INTERPUBLIC GROUP OF COMPANIES, INC. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended September 30, 2020
or
| ☐ | 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.) | |||||||
909 Third Avenue, New York, New York 10022
(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)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.10 per share | IPG | The New York Stock Exchange | ||||||
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | |||||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||||||||
| Emerging Growth Company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The number of shares of the registrant’s common stock outstanding as of October 15, 2020 was 390,034,693.
INDEX
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
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. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or comparable terminology are intended to identify 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 under Item 1A, Risk Factors, in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. 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:
•the effects of a challenging economy on the demand for our advertising and marketing services, on our clients’ financial condition and on our business or financial condition;
•the outbreak of the novel coronavirus (COVID-19), including the measures to contain its spread, and the impact on the economy and demand for our services, which may precipitate or exacerbate other risks and uncertainties;
•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, including changes in assumptions associated with any effects of a weakened economy;
•potential adverse effects if we are required to recognize impairment charges or other adverse accounting-related developments;
•risks associated with the effects of global, national and regional economic and political conditions, including counterparty risks and fluctuations in economic growth rates, interest rates and currency exchange rates;
•developments from changes in the regulatory and legal environment for advertising and marketing and communications services companies around the world; and
•failure to realize the anticipated benefits on the acquisition of the Acxiom business.
Investors should carefully consider these factors and the additional risk factors outlined in more detail under Item 1A, Risk Factors, in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q.
1
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements (Unaudited) | ||||
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| REVENUE: | |||||||||||||||||||||||
| Net revenue | $ | 1,954.6 | $ | 2,061.4 | $ | 5,780.1 | $ | 6,192.1 | |||||||||||||||
| Billable expenses | 170.9 | 376.7 | 730.9 | 1,127.4 | |||||||||||||||||||
| Total revenue | 2,125.5 | 2,438.1 | 6,511.0 | 7,319.5 | |||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Salaries and related expenses | 1,269.9 | 1,334.4 | 3,998.8 | 4,136.7 | |||||||||||||||||||
| Office and other direct expenses | 307.9 | 367.9 | 1,003.1 | 1,144.4 | |||||||||||||||||||
| Billable expenses | 170.9 | 376.7 | 730.9 | 1,127.4 | |||||||||||||||||||
Cost of services | 1,748.7 | 2,079.0 | 5,732.8 | 6,408.5 | |||||||||||||||||||
| Selling, general and administrative expenses | 9.9 | 9.8 | 36.4 | 69.3 | |||||||||||||||||||
| Depreciation and amortization | 71.0 | 69.0 | 216.9 | 213.1 | |||||||||||||||||||
| Restructuring charges | 47.3 | 0.0 | 159.9 | 33.9 | |||||||||||||||||||
| Total operating expenses | 1,876.9 | 2,157.8 | 6,146.0 | 6,724.8 | |||||||||||||||||||
| OPERATING INCOME | 248.6 | 280.3 | 365.0 | 594.7 | |||||||||||||||||||
| EXPENSES AND OTHER INCOME: | |||||||||||||||||||||||
| Interest expense | (50.8) | (49.7) | (145.4) | (151.1) | |||||||||||||||||||
| Interest income | 6.1 | 9.5 | 22.7 | 25.0 | |||||||||||||||||||
| Other expense, net | (11.3) | (7.4) | (54.6) | (18.1) | |||||||||||||||||||
| Total (expenses) and other income | (56.0) | (47.6) | (177.3) | (144.2) | |||||||||||||||||||
| Income before income taxes | 192.6 | 232.7 | 187.7 | 450.5 | |||||||||||||||||||
| (Benefit of) provision for income taxes | (86.3) | 64.6 | (50.1) | 118.7 | |||||||||||||||||||
| Income of consolidated companies | 278.9 | 168.1 | 237.8 | 331.8 | |||||||||||||||||||
| Equity in net (loss) income of unconsolidated affiliates | (0.4) | 0.3 | (0.6) | (0.1) | |||||||||||||||||||
| NET INCOME | 278.5 | 168.4 | 237.2 | 331.7 | |||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 1.2 | (2.8) | 1.6 | (4.6) | |||||||||||||||||||
| NET INCOME AVAILABLE TO IPG COMMON STOCKHOLDERS | $ | 279.7 | $ | 165.6 | $ | 238.8 | $ | 327.1 | |||||||||||||||
| Earnings per share available to IPG common stockholders: | |||||||||||||||||||||||
| Basic | $ | 0.72 | $ | 0.43 | $ | 0.61 | $ | 0.85 | |||||||||||||||
| Diluted | $ | 0.71 | $ | 0.42 | $ | 0.61 | $ | 0.84 | |||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 389.6 | 386.7 | 388.9 | 385.8 | |||||||||||||||||||
| Diluted | 393.9 | 391.8 | 392.6 | 390.3 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
2
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Millions)
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| NET INCOME | $ | 278.5 | $ | 168.4 | $ | 237.2 | $ | 331.7 | |||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||
| Foreign currency translation adjustments | 46.5 | (50.9) | (58.3) | (38.4) | |||||||||||||||||||
| Reclassification adjustments recognized in net income | 9.6 | (0.6) | 9.3 | 5.2 | |||||||||||||||||||
| 56.1 | (51.5) | (49.0) | (33.2) | ||||||||||||||||||||
| Derivative instruments: | |||||||||||||||||||||||
| Changes in fair value of derivative instruments | 4.5 | 0.0 | 3.6 | 0.0 | |||||||||||||||||||
| Recognition of previously unrealized losses in net income | 0.6 | 0.6 | 1.8 | 1.8 | |||||||||||||||||||
| Income tax effect | (1.3) | (0.2) | (1.4) | (0.4) | |||||||||||||||||||
| 3.8 | 0.4 | 4.0 | 1.4 | ||||||||||||||||||||
