THE INTERPUBLIC GROUP OF COMPANIES, INC.
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 (the "Company," "IPG,"
"we," "us" or "our"). MD&A should be read in conjunction with our Consolidated
Financial Statements and the accompanying notes included in this report. Our
MD&A includes the following sections:
EXECUTIVE SUMMARY provides a discussion about our strategic outlook, factors
influencing our business and an overview of our results of operations and
liquidity.
RESULTS OF OPERATIONS provides an analysis of the consolidated and segment
results of operations for 2019 compared to 2018 and 2018 compared to 2017.
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, funding
requirements, contractual obligations, financing and sources of funds, and debt
credit ratings.
CRITICAL ACCOUNTING ESTIMATES provides a discussion of our accounting policies
that require critical judgment, assumptions and estimates.
RECENT ACCOUNTING STANDARDS, by reference to Note 17 to the Consolidated
Financial Statements, provides a discussion of certain accounting standards that
have been adopted during 2019 or that have not yet been required to be
implemented and may be applicable to our future operations.
NON-GAAP FINANCIAL MEASURE provides a reconciliation of non-GAAP financial
measure with the most directly comparable generally accepted accounting
principles in the United States ("U.S. GAAP") financial measures and sets forth
the reasons we believe that presentation of the non-GAAP financial measure
contained therein provides useful information to investors regarding our results
of operations and financial condition.
EXECUTIVE SUMMARY
We are one of the world's premier global advertising and marketing services
companies. Our companies specialize in consumer advertising, digital marketing,
media planning and buying, public relations, specialized communications
disciplines and data management. Our agencies create customized marketing
programs for clients that range in scale from large global marketers to regional
and local clients. Comprehensive global services are critical to effectively
serve our multinational and local clients in markets throughout the world as
they seek to build brands, increase sales of their products and services, and
gain market share.
We operate in a media landscape that continues to evolve at a rapid pace. Media
channels continue to fragment, and clients face an increasingly complex consumer
environment. To stay ahead of these challenges and to achieve our objectives, we
have made and continue to make investments in creative, strategic and technology
talent in areas including fast-growth digital marketing channels, high-growth
geographic regions and strategic world markets. We consistently review
opportunities within our Company to enhance our operations through acquisitions
and strategic alliances and internal programs that encourage intra-company
collaboration. As appropriate, we also develop relationships with technology and
emerging media companies that are building leading-edge marketing tools that
complement our agencies' skill sets and capabilities.
Our financial goals include competitive organic net revenue growth and expansion
of EBITA margin, as defined and discussed within the Non-GAAP Financial
Measure section of this MD&A, which we expect will further strengthen our
balance sheet and total liquidity and increase value to our shareholders.
Accordingly, we remain focused on meeting the evolving needs of our clients
while concurrently managing our cost structure. We continually seek greater
efficiency in the delivery of our services, focusing on more effective resource
utilization, including the productivity of our employees, real estate,
information technology and shared services, such as finance, human resources and
legal. The improvements we have made and continue to make in our financial
reporting and business information systems in recent years allow us more timely
and actionable insights from our global operations. Our disciplined approach to
our balance sheet and liquidity provides us with a solid financial foundation
and financial flexibility to manage and grow our business. We believe that our
strategy and execution position us to meet our financial goals and to deliver
long-term shareholder value.
When we analyze period-to-period changes in our operating performance, we
determine the portion of the change that is attributable to changes in foreign
currency rates and the net effect of acquisitions and divestitures, and the
remainder we call organic change, which indicates how our underlying business
performed. We exclude the impact of billable expenses in analyzing our operating
performance as the fluctuations from period to period are not indicative of the
performance of our underlying businesses and have no impact on our operating
income or net income.
The change in our operating performance attributable to changes in foreign
currency rates is determined by converting the prior-period reported results
using the current-period exchange rates and comparing these prior-period
adjusted amounts to the prior-period reported results. Although the U.S. Dollar
is our reporting currency, a substantial portion of our revenues and expenses
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
are generated in foreign currencies. Therefore, our reported results are
affected by fluctuations in the currencies in which we conduct our international
businesses. Our exposure is mitigated as the majority of our revenues and
expenses in any given market are generally denominated in the same currency.
