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Interpublic Group of Companies 10-K 2010
Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

  x ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

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 ¨    No x

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 x

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 the filing requirements for at least the past 90 days.

Yes x    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 ¨    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 the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

    Large accelerated filer   x    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 x

As of June 30, 2009, the aggregate market value of the shares of registrant’s common stock held by non-affiliates was $2,454,652,460. The number of shares of the registrant’s common stock outstanding as of February 16, 2010 was 485,867,132.

DOCUMENTS INCORPORATED BY REFERENCE

The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2010 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,” “Compensation of Executive Officers,” “Non-Management Director Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Outstanding Shares,” “Review and Approval of Transactions with Related Persons,” “Director Independence” and “Appointment of Independent Registered Public Accounting Firm.”

 

 

 


Table of Contents

TABLE OF CONTENTS

 

        Page

Part I.

Item 1.   Business   2
Item 1A.   Risk Factors   6
Item 1B.   Unresolved Staff Comments   9
Item 2.   Properties   9
Item 3.   Legal Proceedings   9
Item 4.   Submission of Matters to a Vote of Security Holders   9

Part II.

 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   11
Item 6.   Selected Financial Data   13
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   36
Item 8.   Financial Statements and Supplementary Data   38
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   85
Item 9A.   Controls and Procedures   85
Item 9B.   Other Information   85

Part III.

 
Item 10.   Directors, Executive Officers and Corporate Governance   86
Item 11.   Executive Compensation   86
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   86
Item 13.   Certain Relationships and Related Transactions, and Director Independence   87
Item 14.   Principal Accountant Fees and Services   87

Part IV.

 
Item 15.   Exhibits, Financial Statement Schedules   88


Table of Contents

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.

 

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PART I

 

Item 1. Business

The Interpublic Group of Companies, Inc. (“IPG”) 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

IPG is one of the world’s premier global advertising and marketing services companies. Our agencies create marketing programs for clients in every major world market. These companies deliver services across the full spectrum of marketing disciplines and specialties, including advertising, direct marketing, media buying and planning, public relations, events marketing, internet and search engine marketing, social media marketing and mobile marketing.

The work we produce for our clients is specific to their unique needs. Our solutions vary from project-based activity involving one agency and its client to long-term, fully integrated campaigns created by a group of our companies working together on behalf of a client. With offices in over 100 countries, we can operate in a single region or align work globally across all major world markets.

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 also sets company-wide financial objectives and corporate strategy, directs collaborative inter-agency programs, establishes financial management and operational controls, guides personnel policy, conducts investor relations and oversees mergers and acquisitions. In addition, we provide limited centralized functional services that offer our companies operational efficiencies, including accounting and finance, marketing information retrieval and analysis, legal services, real estate expertise, travel services, recruitment assistance, employee benefits and executive compensation management.

To keep our company well-positioned in an evolving industry, we support our agencies’ talent and operational initiatives to expand high-growth capabilities and build offerings in key developing markets. When appropriate, we also develop relationships with companies that are building leading-edge marketing tools that complement our agencies and the programs they are developing for clients. In addition, we look for opportunities within our company to modernize operations through mergers, strategic alliances and the development of internal programs that encourage intra-company collaboration.

Market Strategy

We have taken several major strategic steps in recent years to position our agencies as leaders in the global advertising and communications market.

Although we have seen some signs of economic stability in recent months, the global economic recession made business conditions in 2009 extremely challenging for all our companies, across all sectors. The weak conditions in the broader economy continue to affect the demand for advertising and marketing services and present a challenge to the revenue and profit growth of companies in our industry. During these challenging economic conditions, we have focused on meeting our clients’ needs while carefully managing our cost structure. We initiated significant severance actions in the fourth quarter of 2008, which have continued through 2009. We believe that our company is well positioned to capitalize on marketplace expansion once consumer confidence and client spending return.

We operate in a media landscape that has vastly changed over the past decade. 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 invested in creative and strategic talent in high-growth areas and have realigned a number of our capabilities to meet market demand.

 

   

At our McCann Worldgroup (“McCann”) unit, a premier global integrated network, we have continued to invest in talent so as to upgrade the group’s integrated marketing services offering at MRM, Momentum and McCann Healthcare.

 

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We combined accountable marketing and consumer advertising agencies to form the unique global offering of Draftfcb.

 

   

We have taken significant actions in recent years to create a more focused and strategic Lowe & Partners (“Lowe”) and this year we aligned Deutsch and Lowe to build on the complementary strengths of the two agencies.

 

   

At our marketing services group, Constituency Management Group (“CMG”), we continue to strengthen our best-in-class public relations and events marketing specialists.

 

   

We have also taken a unique approach to our media offering by installing a single management structure (“Mediabrands”) to oversee all media operations, while concurrently aligning our global media networks with our global brand agencies. This approach ensures that the ideas we develop for clients work across new and traditional media channels and this differentiated media strategy has shown significant traction in the marketplace.

The aspects of our business addressing digital media continue to evolve rapidly. As such, strong, multi-channel talent is vital to our long-term success as a marketing partner to our clients. In order to grow with our clients, we have therefore accelerated our investment in digital talent, professional training and technology throughout the organization in recent years. This reflects our belief that digital marketing should not be treated as a stand-alone function, but instead, should be incorporated within all of our companies. Recruiting and developing digitally conversant talent at all our agencies and in all marketing disciplines is therefore an area where we continue to invest.

To meet these changing needs of the marketplace, we have at times acquired or built specialty digital assets, such as Reprise Media (search engine marketing), The Interpublic Emerging Media Lab and HUGE (e-commerce solutions). We have also invested in existing digital assets such as R/GA, a stand-alone digital agency and industry leader in the development of award-winning interactive campaigns for global clients. These specialty assets have unique capabilities and service their own client rosters, while also serving as key digital partners to many of the agencies within IPG.

Likewise, we continue to look for strategic investments that will position us to capitalize on fast-growth geographic regions. In recent years, we have made investments in India and Brazil, further strengthening our leadership position in these high-growth, developing markets. In 2008, we built on this strategy and completed an important transaction that increased our stake in the Middle East Communication Networks (“MCN”) to a majority position. Headquartered in Dubai, we believe MCN is the region’s premier marketing services management company, with 60 offices across 14 countries. Our partner in Russia is an acknowledged advertising 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 behind our companies.

Going forward, we will continue to derive benefits from our diversified client base, global footprint and broad range of services. The improvements we have made in our financial reporting and business information systems during recent years provide us with timely and actionable insights from our global operations, which enables us to manage our business more effectively. Our conservative approach to the balance sheet and liquidity, as well as recent measures to further improve our debt maturity profile, have given us a solid financial foundation and the flexibility required to successfully move forward as business conditions improve.

Despite economic challenges, clients continue to invest in marketing to protect market share and enhance brand value. In 2009, IPG units were recognized with many of the industry’s most coveted honors, across many advertising and marketing disciplines. Our agencies are invited to compete for most major new business opportunities and won a number of the year’s biggest and most competitive new business assignments. We believe that the competitiveness of our offering bodes well for us when a broader economic turnaround takes hold.

Our Offering

IPG is home to some of the world’s best-known and most innovative communications specialists. We have three global brands that provide integrated, large-scale solutions for clients, McCann, Draftfcb and Lowe, as well as our premier domestic integrated agencies and global media networks.

 

   

McCann offers best-in-class communications tools and resources to many of the world’s top companies and most famous brands. We believe McCann is exceptionally qualified to meet client demands in all regions of the world

 

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and in all marketing disciplines through its operating units: McCann Erickson Advertising, with operations in over 100 countries; MRM Worldwide for relationship marketing and digital expertise; Momentum Worldwide for experiential marketing and promotions; and McCann Healthcare Worldwide for healthcare communications.

 

   

Launched in 2006, Draftfcb is a modern agency model for clients seeking creative and accountable marketing programs. With more than 130 years of combined expertise, the company has its roots in both consumer advertising and behavioral, data- driven direct marketing. We believe the agency is the first global, behavior-based, creative and accountable marketing communications organization operating as a financially and structurally integrated business unit.

 

   

Lowe is a premier creative agency that operates in the world’s largest advertising markets. Lowe is focused on delivering and sustaining high-value ideas for some of the world’s largest clients. The quality of the agency’s product is evident in its high global creative rankings and its standing in major markets. In the fourth quarter of 2009, we announced the alignment of Deutsch, one of our larger domestic full-service agency brands, and Lowe in order to build on the complementary strengths of the two agencies to create a more powerful offering and accelerate our growth. We anticipate that Lowe will be strengthened by adding a dynamic U.S. agency to its strong global network, and that Deutsch will benefit from the multinational reach of Lowe. Deutsch will now be referred to as Deutsch, Inc., a Lowe & Partners Company.

 

   

We created a management entity called Mediabrands in 2008 to oversee our two global media networks, Initiative and Universal McCann, which provide specialized services in media planning and buying, market intelligence and return-on-marketing investment analysis for clients. Initiative and Universal McCann operate independently but often work closely with Draftfcb and McCann, respectively. Aligning the efforts of our major media and our integrated communications networks improves cross-media communications and our ability to deliver integrated marketing programs.

 

   

Our domestic independent agencies include some of the larger full-service agency brands, Campbell-Ewald, Campbell Mithun, Hill Holliday, The Martin Agency and Mullen. The integrated marketing programs created by this group have helped build some of the most powerful brands in the U.S., across all sectors and industries.

 

   

We have exceptional marketing specialists across a range of disciplines. These include FutureBrand (corporate branding), Jack Morton (experiential marketing), Octagon (sports marketing), public relations specialists like Weber Shandwick and Golin Harris, and best-in-class digital agencies, led by R/GA. Our healthcare communications specialists reside within our three global brands, McCann, Draftfcb and Lowe.

We list approximately 90 companies on our website’s “Company Finder” tool, with descriptions and office locations for each. To learn more about our broad range of capabilities, visit our website at http://www.interpublic.com.

Financial Reporting Segments

We have two reportable segments: Integrated Agency Network (“IAN”), which is comprised of McCann, Draftfcb, Lowe, Mediabrands and our domestic integrated agencies; and CMG, which is comprised of the bulk of our specialist marketing services offerings. We also report results for the “Corporate and other” group. See Note 14 to the Consolidated Financial Statements for further information.

Principal Markets

Our agencies are located in over 100 countries, including every significant world market. Our geographic revenue breakdown is listed below.

 

     2009 % of Total
Revenue
 

U.S.

   55.9

United Kingdom

   7.6

Continental Europe

   15.3

Asia Pacific

   9.5

Latin America

   5.1

Other

   6.6

 

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For further information concerning revenues and long-lived assets on a geographical basis for each of the last three years, see Note 14 to the Consolidated Financial Statements.

Sources of Revenue

Our revenues are primarily derived from the planning and execution of advertising, marketing and communications programs in various media 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 govern 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 to be provided, we may enter into global, regional and local agreements.

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 and/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 is either retained in total or shared with the client depending on the nature of the 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 directly dependent upon the advertising, marketing and corporate communications requirements of our clients. Our revenue tends to be higher in the second half of the calendar year as a result of the holiday season and lower in the first half as a result of the post-holiday slow-down in client activity.

 

(Amounts in Millions)    Consolidated Revenues for the Three Months Ended  
     2009     2008     2007  

March 31

   $ 1,325.3    22.0   $ 1,485.2    21.3   $ 1,359.1    20.7

June 30

     1,474.4    24.5     1,835.7    26.4     1,652.7    25.2

September 30

     1,426.7    23.7     1,740.0    25.0     1,559.9    23.8

December 31

     1,801.2    29.8     1,901.8    27.3     1,982.5    30.3
                           
   $ 6,027.6      $ 6,962.7      $ 6,554.2   
                           

Depending on the terms of the client contract, fees for services performed can be recognized in three principal ways: proportional performance, straight-line (or monthly basis) or completed contract. 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. As is customary in the industry, our contracts generally provide for termination by either party on relatively short notice, usually 90 days. See Note 1 to the Consolidated Financial Statements for further information on our revenue recognition accounting policies.

Clients

Our holding company structure allows us to work with clients within the same business sector through our different agencies, as well as maintain a diversified client base by sector. In the aggregate, our top ten clients based on revenue accounted for approximately 24% of revenue in both 2009 and 2008. However, our largest client accounted for

 

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approximately 4% and 5% of revenue for 2009 and 2008, respectively. Based on revenue for the year ended December 31, 2009, our largest clients (in alphabetical order) were General Motors Corporation, Johnson & Johnson, Microsoft, Unilever and Verizon. 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 systems. 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.

Since we operate in a highly competitive advertising and marketing communications industry, our operating companies compete amongst other large multinational advertising and marketing communications companies as well as numerous independent and niche agencies in order to obtain new clients and maintain existing client relationships.

Personnel

As of December 31, 2009, we employed approximately 40,000 people, of whom approximately 17,000 were employed in the U.S. Because of the service character of the advertising and marketing communications business, the quality of personnel is of crucial importance to our continuing success. 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 in the Investors section of our website at http://www.interpublic.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission.