| Defined benefit pension and other postretirement plans: | |||||||||||||||||||||||
| Net actuarial gains for the period | 0.0 | 0.0 | 2.2 | 0.7 | |||||||||||||||||||
| Amortization of unrecognized losses, transition obligation and prior service cost included in net income | 1.8 | 1.7 | 5.5 | 5.0 | |||||||||||||||||||
| Other | 0.4 | (0.1) | (1.0) | 0.2 | |||||||||||||||||||
| Income tax effect | (0.4) | (0.2) | (1.6) | (0.4) | |||||||||||||||||||
| 1.8 | 1.4 | 5.1 | 5.5 | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 61.7 | (49.7) | (39.9) | (26.3) | |||||||||||||||||||
| TOTAL COMPREHENSIVE INCOME | 340.2 | 118.7 | 197.3 | 305.4 | |||||||||||||||||||
| Less: comprehensive (loss) income attributable to noncontrolling interests | (0.8) | 1.4 | (3.7) | 3.4 | |||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO IPG | $ | 341.0 | $ | 117.3 | $ | 201.0 | $ | 302.0 | |||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
3
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Millions)
(Unaudited)
| September 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 1,628.0 | $ | 1,192.2 | |||||||
| Accounts receivable, net of allowance of $90.7 and $40.2, respectively | 3,297.4 | 5,209.2 | |||||||||
| Accounts receivable, billable to clients | 1,817.2 | 1,934.1 | |||||||||
| Assets held for sale | 20.0 | 22.8 | |||||||||
| Other current assets | 521.7 | 412.4 | |||||||||
| Total current assets | 7,284.3 | 8,770.7 | |||||||||
| Property and equipment, net of accumulated depreciation and amortization of $1,169.8 and $1,116.4, respectively | 709.8 | 778.1 | |||||||||
| Deferred income taxes | 291.4 | 252.1 | |||||||||
| Goodwill | 4,875.4 | 4,894.4 | |||||||||
| Other intangible assets | 949.3 | 1,014.3 | |||||||||
| Operating lease right-of-use assets | 1,550.2 | 1,574.4 | |||||||||
| Other non-current assets | 414.3 | 467.9 | |||||||||
| TOTAL ASSETS | $ | 16,074.7 | $ | 17,751.9 | |||||||
| LIABILITIES: | |||||||||||
| Accounts payable | $ | 5,105.9 | $ | 7,205.4 | |||||||
| Accrued liabilities | 644.7 | 742.8 | |||||||||
| Contract liabilities | 611.3 | 585.6 | |||||||||
| Short-term borrowings | 46.3 | 52.4 | |||||||||
| Current portion of long-term debt | 506.6 | 502.0 | |||||||||
| Current portion of operating leases | 263.6 | 267.2 | |||||||||
| Liabilities held for sale | 49.5 | 65.0 | |||||||||
| Total current liabilities | 7,227.9 | 9,420.4 | |||||||||
| Long-term debt | 3,411.3 | 2,771.9 | |||||||||
| Non-current operating leases | 1,471.3 | 1,429.6 | |||||||||
| Deferred compensation | 388.2 | 425.0 | |||||||||
| Other non-current liabilities | 662.6 | 714.7 | |||||||||
| TOTAL LIABILITIES | 13,161.3 | 14,761.6 | |||||||||
| Redeemable noncontrolling interests (see Note 5) | 152.8 | 164.7 | |||||||||
| STOCKHOLDERS’ EQUITY: | |||||||||||
| Common stock | 38.9 | 38.7 | |||||||||
| Additional paid-in capital | 1,028.1 | 977.3 | |||||||||
| Retained earnings | 2,623.4 | 2,689.9 | |||||||||
| Accumulated other comprehensive loss, net of tax | (967.8) | (930.0) | |||||||||
| Total IPG stockholders’ equity | 2,722.6 | 2,775.9 | |||||||||
| Noncontrolling interests | 38.0 | 49.7 | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 2,760.6 | 2,825.6 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 16,074.7 | $ | 17,751.9 | |||||||
The accompanying notes are an integral part of these unaudited financial statements.
4
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
(Unaudited)
| Nine months ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 237.2 | $ | 331.7 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 216.9 | 213.1 | |||||||||
| Non-cash restructuring charges | 95.7 | 11.7 | |||||||||
| Amortization of restricted stock and other non-cash compensation | 56.4 | 58.3 | |||||||||
| Net losses on sales of businesses | 51.8 | 19.5 | |||||||||
| Provision for uncollectible receivables | 49.8 | 7.7 | |||||||||
| Net amortization of bond discounts and deferred financing costs | 8.6 | 7.0 | |||||||||
| Deferred income tax | (9.4) | (1.5) | |||||||||
| Other | 20.7 | (1.6) | |||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures, providing (using) cash: | |||||||||||
| Accounts receivable | 1,759.9 | 1,010.2 | |||||||||
| Accounts receivable, billable to clients | 83.0 | (152.0) | |||||||||
| Other current assets | (60.7) | (29.5) | |||||||||
| Accounts payable | (2,014.7) | (952.7) | |||||||||
| Accrued liabilities | (61.3) | (73.5) | |||||||||
| Contract liabilities | 34.1 | 37.2 | |||||||||
| Other non-current assets and liabilities | (142.9) | (62.0) | |||||||||
| Net cash provided by operating activities | 325.1 | 423.6 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | (112.0) | (133.8) | |||||||||
| Acquisitions, net of cash acquired | (2.5) | (0.6) | |||||||||
| Other investing activities | (18.0) | 13.7 | |||||||||
| Net cash used in investing activities | (132.5) | (120.7) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from long-term debt | 646.2 | 0.0 | |||||||||
| Net increase in short-term borrowings | 1.9 | 173.1 | |||||||||
| Exercise of stock options | 0.0 | 4.2 | |||||||||
| Common stock dividends | (298.6) | (272.2) | |||||||||
| Acquisition-related payments | (40.6) | (15.3) | |||||||||
| Tax payments for employee shares withheld | (22.2) | (22.3) | |||||||||
| Distributions to noncontrolling interests | (13.7) | (12.4) | |||||||||
| Repayment of long-term debt | (0.5) | (300.2) | |||||||||
| Other financing activities | (10.2) | 0.1 | |||||||||
| Net cash provided by (used in) financing activities | 262.3 | (445.0) | |||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (20.3) | (11.1) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 434.6 | (153.2) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 1,195.7 | 677.2 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,630.3 | $ | 524.0 | |||||||
The accompanying notes are an integral part of these unaudited financial statements.
