UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2014
Commission file number: 1-6686
THE INTERPUBLIC GROUP OF COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 13-1024020 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
(212) 704-1200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.10 par value | New York Stock Exchange | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No ý
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
As of June 30, 2014, the aggregate market value of the shares of registrant’s common stock held by non-affiliates was approximately $8.2 billion. The number of shares of the registrant’s common stock outstanding as of February 13, 2015 was 412,339,107.
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2015 are incorporated by reference in Part III: “Election of Directors,” “Director Selection Process,” “Code of Conduct,” “Principal Committees of The Board of Directors,” “Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Non-Management Director Compensation,” “Compensation Discussion and Analysis,” “Compensation and Leadership Talent Committee Report,” “Outstanding Shares and Ownership of Common Stock,” “Review and Approval of Transactions with Related Persons,” “Director Independence” and “Appointment of Independent Registered Public Accounting Firm.”
TABLE OF CONTENTS
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STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This annual report on Form 10-K 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 this report. 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:
• | potential effects of a challenging economy, for example, on the demand for our advertising and marketing services, on our clients’ financial condition and on our business or financial condition; |
• | 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; and |
• | developments from changes in the regulatory and legal environment for advertising and marketing and communications services companies around the world. |
Investors should carefully consider these factors and the additional risk factors outlined in more detail under Item 1A, Risk Factors, in this report.
PART I
Item 1. | Business |
The Interpublic Group of Companies, Inc. (“Interpublic,” “IPG,” “we,” “us,” or “our”) was incorporated in Delaware in September 1930 under the name of McCann-Erickson Incorporated as the successor to the advertising agency businesses founded in 1902 by A.W. Erickson and in 1911 by Harrison K. McCann. The company has operated under the Interpublic name since January 1961.
About Us
We are one of the world’s premier global advertising and marketing services companies. Through our 47,400 employees in all major world markets, our companies specialize in consumer advertising, digital marketing, communications planning and media buying, public relations and specialized communications disciplines. Our agencies create customized marketing programs for clients that range in scale from large global marketers to regional and local clients. Comprehensive global services are critical to effectively serve our multinational and local clients in markets throughout the world, as they seek to build brands, increase sales of their products and services and gain market share.
The work we produce for our clients is specific to their unique needs. Our solutions vary from project-based activity involving one agency to long-term, fully integrated campaigns created by multiple IPG agencies working together. With offices in over 100 countries, we can operate in a single region or deliver global integrated programs.
The role of our holding company is to provide resources and support to ensure that our agencies can best meet clients’ needs. Based in New York City, our holding company sets company-wide financial objectives and corporate strategy, establishes financial management and operational controls, guides personnel policy, directs collaborative inter-agency programs, conducts investor relations, manages corporate social responsibility programs, provides enterprise risk management and oversees mergers and acquisitions. In addition, we provide certain centralized functional services that offer our companies operational efficiencies, including accounting and finance, executive compensation management and recruitment assistance, employee benefits, marketing information retrieval and analysis, internal audit, legal services, real estate expertise and travel services.
Our Brands
Interpublic is home to some of the world’s best-known and most innovative communications specialists. We have three global networks, McCann Worldgroup ("McCann"), Foote, Cone & Belding ("FCB") and Lowe and Partners ("Lowe"), which provide integrated, large-scale advertising and marketing solutions for clients. Our global media services companies include UM and Initiative, which operate under the IPG Mediabrands umbrella. We also have a range of best-in-class global specialized communications assets as well as premier domestic integrated and digital agencies that are industry leaders.
• | McCann Worldgroup is a leading global marketing solutions network, comprised of agencies that emphasize creativity, innovation and performance. McCann Erickson is one of the world's largest advertising agency networks; MRM//McCann conducts digital marketing and relationship management; Momentum oversees event marketing and promotion; McCann Health directs professional and consumer healthcare communications; and Craft Worldwide is the network's global adaptation and production arm. UM (media), Weber Shandwick (public relations), and FutureBrand (brand consulting) align with McCann Worldgroup to deliver fully-integrated solutions. |
• | FCB is a global, fully integrated marketing communications company focused on changing consumer behavior for the benefit of their clients, colleagues and communities. With more than 8,000 people from 120 offices in 80 countries, the network brings a strong understanding of local markets and cultures while continuing a heritage of creativity and success dating from 1873. The company has its roots in both creative, brand-building consumer advertising and behavioral, data-driven direct marketing. |
• | Lowe and Partners is a global network of distinctive and diverse agencies, rich in local culture, yet able to deliver at scale. The network delivers brand strategy, communications planning and through-the-line advertising; Lowe Profero is the network’s digital marketing arm; and Lowe Open is its strategic activation and shopper marketing unit. Lowe and Partners is consistently ranked among the most awarded agency networks in the world, based on both creativity and effectiveness. |
• | IPG Mediabrands makes investment decisions for tens of billions of dollars of client marketing budgets. Our global media agencies UM and Initiative deliver business results by advising clients on how to navigate an increasingly complex and digital marketing landscape through integrated, intelligence-driven marketing strategies. Specialist brands within IPG Mediabrands focus on areas such as media innovation, media forecasting, the targeting and aggregation of audiences in the digital space, hyper-local marketing, media barter and a range of other capabilities. IPG Mediabrands is committed to driving automated buying, pay-for-performance and digital innovation. |
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• | We also have exceptional global marketing specialists across a range of disciplines. Our industry-leading public relations agencies such as Weber Shandwick and Golin have expertise in every significant area of communication management. Jack Morton is a global brand experience agency, and FutureBrand is a leading brand consultancy. Octagon is a global sports, entertainment and lifestyle marketing agency. Our digital specialist agencies, led by R/GA, Huge and MRM//McCann, are among the industry's most award-winning digital agencies. Our premier healthcare communications specialists reside within our global creative networks. |
• | Our domestic integrated independent agencies include some of advertising's most recognizable and storied agency brands, including Carmichael Lynch, Deutsch, Hill Holliday, The Martin Agency and Mullen. The marketing programs created by these agencies incorporate all media channels, customer relationship management (CRM), public relations and other marketing activities and have helped build some of the most powerful brands in the U.S., across all sectors and industries. |
We list approximately 90 of our companies on our website under the "Our Agencies" section, with descriptions, case studies, social media channels and office locations for each. To learn more about our broad range of capabilities, visit our website at www.interpublic.com. Information on our website is not part of this report.
Market Strategy
We operate in a media landscape that continues to evolve at a rapid pace. Media channels continue to fragment and clients face an increasingly complex consumer environment. To stay ahead of these challenges and to achieve our objectives, we have made and continue to make investments in creative and strategic talent in areas including fast-growth digital marketing channels, high-growth geographic regions and strategic world markets. We consistently review opportunities within our company to enhance our operations through mergers and strategic alliances, as well as the development of internal programs that encourage intra-company collaboration. As appropriate, we also develop relationships with technology and emerging media companies that are building leading-edge marketing tools that complement our agencies' skill sets and capabilities.
In recent years, we have taken several major strategic steps to position our agencies as leaders in the global advertising and communications market. These include:
• | Investment in senior talent: We successfully completed management succession at our two largest global advertising networks, a number of our US integrated agencies, key media operations and leading marketing services firms. We continue to acquire and develop top strategic, creative and digital talent. |
• | Growing digital capabilities: Our investments in talent and technology – organically growing digital capabilities such as search, social, UX, content creation, eCRM and mobile across the portfolio – promise to drive further growth in this dynamic sector of our business. We continue to internationalize our powerful digital specialist agencies. |
• | Innovative media offering: We launched IPG Mediabrands to reinvent how we plan, buy and measure media investment for clients. Since then, our company has consistently been a leader in delivering fully competitive, efficient and effective traditional media buying to major clients, as well as automated digital ad buying, data and analytics. |
• | Investment in emerging markets: We strengthened our position in emerging markets by driving organic growth as well as completing strategic acquisitions in Asia and Latin America, a region in which we have led the industry in organic growth. |
• | Integrated marketing solutions: A differentiating aspect of our business is our utilization of “open architecture” solutions that integrate the best talent from throughout the organization to fulfill the needs of our leading clients. |
Together, these steps have built a culture of strategic creativity and high performance across IPG, resulting in industry-leading new business performance, as well as increased honors and awards for our company. Since its launch in 2007, IPG Mediabrands has delivered strong growth and for 2014 was named Mediapost's "Media Holding Company of the Year" for the second consecutive year. Our best-in-class public relations offering led The Holmes Report to name Weber Shandwick its “Global Agency of the Year” in 2014 and Interpublic Group its “Holding Company of the Year” in 2013, the first and only time the award was given for this category. In 2013, McCann produced the most-awarded digital work of the year and was named the most-awarded agency in the world by The Gunn Report. In early 2015, Advertising Age named three IPG agencies to its prestigious A-List, Deutsch, Weber Shandwick, and R/GA, which was also awarded "Agency of the Year." Advertising Age also honored the CEO of McCann Worldgroup with its "Executive of the Year" recognition. This level of industry recognition in all marketing disciplines is unprecedented in our company’s history.
Digital Growth
Demand for our digital marketing services continues to evolve rapidly. In order to meet this need and provide high-value resources to clients, we have focused on embedding digital talent and technology throughout the organization. This reflects our belief that digital marketing should be integrated within all of our companies. This structure mirrors the way in which consumers
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incorporate digital media into their other media habits and, ultimately, their day-to-day lives. We continue to invest in recruiting and developing digital expertise at all our agencies and in all marketing disciplines.
To meet the changing needs of the marketplace, we have consistently acquired and invested in specialty digital assets, such as Genuine (digital events), Halesway (digital healthcare), Lowe Profero (global digital network), Optaros (digital commerce), Placed (mobile attribution), Promoqube (social media), Traffic4U (search engine marketing) and Vowel (digital content development). We continue to invest in existing assets such as Cadreon (audience management platform), The IPG Media Lab, Huge, MRM//McCann, as well as R/GA. These companies have unique capabilities and service their own client rosters while also serving as key digital partners to many of the agencies within IPG.
Fast-Growth Regions
We continue to invest and expand our presence in high-growth geographic regions. In recent years, we have made significant investments in Brazil and India, further strengthening our leadership position in these high-growth, developing markets. Transactions in Brazil include the acquisitions of E/OU, a digital agency, as well as Preview Propaganda. Recent acquisitions in India include Interactive Avenues, a digital media agency, End to End, a database marketing agency, and Corporate Voice, a communications agency. Our operations in India are best-in-class, and we will continue to invest in partnerships and talent in this key market. We also hold a majority stake in the Middle East Communication Networks (“MCN”), among the region's premier marketing services companies. MCN is headquartered in Dubai, with 65 offices across 14 countries. Our partner in Russia is a leader in that country. In China, where we operate with all of our global networks and across the full spectrum of marketing services, we continue to invest organically in the talent of our agency brands. Additional areas of investment include other key strategic markets in Asia Pacific, Latin America, Eastern Europe and Africa.
Acquisition Strategy
A disciplined acquisition strategy, focused on high-growth capabilities and regions of the world, is one component of growing our services in today's rapidly-changing marketing services and media landscape. When an outstanding resource or a strong tactical fit becomes available, we have been opportunistic in making tuck-in, niche acquisitions that enhance our service offerings. We will continue to focus on digital and marketing services agencies throughout the world and on key international growth markets.
In recent years, IPG has acquired agencies across the marketing spectrum, including firms specializing in digital, mobile marketing, social media, healthcare communications and public relations, as well as agencies with full-service capabilities. These acquired agencies have been integrated into one of our global networks or specialist agencies.
Financial Objectives
Our financial goals include competitive organic revenue growth and operating margin expansion, which we expect will further strengthen our balance sheet and total liquidity and increase value to our shareholders. Accordingly, we remain focused on meeting the evolving needs of our clients while concurrently managing our cost structure. We continually seek greater efficiency in the delivery of our services, focusing on more effective resource utilization, including the productivity of our employees, real estate, information technology and shared services, such as finance, human resources and legal. The improvements we have made and continue to make in our financial reporting and business information systems in recent years allow us more timely and actionable insights from our global operations. Our disciplined approach to our balance sheet and liquidity provides us with a solid financial foundation and financial flexibility to manage and grow our business.
