with our critical accounting estimates; | |
| • | potential adverse effects if we are required to recognize impairment charges or other adverse accounting-related developments; | |
| • | potential adverse developments in connection with the ongoing Securities and Exchange Commission (“SEC”) investigation; | |
| • | potential downgrades in the credit ratings of our securities; | |
| • | risks associated with the effects of global, national and regional economic and political conditions, including fluctuations in economic growth rates, interest rates and currency exchange rates; and | |
| • | developments from changes in the regulatory and legal environment for advertising and marketing and communications services companies around the world. |
Investors should carefully consider these factors and the
additional risk factors outlined in more detail in our 2006
Annual Report on
Form 10-K
under Item 1A, Risk Factors.
Table of Contents
Part I —
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
THE
INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
REVENUE
|
$ | 1,359.1 | $ | 1,327.0 | ||||
|
OPERATING EXPENSES:
|
||||||||
|
Salaries and related expenses
|
988.8 | 950.7 | ||||||
|
Office and general expenses
|
495.1 | 535.5 | ||||||
|
Restructuring and other
reorganization-related (reversals) charges
|
(0.6 | ) | 0.4 | |||||
|
Total operating expenses
|
1,483.3 | 1,486.6 | ||||||
|
OPERATING LOSS
|
(124.2 | ) | (159.6 | ) | ||||
|
EXPENSES AND OTHER
INCOME:
|
||||||||
|
Interest expense
|
(55.0 | ) | (46.1 | ) | ||||
|
Interest income
|
28.5 | 25.9 | ||||||
|
Other (expense) income
|
(1.5 | ) | 0.6 | |||||
|
Total (expenses) and other income
|
(28.0 | ) | (19.6 | ) | ||||
|
Loss before benefit of income
taxes
|
(152.2 | ) | (179.2 | ) | ||||
|
Benefit of income taxes
|
(25.7 | ) | (8.8 | ) | ||||
|
Loss of consolidated
companies
|
(126.5 | ) | (170.4 | ) | ||||
|
Loss applicable to minority
interests, net of tax
|
0.4 | 0.2 | ||||||
|
Equity in net income of
unconsolidated affiliates, net of tax
|
0.2 | — | ||||||
|
NET LOSS
|
(125.9 | ) | (170.2 | ) | ||||
|
Dividends on preferred stock
|
6.9 | 11.9 | ||||||
|
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS
|
$ | (132.8 | ) | $ | (182.1 | ) | ||
|
Loss per share of common
stock — basic and diluted
|
$ | (0.29 | ) | $ | (0.43 | ) | ||
|
Weighted-average number of common
shares outstanding — basic and diluted
|
456.0 | 426.0 | ||||||
The accompanying notes are an integral part of these financial
statements.
2
Table of Contents
THE
INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
(Amounts in Millions)
(Unaudited)
|
March 31, |
December 31, |
|||||||
| 2007 | 2006 | |||||||
|
ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 1,466.9 | $ | 1,955.7 | ||||
|
Marketable securities
|
51.5 | 1.4 | ||||||
|
Accounts receivable, net of
allowance of $79.5 and $81.3
|
3,459.7 | 3,934.9 | ||||||
|
Expenditures billable to clients
|
1,118.2 | 1,021.4 | ||||||
|
Deferred income taxes
|
70.9 | 70.9 | ||||||
|
Prepaid expenses and other current
assets
|
246.4 | 224.5 | ||||||
|
Total current assets
|
6,413.6 | 7,208.8 | ||||||
|
Land, buildings and equipment, net
of accumulated depreciation of $1,032.6 and $1,017.0
|
605.6 | 624.0 | ||||||
|
Deferred income taxes
|
522.2 | 476.5 | ||||||
|
Investments
|
127.9 | 128.1 | ||||||
|
Goodwill
|
3,077.1 | 3,067.8 | ||||||
|
Other assets
|
348.2 | 358.9 | ||||||
|
TOTAL ASSETS
|
$ | 11,094.6 | $ | 11,864.1 | ||||
|
LIABILITIES:
|
||||||||
|
Accounts payable
|
$ | 3,801.0 | $ | 4,124.1 | ||||
|
Accrued liabilities
|
2,127.9 | 2,426.7 | ||||||
|
Short-term debt
|
464.2 | 82.9 | ||||||
|
Total current liabilities
|
6,393.1 | 6,633.7 | ||||||
|
Long-term debt
|
1,846.1 | 2,248.6 | ||||||
|
Deferred compensation and employee
benefits
|
599.9 | 606.3 | ||||||
|
Other non-current liabilities
|
384.9 | 388.4 | ||||||
|
Minority interests in consolidated
subsidiaries
|
41.6 | 46.5 | ||||||
|
TOTAL LIABILITIES
|
9,265.6 | 9,923.5 | ||||||
|
Commitments and contingencies
(Note 9)
|
||||||||
|
TOTAL STOCKHOLDERS’
EQUITY
|
1,829.0 | 1,940.6 | ||||||
|
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
$ | 11,094.6 | $ | 11,864.1 | ||||
The accompanying notes are an integral part of these financial
statements.
3
Table of Contents
THE
INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
(Amounts in Millions)
(Unaudited)
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (125.9 | ) | $ | (170.2 | ) | ||
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
||||||||
|
Depreciation and amortization of
fixed assets and intangible assets
|
43.0 | 42.9 | ||||||
|
Provision for bad debt
|
3.8 | 4.2 | ||||||
|
Amortization of restricted stock
and other non-cash compensation
|
19.6 | 9.3 | ||||||
|
Amortization of bond discounts and
deferred financing costs
|
7.8 | 3.2 | ||||||
|
Deferred income tax benefit
|
(48.5 | ) | (32.4 | ) | ||||
|
Gain on sales of investments
|
(0.8 | ) | (4.5 | ) | ||||
|
Loss applicable to minority
interests, net of tax
|
(0.4 | ) | (0.2 | ) | ||||
|
Other
|
7.3 | 4.6 | ||||||
|
Change in assets and
liabilities, net of acquisitions and dispositions:
|
||||||||
|
Accounts receivable
|
489.6 | 450.2 | ||||||
|
Expenditures billable to clients
|
(91.9 | ) | (23.9 | ) | ||||
|
Prepaid expenses and other current
assets
|
(22.4 | ) | (38.0 | ) | ||||
|
Accounts payable
|
(347.4 | ) | (494.3 | ) | ||||
|
Accrued liabilities
|
(311.2 | ) | (287.0 | ) | ||||
|
Other non-current assets and
liabilities
|
(5.1 | ) | 8.0 | |||||
|
Net cash used in operating
activities
|
(382.5 | ) | (528.1 | ) | ||||
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
||||||||
|
Acquisitions, including deferred
payments, net of cash acquired
|
(13.5 | ) | (1.7 | ) | ||||
|
Capital expenditures
|
(28.0 | ) | (18.7 | ) | ||||
|
Maturities of short-term
marketable securities
|
238.4 | 77.4 | ||||||
|
Purchases of short-term marketable
securities
|
(288.4 | ) | (381.7 | ) | ||||
|
Proceeds from sales of businesses
and fixed assets, net of cash sold
|
3.9 | 0.9 | ||||||
|
Proceeds from sales of investments
|
13.1 | 6.5 | ||||||
|
Purchases of investments
|
(9.6 | ) | (4.7 | ) | ||||
|
Net cash used in investing
activities
|
(84.1 | ) | (322.0 | ) | ||||
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
||||||||
|
Net decrease in short-term bank
borrowings
|
(20.0 | ) | (8.9 | ) | ||||
|
Payments of long-term debt
|
(1.2 | ) | (0.2 | ) | ||||
|
Proceeds from long-term debt
|
0.6 | 0.1 | ||||||
|
Consent fees
|
— | (0.7 | ) | |||||
|
Issuance of common stock, net of
issuance costs
|
1.4 | — | ||||||
|
Distributions to minority
interests, net
|
(4.6 | ) | (6.3 | ) | ||||
|
Preferred stock dividends
|
(6.9 | ) | (11.2 | ) | ||||
|
Net cash used in financing
activities
|
(30.7 | ) | (27.2 | ) | ||||
|
Effect of exchange rate changes on
cash and cash equivalents
|
8.5 | 8.4 | ||||||
|
Net decrease in cash and cash
equivalents
|
(488.8 | ) | (868.9 | ) | ||||
|
Cash and cash equivalents at
beginning of year
|
1,955.7 | 2,075.9 | ||||||
|
Cash and cash equivalents at end
of period
|
$ | 1,466.9 | $ | 1,207.0 | ||||
The accompanying notes are an integral part of these financial
statements.