5
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in Millions)
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Tax | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 389.6 | $ | 38.9 | $ | 996.3 | $ | 2,444.3 | $ | (1,029.1) | $ | 2,450.4 | $ | 40.7 | $ | 2,491.1 | ||||||||||||||||||||||||||||||||
| Net income (loss) | 279.7 | 279.7 | (1.2) | 278.5 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 61.3 | 61.3 | 0.4 | 61.7 | |||||||||||||||||||||||||||||||||||||||||||
| Reclassifications related to redeemable noncontrolling interests | 2.9 | 2.9 | |||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (4.3) | (4.3) | |||||||||||||||||||||||||||||||||||||||||||||
| Change in redemption value of redeemable noncontrolling interests | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.255 per share) | (100.6) | (100.6) | (100.6) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 0.2 | 0.0 | 23.1 | 23.1 | 23.1 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 0.0 | 0.0 | 0.1 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes | (0.1) | 0.0 | (0.2) | (0.2) | (0.2) | ||||||||||||||||||||||||||||||||||||||||||
| Other | 8.8 | 8.8 | (0.5) | 8.3 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 389.7 | $ | 38.9 | $ | 1,028.1 | $ | 2,623.4 | $ | (967.8) | $ | 2,722.6 | $ | 38.0 | $ | 2,760.6 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Tax | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 387.0 | $ | 38.7 | $ | 977.3 | $ | 2,689.9 | $ | (930.0) | $ | 2,775.9 | $ | 49.7 | $ | 2,825.6 | ||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change | (6.6) | (6.6) | (6.6) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 238.8 | 238.8 | (1.6) | 237.2 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (37.8) | (37.8) | (2.1) | (39.9) | |||||||||||||||||||||||||||||||||||||||||||
| Reclassifications related to redeemable noncontrolling interests | 5.9 | 5.9 | |||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (13.7) | (13.7) | |||||||||||||||||||||||||||||||||||||||||||||
| Change in redemption value of redeemable noncontrolling interests | 3.1 | 3.1 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.765 per share) | (301.8) | (301.8) | (301.8) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 3.8 | 0.4 | 63.7 | 64.1 | 64.1 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 0.0 | 0.0 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes | (1.1) | (0.2) | (22.2) | (22.4) | (22.4) | ||||||||||||||||||||||||||||||||||||||||||
| Other | 8.8 | 8.8 | (0.2) | 8.6 | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 389.7 | $ | 38.9 | $ | 1,028.1 | $ | 2,623.4 | $ | (967.8) | $ | 2,722.6 | $ | 38.0 | $ | 2,760.6 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
6
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in Millions)
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Tax | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 386.4 | $ | 38.6 | $ | 921.4 | $ | 2,381.8 | $ | (917.9) | $ | 2,423.9 | $ | 34.5 | $ | 2,458.4 | ||||||||||||||||||||||||||||||||
| Net income | 165.6 | 165.6 | 2.8 | 168.4 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (48.3) | (48.3) | (1.4) | (49.7) | |||||||||||||||||||||||||||||||||||||||||||
| Reclassifications related to redeemable noncontrolling interests | 2.4 | 2.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (4.3) | (4.3) | |||||||||||||||||||||||||||||||||||||||||||||
| Change in redemption value of redeemable noncontrolling interests | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.235 per share) | (90.8) | (90.8) | (90.8) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 0.1 | 0.0 | 16.2 | 16.2 | 16.2 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 0.5 | 0.1 | 3.6 | 3.7 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes | (0.1) | 0.0 | (0.2) | (0.2) | (0.2) | ||||||||||||||||||||||||||||||||||||||||||
| Other | 0.0 | (1.1) | (1.1) | 0.1 | (1.0) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 386.9 | $ | 38.7 | $ | 941.0 | $ | 2,455.5 | $ | (966.2) | $ | 2,469.0 | $ | 34.1 | $ | 2,503.1 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Tax | Total IPG Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 383.6 | $ | 38.3 | $ | 895.9 | $ | 2,400.1 | $ | (941.1) | $ | 2,393.2 | $ | 39.6 | $ | 2,432.8 | ||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change | 2.2 | 2.2 | 2.2 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | 327.1 | 327.1 | 4.6 | 331.7 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (25.1) | (25.1) | (1.2) | (26.3) | |||||||||||||||||||||||||||||||||||||||||||
| Reclassifications related to redeemable noncontrolling interests | 2.0 | 2.0 | |||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (12.4) | (12.4) | |||||||||||||||||||||||||||||||||||||||||||||
| Change in redemption value of redeemable noncontrolling interests | 1.4 | 1.4 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock dividends ($0.705 per share) | (272.2) | (272.2) | (272.2) | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 3.7 | 0.4 | 64.3 | 64.7 | 64.7 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 0.6 | 0.1 | 4.2 | 4.3 | 4.3 | ||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes | (1.0) | (0.1) | (22.4) | (22.5) | (22.5) | ||||||||||||||||||||||||||||||||||||||||||
| Other | (1.0) | (3.1) | (4.1) | 1.5 | (2.6) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 386.9 | $ | 38.7 | $ | 941.0 | $ | 2,455.5 | $ | (966.2) | $ | 2,469.0 | $ | 34.1 | $ | 2,503.1 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
7
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. and its subsidiaries (the “Company,” “IPG,” “we,” “us” or “our”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting interim financial information on Form 10-Q. Accordingly, they do not include certain information and disclosures required for complete financial statements. The effects of the novel coronavirus ("COVID-19") pandemic have negatively impacted and will likely continue to negatively impact our results of operations, cash flows and financial position. The Company’s Consolidated Financial Statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions to assess the fair values of goodwill, long-lived assets and indefinite-lived intangible assets; assessment of the annual effective tax rate; valuation of deferred income taxes and allowance for expected credit losses on future uncollectible accounts receivable.
Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).
Cost of services is comprised of the expenses of our revenue-producing reportable segments, Integrated Agency Networks (“IAN”) and Constituency Management Group (“CMG”), including salaries and related expenses, office and other direct expenses and billable expenses, and includes an allocation of the centrally managed expenses of our Corporate and other group. Office and other direct expenses include rent expense, professional fees, certain expenses incurred by our staff in servicing our clients and other costs directly attributable to client engagements.
Selling, general and administrative expenses are primarily the unallocated expenses of our Corporate and other group, excluding depreciation and amortization.
Depreciation and amortization of fixed assets and intangible assets of the Company is disclosed as a separate operating expense.
Restructuring charges in the current period relate to the Company's implementation of restructuring actions to lower our operating expenses structurally and permanently relative to revenue and to accelerate the transformation of our business, as discussed further in Note 7. Restructuring charges mainly include severance and termination costs and lease impairments costs.
Segment information for the prior period has been recast to conform to the current-period presentation.
In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting only of normal and recurring adjustments necessary for a fair statement of the information for each period contained therein. Certain reclassifications and immaterial revisions have been made to prior-period financial statements to conform to the current-period presentation.
8
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 2: Revenue
Disaggregation of Revenue
We have two reportable segments as of September 30, 2020: IAN and CMG, as further discussed in Note 11. IAN principally generates revenue from providing advertising and media services as well as a comprehensive array of global communications, marketing services and data management. CMG generates revenue from a comprehensive array of global public relations and communication services as well as providing events, sports and entertainment marketing, corporate and brand identity, and strategic marketing consulting.
