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IPG > SEC Filings for IPG > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for INTERPUBLIC GROUP OF COMPANIES, INC.

Form 10-K for INTERPUBLIC GROUP OF COMPANIES, INC.


24-Feb-2014

Annual Report


Item 7. 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 its subsidiaries ("IPG," "we," "us" or "our"). MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included in this report. Our MD&A includes the following sections:
EXECUTIVE SUMMARY provides a discussion about our strategic outlook, factors influencing our business and an overview of our results of operations and liquidity.
RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2013 compared to 2012 and 2012 compared to 2011. LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, funding requirements, contractual obligations, financing and sources of funds and debt credit ratings.
CRITICAL ACCOUNTING ESTIMATES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.
RECENT ACCOUNTING STANDARDS, by reference to Note 16 to the Consolidated Financial Statements, provides a discussion of certain accounting standards that have been adopted during 2013 or that have not yet been required to be implemented and may be applicable to our future operations.

EXECUTIVE SUMMARY
During 2013, our organic revenue increase was primarily driven by growth in our domestic market, which was a result of net new business with clients won during the year and growth with existing clients. Our international organic increase was primarily in the Asia Pacific and Latin America regions, across our marketing disciplines. The Continental Europe region weighed on our international growth, mainly due to a challenging economic climate. Across most regional markets, we continued to have strong growth in demand for our digital, media and marketing services. Increased operating expenses reflected investments made in our agencies to support our new business portfolio and growing disciplines, as well as to service our existing clients. We incurred expenses for restructuring in order to better align our cost structure with our revenue, primarily in Continental Europe.
With challenging economic conditions in many markets around the world, particularly in Europe, marketers continue to show a degree of caution in their marketing investment. We continue to derive substantial benefit from our diversified client base, our global footprint and the broad range and strength of our professional offerings. We continued to enhance our businesses during 2013 by making investments in creative and strategic talent that emphasize our growth priorities: fast-growth digital marketing channels, high-growth geographic regions and strategic world markets. We believe our continued investment in tools, technology and process improvements will create efficiencies in the delivery of our services.
We continued to enhance value to our shareholders through common stock dividends, share repurchases and improvements in our balance sheet. During 2013, average diluted shares decreased by 11% primarily due to share repurchases. Basic earnings per share available to IPG common stockholders for the years ended December 31, 2013, 2012 and 2011 were $0.62, $1.01 and $1.12 per share, respectively. Diluted earnings per share for the years ended December 31, 2013, 2012 and 2011 were $0.61, $0.94 and $0.99 per share, respectively. Basic and diluted earnings per share for the year ended December 31, 2013 included a negative impact of $0.12 and $0.11 per share, respectively, from the effects of restructuring and related costs, net of tax. Basic and diluted earnings per share for the year ended December 31, 2013 included a negative impact of $0.06 per share from a loss on early extinguishment of debt, net of tax. Basic and diluted earnings per share for the year ended December 31, 2012 included $0.14 and $0.12 per share, respectively, from the gain recorded for the sale of our remaining holdings in Facebook, net of tax. Basic and diluted earnings per share for the year ended December 31, 2011 included $0.27 and $0.23 per share, respectively, from the gain recorded for the sale of approximately half of our holdings in Facebook, net of tax.


Table of Contents

   Management's Discussion and Analysis of Financial Condition and Results of
                            Operations - (continued)
                (Amounts in Millions, Except Per Share Amounts)



The following tables present a summary of financial performance for the year
ended December 31, 2013, as compared with the same periods in 2012 and 2011.
                                                           Years ended December 31,
                                                       2013                      2012
% Increase / (Decrease)                         Total      Organic        Total        Organic
Revenue                                           2.4 %        2.8 %       (0.8 )%        0.7  %
Salaries and related expenses                     3.5 %        3.8 %       (0.2 )%        0.9  %
Office and general expenses                       1.6 %        2.5 %       (1.9 )%       (0.2 )%