4
Table of Contents
THE
INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
(Amounts in Millions)
(Unaudited)
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Net Loss
|
$ | (125.9 | ) | $ | (170.2 | ) | ||
|
Foreign currency translation
adjustment
|
13.7 | 12.8 | ||||||
|
Adjustments to pension and other
postretirement plans, net of tax
|
(0.2 | ) | — | |||||
|
Unrealized holding (losses) gains
on securities, net of tax
|
||||||||
|
Unrealized holding gain
|
— | 6.5 | ||||||
|
Reclassification of gain to net
earnings
|
(0.7 | ) | (0.8 | ) | ||||
|
Net unrealized holding (losses)
gains on securities, net of tax
|
(0.7 | ) | 5.7 | |||||
|
Total Comprehensive
Loss
|
$ | (113.1 | ) | $ | (151.7 | ) | ||
The accompanying notes are an integral part of these financial
statements.
5
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Note 1: | Basis of Presentation |
The unaudited consolidated financial statements have been
prepared by The Interpublic Group of Companies, Inc. (together
with its subsidiaries, the “Company”,
“Interpublic”, “we”, “us” or
“our”) pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) and, in the
opinion of management, include all adjustments of a normal and
recurring nature necessary for a fair statement of the
Consolidated Statements of Operations, Condensed Consolidated
Balance Sheets, Consolidated Statements of Cash Flows and
Consolidated Statements of Comprehensive Loss for each period
presented. Certain reclassifications have been made to prior
periods to conform to the current period presentation. The
consolidated results for interim periods are not necessarily
indicative of results for the full year, as historically our
consolidated revenue is lower in the first half of the fiscal
year than in the second half. These financial results should be
read in conjunction with our 2006 Annual Report on
Form 10-K.
As of March 31, 2007 we have included our $400.0
4.50% Convertible Senior Notes due 2023 in short-term debt
because holders of this debt may require us to repurchase these
Notes on March 15, 2008 for cash at par.
| Note 2: | Restructuring and Other Reorganization-Related (Reversals) Charges |
The components of restructuring and other reorganization-related
(reversals) charges were as follows:
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2006 | |||||||||||
|
Other reorganization-related
reversals
|
$ | (0.2 | ) | $ | — | |||||||
|
Restructuring (reversals) charges
|
||||||||||||
|
Lease termination and other exit
costs
|
0.1 | 0.4 | ||||||||||
|
Severance and termination costs
|
(0.5 | ) | — | |||||||||
| (0.4 | ) | 0.4 | ||||||||||
|
Total
|
$ | (0.6 | ) | $ | 0.4 | |||||||
Restructuring (reversals) charges relate to lease termination
and other exit costs and severance and termination costs for the
2003 and 2001 restructuring programs. For the first quarter of
2007, net reversals primarily consisted of adjustments to
estimates primarily relating to our severance and lease
termination costs offset by the amortization of the discounted
liability related to lease terminations. Net restructuring
reversals was comprised of net reversals of $(0.6) at
Constituency Management Group (“CMG”) partially offset
by net charges of $0.2 at Integrated Agency Networks
(“IAN”).
A rollforward of the remaining liability for the 2003 and 2001
restructuring program is as follows:
|
2003 |
2001 |
|||||||||||
| Program | Program | Total | ||||||||||
|
Liability at December 31, 2006
|
$ | 12.6 | $ | 19.2 | $ | 31.8 | ||||||
|
Charges and adjustments
|
(0.6 | ) | 0.2 | (0.4 | ) | |||||||
|
Payments and other
|
(0.5 | ) | (1.5 | ) | (2.0 | ) | ||||||
|
Liability at March 31, 2007
|
$ | 11.5 | $ | 17.9 | $ | 29.4 | ||||||
6
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Note 3: | Supplementary Data |
Accrued
Liabilities
|
March 31, |
December 31, |
|||||||
| 2007 | 2006 | |||||||
|
Media and production expenses
|
$ | 1,563.4 | $ | 1,690.7 | ||||
|
Salaries, benefits and related
expenses
|
323.7 | 460.6 | ||||||
|
Office and related expenses
|
79.0 | 99.2 | ||||||
|
Professional fees
|
37.2 | 46.1 | ||||||
|
Restructuring and other
reorganization-related
|
15.5 | 18.0 | ||||||
|
Interest
|
24.6 | 30.0 | ||||||
|
Taxes
|
6.2 | 7.3 | ||||||
|
Other
|
78.3 | 74.8 | ||||||
|
Total
|
$ | 2,127.9 | $ | 2,426.7 | ||||
2005
Restatement Liabilities
As part of the restatement set forth in the 2004 Annual Report
on
Form 10-K
filed in September 2005 (the “2005 Restatement”), we
recognized liabilities related to vendor discounts and credits
where we had a contractual or legal obligation to rebate such
amounts to our clients or vendors. Reductions to these
liabilities are primarily achieved through settlements with
clients and vendors but also may occur if the applicable statute
of limitations has lapsed. For the three months ended
March 31, 2007, we satisfied $13.2 of these liabilities
through cash payments of $3.8 and reductions of certain client
receivables of $9.4. Also, as part of the 2005 Restatement, we
recognized liabilities related to internal investigations and
international compensation arrangements. A summary of these and
the vendor discounts and credits liabilities, which are
primarily included in accounts payable, is as follows:
|
March 31, |
December 31, |
|||||||
| 2007 | 2006 | |||||||
|
Vendor discounts and credits
|
$ | 199.8 | $ | 211.2 | ||||
|
Internal investigations (includes
asset reserves)
|
19.5 | 19.5 | ||||||
|
International compensation
arrangements
|
28.1 | 32.3 | ||||||
|
Total
|
$ | 247.4 | $ | 263.0 | ||||
7
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Note 4: | Loss Per Share |
Loss per basic common share equals net loss applicable to common
stockholders divided by the weighted average number of common
shares outstanding for the applicable period. The following sets
forth basic and diluted loss per common share applicable to
common stock:
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Basic and Diluted
|
||||||||
|
Net loss
|
$ | (125.9 | ) | $ | (170.2 | ) | ||
|
Less: preferred stock dividends
|
6.9 | 11.9 | ||||||
|
Net loss applicable to common
stockholders
|
$ | (132.8 | ) | $ | (182.1 | ) | ||
|
Weighted-average number of
common shares outstanding — basic and
diluted
|
456.0 | 426.0 | ||||||
|
Loss per share —
basic and diluted
|
$ | (0.29 | ) | $ | (0.43 | ) | ||
Basic and diluted shares outstanding and loss per share are
equal for the three months ended March 31, 2007 and 2006
because our potentially dilutive securities are antidilutive as
a result of the net loss applicable to common stockholders in
each period. Our participating securities have no impact on our
net loss applicable to common stockholders for the three months
ended March 31, 2007 and 2006 as there are no earnings
distributable to common stockholders after deducting preferred
stock dividends.