Our agencies are located in over 100 countries, including every significant world market. Our geographic revenue breakdown is listed below.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| Total revenue: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | 1,354.8 | $ | 1,550.9 | $ | 4,234.0 | $ | 4,681.1 | |||||||||||||||
| International: | |||||||||||||||||||||||
| United Kingdom | 172.4 | 201.9 | 528.8 | 617.9 | |||||||||||||||||||
| Continental Europe | 174.5 | 177.6 | 508.5 | 565.8 | |||||||||||||||||||
| Asia Pacific | 198.1 | 262.7 | 609.9 | 753.3 | |||||||||||||||||||
| Latin America | 83.2 | 109.2 | 235.7 | 300.3 | |||||||||||||||||||
| Other | 142.5 | 135.8 | 394.1 | 401.1 | |||||||||||||||||||
| Total International | 770.7 | 887.2 | 2,277.0 | 2,638.4 | |||||||||||||||||||
| Total Consolidated | $ | 2,125.5 | $ | 2,438.1 | $ | 6,511.0 | $ | 7,319.5 | |||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| Net revenue: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | 1,273.4 | $ | 1,313.0 | $ | 3,820.6 | $ | 3,964.8 | |||||||||||||||
| International: | |||||||||||||||||||||||
| United Kingdom | 162.0 | 172.1 | 474.9 | 522.8 | |||||||||||||||||||
| Continental Europe | 158.0 | 155.7 | 453.7 | 495.8 | |||||||||||||||||||
| Asia Pacific | 166.0 | 205.0 | 487.4 | 588.1 | |||||||||||||||||||
| Latin America | 78.5 | 97.8 | 220.1 | 270.2 | |||||||||||||||||||
| Other | 116.7 | 117.8 | 323.4 | 350.4 | |||||||||||||||||||
| Total International | 681.2 | 748.4 | 1,959.5 | 2,227.3 | |||||||||||||||||||
| Total Consolidated | $ | 1,954.6 | $ | 2,061.4 | $ | 5,780.1 | $ | 6,192.1 | |||||||||||||||
| IAN | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| Total revenue: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | 1,130.5 | $ | 1,177.8 | $ | 3,402.7 | $ | 3,584.7 | |||||||||||||||
| International | 653.1 | 718.5 | 1,872.2 | 2,133.4 | |||||||||||||||||||
| Total IAN | $ | 1,783.6 | $ | 1,896.3 | $ | 5,274.9 | $ | 5,718.1 | |||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| United States | $ | 1,093.8 | $ | 1,098.3 | $ | 3,254.1 | $ | 3,339.5 | |||||||||||||||
| International | 591.7 | 640.9 | 1,681.6 | 1,906.9 | |||||||||||||||||||
| Total IAN | $ | 1,685.5 | $ | 1,739.2 | $ | 4,935.7 | $ | 5,246.4 | |||||||||||||||
9
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| CMG | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
| Total revenue: | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| United States | $ | 224.3 | $ | 373.1 | $ | 831.3 | $ | 1,096.4 | |||||||||||||||
| International | 117.6 | 168.7 | 404.8 | 505.0 | |||||||||||||||||||
| Total CMG | $ | 341.9 | $ | 541.8 | $ | 1,236.1 | $ | 1,601.4 | |||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| United States | $ | 179.6 | $ | 214.7 | $ | 566.5 | $ | 625.3 | |||||||||||||||
| International | 89.5 | 107.5 | 277.9 | 320.4 | |||||||||||||||||||
| Total CMG | $ | 269.1 | $ | 322.2 | $ | 844.4 | $ | 945.7 | |||||||||||||||
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Accounts receivable, net of allowance of $90.7 and $40.2, respectively | $ | 3,297.4 | $ | 5,209.2 | |||||||
| Accounts receivable, billable to clients | 1,817.2 | 1,934.1 | |||||||||
| Contract assets | 47.5 | 63.0 | |||||||||
| Contract liabilities (deferred revenue) | 611.3 | 585.6 | |||||||||
Contract assets are primarily comprised of contract incentives that are generally satisfied annually under the terms of our contracts and are transferred to accounts receivable when the right to payment becomes unconditional. Contract liabilities relate to advance consideration received from customers under the terms of our contracts primarily related to reimbursements of third-party expenses, whether we act as principal or agent, and to a lesser extent, periodic retainer fees, both of which are generally recognized shortly after billing.
The majority of our contracts are for periods of one year or less with the exception of our data management contracts. For those contracts with a term of more than one year, we had approximately $667.0 of unsatisfied performance obligations as of September 30, 2020, which will be recognized as services are performed over the remaining contractual terms through 2026.
10
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 3: Debt and Credit Arrangements
Long-Term Debt
A summary of the carrying amounts of our long-term debt is listed below.
| Effective Interest Rate | September 30, 2020 | December 31, 2019 | |||||||||||||||
| 3.50% Senior Notes due 2020 (less unamortized discount and issuance costs of $0.0 and $0.0, respectively) | 3.89% | $ | 500.0 | $ | 498.5 | ||||||||||||
| 3.75% Senior Notes due 2021 (less unamortized discount and issuance costs of $0.1 and $1.1, respectively) | 3.98% | 498.8 | 497.9 | ||||||||||||||
| 4.00% Senior Notes due 2022 (less unamortized discount and issuance costs of $0.4 and $0.4, respectively) | 4.13% | 249.2 | 248.7 | ||||||||||||||
| 3.75% Senior Notes due 2023 (less unamortized discount and issuance costs of $0.4 and $1.0, respectively) | 4.32% | 498.6 | 498.2 | ||||||||||||||
| 4.20% Senior Notes due 2024 (less unamortized discount and issuance costs of $0.4 and $1.5, respectively) | 4.24% | 498.1 | 497.8 | ||||||||||||||
| 4.65% Senior Notes due 2028 (less unamortized discount and issuance costs of $1.4 and $3.6, respectively) | 4.78% | 495.0 | 494.6 | ||||||||||||||
| 4.75% Senior Notes due 2030 (less unamortized discount and issuance costs of $3.7 and $5.8, respectively) | 4.92% | 640.5 | — | ||||||||||||||
| 5.40% Senior Notes due 2048 (less unamortized discount and issuance costs of $2.7 and $5.2, respectively) | 5.48% | 492.1 | 491.9 | ||||||||||||||
| Other notes payable and capitalized leases | 45.6 | 46.3 | |||||||||||||||
| Total long-term debt | 3,917.9 | 3,273.9 | |||||||||||||||
| Less: current portion | 506.6 | 502.0 | |||||||||||||||
| Long-term debt, excluding current portion | $ | 3,411.3 | $ | 2,771.9 | |||||||||||||
As of September 30, 2020 and December 31, 2019, the estimated fair value of the Company's long-term debt was $4,381.3 and $3,565.5, respectively. Refer to Note 12 for details.
Debt Transactions
3.50% Senior Notes Due 2020
Our 3.50% Senior Notes in aggregate principal amount of $500.0 matured on October 1, 2020 and we used available cash, including the proceeds from the offering of our 4.75% Senior Notes, to fund the principal repayment.
4.75% Senior Notes Due 2030
On March 30, 2020, we issued a total of $650.0 in aggregate principal amount of 4.75% senior unsecured notes (the “4.75% Senior Notes”) due March 30, 2030. Upon issuance, the 4.75% Senior Notes were reflected in our unaudited Consolidated Balance Sheets at $640.0, net of discount of $3.8 and net of capitalized debt issuance costs, including commissions and offering expenses of $6.2, both of which will be amortized in interest expense through the maturity date using the effective method. Interest is payable semi-annually in arrears on March 30th and September 30th of each year, commencing on September 30, 2020.
Consistent with our other outstanding debt securities, the newly issued 4.75% Senior Notes include covenants that, among other things, limit our liens and the liens of certain of our consolidated subsidiaries, but do not require us to maintain any financial ratios or specified levels of net worth or liquidity. We may redeem the 4.75% Senior Notes at any time in whole, or from time to time in part, in accordance with the provisions of the indenture, including the supplemental indenture, under which the 4.75% Senior Notes were issued. Additionally, upon the occurrence of a change of control repurchase event with respect to the 4.75% Senior Notes, each holder of the 4.75% Senior Notes has the right to require the Company to purchase that holder’s 4.75% Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, unless the Company has exercised its option to redeem all the 4.75% Senior Notes.