Both positive and negative currency fluctuations against the U.S. Dollar affect
our consolidated results of operations, and the magnitude of the foreign
currency impact to our operations related to each geographic region depends on
the significance and operating performance of the region. The foreign currencies
that most adversely impacted our results during the year ended December 31, 2019
were the British Pound Sterling and Euro.
For purposes of analyzing changes in our operating performance attributable to
the net effect of acquisitions and divestitures, transactions are treated as if
they occurred on the first day of the quarter during which the transaction
occurred. During the past few years, we have acquired companies that we believe
will enhance our offerings and disposed of businesses that are not consistent
with our strategic plan.
The metrics that we use to evaluate our financial performance include organic
change in net revenue as well as the change in certain operating expenses, and
the components thereof, expressed as a percentage of consolidated net revenue,
as well as EBITA. These metrics are also used by management to assess the
financial performance of our reportable segments, Integrated Agency Networks
("IAN") and Constituency Management Group ("CMG"). In certain of our
discussions, we analyze net revenue by geographic region and by business sector,
in which we focus on our top 100 clients, which typically constitute
approximately 55% to 60% of our annual consolidated net revenues.
The following table presents a summary of our financial performance for the
years ended December 31, 2019 , 2018 and 2017.
Change
Years ended December 31, 2019 vs 2018 2018 vs 2017
% Increase/ % Increase/
Statement of Operations Data 2019 2018 2017 (Decrease) (Decrease)
REVENUE:
Net revenue $ 8,625.1 $ 8,031.6 $ 7,473.5 7.4 % 7.5 %
Billable expenses 1,596.2 1,682.8 1,574.1 (5.1 )% 6.9 %
Total revenue $ 10,221.3 $ 9,714.4 $ 9,047.6 5.2 % 7.4 %
OPERATING INCOME 1, 2 $ 1,086.0 $ 1,008.8 $ 938.4 7.7 % 7.5 %
EBITA 1, 2, 3 $ 1,172.0 $ 1,046.4 $ 959.5 12.0 % 9.1 %
NET INCOME AVAILABLE TO IPG COMMON
STOCKHOLDERS $ 656.0 $ 618.9 $ 554.4
Earnings per share available to
IPG common stockholders:
Basic 1, 2 $ 1.70 $ 1.61 $ 1.42
Diluted 1, 2 $ 1.68 $ 1.59 $ 1.40
Operating Ratios
Organic change in net revenue 3.3 % 5.5 % 1.5 %
Operating margin on net revenue 1,
2 12.6 % 12.6 % 12.6 %
Operating margin on total revenue
1, 2 10.6 % 10.4 % 10.4 %
EBITA margin on net revenue 1, 2,
3 13.6 % 13.0 % 12.8 %
Expenses as a % of net revenue:
Salaries and related expenses 64.6 % 66.0 % 66.8 %
Office and other direct expenses 18.1 % 16.9 % 17.0 %
Selling, general and
administrative expenses 1 1.1 % 2.1 % 1.6 %
Depreciation and amortization 3.2 % 2.5 % 2.1 %
Restructuring charges 2 0.4 % 0.0 % 0.0 %
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
1 In 2018, results include transaction costs of
acquisition.
2 In 2019, results include restructuring charges of
Charges" in MD&A and Note 11 of Item 8, Financial Statements and
Supplementary Data for further information.