The following table presents the potential shares excluded from
diluted loss per share because the effect of including these
potential shares would be antidilutive:
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Stock Options and Non-vested
Restricted Stock Awards
|
8.6 | 5.4 | ||||||
|
Capped Warrants
|
5.6 | — | ||||||
|
Uncapped Warrants
|
2.7 | — | ||||||
|
4.25% Convertible Senior Notes
|
32.2 | — | ||||||
|
4.50% Convertible Senior Notes
|
32.2 | 64.4 | ||||||
|
Series A Mandatory
Convertible Preferred Stock
|
— | 27.7 | ||||||
|
Series B Cumulative
Convertible Perpetual Preferred Stock
|
38.4 | 38.4 | ||||||
|
Total
|
119.7 | 135.9 | ||||||
|
Securities excluded from the loss
per share calculation because the exercise price was greater
than the average market price:
|
||||||||
|
Stock
Options(1)
|
19.3 | 30.6 | ||||||
| (1) | These options represent what is outstanding at the end of the respective period. At the point that the exercise price is less than the average market price, these options have the potential to be dilutive and application of the treasury stock method would reduce this amount. |
8
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
There were an additional 8.2 and 3.0 outstanding stock options
to purchase common shares as of March 31, 2007 and 2006,
respectively, with exercise prices less than the average market
price for the respective period. However, these options are not
included in the table above presenting the potential shares
excluded from diluted loss per share due to the application of
the treasury stock method and the rules related to stock-based
compensation arrangements.
| Note 5: | Taxes |
For the three months ended March 31, 2007 the difference
between the effective tax rate and the statutory rate of 35% is
due primarily to state and local taxes, losses incurred in
non-U.S. jurisdictions
that receive no benefit and the write-off of deferred tax assets
for restricted stock. The improvement in the effective tax rate,
as compared to the first quarter of 2006, was primarily
attributable to a reduction in the losses incurred in
non-U.S. jurisdictions
that receive no benefit and a reduction in the amount of
U.S. taxation of
non-U.S. income
without offsetting U.S. foreign tax credits.
We adopted the provisions of Financial Accounting Standards
Board (“FASB”) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
(“FIN 48”) on January 1, 2007. As a result
of the implementation of FIN 48, we recorded a $9.5
increase in the net liability for unrecognized tax positions,
which was recorded as an adjustment to retained earnings
effective January 1, 2007. The total amount of unrecognized
tax benefits at January 1, 2007 was $253.8, including
$213.7 of tax benefits that, if recognized, would impact the
effective tax rate and $40.1 of tax benefits that, if
recognized, would result in adjustments to other tax accounts,
primarily deferred taxes. The total amount of accrued interest
and penalties at January 1, 2007 was $30.2. In accordance
with our accounting policy, interest and penalties accrued on
unrecognized tax benefits are classified as income taxes in the
statement of operations. We have not elected to change this
classification with the adoption of FIN 48.
In 2006, the IRS completed the field audit of the years 1997
through 2002 and has proposed additions to our taxable income.
We have appealed a number of these proposed additions and
discussions are ongoing.
At March 31, 2007, the IRS field audit of our 2003 and 2004
income tax returns remained ongoing. On May 1, 2007, the
IRS completed its examination of these years and proposed a
number of adjustments to our taxable income. We intend to appeal
a number of these items. In addition, we have various tax years
under examination by tax authorities in various countries, such
as the United Kingdom, and in various states, such as New York,
in which we have significant business operations. It is not yet
known whether these examinations will, in the aggregate, result
in our paying additional taxes. We have established tax reserves
that we believe to be adequate in relation to the potential for
additional assessments in each of the jurisdictions in which we
are subject to taxation. We regularly assess the likelihood of
additional tax assessments in those jurisdictions and adjust our
reserves as additional information or events require.
With respect to all tax years open to examination by
U.S. Federal, various state, local, and
non-U.S. tax
authorities, we currently anticipate that approximately $80.0 of
previously unrecognized tax benefits related to various items of
income and expense, including certain worthless securities
deductions and transfer pricing adjustments, will be recognized
in the next twelve months primarily as a result of the
completion of tax examinations in the second quarter of 2007 and
the lapsing of statutes of limitation.
With limited exceptions, we are no longer subject to
U.S. income tax audits for years prior to 1997, state and
local income tax audits for years prior to 1999, or
non-U.S. income
tax audits for years prior to 2000.
9
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Note 6: | Employee Benefits |
The components of net periodic cost for the domestic pension
plans, the principal foreign pension plans and the
postretirement benefit plans are as follows:
|
Domestic |
Foreign |
Postretirement |
||||||||||||||||||||||
| Pension Plans | Pension Plans | Benefit Plans | ||||||||||||||||||||||
|
Three Months Ended March 31,
|
2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
|
Service cost
|
$ | — | $ | 0.2 | $ | 3.5 | $ | 4.1 | $ | 0.1 | $ | 0.1 | ||||||||||||
|
Interest cost
|
2.1 | 2.2 | 6.1 | 5.4 | 0.9 | 1.0 | ||||||||||||||||||
|
Expected return on plan assets
|
(2.5 | ) | (2.2 | ) | (5.9 | ) | (4.3 | ) | — | — | ||||||||||||||
|
Amortization of:
|
||||||||||||||||||||||||
|
Transition obligation
|
— | — | — | 0.1 | — | — | ||||||||||||||||||
|
Prior service cost
|
— | — | 0.1 | — | — | — | ||||||||||||||||||
|
Unrecognized actuarial losses
|
1.2 | 1.5 | 0.8 | 1.5 | 0.3 | 0.3 | ||||||||||||||||||
|
Net periodic cost
|
$ | 0.8 | $ | 1.7 | $ | 4.6 | $ | 6.8 | $ | 1.3 | $ | 1.4 | ||||||||||||
During the three months ended March 31, 2007, we made
contributions of $5.3 to our foreign pension plans. For the
remainder of 2007, we do not anticipate making contributions to
our domestic pension plans. We expect to contribute an
additional $21.2 to our foreign pension plans.
| Note 7: | Employee Stock Purchase Plan |
The Interpublic Group of Companies Employee Stock Purchase Plan
(2006) (the “2006 Plan”) became active beginning
April 1, 2007. Under the 2006 Plan, employees may purchase
our common stock through payroll deductions not exceeding 10% of
their compensation. The price an employee pays for a share of
stock under the 2006 Plan is 90% of the lesser of the average
market price of a share on the first business day of the
offering period or the average market price of a share on the
last business day of the offering period of three months. An
aggregate of 15.0 shares are reserved for issuance under
the 2006 Plan. We filed a registration statement with the SEC to
register the shares that may be purchased under the 2006 Plan.
10
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Note 8: | Segment Information |
We have two reportable segments: IAN, which is comprised of
Draftfcb, Lowe, McCann, our media services and our leading
stand-alone agencies, and CMG, which is comprised of the bulk of
our specialist marketing service offerings. We also report
results for the Corporate and other group. Segment information
is presented consistently with the basis described in our 2006
Annual Report on
Form 10-K.