Our Corporate Governance Guidelines, Interpublic Group Code of Conduct and the charters for each of the Audit Committee, Compensation Committee and the Corporate Governance Committee are available free of charge in the Corporate Citizenship section of our website at http://www.interpublic.com, 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 impair our business operations or financial condition. See also “Statement Regarding Forward-Looking Disclosure.”

 

   

We operate in a highly competitive industry.

The marketing communications business is highly competitive. Our agencies and media services must compete with other agencies, and with other providers of creative or media services, in order to maintain existing client relationships and to win new clients. Our competitors include not only other large multinational advertising and marketing communications companies, but also smaller entities that operate in local or regional markets. New market participants include database marketing and modeling companies, telemarketers and internet companies.

The client’s perception of the quality of our agencies’ creative work, our reputation and our agencies’ reputations are important factors in determining our competitive position. An agency’s ability to serve clients, particularly large international clients, on a broad geographic basis is also 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.

Many companies put their advertising and marketing communications business up for competitive review from time to time. 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 24% of revenue in 2009. While we believe it unlikely that we would

 

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lose the entire business of any one of our largest clients at the same time due to competitive considerations, a substantial decline in a large client’s advertising and marketing spending, or the loss of its entire 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.

 

   

Continuing difficult economic and financial conditions could adversely impact our financial condition and results.

The global economic recession made business conditions extremely challenging for us during 2009. The weak conditions in the broader economy continue to affect the demand for advertising and marketing services and present a challenge to the revenue and profit growth of our company.

 

  a) As a marketing services company, our revenues are highly susceptible to declines as a result of unfavorable economic conditions.

The economic downturn has severely affected the marketing services industry, and the recovery of the marketing services industry could lag that of the economy generally. Many clients have responded to weak economic and financial conditions with reductions to their marketing budgets, which include discretionary components that are easier to reduce in the short term than other operating expenses. This pattern may continue or recur in the future. A decrease in our revenue could pose a challenge to our cash generation from operations.

 

  b) 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 like those that have impacted most sectors of the economy 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.

 

  c) Our financial condition could be adversely affected if our available liquidity is insufficient.

We maintain a committed credit facility to increase our financial flexibility. The $335.0 million Three-Year Credit Agreement (the “2008 Credit Agreement”) we entered into in July 2008 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. Furthermore, the 2008 Credit Agreement contains financial covenants, and continued economic difficulties could adversely affect our ability to comply with them, for example, if we experience substantially lower revenues, a substantial increase in client defaults or sizable asset impairment charges. In 2009 and in January 2010, we obtained amendments to the 2008 Credit Agreement in order to retain our ability to comply with those covenants. If in the future we were to conclude that we would be unable to comply with any of the financial covenants contained in the 2008 Credit Agreement, we could be required to seek further amendments or waivers, and our costs under the 2008 Credit Agreement could increase. If we were unable to obtain a necessary amendment or waiver, the 2008 Credit Agreement could be terminated. If credit under our credit facilities were unavailable or insufficient, our liquidity could be adversely affected.

If our business is significantly adversely affected by the difficult economic environment or otherwise, it could lead us to seek new or additional sources of liquidity to fund our needs. Currently, for a non-investment-grade company like ours, the capital markets remain challenging. 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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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 of impairment or lack of realizability. If certain criteria are met, we are required to record an impairment charge or valuation allowance. In prior years, we recorded substantial amounts of goodwill, investment and other impairment charges, and we have been required to establish substantial valuation allowances with respect to deferred tax assets.

As of December 31, 2009, we have substantial amounts of long-lived assets, deferred tax assets and investments on our Consolidated Balance Sheet, including approximately $3.3 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, investments and deferred tax assets may have become impaired. 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. Any resulting impairment loss would have an adverse impact on our reported earnings in the period in which the charge is recognized.

 

   

We may lose or fail to attract and retain key employees and management personnel.

Our employees, including creative, research, media and account specialists, and their skills and relationships with clients, are among our most important assets. An important aspect of our competitiveness is our ability 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 could be adversely affected by our financial or market performance.

 

   

Downgrades of our credit ratings could adversely affect us.

As of February 16, 2010 our long-term debt is rated Ba3 with positive outlook by Moody’s Investor Service, B+ with stable outlook by Standard and Poor’s, and BB+ with positive outlook by Fitch Ratings. Any ratings downgrades or ratings weaker than those of our competitors can 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. 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.

 

   

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.”

 

   

International business risks could adversely affect our operations.

International revenues represent a significant portion of our revenues, approximately 44% in 2009. Our international operations are exposed to risks that affect foreign operations of all kinds, including local legislation, monetary devaluation, exchange control restrictions and unstable political conditions. 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 Euro, Pound Sterling, Brazilian Real, Japanese Yen, Canadian Dollar and Chinese Yuan Renminbi, fluctuations in exchange rates between the U.S. dollar and such currencies may materially affect our financial results.

 

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We are subject to regulations and other governmental scrutiny that could restrict our activities or negatively impact our revenues.

Our industry is subject to government regulation and other governmental action, both domestic and foreign. There has been an increasing tendency on the part of advertisers and consumer groups to challenge advertising through legislation, regulation, the courts or otherwise, for example on the grounds that the advertising is false and deceptive or injurious to public welfare. Through the years, there has been a continuing expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to the advertising for certain products. Representatives within government bodies, both domestic and foreign, continue to initiate proposals to ban the advertising of specific products and to impose taxes on or deny deductions for advertising, which, if successful, may have an adverse effect on advertising expenditures and, consequently, our revenues.

 

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 15 to the Consolidated Financial Statements for further information on our lease commitments.

 

Item 3. Legal Proceedings

We are involved in legal and administrative proceedings of various types. While any litigation contains an element of uncertainty, we do not believe that the outcome of such proceedings will have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Executive Officers of IPG

 

Name

   Age   

Office

Michael I. Roth 1

   64    Chairman of the Board and Chief Executive Officer

Nicholas J. Camera

   63    Senior Vice President, General Counsel and Secretary

Christopher F. Carroll

   43    Senior Vice President, Controller and Chief Accounting Officer

Julie M. Connors

   38    Senior Vice President, Audit and Chief Risk Officer

John J. Dooner, Jr.

   61    Chairman and Chief Executive Officer of McCann Worldgroup

Philippe Krakowsky

   47    Executive Vice President, Strategy and Corporate Relations

Frank Mergenthaler

   49    Executive Vice President and Chief Financial Officer

Timothy A. Sompolski

   57    Executive Vice President, Chief Human Resources 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 a director of Pitney Bowes Inc. and Gaylord Entertainment Company.

 

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Mr. Camera was hired in May 1993. He was elected Vice President, Assistant General Counsel and Assistant Secretary in June 1994, Vice President, General Counsel and Secretary in December 1995, and Senior Vice President, General Counsel and Secretary in February 2000.

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. Dooner became Chairman and Chief Executive Officer of the McCann Worldgroup in February 2003. Prior to that time, Mr. Dooner served as Chairman of the Board, President and Chief Executive Officer of IPG from December 2000 to February 2003, and as President and Chief Operating Officer of IPG from April 2000 to December 2000. Nicholas Brien has been designated to succeed Mr. Dooner as Chief Executive Officer of McCann Worldgroup, effective April 2010. Mr. Dooner will continue as Chairman of McCann Worldgroup through 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. 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.

Mr. Sompolski was hired in July 2004 as Executive Vice President, Chief Human Resources Officer. Prior to joining us, he served as Senior Vice President of Human Resources and Administration for Altria Group from November 1996 to January 2003.

 

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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 16, 2010, there were approximately 23,700 registered holders of our outstanding common stock.

 

     NYSE Sale Price

Period

   High    Low

2009:

     

Fourth Quarter

   $ 7.53    $ 5.89

Third Quarter

   $ 7.59    $ 4.71

Second Quarter

   $ 6.32    $ 4.45

First Quarter

   $ 4.53    $ 3.20

2008:

     

Fourth Quarter

   $ 7.70    $ 2.61

Third Quarter

   $ 9.57    $ 7.21

Second Quarter

   $ 10.39    $ 7.90

First Quarter

   $ 8.98    $ 7.40

Dividend Policy

No dividend has been paid on our common stock since the fourth quarter of 2002. Our future dividend policy will be determined on a quarter-by-quarter basis and will depend on earnings, financial condition, capital requirements and other factors. Our future dividend policy may also be influenced by the terms of our $335.0 million Three-Year Credit Agreement, dated as of July 18, 2008 (the “2008 Credit Agreement”) and certain of our outstanding securities. The 2008 Credit Agreement places certain limitations on the amount of common stock dividends that we may pay in any year. The terms of our outstanding series of preferred stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends have been or are contemporaneously declared and paid or provision for the payment thereof has been made. In the event we pay dividends on our common stock, the conversion terms of our 4.75% Convertible Senior Notes due 2023, 4.25% Convertible Senior Notes due 2023 and our Series B Preferred Stock will be adjusted (see Note 2 and Note 9 to the Consolidated Financial Statements for further information).

Transfer Agent and Registrar for Common Stock

The transfer agent and registrar for our common stock is:

BNY Mellon Shareowner Services, Inc.

480 Washington Boulevard

29th Floor

Jersey City, New Jersey 07310

Telephone: (877) 363-6398

Sales of Unregistered Securities

Not applicable

 

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Repurchase of Equity Securities

The following table provides information regarding our purchases of equity securities during the fourth quarter of 2009.

 

     Total Number of
Shares (or Units)
Purchased
   Average Price per
Share (or Unit) 2
   Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs

October
1-31

   19,779    $ 6.46      

November
1-30

   9,133    $ 6.66      

December
1-31

   24,657    $ 7.45      
                     

Total 1

   53,569    $ 6.95      
                     

 

1

Consists of restricted 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 during each month of the fourth quarter of 2009 (the “Withheld Shares”).

2

The average price per month of the Withheld Shares was calculated by dividing the aggregate value of the tax withholding obligations for each month by the aggregate number of shares of our common stock withheld each month.

 

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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,

   2009    2008    2007    2006     2005  

Statement of Operations Data

             

Revenue

   $ 6,027.6    $ 6,962.7    $ 6,554.2    $ 6,190.8      $ 6,274.3   

Salaries and related expenses

     3,961.2      4,342.6      4,139.2      3,944.1        3,999.1   

Office and general expenses

     1,720.5      2,013.3      2,044.8      2,079.0        2,288.1   

Operating income (loss)

     341.3      589.7      344.3      106.0        (104.2

Provision for income taxes

     90.1      156.6      58.9      18.7        81.9   

Income (loss) from continuing operations

     143.4      318.0      184.3      (16.7     (255.2

Income from discontinued operations, net of tax

                    5.0        9.0   

Net income (loss) available to IPG common stockholders

     93.6      265.2      131.3      (79.3     (289.2

Earnings (loss) per share available to IPG common stockholders:

             

Basic:

             

Continuing operations

   $ 0.20    $ 0.57    $ 0.29    $ (0.20   $ (0.70

Discontinued operations

                    0.01        0.02   
                                     

Total

   $ 0.20    $ 0.57    $ 0.29    $ (0.19   $ (0.68
                                     

Diluted:

             

Continuing operations

   $ 0.19    $ 0.52    $ 0.26    $ (0.20   $ (0.70

Discontinued operations

                    0.01        0.02   
                                     

Total

   $ 0.19    $ 0.52    $ 0.26    $ (0.19   $ (0.68
                                     

Weighted-average number of common shares outstanding:

             

Basic

     468.2      461.5      457.7      428.1        424.8   

Diluted

     508.1      518.3      503.1      428.1        424.8   

As of December 31,

   2009    2008    2007    2006     2005  

Balance Sheet Data

             

Cash and cash equivalents and marketable securities

   $ 2,506.1    $ 2,274.9    $ 2,037.4    $ 1,957.1      $ 2,191.5   

Total assets

     12,263.1      12,125.2      12,458.1      11,864.1        11,945.2   

Long-term debt

     1,638.0      1,786.9      2,044.1      2,248.6        2,183.0   

Total liabilities

     9,449.0      9,592.6      10,081.8      9,877.0        9,950.6   

Preferred stock – Series A

                           373.7   

Preferred stock – Series B

     525.0      525.0      525.0      525.0        525.0   

Total stockholders’ equity

     2,536.3      2,244.2      2,275.1      1,928.6        1,933.5   

Other Financial Data

             

Ratios of earnings to fixed charges1

     1.7      2.2      1.6      N/A        N/A   

 

1

We had a less than 1:1 ratio of earnings to fixed charges due to our losses in the years ended December 31, 2006 and 2005. To provide a 1:1 coverage ratio for the deficient periods results as reported would have required additional earnings of $5.0 and $186.6 in the years ended December 31, 2006 and 2005, respectively.