3 EBITA is a financial measure that is not defined by U.S. GAAP. EBITA iscalculated as net income available to IPG common stockholder before provision
for incomes taxes, total (expenses) and other income, equity in net income
(loss) of unconsolidated affiliates, net income attributable to
noncontrolling interests and amortization of acquired intangibles. Refer to
the Non-GAAP Financial Measure section of this MD&A for additional
information and for a reconciliation to
Our organic net revenue increase of 3.3% for the year endedDecember 31, 2019 was driven by growth across nearly all geographic regions, attributable to a combination of net higher spending from existing clients and net client wins, most notably in the healthcare, financial services, technology and telecom, and retail sectors, partially offset by a decrease in the auto and transportation sector. During the year endedDecember 31, 2019 , our EBITA margin on net revenue grew to 13.6% from 13.0% in the prior-year period as the increase in net revenue outpaced the overall increase in our operating expense, excluding billable expenses and amortization of acquired intangibles. Our organic net revenue increase of 5.5% for the year endedDecember 31, 2018 was driven by growth throughout all geographic regions, and attributable to a combination of net client wins and net higher spending from existing clients, most notably in the healthcare sector, partially offset by decreases in the food and beverage sector. During the year endedDecember 31, 2018 , our EBITA margin on net revenue increased to 13.0% from 12.8% in the prior-year period as the increase in net revenue outpaced the overall increase in our operating expense, excluding billable expenses and amortization of acquired intangibles. RESULTS OF OPERATIONS Consolidated Results of OperationsNet Revenue Our net revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. Most of our expenses are recognized ratably throughout the year and are therefore less seasonal than revenue. Our net revenue is typically lowest in the first quarter and highest in the fourth quarter, reflecting the seasonal spending of our clients. Components of Change Change Year ended Net Year ended December 31, Foreign Acquisitions/ December 31, 2018 Currency (Divestitures) Organic 2019 Organic Total Consolidated$ 8,031.6 $ (143.1 ) $ 467.8 $ 268.8 $ 8,625.1 3.3 % 7.4 % Domestic 4,825.0 0.0 469.9 91.2 5,386.1 1.9 % 11.6 % International 3,206.6 (143.1 ) (2.1 ) 177.6 3,239.0 5.5 % 1.0 % United Kingdom 711.7 (32.0 ) 20.8 26.5 727.0 3.7 % 2.1 % Continental Europe 737.5 (40.6 ) (8.4 ) 53.9 742.4 7.3 % 0.7 % Asia Pacific 896.8 (26.2 ) (9.9 ) (2.4 ) 858.3 (0.3 )% (4.3 )% Latin America 350.1 (34.4 ) (2.1 ) 76.3 389.9 21.8 % 11.4 % Other 510.5 (9.9 ) (2.5 ) 23.3 521.4 4.6 % 2.1 % The organic increase in our domestic market was primarily driven by growth at our advertising and media businesses as well as our data management business. In our international markets, the organic increase was primarily driven by strong performance at our media businesses throughout all geographic regions. In addition, the organic increase was also driven by growth at our advertising businesses and our public relations agencies as well as at our digital specialist agencies inLatin America . Consolidated net acquisitions primarily includes net revenue during the first nine months endedSeptember 30, 2019 from Acxiom, which we acquired onOctober 1, 2018 , partially offset by divestitures, mostly in our domestic market,Asia Pacific and Continental Europe regions. 20
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Components of Change Change
Year ended Net Year ended
December 31, Foreign Acquisitions/ December 31,
2017 Currency (Divestitures) Organic 2018 Organic Total
Consolidated $ 7,473.5 $ 15.9 $ 128.2 $ 414.0 $ 8,031.6 5.5 % 7.5 %
Domestic 4,458.8 0.0 139.9 226.3 4,825.0 5.1 % 8.2 %
International 3,014.7 15.9 (11.7 ) 187.7 3,206.6 6.2 % 6.4 %
United Kingdom 613.1 24.1 15.3 59.2 711.7 9.7 % 16.1 %
Continental Europe 687.8 27.8 (14.7 ) 36.6 737.5 5.3 % 7.2 %
Asia Pacific 866.9 (2.0 ) (2.0 ) 33.9 896.8 3.9 % 3.4 %
Latin America 350.8 (35.6 ) (6.1 ) 41.0 350.1 11.7 % (0.2 )%
Other 496.1 1.6 (4.2 ) 17.0 510.5 3.4 % 2.9 %
The organic increase in our domestic market was driven by growth across all
disciplines, most notably at our advertising and media businesses. In our
international markets, the organic increase was driven by growth across all
geographic regions and nearly all disciplines, primarily at our media and
advertising businesses and our digital specialist agencies, including strong
performance at our advertising businesses in the United Kingdom and at our media
businesses in the Continental Europe, Latin America and United Kingdom regions.