Summarized financial information concerning our reportable
segments is shown in the following table:
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Revenue:
|
||||||||
|
IAN
|
$ | 1,131.2 | $ | 1,108.8 | ||||
|
CMG
|
227.9 | 218.2 | ||||||
|
Total
|
$ | 1,359.1 | $ | 1,327.0 | ||||
|
Segment operating income
(loss):
|
||||||||
|
IAN
|
$ | (64.8 | ) | $ | (72.9 | ) | ||
|
CMG
|
(1.4 | ) | 4.2 | |||||
|
Corporate and other
|
(58.6 | ) | (90.5 | ) | ||||
|
Total
|
(124.8 | ) | (159.2 | ) | ||||
|
Restructuring and other
reorganization-related reversals (charges)
|
0.6 | (0.4 | ) | |||||
|
Interest expense
|
(55.0 | ) | (46.1 | ) | ||||
|
Interest income
|
28.5 | 25.9 | ||||||
|
Other (expense) income
|
(1.5 | ) | 0.6 | |||||
|
Loss before benefit of income
taxes
|
$ | (152.2 | ) | $ | (179.2 | ) | ||
|
Depreciation and amortization
of fixed assets and intangible assets:
|
||||||||
|
IAN
|
$ | 31.2 | $ | 31.1 | ||||
|
CMG
|
4.7 | 5.0 | ||||||
|
Corporate and other
|
7.1 | 6.8 | ||||||
|
Total
|
$ | 43.0 | $ | 42.9 | ||||
|
Capital expenditures:
|
||||||||
|
IAN
|
$ | 19.7 | $ | 13.5 | ||||
|
CMG
|
2.0 | 1.7 | ||||||
|
Corporate and other
|
6.3 | 3.5 | ||||||
|
Total
|
$ | 28.0 | $ | 18.7 | ||||
|
March 31, |
December 31, |
|||||||
| Total assets: | 2007 | 2006 | ||||||
|
IAN
|
$ | 9,043.3 | $ | 9,359.5 | ||||
|
CMG
|
928.7 | 908.3 | ||||||
|
Corporate and other
|
1,122.6 | 1,596.3 | ||||||
|
Total
|
$ | 11,094.6 | $ | 11,864.1 | ||||
11
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
The following expenses are included in Corporate and other:
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Salaries and related expenses
|
$ | 58.0 | $ | 50.3 | ||||
|
Professional fees
|
25.4 | 60.8 | ||||||
|
Rent, depreciation and amortization
|
17.3 | 15.3 | ||||||
|
Corporate insurance
|
6.0 | 4.9 | ||||||
|
Other
|
7.7 | 6.0 | ||||||
|
Expenses allocated to operating
divisions
|
(55.8 | ) | (46.8 | ) | ||||
|
Total
|
$ | 58.6 | $ | 90.5 | ||||
| Note 9: | Commitments and Contingencies |
SEC
Investigation
The SEC opened a formal investigation in response to the
restatement we first announced in August 2002 and the
investigation expanded to encompass the 2005 Restatement. In
particular, since we filed our 2004 Annual Report on
Form 10-K,
we have received subpoenas from the SEC relating to matters
addressed in our 2005 Restatement. We have also responded to
inquiries from the SEC staff concerning the restatement of the
first three quarters of 2005 that we made in our 2005 Annual
Report on
Form 10-K.
We continue to cooperate with the investigation. We expect that
the investigation will result in monetary liability, but because
the investigation is ongoing, in particular with respect to the
2005 Restatement, we cannot reasonably estimate the amount,
range of amounts or timing of a resolution. Accordingly, we have
not yet established any provision relating to these matters.
Other
Legal Matters
We are or have been involved in other legal and administrative
proceedings of various types. While any litigation contains an
element of uncertainty, we do not believe that the outcome of
such proceedings or claims will have a material adverse effect
on our financial condition.
Guarantees
As discussed in our 2006 Annual Report on
Form 10-K,
we have contingent obligations under guarantees of certain
obligations of our subsidiaries relating principally to credit
facilities, guarantees of certain media payables and operating
leases of certain subsidiaries. As of March 31, 2007 there
have been no material changes to these guarantees.
| Note 10: | Recent Accounting Standards |
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”), which permits an
entity to measure certain financial assets and financial
liabilities at fair value. Under SFAS No. 159,
entities that elect the fair value option will report unrealized
gains and losses in earnings at each subsequent reporting date.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
potential impact of SFAS No. 159 on our Consolidated
Financial Statements.
In January 2007 we adopted FIN 48. See Note 5 for
further information.
12
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value in
U.S. GAAP, and expands disclosures about fair value
measurements. Under the standard, fair value refers to the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. The
standard clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing
the asset or liability. In support of this principle, the
standard establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for
example, the reporting entity’s own data. Under the
standard, fair value measurements would be separately disclosed
by level within the fair value hierarchy. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the potential impact of
SFAS No. 157 on our Consolidated Financial Statements.
The adoption of the following accounting pronouncements during
2007 did not have a material impact on our Consolidated
Financial Statements:
| • | SFAS No. 155, Accounting for Certain Hybrid Financial Instruments | |
| • | EITF Issue No. 05-1, Accounting for the Conversion of an Instrument That Becomes Convertible Upon the Issuer’s Exercise of a Call Option | |
| • | EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross versus Net Presentation) | |
| • | EITF Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance | |
| • | EITF Issue No. 06-6, Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments |
13
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(“MD&A”) is intended to help you understand The
Interpublic Group of Companies, Inc. and subsidiaries (the
“Company”, “Interpublic”, “we”,
“us” or “our”). MD&A should be read in
conjunction with our financial statements and the accompanying
notes. Our MD&A includes the following sections:
EXECUTIVE SUMMARY provides an overview of our results of
operations and liquidity.
RESULTS OF OPERATIONS provides an analysis of the consolidated
and segment results of operations for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash
flows and financing activities.
INTERNAL CONTROL OVER FINANCIAL REPORTING, by reference to our
2006 Annual Report on
Form 10-K,
provides a description of the status of our compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
CRITICAL ACCOUNTING ESTIMATES provides an updated discussion of
our accounting policies that require critical judgment,
assumptions and estimates that were incorporated in our 2006
Annual Report on
Form 10-K.
RECENT ACCOUNTING STANDARDS, by reference to Note 10 to the
unaudited Consolidated Financial Statements, provides a
discussion of accounting standards that we have not yet been
required to implement, but which may affect us in the future, as
well as those accounting standards that have been adopted during
2007.
EXECUTIVE
SUMMARY
We are one of the world’s largest advertising and marketing
services companies, comprised of communication agencies around
the world that deliver custom marketing solutions on behalf of
our clients. These agencies cover the spectrum of marketing
disciplines and specialties, from traditional services such as
consumer advertising and direct marketing, to emerging services
such as mobile and search engine marketing. To meet the
challenge of an increasingly complex consumer culture, we create
customized marketing solutions for each of our clients. These
solutions vary from project-based work between one agency and
its client to long-term, fully-integrated campaigns involving
several of our companies working on behalf of a client.
Furthermore, our agencies cover all major markets geographically
and can operate in a single region or align work globally across
many markets.