We believe that our strategy and execution position us to meet our financial goals and to deliver long-term shareholder value.
Financial Reporting Segments
We have two reportable segments, which are Integrated Agency Networks (“IAN”) and Constituency Management Group (“CMG”). IAN is comprised of McCann, FCB, Lowe, IPG Mediabrands, our digital specialist agencies and our domestic integrated agencies. CMG is comprised of a number of our specialist marketing services offerings. We also report results for the “Corporate and other” group. See Note 13 to the Consolidated Financial Statements for further information.
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Principal Markets
Our agencies are located in over 100 countries, including every significant world market. Our geographic revenue breakdown is listed below.
% of Total Revenue | ||||||||
2014 | 2013 | 2012 | ||||||
Domestic | 55.5 | % | 55.8 | % | 54.7 | % | ||
United Kingdom | 9.1 | % | 8.0 | % | 8.2 | % | ||
Continental Europe | 10.7 | % | 11.2 | % | 11.8 | % | ||
Asia Pacific | 12.2 | % | 12.2 | % | 12.0 | % | ||
Latin America | 6.2 | % | 6.5 | % | 6.5 | % | ||
Other | 6.3 | % | 6.3 | % | 6.8 | % | ||
For further information regarding revenues and long-lived assets on a geographical basis for each of the last three years, see Note 13 to the Consolidated Financial Statements.
Sources of Revenue
Our revenues are primarily derived from the planning and execution of multi-channel advertising, marketing and communications programs around the world. Our revenues are directly dependent upon the advertising, marketing and corporate communications requirements of our existing clients and our ability to win new clients. Most of our client contracts are individually negotiated and, accordingly, the terms of client engagements and the bases on which we earn commissions and fees vary significantly. As is customary in the industry, our contracts generally provide for termination by either party on relatively short notice, usually 90 days.
Revenues for the creation, planning and placement of advertising are determined primarily on a negotiated fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. Many clients include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitative or quantitative metrics within specified time periods. Commissions are earned based on services provided and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate; the difference is the commission that we earn, which we either retain in full or share with the client depending on the nature of the applicable services agreement.
We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, sports and entertainment marketing and corporate and brand identity services.
In most of our businesses, our agencies enter into commitments to pay production and media costs on behalf of clients. To the extent possible, we pay production and media charges after we have received funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the provider that we will only be liable to pay the production and media costs after the client has paid us for the charges.
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 that is typically completed during the fourth quarter. Fee revenue recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in the fourth quarter because the majority of our contracts end at December 31.
Consolidated Revenues for the Three Months Ended | |||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||
(Amounts in Millions) | % of Total | % of Total | % of Total | ||||||||||||||
March 31 | $ | 1,637.5 | 21.7% | $ | 1,543.0 | 21.7% | $ | 1,506.8 | 21.7% | ||||||||
June 30 | 1,851.4 | 24.6% | 1,756.2 | 24.7% | 1,715.7 | 24.7% | |||||||||||
September 30 | 1,841.1 | 24.4% | 1,700.4 | 23.9% | 1,670.4 | 24.0% | |||||||||||
December 31 | 2,207.1 | 29.3% | 2,122.7 | 29.7% | 2,063.3 | 29.6% | |||||||||||
$ | 7,537.1 | $ | 7,122.3 | $ | 6,956.2 | ||||||||||||
See Note 1 to the Consolidated Financial Statements for further information on our revenue recognition accounting policies.
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Clients
Our large and diverse client base includes many of the most recognizable companies and brands throughout the world. Our holding company structure allows us to maintain a diversified client base across and within a full range of industry sectors. In the aggregate, our top ten clients based on revenue accounted for approximately 20% and 21% of revenue in 2014 and 2013, respectively. Our largest client accounted for approximately 5% of revenue for 2014 and 2013. Based on revenue for the year ended December 31, 2014, our five largest clients (in alphabetical order) were General Motors, Johnson & Johnson, L'Oréal, Samsung and Unilever. We represent several different brands or divisions of each of these clients in a number of geographic markets, as well as provide services across multiple advertising and marketing disciplines, in each case through more than one of our agency brands. Representation of a client rarely means that we handle advertising for all brands or product lines of the client in all geographical locations. Any client may transfer its business from one of our agencies to another one of our agencies or to a competing agency, and a client may reduce its marketing budget at any time.
We operate in a highly competitive advertising and marketing communications industry. Our operating companies compete against other large multinational advertising and marketing communications companies as well as numerous independent and niche agencies to win new clients and maintain existing client relationships.
Personnel
As of December 31, 2014, we employed approximately 47,400 people, of whom approximately 19,200 were employed in the United States. Because of the service character of the advertising and marketing communications business, the quality of personnel is of crucial importance to our continuing success. We conduct extensive employee training and development throughout our agencies and benchmark our compensation programs against those of our industry for their competitiveness and effectiveness in recruitment and retention. There is keen competition for qualified employees.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available, free of charge, on our website at www.interpublic.com under the "Investor Relations" section, as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission at www.sec.gov. The public may also read and copy materials we file with the SEC at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Room 1580, Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Our Corporate Governance Guidelines, Interpublic Group Code of Conduct and the charters for each of the Audit Committee, Compensation and Leadership Talent Committee and the Corporate Governance Committee are available, free of charge, on our website at www.interpublic.com in the "Corporate Governance" subsection of the "About" section, or by writing to The Interpublic Group of Companies, Inc., 1114 Avenue of the Americas, New York, New York 10036, Attention: Secretary. Information on our website is not part of this report.
Item 1A. | Risk Factors |
We are subject to a variety of possible risks that could adversely impact our revenues, results of operations or financial condition. Some of these risks relate to general economic and financial conditions, while others are more specific to us and the industry in which we operate. The following factors set out potential risks we have identified that could adversely affect us. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, could also have a negative impact on our business operations or financial condition. See also Statement Regarding Forward-Looking Disclosure.
• | We operate in a highly competitive industry. |
The advertising and marketing communications business is highly competitive. Our agencies and media services compete with other agencies and other providers of creative, marketing or media services, to maintain existing client relationships and to win new business. Our competitors include not only other large multinational advertising and marketing communications companies, but also smaller entities that operate in local or regional markets as well as new forms of market participants.
The client’s perception of the quality of our agencies’ creative work and its relationships with key personnel at the Company or our agencies are important factors that affect our competitive position. An agency’s ability to serve clients, particularly large international clients, on a broad geographic basis and across a range of services may also be an important competitive consideration. On the other hand, because an agency’s principal asset is its people, freedom of entry into the business is almost unlimited and a small agency is, on occasion, able to take all or some portion of a client’s account from a much larger competitor.
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Many companies put their advertising and marketing communications business up for competitive review from time to time, and clients may choose to terminate their contracts on a relatively short time frame. We have won and lost client accounts in the past as a result of such periodic competitions. In the aggregate, our top ten clients based on revenue accounted for approximately 20% of revenue in 2014. A substantial decline in a large client’s advertising and marketing spending, or the loss of a significant part of its business, could have a material adverse effect upon our business and results of operations.
Our ability to attract new clients and to retain existing clients may also, in some cases, be limited by clients’ policies or perceptions about conflicts of interest. These policies can, in some cases, prevent one agency, or even different agencies under our ownership, from performing similar services for competing products or companies.
• | Our results of operations are highly susceptible to unfavorable economic conditions. |
Economic conditions continue to vary across geographic regions, and areas of uncertainty about the prospects for continued improvements in the global economy or economic conditions in certain regions, and a degree of caution on the part of some marketers, continue to have an effect on the demand for advertising and marketing communication services. Our industry can be affected more severely than other sectors by an economic downturn and can recover more slowly than the economy in general. In the past, some clients have responded to weak economic and financial conditions by reducing their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may recur in the future. Furthermore, unexpected revenue shortfalls can result in misalignments of costs and revenues, resulting in a negative impact to our operating margins. If our business is significantly adversely affected by unfavorable economic conditions, the negative impact on our revenue could pose a challenge to our operating income and cash generation from operations.
• | We may lose or fail to attract and retain key employees and management personnel. |
Our employees, including creative, digital, research, media and account specialists, and their skills and relationships with clients, are among our most valuable assets. An important aspect of our competitiveness is our ability to identify and develop the appropriate talent and to attract and retain key employees and management personnel. Our ability to do so is influenced by a variety of factors, including the compensation we award and other factors which may be beyond our control. In addition, the advertising and marketing services industry is characterized by a high degree of employee mobility. If we were to fail to attract key personnel or lose them to competitors or clients, our business and results of operations could be adversely affected.
• | We may not be able to meet our performance targets and milestones. |
From time to time, we communicate to the public certain targets and milestones for our financial and operating performance that are intended to provide metrics against which to evaluate our performance. They should not be understood as predictions or guidance about our expected performance. Our ability to meet any target or milestone is subject to inherent risks and uncertainties, and we caution investors against placing undue reliance on them. See Statement Regarding Forward-Looking Disclosure.
• | Our financial condition could be adversely affected if our available liquidity is insufficient. |
We maintain a $1 billion committed credit facility to increase our financial flexibility (the “Credit Agreement”). If credit under the Credit Agreement were unavailable or insufficient, our liquidity could be adversely affected. The Credit Agreement contains financial covenants, and events like a material economic downturn could adversely affect our ability to comply with them. For example, compliance with the financial covenants would be more difficult to achieve if we were to experience substantially lower revenues, a substantial increase in client defaults or sizable asset impairment charges. If we were unable to comply with any of the financial covenants contained in the Credit Agreement, we could be required to seek an amendment or waiver from our lenders, and our costs under the Credit Agreement could increase. If we were unable to obtain a necessary amendment or waiver, the Credit Agreement could be terminated, and any outstanding amounts could be subject to acceleration. Furthermore, the Credit Agreement includes commitments from a syndicate of financial institutions, and if any of them were unable to perform and no other bank assumed that institution’s commitment, the availability of credit under that agreement would be correspondingly reduced.
In most of our businesses, our agencies enter into commitments to pay production and media costs on behalf of clients. The amounts involved substantially exceed our revenues and primarily affect the level of accounts receivable, expenditures billable to clients, accounts payable and accrued liabilities. To the extent possible, we pay production and media charges only after we have received funds from our clients, although, if clients are unable to pay for commitments that we have entered into on their behalf, there could be an adverse effect on our working capital, which would negatively impact our operating cash flow.
Furthermore, if our business or financial needs lead us to seek new or additional sources of liquidity, there can be no guarantee that we would be able to access any new sources of liquidity on commercially reasonable terms or at all. For further discussion of our liquidity profile and outlook, see “Liquidity and Capital Resources” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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• | International business risks could adversely affect our operations. |
We are a global business. Operations outside the United States represent a significant portion of our revenues, approximately 44% in 2014. These operations are exposed to risks that include local legislation, currency variation, exchange control restrictions and difficult political or economic conditions. We also must comply with applicable U.S., local and other international anti-corruption laws, which can be complex and stringent, in all jurisdictions where we operate. In developing countries or regions, we may face further risks, such as slower receipt of payments, nationalization, social and economic instability, currency repatriation restrictions and undeveloped or inconsistently enforced commercial laws. These risks may limit our ability to grow our business and effectively manage our operations in those countries.
In addition, because a significant portion of our business is denominated in currencies other than the U.S. Dollar, such as the Argentine Peso, Australian Dollar, Brazilian Real, British Pound Sterling, Canadian Dollar, Chilean Peso, Euro, Indian Rupee, Japanese Yen and South African Rand, fluctuations in exchange rates between the U.S. Dollar and such currencies may materially affect our financial results. Concerns persist in Europe in particular over the debt burdens of certain countries that use the Euro as their currency and the overall stability of the Euro. Possible consequences, such as the re-introduction of individual currencies in countries currently employing the Euro, the dissolution of the Euro as a common currency or market perceptions and uncertainties about the possibility and impact of such events, could adversely affect the value of our Euro-denominated assets and results of operations.