                                                                 Years ended December 31,
                                                             2013         2012          2011
Operating margin                                               8.4 %        9.8  %        9.8  %
Expenses as % of revenue:
Salaries and related expenses                                 63.8 %       63.1  %       62.8  %
Office and general expenses                                   26.9 %       27.1  %       27.4  %
Restructuring and other
reorganization-related charges (reversals),
net                                                            0.9 %        0.0  %        0.0  %

Net income available to IPG common
stockholders                                              $  259.2     $  435.1      $  520.7

Earnings per share available to IPG common
stockholders:
    Basic                                                 $   0.62     $   1.01      $   1.12
    Diluted                                               $   0.61     $   0.94      $   0.99

When we analyze period-to-period changes in our operating performance we determine the portion of the change that is attributable to changes in foreign currency rates and the net effect of acquisitions and divestitures, and the remainder we call organic change, which indicates how our underlying business performed. The performance metrics that we use to evaluate our results 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 total consolidated revenue. Additionally, in certain of our discussions we analyze revenue by business sector, where we focus on our top 100 clients, which typically constitutes approximately 55% to 60% of our annual consolidated revenues. We also analyze revenue by geographic region. The change in our operating performance attributable to changes in foreign currency rates is determined by converting the prior-period reported results using the current-period exchange rates and comparing these prior-period adjusted amounts to the prior-period reported results. Although the U.S. Dollar is our reporting currency, a substantial portion of our revenues and expenses are 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. Our exposure is mitigated as the majority of our revenues and expenses in any given market are generally denominated in the same currency. Both positive and negative currency fluctuations against the U.S. Dollar affect our consolidated results of operations, and the magnitude of the foreign currency impact on us related to each geographic region depends on the significance and operating performance of the region. The primary foreign currencies that impacted our results during 2013 include the Australian Dollar, Brazilian Real, Euro, Japanese Yen and the South African Rand. During 2013, the U.S. Dollar was stronger relative to several foreign currencies in regions where we primarily conduct our business as compared to the prior-year period, which had a net negative impact on our 2013 consolidated results of operations. For 2013, foreign currency fluctuations resulted in net decreases of approximately 1% in revenues and operating expenses, which had a minimal impact on our operating margin percentage. For 2012, foreign currency fluctuations resulted in net decreases of approximately 2% in revenues and operating expenses, which had no net impact on our operating margin percentage.
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 offerings and disposed of businesses that are not consistent with our strategic plan. For 2013 and 2012, the net effect of acquisitions and divestitures increased revenue and operating expenses compared to the prior-year period. See Note 5 to the Consolidated Financial Statements for additional information on our acquisitions.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

(Amounts in Millions, Except Per Share Amounts)

RESULTS OF OPERATIONS
Consolidated Results of Operations
REVENUE
Our revenue is directly impacted by our ability to win new clients and the retention and spending levels of existing 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 spending of our clients, incentives earned at year end on various contracts and project work completed that is typically recognized during the fourth quarter. In the events marketing business, revenues can fluctuate due to the timing of completed projects, as revenue is typically recognized when the project is complete. We generally act as principal for these projects and accordingly record the gross amount billed to the client as revenue and the related costs incurred as pass-through costs in office and general expenses.

                                                Components of Change                                        Change
                      Year ended                         Net                         Year ended
                     December 31,      Foreign      Acquisitions/                   December 31,
                         2012          Currency     (Divestitures)     Organic          2013          Organic      Total
Consolidated       $      6,956.2     $  (80.4 )   $         50.3     $ 196.2     $      7,122.3        2.8  %      2.4  %
Domestic                  3,803.6          0.0               26.4       142.6            3,972.6        3.7  %      4.4  %
International             3,152.6        (80.4 )             23.9        53.6            3,149.7        1.7  %     (0.1 )%
United Kingdom              572.0         (7.0 )             (1.2 )       4.5              568.3        0.8  %     (0.6 )%
Continental Europe          823.1         23.0                2.7       (48.2 )            800.6       (5.9 )%     (2.7 )%
Asia Pacific                838.1        (43.6 )             21.0        53.4              868.9        6.4  %      3.7  %
Latin America               450.1        (32.7 )              1.4        45.7              464.5       10.2  %      3.2  %
Other                       469.3        (20.1 )              0.0        (1.8 )            447.4       (0.4 )%     (4.7 )%