11
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Credit Arrangements
Credit Agreement
We maintain a committed corporate credit facility, originally dated as of July 18, 2008, which has been amended and restated from time to time (the "Credit Agreement"). We use our Credit Agreement to increase our financial flexibility, to provide letters of credit primarily to support obligations of our subsidiaries and to support our commercial paper program. The Credit Agreement is a revolving facility, expiring in November 2024, under which amounts borrowed by us or any of our subsidiaries designated under the Credit Agreement may be repaid and reborrowed, subject to an aggregate lending limit of $1,500.0, or the equivalent in other currencies. The Company has the ability to increase the commitments under the Credit Agreement from time to time by an additional amount of up to $250.0, provided the Company receives commitments for such increases and satisfies certain other conditions. The aggregate available amount of letters of credit outstanding may decrease or increase, subject to a sublimit of $50.0, or the equivalent in other currencies. Our obligations under the Credit Agreement are unsecured. As of September 30, 2020, there were no borrowings under the Credit Agreement; however, we had $9.0 of letters of credit under the Credit Agreement, which reduced our total availability to $1,491.0. We were in compliance with all of our covenants in the Credit Agreement as of September 30, 2020.
364-Day Credit Facility
On March 27, 2020, we entered into an agreement for a 364-day revolving credit facility (the "364-Day Credit Facility") that matures on March 26, 2021. The 364-Day Credit Facility is a revolving facility, under which amounts borrowed by us may be repaid and reborrowed, subject to an aggregate lending limit of $500.0. The cost structure of the 364-Day Credit Agreement is based on the Company’s current credit ratings. The applicable margin for Base Rate Advances (as defined in the 364-Day Credit Facility) is 0.250%, the applicable margin for Eurodollar Rate Advances (as defined in the 364-Day Credit Facility) is 1.250%, and the facility fee payable on a lender’s revolving commitment is 0.250%. In addition, the 364-Day Credit Facility includes covenants that, among other things, (i) limit our liens and the liens of our consolidated subsidiaries, and (ii) limit subsidiary debt. The 364-Day Credit Facility also contains a financial covenant that requires us to maintain, on a consolidated basis as of the end of each fiscal quarter, a leverage ratio for the four quarters then ended. The leverage ratio and other covenants set forth in the 364-Day Credit Facility are equivalent to the covenants contained in the Company’s existing Credit Agreement, which remains in full effect. As of September 30, 2020, there were no borrowings under the 364-Day Credit Facility, and we were in compliance with all of our covenants in the 364-Day Credit Facility.
The Amendments
On July 28, 2020, we entered into Amendment No. 1 to the Credit Agreement and Amendment No. 1 to the 364-Day Credit Facility (together, the “Amendments”). The Amendments increased the maximum leverage ratio covenant to 4.25x in the case of the 364-Day Credit Facility and, in the case of the Credit Agreement, to (i) 4.25x through the quarter ended June 30, 2021, and (ii) 3.50x thereafter. Amendment No.1 to the Credit Agreement also increased the Applicable Margin (as defined in the Credit Agreement) for any borrowings we make under the Credit Agreement if our long-term public debt ratings are BB+/Ba1 or below at the time of borrowing. We have the option to terminate Amendment No.1 to the Credit Agreement at any time, provided that at the time we deliver a termination notice, the leverage ratio as of the end of the most recently ended fiscal quarter did not exceed 3.50x. The Credit Agreement reverts to its original terms on June 30, 2021, or following any such early termination, whichever is earlier. We paid amendment fees of $2.0 in connection with the Amendments.
Uncommitted Lines of Credit
We also have uncommitted lines of credit with various banks that permit borrowings at variable interest rates and that are primarily used to fund working capital needs. We have guaranteed the repayment of some of these borrowings made by certain subsidiaries. If we lose access to these credit lines, we would have to provide funding directly to some of our operations. As of September 30, 2020, the Company had uncommitted lines of credit in an aggregate amount of $929.8, under which we had outstanding borrowings of $46.3 classified as short-term borrowings on our Consolidated Balance Sheet. The average amount outstanding during the third quarter of 2020 was $78.1, with a weighted-average interest rate of approximately 2.9%.
Commercial Paper
The Company is authorized to issue unsecured commercial paper up to a maximum aggregate amount outstanding at any time of $1,500.0. Borrowings under the program are supported by the Credit Agreement described above. Proceeds of the commercial paper are used for working capital and general corporate purposes, including the repayment of maturing indebtedness and other short-term liquidity needs. The maturities of the commercial paper vary but may not exceed 397 days from the date of issue. There was no commercial paper outstanding during the third quarter of 2020.
12
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 4: Earnings Per Share
The following sets forth basic and diluted earnings per common share available to IPG common stockholders.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income available to IPG common stockholders | $ | 279.7 | $ | 165.6 | $ | 238.8 | $ | 327.1 | |||||||||||||||
| Weighted-average number of common shares outstanding - basic | 389.6 | 386.7 | 388.9 | 385.8 | |||||||||||||||||||
| Dilutive effect of stock options and restricted shares | 4.3 | 5.1 | 3.7 | 4.5 | |||||||||||||||||||
| Weighted-average number of common shares outstanding - diluted | 393.9 | 391.8 | 392.6 | 390.3 | |||||||||||||||||||
| Earnings per share available to IPG common stockholders: | |||||||||||||||||||||||
| Basic | $ | 0.72 | $ | 0.43 | $ | 0.61 | $ | 0.85 | |||||||||||||||
| Diluted | $ | 0.71 | $ | 0.42 | $ | 0.61 | $ | 0.84 | |||||||||||||||
Note 5: Supplementary Data
Accrued Liabilities
The following table presents the components of accrued liabilities.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Salaries, benefits and related expenses | $ | 415.6 | $ | 494.1 | |||||||
| Interest | 58.7 | 38.8 | |||||||||
| Acquisition obligations | 49.9 | 45.7 | |||||||||
| Restructuring charges | 25.9 | 1.6 | |||||||||
| Office and related expenses | 22.7 | 26.9 | |||||||||
| Income taxes payable | 0.0 | 43.2 | |||||||||
| Other | 71.9 | 92.5 | |||||||||
| Total accrued liabilities | $ | 644.7 | $ | 742.8 | |||||||
Other Expense, Net
Results of operations for the three and nine months ended September 30, 2020 and 2019 include certain items that are not directly associated with our revenue-producing operations.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net losses on sales of businesses | $ | (8.6) | $ | (7.7) | $ | (51.8) | $ | (19.5) | |||||||||||||||
| Other | (2.7) | 0.3 | (2.8) | 1.4 | |||||||||||||||||||
| Total other expense, net | $ | (11.3) | $ | (7.4) | $ | (54.6) | $ | (18.1) | |||||||||||||||
Net losses on sales of businesses – During the three and nine months ended September 30, 2020, the amounts recognized were related to sales of businesses and the classification of certain assets and liabilities, consisting primarily of cash, as held for sale, within our IAN and CMG reportable segments. During the three and nine months ended September 30, 2019, the amounts recognized were related to sales of businesses and the classification of certain assets and liabilities, consisting primarily of cash, as held for sale, within our IAN reportable segment. The businesses held for sale primarily represent unprofitable, non-strategic agencies which are expected to be sold within the next twelve months.