 

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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 (“Interpublic,” “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.

CRITICAL ACCOUNTING ESTIMATES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.

RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2009 compared to 2008 and 2008 compared to 2007.

LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, funding requirements, contractual obligations, financing and sources of funds and debt ratings.

RECENT ACCOUNTING STANDARDS, by reference to Note 16 to the Consolidated Financial Statements, provides a discussion of certain accounting standards that have been adopted during 2009 and certain accounting standards which we have not yet been required to implement and may be applicable to our future operations.

EXECUTIVE SUMMARY

Interpublic is one of the world’s premier global advertising and marketing services companies. Our agencies create marketing programs for clients to achieve or improve their business results, which in turn, generates revenue, earnings and cash flow for us. Comprehensive global services will remain critical to the competitiveness of our multinational clients in 2010 and beyond as they look to build brands and increase market share in an increasingly complex and fragmented media landscape. Our business objectives are to continue to strengthen our full range of marketing expertise, while focusing our investment on the fastest growing geographic regions and marketing channels. Our long-term financial objectives include maintaining organic revenue growth at competitive levels while expanding operating margins. Accordingly, we remain focused on cost control, including more efficient discretionary spending, and effective resource utilization, including the productivity of our employees, real estate and information technology.

Although we have seen some signs of economic stability in recent months, the global economic recession made business conditions in 2009 extremely challenging for all our companies, across all sectors. The weak conditions in the broader economy continue to affect the demand for advertising and marketing services and present a challenge to the revenue and profit growth of companies in our industry. During these challenging conditions, we have focused on meeting our clients’ needs while carefully managing our cost structure. We initiated significant severance actions in the fourth quarter of 2008, which have continued through 2009. In 2009, we recognized $165.5 of severance expense compared to $88.3 in 2008. The savings from these actions will continue to be realized in future periods. We believe we are well-positioned to capitalize on marketplace expansion once consumer confidence and client spending return. Going forward, we will continue to derive benefits from our diversified client base, global footprint and broad range of services. The improvements we have made in our financial reporting and business information systems during recent years provide us with timely and actionable insights from our global operations, which enables us to manage our business more effectively. Our conservative approach to the balance sheet and liquidity, as well as recent measures to further improve our debt maturity profile, have given us a solid financial foundation and the flexibility required to successfully move forward as business conditions improve.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Highlights

 

     Years ended December 31,  
     2009     2008  
% Increase/(Decrease)    Total     Organic     Total     Organic  

Revenue

     (13.4 )%      (10.8 )%      6.2   3.8

Salaries and related expenses

     (8.8 )%      (6.4 )%      4.9   2.5

Office and general expenses

     (14.5 )%      (11.8 )%      (1.5 )%    (2.6 )% 
     Years ended December 31,        
       2009         2008         2007          

Operating margin

     5.7     8.5     5.3  

Expenses as % of revenue:

        

Salaries and related expenses

     65.7     62.4     63.2  

Office and general expenses

     28.5     28.9     31.2  

 

Net income available to IPG common stockholders

   $ 93.6      $ 265.2      $ 131.3     

 

Operating cash flow

   $ 540.8      $ 865.3      $ 298.1     

 

Earnings per share available to IPG common stockholders:

        

Basic

   $ 0.20      $ 0.57      $ 0.29     

Diluted

   $ 0.19      $ 0.52      $ 0.26     

When we analyze period-to-period changes in our operating performance we determine the portion of the change that is attributable to 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 analyze 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 revenue. Additionally, in certain of our discussions we analyze revenue by business sector, where we focus on our top 100 clients, which typically constitute 50%-55% of our consolidated revenues. We also analyze revenue by geographic region.

The change in our operating performance attributable to foreign currency rates is determined by converting the prior-period reported results using the current period exchange rates and comparing the 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. As a result, both positive and negative currency fluctuations against the U.S. Dollar affect our consolidated results of operations. The primary foreign currencies that impact our results include the Euro, Pound Sterling, Brazilian Real, Japanese Yen, Canadian Dollar and Chinese Yuan Renminbi. For 2008, foreign currency fluctuations resulted in increases of approximately 1% in revenues and operating expenses, which contributed to a net increase in operating income of approximately 4% compared to the prior-year period. For 2009, foreign currency fluctuations resulted in decreases of approximately 4% in revenues and operating expenses, which contributed to a net decrease in operating income of approximately 4% compared to the prior-year period. For most of 2009, the U.S. Dollar strengthened against several foreign currencies as compared to the prior-year period, which had a negative impact on our 2009 consolidated results of operations. This trend began to reverse during the latter part of 2009 as the U.S. Dollar has weakened against several foreign currencies, and if this trend continues, it could have a positive impact on our consolidated results of operations in 2010.

For purposes of analyzing changes in our operating performance attributable to the net effect of acquisitions and divestitures, transactions are treated as if they occurred on the first day of the quarter during which the transaction occurred. During the past few years we have acquired companies that we believe will enhance our offering and disposed of businesses that are not consistent with our strategic plan. For additional information on our acquisitions, see Note 6 to the Consolidated Financial Statements. For 2009 and 2008, the net effect of acquisitions and divestitures increased revenue and operating expenses compared to the respective prior-year period.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

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. 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 advertising, marketing and communications programs in various media 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. Depending on the terms of a client contract, fees for services performed can be recognized in three principal ways: proportional performance, straight-line (or monthly basis) or completed contract. See Note 1 to the Consolidated Financial Statements for further information.

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 both qualitative and quantitative goals. 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. Incremental direct costs incurred related to contracts where revenue is accounted for on a completed contract basis are generally expensed as incurred. There are certain exceptions made for significant contracts or for certain agencies where the majority of the contracts are project-based and systems are in place to properly capture appropriate direct costs.

Substantially all 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. In accordance with the authoritative guidance for revenue recognition, 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

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

pass-through charges as we believe the key indicators of the business suggest we act as an agent on behalf of our clients in our primary lines of business. In those businesses (primarily sales promotion, event, sports and entertainment marketing) where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue and the related costs incurred as office and general expenses. Revenue is generally reported net of taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions.

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 financial performance. 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 or expense may also be realized in connection with settling vendor discount or credit liabilities that were established as part of the restatement we presented in our 2004 Annual Report on Form 10-K (the “2004 Restatement”). In these situations, and given the historical nature of these liabilities, we have recorded such items as other income or expense as we do not consider these to be part of current operating results.

Income Taxes

The provision for income taxes includes 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 changes.

In accordance with the authoritative guidance for income taxes, 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 due to the inability to generate sufficient taxable income in future periods. In circumstances where there is significant 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. In 2009 we recorded a net charge of $12.4 for the establishment of valuation allowances. In 2008 and 2007 we recorded a net reversal of valuation allowances of $48.0 and $22.3, respectively.

The authoritative guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement 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 a “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. See Note 7 to the Consolidated Financial Statements for further information.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Goodwill and Other Intangible Assets

As a result of changes in authoritative guidance, we account for our business combinations using the acquisition accounting method in 2009, while we utilized the purchase accounting method in prior years. Both accounting methods require us to determine the fair value of net assets acquired and the related goodwill and other intangible assets. See Note 1 to the Consolidated Financial Statements for further information. 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 1 st 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 15 reporting units that were subject to the 2009 annual impairment testing. Our reporting unit structure has not changed from 2008 except for the movement of one reporting unit into another reporting unit due to an operational decision by management during 2009. In addition, Deutsch and Lowe were tested as separate reporting units during 2009 but will be combined into one reporting unit in 2010 as a result of their alignment. Our annual impairment reviews as of October 1, 2009 did not result in an impairment charge at any of our reporting units.

We review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of these assets to the estimated undiscounted future cash flows expected to be generated by these assets. These assets are impaired when their carrying value exceeds their fair value. Impaired intangible assets with definite lives subject to amortization are written down to their fair value with a charge to expense in the period the impairment is identified. Intangible assets with definite lives are amortized on a straight-line basis with estimated useful lives generally between 7 and 15 years. Events or circumstances that might require impairment testing include the loss of a significant client, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, significant decline in stock price or a significant adverse change in business climate or regulations.

The authoritative guidance for goodwill specifies a two-step process for goodwill impairment testing and measuring the magnitude of any impairment. The first step of the impairment test is a comparison of the fair value of each reporting unit to its carrying value, including goodwill. The sum of the fair values of all our reporting units is reconciled to our current market capitalization plus an estimated control premium. Goodwill allocated to a reporting unit whose fair value is equal to or greater than its carrying value is not impaired, and no further testing is required. Should the carrying amount for a reporting unit exceed its fair value, then the first step of the impairment test is failed and the magnitude of any goodwill impairment is determined under the second step, which is a comparison of the implied fair value of a reporting unit’s goodwill to its carrying value. Goodwill of a reporting unit is impaired when its carrying value exceeds its implied fair value. Impaired goodwill is written down to its implied fair value with a charge to expense in the period the impairment is identified.

The fair value of a reporting unit for 2009 was estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. Historically, we have used a combination of the income and market approach for our analysis. However, the fair value of a reporting unit for 2008 was estimated using only the income approach as we determined that the market approach was not appropriate due to the deterioration and extreme volatility of the credit markets in the latter part of 2008. For 2009, we determined that the market approach was appropriate to use and we primarily applied an equal weighting to the income and market approach for our analysis. For the income approach, we used projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management. For the market approach, we used judgment in identifying the relevant comparable company market multiples.

 

18


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

These estimates and assumptions vary between each reporting unit depending on the facts and circumstances specific to that unit. The discount rate for each reporting unit is influenced by general market conditions as well as factors specific to the reporting unit and the discount rates we used for our reporting units were between 12.0% and 15.0%. We believe that the estimates and assumptions we made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material. A deterioration in profitability, adverse market conditions and a slower or weaker economic recovery than currently estimated by management could have a significant impact on the estimated fair value of our reporting units and could result in an impairment charge in the future.

We have performed a sensitivity analysis to detail the impact that changes in assumptions may have on the outcome of the first step of the impairment test. Our sensitivity analysis provides a range of fair value for each reporting unit, where the low end of the range reduces growth rates by 0.5% and increases discount rates by 0.5% and the high end of the range increases growth rates by 0.5% and decreases discount rates by 0.5%. We use the average of our fair values for purposes of our comparison between carrying value and fair value for the first step of the impairment test.

The following table shows the number of reporting units we tested in our 2009 and 2008 annual impairment reviews and the related goodwill value associated with the reporting units at the low end, average and high end of the valuation range for a) fair values exceeding carrying values by less than 10%, b) fair values exceeding carrying values between 10% and 20%, c) fair values exceeding carrying values by more than 20% and d) carrying values that exceed fair value.

 

2009 Impairment Test 1

   

2008 Impairment Test

 

Low End

   

Low End

 

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
   

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
 

Less than 10%

  3   $ 715.0      Less than 10%   3   $ 231.1   

10% – 20%

  1     12.2      10% – 20%   3     759.9   

Greater than 20%

  4     1,493.7      Greater than 20%   7     1,899.1   

Carrying value exceeds fair value

  5     341.8 2   

Carrying value exceeds fair value

  3     330.8 2 

Average

   

Average

 

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
   

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
 

Less than 10%

  6   $ 615.3      Less than 10%   5   $ 541.9   

10% – 20%

  2     447.6      10% – 20%   1     20.0   

Greater than 20%

  4     1,493.7      Greater than 20%   10     2,659.0   
Carrying value exceeds fair value   1     6.1 2       

High End

   

High End

 

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
   

Fair value exceeds
carrying value by:

  Number of
reporting
units
  Total goodwill
at the reporting
units
 

Less than 10%

  5   $ 430.4      Less than 10%   4   $ 535.7   

10% – 20%

  4     638.6      10% – 20%   2     26.2   

Greater than 20%

  4     1,493.7      Greater than 20%   10     2,659.0   

 

1

We did not test two reporting units in 2009 because we determined we could carry forward the fair value of the reporting unit from the last annual test, as the fair value significantly exceeded the book value.

2

We used the average fair value for purposes of our comparison between carrying value and fair value for the first step of the impairment test.

One reporting unit’s carrying value was greater than its average fair value during the first step of our goodwill impairment test and we were required to perform the second step of the impairment test. Total goodwill at this reporting unit was $6.1. Under the second step, the estimated fair value of the reporting unit was allocated among its assets and liabilities in

 

19


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

order to determine the implied fair value of goodwill. We did not record an impairment charge in the fourth quarter of 2009, as we determined that the implied fair value of goodwill was greater than the carrying value for this reporting unit. Additionally, no carrying value adjustment was made to the intangible assets for this reporting unit as the estimated cash flows were greater than the carrying value of these assets on an undiscounted basis.

Pension and Postretirement Benefits

We use various actuarial assumptions in determining our net pension and postretirement benefit costs and obligations. Management is required to make significant judgments about a number of actuarial assumptions, including discount rates and expected returns on plan assets, which are updated annually or more frequently with the occurrence of significant events.