• | If our clients experience financial distress, their weakened financial position could negatively affect our own financial position and results. |
We have a large and diverse client base, and at any given time, one or more of our clients may experience financial difficulty, file for bankruptcy protection or go out of business. Unfavorable economic and financial conditions could result in an increase in client financial difficulties that affect us. The direct impact on us could include reduced revenues and write-offs of accounts receivable and expenditures billable to clients, and if these effects were severe, the indirect impact could include impairments of intangible assets, credit facility covenant violations and reduced liquidity. For a description of our client base, see “Clients” in Item 1, Business.
• | We are subject to industry regulations and other legal or reputational risks that could restrict our activities or negatively impact our performance or financial condition. |
Our industry is subject to government regulation and other governmental action, both domestic and foreign. Advertisers and consumer groups may challenge advertising through legislation, regulation, judicial actions or otherwise, for example on the grounds that the advertising is false and deceptive or injurious to public welfare. Our business is also subject to specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements applicable to advertising for certain products. Existing and proposed laws and regulations, in particular in the European Union and the United States, concerning user privacy, use of personal information and on-line tracking technologies could affect the efficacy and profitability of internet-based and digital marketing. Legislators, agencies and other governmental units may also continue to initiate proposals to ban the advertising of specific products, such as alcohol or tobacco, and to impose taxes on or deny deductions for advertising, which, if successful, may hinder our ability to accomplish our clients’ goals and have an adverse effect on advertising expenditures and, consequently, on our revenues. Furthermore, we could suffer reputational risk as a result of governmental or legal action or from undertaking work that may be challenged by consumer groups or considered controversial.
• | We face risks associated with our acquisitions and other investments. |
We regularly undertake acquisitions and other investments that we believe will enhance our service offerings to our clients. These transactions can involve significant challenges and risks, including that the transaction does not advance our business strategy or fails to produce a satisfactory return on our investment. While our evaluation of any potential acquisition includes business, legal and financial due diligence with the goal of identifying and evaluating the material risks involved, we may be unsuccessful in ascertaining or evaluating all such risks. Though we typically structure our acquisitions to provide for future contingent purchase payments that are based on the future performance of the acquired entity, our forecasts of the investment’s future performance also factor into the initial consideration. When actual financial results differ, our returns on the investment could be adversely affected.
We may also experience difficulty integrating new employees, businesses, assets or systems into our organization, including with respect to our internal policies and required controls. We may face reputational and legal risks in situations where we have a significant minority investment but limited control over the investment's operations. Furthermore, it may take longer than anticipated to realize the expected benefits from these transactions, or those benefits may ultimately be smaller than anticipated or may not be realized at all. Talent is among our most valuable assets, and we also may not realize the intended benefits of a transaction if we fail to retain targeted personnel. Acquisition and integration activity may also divert management’s attention and other corporate resources from other business needs. If we fail to realize the intended advantages of any given investment or
8
acquisition, or if we do not identify or correctly measure the associated risks and liabilities, our results of operations and financial position could be adversely affected.
• | We rely extensively on information technology systems and could face cybersecurity risks. |
We rely extensively and increasingly on information technologies and infrastructure to manage our business, including digital storage of marketing strategies and client information, developing new business opportunities and processing business transactions. We operate in many respects on a decentralized basis, with a large number of agencies and legal entities, and the resulting size, diversity and disparity of our technology systems and complications in implementing standardized technologies and procedures could increase the potential vulnerability of our systems to breakdown, malicious intrusion or random attack. Likewise, data privacy breaches, as well as improper use of social media, by employees and others may pose a risk that sensitive data could be exposed to third parties or to the general public. Any such breakdowns or breaches in our systems or data-protection policies could adversely affect our reputation or business.
• | Our earnings would be adversely affected if we were required to recognize asset impairment charges or increase our deferred tax valuation allowances. |
We evaluate all of our long-lived assets (including goodwill, other intangible assets and fixed assets), investments and deferred tax assets for possible impairment or realizability annually or whenever there is an indication that they are impaired or not realizable. If certain criteria are met, we are required to record an impairment charge or valuation allowance.
As of December 31, 2014, we have substantial amounts of long-lived assets, deferred tax assets and investments on our Consolidated Balance Sheet, including approximately $3.7 billion of goodwill. Future events, including our financial performance, market valuation of us or market multiples of comparable companies, loss of a significant client’s business or strategic decisions, could cause us to conclude that impairment indicators exist and that the asset values associated with long-lived assets, deferred tax assets and investments may have become impaired. Any significant impairment loss would have an adverse impact on our reported earnings in the period in which the charge is recognized. For further discussion of goodwill and other intangible assets, and our sensitivity analysis of our valuation of these assets, see “Critical Accounting Estimates” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
• | Downgrades of our credit ratings could adversely affect us. |
Because ratings are an important factor influencing our ability to access capital and the terms of any new indebtedness, including covenants and interest rates, we could be adversely affected if our credit ratings are downgraded or if they are significantly weaker than those of our competitors. Our clients and vendors may also consider our credit profile when negotiating contract terms, and if they were to change the terms on which they deal with us, it could have an adverse effect on our liquidity.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Substantially all of our office space is leased from third parties. Certain leases are subject to rent reviews or contain escalation clauses, and certain of our leases require the payment of various operating expenses, which may also be subject to escalation. Physical properties include leasehold improvements, furniture, fixtures and equipment located in our offices. We believe that facilities leased or owned by us are adequate for the purposes for which they are currently used and are well maintained. See Note 14 to the Consolidated Financial Statements for further information on our lease commitments.
Item 3. | Legal Proceedings |
We are involved in various legal proceedings, and subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the normal course of our business. The types of allegations that arise in connection with such legal proceedings vary in nature, but can include claims related to contract, employment, tax and intellectual property matters. While any outcome related to litigation or such governmental proceedings in which we are involved cannot be predicted with certainty, we believe that the outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
9
Item 4. | Mine Safety Disclosures |
Not applicable.
Executive Officers of IPG
Name | Age | Office | ||
Michael I. Roth1 | 69 | Chairman of the Board and Chief Executive Officer | ||
Andrew Bonzani | 51 | Senior Vice President, General Counsel and Secretary | ||
Christopher F. Carroll | 48 | Senior Vice President, Controller and Chief Accounting Officer | ||
Julie M. Connors | 43 | Senior Vice President, Audit and Chief Risk Officer | ||
Philippe Krakowsky | 52 | Executive Vice President, Chief Strategy and Talent Officer | ||
Frank Mergenthaler | 54 | Executive Vice President and Chief Financial Officer | ||
1 | Also a Director |
There is no family relationship among any of the executive officers.
Mr. Roth became our Chairman of the Board and Chief Executive Officer in January 2005. Prior to that time, Mr. Roth served as our Chairman of the Board from July 2004 to January 2005. Mr. Roth served as Chairman and Chief Executive Officer of The MONY Group Inc. from February 1994 to June 2004. Mr. Roth has been a member of the Board of Directors of IPG since February 2002. He is also non-executive chairman of the board of Pitney Bowes Inc. and a director of Ryman Hospitality Properties.
Mr. Bonzani was hired as Senior Vice President, General Counsel and Secretary in April 2012. Prior to joining IPG, Mr. Bonzani worked at IBM for 18 years, holding a number of positions in the legal department, most recently as Vice President, Assistant General Counsel and Secretary from July 2008 to March 2012.
Mr. Carroll was named Senior Vice President, Controller and Chief Accounting Officer in April 2006. Mr. Carroll served as Senior Vice President and Controller of McCann Worldgroup from November 2005 to March 2006. Prior to joining us, Mr. Carroll served as Chief Accounting Officer and Controller at Eyetech Pharmaceuticals from June 2004 to October 2005. Prior to that time, Mr. Carroll served as Chief Accounting Officer and Controller at MIM Corporation from January 2003 to June 2004 and served as a Financial Vice President at Lucent Technologies, Inc. from July 2001 to January 2003.
Ms. Connors was hired in February 2010 as Senior Vice President, Audit and Chief Risk Officer. Prior to joining us, she served as a partner at Deloitte & Touche, LLP from September 2003 to January 2010.
Mr. Krakowsky was hired in January 2002 as Senior Vice President, Director of Corporate Communications. He was elected Executive Vice President, Strategy and Corporate Relations in December 2005 and in February 2011 was elected Executive Vice President, Chief Strategy and Talent Officer. Prior to joining us, he served as Senior Vice President, Communications Director for Young & Rubicam from August 1996 to December 2000. During 2001, Mr. Krakowsky was complying with the terms of a non-competition agreement entered into with Young & Rubicam.
Mr. Mergenthaler was hired in August 2005 as Executive Vice President and Chief Financial Officer. Prior to joining us, he served as Executive Vice President and Chief Financial Officer for Columbia House Company from July 2002 to July 2005. Mr. Mergenthaler served as Senior Vice President and Deputy Chief Financial Officer for Vivendi Universal from December 2001 to March 2002. Prior to that time Mr. Mergenthaler was an executive at Seagram Company Ltd. from November 1996 to December 2001. Mr. Mergenthaler is a director of Express Scripts, Inc.
10
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
Our common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “IPG.” The following table provides the high and low closing sales prices per share for the periods shown below as reported on the NYSE. As of February 13, 2015, there were approximately 12,900 registered holders of our outstanding common stock.
NYSE Sale Price | |||||||
Period | High | Low | |||||
2014: | |||||||
Fourth Quarter | $ | 20.83 | $ | 16.51 | |||
Third Quarter | $ | 20.54 | $ | 18.14 | |||
Second Quarter | $ | 19.69 | $ | 16.28 | |||
First Quarter | $ | 17.75 | $ | 16.05 | |||
2013: | |||||||
Fourth Quarter | $ | 17.70 | $ | 15.40 | |||
Third Quarter | $ | 17.51 | $ | 14.69 | |||
Second Quarter | $ | 14.94 | $ | 12.91 | |||
First Quarter | $ | 13.38 | $ | 11.61 | |||
During 2014, the following dividends were declared and paid:
Declaration Date | Per Share Dividend | Aggregate Dividend ($ in millions) | Record Date | Payment Date | ||||||||
November 12, 2014 | $ | 0.095 | $ | 39.1 | December 1, 2014 | December 15, 2014 | ||||||
August 12, 2014 | $ | 0.095 | $ | 39.8 | September 2, 2014 | September 16, 2014 | ||||||
May 22, 2014 | $ | 0.095 | $ | 39.9 | June 3, 2014 | June 17, 2014 | ||||||
February 14, 2014 | $ | 0.095 | $ | 40.2 | March 3, 2014 | March 17, 2014 | ||||||
During 2013, the following dividends were declared and paid:
Declaration Date | Per Share Dividend | Aggregate Dividend ($ in millions) | Record Date | Payment Date | ||||||||
November 15, 2013 | $ | 0.075 | $ | 31.9 | December 2, 2013 | December 16, 2013 | ||||||
August 14, 2013 | $ | 0.075 | $ | 31.4 | September 3, 2013 | September 17, 2013 | ||||||
May 23, 2013 | $ | 0.075 | $ | 31.7 | June 7, 2013 | June 21, 2013 | ||||||
February 22, 2013 | $ | 0.075 | $ | 31.0 | March 11, 2013 | March 25, 2013 | ||||||
On February 13, 2015, we announced that our Board of Directors (the “Board”) had declared a common stock cash dividend of $0.12 per share, payable on March 16, 2015 to holders of record as of the close of business on March 2, 2015. Although it is the Board's current intention to declare and pay future dividends, there can be no assurance that such additional dividends will in fact be declared and paid. Any and the amount of any such declaration is at the discretion of the Board and will depend upon factors such as our earnings, financial position and cash requirements.
Equity Compensation Plans
See Item 12 for information about our equity compensation plans.
11
Transfer Agent and Registrar for Common Stock
The transfer agent and registrar for our common stock is:
Computershare Shareowner Services LLC
480 Washington Boulevard
29th Floor
Jersey City, New Jersey 07310
Telephone: (877) 363-6398
Sales of Unregistered Securities
Not applicable.