Other – During the nine months ended September 30, 2019, the amounts recognized were primarily a result of changes in the fair market value of equity investments, partially offset by the sale of an equity investment.
13
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Share Repurchase Program
On July 2, 2018, in connection with the announcement of the Acxiom acquisition, we announced that share repurchases will be suspended for a period of time in order to reduce the increased debt levels incurred in conjunction with the acquisition. As of September 30, 2020, $338.4, excluding fees, remains available for repurchase under the share repurchase programs authorized in previous years, which have no expiration date.
Redeemable Noncontrolling Interests
Many of our acquisitions include provisions under which the noncontrolling equity owners may require us to purchase additional interests in a subsidiary at their discretion. Redeemable noncontrolling interests are adjusted quarterly, if necessary, to their estimated redemption value, but not less than their initial fair value. Any adjustments to the redemption value impact retained earnings or additional paid in capital, except for foreign currency translation adjustments.
The following table presents changes in our redeemable noncontrolling interests.
| Nine months ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Balance at beginning of period | $ | 164.7 | $ | 167.9 | |||||||
| Change in related noncontrolling interests balance | (6.0) | (2.1) | |||||||||
| Changes in redemption value of redeemable noncontrolling interests: | |||||||||||
| Additions | 0.0 | 24.3 | |||||||||
| Redemptions | (2.5) | (3.1) | |||||||||
| Redemption value adjustments | (3.4) | (1.6) | |||||||||
| Balance at end of period | $ | 152.8 | $ | 185.4 | |||||||
14
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 6: Income Taxes
For the three and nine months ended September 30, 2020, our income tax benefit was positively impacted by the settlement of the 2006 through 2016 U.S. Federal income tax audit, partially offset by losses in certain foreign jurisdictions where we received no tax benefit due to 100% valuation allowances, by net losses on sales of businesses and the classification of certain assets as held for sale for which we received minimal tax benefit and by tax expense associated with the change to our assertion regarding the permanent reinvestment of undistributed earnings attributable to certain foreign subsidiaries.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act includes several provisions for corporations including increasing the amount of deductible interest, allowing companies to carryback certain net operating losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. The CARES Act did not materially affect our quarter or year-to-date income tax provision, deferred tax assets and liabilities, or related taxes payable, nor do we expect it to have a material impact for the full year.
In 2020, in response to changes in non-US tax law, a decision was made to change our indefinite reinvestment assertion on a $120.0 of undistributed foreign earnings of specific subsidiaries. We recorded $10.4 of income tax costs associated with this change to our assertion.
In the third quarter of 2020, in response to restructuring actions taken within foreign subsidiaries, a decision was made to change our indefinite reinvestment assertion on a $46.0 of undistributed foreign earnings of specific subsidiaries. We recorded $3.2 of income tax costs associated with this change to our assertion.
We have various tax years under examination by tax authorities in various countries, and in various states, 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 believe our tax reserves are 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, if necessary, adjust our reserves as additional information or events require.
On July 29, 2020, the Internal Revenue Service notified the Company that the U.S. Federal income tax audit of years 2006 through 2016 has been finalized and settled. As a result, we recognized an income tax benefit of $136.2 in the third quarter of 2020.
With respect to all tax years open to examination by U.S. federal, various state and local, and non-U.S. tax authorities, we currently anticipate that total unrecognized tax benefits will decrease by an amount between $10.0 and $20.0 in the next twelve months, a portion of which will affect our effective income tax rate, primarily as a result of the settlement of tax examinations and the lapsing of statutes of limitations.
We are effectively settled with respect to U.S. federal income tax audits through 2016. With limited exceptions, we are no longer subject to state and local income tax audits for years prior to 2013 or non-U.S. income tax audits for years prior to 2009.
15
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 7: Restructuring Charges
The components of restructuring charges for 2020 and 2019 restructuring plans are listed below.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Severance and termination costs | $ | 17.9 | $ | 0.0 | $ | 62.5 | $ | 22.0 | |||||||||||||||
| Lease impairment costs | 26.6 | 0.0 | 92.3 | 11.9 | |||||||||||||||||||
| Other restructuring costs | 2.8 | 0.0 | 5.1 | 0.0 | |||||||||||||||||||
Total restructuring charges | $ | 47.3 | $ | 0.0 | $ | 159.9 | $ | 33.9 | |||||||||||||||
2020 Restructuring Plan
In the second and third quarters of 2020, the Company took restructuring actions to lower our operating expenses structurally and permanently relative to revenue and to accelerate the transformation of our business (the “2020 Plan”). Most of these actions are based on our recent experience and learning in the COVID-19 pandemic and a resulting review of our operations, which continues, to address certain operating expenses such as occupancy expense and salaries and related expenses.
Net restructuring charges were comprised of $24.9 at IAN and $17.2 at CMG for the three months ended September 30, 2020, which include non-cash lease impairment costs of $14.3 and $12.8, respectively. Net restructuring charges were comprised of $93.7 at IAN and $53.9 at CMG for the nine months ended September 30, 2020, which include non-cash lease impairment costs of $50.1 and $39.6, respectively.
Restructuring actions under the 2020 Plan were identified and initiated during the second quarter of 2020, with additional actions in the third quarter and expected in the fourth quarter and all actions to be substantially complete by the end of the fourth quarter of 2020.
During the first nine months of 2020, severance and termination costs were related to a planned reduction in workforce of 971 employees. The employee groups affected include executive, regional and account management as well as administrative, creative and media production personnel.
Lease impairment costs, which relate to the office spaces that were vacated as part of the 2020 Plan, included impairments of operating lease right-of-use assets and associated leasehold improvements, furniture and asset retirement obligations. Lease impairments were calculated based on estimated fair values using market participant assumptions including forecasted net discounted cash flows related to the operating lease right-of-use assets.
A summary of the restructuring activities related to the 2020 Plan is as follows:
| 2020 Plan | |||||||||||||||||||||||
| Restructuring Expense | Non-Cash Items | Cash Payments | Liability at September 30, 2020 | ||||||||||||||||||||
| Severance and termination costs | $ | 62.5 | $ | 1.0 | $ | 34.0 | $ | 27.5 | |||||||||||||||
| Lease impairment costs | 92.3 | 92.3 | 0.0 | 0.0 | |||||||||||||||||||
| Other | 5.1 | 2.4 | 2.7 | 0.0 | |||||||||||||||||||
Total | $ | 159.9 | $ | 95.7 | $ | 36.7 | $ | 27.5 | |||||||||||||||
2019 Restructuring Plan
In the first quarter of 2019, the Company implemented a cost initiative (the “2019 Plan”) to better align our cost structure with our revenue primarily related to specific client losses occurring in 2018. All restructuring actions were identified and initiated by the end of the first quarter of 2019, with all actions substantially completed by the end of the second quarter of 2019, and there have not been any restructuring adjustments.