The discount rate is one of the significant assumptions that impact our net pension and postretirement costs and obligations. For the domestic pension and postretirement benefit plans, we determine our discount rate based on the estimated rate at which annuity contracts could be purchased to effectively settle the respective benefit obligations. Each plan’s projected cash flow is matched to a yield curve based on Aa-rated corporate non-callable bonds and a present value is estimated, which is then used to develop a single equivalent discount rate. For the foreign pension plans, we either determine our discount rate using the same methodology as described for our domestic pension plan or based on a discount rate by referencing market yields on high quality corporate bonds in the local markets with the appropriate term as of December 31, 2009. For 2009, we used a weighted average discount rate of 6.01%, 5.54% and 6.00% for the domestic pension plans, foreign plans and the postretirement plan, respectively. For 2010, we plan to use weighted average discount rates of 5.53%, 5.51% and 5.50% for the domestic pension plans, foreign plans and the postretirement plan, respectively. Changes in the discount rates are generally due to increases or decreases in long-term interest rates. A higher discount rate will decrease our net pension cost. A 25 basis point increase or decrease in the discount rate would have decreased or increased the 2009 net pension and postretirement cost by approximately $2.0. In addition, a 25 basis point increase or decrease in the discount rate would have decreased or increased the December 31, 2009 benefit obligation by $18.7 and $19.8, respectively.

The expected rate of return on pension plan assets is another significant assumption that impacts our net pension cost and is determined at the beginning of the year. For the domestic pension plans, our expected rate of return considers the historical trends of asset class index returns over various market cycles and economic conditions, current market conditions, risk premiums associated with asset classes and long-term inflation rates. We determine both a short-term and long-term view and then attempt to select a long-term rate of return assumption that matches the duration of our liabilities. For the foreign pension plans, primarily the U.K. Pension Plan, we determine the expected rate of return by utilizing a weighted-average approach based on the current long-term expected rates of return for each asset category. The long-term expected rate of return for the equity category is based on the current long-term rates of return available on government bonds and applying suitable risk premiums that consider historical market returns and current market expectations. For 2009, we used weighted-average expected rates of return of 8.16% and 5.05% for the domestic and foreign pension plans, respectively. For 2010, we plan to use weighted-average expected rates of return of 7.46% and 5.87% for the domestic and foreign pension plans, respectively. Changes in the rates are due to lower or higher expected future returns based on the mix of assets held. A lower expected rate of return will increase our net pension cost. A 25 basis point increase or decrease in the expected return on plan assets would have decreased or increased the 2009 net pension cost by approximately $1.0.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

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. Additionally, revenues can fluctuate due to the timing of completed projects in the events marketing business, as revenue is typically recognized when the project is complete. We generally act as principal for these projects and as such record the gross amount billed to the client as revenue and the related costs incurred as pass-through costs in office and general expenses.

 

     Year ended
December 31,
2008
   Components of change     Year ended
December 31,
2009
   Change  
        Foreign
currency
    Net
acquisitions/
(divestitures)
   Organic        Organic     Total  

Consolidated

   $ 6,962.7    $ (251.6   $ 69.1    $ (752.6   $ 6,027.6    (10.8 )%    (13.4 )% 

Domestic

     3,786.3             14.2      (428.2     3,372.3    (11.3 )%    (10.9 )% 

International

     3,176.4      (251.6     54.9      (324.4     2,655.3    (10.2 )%    (16.4 )% 

United Kingdom

     612.9      (96.9          (57.5     458.5    (9.4 )%    (25.2 )% 

Continental Europe

     1,150.4      (85.0     2.3      (145.5     922.2    (12.6 )%    (19.8 )% 

Asia Pacific

     657.3      (13.9     4.2      (72.2     575.4    (11.0 )%    (12.5 )% 

Latin America

     353.4      (34.6          (11.5     307.3    (3.3 )%    (13.0 )% 

Other

     402.4      (21.2     48.4      (37.7     391.9    (9.4 )%    (2.6 )% 

During 2009, our revenue decreased by $935.1, or 13.4%, compared to 2008, primarily consisting of an organic revenue decrease of $752.6, or 10.8%, and an adverse foreign currency impact of $251.6. The decrease is primarily attributable to the negative impact of global economic conditions on nearly all sectors of our business throughout all geographic regions. Our organic decrease was primarily caused by spending declines and lost assignments from several of our largest clients in the sectors of technology and telecom, which is our largest sector, auto and transportation and financial services. Two other significant sectors, health and personal care and food and beverage, were relatively stable in 2009 as they only had slight organic revenue decreases. Additionally, a small percentage of our organic revenue decrease was related to prior-year project assignments in our events marketing discipline that, due to economic conditions, did not recur or were substantially curtailed. These projects are reflected in various sectors and geographic regions.

 

     Year ended
December 31,
2007
   Components of change    Year ended
December 31,
2008
   Change  
        Foreign
currency
    Net
acquisitions/
(divestitures)
    Organic       Organic     Total  

Consolidated

   $ 6,554.2    $ 71.5      $ 87.6      $ 249.4    $ 6,962.7    3.8   6.2

Domestic

     3,651.3             18.8        116.2      3,786.3    3.2   3.7

International

     2,902.9      71.5        68.8        133.2      3,176.4    4.6   9.4

United Kingdom

     603.6      (41.9     8.1        43.1      612.9    7.1   1.5

Continental Europe

     1,070.2      81.4        (19.5     18.3      1,150.4    1.7   7.5

Asia Pacific

     581.3      22.3        21.3        32.4      657.3    5.6   13.1

Latin America

     314.1      12.4        (2.8     29.7      353.4    9.5   12.5

Other

     333.7      (2.7     61.7        9.7      402.4    2.9   20.6

During 2008, our revenue increased by $408.5, or 6.2%, compared to 2007, primarily consisting of organic revenue growth of $249.4, or 3.8%, led by the technology and telecom and retail sectors. The organic increase was driven by expanding business with existing clients and winning new clients throughout all geographic regions, predominantly at IAN and to a lesser extent at Constituency Management Group (“CMG”).

 

21


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

In the latter part of 2008 economic conditions deteriorated, and persisted throughout 2009, which negatively impacted our revenue in the fourth quarter of 2008. During the fourth quarter of 2008, our revenue decreased by 4.1% compared to the fourth quarter of 2007, which reflected an organic revenue decrease of 2.2%.

Refer to the segment discussion later in this MD&A for information on changes in revenue by segment.

OPERATING EXPENSES

 

     Years ended December 31,  
     2009     2008     2007  
   $    % of
Revenue
    $    % of
Revenue
    $    % of
Revenue
 

Salaries and related expenses

   $ 3,961.2    65.7   $ 4,342.6    62.4   $ 4,139.2    63.2

Office and general expenses

     1,720.5    28.5     2,013.3    28.9     2,044.8    31.2

Restructuring and other reorganization-related charges

     4.6        17.1        25.9   
                           

Total operating expenses

   $ 5,686.3      $ 6,373.0      $ 6,209.9   
                           

Operating income

   $ 341.3      $ 589.7      $ 344.3   
                           

Salaries and Related Expenses

Salaries and related expenses consist of payroll costs, employee performance incentives, including annual bonus and long-term incentive stock awards, 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 hiring freelance contractors who are utilized to support business development and changes in the performance levels and types of employee incentive awards. Changes in our incentive awards mix can impact future-period expense, as annual bonus awards are expensed during the year they are earned and long-term incentive stock 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 and changes to our projected results, which could impact the satisfaction of certain performance targets. See Note 11 to the Consolidated Financial Statements for further information on our incentive compensation plans.

 

     Prior year
amount
   Components of change during the year     Total
amount
   Change  
        Foreign
currency
    Net
acquisitions/
(divestitures)
   Organic        Organic     Total  

2008 – 2009

   $ 4,342.6    $ (150.0   $ 47.8    $ (279.2   $ 3,961.2    (6.4 )%    (8.8 )% 

2007 – 2008

     4,139.2      40.8        59.4      103.2        4,342.6    2.5   4.9

Salaries and related expenses in 2009 decreased by $381.4 compared to 2008, primarily consisting of an organic decrease of $279.2 and a favorable foreign currency rate impact of $150.0. The organic improvement was due to lower base salaries, benefits and temporary help of $266.7, primarily related to work force reductions across all networks that were initiated in the fourth quarter of 2008 and continued throughout 2009 to respond to the difficult economic conditions. Our work force reductions resulted in an organic increase in severance charges of $79.9 in 2009 when compared to the prior year. Excluding incremental severance, the organic decrease in salaries and related expenses would have been 8.3% when compared to 2008. The largest components of our severance charges in 2009 were related to our advertising and media businesses in the IAN segment, primarily in the U.S. and Continental Europe regions. Since we started taking actions in the fourth quarter of 2008, work force reductions have decreased headcount by approximately 6,400 employees, representing approximately 14% of our work force. We expect that our more recent work force reductions will contribute to further declines in base salaries and benefits, and we currently do not anticipate significant additional work force reductions in 2010.

Also contributing to the organic decrease in 2009 was a reduction in incentive award expense of $55.9, resulting from lower annual bonus awards and long-term incentive award expense. There were lower annual bonus award accruals in 2009

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

due to lower operating results, and to a lesser extent, lower headcount when compared to the prior year. The reduction in expected long-term incentive award expense was attributable to an increase in our forfeiture rate as a result of higher actual forfeitures compared to estimates, changes in our assumptions on achieving certain performance targets, and, to a lesser extent, the vesting in the first quarter of 2009 of a one-time performance-based equity award granted in 2006 to a limited number of senior executives. These reductions were partially offset by higher expense due to increases in our stock price in 2009 as compared to 2008.

Salaries and related expenses in 2008 increased by $203.4 compared to 2007, consisting of an organic increase of $103.2, net acquisitions of $59.4 and an adverse foreign currency impact of $40.8. The organic increase was primarily to support business growth (an organic revenue increase of $249.4) during 2008, resulting in higher base salaries, benefits and temporary help of $100.4, predominantly at our largest networks. There was no significant change in incentive award expense compared to the prior year as long-term incentive award expense was unchanged, and annual bonus award expense decreased by $15.1. As economic conditions deteriorated in the latter part of 2008, we incurred an organic increase in severance charges of $17.4 in the fourth quarter.

The following table details our salaries and related expenses as a percentage of total consolidated revenue.

 

     Years ended December 31,  
       2009         2008         2007    

Salaries and related expenses

   65.7   62.4   63.2

Base salaries, benefits and tax

   54.5   51.6   51.9

Incentive expense

   2.9   3.4   3.7

Severance expense

   2.7   1.3   1.2

Temporary help

   2.8   3.1   3.5

All other salaries and related expenses

   2.8   3.0   2.9

Our staff cost ratio, defined as salaries and related expenses as a percentage of total consolidated revenue, increased to 65.7% in 2009 from 62.4% in 2008, primarily driven by lower revenues and increased severance expense, partially offset by lower base salaries, benefits, temporary help and incentive award expenses. Our staff cost ratio declined to 62.4% in 2008 from 63.2% in 2007, primarily driven by higher revenues and better utilization of base salaries and benefits expenses.

Office and General Expenses

Office and general expenses primarily include rent expense, professional fees, certain expenses incurred by our staff in servicing our clients and depreciation and amortization costs. Office and general expenses also include costs directly attributable to client engagements, including production costs, out-of-pocket costs such as travel for client service staff, and other direct costs that are rebilled to our clients. Production expenses can vary significantly between periods depending upon the timing of completion of certain projects where we act as principal, which could impact trends between various periods in the future.

 

          Components of change during the year          Change  
     Prior year
amount
   Foreign
currency
    Net
acquisitions/
(divestitures)
   Organic     Total
amount
   Organic     Total  

2008 – 2009

   $ 2,013.3    $ (79.2   $ 24.9    $ (238.5   $ 1,720.5    (11.8 )%    (14.5 )% 

2007 – 2008

     2,044.8      16.5        5.7      (53.7     2,013.3    (2.6 )%    (1.5 )% 

Office and general expenses in 2009 decreased by $292.8 compared to 2008, primarily consisting of an organic decrease of $238.5 and a favorable foreign currency rate impact of $79.2. The organic improvement was largely due to our cost containment efforts, which resulted in lower discretionary spending, primarily related to travel and entertainment, office supplies and employment costs. Additionally, approximately one-third of the organic decline was from lower production expenses related to pass-through costs for certain projects where we acted as principal that did not recur or decreased in size during 2009. These reductions were partially offset by a benefit from favorable foreign currency changes in 2008 on certain balance sheet items that did not recur in 2009, and to a lesser extent, higher rent charges in 2009 due to lease terminations and other exit costs.