Our strategy is focused on improving our organic revenue growth
and operating income, and we are working to achieve a level of
organic revenue growth comparable to industry peers and
double-digit operating margins by 2008. We analyze
period-to-period
changes in our operating performance by determining the portion
of the change that is attributable to foreign currency rates and
the change attributable to the net effect of acquisitions and
divestitures, and the remainder is considered the organic
change. For purposes of analyzing this change, acquisitions and
divestitures are treated as if they occurred on the first day of
the quarter during which the transaction occurred.
Although the U.S. Dollar is our functional currency for
reporting purposes, a substantial portion of our revenues is
generated in foreign currencies. Therefore, our reported results
are affected by fluctuations in the currencies our international
businesses are conducted in, principally the Euro and Pound
Sterling. In the first quarter of 2007, the U.S. Dollar was
weaker against both of these currencies as compared to the first
quarter
14
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
of 2006. As a result, the net effect of foreign currency changes
from the comparable prior year period was an increase in
revenues and operating expenses in the first quarter of 2007.
As discussed in more detail in this MD&A, for the first
quarter of 2007 compared to 2006:
| • | Total revenue increased 2.4%. | |
| • | Organic revenue increase was 1.6% primarily due to higher revenue from existing clients. | |
| • | Operating margin was (9.1%) in 2007, compared to (12.0%) in 2006. | |
| • | Operating expenses decreased slightly to $1,483.3 in 2007, compared to $1,486.6 in 2006. | |
| • | Total salaries and related expenses increased 4.0%. The organic increase was 2.8%. | |
| • | Total office and general expenses decreased 7.5% primarily due to lower professional fees. The organic decrease was 7.9%. |
RESULTS
OF OPERATIONS
Consolidated
Results of Operations — Three Months Ended
March 31, 2007 compared to Three Months Ended
March 31, 2006
REVENUE
|
Three Months |
Components of Change |
Three Months |
||||||||||||||||||||||||||
|
Ended |
Net |
Ended |
||||||||||||||||||||||||||
|
March 31, |
Foreign |
Acquisitions/ |
March 31, |
Change | ||||||||||||||||||||||||
| 2006 | Currency | (Divestitures) | Organic | 2007 | Organic | Total | ||||||||||||||||||||||
|
Total
|
$ | 1,327.0 | 31.6 | (20.3 | ) | 20.8 | $ | 1,359.1 | 1.6 | % | 2.4 | % | ||||||||||||||||
|
Domestic
|
775.4 | — | (1.7 | ) | 32.3 | 806.0 | 4.2 | % | 3.9 | % | ||||||||||||||||||
|
International
|
551.6 | 31.6 | (18.6 | ) | (11.5 | ) | 553.1 | (2.1 | )% | 0.3 | % | |||||||||||||||||
Revenue increased due to changes in foreign currency exchange
rates and organic revenue increases at both the Integrated
Agency Networks (“IAN”) and Constituency Management
Group (“CMG”) segments. The domestic organic increase
was primarily driven by increased client spending and net client
wins in the traditional advertising sector, public relations and
sports marketing disciplines. The international organic decrease
was driven by lower revenue from existing clients primarily in
the Latin America region at IAN and in the Asia Pacific region
in the events marketing businesses at CMG as well as changes in
the timing of client spending relative to a year ago. Europe
slightly declined as a result of weakness in traditional
advertising and marketing services, partially offset by higher
client spending in the events marketing businesses.
Refer to the segment discussion later in this MD&A for more
detailed information on changes in revenue by segment.
15
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
OPERATING
EXPENSES
| Three Months Ended March 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
|
% of |
% of |
|||||||||||||||
| $ | Revenue | $ | Revenue | |||||||||||||
|
Salaries and related expenses
|
$ | 988.8 | 72.8 | % | $ | 950.7 | 71.6 | % | ||||||||
|
Office and general expenses
|
495.1 | 36.4 | % | 535.5 | 40.4 | % | ||||||||||
|
Restructuring and other
reorganization-related (reversals) charges
|
(0.6 | ) | 0.4 | |||||||||||||
|
Total operating expenses
|
$ | 1,483.3 | $ | 1,486.6 | ||||||||||||
Salaries
and Related Expenses
| Components of Change | ||||||||||||||||||||||||||||
|
Net |
||||||||||||||||||||||||||||
|
Foreign |
Acquisitions/ |
Change | ||||||||||||||||||||||||||
| 2006 | Currency | (Divestitures) | Organic | 2007 | Organic | Total | ||||||||||||||||||||||
|
Three months ended
March 31,
|
$ | 950.7 | 24.4 | (12.8 | ) | 26.5 | $ | 988.8 | 2.8 | % | 4.0 | % | ||||||||||||||||
Salaries and related expenses increased $38.1 during the first
quarter of 2007 due to higher base salaries and benefits, stock
compensation expense and accruals for bonus awards. Salaries and
related expenses were also affected by foreign currency exchange
rate variances and net divestitures. Salaries and benefits grew
by $27.6 primarily to support growth in certain of our
businesses. Long-term incentive stock compensation expense and
bonus accruals increased a combined $17.4. Long-term incentive
stock expense increased due to the effect of equity-based awards
granted in June 2006 and a one-time performance equity-based
award granted in 2006 to a limited number of operating and
corporate executives. Cash bonus awards increased primarily due
to higher accruals in the first quarter of 2007 compared to the
first quarter of 2006. Changes can occur in both short and
long-term compensation awards based on projected results and
could impact trends between various periods in the future.
Office
and General Expenses
| Components of Change | ||||||||||||||||||||||||||||
|
Net |
||||||||||||||||||||||||||||
|
Foreign |
Acquisitions/ |
Change | ||||||||||||||||||||||||||
| 2006 | Currency | (Divestitures) | Organic | 2007 | Organic | Total | ||||||||||||||||||||||
|
Three months ended
March 31,
|
$ | 535.5 | 13.2 | (11.4 | ) | (42.2 | ) | $ | 495.1 | (7.9 | )% | (7.5 | )% | |||||||||||||||
Office and general expenses for the first quarter of 2007
decreased primarily due to continued reductions in professional
fees, mainly from reduced costs associated with finance related
projects, including internal control compliance and certain
accounting projects. The decrease primarily occurred at
Corporate. We expect professional fees to continue to decrease
throughout 2007.
Restructuring
and Other Reorganization-Related (Reversals) Charges
The net reversals during the first quarter of 2007 primarily
consisted of adjustments to estimates primarily relating to our
severance and lease termination costs, partially offset by the
amortization of the discounted liability related to lease
terminations.
16
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
EXPENSE
AND OTHER INCOME
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Interest expense
|
$ | (55.0 | ) | $ | (46.1 | ) | ||
|
Interest income
|
28.5 | 25.9 | ||||||
|
Other (expense) income
|
(1.5 | ) | 0.6 | |||||
|
Total
|
$ | (28.0 | ) | $ | (19.6 | ) | ||
The increase in net interest expense during the first quarter is
largely attributable to non-cash items related to the
amortization of issuance costs and deferred warrant costs
incurred as result of the ELF Financing transaction completed in
the second quarter of 2006.
INCOME
TAXES
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Loss before benefit of income taxes
|
$ | (152.2 | ) | $ | (179.2 | ) | ||
|
Benefit of income taxes
|
(25.7 | ) | (8.8 | ) | ||||
For the three months ended March 31, 2007 the difference
between the effective tax rate and the statutory rate of 35% is
due primarily to state and local taxes, losses incurred in
non-U.S. jurisdictions
that receive no benefit and the write-off of deferred tax assets
for restricted stock. The improvement in the effective tax rate
was primarily attributable to a reduction in the losses incurred
in
non-U.S. jurisdictions
that receive no benefit and a reduction in the amount of
U.S. taxation of
non-U.S. income
without offsetting U.S. foreign tax credits.