16
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 8: Incentive Compensation Plans
We issue stock-based compensation and cash awards to our employees under various plans established by the Compensation and Leadership Talent Committee of the Board of Directors (the "Compensation Committee") and approved by our stockholders. We issued the following stock-based awards under the 2019 Performance Incentive Plan (the "2019 PIP") during the nine months ended September 30, 2020.
| Awards | Weighted-average grant-date fair value (per award) | ||||||||||
| Restricted stock (shares or units) | 2.3 | $ | 20.74 | ||||||||
| Performance-based stock (shares) | 2.4 | $ | 18.69 | ||||||||
Total stock-based compensation awards | 4.7 | ||||||||||
During the nine months ended September 30, 2020, the Compensation Committee granted performance cash awards under the 2019 PIP and restricted cash awards under the 2009 Restricted Cash Plan with a total annual target value of $43.3 and $36.2, respectively. Cash awards are expensed over the vesting period, which is typically three years for performance cash awards and two years or three years for restricted cash awards.
Note 9: Accumulated Other Comprehensive Loss, Net of Tax
The following tables present the changes in accumulated other comprehensive loss, net of tax, by component.
| Foreign Currency Translation Adjustments | Derivative Instruments | Defined Benefit Pension and Other Postretirement Plans | Total | ||||||||||||||||||||
| Balance as of December 31, 2019 | $ | (697.7) | $ | (3.5) | $ | (228.8) | $ | (930.0) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (56.2) | 2.7 | 0.8 | (52.7) | |||||||||||||||||||
| Amount reclassified from accumulated other comprehensive loss, net of tax | 9.3 | 1.3 | 4.3 | 14.9 | |||||||||||||||||||
| Balance as of September 30, 2020 | $ | (744.6) | $ | 0.5 | $ | (223.7) | $ | (967.8) | |||||||||||||||
| Foreign Currency Translation Adjustments | Derivative Instruments | Defined Benefit Pension and Other Postretirement Plans | Total | ||||||||||||||||||||
| Balance as of December 31, 2018 | $ | (716.4) | $ | (5.3) | $ | (219.4) | $ | (941.1) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (37.2) | 0.0 | 1.6 | (35.6) | |||||||||||||||||||
| Amount reclassified from accumulated other comprehensive loss, net of tax | 5.2 | 1.4 | 3.9 | 10.5 | |||||||||||||||||||
| Balance as of September 30, 2019 | $ | (748.4) | $ | (3.9) | $ | (213.9) | $ | (966.2) | |||||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2020 and 2019 are as follows:
| Three months ended September 30, | Nine months ended September 30, | Affected Line Item in the Consolidated Statements of Operations | |||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | 9.6 | $ | (0.6) | $ | 9.3 | $ | 5.2 | Other expense, net | ||||||||||||||||||||
| Losses on derivative instruments | 0.6 | 0.6 | 1.8 | 1.8 | Interest expense | ||||||||||||||||||||||||
| Amortization of defined benefit pension and postretirement plan items | 1.8 | 1.7 | 5.5 | 5.0 | Other expense, net | ||||||||||||||||||||||||
| Tax effect | (0.6) | (0.6) | (1.7) | (1.5) | (Benefit of) provision for income taxes | ||||||||||||||||||||||||
| Total amount reclassified from accumulated other comprehensive loss, net of tax | $ | 11.4 | $ | 1.1 | $ | 14.9 | $ | 10.5 | |||||||||||||||||||||
17
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 10: Employee Benefits
We have a defined benefit pension plan that covers certain U.S. employees (the “Domestic Pension Plan”). We also have numerous funded and unfunded plans outside the U.S. The Interpublic Limited Pension Plan in the U.K. is a defined benefit plan and is our most material foreign pension plan in terms of the benefit obligation and plan assets. Some of our domestic and foreign subsidiaries provide postretirement health benefits and life insurance to eligible employees and, in certain cases, their dependents. The domestic postretirement benefit plan is our most material postretirement benefit plan in terms of the benefit obligation. Certain immaterial foreign pension and postretirement benefit plans have been excluded from the table below.
The components of net periodic cost for the Domestic Pension Plan, the significant foreign pension plans and the domestic postretirement benefit plan are listed below.
| Domestic Pension Plan | Foreign Pension Plans | Domestic Postretirement Benefit Plan | |||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Service cost | $ | 0.0 | $ | 0.0 | $ | 1.2 | $ | 1.2 | $ | 0.0 | $ | 0.0 | |||||||||||||||||||||||
| Interest cost | 0.9 | 1.2 | 2.4 | 3.0 | 0.2 | 0.3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (1.4) | (1.5) | (4.7) | (4.2) | 0.0 | 0.0 | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | 0.0 | 0.0 | 0.0 | 0.0 | (0.1) | 0.0 | |||||||||||||||||||||||||||||
| Unrecognized actuarial losses | 0.4 | 0.5 | 1.4 | 1.2 | 0.1 | 0.0 | |||||||||||||||||||||||||||||
| Net periodic cost | $ | (0.1) | $ | 0.2 | $ | 0.3 | $ | 1.2 | $ | 0.2 | $ | 0.3 | |||||||||||||||||||||||
| Domestic Pension Plan | Foreign Pension Plans | Domestic Postretirement Benefit Plan | |||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Service cost | $ | 0.0 | $ | 0.0 | $ | 3.5 | $ | 3.5 | $ | 0.0 | $ | 0.0 | |||||||||||||||||||||||
| Interest cost | 2.8 | 3.6 | 7.0 | 9.3 | 0.6 | 0.9 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (4.2) | (4.4) | (14.0) | (13.0) | 0.0 | 0.0 | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | 0.0 | 0.0 | 0.1 | 0.1 | (0.1) | (0.1) | |||||||||||||||||||||||||||||
| Unrecognized actuarial losses | 1.2 | 1.4 | 4.1 | 3.6 | 0.2 | 0.0 | |||||||||||||||||||||||||||||
| Net periodic cost | $ | (0.2) | $ | 0.6 | $ | 0.7 | $ | 3.5 | $ | 0.7 | $ | 0.8 | |||||||||||||||||||||||
The components of net periodic cost other than the service cost component are included in the line item “Other expense, net” in the Consolidated Statements of Operations.
During the nine months ended September 30, 2020, we contributed $1.3 and $13.9 of cash to our domestic and foreign pension plans, respectively. For the remainder of 2020, we expect to contribute approximately $1.0 and $4.0 of cash to our domestic and foreign pension plans, respectively.