 

23


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Office and general expenses in 2008 decreased by $31.5 compared to 2007, primarily consisting of an organic decrease of $53.7. The organic improvement was primarily due to reductions in professional fees, occupancy costs, depreciation and amortization as well as a higher focus on managing discretionary expenses. The organic decrease in professional fees of $29.0 was primarily due to reduced legal consultations as a result of the resolution of the SEC investigation and improvements in our financial systems, back office processes and internal controls. Occupancy costs and depreciation and amortization declined, and there were favorable foreign currency changes on certain balance sheet items in 2008 when compared to 2007. These decreases were partially offset by an increase in production expenses of $33.6 related to pass-through costs for certain projects where we acted as principal and an increase in bad debt expense related to collection concerns for certain clients.

The following table details our office and general expenses as a percentage of total consolidated revenue. All other office and general expenses primarily include production expenses, and to a smaller extent, depreciation and amortization, bad debt expense, foreign currency gains (losses) and other expenses.

 

     Years ended December 31,  
       2009         2008         2007    

Office and general expenses

   28.5   28.9   31.2

Professional fees

   2.0   2.0   2.5

Occupancy expense (excluding depreciation and amortization)

   8.6   7.6   8.1

Travel & entertainment, office supplies and telecommunications

   3.6   4.3   4.7

All other office and general expenses

   14.3   15.0   15.9

Our office and general expense ratio, defined as office and general expenses as a percentage of total consolidated revenue, declined to 28.5% in 2009 from 28.9% in 2008, driven by the major expense categories that had reductions listed above, partially offset by lower revenue. Our office and general expense ratio declined to 28.9% in 2008 from 31.2% in 2007, driven by higher revenue and reductions in key expense categories.

Restructuring and Other Reorganization-Related Charges

The components of restructuring and other reorganization-related charges is listed below.

 

     Years ended December 31,  
       2009         2008        2007    

Restructuring (reversals) charges:

       

Lease termination and other exit costs

   $ (0.1   $ 5.2    $ (0.4

Severance and termination costs

     (0.3     0.6      13.8   
                       
     (0.4     5.8      13.4   

Other reorganization-related charges

     5.0        11.3      12.5   
                       

Total

   $ 4.6      $ 17.1    $ 25.9   
                       

Restructuring (reversals) charges relate to the 2003 and 2001 restructuring programs and a restructuring program entered into at Lowe during the third quarter of 2007. Included in these net (reversals) charges are adjustments primarily resulting from changes in management’s estimates relating to sublease rental income assumptions and prior severance and termination related actions. Additionally, in 2008 and 2007 net charges included adjustments resulting from severance and termination costs and accelerated leasehold amortization for the 2007 program at Lowe.

Other reorganization-related charges were separated from the rest of our operating expenses within the Consolidated Statements of Operations because they did not result from charges that occurred in the normal course of business. These charges primarily relate to the alignment of Deutsch and Lowe in 2009 and the realignment of our media businesses into a management entity called Mediabrands in 2008. Charges relate to severance and termination costs and lease termination and

 

24


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

other exit costs for these activities. We expect to incur additional charges of approximately $1.5 associated with the Deutsch and Lowe alignment in 2010 as we finish implementing our plans. The actions associated with Mediabrands are complete. See Note 8 to the Consolidated Financial Statements for further information.

EXPENSES AND OTHER INCOME

 

     Years ended December 31,  
         2009             2008             2007      

Cash interest on debt obligations

   $ (138.6   $ (183.2   $ (205.9

Non-cash interest

     (17.0     (28.7     (30.8
                        

Interest expense

     (155.6     (211.9     (236.7

Interest income

     35.0        90.6        119.6   
                        

Net interest expense

     (120.6     (121.3     (117.1

Other income, net

     11.7        3.1        8.5   
                        

Total (expenses) and other income

   $ (108.9   $ (118.2   $ (108.6
                        

Net Interest Expense

For 2009 as compared to 2008, cash interest expense, largely related to our short-term obligations, and interest income both decreased primarily due to lower interest rates, mostly in the United Kingdom, Continental Europe, and to a lesser extent, the United States. The majority of the change in non-cash interest expense resulted from a decline in amortization of deferred warrant costs and debt issuance costs in connection with the expiration of our $750.0 Three-Year Credit Agreement, dated as of June 13, 2006 (the “2006 Credit Agreement”) in June 2009. The decrease in non-cash interest expense was partially offset by changes in the value of obligations to purchase noncontrolling equity shares of consolidated subsidiaries. The value of these obligations may fluctuate depending on projected future operating performance of these subsidiaries. See Note 12 to the Consolidated Financial Statements for further information.

For 2008 as compared to 2007, cash interest expense decreased primarily due to the repurchase of the majority of the 4.50% Convertible Senior Notes due 2023 (the “4.50% Notes”) in the first quarter of 2008, lower interest rates paid on the Floating Rate Senior Unsecured Notes due 2010 (the “2010 Notes”), lower short-term debt balances and lower interest rates at our international agencies. Interest income decreased due to more conservative investment strategies in the United States compared to the prior year and lower interest rates in the United States.

Other Income, net

Results of operations include certain items which are either discrete or are not directly associated with our revenue producing operations.

 

     Years ended December 31,  
         2009             2008             2007      

Net loss on early extinguishment of debt

   $ (25.1   $      $ (12.5

Gains (losses) on sales of businesses and investments

     10.2        (3.1     (9.4

Vendor discounts and credit adjustments

     24.4        20.7        24.3   

Litigation settlement

            (12.0     2.8   

Investment impairments

     (2.7     (2.9     (6.2

Other income, net

     4.9        0.4        9.5   
                        

Total other income, net

   $ 11.7      $ 3.1      $ 8.5   
                        

Net Loss on Early Extinguishment of DebtDuring 2009, we recorded a net charge of $25.1 related to the settlement of our tender offers for the 5.40% Senior Unsecured Notes due 2009 (the “2009 Notes”), 7.25% Senior Unsecured Notes due 2011 (the “2011 Notes”) and the 2010 Notes, the redemption of all of our outstanding 2009 Notes and the retirement of our 4.50% Notes. During 2007, we recognized non-cash charges related to the extinguishment of $200.0 of our 4.50% Notes. See Note 2 to the Consolidated Financial Statements for further information.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Sales of Businesses and Investments – Primarily includes realized gains and losses relating to the sales of businesses, cumulative translation adjustment balances from the liquidation of entities and sales of marketable securities and investments in publicly traded and privately held companies in our Rabbi Trusts. During 2009, we realized a gain of $15.2 related to the sale of an investment in our Rabbi Trusts, which was partially offset by losses realized from the sale of various businesses. Losses in 2007 primarily related to the sale of several businesses within Draftfcb for a loss of $9.3 and charges at Lowe of $7.8 as a result of the realization of cumulative translation adjustment balances from the liquidation of several businesses.

Vendor Discounts and Credit Adjustments – We are in the process of settling our liabilities related to vendor discounts and credits established during the restatement we presented in our 2004 Annual Report on Form 10-K (the “2004 Restatement”). These adjustments reflect the reversal of certain of these liabilities as a result of settlements with clients or vendors or where the statute of limitations has lapsed. See Note 4 to the Consolidated Financial Statements for further information.

Litigation Settlement – During May 2008, the SEC concluded its investigation that began in 2002 into our financial reporting practices, resulting in a settlement charge of $12.0.

Investment Impairments – In 2007 we realized an other-than-temporary charge of $5.8 relating to a $12.5 investment in auction rate securities, representing our total investment in auction rate securities. See Note 12 to the Consolidated Financial Statements for further information.

INCOME TAXES

 

     Years ended December 31,
         2009            2008            2007    

Income before income taxes

   $ 232.4    $ 471.5    $ 235.7
                    

Provision for income taxes

   $ 90.1    $ 156.6    $ 58.9
                    

Our tax rate is affected by many factors, including our worldwide earnings from various countries, changes in legislation and tax characteristics of our income. Our effective tax rate of 38.8% was positively impacted in 2009 by the recognition of previously unrecognized tax benefits, net, which includes the recognition of tax benefits on partially worthless securities of $10.7. Our effective tax rate was negatively impacted by losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances, the establishment of valuation allowances in the Asia Pacific region and the write-off of deferred tax assets related to restricted stock.

During 2009, we finalized our proceedings with the IRS appeals division for the 1997-2002 and 2003-2004 audit cycles. We also finalized our IRS examination for the 2005-2006 audit cycle. As a result, we recognized previously unrecognized tax benefits and related interest of $50.1 related to various items of income and expense, including transfer pricing adjustments and adjustments relating to the 2004 Restatement.

Also during 2009, we recorded a net establishment of a valuation allowance of $12.4 relating to deferred tax assets in jurisdictions where there was significant negative evidence causing us to believe that it is no longer “more likely than not” that the corresponding tax loss carryforward will be utilized. During 2008 and 2007, we had net reversals in our valuation allowances of $48.0 and $22.3, respectively, on existing deferred tax assets.

In 2008, our effective tax rate of 33.2% was negatively impacted by losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances, the non-deductible SEC settlement provision and additional net tax reserves for uncertain tax positions. Our effective tax rate was positively impacted in 2008 by the utilization of tax loss carryforwards against taxable profits and by the net reversal of certain valuation allowances in jurisdictions where entities have demonstrated a sustained period of profitability and future projections indicate that the trend will continue. Additionally, we recognized tax benefits from tax law and other changes in certain U.S. states, which impacted the effective tax rate.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

In 2007, our effective tax rate of 25.0% was primarily impacted by the effective settlement of the IRS examination for 2003 and 2004 which resulted in the realization of previously unrecognized tax benefits, of which approximately $80.0 was attributable to certain worthless securities deductions. The tax provision for 2007 was also impacted by foreign profits subject to tax at different rates and losses in certain foreign locations where we receive no tax benefit due to 100% valuation allowances.

See Note 7 to the Consolidated Financial Statements for further information.

Segment Results of Operations

As discussed in Note 14 to the Consolidated Financial Statements, we have two reportable segments as of December 31, 2009: IAN and CMG. We also report results for the Corporate and other group.

IAN

REVENUE

 

          Components of change          Change  
     Year ended
December 31,
2008
   Foreign
currency
    Net
acquisitions/
(divestitures)
   Organic     Year ended
December 31,
2009
   Organic     Total  

Consolidated

   $ 5,870.7    $ (216.6   $ 69.1    $ (610.7   $ 5,112.5    (10.4 )%    (12.9 )% 

Domestic

     3,075.4             14.2      (338.3     2,751.3    (11.0 )%    (10.5 )% 

International

     2,795.3      (216.6     54.9      (272.4     2,361.2    (9.7 )%    (15.5 )% 

During 2009, our revenue decreased by $758.2, compared to 2008, primarily consisting of organic revenue decrease of $610.7 and an adverse foreign currency impact of $216.6. The domestic and international organic revenue decrease was primarily driven by a pullback of existing client spending throughout all agencies within IAN, primarily due to challenging economic conditions. Additionally contributing to the organic revenue decrease was lost assignments from certain existing clients. The international organic decrease occurred throughout all regions, with the largest impacts in the Continental Europe region, primarily in Spain and France, the United Kingdom, and the Asia Pacific region, primarily in China and Japan. The decrease was most predominant in the technology and telecom, auto and transportation and financial service sectors. However, two other significant sectors, health and personal care and food and beverage, were relatively stable during 2009 as they only had slight decreases.

 

          Components of change         Change  
     Year ended
December 31,
2007
   Foreign
currency
   Net
acquisitions/
(divestitures)
   Organic    Year ended
December 31,
2008
   Organic     Total  

Consolidated

   $ 5,505.7    $ 70.8    $ 109.4    $ 184.8    $ 5,870.7    3.4   6.6

Domestic

     2,972.1           18.8      84.5      3,075.4    2.8   3.5

International

     2,533.6      70.8      90.6      100.3      2,795.3    4.0   10.3

During 2008, our revenue increased by $365.0 compared to 2007, primarily consisting of organic revenue growth of $184.8 and net acquisitions of $109.4. The increase was predominantly in the technology and telecom sector, and to a lesser extent, in the retail and financial service sectors. The domestic organic revenue increase was primarily a result of higher revenues with existing clients and net client wins, primarily at McCann and Mediabrands. Partially offsetting this domestic organic increase was decreased revenue from Lowe and certain independent agencies that are largely dependent on the automobile sector and were impacted by lower revenues with existing clients and net client losses. The international organic revenue increase occurred throughout all regions due to net client wins and higher revenue from existing clients. The increase in the United Kingdom was primarily at Lowe and the increase in the Asia Pacific region occurred primarily in China at McCann. The increase in the Continental Europe region occurred primarily in Spain at Lowe and Mediabrands and the increase in the Latin America region primarily occurred in Brazil at Draftfcb.