Repurchase of Equity Securities
The following table provides information regarding our purchases of our equity securities during the period from October 1, 2014 to December 31, 2014.
Total Number of Shares (or Units) Purchased 1 | Average Price Paid per Share (or Unit) 2 | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs 3 | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs 3 | ||||||||||
October 1 - 31 | 5,854,930 | $ | 18.93 | 5,849,517 | $ | 159,819,370 | |||||||
November 1 - 30 | 4,266 | $ | 20.29 | — | $ | 159,819,370 | |||||||
December 1 - 31 | 826,744 | $ | 19.67 | 826,639 | $ | 143,559,758 | |||||||
Total | 6,685,940 | $ | 19.02 | 6,676,156 | |||||||||
1 | Included shares of our common stock, par value $0.10 per share, withheld under the terms of grants under employee stock-based compensation plans to offset tax withholding obligations that occurred upon vesting and release of restricted shares (the "Withheld Shares"). We repurchased 5,413 Withheld Shares in October 2014, 4,266 Withheld Shares in November 2014 and 105 Withheld Shares in December 2014. |
2 | The average price per share for each of the months in the fiscal quarter and for the three-month period was calculated by dividing the sum of the applicable period of the aggregate value of the tax withholding obligations and the aggregate amount we paid for shares acquired under our stock repurchase program, described in Note 5 to the Consolidated Financial Statements, by the sum of the number of Withheld Shares and the number of shares acquired in our stock repurchase program. |
3 | In February 2014, the Board authorized a new share repurchase program to repurchase from time to time up to $300.0 million, excluding fees, of our common stock (the "2014 share repurchase program"). On February 13, 2015, we announced that our Board had approved a new share repurchase program to repurchase from time to time up to $300.0 million, excluding fees, of our common stock. The new authorization is in addition to any amounts remaining available for repurchase under the 2014 share repurchase program. There is no expiration date associated with the share repurchase programs. |
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Item 6. | Selected Financial Data |
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES
Selected Financial Data
(Amounts in Millions, Except Per Share Amounts and Ratios)
(Unaudited)
Years ended December 31, | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Statement of Operations Data | |||||||||||||||||||
Revenue | $ | 7,537.1 | $ | 7,122.3 | $ | 6,956.2 | $ | 7,014.6 | $ | 6,507.3 | |||||||||
Salaries and related expenses | 4,820.4 | 4,545.5 | 4,391.9 | 4,402.1 | 4,117.0 | ||||||||||||||
Office and general expenses | 1,928.1 | 1,917.9 | 1,887.2 | 1,924.3 | 1,837.7 | ||||||||||||||
Restructuring and other reorganization-related charges (reversals), net | 0.2 | 60.6 | (1.2 | ) | 1.0 | 3.9 | |||||||||||||
Operating income | 788.4 | 598.3 | 678.3 | 687.2 | 548.7 | ||||||||||||||
Provision for income taxes 1 | 216.5 | 181.2 | 213.3 | 190.2 | 171.3 | ||||||||||||||
Net income 2 | 505.4 | 288.9 | 464.6 | 551.5 | 281.2 | ||||||||||||||
Net income available to IPG common stockholders 2 | 477.1 | 259.2 | 435.1 | 520.7 | 271.2 | ||||||||||||||
Earnings per share available to IPG common stockholders: | |||||||||||||||||||
Basic 3 | $ | 1.14 | $ | 0.62 | $ | 1.01 | $ | 1.12 | $ | 0.57 | |||||||||
Diluted 3 | $ | 1.12 | $ | 0.61 | $ | 0.94 | $ | 0.99 | $ | 0.47 | |||||||||
Weighted-average number of common shares outstanding: | |||||||||||||||||||
Basic | 419.2 | 421.1 | 432.5 | 465.5 | 473.6 | ||||||||||||||
Diluted | 425.4 | 429.6 | 481.4 | 540.6 | 542.1 | ||||||||||||||
Dividends declared per common share | $ | 0.38 | $ | 0.30 | $ | 0.24 | $ | 0.24 | $ | 0.00 | |||||||||
Other Financial Data | |||||||||||||||||||
Net cash provided by operating activities | $ | 669.5 | $ | 592.9 | $ | 357.2 | $ | 273.5 | $ | 817.3 | |||||||||
Ratios of earnings to fixed charges | 3.8 | 2.6 | 3.2 | 3.4 | 2.4 | ||||||||||||||
As of December 31, | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Balance Sheet Data | |||||||||||||||||||
Cash and cash equivalents and marketable securities | $ | 1,667.2 | $ | 1,642.1 | $ | 2,590.8 | $ | 2,315.6 | $ | 2,689.4 | |||||||||
Total assets | 12,747.2 | 12,905.0 | 13,493.9 | 12,908.7 | 13,070.8 | ||||||||||||||
Total debt | 1,732.8 | 1,662.5 | 2,449.6 | 1,769.2 | 1,737.0 | ||||||||||||||
Total liabilities | 10,338.6 | 10,405.1 | 10,810.1 | 10,168.0 | 10,212.7 | ||||||||||||||
Preferred stock – Series B | 0.0 | 0.0 | 221.5 | 221.5 | 221.5 | ||||||||||||||
Total stockholders’ equity | 2,151.2 | 2,250.8 | 2,456.6 | 2,497.3 | 2,566.9 | ||||||||||||||
1 | The year ended December 31, 2014 included the net reversal of valuation allowances on deferred tax assets in Continental Europe of $67.6. |
2 | The years ended December 31, 2014 and 2013 included losses of $6.6 and $28.3, net of tax, related to our early extinguishment of debt, respectively. The year ended December 31, 2013 included a loss of $50.9, net of tax, from the effects of restructuring and related costs. The years ended December 31, 2012 and 2011 included a gain of $57.2 and $126.2, net of tax, respectively, related to the sales of our holdings in Facebook. |
3 | Both basic and diluted earnings per share for the year ended December 31, 2014 included a positive impact of $0.16 per share from the net reversal of valuation allowances on deferred tax assets in Continental Europe. Basic and diluted earnings per share for the year ended December 31, 2014 included a negative impact of $0.01 and $0.02 per share, respectively, from a loss on early extinguishment of debt, net of tax. 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 earnings per share for the years ended December 31, 2012 and 2011 included a positive impact of $0.14 and $0.27 per share, respectively, and diluted earnings per share included a positive impact of $0.12 and $0.23 per share, respectively, from the gains recorded for the sale of our holdings in Facebook, net of tax. |
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in Millions, Except Per Share Amounts)
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 2014 compared to 2013 and 2013 compared to 2012.
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 15 to the Consolidated Financial Statements, provides a discussion of certain accounting standards that have been adopted during 2014 or that have not yet been required to be implemented and may be applicable to our future operations.
EXECUTIVE SUMMARY
During 2014, our organic revenue increase was driven by growth throughout nearly all our regions, which was a result of net new business wins during the year and growth with existing clients. The growth in our domestic market was across all major disciplines and nearly all agencies. Our international organic increase was across all our marketing disciplines, with notable contributions from the Asia Pacific, United Kingdom and Latin America regions. The challenging economic climate in the Continental Europe region continued to impact our international growth. We continued to have strong growth in demand for our digital, media and marketing services across most of our regional markets. We carefully managed our increase in operating expenses, which reflected investments made in our agencies to support our new business portfolio and growing disciplines as well as to service our existing clients.
Overall demand for our services by clients remains solid, though with challenging economic conditions in some parts of the world, marketers continue to show a measure of caution. 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 2014 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. Basic earnings per share available to IPG common stockholders for the years ended December 31, 2014, 2013 and 2012 were $1.14, $0.62 and $1.01 per share, respectively. Diluted earnings per share for the years ended December 31, 2014, 2013 and 2012 were $1.12, $0.61 and $0.94 per share, respectively. Both basic and diluted earnings per share for the year ended December 31, 2014 included a positive impact of $0.16 per share from the net reversal of valuation allowances on deferred tax assets in Continental Europe. Basic and diluted earnings per share for the years ended December 31, 2014 and 2013 included a negative impact of $0.01 and $0.02 per share, respectively, from the loss on early extinguishment of debt, net of tax. 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, 2012 included a positive impact of $0.14 and $0.12 per share, respectively, from the gain recorded on the sale of our remaining holdings in Facebook, net of tax.
14
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, 2014, as compared with the same periods in 2013 and 2012.
Years ended December 31, | ||||||||||||||
2014 | 2013 | |||||||||||||
% Increase | Total | Organic | Total | Organic | ||||||||||
Revenue | 5.8 | % | 5.5 | % | 2.4 | % | 2.8 | % | ||||||
Salaries and related expenses | 6.0 | % | 5.6 | % | 3.5 | % | 3.8 | % | ||||||
Office and general expenses | 0.5 | % | 0.5 | % | 1.6 | % | 2.5 | % | ||||||
Years ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | ||||||||||||
Operating margin | 10.5 | % | 8.4 | % | 9.8 | % | ||||||||
Expenses as % of revenue: | ||||||||||||||
Salaries and related expenses | 64.0 | % | 63.8 | % | 63.1 | % | ||||||||
Office and general expenses | 25.6 | % | 26.9 | % | 27.1 | % | ||||||||
Restructuring and other reorganization-related charges (reversals), net | 0.0 | % | 0.9 | % | 0.0 | % | ||||||||
Net income available to IPG common stockholders | $ | 477.1 | $ | 259.2 | $ | 435.1 | ||||||||
Earnings per share available to IPG common stockholders: | ||||||||||||||
Basic | $ | 1.14 | $ | 0.62 | $ | 1.01 | ||||||||
Diluted | $ | 1.12 | $ | 0.61 | $ | 0.94 | ||||||||
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 2014 included the Argentine Peso, Australian Dollar, Brazilian Real and British Pound Sterling. During 2014, the U.S. Dollar was stronger relative to several foreign currencies in regions where we conduct our business as compared to the prior-year period, which had a negative impact on our 2014 consolidated results of operations. For 2014 and 2013, foreign currency fluctuations resulted in net decreases of approximately 1% in revenues and operating expenses, which had a negative 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 2014 and 2013, the net effect of acquisitions and divestitures increased revenue and operating expenses compared to the prior-year period. See Note 4 to the Consolidated Financial Statements for additional information on our acquisitions.
15
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.
Year ended December 31, 2013 | Components of Change | Year ended December 31, 2014 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
Consolidated | $ | 7,122.3 | $ | (75.5 | ) | $ | 95.3 | $ | 395.0 | $ | 7,537.1 | 5.5 | % | 5.8 | % | ||||||||||
Domestic | 3,972.6 | 0.0 | 24.8 | 186.6 | 4,184.0 | 4.7 | % | 5.3 | % | ||||||||||||||||
International | 3,149.7 | (75.5 | ) | 70.5 | 208.4 | 3,353.1 | 6.6 | % | 6.5 | % | |||||||||||||||
United Kingdom | 568.3 | 30.9 | 29.0 | 60.1 | 688.3 | 10.6 | % | 21.1 | % | ||||||||||||||||
Continental Europe | 800.6 | (5.2 | ) | 19.7 | (10.4 | ) | 804.7 | (1.3 | )% | 0.5 | % | ||||||||||||||
Asia Pacific | 868.9 | (35.6 | ) | 20.1 | 69.1 | 922.5 | 8.0 | % | 6.2 | % | |||||||||||||||
Latin America | 464.5 | (46.0 | ) | 1.7 | 50.2 | 470.4 | 10.8 | % | 1.3 | % | |||||||||||||||
Other | 447.4 | (19.6 | ) | 0.0 | 39.4 | 467.2 | 8.8 | % | 4.4 | % | |||||||||||||||
During 2014, our revenue increased by $414.8, or 5.8%, compared to 2013, comprised of an organic revenue increase of $395.0, or 5.5%, and the effect of net acquisitions of $95.3, partially offset by an adverse foreign currency rate impact of $75.5. Our organic revenue increase was throughout nearly all geographic regions, attributable to net client wins and net higher spending from existing clients, most notably in the health care and auto and transportation sectors, partially offset by modest declines in the technology and telecom and consumer goods sectors. The organic increase in our domestic market was driven by growth across most disciplines, most notably at our advertising and media businesses and at our digital specialist agencies, partially offset by a decline at our events marketing business. In our international market, the organic revenue increase was primarily in the Asia Pacific region, led by Australia, China and Singapore, in the United Kingdom, in the Latin America region, led by Brazil and Argentina, and in the Other regions, primarily in the Middle East, partially offset by an organic decrease in the Continental Europe region due to a continued challenging economic climate. The international organic revenue increase was driven by growth across all disciplines.