Segment
Results of Operations — Three Months Ended
March 31, 2007 compared to Three Months Ended
March 31, 2006
As discussed in Note 8 to the unaudited Consolidated
Financial Statements, we have two reportable segments as of
March 31, 2007: IAN and CMG. We also report results for the
Corporate and other group.
INTEGRATED
AGENCY NETWORKS (“IAN”)
REVENUE
|
Three Months |
Components of Change |
Three Months |
||||||||||||||||||||||||||
|
Ended |
Net |
Ended |
||||||||||||||||||||||||||
|
March 31, |
Foreign |
Acquisitions/ |
March 31, |
Change | ||||||||||||||||||||||||
| 2006 | Currency | (Divestitures) | Organic | 2007 | Organic | Total | ||||||||||||||||||||||
|
Total
|
$ | 1,108.8 | 25.3 | (14.0 | ) | 11.1 | $ | 1,131.2 | 1.0 | % | 2.0 | % | ||||||||||||||||
|
Domestic
|
635.7 | — | (1.7 | ) | 22.7 | 656.7 | 3.6 | % | 3.3 | % | ||||||||||||||||||
|
International
|
473.1 | 25.3 | (12.3 | ) | (11.6 | ) | 474.5 | (2.5 | )% | 0.3 | % | |||||||||||||||||
The revenue increase in the first quarter of 2007 was a result
of changes in foreign currency exchange rates and organic
increases, partially offset by net divestitures primarily from
the sale of several businesses at Draftfcb in 2006. The domestic
increase was mostly organic as a result of higher revenue from
existing clients and net client wins, primarily at McCann
Worldgroup, and a performance incentive award earned in the
first quarter of 2007 for work on projects started in 2006 at
one of our independent agencies. International revenues were
consistent period over period; however, the first quarter of
2007 benefited from the favorable effect of
17
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
changes in foreign currency exchange rates. This was offset by
net divestitures of businesses primarily at Draftfcb and an
organic revenue decline, primarily at Draftfcb and Lowe, related
to lower spending by existing clients mainly in Europe.
SEGMENT
OPERATING LOSS
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2006 | Change | ||||||||||
|
Segment operating loss
|
$ | (64.8 | ) | $ | (72.9 | ) | (11.1 | )% | ||||
|
Operating margin
|
(5.7 | )% | (6.6 | )% | ||||||||
Operating loss improved during the first quarter of 2007 due to
an increase in revenue of $22.4 and a decrease in office and
general expenses of $5.5, partially offset by an increase in
salaries and related expenses of $19.8. Higher salaries and
related expenses were primarily due to the impact of changes in
foreign currency exchange rates, increased base salaries to
support growth, larger cash bonus awards primarily due to higher
accruals in the first quarter of 2007 compared to the first
quarter of 2006, and an increased amount of long-term incentive
awards, partially offset by net divestitures. On an organic
basis, the revenue increase was greater than the operating
expense increase, which contributed to IAN’s operating loss
improvement.
CONSTITUENCY
MANAGEMENT GROUP (“CMG”)
REVENUE
|
Three Months |
Components of Change |
Three Months |
||||||||||||||||||||||||||
|
Ended |
Net |
Ended |
||||||||||||||||||||||||||
|
March 31, |
Foreign |
Acquisitions/ |
March 31, |
Change | ||||||||||||||||||||||||
| 2006 | Currency | (Divestitures) | Organic | 2007 | Organic | Total | ||||||||||||||||||||||
|
Total
|
$ | 218.2 | 6.3 | (6.3 | ) | 9.7 | $ | 227.9 | 4.4 | % | 4.4 | % | ||||||||||||||||
|
Domestic
|
139.7 | — | — | 9.6 | 149.3 | 6.9 | % | 6.9 | % | |||||||||||||||||||
|
International
|
78.5 | 6.3 | (6.3 | ) | 0.1 | 78.6 | 0.1 | % | 0.1 | % | ||||||||||||||||||
Revenue growth was primarily a result of higher revenue in the
public relations and sports marketing businesses. The domestic
increase was primarily due to higher revenue from existing
clients and net client wins in public relations and sports
marketing, partially offset by declines in the events marketing
businesses due to net client losses. International revenues were
consistent period over period primarily due to increased client
spending in the events marketing businesses in Europe offset by
project-based events that did not recur in the first quarter of
2007 in the Asia Pacific region and a decline in the sports
marketing business in Europe due to net client losses.
SEGMENT
OPERATING (LOSS) INCOME
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2006 | Change | ||||||||||
|
Segment operating (loss) income
|
$ | (1.4 | ) | $ | 4.2 | (133.3 | )% | |||||
|
Operating margin
|
(0.6 | )% | 1.9 | % | ||||||||
Operating income decreased to a loss primarily as a result of an
increase in salaries and related expenses of $10.6 and an
increase in office and general expenses of $4.7, partially
offset by the increase in revenue of
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Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
$9.7. Higher salaries and related expenses primarily related to
the hiring of additional staff in the public relations and
sports marketing businesses to support their revenue growth.
Office and general expenses increased primarily due to higher
Corporate charges allocated to the segment related to the
implementation of new information technology-related projects.
On an organic basis, the operating expense increase was greater
than the revenue increase, which contributed to the operating
loss at CMG.
CORPORATE
AND OTHER
|
Three Months Ended |
||||||||||||
| March 31, | ||||||||||||
| 2007 | 2006 | Change | ||||||||||
|
Salaries and related expenses
|
$ | 58.0 | $ | 50.3 | 15.3 | % | ||||||
|
Professional fees
|
25.4 | 60.8 | (58.2 | )% | ||||||||
|
Rent, depreciation and amortization
|
17.3 | 15.3 | 13.1 | % | ||||||||
|
Corporate insurance
|
6.0 | 4.9 | 22.4 | % | ||||||||
|
Other
|
7.7 | 6.0 | 28.3 | % | ||||||||
|
Expenses allocated to operating
divisions
|
(55.8 | ) | (46.8 | ) | 19.2 | % | ||||||
|
Total
|
$ | 58.6 | $ | 90.5 | (35.2 | )% | ||||||
Corporate and other expenses decreased primarily due to reduced
professional fees and higher amounts allocated to operating
divisions, partially offset by increased salaries and related
expenses. Lower professional fees were primarily from reduced
costs associated with finance related projects, including
internal control compliance, certain accounting projects and
legal consultation. Amounts allocated to operating divisions
increased primarily due to the implementation of new information
technology-related projects and the charging of shared service
and technology expenses. Salaries and related expenses primarily
increased due to a one-time performance equity-based award
granted in 2006 to a limited number of operating and corporate
executives. Additionally, salaries and related expenses
increased due to higher headcount at our shared service center,
which is used to support our technology initiatives.