 

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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  
         2009             2008             2007         '09 vs '08     '08 vs '07  

Segment operating income

   $ 425.9      $ 690.8      $ 528.2      (38.3 )%    30.8

Operating margin

     8.3     11.8     9.6    

Operating income decreased during 2009 when compared to 2008 due to a decrease in revenue of $758.2, partially offset by decreases in salaries and related expenses of $286.3 and office and general expenses of $207.0. The decrease in salaries and related expenses was primarily due to lower base salaries, benefits and temporary help related to work force actions taken during the fourth quarter of 2008 and throughout 2009, across all agencies within IAN, in response to the difficult economic conditions that began in the latter part of 2008. Incentive award expense was lower during 2009, primarily due to reduced annual bonus awards consistent with the explanations provided in the consolidated Salaries and Related Expenses section. These reductions were partially offset by higher severance charges resulting from the work force actions taken during 2009, which affected all regions, with the largest impact in the U.S. and Continental Europe. Office and general expenses were lower primarily attributable to cost containment measures that reduced discretionary expenses, mainly related to travel and entertainment, office supplies, employment costs, as well as, lower production expenses associated with reduced project work where we acted as principal. These reductions were partially offset by a benefit from favorable foreign currency changes in 2008 on certain balance sheet items that did not recur in 2009.

Operating income increased during 2008 when compared to 2007 due to an increase in revenue of $365.0 and a decrease in office and general expenses of $15.1, partially offset by increases in salaries and related expenses of $217.5. The decrease in office and general expenses was due to favorable foreign currency changes on certain balance sheet items in 2008 when compared to 2007 and lower production expenses. The decrease in office and general expenses is partially offset by increased bad debt expense and higher amortization of intangibles primarily related to acquisitions made in 2008. Higher salaries and related expenses were primarily due to an increase in base salaries, benefits and temporary help of $183.1 to support growth in 2008, primarily at McCann and Mediabrands.

CMG

REVENUE

 

          Components of change          Change  
     Year ended
December 31,
2008
   Foreign
currency
    Net
acquisitions/
(divestitures)
   Organic     Year ended
December 31,
2009
   Organic     Total  

Consolidated

   $ 1,092.0    $ (35.0   $    $ (141.9   $ 915.1    (13.0 )%    (16.2 )% 

Domestic

     710.9                  (89.9     621.0    (12.6 )%    (12.6 )% 

International

     381.1      (35.0          (52.0     294.1    (13.6 )%    (22.8 )% 

During 2009, our revenue decreased by $176.9, compared to 2008, due to an organic revenue decline of $141.9 and an adverse foreign currency impact of $35.0. The domestic and international organic revenue decreases were primarily due to the completion of several projects with existing clients in 2008 that did not recur or were substantially curtailed in 2009 in our events marketing business and the pullback of existing client spending in certain of our public relations and branding businesses due to broader economic difficulties. The international organic decrease occurred primarily in the United Kingdom and the Asia Pacific region, primarily in China and Australia.

 

          Components of change         Change  
     Year ended
December 31,
2007
   Foreign
currency
   Net
acquisitions/
(divestitures)
    Organic    Year ended
December 31,
2008
   Organic     Total  

Consolidated

   $ 1,048.5    $ 0.7    $ (21.8   $ 64.6    $ 1,092.0    6.2   4.1

Domestic

     679.2                  31.7      710.9    4.7   4.7

International

     369.3      0.7      (21.8     32.9      381.1    8.9   3.2

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

During 2008, our revenue increased by $43.5 compared to 2007, primarily due to organic growth of $64.6, partially offset by net divestitures of $21.8. The domestic organic revenue increase was primarily due to net client wins and increased spending from existing clients in the public relations business, which covers a broad range of services and client sectors. The international organic revenue increase was primarily due to the completion of several projects with existing clients and net client wins in the events marketing business in the United Kingdom.

SEGMENT OPERATING INCOME

 

     Years ended December 31,     Change  
       2009         2008         2007       '09 vs '08     '08 vs '07  

Segment operating income

   $ 70.6      $ 86.6      $ 57.9      (18.5 )%    49.6

Operating margin

     7.7     7.9     5.5    

Operating income decreased during 2009 when compared to 2008 due to a decrease in revenue of $176.9, partially offset by decreases in office and general expenses of $84.2 and salaries and related expenses of $76.7. Office and general expenses decreased primarily due to lower production expenses in the events marketing business and, to a lesser extent, reductions in certain discretionary expenses. These reductions were partially offset by a benefit from favorable foreign currency changes in 2008 on certain balance sheet items that did not recur in 2009. Salaries and related expenses decreased primarily due to a decrease in base salaries, benefits and temporary help of $59.1 as a result of lower headcount from severance actions. Additionally, incentive award expense was lower during 2009 driven by lower annual bonus awards due to reduced operating results.

Operating income increased during 2008 when compared to 2007 due to an increase in revenue of $43.5 and a decrease in office and general expenses of $9.1, partially offset by an increase in salaries and related expenses of $23.9. Office and general expenses decreased primarily due to lower occupancy costs, as a result of lease termination and other exit costs related to facilities exited in 2007 and due to favorable foreign currency changes on certain balance sheet items in 2008 when compared to 2007, partially offset by higher production expenses related to several projects with new and existing clients in the events marketing business. Salaries and related expenses increased primarily due to an increase in base salaries, benefits and temporary help of $17.8 related to the events marketing and public relations businesses to support revenue growth.

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 and shared service center expenses, as well as certain other centrally managed expenses that are not fully allocated to operating divisions. Salaries and related expenses include salaries, long-term incentives, bonus, 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, which 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 these 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. Allocation methodologies are consistent with prior years.

Corporate and other expenses decreased during 2009 by $20.0 to $150.6 compared to 2008, primarily due to lower long-term incentive award expense and reductions in professional fees. The reduction in long-term incentive award expense primarily relates to the vesting in the first quarter of 2009 of a one-time performance-based equity award granted in 2006 to a limited number of senior executives and to changes in our assumptions on achieving certain performance targets. The decline in professional fees is primarily due to reduced audit and legal fees.

Corporate and other expenses decreased during 2008 by $45.3 to $170.6 compared to 2007, primarily due to lower professional fees, partially offset by the impact of unfavorable foreign currency changes on certain balance sheet items when

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

compared to 2007. Lower professional fees were primarily due to improvements in our financial systems, back office processes and internal controls as well as reduced legal consultations associated with the resolution of our SEC investigation and other financial matters. In addition, base salaries, benefits and temporary help decreased due to lower headcount and reduced technology projects.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW OVERVIEW

Our key liquidity metrics are operating cash flow and changes in working capital. The following tables summarize key financial data relating to our liquidity, capital resources and uses of capital.

 

     Years ended December 31,  

Cash Flow Data

   2009     2008     2007  

Net cash provided by operating activities

   $ 540.8      $ 865.3      $ 298.1   

Net cash provided by (used in) investing activities

     29.4        (404.3     (267.8

Net cash used in financing activities

     (267.0     (275.8     (37.3

Working capital source (usage) (included in operating activities)

   $ 98.9      $ 193.5      $ (171.0
     December 31,        

Balance Sheet Data

   2009     2008        

Cash, cash equivalents and marketable securities

   $ 2,506.1      $ 2,274.9     

Short-term debt

   $ 308.6      $ 332.8     

Long-term debt

     1,638.0        1,786.9     
                  

Total debt

   $ 1,946.6      $ 2,119.7     
                  

Operating Activities

Net cash provided by operating activities during 2009 was $540.8, which is a decrease of $324.5 as compared to 2008, primarily the result of a decrease in net income of $174.6 and a reduction in working capital generation of $94.6. Net cash provided by operating activities primarily reflects net income of $143.4, working capital cash generation of $98.9 and net adjustments to reconcile net income of $378.5. Net adjustments to reconcile net income primarily include depreciation and amortization of fixed assets and intangible assets, amortization of restricted stock and other non-cash compensation, deferred income tax benefits and the net loss on early extinguishment of debt. Cash generated or used by working capital reflects changes in accounts receivable, expenditures billable to clients, prepaid expenses and other current assets, accounts payable and accrued liabilities. Due to the combined effect of decreases in client spending as a result of economic conditions during 2009 and strong growth in the latter part of 2008 at certain of our businesses, our generation of working capital decreased in 2009 compared to 2008; however, continued improvement in working capital management at certain businesses contributed to our ability to generate cash from working capital in 2009.

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 media and production liabilities. Our assets include both cash received and accounts receivable from clients for these pass-through arrangements, while our liabilities include amounts owed on behalf of clients to media and production suppliers.

Our accrued liabilities are also affected by the timing of certain other payments. For example, while cash incentive awards are accrued throughout the year, they are generally paid during the first quarter of the subsequent year.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Investing Activities

Net cash provided by investing activities during 2009 includes sales and maturities of short-term marketable securities, partially offset by deferred payments on prior acquisitions and capital expenditures. Net sales and maturities of short-term marketable securities of $168.2 primarily relates to a redemption of a time deposit.

Financing Activities

Net cash used in financing activities during 2009 primarily reflects proceeds, uses and fees related to our debt transactions. We issued $600.0 in aggregate principal amount of 2017 Notes at 97.958% of par and incurred related debt issuance costs. We settled tenders of our 2009 Notes, 2011 Notes and 2010 Notes with a cash payment of $734.7. Additionally, during the third quarter of 2009, we paid $36.0 of cash to redeem the remaining $36.0 aggregate principal amount of the 2009 Notes, and during the fourth quarter of 2009, we paid $8.0 of cash to retire the remaining $8.7 aggregate principal amount of the 4.50% Notes. Amounts related to accrued and unpaid interest for these transactions are reflected in Operating Activities. Total net cash used related to these debt transactions, including issuance costs and discounts, was $210.2.

Additionally, net cash used in financing activities reflects dividend payments of $27.6 on our Series B Preferred Stock and distributions to noncontrolling interests of $22.2.

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 an increase of $84.8 during 2009. This increase primarily reflects the strengthening of the Euro against the U.S. Dollar during this period.

LIQUIDITY OUTLOOK

We generated significant cash from operations in 2009 and ended the year with $2,506.1 in cash, cash equivalents and marketable securities. Based on our cash flow forecasts, 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. In addition, we have a committed credit facility available to support our operating needs. Our policy is to maintain a conservative approach to liquidity, which we believe is appropriate for our company. We are closely managing our spending and will defer or limit discretionary spending where appropriate, while continuing to position ourselves for growth in the future.

Although we have seen some signs of economic stability in recent months, the difficult global economic conditions made business conditions extremely challenging for us during 2009, and should market conditions continue to adversely affect our clients, it could challenge our level of cash generation from operations. Economic conditions have caused a decrease in demand for advertising and marketing services, which led to a decrease in our revenue during 2009. Although we have not experienced and currently do not expect that we will experience a material increase in client defaults, a deterioration in market conditions increase the likelihood that we could experience a loss in the future. We have accounts receivable related to revenues earned and for pass-through costs incurred on behalf of our clients as well as expenditures billable to clients related to costs incurred and fees earned that have not yet been billed.

We maintain a committed corporate credit facility to increase our financial flexibility. We have not drawn on any of our corporate credit facilities since 2003, although we use them to issue letters of credit primarily to support commitments on behalf of certain clients. Our 2006 Credit Agreement expired in June 2009. Prior to the expiration of our 2006 Credit Agreement, we replaced a portion of this facility with our $335.0 Three-Year Credit Agreement, dated as of July 18, 2008 (the “2008 Credit Agreement”). The outstanding letters of credit under the 2006 Credit Agreement were replaced with letters of credit issued under the 2008 Credit Agreement in the second quarter of 2009. In December 2009, we entered into a letter of credit agreement (the “2009 LC Agreement”) in order to provide additional liquidity under the 2008 Credit Agreement by replacing a portion of the letters of credit outstanding under the 2008 Credit Agreement. As of December 31, 2009, no letters of credit had been issued under the 2009 LC Agreement. See “Financing and Sources of Funds” below and Note 2 to the Consolidated Financial Statements for further information.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

As discussed below, we took measures in 2009 to extend our debt maturities. From time to time we evaluate market conditions and financing alternatives for opportunities to raise additional financing or otherwise improve our liquidity profile and enhance our financial flexibility. 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 capital markets, such as the amount or terms of available credit. Should we access the capital markets, there can be no guarantee that we would be able to access new sources of liquidity on commercially reasonable terms.

Funding Requirements

Our most significant funding requirements include: our operations, non-cancelable operating lease obligations, acquisitions, capital expenditures, debt service, preferred stock dividends, contributions to pension and postretirement plans and taxes. Additionally, we may be required to make payments to minority owners if put options related to prior acquisitions are exercised. In any twelve-month period, we maintain substantial flexibility over certain significant uses of cash, including our capital expenditures and cash used for new acquisitions. Notable funding requirements include:

 

   

Debt service – The remaining $213.7 aggregate principal amount of our 2010 Notes matures on November 15, 2010. We expect to use available cash to reduce our debt in 2010. The remainder of our debt is primarily long-term, with maturities scheduled from 2011 to 2023. See table below for the maturity schedule of our long-term debt.