Consolidated net acquisitions primarily includes net revenue from Acxiom, which
we acquired on October 1, 2018 .
Refer to the segment discussion later in this MD&A for information on changes in
revenue by segment.
Salaries and Related Expenses
Change
Years ended December 31, 2019 vs 2018 2018 vs 2017
% Increase/ % Increase/
2019 2018 2017 (Decrease) (Decrease)Salaries and related expenses$ 5,568.8 $ 5,298.3 $ 4,990.7 5.1 % 6.2 % As a % of net revenue: Salaries and related expenses 64.6 % 66.0 % 66.8 % Base salaries, benefits and tax 54.5 % 54.9 % 56.1 % Incentive expense 3.3 % 3.7 % 3.3 % Severance expense 0.6 % 0.9 % 1.0 % Temporary help 4.1 % 4.2 %
3.9 % All other salaries and related expenses 2.1 % 2.3 % 2.5 %
Net revenue growth of 7.4% outpaced the increase in salaries and related expenses of 5.1% during the year endedDecember 31, 2019 as compared to the prior-year period, primarily due to base salaries, benefits and tax, and temporary help expenses increasing at rates less than net revenue growth. The improved ratio was also attributable to the inclusion of Acxiom, for the full year in 2019, which has a lower ratio of salaries and related expenses as a percentage of its net revenue as well as a result of carefully managing our employee costs. Net revenue growth of 7.5% outpaced the increase in salaries and related expenses of 6.2% in 2018 as compared to the prior-year period, primarily driven by leverage in base salaries, benefits and tax, partially offset by higher incentive expense as a result of improved financial performance and higher temporary help to support business growth. The acquisition of Acxiom, completed onOctober 1, 2018 , did not have a significant impact on the ratios presented above. 21
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)Office and Other Direct Expenses
Change
Years ended December 31, 2019 vs 2018 2018 vs 2017
% Increase/ % Increase/
2019 2018 2017 (Decrease) (Decrease)
Office and other direct expenses $ 1,564.1 $ 1,355.1 $ 1,269.2 15.4 % 6.8 %
As a % of net revenue: Office and other direct expenses 18.1 % 16.9 % 17.0 % Occupancy expense
6.3 % 6.5 % 6.8 %
All other office and other direct
expenses 1 11.8 % 10.4 % 10.2 %
1 Includes production expenses, travel and entertainment, professional fees,
spending to support new business activity, telecommunications, office
supplies, bad debt expense, adjustments to contingent acquisition
obligations, foreign currency losses (gains) and other expenses.
Office and other direct expenses increased by 15.4% compared to net revenue
growth of 7.4% during the year ended December 31, 2019 as compared to the
prior-year period. The increase in office and other direct expenses was mainly
due to the inclusion of Acxiom, for the full year in 2019, which has a higher
ratio of office and other direct expenses as a percentage of its net revenue,
primarily driven by client service costs and professional fees. Additionally,
contributing to the increase was a year-over-year change in contingent
acquisition obligations, partially offset by leverage on occupancy expense.
Net revenue growth of 7.5% outpaced the increase in office and other direct
expenses of 6.8% in 2018 as compared to the prior-year period, primarily driven
by leverage in occupancy expense, partially offset by an increase in client
service costs from Acxiom and year-over-year change in contingent acquisition
obligations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") are primarily the
unallocated expenses of our Corporate, as detailed further in the segment
discussion later in this MD&A, excluding depreciation and amortization. SG&A as
a percentage of net revenue decreased to 1.1% in 2019 from 2.1% in the
prior-year period, primarily attributable to lower professional fees, mainly
driven by transaction costs related to the Acxiom acquisition in 2018 and an
increase in allocated service fees from Selling, General and Administrative
expenses to Cost of Services, mainly as a result of the inclusion of Acxiom.