During 2013, our revenue increased by $166.1, or 2.4%, compared to 2012, due to an organic revenue increase of $196.2, or 2.8%, and the effect of net acquisitions of $50.3, partially offset by an adverse foreign currency rate impact of $80.4. We had growth in the domestic market, with our organic revenue increase primarily attributable to net client wins, most notably in the auto and transportation sector, and net higher spending from existing clients, primarily in the healthcare sector, partially offset by decreases in the technology and telecom sector. In addition, our organic revenue increase in the domestic market was mainly driven by our events marketing and public relations businesses. In our international market, the organic revenue increase was primarily in the Asia Pacific region, led by Australia and China, and in the Latin America region, primarily in Brazil. Also contributing to our international organic revenue increase was net higher spending from existing clients throughout nearly all client sectors, most notably in the technology and telecom and healthcare sectors. The international organic revenue increase was partially offset by a decline in the Continental Europe region, across most countries in the market, due to a continued challenging economic climate.

                                                 Components of Change                                        Change
                      Year ended                         Net                          Year ended
                     December 31,      Foreign      Acquisitions/                    December 31,
                         2011          Currency     (Divestitures)     Organic           2012          Organic      Total
Consolidated       $      7,014.6     $ (147.6 )   $         41.8     $   47.4     $      6,956.2        0.7  %     (0.8 )%
Domestic                  3,887.7          0.0              (12.2 )      (71.9 )          3,803.6       (1.8 )%     (2.2 )%
International             3,126.9       (147.6 )             54.0        119.3            3,152.6        3.8  %      0.8  %
United Kingdom              539.4         (7.0 )             13.6         26.0              572.0        4.8  %      6.0  %
Continental Europe          908.9        (66.6 )              4.4        (23.6 )            823.1       (2.6 )%     (9.4 )%
Asia Pacific                741.7        (12.2 )             23.9         84.7              838.1       11.4  %     13.0  %
Latin America               444.4        (40.2 )              7.6         38.3              450.1        8.6  %      1.3  %
Other                       492.5        (21.6 )              4.5         (6.1 )            469.3       (1.2 )%     (4.7 )%

During 2012, our revenue decreased by $58.4, or 0.8%, compared to 2011, due to an adverse foreign currency rate impact of $147.6, partially offset by an organic revenue increase of $47.4, or 0.7%, and the effect of net acquisitions of $41.8. Our organic revenue increase was primarily attributable to new client wins and net higher spending from existing clients in our international markets. We had strong growth in the Asia Pacific region, primarily in Australia, Singapore, India and China, and in the Latin America region, predominantly in Brazil. Also contributing to our international organic revenue increase was an


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

(Amounts in Millions, Except Per Share Amounts)

increase in the United Kingdom, predominately due to our events marketing business, which benefited from work performed in connection with the London Olympics in the third quarter of 2012. The organic revenue increase in our international markets was throughout nearly all client sectors, most notably in the retail and technology and telecom sectors, partially offset by a decrease in the consumer goods sector due to net client losses in the prior year. Our revenue decreased in the Continental Europe region, primarily in Spain and Italy, due to a continued challenging economic climate. This was partially offset by growth in Germany. In our domestic market, our organic revenue decrease was due to net client losses in the prior year, most notably in the consumer goods and technology and telecom sectors, and a decline in spending from existing clients, primarily in the retail and health care sectors. Partially offsetting this decline in the domestic market was an organic revenue increase in the auto and transportation and financial services sectors. Refer to the segment discussion later in this MD&A for information on changes in revenue by segment.

