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| IPG > SEC Filings for IPG > Form 10-Q on 28-Apr-2009 | All Recent SEC Filings |
28-Apr-2009
Quarterly Report
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 unaudited Consolidated Financial Statements and the accompanying notes included in this report and in the 2008 Annual Report on Form 10-K, as well as our reports on Form 8-K and other SEC filings. Our Annual Report includes additional information about our significant accounting policies and practices as well as details about our most significant risks and uncertainties associated with our financial and operating results. Our MD&A includes the following sections:
EXECUTIVE SUMMARY provides an overview of our results of operations.
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, funding requirements, financing and sources of funds.
CRITICAL ACCOUNTING ESTIMATES provides an update to the discussion of our accounting policies that require critical judgment, assumptions and estimates in our 2008 Annual Report on Form 10-K.
RECENT ACCOUNTING STANDARDS, by reference to Note 1 and 12 to the unaudited Consolidated Financial Statements, provides a discussion of certain accounting standards that have been adopted during 2009.
EXECUTIVE SUMMARY
We are one of the world's premier global advertising and marketing services companies. Our agencies create marketing programs for clients to achieve or improve their business results. This, in turn, generates sales, earnings and cash flow for us. Our agencies deliver services across the full spectrum of marketing disciplines and specialties, including advertising, direct marketing, public relations, mobile marketing, internet and search engine marketing, social media marketing, and media buying and planning. Major global brands in our portfolio of companies include Draftfcb, FutureBrand, GolinHarris, Initiative, Jack Morton, Lowe, McCann Erickson, Momentum, MRM, Octagon, Universal McCann and Weber Shandwick. Leading domestic brands include Campbell-Ewald, Carmichael Lynch, Deutsch, Hill Holliday, The Martin Agency, Mullen and R/GA.
Our strategic outlook for 2009 and beyond is for a media landscape that continues to grow more complex, such that our high-quality, comprehensive global services will remain critical to the competitiveness of our clients. Our objectives are to continue to strengthen our full range of marketing expertise, while focusing our investment on the fastest growing markets and disciplines. Over the long term, our financial objectives include maintaining our organic revenue growth at competitive levels and achieving further operating margin expansion, ultimately to the level of our global peer group. Accordingly, we remain focused on cost control and effective resource utilization, including the productivity of our employees, real estate, and information technology, and on reducing certain discretionary expenses.
We began 2009 with the global economy in recession and widespread uncertainty in financial markets, which has made business conditions extremely challenging for nearly all companies. These conditions adversely affected the demand for advertising and marketing services in the first quarter, and will present a challenge to the revenue and profit growth of our company and our sector as a whole for as long as they persist. While we cannot predict the magnitude and duration of the economic downturn or its impact on the demand for our services, we believe that we will continue to derive relative benefits from our diversified client base, global presence and broad range of services. Recent improvements in our financial reporting and business information systems provide us with timely and actionable insights from our businesses around the world. Our
Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
extensive operating improvements over the past several years have strengthened our ability to effectively manage our expenses, and our balance sheet and liquidity are important sources of financial flexibility. These should also provide a measure of protection in a harsh business environment.
2009 First Quarter Highlights
Three months ended
March 31, 2009
% increase/(decrease) Total Organic
Revenue (10.8%) (5.6%)
Salaries and related expenses (6.4%) (1.8%)
Office and general expenses (13.5%) (8.4%)
Three months ended
March 31,
2009 2008
Operating margin (6.2%) (3.9%)
Expenses as % of revenue
Salaries and related expenses 75.2% 71.7%
Office and general expenses 31.0% 32.0%
Net loss available to IPG common stockholders $ (73.9) $ (69.7)
Loss per share available to IPG common stockholders -
basic and diluted $ (0.16) $ (0.15)
Operating cash flow $ (557.3) $ (288.0)
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When we analyze period-to-period changes in our operating performance, we determine the portions of the change that are attributable to exchange rates and to the net effect of acquisitions and divestitures, and we consider that the remainder, which we call organic change, indicates how our underlying business performed. Our performance metrics that are used to analyze our results in the MD&A include the organic change in revenue, salaries and related expenses and office and general expenses, and the components of operating expenses, expressed as a percentage of revenue. Additionally, in certain of our discussions we analyze revenue by business sector and geographic region. In our business sector analysis, we focused on our top 100 clients, which represent over 50% of our consolidated revenue.