Year ended December 31, 2012 | Components of Change | Year ended December 31, 2013 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | 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, comprised of 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
16
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
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.
Refer to the segment discussion later in this MD&A for information on changes in revenue by segment.
OPERATING EXPENSES
Years ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | $ | % of Revenue | |||||||||||||||
Salaries and related expenses | $ | 4,820.4 | 64.0 | % | $ | 4,545.5 | 63.8 | % | $ | 4,391.9 | 63.1 | % | ||||||||
Office and general expenses | 1,928.1 | 25.6 | % | 1,917.9 | 26.9 | % | 1,887.2 | 27.1 | % | |||||||||||
Restructuring and other reorganization-related charges (reversals), net | 0.2 | 0.0 | % | 60.6 | 0.9 | % | (1.2 | ) | 0.0 | % | ||||||||||
Total operating expenses | $ | 6,748.7 | $ | 6,524.0 | $ | 6,277.9 | ||||||||||||||
Operating income | $ | 788.4 | 10.5 | % | $ | 598.3 | 8.4 | % | $ | 678.3 | 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 in which 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.
Prior Year Amount | Components of Change | Total Amount | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
2013 - 2014 | $ | 4,545.5 | $ | (38.3 | ) | $ | 59.3 | $ | 253.9 | $ | 4,820.4 | 5.6 | % | 6.0 | % | ||||||||||
2012 - 2013 | 4,391.9 | (40.3 | ) | 28.2 | 165.7 | 4,545.5 | 3.8 | % | 3.5 | % | |||||||||||||||
Our staff cost ratio, defined as salaries and related expenses as a percentage of total consolidated revenue, increased in 2014 to 64.0% from 63.8% in 2013. Salaries and related expenses in 2014 increased by $274.9 compared to 2013, comprised of an organic increase of $253.9 and the effect of net acquisitions of $59.3, partially offset by a favorable foreign currency rate impact of $38.3. The organic increase was primarily attributable to an increase in base salaries, benefits and temporary help of $202.1, primarily due to increases in our workforce at businesses where we had revenue growth or new business wins, primarily in the domestic market and in the United Kingdom and Asia Pacific region. Also contributing to the organic increase was higher incentive awards expense and certain agency-related bonus accruals resulting from improved financial performance, partially offset by lower severance expense.
Our staff cost ratio increased in 2013 to 63.8% from 63.1% in 2012. Salaries and related expenses in 2013 increased by $153.6 compared to 2012, comprised of 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 due 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.
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
The following table details our staff cost ratio.
Years ended December 31, | ||||||||
2014 | 2013 | 2012 | ||||||
Salaries and related expenses | 64.0 | % | 63.8 | % | 63.1 | % | ||
Base salaries, benefits and tax | 52.6 | % | 52.9 | % | 52.2 | % | ||
Incentive expense | 3.5 | % | 3.0 | % | 3.0 | % | ||
Severance expense | 0.9 | % | 1.1 | % | 1.3 | % | ||
Temporary help | 3.8 | % | 3.6 | % | 3.6 | % | ||
All other salaries and related expenses | 3.2 | % | 3.2 | % | 3.0 | % | ||
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.
Prior Year Amount | Components of Change | Total Amount | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
2013 - 2014 | $ | 1,917.9 | $ | (19.7 | ) | $ | 20.1 | $ | 9.8 | $ | 1,928.1 | 0.5 | % | 0.5 | % | ||||||||||
2012 - 2013 | 1,887.2 | (27.3 | ) | 10.2 | 47.8 | 1,917.9 | 2.5 | % | 1.6 | % | |||||||||||||||
Our office and general expense ratio, defined as office and general expenses as a percentage of total consolidated revenue, decreased in 2014 to 25.6% from 26.9% in 2013. Office and general expenses in 2014 increased by $10.2 compared to 2013, due to the effect of net acquisitions of $20.1 and an organic increase of $9.8, partially offset by a favorable foreign currency rate impact of $19.7. The organic increase was primarily attributable to increases in adjustments to contingent acquisition obligations as compared to the prior year and increased spending to support new business activity, partially offset by lower production expenses related to pass-through costs, which are also reflected in revenue, primarily in the domestic market.
Our office and general expense ratio 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, partially offset by certain adjustments to contingent acquisition obligations.
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, | ||||||||
2014 | 2013 | 2012 | ||||||
Office and general expenses | 25.6 | % | 26.9 | % | 27.1 | % | ||
Professional fees | 1.5 | % | 1.7 | % | 1.7 | % | ||
Occupancy expense (excluding depreciation and amortization) | 6.7 | % | 7.1 | % | 7.0 | % | ||
Travel & entertainment, office supplies and telecommunications | 3.4 | % | 3.6 | % | 3.6 | % | ||
All other office and general expenses | 14.0 | % | 14.5 | % | 14.8 | % | ||
18
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 restructuring and other reorganization-related charges (reversals), net are listed below.
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Severance and termination costs | $ | 0.1 | $ | 55.9 | $ | 0.0 | |||||
Lease termination costs | 0.1 | 4.2 | (1.1 | ) | |||||||
Other exit costs | 0.0 | 0.5 | (0.1 | ) | |||||||
Total restructuring and other reorganization-related charges (reversals), net | $ | 0.2 | $ | 60.6 | $ | (1.2 | ) | ||||
2013 Restructuring Plan
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 identified and initiated restructuring actions resulting in pre-tax charges in 2013 of $61.2 related to the 2013 Plan, comprised of severance and termination costs of $55.9, lease termination costs of $4.8 and other exit costs of $0.5. In 2014, we recorded an additional $0.1 of net restructuring charges related to the 2013 Plan. All restructuring actions were substantially completed by the end of the first quarter of 2014, with remaining payments expected to be made through 2021.
A summary of the 2013 Plan restructuring liability activity is listed below.
December 31, 2013 | Net Restructuring Charges | Cash Payments | Foreign Currency Translation Adjustment | December 31, 2014 | ||||||||||||||||
Severance and termination costs | $ | 46.5 | $ | 0.1 | $ | (41.8 | ) | $ | (0.4 | ) | $ | 4.4 | ||||||||
Lease termination costs | 3.9 | 0.0 | (1.2 | ) | (0.1 | ) | 2.6 | |||||||||||||
Other exit costs | 0.5 | 0.0 | (0.5 | ) | 0.0 | 0.0 | ||||||||||||||
Total | $ | 50.9 | $ | 0.1 | $ | (43.5 | ) | $ | (0.5 | ) | $ | 7.0 | ||||||||
Net restructuring charges related to the 2013 Plan for the year ended December 31, 2014, were comprised of net charges of approximately $0.3 at IAN ("Integrated Agency Network") and net reversals of approximately $0.2 at CMG ("Constituency Management Group").
Prior Restructuring Plans
The 2007, 2003 and 2001 restructuring plans (the "Prior Restructuring Plans") with current year activity included net charges (reversals) that are adjustments primarily resulting from changes in management’s estimates relating to sublease rental income assumptions. For the years ended December 31, 2014, 2013 and 2012, the Prior Restructuring Plans incurred net restructuring and other reorganization-related charges of $0.1 and net reversals of $0.6 and $1.2, respectively. As of December 31, 2014, the remaining liability for the Prior Restructuring Plans was $1.1.
EXPENSES AND OTHER INCOME
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Cash interest on debt obligations | $ | (78.9 | ) | $ | (110.7 | ) | $ | (130.6 | ) | ||
Non-cash interest | (6.0 | ) | (12.0 | ) | (2.9 | ) | |||||
Interest expense | (84.9 | ) | (122.7 | ) | (133.5 | ) | |||||
Interest income | 27.4 | 24.7 | 29.5 | ||||||||
Net interest expense | (57.5 | ) | (98.0 | ) | (104.0 | ) | |||||
Other (expense) income, net | (10.2 | ) | (32.3 | ) | 100.5 | ||||||
Total (expenses) and other income | $ | (67.7 | ) | $ | (130.3 | ) | $ | (3.5 | ) | ||
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Net Interest Expense
For 2014, net interest expense decreased by $40.5 as compared to 2013, primarily due to lower borrowing costs in the current year. Cash interest expense decreased primarily due to the redemption of our 6.25% Senior Unsecured Notes due 2014 (the "6.25% Notes") in the second quarter of 2014 and redemption of our 10.00% Senior Unsecured Notes due 2017 (the "10.00% Notes") in the third quarter of 2013, partially offset by the issuance of our 4.20% Senior Notes due 2024 (the "4.20% Notes") in the second quarter of 2014. Non-cash interest expense decreased as compared to 2013 primarily due to the write-off of unamortized debt issuance costs during 2013 as part of the amendment of our credit agreement as well as the redemption of the 6.25% Notes and 10.00% Notes.
For 2013, net interest expense decreased by $6.0 as compared to 2012, primarily due to a decrease in debt obligations in 2013. Cash interest expense decreased primarily due to the retirement of our 4.75% Convertible Senior Notes due 2023 (the "4.75% Notes") in the first quarter of 2013 and redemption of our 10.00% Notes in the third quarter of 2013, which were refinanced with debt issued at lower rates in 2012. Non-cash interest expense increased primarily as a result of the retirement of our 4.75% Notes and our 4.25% Convertible Senior Notes due 2023 (the "4.25% Notes") in the first quarter of 2013 and first quarter of 2012, respectively. At retirement, the premiums associated with these Notes, which had reduced interest expense in prior periods, were fully amortized.
Other (Expense) Income, net
Results of operations include certain items that are not directly associated with our revenue-producing operations.
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Loss on early extinguishment of debt | $ | (10.4 | ) | $ | (45.2 | ) | $ | 0.0 | |||
Gains on sales of businesses and investments, net | 0.8 | 1.5 | 88.2 | ||||||||
Vendor discounts and credit adjustments | 3.3 | 8.6 | 15.3 | ||||||||
Other (expense) income, net | (3.9 | ) | 2.8 | (3.0 | ) | ||||||
Total other (expense) income, net | $ | (10.2 | ) | $ | (32.3 | ) | $ | 100.5 | |||
Loss on Early Extinguishment of Debt – During 2014, we recorded a charge of $10.4 related to the redemption of our 6.25% Notes. During 2013, we recorded a charge of $45.2 related to the redemption of our 10.00% Notes. See Note 2 to the Consolidated Financial Statements for further information.
Gains on Sales of Businesses and Investments, net – During 2014, we recognized gains from the sale of a business located in the Continental Europe region within our IAN segment and the sale of investments in our Rabbi Trusts, which were partially offset by a loss from the sale of a business in the domestic market within our IAN segment. During 2013, we recognized gains from the sale of marketable securities in the Asia Pacific region within our IAN segment and the sale of investments in our Rabbi Trusts, which were partially offset by a loss from the sale of a business in the United Kingdom within our IAN segment. During 2012, we recognized gains from the sale of remaining holdings in Facebook and a business in an international market within our CMG segment, which were partially offset by losses from the sale of businesses within our IAN segment, as well as an adjustment relating to a reserve for a change in estimate in connection with a business disposed of in a prior year.
Vendor Discounts and Credit Adjustments – In connection with the liabilities related to vendor discounts and credits established as part of the restatement we presented in our 2004 Annual Report on Form 10-K, these adjustments reflect the reversal of certain of these liabilities primarily where the statute of limitations has lapsed, or as a result of differences resulting from settlements with clients or vendors.