OPERATING EXPENSES
                                                                 Years ended December 31,
                                                  2013                     2012                     2011
                                                         % of                     % of                     % of
                                              $        Revenue         $        Revenue         $        Revenue
Salaries and related expenses            $ 4,545.5       63.8 %   $ 4,391.9      63.1  %   $ 4,402.1       62.8 %
Office and general expenses                1,917.9       26.9 %     1,887.2      27.1  %     1,924.3       27.4 %
Restructuring and other
reorganization-related charges
(reversals), net                              60.6        0.9 %        (1.2 )     0.0  %         1.0        0.0 %
Total operating expenses                 $ 6,524.0                $ 6,277.9                $ 6,327.4
Operating income                         $   598.3        8.4 %   $   678.3       9.8  %   $   687.2        9.8 %

Salaries and Related Expenses
Salaries and related expenses consist of payroll costs, employee performance incentives, including annual bonus and long-term incentive awards, costs for temporary workers, severance and other benefits associated with client service professional staff and administrative staff. Salaries and related expenses do not vary significantly with short-term changes in revenue levels. However, salaries may fluctuate due to the timing of the hiring of personnel to support revenue growth and changes in the performance levels and types of employee incentive awards. Additionally, we may take severance actions in areas where we have or anticipate decreases in operating performance or to enhance our teams or leadership. Changes in our incentive awards mix can impact future-period expense, as annual 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, the change in our stock price, actual results, and changes to our projected results, which could impact the achievement of certain performance targets.

                                                    Components of Change                                         Change
                                                            Net
                         Prior Year      Foreign       Acquisitions/
                           Amount        Currency      (Divestitures)      Organic       Total Amount     Organic      Total

2012 - 2013 $ 4,391.9 $ (40.3 ) $ 28.2 $ 165.7 $ 4,545.5 3.8 % 3.5 % 2011 - 2012 4,402.1 (85.6 ) 34.5 40.9 4,391.9 0.9 % (0.2 )%

Our staff cost ratio, defined as salaries and related expenses as a percentage of total consolidated revenue, increased in 2013 to 63.8% from 63.1% in 2012. Salaries and related expenses in 2013 increased by $153.6 compared to 2012, due to an organic increase of $165.7 and the effect of net acquisitions of $28.2, partially offset by a favorable foreign currency rate impact of $40.3. The organic increase was primarily attributable to an increase in base salaries, benefits and temporary help of $150.1, primarily due to increases in our workforce in international markets, predominantly in the Asia Pacific and Latin America regions, as well as in our domestic market at businesses where we had revenue growth or new business wins, and to a lesser extent, modest wage increases.
Our staff cost ratio increased in 2012 to 63.1% from 62.8% in 2011. Salaries and related expenses in 2012 decreased by $10.2 compared to 2011, due to a favorable foreign currency rate impact of $85.6, partially offset by an organic increase of $40.9 and the effect of net acquisitions of $34.5. The organic increase was primarily due to an increase in base salaries, benefits and temporary help of $96.4, primarily attributable to increases in our workforce in international regions, most notably in the Asia Pacific and Latin America regions, and businesses where we had revenue growth, as well as modest wage increases. Our workforce decreased in regions and businesses where we had revenue declines as we were disciplined in managing our workforce.


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

(Amounts in Millions, Except Per Share Amounts)

Partially offsetting this organic increase was a reduction in incentive award expense of $51.1, resulting from lower financial performance compared to targets.

The following table details our staff cost ratio.