The change in our operating performance attributable to foreign currency rates is determined by converting the prior period results using the current period exchange rates and comparing the prior period adjusted amounts to the prior period results. Although the U.S. Dollar is our reporting currency, a substantial portion of our revenues is generated in foreign currencies. Therefore, our reported results are affected by fluctuations in the currencies in which we conduct our international businesses. We do not use derivative financial instruments to manage this translation risk. As a result, both positive and negative currency fluctuations against the U.S. Dollar will continue to affect our results of operations. Foreign currency fluctuations resulted in decreases of approximately 7% in revenues and salaries and related expenses and approximately 8% in office and general expenses, which contributed a net benefit of approximately 10% to operating loss for the three months ended March 31, 2009 compared to the prior-year period. During the second half of 2008 and the first three months of 2009 the U.S. Dollar strengthened against several foreign currencies, and if this trend continues, it could have a continuing negative impact on our consolidated results of operations.
For purposes of analyzing changes in our operating performance attributable to the net effect of acquisitions and divestitures, transactions are treated as if they occurred on the first day of the quarter during which the transaction occurred. During the past few years, we have acquired companies that we believe will enhance our offering and disposed of businesses that are not consistent with our strategic plan. For the three months ended March 31, 2009, the net effect of acquisitions and divestitures was to increase revenue and operating expenses compared to the respective prior-year period.
Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
RESULTS OF OPERATIONS
Consolidated Results of Operations - Three Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008
REVENUE
Components of change Change
Three months Net Three months
ended Foreign acquisitions/ ended
March 31, 2008 currency divestitures Organic March 31, 2009 Organic Total
Consolidated $ 1,485.2 $ (107.9 ) $ 31.6 $ (83.6 ) $ 1,325.3 (5.6 %) (10.8 %)
Domestic 849.1 - 7.4 (75.1 ) 781.4 (8.8 %) (8.0 %)
International 636.1 (107.9 ) 24.2 (8.5 ) 543.9 (1.3 %) (14.5 %)
United Kingdom 146.5 (40.8 ) - 5.8 111.5 4.0 % (23.9 %)
Continental Europe 232.6 (32.6 ) 1.6 (7.6 ) 194.0 (3.3 %) (16.6 %)
Asia Pacific 127.1 (10.6 ) - (8.7 ) 107.8 (6.8 %) (15.2 %)
Latin America 65.0 (12.1 ) - 2.2 55.1 3.4 % (15.2 %)
Other 64.9 (11.8 ) 22.6 (0.2 ) 75.5 (0.3 %) 16.3 %
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During the first quarter of 2009, our revenue decreased by $159.9, primarily consisting of an adverse foreign currency impact of $107.9 and an organic revenue decrease of $83.6, predominantly in the auto and transportation sector and to a lesser extent the financial services sector. Our remaining client sectors, in the aggregate, were relatively flat when compared to the prior-year period. The domestic organic decline was primarily driven by a pullback of existing client business in the advertising and events marketing businesses due to broader economic difficulties. The net international organic revenue decrease was primarily in the Asia Pacific region, mainly in Japan, where we have a significant presence, as well as throughout the Continental Europe region, due to lower spending from existing clients. The United Kingdom and Brazil had organic revenue increases due to increased spending from existing clients.
Our revenue is directly impacted by our ability to win new clients and the retention and spending levels of existing clients and is subject to fluctuations related to seasonal spending from our clients. Most of our expenses are recognized ratably throughout the year and are therefore less seasonal than revenue. Our revenue is typically lowest in the first quarter and highest in the fourth quarter. This reflects the seasonal holiday spending of our clients, incentives earned at year-end on various contracts and project work completed that is typically recognized during the fourth quarter. Additionally, revenues can fluctuate due to the timing of completed projects in the events marketing business, as revenue is typically recognized when the project is complete. Furthermore, we generally act as principal for these projects and as such record the gross amount billed to the client as revenue and the related costs incurred as pass-through costs in office and general expenses.
Refer to the segment discussion later in this MD&A for information on changes in revenue by segment.