 

   

Acquisitions – During 2009 we paid approximately $66.0 of deferred payments related to acquisitions completed in previous years. We expect to continue to evaluate strategic opportunities to grow and to increase our ownership interests in current investments, particularly in our digital and marketing services offerings, and to expand our presence in high-growth markets.

 

   

Contributions to pension and postretirement plans – Our funding policy regarding our pension plan is to contribute amounts necessary to satisfy minimum pension funding requirements, plus such additional amounts as we consider appropriate to improve the plans’ funded status. During 2009, we contributed $31.9 to our foreign pension plans and contributions to the domestic pension plan were negligible. For 2010, we expect to contribute $25.2 to our foreign pension plans and $9.2 to our domestic pension plans. A significant portion of our contributions to the foreign pension plans relate to the Interpublic Pension Plan in the U.K. (“the U.K. Pension Plan”). Additionally, we are in the process of modifying the schedule of employer contributions for the U.K. Pension Plan and we expect to finalize this during 2010. As a result, we expect our contributions to our foreign pension plans to increase from current levels in 2010 and subsequent years.

 

   

Preferred stock dividends – We pay regular quarterly dividends on our Series B Preferred Stock of $6.9, or $27.6 annually.

The following summarizes our estimated contractual cash obligations and commitments as of December 31, 2009 and their effect on our liquidity and cash flow in future periods.

 

     Years ended December 31,          
     2010    2011    2012    2013    2014    Thereafter    Total

Long-term debt 1

   $ 217.1    $ 39.0    $ 2.2    $ 17.7    $ 350.1    $ 1,200.2    $ 1,826.3

Interest payments on long-term debt

     126.6      112.7      108.4      108.4      108.4      405.3      969.8

Non-cancelable operating lease obligations 2

     285.6      259.0      221.0      190.8      158.5      663.3      1,778.2

Contingent acquisition payments 3

     64.9      82.7      41.7      37.4      5.4      0.3      232.4

Uncertain tax positions

     54.8      28.2      7.5      6.5      27.4      10.0      134.4
                                                

Total

   $ 749.0    $ 521.6    $ 380.8    $ 360.8    $ 649.8    $ 2,279.1    $ 4,941.1
                                                

 

1

Amounts represent maturity at par. Holders of our 4.25% Convertible Senior Notes due 2023 may require us to repurchase their Notes for cash at par in March 2012 and holders of our 4.75% Convertible Senior Notes due 2023 may require us to repurchase their Notes for cash, stock or a combination, at our election, at par in March 2013. All of these Notes will mature in 2023 if not converted or repurchased.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

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 in order to reduce the potential risk associated with negative future performance of the acquired entity. See Note 6 and Note 15 to the Consolidated Financial Statements for further information.

FINANCING AND SOURCES OF FUNDS

Substantially all of our operating cash flow is generated by our agencies. Our cash balances are held in numerous locations 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, 2009  
     Total
Facility
   Amount
Outstanding
   Letters
of Credit 1
    Total
Available
 

Cash, cash equivalents and marketable securities

           $ 2,506.1   

Committed

          

2008 Credit Agreement

   $ 335.0    $    $ 94.5 2    $ 240.5 2 

Uncommitted

   $ 413.2    $ 93.4    $ 0.1      $ 319.7   

 

1

We are required from time to time to post letters of credit, primarily to support our commitments, or those of our subsidiaries, primarily to purchase media placements, mostly in locations outside the U.S., or to satisfy other obligations. These letters of credit have historically not been drawn upon.

2

In January 2010, we replaced the equivalent of $67.2 of the letters of credit outstanding under the 2008 Credit Agreement with letters of credit issued under the 2009 LC Agreement.

We entered into the following transactions that have impacted our liquidity:

Long-Term Debt

 

   

On June 8, 2009, we launched tender offers to purchase, for cash, (i) any and all of our $250.0 2009 Notes and (ii) up to $500.0 in aggregate principal amount of our outstanding 2011 Notes and 2010 Notes. As a result of our tender offers we purchased $214.0 aggregate principal amount of the 2009 Notes, $463.7 aggregate principal of the 2011 Notes and $36.3 aggregate principal of the 2010 Notes. Total cash paid for all of our tender offers, including accrued and unpaid interest, was $747.9.

 

   

On June 15, 2009, we issued $600.0 in aggregate principal amount of 2017 Notes at 97.958% of par. The net proceeds were approximately $572.0 after deducting discounts, commissions and offering expenses. We used the proceeds from the offering of the 2017 Notes in part to fund our tender offer to purchase up to $500.0 aggregate principal amount of outstanding 2011 Notes and 2010 Notes.

 

   

In the third quarter of 2009, we entered into a series of interest rate swap agreements related to our 6.25% Senior Unsecured Notes due 2014 (the “2014 Notes”). These swap agreements effectively converted $250.0 notional amount of our $350.0 2014 Notes from fixed rate to floating rate debt. In February 2010, we terminated all of these interest rate swap agreements and we received a total of $5.4 in cash relating to the gain which will be amortized as a reduction to interest expense over the remaining term of the 2014 Notes.

 

   

On September 14, 2009, we redeemed all of our 2009 Notes that remained outstanding, which were scheduled to mature on November 15, 2009. Total cash paid to redeem the $36.0 aggregate principal amount of the 2009 Notes, including accrued and unpaid interest, was $37.0.

 

   

In the fourth quarter of 2009, we retired the remaining outstanding 4.50% Notes. Total cash paid to retire the $8.7 aggregate principal amount of the 4.50% Notes, including accrued and unpaid interest, was $8.1.

See Note 2 to the Consolidated Financial Statements for further information.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

(Amounts in Millions, Except Per Share Amounts)

 

Credit Facilities

The 2008 Credit Agreement is a revolving facility expiring July 18, 2011, under which amounts borrowed by us or any of our subsidiaries designated under the 2008 Credit Agreement may be repaid and reborrowed, subject to an aggregate lending limit of $335.0 or the equivalent in other currencies. The aggregate available amount of letters of credit outstanding may decrease or increase, subject to a limit on letters of credit of $200.0 or the equivalent in other currencies. Our obligations under the 2008 Credit Agreement are unsecured.

 

   

On May 13, 2009, we entered into Amendment No. 1 to the 2008 Credit Agreement to exclude from the financial covenant calculations certain effects of any bankruptcy or related event with respect to General Motors Corporation (“GM”) and/or any of its affiliates. Amendment No. 1 modifies the definition of earnings before interest, taxes, depreciation and amortization (“EBITDA”) under the 2008 Credit Agreement to exclude from the determination of consolidated EBITDA any effects arising from any bankruptcy or other adverse event with respect to GM and/or any of its affiliates, limited to an aggregate amount of $150.0 of cash charges and an aggregate amount of $100.0 of non-cash charges.

 

   

In June 2009 and January 2010, we entered into Amendment No. 2 and Amendment No. 3, respectively, to the 2008 Credit Agreement to modify certain terms of the financial covenants. As of the end of each fiscal quarter, the amendments require that we maintain (i) an interest coverage ratio (EBITDA to net interest expense plus cash dividends on convertible preferred stock) for the four quarters then ended of not less than 3.75 to 1, (ii) a leverage ratio (debt as of such date to EBITDA) for the four quarters then ended of not greater than 3.75 to 1 for December 31, 2009 and March 31, 2010, 3.50 to 1 for June 30, 2010 and 3.25 to 1 thereafter, and (iii) minimum EBITDA for the four quarters then ended of not less than $520.0 for December 31, 2009 and March 31, 2010, $550.0 for June 30, 2010 and $600.0 thereafter. If we had not entered into Amendment No. 3 to the 2008 Credit Agreement, we would have breached our leverage ratio as of December 31, 2009.

We are in compliance with all applicable restrictive and financial covenants in the 2008 Credit Agreement, as amended, as seen in the table below.

 

Financial Covenants

  Four Quarters
Ended
December 31,
2009

Interest coverage ratio (not less than)

    3.75x

Actual interest coverage ratio

    4.20x

Leverage ratio (not greater than)

    3.75x

Actual leverage ratio

    3.47x

EBITDA (not less than)

  $ 520.0

Actual EBITDA

  $ 560.6

EBITDA Reconciliation

  Four Quarters
Ended
December 31,
2009
Operating income   $ 341.3
Add:  
Depreciation and amortization     219.3
Non-cash charges    
     
EBITDA   $ 560.6
     

 

If we are unable to comply with these financial covenants in the future, we would seek an additional amendment and/or waiver from our lenders, but there is no assurance that our lenders would grant an amendment or waiver. If we do not comply with these financial covenants and are unable to obtain the necessary amendment or waiver, the 2008 Credit Agreement 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. As of December 31, 2009, there was no outstanding principal and $94.5 in outstanding letters of credit.

Under the 2009 LC Agreement, the face amount of letters of credit outstanding is subject to an aggregate limit at any one time of £45.0 (equivalent as of December 31, 2009 to $72.0). IPG has guaranteed any obligations of our subsidiary under this facility.

 

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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. We use our uncommitted credit lines for working capital needs at some of our operations outside the U.S., and the amount outstanding as of December 31, 2009 and 2008 was $93.4 and $78.8, respectively. 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, 2009 and 2008 was approximately 2% and 3%, respectively.

On June 15, 2009, our 2006 Credit Agreement expired and, as of the expiration date, there was no outstanding principal. In connection with the 2006 Credit Agreement, we had issued 67.9 warrants with a stated exercise date of June 15, 2009. Based on the market price of our common stock and stated exercise prices of the warrants, we did not have to make any cash payments or issue any common stock to settle the warrants. See Note 2 to the Consolidated Financial Statements for further information.

Cash Pooling

We aggregate our net domestic cash position on a daily basis. Outside the U.S. we use cash pooling arrangements with banks to help manage our liquidity requirements. In these pooling arrangements, several Interpublic agencies agree with a single bank that the cash balances of any of the agencies with the bank will be subject to a full right of setoff against amounts the other agencies owe the bank, and the bank provides 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, 2009 and 2008 the amounts netted were $946.5 and $858.7, respectively.

DEBT RATINGS

Our long-term debt credit ratings as of February 16, 2010 are listed below.

 

     Moody’s Investor
Service
   Standard and
Poor’s
   Fitch Ratings

Rating

   Ba3    B+    BB+

Outlook

   Positive    Stable    Positive

The most recent change in our credit ratings occurred on March 5, 2009 when Standard and 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.

RECENT ACCOUNTING STANDARDS

See Note 16 to the Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2009 and certain accounting standards which we have not yet been required to implement and may be applicable to our future operations.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

(Amounts in millions)

In the normal course of business, we are exposed to market risks related to interest rates, foreign currency rates and certain balance sheet items. From time to time, we use derivatives, pursuant to established guidelines and policies, to manage some portion of these risks. Derivative instruments utilized in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes.

Interest Rates

Our exposure to market risk for changes in interest rates relates primarily to the fair market value of our debt obligations as the majority of our debt (approximately 84% as of December 31, 2009 and 2008) bears interest at fixed rates. We do have debt with variable interest rates, but a 10% increase or decrease in interest rates would not be material to our interest expense or cash flows. The fair market value of our debt is sensitive to changes in interest rates and the impact of a change in interest rates is summarized below.

 

     Increase/(Decrease) in
Fair Market Value
     10% Increase
in Interest
Rates
    10% Decrease
in Interest
Rates

2009

   $ (36.0   $ 33.0

2008

     (22.0     23.0

We enter into interest rate swaps for risk management purposes to manage our exposure to changes in interest rates and to maintain a mix of fixed and floating rate debt. Changes in interest rates could affect the amount recorded to our Consolidated Financial Statements related to interest rate swap agreements. In the third quarter of 2009, we entered into a series of interest rate swap agreements that effectively converted $250.0 notional amount of our $350.0 2014 Notes from fixed rate to floating rate debt. We recognize changes in fair value of the interest rate swap agreements as well as changes in fair value of the underlying debt within other income, net and as a result we recorded a net gain of $0.1 for the year ended December 31, 2009. In February 2010 we terminated all of our interest rate swaps. See Note 2 and Note 12 to the Consolidated Financial Statements for further information.

We have $2,506.1 of cash, cash equivalents and marketable securities as of December 31, 2009, which are subject to changes in interest rates, and we generally invest these assets in conservative, short-term investment-grade securities with financial institutions. The interest income we obtain from these investments are subject to both domestic and foreign interest rate movements. During 2009, due to significant declines in foreign interest rates, and to a lesser extent, domestic interest rates, our interest income decreased when compared to 2008. A 1% increase or decrease in interest rates would impact our interest income by approximately $25.0. This assumes that all cash, cash equivalents and marketable securities are impacted in the same manner and balances remain constant from year-end levels.