18
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Note 11: Segment Information
As of September 30, 2020, we have two reportable segments: IAN and CMG. IAN is comprised of McCann Worldgroup, FCB (Foote, Cone & Belding), MullenLowe Group, Media, Data Services and Tech, which includes IPG Mediabrands, Acxiom and Kinesso, our digital specialist agencies and our domestic integrated agencies. CMG is comprised of a number of our specialist marketing services offerings including Weber Shandwick, DeVries, Golin, FutureBrand, Jack Morton and Octagon Worldwide. We also report results for the “Corporate and other” group. We continue to evaluate our financial reporting structure, and the profitability measure, employed by our chief operating decision maker for allocating resources to operating divisions and assessing operating division performance, is segment EBITA. Summarized financial information concerning our reportable segments is shown in the following table.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Total revenue: | |||||||||||||||||||||||
| IAN | $ | 1,783.6 | $ | 1,896.3 | $ | 5,274.9 | $ | 5,718.1 | |||||||||||||||
| CMG | 341.9 | 541.8 | 1,236.1 | 1,601.4 | |||||||||||||||||||
| Total | $ | 2,125.5 | $ | 2,438.1 | $ | 6,511.0 | $ | 7,319.5 | |||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| IAN | $ | 1,685.5 | $ | 1,739.2 | $ | 4,935.7 | $ | 5,246.4 | |||||||||||||||
| CMG | 269.1 | 322.2 | 844.4 | 945.7 | |||||||||||||||||||
| Total | $ | 1,954.6 | $ | 2,061.4 | $ | 5,780.1 | $ | 6,192.1 | |||||||||||||||
Segment EBITA 1: | |||||||||||||||||||||||
| IAN | $ | 260.0 | $ | 262.3 | $ | 459.4 | $ | 640.7 | |||||||||||||||
| CMG | 25.9 | 50.7 | 21.9 | 94.0 | |||||||||||||||||||
| Corporate and other | (16.0) | (11.0) | (51.9) | (75.4) | |||||||||||||||||||
| Total | $ | 269.9 | $ | 302.0 | $ | 429.4 | $ | 659.3 | |||||||||||||||
| Amortization of acquired intangibles: | |||||||||||||||||||||||
| IAN | $ | 20.2 | $ | 20.6 | $ | 61.2 | $ | 61.3 | |||||||||||||||
| CMG | 1.1 | 1.1 | 3.2 | 3.3 | |||||||||||||||||||
| Corporate and other | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||||||||||||
| Total | $ | 21.3 | $ | 21.7 | $ | 64.4 | $ | 64.6 | |||||||||||||||
Depreciation and amortization 2: | |||||||||||||||||||||||
| IAN | $ | 43.8 | $ | 40.9 | $ | 133.8 | $ | 127.9 | |||||||||||||||
| CMG | 5.0 | 5.2 | 15.5 | 15.2 | |||||||||||||||||||
| Corporate and other | 0.9 | 1.2 | 3.2 | 5.4 | |||||||||||||||||||
| Total | $ | 49.7 | $ | 47.3 | $ | 152.5 | $ | 148.5 | |||||||||||||||
| Capital expenditures: | |||||||||||||||||||||||
| IAN | $ | 31.7 | $ | 44.5 | $ | 85.2 | $ | 106.9 | |||||||||||||||
| CMG | 1.2 | 4.0 | 4.1 | 7.9 | |||||||||||||||||||
| Corporate and other | 7.2 | 5.2 | 22.7 | 19.0 | |||||||||||||||||||
| Total | $ | 40.1 | $ | 53.7 | $ | 112.0 | $ | 133.8 | |||||||||||||||
1 Adjusted EBITA is calculated as net income available to IPG common stockholders before (benefit of) provision for incomes taxes, total (expenses) and other income, equity in net (loss) income of unconsolidated affiliates, net loss (income) attributable to noncontrolling interests and amortization of acquired intangibles.
2 Excludes amortization of acquired intangibles.
19
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Total assets: | |||||||||||
| IAN | $ | 13,307.4 | $ | 15,155.2 | |||||||
| CMG | 1,505.4 | 1,725.5 | |||||||||
| Corporate and other | 1,261.9 | 871.2 | |||||||||
| Total | $ | 16,074.7 | $ | 17,751.9 | |||||||
The following table presents the reconciliation of segment EBITA to Income before income taxes.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| IAN EBITA | $ | 260.0 | $ | 262.3 | $ | 459.4 | $ | 640.7 | |||||||||||||||
| CMG EBITA | 25.9 | 50.7 | 21.9 | 94.0 | |||||||||||||||||||
| Corporate and other EBITA | (16.0) | (11.0) | (51.9) | (75.4) | |||||||||||||||||||
| Less: consolidated amortization of acquired intangibles | 21.3 | 21.7 | 64.4 | 64.6 | |||||||||||||||||||
| Operating income | 248.6 | 280.3 | 365.0 | 594.7 | |||||||||||||||||||
| Total (expenses) and other income | (56.0) | (47.6) | (177.3) | (144.2) | |||||||||||||||||||
| Income before income taxes | $ | 192.6 | $ | 232.7 | $ | 187.7 | $ | 450.5 | |||||||||||||||
Note 12: Fair Value Measurements
Authoritative guidance for fair value measurements establishes a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | |||||||
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |||||||
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | |||||||
Financial Instruments that are Measured at Fair Value on a Recurring Basis
We primarily apply the market approach to determine the fair value of financial instruments that are measured at fair value on a recurring basis. There were no changes to our valuation techniques used to determine the fair value of financial instruments during the nine months ended September 30, 2020. The following tables present information about our financial instruments measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.
20
Notes to Consolidated Financial Statements – (continued)
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
| September 30, 2020 | Balance Sheet Classification | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | 103.1 | $ | 0.0 | $ | 0.0 | $ | 103.1 | Cash and cash equivalents | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
Contingent acquisition obligations 1 | $ | 0.0 | $ | 0.0 | $ | 94.7 | $ | 94.7 | Accrued liabilities and Other non-current liabilities | ||||||||||||||||||||
| December 31, 2019 | Balance Sheet Classification | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash equivalents | $ | 786.0 | $ | 0.0 | $ | 0.0 | $ | 786.0 | Cash and cash equivalents | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
Contingent acquisition obligations 1 | $ | 0.0 | $ | 0.0 | $ | 114.1 | $ | 114.1 | Accrued liabilities and Other non-current liabilities | ||||||||||||||||||||
1Contingent acquisition obligations includes deferred acquisition payments and unconditional obligations to purchase additional noncontrolling equity shares of consolidated subsidiaries. Fair value measurement of the obligations is based upon actual and projected operating performance targets as specified in the related agreements. The decrease in this balance of $19.4 from December 31, 2019 to September 30, 2020 is primarily due to acquisition payments, partially offset by valuation adjustments, an increase in deferred acquisition payments and exercises of put options. The amounts payable within the next twelve months are classified in accrued liabilities; any amounts payable thereafter are classified in other non-current liabilities.
Financial Instruments that are not Measured at Fair Value on a Recurring Basis
The following table presents information about our financial instruments that are not measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||