SG&A as a percentage of net revenue increased to 2.1% in 2018 from 1.6% in 2017,
primarily as a result of transaction costs related to the Acxiom acquisition and
higher incentive expense.
Depreciation and Amortization
Depreciation and amortization as a percentage of net revenue was 3.2% in 2019,
2.5% in 2018 and 2.1% in 2017. The increases in both 2019 and 2018 compared to
prior-year periods were primarily due to the inclusion of Acxiom. For the years
ended December 31, 2019 , 2018 and 2017, amortization of acquired intangibles was
$86.0 , $37.6 and $21.1 , respectively.
Restructuring Charges
In the first quarter of 2019, the Company implemented a cost initiative (the
"2019 Plan") to better align our cost structure with our revenue primarily
related to specific client losses occurring in 2018, the components of which are
listed below. All restructuring actions were substantially completed by the end
of the second quarter of 2019 and we don't expect any further restructuring
adjustments to the 2019 Plan.
Years ended December 31,
2019 2018 2017
Severance and termination costs $ 22.0 $ 0.0 $ 0.0
Lease restructuring costs 11.9 0.0 (0.4 )
Total restructuring charges $ 33.9 $ 0.0 $ (0.4 ) The following table presents the 2019 Plan restructuring charges and employee
headcount reduction for the twelve months ended
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Restructuring Charges Headcount Reduction (Actual Number)
Domestic $ 26.3 507
International 7.6 120
Consolidated $ 33.9 627
EXPENSES AND OTHER INCOME
Years ended December 31,
2019 2018 2017
Cash interest on debt obligations $ (188.3 ) $ (118.4 ) $ (81.9 )
Non-cash interest (11.0 ) (4.6 ) (8.9 )
Interest expense (199.3 ) (123.0 ) (90.8 )
Interest income 34.5 21.8 19.4
Net interest expense (164.8 ) (101.2 ) (71.4 )
Other expense, net (42.9 ) (69.6 ) (26.2 )
Total (expenses) and other income
Net Interest Expense For 2019, net interest expense increased by$63.6 as compared to 2018, primarily attributable to increased cash interest expense from the issuance of$2,500.0 of long-term debt in September and October of 2018 in order to finance the acquisition of Acxiom, partially offset by an increase in interest income, primarily due to higher cash balances in international markets. For 2018, net interest expense increased by$29.8 as compared to 2017, primarily attributable to increased cash interest expense from the issuance of long-term debt in 2018 as well as increased short-term borrowings and higher interest rates throughout the year. This was partially offset by decreased non-cash interest expense from revaluations of mandatorily redeemable noncontrolling interests. Other Expense, Net Results of operations include certain items that are not directly associated with our revenue-producing operations. Years ended December 31, 2019 2018 2017
Net losses on sales of businesses
0.5 (7.7 ) (2.1 )
Total other expense, net
Net losses on sales of businesses - During 2019, the amounts recognized were related to sales of businesses and the classification of certain assets and liabilities, consisting primarily of cash, as held for sale within our IAN and CMG reportable segments. During 2018, the amounts recognized were related to sales of businesses and the classification of certain assets and liabilities, consisting primarily of cash, as held for sale within our IAN and CMG reportable segments. During 2017, the amounts recognized were related to sales of businesses and the classification of certain assets and liabilities, consisting primarily of cash, accounts receivable and accounts payable, as held for sale within our IAN reportable segment. The businesses held for sale as of year end primarily represent unprofitable, non-strategic agencies which are expected to be sold within the next twelve months. Other - During 2019, the amounts recognized are primarily a result of changes in fair market value of equity investments, partially offset by the sale of an equity investment. During 2018, the amounts recognized are primarily a result of transaction-related costs from the Acxiom acquisition, partially offset by changes in fair market value of equity investments.