Foreign Currencies

We are subject to translation and transaction risks related to changes in foreign currency exchange rates. Since we report revenues and expenses in U.S. Dollars, changes in exchange rates may either positively or negatively affect our consolidated revenues and expenses (as expressed in U.S. Dollars) from foreign operations. The primary currency exchanges that we have exposure to in 2009 are the Euro, Pound Sterling, Brazilian Real, Japanese Yen, Canadian Dollar and Chinese Yuan Renminbi. Based on 2009 exchange rates and operating results, if the U.S. dollar were to strengthen by 10%, we currently estimate operating income would decrease between 1% and 3%. This assumes that all currencies are impacted in the same manner and our international revenue and expenses remain constant from current levels. The functional currency of our foreign operations is generally their respective local currency. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date and revenues and expenses are translated at the average exchange rates during the period presented. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in the stockholders’ equity section of our Consolidated Balance Sheets. Our foreign subsidiaries generally collect revenues and pay

 

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expenses in their functional currency, mitigating transaction risk. However, certain subsidiaries may enter into transactions in currencies other than their functional currency. Assets and liabilities denominated in currencies other than the functional currency are susceptible to movements in foreign currency until final settlement. Currency transaction gains or losses primarily arising from transactions in currencies other than the functional currency are included in office and general expenses. We have not entered into a material amount of foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of potential adverse fluctuations in foreign currency exchange rates.

We monitor the currencies of countries in which we operate in order to determine if the country should be considered a highly inflationary environment. A currency is determined to be highly inflationary when there is cumulative inflation of approximately 100% or more over a three-year period. If this occurs the functional currency of that country would be changed to our reporting currency, the U.S. dollar, and foreign exchange gains or losses would be recognized on all monetary transactions, assets and liabilities denominated in currencies other than the U.S. dollar until the currency is no longer considered highly inflationary. Our Venezuela agencies will transition to inflationary accounting on January 1, 2010, and we will be recording a foreign exchange translation loss of approximately $5.0 in the first quarter of 2010 as a result of the significant devaluation that occurred to the official rate in January 2010. This will be recorded in income before income taxes within the Consolidated Statement of Operations. Going forward, we will be re-measuring our local non-monetary transactions, assets and liabilities using the exchange rate of 4.3 Venezuelan Bolivars Fuertes per U.S. dollar. Although this devaluation will result in a reduction in the U.S. dollar reported amount of local currency denominated revenues and expenses, we do not have significant operations in Venezuela and, subsequent to our foreign exchange translation loss on devaluation noted above, we do not expect this to have a material impact to our consolidated financial statements.

Credit and Market Risks

Certain balance sheet items that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents, short-term marketable securities, accounts receivable and expenditures billable to clients. We invest our excess cash in investment-grade, short-term securities with financial institutions and limit the amount of credit exposure to any one counterparty. Concentrations of credit risk with respect to accounts receivable are mitigated by our large number of clients and their dispersion across different industries and geographic areas. We perform ongoing credit evaluations of our clients and maintain an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.

Our pension plan assets are also exposed to market risk. The fair value of our pension plan assets may appreciate or depreciate during the year and can result in lower or higher pension expense and funding requirements in future periods.

 

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Table of Contents
Item 8. Financial Statements and Supplementary Data

INDEX

 

     Page

Report of Independent Registered Public Accounting Firm

   39

Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   40

Consolidated Balance Sheets as of December 31, 2009 and 2008

   41

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   42

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007

   43

Notes to Consolidated Financial Statements

   45

1. Summary of Significant Accounting Policies

   45

2. Debt and Credit Arrangements

   51

3. Earnings per Share

   57

4. Supplementary Data

   58

5. Intangible Assets

   60

6. Acquisitions

   61

7. Income Taxes

   63

8. Restructuring and Other Reorganization-Related Charges

   67

9. Convertible Preferred Stock

   68

10. Accumulated Other Comprehensive Loss, net of tax

   68

11. Incentive Compensation Plans

   69

12. Fair Value Measurements

   72

13. Employee Benefits

   74

14. Segment Information

   79

15. Commitments and Contingencies

   81

16. Recent Accounting Standards

   82

17. Results by Quarter (Unaudited)

   84

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of The Interpublic Group of Companies, Inc.

In our opinion, the accompanying Consolidated Balance Sheets and the related Consolidated Statements of Operations, of Cash Flows, and of Stockholders’ Equity and Comprehensive Income present fairly, in all material respects, the financial position of The Interpublic Group of Companies, Inc., and its subsidiaries, (“the Company”) at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for noncontrolling interests as of January 1, 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers, LLP

New York, New York

February 26, 2010

 

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Amounts in Millions, Except Per Share Amounts)

 

     Years ended December 31,  
     2009     2008     2007  

REVENUE

   $ 6,027.6      $ 6,962.7      $ 6,554.2   
                        

OPERATING EXPENSES:

      

Salaries and related expenses

     3,961.2        4,342.6        4,139.2   

Office and general expenses

     1,720.5        2,013.3        2,044.8   

Restructuring and other reorganization-related charges

     4.6        17.1        25.9   
                        

Total operating expenses

     5,686.3        6,373.0        6,209.9   
                        

OPERATING INCOME

     341.3        589.7        344.3   
                        

EXPENSES AND OTHER INCOME:

      

Interest expense

     (155.6     (211.9     (236.7

Interest income

     35.0        90.6        119.6   

Other income, net

     11.7        3.1        8.5   
                        

Total (expenses) and other income

     (108.9     (118.2     (108.6
                        

Income before income taxes

     232.4        471.5        235.7   

Provision for income taxes

     90.1        156.6        58.9   
                        

Income of consolidated companies

     142.3        314.9        176.8   

Equity in net income of unconsolidated affiliates

     1.1        3.1        7.5   
                        

NET INCOME

     143.4        318.0        184.3   

Net income attributable to noncontrolling interests

     (22.1     (23.0     (16.7
                        

NET INCOME ATTRIBUTABLE TO IPG

     121.3        295.0        167.6   

Dividends on preferred stock

     (27.6     (27.6     (27.6

Allocation to participating securities

     (0.1     (2.2     (8.7
                        

NET INCOME AVAILABLE TO IPG COMMON STOCKHOLDERS

   $ 93.6      $ 265.2      $ 131.3   
                        

Earnings per share available to IPG common stockholders:

      

Basic

   $ 0.20      $ 0.57      $ 0.29   

Diluted

   $ 0.19      $ 0.52      $ 0.26   

Weighted-average number of common shares outstanding:

      

Basic

     468.2        461.5        457.7   

Diluted

     508.1        518.3        503.1   

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in Millions, Except Per Share Amounts)

 

     December 31,  
     2009     2008  

ASSETS:

    

Cash and cash equivalents

   $ 2,495.2      $ 2,107.2   

Marketable securities

     10.9        167.7   

Accounts receivable, net of allowance of $66.0 and $63.9

     3,756.5        3,746.5   

Expenditures billable to clients

     1,100.1        1,099.5   

Other current assets

     275.0        366.7   
                

Total current assets

     7,637.7        7,487.6   

Furniture, equipment and leasehold improvements, net

     490.1        561.5   

Deferred income taxes

     398.3        416.8   

Goodwill

     3,321.0        3,220.9   

Other assets

     416.0        438.4   
                

TOTAL ASSETS

   $ 12,263.1      $ 12,125.2   
                

LIABILITIES:

    

Accounts payable

   $ 4,003.9      $ 4,022.6   

Accrued liabilities

     2,593.1        2,521.6   

Short-term debt

     308.6        332.8   
                

Total current liabilities

     6,905.6        6,877.0   

Long-term debt

     1,638.0        1,786.9   

Deferred compensation and employee benefits

     565.0        549.8   

Other non-current liabilities

     340.4        378.9   
                

TOTAL LIABILITIES

     9,449.0        9,592.6   
                

Commitments and contingencies (see Note 15)

    

Redeemable noncontrolling interests (see Note 6)

     277.8        288.4   

STOCKHOLDERS’ EQUITY:

    

Preferred stock, no par value, shares authorized: 20.0
Series B shares issued and outstanding: 0.5

     525.0        525.0   

Common stock, $0.10 par value, shares authorized: 800.0
shares issued: 2009 – 486.5; 2008 – 477.1
shares outstanding: 2009 – 486.1; 2008 – 476.6

     47.1        46.4   

Additional paid-in capital

     2,441.0        2,413.5   

Accumulated deficit

     (324.8     (446.1

Accumulated other comprehensive loss, net of tax

     (176.6     (318.5
                
     2,511.7        2,220.3   

Less: Treasury stock, at cost: 0.4 shares

     (14.0     (14.0
                

Total IPG stockholders’ equity

     2,497.7        2,206.3   

Noncontrolling interests

     38.6        37.9   
                

TOTAL STOCKHOLDERS’ EQUITY

     2,536.3        2,244.2   
                

TOTAL LIABILITIES AND EQUITY

   $ 12,263.1      $ 12,125.2   
                

 

The accompanying notes are an integral part of these financial statements.

 

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in Millions)

 

     Years ended December 31,  
     2009     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 143.4      $ 318.0      $ 184.3   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization of fixed assets and intangible assets

     169.9        173.3        177.2   

Provision for (reversal of) bad debt

     19.3        17.0        (3.6

Amortization of restricted stock and other non-cash compensation

     49.5        80.1        79.7   

Amortization of bond discounts and deferred financing costs

     12.1        28.7        30.8   

Net loss on early extinguishment of debt

     25.1               12.5   

Deferred income tax provision (benefit)

     89.2        51.9        (22.4

Other

     13.4        29.0        25.2   

Changes in assets and liabilities, net of acquisitions and dispositions, providing (using) cash:

      

Accounts receivable

     179.5        283.9        43.5   

Expenditures billable to clients

     19.7        69.7        (124.5

Prepaid expenses and other current assets

     33.1        (19.2     9.7   

Accounts payable

     (173.0     6.8        (221.5

Accrued liabilities

     39.6        (147.7     121.8   

Other non-current assets and liabilities

     (80.0     (26.2     (14.6
                        

Net cash provided by operating activities

     540.8        865.3        298.1   
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Sales and maturities of short-term marketable securities

     168.2        5.6        702.7   

Purchases of short-term marketable securities

     (9.7     (159.9     (720.8

Acquisitions, including deferred payments, net of cash acquired

     (72.4     (106.0     (151.4

Capital expenditures

     (67.1     (138.4     (147.6

Proceeds from sales of businesses and investments, net of cash sold

     11.1        27.9        69.6   

Purchases of investments

     (1.9     (35.6     (25.0

Other investing activities

     1.2        2.1        4.7   
                        

Net cash provided by (used in) investing activities

     29.4        (404.3     (267.8
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Purchase of long-term debt

     (778.7     (190.8       

Proceeds from issuance of 10.0% Senior Notes due 2017

     587.7                 

Issuance costs

     (19.2     (11.3     (3.5

Net (decrease) increase in short-term bank borrowings

            (23.7     10.0   

Distributions to noncontrolling interests

     (22.2     (14.6     (18.1

Preferred stock dividends

     (27.6     (27.6     (27.6

Other financing activities

     (7.0     (7.8     1.9   
                        

Net cash used in financing activities

     (267.0     (275.8     (37.3
                        

Effect of foreign exchange rate changes on cash and cash equivalents

     84.8        (92.9     66.2   
                        

Net increase in cash and cash equivalents

     388.0        92.3        59.2   

Cash and cash equivalents at beginning of period

     2,107.2        2,014.9        1,955.7   
                        

Cash and cash equivalents at end of period

   $ 2,495.2      $ 2,107.2      $ 2,014.9   
                        

SUPPLEMENTAL CASH FLOW INFORMATION

      

Cash paid for interest

   $ 138.6      $ 183.2      $ 205.9   

Cash paid for income taxes, net of $55.0, $12.9 and $31.1 of refunds in 2009, 2008 and 2007, respectively

   $ 57.3      $ 104.4      $ 88.3   

 

The accompanying notes are an integral part of these financial statements.

 

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(Amounts in Millions)

 

<
    Preferred
Stock
  Common Stock   Additional
Paid-

in Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive

Loss, Net of
Tax
    Treasury
Stock
    Total IPG
Stockholders’

Equity
    Noncontrolling
Interests
    Total
Stockholders’

Equity
 
      Shares   Amount              

Balance at December 31, 2006

  $ 525.0   469.0   $ 45.6   $ 2,536.1      $ (899.2   $ (303.0   $ (14.0   $ 1,890.5      $ 38.1      $ 1,928.6   

Comprehensive income:

                   

Net income

            167.6            167.6        16.7        184.3   

Foreign currency translation adjustment, net of tax

              142.1          142.1        2.7        144.8   

Changes in market value of securities available-for-sale, net of tax of ($1.2)

              (5.2       (5.2       (5.2

Recognition of previously unrealized losses on securities available-for-sale, net of tax

              1.0          1.0          1.0   

Unrecognized losses, transition obligation and prior service cost, net of tax of ($9.8)

              46.5          46.5          46.5   
                                     

Total comprehensive income

                $ 352.0      $ 19.4      $ 371.4   
                                     

Reclassifications related to redeemable noncontrolling interests

                    1.0        1.0   

Noncontrolling interest transactions