                                           Years ended December 31,
                                          2013         2012       2011
Salaries and related expenses             63.8 %       63.1 %    62.8 %
Base salaries, benefits and tax           52.9 %       52.2 %    50.9 %
Incentive expense                          3.0 %        3.0 %     3.7 %
Severance expense                          1.1 %        1.3 %     1.5 %
Temporary help                             3.6 %        3.6 %     3.6 %
All other salaries and related expenses    3.2 %        3.0 %     3.1 %

Office and General Expenses
Office and general expenses primarily include rent expense, professional fees,
certain expenses incurred by our staff in servicing our clients and depreciation
and amortization costs. Office and general expenses also include costs directly
attributable to client engagements, including production costs, out-of-pocket
costs such as travel for client service staff, and other direct costs that are
rebilled to our clients. 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.
                                                    Components of Change                                         Change
                                                            Net
                         Prior Year      Foreign       Acquisitions/
                           Amount        Currency      (Divestitures)      Organic       Total Amount      Organic      Total
2012 - 2013             $   1,887.2     $  (27.3 )   $           10.2     $   47.8     $      1,917.9        2.5  %      1.6  %

2011 - 2012 1,924.3 (40.7 ) 8.4 (4.8 ) 1,887.2 (0.2 )% (1.9 )%

Our office and general expense ratio, defined as office and general expenses as a percentage of total consolidated revenue, decreased in 2013 to 26.9% from 27.1% in 2012. Office and general expenses in 2013 increased by $30.7 compared to 2012, due to an organic increase of $47.8 and the effect of net acquisitions of $10.2, partially offset by a favorable foreign currency rate impact of $27.3. The organic increase was primarily attributable to an increase in occupancy costs and higher production expenses in our domestic market related to pass-through costs, which are also reflected in revenue, for certain projects where we acted as principal that increased in size or were new during 2013, partially offset by certain adjustments to contingent acquisition obligations. Our office and general expense ratio decreased in 2012 to 27.1% from 27.4% in 2011. Office and general expenses in 2012 decreased by $37.1 compared to 2011, due to a favorable foreign currency rate impact of $40.7 and an organic decrease of $4.8, partially offset by the effect of net acquisitions of $8.4. The organic decrease was primarily attributable to lower occupancy costs, as we continue to find efficiencies in our real estate portfolio, and professional fees. The organic decrease was partially offset by higher production expenses in our international markets, most notably in the Asia Pacific region and in the United Kingdom, related to pass-through costs, which are also reflected in revenue, for certain projects where we acted as principal that increased in size or were new during 2012.
The following table details our office and general expense ratio. All other office and general expenses primarily include production expenses, and, to a lesser extent, depreciation and amortization, bad debt expense, adjustments for contingent acquisition obligations, foreign currency gains (losses), long-lived asset impairments and other expenses.

                                                             Years ended December 31,
                                                           2013         2012        2011
Office and general expenses                                26.9 %       27.1 %      27.4 %
Professional fees                                           1.7 %        1.7 %       1.8 %
Occupancy expense (excluding depreciation and
amortization)                                               7.1 %        7.0 %       7.2 %
Travel & entertainment, office supplies and
telecommunications                                          3.6 %        3.6 %       3.6 %
All other office and general expenses                      14.5 %       14.8 %      14.8 %


Table of Contents

   Management's Discussion and Analysis of Financial Condition and Results of
                            Operations - (continued)
                (Amounts in Millions, Except Per Share Amounts)



Restructuring and Other Reorganization-Related Charges (Reversals), net
The components of the restructuring and other reorganization-related charges,
net for 2013 and prior restructuring plans are listed below.
                                                                        Year ended
                                                                     December 31, 2013
Severance and termination costs                                   $                55.9
Lease termination costs                                                             4.2
Other exit costs                                                                    0.5
Total restructuring and other reorganization-related charges, net $                60.6

In the fourth quarter of 2013, we implemented a cost savings initiative (the "2013 Plan") to better align our cost structure with our revenue, primarily in Continental Europe. In connection with this initiative, we recorded pre-tax . . .

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