Other (Expense) Income, net – During 2014, we recorded an other-than-temporary impairment on an investment in an unconsolidated affiliate in the Asia Pacific region within our IAN segment. During 2013, other income (expense), net primarily included a non-cash gain on re-measurement to fair value of an equity interest in an affiliate, located in the Asia Pacific region within our CMG segment, upon acquiring a controlling interest.
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
INCOME TAXES
Years ended December 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Income before income taxes | $ | 720.7 | $ | 468.0 | $ | 674.8 | |||||
Provision for income taxes | $ | 216.5 | $ | 181.2 | $ | 213.3 | |||||
Effective income tax rate | 30.0 | % | 38.7 | % | 31.6 | % | |||||
Our tax rates are affected by many factors, including our worldwide earnings from various countries, changes in legislation and tax characteristics of our income. In 2014, our effective income tax rate of 30.0% was positively impacted from changes to our valuations allowances of $66.0. The primary drivers of the net change were associated with a valuation allowance reversal of $124.8 in one jurisdiction partially offset by the establishment of a valuation allowance of $57.2 in another jurisdiction, both in Continental Europe. In addition, our effective income tax rate was negatively impacted by losses in certain foreign jurisdictions where we receive no tax benefit due to 100% valuation allowances.
In 2013, our effective income tax rate of 38.7% was positively impacted by the recognition of losses attributable to worthless securities in a consolidated subsidiary and the recognition of previously unrecognized tax benefits as a result of the settlement of the 2002-2006 New York State audit cycle. Our effective income tax rate was negatively impacted primarily by losses in certain foreign jurisdictions where we receive no tax benefit due to 100% valuation allowances.
In 2012, our effective income tax rate of 31.6% was positively impacted by the reversals of valuation allowances associated with the Asia Pacific and Continental Europe regions of $26.2 and $21.8, respectively, as well as by a benefit derived from the deduction of foreign tax credits that previously had a full valuation allowance. Our effective income tax rate was negatively impacted by an adjustment of $19.5 associated with the establishment of a previously unrecorded reserve for a tax contingency for the years 2007 through 2010, losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances and state and local income taxes, net of federal income tax benefit.
See Note 7 to the Consolidated Financial Statements for further information.
EARNINGS PER SHARE
Basic earnings per share available to IPG common stockholders for the years ended December 31, 2014, 2013 and 2012 were $1.14, $0.62 and $1.01 per share, respectively. Diluted earnings per share for the years ended December 31, 2014, 2013 and 2012 were $1.12, $0.61 and $0.94 per share, respectively.
Both basic and diluted earnings per share for the year ended December 31, 2014 included a positive impact of $0.16 per share from the net reversal on valuation allowances on deferred tax assets in Continental Europe. Basic and diluted earnings per share for the year ended December 31, 2014 included a negative impact of $0.01 and $0.02 per share, respectively, from a loss on early extinguishment of debt, net of tax. 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 a positive impact of $0.14 and $0.12 per share, respectively, from the gain recorded for the sale of our remaining holdings in Facebook, net of tax.
21
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Segment Results of Operations
As discussed in Note 13 to the Consolidated Financial Statements, we have two reportable segments as of December 31, 2014: IAN and CMG. We also report results for the "Corporate and other" group.
IAN
REVENUE
Year ended December 31, 2013 | Components of Change | Year ended December 31, 2014 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
Consolidated | $ | 5,795.6 | $ | (76.7 | ) | $ | 61.0 | $ | 317.4 | $ | 6,097.3 | 5.5 | % | 5.2 | % | ||||||||||
Domestic | 3,094.0 | 0.0 | 10.2 | 171.6 | 3,275.8 | 5.5 | % | 5.9 | % | ||||||||||||||||
International | 2,701.6 | (76.7 | ) | 50.8 | 145.8 | 2,821.5 | 5.4 | % | 4.4 | % | |||||||||||||||
During 2014, IAN revenue increased by $301.7 compared to 2013, comprised of an organic revenue increase of $317.4 and the effect of net acquisitions of $61.0, partially offset by an adverse foreign currency rate impact of $76.7. The organic revenue increase was primarily attributable to net client wins and net higher spending from existing clients, most notably in the health care and auto and transportation sectors, partially offset by a modest decline in the technology and telecom and consumer goods sectors. The organic revenue increase in our domestic market was driven by growth across all our disciplines. The international organic revenue increase was driven by our advertising and media businesses, primarily in the Asia Pacific region, led by Australia and China, in the Latin America region, primarily in Brazil, and in Other regions, primarily in the Middle East.
Year ended December 31, 2012 | Components of Change | Year ended December 31, 2013 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
Consolidated | $ | 5,728.5 | $ | (73.2 | ) | $ | 40.4 | $ | 99.9 | $ | 5,795.6 | 1.7 | % | 1.2 | % | ||||||||||
Domestic | 3,020.8 | 0.0 | 26.4 | 46.8 | 3,094.0 | 1.5 | % | 2.4 | % | ||||||||||||||||
International | 2,707.7 | (73.2 | ) | 14.0 | 53.1 | 2,701.6 | 2.0 | % | (0.2 | )% | |||||||||||||||
During 2013, IAN revenue increased by $67.1 compared to 2012, comprised of an organic revenue increase of $99.9 and the effect of net acquisitions of $40.4, partially offset by an adverse foreign currency rate impact of $73.2. The organic revenue increase in our domestic market was 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 and retail sectors. In our international markets, the organic revenue increase was primarily due to net higher spending from existing clients across most client sectors, primarily in the Asia Pacific region, led by Australia, and in the Latin America region, primarily in Brazil. The international organic revenue increase was partially offset by a decline in the Continental Europe region across most countries in the market.
SEGMENT OPERATING INCOME
Years ended December 31, | Change | ||||||||||||||||
2014 | 2013 | 2012 | 2014 vs 2013 | 2013 vs 2012 | |||||||||||||
Segment operating income1 | $ | 777.1 | $ | 662.1 | $ | 700.2 | 17.4 | % | (5.4 | )% | |||||||
Operating margin1 | 12.7 | % | 11.4 | % | 12.2 | % | |||||||||||
1 | Segment operating income and operating margin exclude restructuring and other reorganization-related charges of approximately $0.7 and $55.4 for the years ended December 31, 2014 and 2013, respectively, and reversals of approximately $0.9 for the year ended December 31, 2012. See "Restructuring and Other Reorganization-Related Charges (Reversals), net" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 to the Consolidated Financial Statements for further information. |
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Operating income increased during 2014 when compared to 2013 due to an increase in revenue of $301.7, partially offset by increases in salaries and related expenses of $185.2 and office and general expenses of $1.5. The increase in salaries and related expenses was primarily due to an increase in base salaries, benefits and temporary help, primarily attributable to an increase in our workforce in certain businesses where we had revenue growth or new business wins. Also contributing to the increase were higher incentive awards expense and certain agency-related bonus accruals resulting from improved financial performance, offset by lower severance expense. The increase in office and general expenses was primarily attributable to increases in adjustments to contingent acquisition obligations as compared to the prior year and increased spending to support new business activity, partially offset by lower production expenses related to pass-through costs, which are also reflected in revenue, primarily in the domestic market.
Operating income decreased during 2013 when compared to 2012 due to an increase in salaries and related expenses of $109.5, partially offset by an increase in revenue of $67.1 and a decrease in office and general expenses of $4.3. The increase in salaries and related expenses was primarily due to an increase in base salaries, benefits and temporary help, primarily attributable to an increase in our workforce in certain businesses where we had new business wins, as well as increases due to acquisitions during 2013. The decrease in office and general expenses was primarily attributable to lower production expenses related to pass-through costs for certain projects where we acted as principal that decreased in size or did not occur during 2013, certain adjustments to contingent acquisition obligations and lower discretionary spending, partially offset by an increase in occupancy costs.
CMG
REVENUE
Year ended December 31, 2013 | Components of Change | Year ended December 31, 2014 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
Consolidated | $ | 1,326.7 | $ | 1.2 | $ | 34.3 | $ | 77.6 | $ | 1,439.8 | 5.8 | % | 8.5 | % | |||||||||||
Domestic | 878.6 | 0.0 | 14.6 | 15.0 | 908.2 | 1.7 | % | 3.4 | % | ||||||||||||||||
International | 448.1 | 1.2 | 19.7 | 62.6 | 531.6 | 14.0 | % | 18.6 | % | ||||||||||||||||
During 2014, CMG revenue increased by $113.1 compared to 2013, primarily comprised of an organic revenue increase of $77.6 and the effect of net acquisitions of $34.3. The organic revenue increase in our international markets was driven by growth across all disciplines, most notably at our public relations businesses, primarily in the Asia Pacific region and in the United Kingdom. Also contributing to the international organic revenue increase was our events marketing business in the United Kingdom and our sports marketing business in the Latin America region. The domestic organic revenue increase was primarily attributable to growth at our public relations and sports marketing businesses, partially offset by a decline at our events marketing business.
Year ended December 31, 2012 | Components of Change | Year ended December 31, 2013 | Change | ||||||||||||||||||||||
Foreign Currency | Net Acquisitions/ (Divestitures) | Organic | Organic | Total | |||||||||||||||||||||
Consolidated | $ | 1,227.7 | $ | (7.2 | ) | $ | 9.9 | $ | 96.3 | $ | 1,326.7 | 7.8 | % | 8.1 | % | ||||||||||
Domestic | 782.8 | 0.0 | 0.0 | 95.8 | 878.6 | 12.2 | % | 12.2 | % | ||||||||||||||||
International | 444.9 | (7.2 | ) | 9.9 | 0.5 | 448.1 | 0.1 | % | 0.7 | % | |||||||||||||||
During 2013, CMG revenue increased by $99.0 compared to 2012, comprised of an organic revenue increase of $96.3. We had growth in the domestic market, with our organic revenue increase primarily due to net client wins and net higher spending from existing clients across all disciplines, most notably in our events marketing and public relations businesses. The international organic revenue increase occurred primarily in our public relations business and was predominantly in the Latin America region, most notably in Brazil, and in the Asia Pacific region, primarily in China. Mostly offsetting the international organic revenue increase was an organic revenue decrease in the United Kingdom, due to a decrease in our events marketing business which in the prior-year included work performed for the London Olympics, and in the Continental Europe region due to a continued challenging economic climate.
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
SEGMENT OPERATING INCOME
Years ended December 31, | Change | ||||||||||||||||
2014 | 2013 | 2012 | 2014 vs 2013 | 2013 vs 2012 | |||||||||||||
Segment operating income1 | $ | 161.0 | $ | 137.6 | $ | 114.2 | 17.0 | % | 20.5 | % | |||||||
Operating margin1 | 11.2 | % | 10.4 | % | 9.3 | % | |||||||||||
1 | Segment operating income and operating margin exclude restructuring and other reorganization-related reversals of approximately $0.5 and $0.3 for the years ended December 31, 2014 and 2012, respectively, and charges of approximately $4.5, for the year ended December 31, 2013. See "Restructuring and Other Reorganization-Related Charges (Reversals), net" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 to the Consolidated Financial Statements for further information. |
Operating income increased during 2014 when compared to 2013 due to an increase in revenue of $113.1, partially offset by increases in salaries and related expenses of $70.8 and office and general expenses of $18.9. The increase in salaries and related expenses was due to an increase in base salaries, benefits and temporary help, primarily attributable to increases in our workforce, most notably at our public relations business, to support business growth, as well as increases due to acquisitions in 2014. Office and general expenses increased primarily due to higher occupancy costs and increased spending to support new business activity and increases due to acquisitions during 2014.
Operating income increased during 2013 when compared to 2012 due to an increase in revenue of $99.0, partially offset by increases in salaries and related expenses of $38.8 and office and general expenses of $36.8. The increase in salaries and related expenses was primarily attributable to increases in our workforce across most disciplines, primarily at our public relations business to support business growth. Office and general expenses increased primarily due to higher production expenses related to pass-through costs for certain projects where we acted as principal that increased in size or were new during 2013.