LIQUIDITY
AND CAPITAL RESOURCES
CASH
FLOW OVERVIEW
Cash, cash equivalents and marketable securities decreased by
$438.7 to $1,518.4 during the first quarter of 2007 primarily
due to working capital usage. Of this change, marketable
securities increased by $50.1, primarily as a result of our net
purchases of auction rate securities in the quarter. A summary
of our cash flow activities is as follows:
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
|
Net cash used in operating
activities
|
$ | (382.5 | ) | $ | (528.1 | ) | ||
|
Net cash used in investing
activities
|
(84.1 | ) | (322.0 | ) | ||||
|
Net cash used in financing
activities
|
(30.7 | ) | (27.2 | ) | ||||
Operating
Activities
During the first quarter of 2007, we used working capital of
$283.3. Working capital reflects changes in accounts receivable,
expenditures billable to clients, prepaid expenses and other
current assets, accounts payable and accrued liabilities. During
the three months ended March 31, 2007, a reduction in
accounts
19
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
payable of $347.4 and in accrued media and production expenses
of $127.3, included in accrued liabilities, was more than offset
by a reduction in accounts receivable of $489.6. Accrued
liabilities also decreased as a result of payments related to
cash incentive awards earned during 2006. Accrued liabilities
are affected by the timing of certain payments. For example,
while employee incentive awards are accrued throughout the year,
they are paid during the first quarter of the subsequent year.
The timing of media buying on behalf of our clients affects our
working capital and operating cash flow. In most of our
businesses, we collect funds from our clients which we use, on
their behalf, to pay production costs and media costs. The
amounts involved substantially exceed our revenues, and
primarily affect the level of accounts receivable, expenditures
billable to clients, accounts payable and accrued media and
production liabilities. Our assets include both cash received
and accounts receivable from clients for these pass-through
arrangements, while our liabilities include amounts owed on
behalf of clients to media and production suppliers. Generally,
we pay production and media charges after we have received funds
from our clients, and our risk from client nonpayment has
historically not been significant.
The net loss of $125.9 during the three months ended
March 31, 2007 includes non-cash items that are not
expected to generate cash or require the use of cash. Net
non-cash expense items of $31.8 primarily include the add-back
of the deferred income tax benefit, depreciation of fixed assets
and the amortization of intangible assets, restricted stock
awards and non-cash compensation.
Investing
Activities
Cash used in investing activities during the three months ended
March 31, 2007 primarily reflects net purchases of
short-term marketable securities, capital expenditures and
acquisitions. Net purchases of marketable securities were from
purchases of auction rate securities which are classified as
short-term marketable securities based upon our evaluation of
the maturity dates associated with the underlying bonds. The
cash flows attributable to short-term marketable securities vary
from one period to another because of changes in the maturity
profile of our treasury investments. Capital expenditures of
$28.0 primarily related to computer hardware and leasehold
improvements. Payments for acquisitions related to the purchase
of an agency in Latin America and deferred payments on prior
acquisitions.
Financing
Activities
Cash used in financing activities during the three months ended
March 31, 2007 primarily reflects repayments of short-term
borrowings and dividend payments of $6.9 on our Series B
Preferred Stock.
LIQUIDITY
OUTLOOK
We expect our cash and cash equivalents and marketable
securities to be sufficient to meet our anticipated operating
requirements at a minimum for the next twelve months.
We believe that a conservative approach to liquidity is
appropriate for our Company, in view of the cash requirements
resulting from, among other things, high professional fees,
liabilities to our clients for vendor discounts and credits, any
potential penalties or fines that may have to be paid in
connection with the ongoing SEC investigation, the normal cash
variability inherent in our operations and other unanticipated
requirements. In addition, until our margins consistently
improve in connection with our turnaround, cash generation from
operations could be challenged in certain periods.
A reduction in our liquidity in future periods as a result of
the above items or other business objectives could lead us to
seek new or additional sources of liquidity to fund our working
capital needs. From time to time we evaluate market conditions
and financing alternatives for opportunities to raise additional
financing or
20
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
otherwise improve our liquidity profile and enhance our
financial flexibility. There can be no guarantee that we would
be able to access new sources of liquidity on commercially
reasonable terms, or at all.
Funding
Requirements
Our most significant funding requirements include: our
operations, non-cancelable operating lease obligations, capital
expenditures, payments related to vendor discounts and credits,
debt service, preferred stock dividends, contributions to
pension and postretirement plans, acquisitions and taxes.
On March 15, 2008 holders of our $400.0
4.50% Convertible Senior Notes due 2023 may require us to
repurchase these Notes for cash at par. The remainder of our
debt profile is primarily long-term, with maturities scheduled
from 2009 to 2023.
Of the liabilities recognized as part of the 2005 Restatement,
we estimate that we will pay approximately $100.0 related to
vendor discounts and credits, internal investigations and
international compensation arrangements over the next
12 months.
Our Series B Preferred Stock provides for a quarterly
dividend of $13.125 per share, or $6.9. We have not paid any
dividends on our common stock since December of 2002. The terms
of our Series B Preferred Stock do not permit us to pay
dividends on our common stock unless all accumulated and unpaid
dividends on our Series B Preferred Stock have been, or
contemporaneously are, declared and paid, or provision for the
payment thereof has been made.
We are currently evaluating strategic opportunities to grow the
business and increase our ownership interests in current
investments, particularly to develop the digital and marketing
services components of our business and to expand our presence
in key markets, including Brazil, Russia, India and China.
We have various tax years under examination in various countries
in which we have significant business operations. We do not know
whether these examinations will, in the aggregate, result in our
paying additional income taxes, which we believe are adequately
reserved for.
FINANCING
AND SOURCES OF FUNDS
Substantially all of our operating cash flow is generated by our
agencies. Our liquid assets are held primarily at the holding
company level, and to a lesser extent at our largest
subsidiaries.
In recent years, we have obtained long-term financing in the
capital markets by issuing debt securities, convertible debt
securities and convertible preferred stock. We have also used
borrowing facilities to provide us with liquidity for working
capital needs. In connection with the ELF Financing, we also
have two series of equity warrants outstanding and have entered
into call spread transactions in connection with one of the
series of equity warrants.
Credit
Facilities
Our principal credit facility is our $750.0 Three-Year Credit
Agreement (the “Credit Agreement”), which we can
utilize for cash advances and for letters of credit up to
$600.0. This is a revolving facility under which amounts
borrowed may be repaid and borrowed again, and the aggregate
available amount of letters of credit may decrease or increase,
subject to the overall limit of $750.0 and a $600.0 limit on
letters of credit. We have not drawn on the Credit Agreement or
our previous committed credit agreements since late 2003.
In addition to the Credit Agreement, we have uncommitted credit
facilities with various banks that permit borrowings at variable
interest rates. We use our uncommitted credit lines for working
capital needs at some of our operations outside the United
States and the amount outstanding as of March 31, 2007 was
$61.8. If we
21
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
lose access to these credit lines we would have to provide
funding directly to some overseas operations. The
weighted-average interest rate on this outstanding balance was
approximately 5%.
Letters
of Credit
We are required from time to time to post letters of credit,
primarily to support our commitments, or those of our
subsidiaries, to purchase media placements, mostly in locations
outside the United States, or to satisfy other obligations.
These letters of credit are generally backed by letters of
credit issued under the Credit Agreement. As of March 31,
2007, the aggregate amount of outstanding letters of credit
issued for our account under the Credit Agreement was $222.9.
These letters of credit have historically not been drawn upon.
Cash
Pooling
We aggregate our net domestic cash position on a daily basis.
Outside the United States, we use cash pooling arrangements with
banks to help manage our liquidity requirements. In these
pooling arrangements, several Interpublic agencies agree with a
single bank that the cash balances of any of the agencies with
the bank will be subject to a full right of setoff against
amounts the other agencies owe the bank, and the bank provides
overdrafts as long as the net balance for all the agencies does
not exceed an
agreed-upon
level. Typically each agency pays interest on outstanding
overdrafts and receives interest on cash balances. Our
consolidated balance sheets reflect cash net of overdrafts for
each pooling arrangement. As of March 31, 2007 a gross
amount of approximately $1,053.0 in cash was netted against an
equal gross amount of overdrafts under pooling arrangements.