OPERATING EXPENSES
Three months ended
March 31,
2009 2008
Salaries and related expenses $ 996.5 $ 1,064.8
Office and general expenses 410.9 475.0
Restructuring and other reorganization-
related (reversals) charges (0.2 ) 3.2
Total operating expenses $ 1,407.2 $ 1,543.0
Operating loss $ (81.9 ) $ (57.8 )
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Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
Salaries and Related Expenses
Components of change Change
Net
Foreign acquisitions/
2008 currency divestitures Organic 2009 Organic Total
Three months ended
March 31, $ 1,064.8 $ (74.8 ) $ 25.7 $ (19.2 ) $ 996.5 (1.8 %) (6.4 %)
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Salaries and related expenses in the first quarter of 2009 decreased by $68.3 compared to the first quarter of 2008, consisting of a favorable foreign currency rate impact of $74.8 partially offset by the impact of net acquisitions of $25.7, resulting in an organic decrease of $19.2. The organic decrease was due to lower base salaries, benefits and temporary help of $19.5, primarily related to work force reductions we took in the fourth quarter of 2008 to prepare our businesses in response to the deteriorating economic outlook. In addition, we took further work force actions in the first quarter of 2009 resulting in an increase in severance charges of $28.5 when compared to the first quarter of 2008, as the challenging economic conditions continued in 2009. The severance charges in the first quarter of 2009 were primarily related to our advertising businesses in our Integrated Agency Network ("IAN") segment and were spread across all geographic regions with the highest concentration in the U.S. and Continental Europe. The work force reduction that we initiated during the fourth quarter of 2008 and the first quarter of 2009 decreased headcount by approximately 2,800 employees. The reductions in the workforce will contribute to declines in base salaries and benefits through the remainder of the year. In addition, contributing to the organic decrease was a reduction in expected long-term incentive award expense, primarily related to higher actual forfeitures compared to estimates, which resulted in an increase to our forfeiture rate, and changes in our assumptions in achieving certain performance targets.
Changes in our incentive awards mix can impact future period expense as bonus awards are expensed during the year they are earned and long-term incentive awards are expensed over the performance period, generally three years. Factors impacting long-term incentive awards are the actual number of awards vesting and the change in our stock price. Additionally, changes can occur based on projected results and could impact trends between various periods in the future. See Note 7 to the unaudited Consolidated Financial Statements for further information on our incentive compensation plans.
The following table details our salary and related expenses as a percentage of consolidated revenue.
Three months ended
March 31,
2009 2008
Salaries and related expenses 75.2 % 71.7 %
Base salaries, benefits and tax 64.3 % 60.5 %
Incentive expense 3.0 % 3.8 %
Severance expense 3.1 % 0.9 %
Temporary help 2.7 % 3.6 %
All other salaries and related expenses 2.1 % 2.9 %
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Our staff cost ratio, defined as salaries and related expenses as a percentage of revenue, increased to 75.2% in the first quarter of 2009 from 71.7% in the first quarter of 2008, primarily driven by lower revenues and increased severance expense in the first quarter of 2009.
Office and General Expenses
Components of change Change
Net
Foreign acquisitions/
2008 currency divestitures Organic 2009 Organic Total
Three months ended March 31, $ 475.0 $ (38.9 ) $ 14.6 $ (39.8 ) $ 410.9 (8.4 %) (13.5 %)
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Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
Office and general expenses in the first quarter of 2009 decreased by $64.1 compared to the first quarter of 2008, primarily consisting of an organic decrease of $39.8 and a favorable foreign currency rate impact of $38.9. The organic decrease was primarily due to lower discretionary spending as a result of cost containment efforts by the Company during the first quarter of 2009 and lower production expenses related to pass-through costs for certain projects where we act as a principal.
Production expenses can vary significantly between periods depending upon the timing of completion of certain projects where we act as principal, which could impact trends between various periods in the future.
The following table details our office and general expenses as a percentage of consolidated revenue. All other office and general expenses includes production expenses, depreciation and amortization, bad debt expense, foreign currency gains (losses) and other expenses.
Three months ended
March 31,
2009 2008
Office and general expenses 31.0 % 32.0 %
Professional fees 2.3 % 2.5 %
Occupancy expense (excluding depreciation and
amortization) 9.6 % 8.8 %
Travel & entertainment, office supplies and
telecommunications 4.0 % 4.9 %
All other office and general expenses 15.1 % 15.8 %
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Our office and general expense ratio, defined as office and general expenses as a percentage of revenue, in the first quarter of 2009 decreased to 31.0% from 32.0% compared to the first quarter of 2008. The improvement in the office and general expense ratio was driven by a reduction in certain key expense categories, partly offset by lower revenue during the first quarter of 2009.