CORPORATE AND OTHER
Certain corporate and other charges are reported as a separate line item within total segment operating income and include corporate office expenses, as well as shared service center and certain other centrally managed expenses that are not fully allocated to operating divisions. Salaries and related expenses include salaries, long-term incentives, annual bonuses and other miscellaneous benefits for corporate office employees. Office and general expenses primarily include professional fees related to internal control compliance, financial statement audits and legal, information technology and other consulting services that are engaged and managed through the corporate office. In addition, office and general expenses also include rental expense and depreciation of leasehold improvements for properties occupied by corporate office employees. A portion of centrally managed expenses are allocated to operating divisions based on a formula that uses the planned revenues of each of the operating units. Amounts allocated also include specific charges for information technology-related projects, which are allocated based on utilization.
Corporate and other expenses increased during 2014 by $8.7 to $149.5 compared to 2013, primarily due to higher incentive awards expense resulting from improved financial performance and higher employee insurance costs due to increased claims and regulatory changes, partially offset by lower occupancy costs.
Corporate and other expenses increased slightly during 2013 by $3.5 to $140.8 compared to 2012, primarily due to an increase in salaries and related expenses, mainly attributable to higher base salaries, benefits and temporary help, partially offset by lower severance expenses and a decrease in office and general expenses.
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
The following tables summarize key financial data relating to our liquidity, capital resources and uses of capital.
Years ended December 31, | |||||||||||
Cash Flow Data | 2014 | 2013 | 2012 | ||||||||
Net income, adjusted to reconcile net income to net cash provided by operating activities 1 | $ | 831.2 | $ | 598.4 | $ | 697.2 | |||||
Net cash used in working capital ² | (131.1 | ) | (9.6 | ) | (293.2 | ) | |||||
Changes in other non-current assets and liabilities using cash | (30.6 | ) | 4.1 | (46.8 | ) | ||||||
Net cash provided by operating activities | $ | 669.5 | $ | 592.9 | $ | 357.2 | |||||
Net cash used in investing activities | (200.8 | ) | (224.5 | ) | (210.2 | ) | |||||
Net cash (used in) provided by financing activities | (343.9 | ) | (1,212.3 | ) | 131.3 | ||||||
1 | Reflects net income adjusted primarily for depreciation and amortization of fixed assets and intangible assets, amortization of restricted stock and other non-cash compensation, non-cash (gain) loss related to early extinguishment of debt, and deferred income taxes. |
2 | Reflects changes in accounts receivable, expenditures billable to clients, other current assets, accounts payable and accrued liabilities. |
Operating Activities
Net cash provided by operating activities during 2014 was $669.5, which was an improvement of $76.6 as compared to 2013, primarily as a result of an increase in net income, offset by an increase in working capital usage of $121.5. Due to the seasonality of our business, we typically generate cash from working capital in the second half of a year and use cash from working capital in the first half of a year, with the largest impacts in the first and fourth quarters. Our net working capital usage in 2014 was impacted by our media businesses.
Net cash provided by operating activities during 2013 was $592.9, which was an increase of $235.7 as compared to 2012, primarily as a result of an improvement in working capital usage of $283.6, offset by a decrease in net income. The improvement in working capital in 2013 was impacted by our media businesses and an ongoing focus on working capital management at our agencies.
The timing of media buying on behalf of our clients affects our working capital and operating cash flow. In most of our businesses, our agencies enter into commitments to pay production and media costs on behalf of clients. To the extent possible we pay production and media charges after we have received funds from our clients. The amounts involved substantially exceed our revenues and primarily affect the level of accounts receivable, expenditures billable to clients, accounts payable and accrued liabilities. Our assets include both cash received and accounts receivable from clients for these pass-through arrangements, while our liabilities include amounts owed on behalf of clients to media and production suppliers.
Our accrued liabilities are also affected by the timing of certain other payments. For example, while annual cash incentive awards are accrued throughout the year, they are generally paid during the first quarter of the subsequent year.
Investing Activities
Net cash used in investing activities during 2014 primarily related to payments for capital expenditures and acquisitions. Capital expenditures of $148.7 related primarily to computer hardware and software and leasehold improvements. We made payments of $67.8 related to acquisitions completed during 2014, net of cash acquired.
Net cash used in investing activities during 2013 primarily related to payments for capital expenditures and acquisitions. Capital expenditures of $173.0 related primarily to computer hardware and software and leasehold improvements. We made payments of $61.5 related to acquisitions completed during 2013, net of cash acquired.
Financing Activities
Net cash used in financing activities during 2014 primarily related to the purchase of long-term debt, the repurchase of our common stock and payment of dividends. During 2014, we redeemed all $350.0 in aggregate principal amount of the 6.25% Notes, repurchased 14.9 shares of our common stock for an aggregate cost of $275.1, including fees, and made dividend payments of $159.0 on our common stock. This was offset by the issuance of $500.0 in aggregate principal amount of our 4.20% Notes.
Net cash used in financing activities during 2013 primarily related to the purchase of long-term debt, the repurchase of our common stock and payment of dividends. We redeemed all $600.0 in aggregate principal amount of our 10.00% Notes. In addition,
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
we repurchased 31.8 shares of our common stock for an aggregate cost of $481.8, including fees, and made dividend payments of $126.0 on our common stock.
Foreign Exchange Rate Changes
The effect of foreign exchange rate changes on cash and cash equivalents included in the Consolidated Statements of Cash Flows resulted in a decrease of $101.0 in 2014. The decrease was primarily a result of the U.S. Dollar being stronger than several foreign currencies, including the Canadian Dollar, Brazilian Real, Australian Dollar and the Euro as of December 31, 2014 compared to December 31, 2013.
The effect of foreign exchange rate changes on cash and cash equivalents included in the Consolidated Statements of Cash Flows resulted in a decrease of $94.1 in 2013. The decrease was primarily a result of the U.S. Dollar being stronger than several foreign currencies, including the Australian Dollar, Brazilian Real, Canadian Dollar, Japanese Yen, and South African Rand as of December 31, 2013 compared to December 31, 2012.
December 31, | |||||||
Balance Sheet Data | 2014 | 2013 | |||||
Cash, cash equivalents and marketable securities | $1,667.2 | $1,642.1 | |||||
Short-term borrowings | $107.2 | $179.1 | |||||
Current portion of long-term debt | 2.1 | 353.6 | |||||
Long-term debt | 1,623.5 | 1,129.8 | |||||
Total debt | $ | 1,732.8 | $ | 1,662.5 | |||
LIQUIDITY OUTLOOK
We expect our cash flow from operations, cash and cash equivalents to be sufficient to meet our anticipated operating requirements at a minimum for the next twelve months. We also have a committed corporate credit facility as well as uncommitted facilities available to support our operating needs. We continue to maintain a disciplined approach to managing liquidity, with flexibility over significant uses of cash, including our capital expenditures, cash used for new acquisitions, our common stock repurchase program and our common stock dividends.
From time to time, we evaluate market conditions and financing alternatives for opportunities to raise additional funds or otherwise improve our liquidity profile, enhance our financial flexibility and manage market risk. Our ability to access the capital markets depends on a number of factors, which include those specific to us, such as our credit rating, and those related to the financial markets, such as the amount or terms of available credit. There can be no guarantee that we would be able to access new sources of liquidity on commercially reasonable terms, or at all.
Funding Requirements
Our most significant funding requirements include our operations, non-cancelable operating lease obligations, capital expenditures, acquisitions, common stock dividends, taxes, debt service, restructuring and contributions to pension and postretirement plans. Additionally, we may be required to make payments to minority shareholders in certain subsidiaries if they exercise their options to sell us their equity interests.
Notable funding requirements include:
• | Debt service – The majority of our debt is classified as long-term, with maturities scheduled through 2031. During 2014, we issued $500.0 in aggregate principal amount of the 4.20% Notes at a discount and redeemed all $350.0 in aggregate principal amount of the 6.25% Notes. The majority of the net proceeds of the 4.20% Notes were used toward the redemption of the 6.25% Notes. |
• | Acquisitions – We paid cash of $67.8, which was net of cash acquired of $29.9, for acquisitions completed in 2014. We also paid cash of $16.1 in deferred payments for prior-year acquisitions as well as ownership increases in our consolidated subsidiaries. In addition to potential cash expenditures for new acquisitions, we expect to pay approximately $60.0 in 2015 related to prior-year acquisitions. We may also be required to pay approximately $30.0 in 2015 related to put options held by minority shareholders if exercised. We will continue to evaluate strategic opportunities to grow and continue to strengthen our market position, particularly in our digital and marketing services offerings, and to expand our presence in high-growth and key strategic world markets. |
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
• | Dividends – During 2014, we paid four quarterly cash dividends of $0.095 per share on our common stock, which corresponded to an aggregate dividend payment of $159.0. On February 13, 2015, we announced that our Board had declared a common stock cash dividend of $0.12 per share, payable on March 16, 2015 to holders of record as of the close of business on March 2, 2015. Assuming we pay a quarterly dividend of $0.12 per share and there is no significant change in the number of outstanding shares as of December 31, 2014, we would expect to pay approximately $200.0 over the next twelve months. |
• | Restructuring – In 2014, we paid cash of $43.5 in connection with restructuring actions. We expect to pay approximately $5.0 in 2015, with remaining cash payments in relation to such restructuring actions expected to be made through 2021. |
• | Contributions to pension plans – Our funding policy regarding our pension plans is to make contributions necessary to satisfy minimum pension funding requirements, plus such additional contributions as we consider appropriate to improve the plans’ funded status. During 2014, we contributed $2.7 and $25.7 of cash to our domestic and foreign pension plans, respectively. For 2015, we expect to contribute approximately $3.0 and $24.0 of cash to our domestic and foreign pension plans, respectively. |
• | Other payments and obligations – In 2014, we paid cash of approximately $1.2 pursuant to a licensing agreement and acquisition of the rights to use a trademark. We expect to make a final cash payment of approximately $30.0 in 2015. |
The following summarizes our estimated contractual cash obligations and commitments as of December 31, 2014 and their effect on our liquidity and cash flow in future periods.
Years ended December 31, | Thereafter | Total | |||||||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||
Long-term debt 1 | $ | 2.1 | $ | 2.2 | $ | 324.2 | $ | 2.0 | $ | 2.0 | $ | 1,293.1 | $ | 1,625.6 | |||||||||||||
Interest payments on long-term debt 1 | 58.8 | 58.8 | 58.6 | 51.9 | 49.8 | 179.0 | 456.9 | ||||||||||||||||||||
Non-cancelable operating lease obligations 2 | 320.0 | 286.1 | 247.2 | 222.2 | 198.9 | 845.1 | 2,119.5 | ||||||||||||||||||||
Contingent acquisition payments 3 | 95.7 | 86.3 | 86.1 | 15.7 | 21.3 | 7.9 | 313.0 | ||||||||||||||||||||
Uncertain tax positions 4 | 30.7 | 104.5 | 61.6 | 20.4 | 3.8 | 17.0 | 238.0 | ||||||||||||||||||||
Total | $ | 507.3 | $ | 537.9 | $ | 777.7 | $ | 312.2 | $ | 275.8 | $ | 2,342.1 | $ | 4,753.0 | |||||||||||||
1 | Amounts represent maturity at book value and interest payments based on contractual obligations. We may redeem all or some of the 2.25% Senior Notes due 2017, the 4.00% Senior Notes due 2022 , the 3.75% Senior Notes due 2023 and the 4.20% Senior Notes due 2024 at the greater of the principal amount of the notes to be redeemed and a "make-whole" amount, plus, in each case, accrued and unpaid interest to the date of redemption. |
2 | Non-cancelable operating lease obligations are presented net of future receipts on contractual sublease arrangements. |
3 | We have structured certain acquisitions with additional contingent purchase price obligations based on factors including future performance of the acquired entity. See Note 4 and Note 14 to the Consolidated Financial Statements for further information. |
4 | The amounts presented are estimates due to inherent uncertainty of tax settlements, including the ability to offset liabilities with tax loss carryforwards. |
Share Repurchase Program
In February 2013, our Board authorized a new share repurchase program to repurchase from time to time up to $300.0, excluding fees, of our common stock (the "2013 Share Repurchase Program"). In March 2013, the Board authorized an increase in the amount available under our 2013 Share Repurchase Program up to $500.0, excluding fees, of our common stock to be used towards the repurchase of shares resulting from the conversion to common stock of the 4.75% Notes. We fully utilized the 2013 Share Repurchase Program as of the third quarter of 2014. In February 2014, the Board authorized a new share repurchase program to repurchase from time to time up to $300.0, excluding fees, of our common stock (the "2014 Share Repurchase Program"). As of December 31, 2014, $143.6 remained available for repurchase under the 2014 Share Repurchase Program.