CREDIT
AGENCY RATINGS
Our long-term debt credit ratings as of March 31, 2007 were
Ba3 with stable outlook, B with positive outlook and B with
negative outlook, as reported by Moody’s Investors Service,
Standard & Poor’s and Fitch Ratings,
respectively. A downgrade in our credit ratings could adversely
affect our ability to access capital and could result in more
stringent covenants and higher interest rates under the terms of
any new indebtedness.
INTERNAL
CONTROL OVER FINANCIAL REPORTING
Our internal control over financial reporting is described in
detail in Item 8, Management’s Assessment of Internal
Control Over Financial Reporting, and Item 9A, Controls and
Procedures, in our 2006 Annual Report on
Form 10-K.
CRITICAL
ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 1
to the Consolidated Financial Statements for the year ended
December 31, 2006 included in our 2006 Annual Report on
Form 10-K.
As summarized in Item 7 of our 2006 Annual Report on
Form 10-K,
we believe that certain of these policies are critical because
they are important to the presentation of our financial
condition and results of operations and they require
management’s most difficult, subjective or complex
judgments, often as a result of the need to estimate the effect
of matters that are inherently uncertain. We base our estimates
on historical experience and on other factors that we consider
reasonable under the circumstances. Estimation methodologies are
applied consistently from year to year, and there have been no
significant changes in the application of critical accounting
estimates since December 31, 2006 except as noted below in
regards to income taxes. Actual results may differ from these
estimates under different assumptions or conditions.
On January 1, 2007 we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
(“FIN 48”) which prescribes a recognition
threshold and measurement attribute for the financial statement
22
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
AND RESULTS OF OPERATIONS — (Continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
recognition and measurement of a tax position that an entity
takes or expects to take in a tax return. Additionally,
FIN 48 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. The assessment of recognition and
measurement requires critical estimates and the use of complex
judgments. We evaluate our tax positions using a “more
likely than not” recognition threshold and then we apply a
measurement assessment to those positions that meet the
recognition threshold.
RECENT
ACCOUNTING STANDARDS
Please refer to Note 10 to our unaudited Consolidated
Financial Statements for a discussion of recent accounting
standards that we have not yet been required to implement, but
which may affect us in the future, as well as those accounting
standards that have been adopted during 2007.
23
Table of Contents
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There has been no significant change in our exposure to market
risk during the three months ended March 31, 2007. For a
discussion of our exposure to market risk, refer to
Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in our 2006 Annual Report on
Form 10-K.
| Item 4. | Controls and Procedures |
Disclosure
Controls and Procedures
We have carried out an evaluation under the supervision of, and
with the participation of, our management, including the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2007. We continue
to have numerous material weaknesses in our internal control
over financial reporting as noted in Management’s
Assessment of Internal Control over Financial Reporting located
in Item 8, Financial Statements and Supplementary Data, in
our 2006 Annual Report on
Form 10-K.
Based on an evaluation of these material weaknesses, our Chief
Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are not effective to
provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods
specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding
of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Changes
in internal control over financial reporting
There has been no change in internal control over financial
reporting in the quarter ended March 31, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
24
Table of Contents
PART II —
OTHER INFORMATION
| Item 1. | Legal Proceedings |
Information about our legal proceedings is set forth in
Note 9 to the unaudited consolidated financial statements
included in this report.
Item 1A. Risk
Factors
In the first quarter of 2007, there have been no material
changes from risk factors as previously disclosed. See
Item 1A in our 2006 Annual Report on
Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) During the first quarter of 2007, we engaged in one
transaction, which is described below, in which we issued shares
of our common stock, par value $.10 per share, that were
not registered under the Securities Act of 1933, as amended (the
“Securities Act”).
1. On January 4, 2007, we issued 8,159 shares of
our common stock as part of a deferred payment of purchase price
to three former shareholders of a company, 48% of the
outstanding shares of which one of our subsidiaries had acquired
in the first quarter of 2001. The shares were valued at $97,170
as of the date of issuance and were issued without registration
in an “offshore transaction” and solely to
“non-U.S. persons”
in reliance on Regulation S under the Securities Act.
(c) The following table provides information regarding our
purchases of our equity securities during the period from
January 1, 2007 to March 31, 2007:
|
Maximum |
||||||||||||||||
|
Number (or |
||||||||||||||||
|
Approximate |
||||||||||||||||
|
Dollar Value) of |
||||||||||||||||
|
Total Number of Shares |
Shares (or Units) |
|||||||||||||||
|
(or Units) Purchased as |
that May Yet be |
|||||||||||||||
|
Total Number of |
Average Price |
Part of Publicly |
Purchased Under |
|||||||||||||
|
Shares (or Units) |
Paid per Share |
Announced Plans |
the Plans or |
|||||||||||||
| Purchased | (or Unit)(2) | or Programs | Programs | |||||||||||||
|
January 1-31
|
175,345 shares | $ | 12.25 | — | — | |||||||||||
|
February 1-28
|
31,365 shares | $ | 12.81 | — | — | |||||||||||
|
March 1-31
|
57,838 shares | $ | 12.33 | — | — | |||||||||||
|
Total(1)
|
264,548 shares | $ | 12.34 | — | — | |||||||||||
| (1) | Consists of restricted shares of our common stock withheld under the terms of grants under employee stock-based compensation plans to offset tax withholding obligations that occurred upon vesting and release of restricted shares during each month of the first quarter of 2007 (the “Withheld Shares”). | |
| (2) | The average price per month of the Withheld Shares was calculated by dividing the aggregate value of the tax withholding obligations for each month by the aggregate number of shares of common stock withheld each month. |
(d) The terms of our outstanding series of preferred stock
do not permit us to pay dividends on our common stock unless all
accumulated and unpaid dividends on our preferred stock have
been or contemporaneously are declared and paid or provision for
the payment thereof has been made.
25
Table of Contents
| Item 6. | Exhibits |
|
Exhibit No.
|
Description
|
|
|
10(iii)(A)
|
Description of Performance Objectives To Be Used To Determine 2007 Management Incentive Compensation Awards Payable in 2008 to the Named Executive Officers of The Interpublic Group of Companies, Inc. (“Interpublic”) under Interpublic’s 2006 Performance Incentive Plan. | |
|
12.1
|
Supplemental Computation of Ratios of Earnings to Fixed Charges. | |
|
12.2
|
Supplemental Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | |
|
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
|
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
|
32
|
Certification of the Chief Executive Officer and the Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. |
26
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE INTERPUBLIC GROUP OF COMPANIES, INC.
| By |
/s/ Michael
I. Roth
|
Michael I. Roth
Chairman and Chief Executive Officer
Date: May 10, 2007
| By |
/s/ Frank
Mergenthaler
|
Frank Mergenthaler
Executive Vice President and
Chief Financial Officer
Date: May 10, 2007
27
Table of Contents
INDEX TO
EXHIBITS
|
Exhibit No.
|
Description
|
|
|
10(iii)(A)
|
Description of Performance Objectives To Be Used To Determine 2007 Management Incentive Compensation Awards Payable in 2008 to the Named Executive Officers of The Interpublic Group of Companies, Inc. (“Interpublic”) under Interpublic’s 2006 Performance Incentive Plan. | |
|
12.1
|
Supplemental Computation of Ratios of Earnings to Fixed Charges. | |
|
12.2
|
Supplemental Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | |
|
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
|
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
|
32
|
Certification of the Chief Executive Officer and the Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. |
28