EXPENSES AND OTHER INCOME
Three months ended
March 31,
2009 2008
Cash interest on debt obligations $ (35.4 ) $ (50.7 )
Non-cash interest 0.6 (7.0 )
Interest expense (34.8 ) (57.7 )
Interest income 12.3 28.7
Net interest expense (22.5 ) (29.0 )
Other income (expense), net 4.9 (1.4 )
Total $ (17.6 ) $ (30.4 )
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Net Interest Expense
For the three months ended March 31, 2009, cash interest expense and interest income decreased compared to the first quarter of 2008 primarily due to declining interest rates, mainly in the U.S. and the United Kingdom. Non-cash interest expense declined as a result of the reduction in value of an obligation to purchase noncontrolling equity shares of a consolidated subsidiary. See Note 10 to the unaudited Consolidated Financial Statements for further information.
Other Income (Expense), Net
Results of operations for the three months ended March 31, 2009 and 2008 include certain items which are either non-recurring or are not directly associated with our revenue producing operations such as sales of businesses and
Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
investments and vendor discounts and credit adjustments. These items are included in the other income (expense), net line in the unaudited Consolidated Statements of Operations. Included in other expense, net, of $1.4 for the three months ended March 31, 2008 is a settlement estimate of $12.0 for our previously disclosed SEC investigation of our past restatement of our financial statements, which we settled in May 2008. This expense is partially offset by vendor discounts and credit adjustments due to the reversal of certain liabilities where the statute of limitations has lapsed.
INCOME TAXES
Three months ended
March 31,
2009 2008
Loss before income taxes $ (99.5 ) $ (88.2 )
Total benefit of income taxes $ (25.4 ) $ (23.7 )
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The effective tax rate for the first quarter of 2009 was 25.5%, compared to 26.9% for the same period a year ago. Our tax rates are affected by many factors, including our worldwide earnings from various countries, disposition activity, changes in legislation and tax characteristics of our income. Specifically, for the three months ended March 31, 2009, the difference between the effective tax rate and the statutory rate of 35% is primarily due to state and local taxes, losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances and the write-off of deferred tax assets related to restricted stock.
For the three months ended March 31, 2008, the difference between the effective tax rate and the statutory rate of 35% is primarily due to state and local taxes and losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances.
Segment Results of Operations - Three Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008
As discussed in Note 9 to the unaudited Consolidated Financial Statements, we have two reportable segments as of March 31, 2009: IAN and CMG. We also report results for the Corporate and other group.
IAN
REVENUE
Components of change Change
Three months Net Three months
ended Foreign acquisitions/ ended
March 31, 2008 currency divestitures Organic March 31, 2009 Organic Total
Consolidated $ 1,241.1 $ (91.4 ) $ 31.6 $ (66.4 ) $ 1,114.9 (5.4 %) (10.2 %)
Domestic 692.2 - 7.4 (58.1 ) 641.5 (8.4 %) (7.3 %)
International 548.9 (91.4 ) 24.2 (8.3 ) 473.4 (1.5 %) (13.8 %)
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During the first quarter of 2009 our revenue decreased by $126.2, primarily consisting of an adverse foreign currency impact of $91.4 and an organic revenue decrease of $66.4, predominantly in the auto and transportation sector and to a lesser extent the financial services sector. The domestic organic revenue decrease was primarily driven by a pullback of existing client business throughout our advertising businesses. Partially offsetting this domestic organic decrease was a revenue increase at Draftfcb. The international organic revenue decrease occurred primarily in the Asia Pacific region, mainly in Japan, as well as throughout the Continental Europe region, due to lower spending from existing clients throughout our advertising businesses. The United Kingdom and Brazil had organic revenue increases due to increased client spending, primarily throughout our advertising businesses.
Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)
SEGMENT OPERATING LOSS
Three months ended
March 31,
2009 2008 Change
Segment operating loss $ (57.5 ) $ (19.8 ) 190.4 %
Operating margin (5.2 %) (1.6 %)
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Operating loss increased during the first quarter of 2009 due to a decrease in revenue of $126.2, partially offset by decreases in office and general expenses of $48.0 and salaries and related expenses of $40.5. Lower office and general . . .
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