On February 13, 2015, we announced that our Board had approved a new share repurchase program to repurchase from time to time up to $300.0, excluding fees, of our common stock. The new authorization is in addition to any amounts remaining available for repurchase under the 2014 Share Repurchase Program.
We may effect such repurchases through open market purchases, trading plans established in accordance with SEC rules, derivative transactions or other means. We expect to continue to repurchase our common stock in future periods, although the
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
timing and amount of the repurchases will depend on market conditions and other funding requirements. There is no expiration date associated with the share repurchase programs.
FINANCING AND SOURCES OF FUNDS
Substantially all of our operating cash flow is generated by our agencies. Our cash balances are held in numerous jurisdictions throughout the world, primarily at the holding company level and at our largest subsidiaries. Below is a summary of our sources of liquidity.
December 31, 2014 | |||||||||||||||
Total Facility | Amount Outstanding | Letters of Credit 1 | Total Available | ||||||||||||
Cash, cash equivalents and marketable securities | $ | 1,667.2 | |||||||||||||
Committed credit agreement | $ | 1,000.0 | $ | 0.0 | $ | 16.0 | $ | 984.0 | |||||||
Uncommitted credit arrangements | $ | 740.3 | 107.2 | $ | 3.9 | $ | 629.2 | ||||||||
1 | We are required from time to time to post letters of credit, primarily to support obligations of our subsidiaries. These letters of credit historically have not been drawn upon. |
At December 31, 2014, we held $896.5 of cash, cash equivalents and marketable securities in foreign subsidiaries. We have not provided U.S. federal income taxes on undistributed foreign earnings of our foreign subsidiaries because we consider such earnings to be permanently reinvested outside the United States. If in the future we distribute these amounts to the United States, an additional provision for the U.S. income and foreign withholding taxes, net of foreign tax credits, could be necessary.
Credit Agreements
We maintain a committed corporate credit facility to increase our financial flexibility (the "Credit Agreement"). The Credit Agreement is a revolving facility, expiring in December 2018, 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 $1,000.0 or the equivalent in other currencies. The Company continues to have 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 on letters of credit of $200.0 or the equivalent in other currencies. We use our Credit Agreement to provide letters of credit primarily to support obligations of our subsidiaries. Our obligations under the Credit Agreement are unsecured.
Under the Credit Agreement, we can elect to receive advances bearing interest based on either the base rate or the Eurocurrency rate (each as defined in the Credit Agreement) plus an applicable margin that is determined based on our credit ratings. As of December 31, 2014, the applicable margin is 0.275% for base rate advances and 1.275% for Eurocurrency rate advances. Letter of credit fees accrue on the average daily aggregate amount of letters of credit outstanding, at a rate equal to the applicable margin for Eurocurrency rate advances, and fronting fees accrue on the aggregate amount of letters of credit outstanding at an annual rate of 0.250%. We also pay a facility fee at an annual rate of 0.225% on the aggregate lending commitment under the Credit Agreement.
The table below sets forth the financial covenants in effect as of December 31, 2014.
Four Quarters Ended | Four Quarters Ended | |||||
Financial Covenants | December 31, 2014 | EBITDA Reconciliation | December 31, 2014 | |||
Interest coverage ratio (not less than) | 5.00x | Operating income | $ | 788.4 | ||
Actual interest coverage ratio | 17.80x | Add: | ||||
Leverage ratio (not greater than) | 3.25x | Depreciation and amortization | 217.3 | |||
Actual leverage ratio | 1.72x | EBITDA 1 | $ | 1,005.7 | ||
1 | EBITDA is calculated as defined in the Credit Agreement. |
As of December 31, 2014, we were in compliance with all of our covenants in the Credit Agreement. If we were unable to comply with our covenants in the future, we would seek an amendment or waiver from our lenders, but there is no assurance that our lenders would grant an amendment or waiver. If we were unable to obtain the necessary amendment or waiver, the credit facility could be terminated and our lenders could accelerate payments of any outstanding principal. In addition, under those circumstances we could be required to deposit funds with one of our lenders in an amount equal to any outstanding letters of credit under the credit facility.
28
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
We also have uncommitted credit facilities with various banks that permit borrowings at variable interest rates. As of December 31, 2014, there were borrowings under some of the uncommitted facilities to manage 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 international operations. The weighted-average interest rate on outstanding balances under the uncommitted credit facilities as of December 31, 2014 and 2013 was approximately 4.5%.
Cash Pooling
We aggregate our domestic cash position on a daily basis. Outside the United States we use cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, several IPG agencies agree with a single bank that the cash balances of any of the agencies with the bank will be subject to a full right of set-off against amounts the other agencies owe the bank, and the bank provides for overdrafts as long as the net balance for all the agencies does not exceed an agreed-upon level. Typically, each agency pays interest on outstanding overdrafts and receives interest on cash balances. Our Consolidated Balance Sheets reflect cash, net of bank overdrafts, under all of our pooling arrangements, and as of December 31, 2014 and 2013 the amounts netted were $1,590.7 and $1,415.3, respectively.
DEBT CREDIT RATINGS
Our long-term debt credit ratings as of February 13, 2015 are listed below.
Moody’s Investor Service | Standard and Poor’s | Fitch Ratings | |||
Rating | Baa3 | BB+ | BBB | ||
Outlook | Stable | Stable | Stable | ||
We are rated investment-grade by both Moody's Investor Services ("Moody's") and Fitch Ratings. The most recent update to our credit ratings occurred in February 2013, when Standard & Poor's changed our outlook from positive to stable. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning credit rating agency. The rating of each credit rating agency should be evaluated independently of any other rating. Credit ratings could have an impact on liquidity, either adverse or favorable, including, among other things, because they could affect funding costs in the capital markets or otherwise. For example, our Credit Agreement fees and borrowing rates are based on a credit ratings grid.
CRITICAL ACCOUNTING ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of the Consolidated Financial Statements and related disclosures requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed in the accompanying financial statements and footnotes. Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements. We believe that of our significant accounting policies, the following critical accounting estimates involve management’s most difficult, subjective or complex judgments. We consider these accounting estimates to be critical because changes in the underlying assumptions or estimates have the potential to materially impact our Consolidated Financial Statements. Management has discussed with our Audit Committee the development, selection, application and disclosure of these critical accounting estimates. We regularly evaluate our judgments, assumptions and estimates based on historical experience and various other factors that we believe to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our revenues are primarily derived from the planning and execution of multi-channel advertising, marketing and communications programs around the world. Most of our client contracts are individually negotiated and, accordingly, the terms of client engagements and the bases on which we earn commissions and fees vary significantly. Our client contracts are complex arrangements that may include provisions for incentive compensation and vendor rebates and credits. Our largest clients are multinational entities, and, as such, we often provide services to these clients out of multiple offices and across many of our agencies. In arranging for such services, it is possible that we will enter into global, regional and local agreements. Agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved. Critical judgments and estimates are involved in determining both the amount and timing of revenue recognition under these arrangements.
Revenue for our services is recognized when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) services have been performed.
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Depending on the terms of a client contract, fees for services performed can be recognized in three principal ways: proportional performance (input or output), straight-line (or monthly basis) or completed contract.
Depending on the terms of the client contract, revenue is derived from diverse arrangements involving fees for services performed, commissions, performance incentive provisions and combinations of the three. Commissions are generally earned on the date of the broadcast or publication. Contractual arrangements with clients may also include performance incentive provisions designed to link a portion of our revenue to our performance relative to either qualitative or quantitative goals, or both. Performance incentives are recognized as revenue for quantitative targets when the target has been achieved and for qualitative targets when confirmation of the incentive is received from the client. The classification of client arrangements to determine the appropriate revenue recognition involves judgments. If the judgments change there can be a material impact on our Consolidated Financial Statements, and particularly on the allocation of revenues between periods.
The majority of our revenue is recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our Consolidated Financial Statements because of various pass-through expenses, such as production and media costs. We assess whether our agency or the third-party supplier is the primary obligor, and we evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we operate broadly as an advertising agency, based on our primary lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we generally record revenue net of pass-through charges as we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses where the key indicators suggest we act as a principal (primarily sales promotion and event, sports and entertainment marketing), we record the gross amount billed to the client as revenue and the related incremental direct costs incurred as office and general expenses. In general, we also report revenue net of taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions.
As we provide services as part of our core operations, we generally incur incidental expenses, which, in practice, are commonly referred to as “out-of-pocket” expenses. These expenses often include expenses related to airfare, mileage, hotel stays, out-of-town meals and telecommunication charges. We record the reimbursements received for such incidental expenses as revenue with a corresponding offset to office and general expense.
The determination as to whether revenue in a particular line of business should be recognized net or gross involves complex judgments. If we make these judgments differently it could significantly affect our reported results. If it were determined that we must recognize a significant portion of revenues on a gross basis rather than a net basis it would positively impact revenues, have no impact on our operating income and have an adverse impact on operating margin.
We receive credits from our vendors and media outlets for transactions entered into on behalf of our clients that, based on the terms of our contracts and local law, are either remitted to our clients or retained by us. If amounts are to be passed through to clients, they are recorded as liabilities until settlement or, if retained by us, are recorded as revenue when earned.
Income Taxes
The provision for income taxes includes U.S. federal, state, local and foreign taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be reversed. Changes to enacted tax rates would result in either increases or decreases in the provision for income taxes in the period of change.
We are required to evaluate the realizability of our deferred tax assets, which is primarily dependent on future earnings. A valuation allowance shall be recognized when, based on available evidence, it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. The factors used in assessing valuation allowances include all available evidence, such as past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In circumstances where there is negative evidence, establishment of a valuation allowance must be considered. We believe that cumulative losses in the most recent three-year period represent significant negative evidence when evaluating a decision to establish a valuation allowance. Conversely, a pattern of sustained profitability represents significant positive evidence when evaluating a decision to reverse a valuation allowance. Further, in those cases where a pattern of sustained profitability exists, projected future taxable income may also represent positive evidence, to the extent that such projections are determined to be reliable given the current economic environment. Accordingly, the increase and decrease of valuation allowances has had and could have a significant negative or positive impact on our current and future earnings.
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
The authoritative guidance for uncertainty in income taxes prescribes a recognition threshold and measurement criteria for the financial statement reporting of a tax position that an entity takes or expects to take in a tax return. Additionally, guidance is provided for de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The assessment of recognition and measurement requires critical estimates and the use of complex judgments. We evaluate our tax positions using the “more likely than not” recognition threshold and then apply a measurement assessment to those positions that meet the recognition threshold. We have established tax reserves that we believe to be adequate in relation to the potential for additional assessments in each of the jurisdictions in which we are subject to taxation. We regularly assess the likelihood of additional tax assessments in those jurisdictions and adjust our reserves as additional information or events require.
Goodwill and Other Intangible Assets
We account for our business combinations using the acquisition accounting method, which requires us to determine the fair value of net assets acquired and the related goodwill and other intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and involves the use of significant estimates, including projections of future cash inflows and outflows, discount rates, asset lives and market multiples. Considering the characteristics of advertising, specialized marketing and communication services companies, our acquisitions usually do not have significant amounts of tangible assets, as the principal asset we typically acquire is creative talent. As a result, a substantial portion of the purchase price is allocated to goodwill and other intangible assets.
We review goodwill and other intangible assets with indefinite lives not subject to amortization as of October 1st each year and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. We evaluate the recoverability of goodwill at a reporting unit level. We have 13 reporting units that were subject to the 2014 annual impairment testing. Our annual impairment review as of October 1, 2014 did not result in an impairment charge at any of our reporting units.
During 2012, we adopted new authoritative gu