INCOME TAXES
Years ended December 31,
2019 2018 2017
Income before income taxes
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
Effective Tax Rate
Our tax rates are affected by many factors, including our worldwide earnings
from various countries, changes in legislation and tax characteristics of our
income. In 2019, our effective income tax rate of 23.3% was positively impacted
by the reversal of valuation allowances primarily in Continental Europe, by the
settlement of state income tax audits and by excess tax benefits on employee
share-based payments.The effective tax rate was negatively impacted by losses in
certain foreign jurisdictions where we receive no tax benefit due to 100%
valuation allowances, net losses on sales of businesses and the classification
of certain assets as held for sale, for which we received minimal tax benefit.
In 2018, our effective income tax rate of 23.8% was positively impacted by U.S.
tax incentives, foreign tax credits from a distribution of unremitted earnings,
the net reversal of valuation allowance in Continental Europe and research and
development credits. The effective income tax rate was negatively impacted by
losses in certain foreign jurisdictions where we received no tax benefit due to
100% valuation allowances, non-deductible losses on sales of businesses and
assets held for sale, by tax expense associated with the change to our assertion
regarding the permanent reinvestment of undistributed earnings attributable to
certain foreign subsidiaries, and by tax expense related to the true-up of our
December 31, 2017 tax reform estimates as permitted by SEC Staff issued
Accounting Bulletin No. 118 ("SAB 118").
Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "Tax
Act") was signed into law on December 22, 2017 . The Tax Act legislated many new
tax provisions which impacted our operations. At December 31, 2017 , provisional
amounts were recorded as permitted by SAB 118. The impact of the Tax Act as
required by SAB 118, resulted in a net tax expense of $13.4 in 2018, which was
primarily attributable to our estimate of the tax imposed on the deemed
repatriation of unremitted foreign earnings.
The Company has historically asserted that its unremitted foreign earnings are
permanently reinvested, and therefore did not record income taxes on such
amounts. In light of increased debt and associated servicing commitments in
connection with the Acxiom acquisition that was consummated on October 1, 2018 ,
the Company re-evaluated its global cash needs and as a result determined that
approximately $435.0 of undistributed foreign earnings from certain
international entities were no longer subject to the permanent reinvestment
assertion. We recorded a tax expense of $10.8 in 2018 representing our estimate
of the tax costs associated with this change to our assertion. We did not change
our permanent reinvestment assertion with respect to any other international
entities as we used the related historical earnings and profits to fund
international operations and investments.
The Tax Act imposed a new tax on certain foreign earnings generated in 2018 and
forward. These global intangible low-taxed income ("GILTI") tax rules are
complex. U.S. GAAP allows us to choose an accounting policy which treats the
U.S. tax under GILTI provisions as either a current expense, as incurred, or as
a component of the Company's measurement of deferred taxes. The Company elected
to account for the GILTI tax as a current expense.
In 2017, our effective income tax rate of 32.3% was positively impacted by a net
benefit of $36.0 as a result of the Tax Act, as well as excess tax benefits on
employee share-based payments, partially offset by losses in certain foreign
jurisdictions where we receive no tax benefit due to 100% valuation allowances.
See Note 9 in Item 8, Financial Statements and Supplementary Data for further
information.
EARNINGS PER SHARE
Basic earnings per share available to IPG common stockholders for the years
ended December 31, 2019 , 2018 and 2017 were $1.70 , $1.61 and $1.42 per share,
respectively. Diluted earnings per share for the years ended December 31, 2019 ,
2018 and 2017 were $1.68 , $1.59 and $1.40 per share, respectively.
Basic and diluted earnings per share for the year ended December 31, 2019
included negative impacts of $0.18 from the amortization of acquired
intangibles, negative impacts of $0.06 from first-quarter restructuring charges,
negative impacts of $0.12 from losses on sales of businesses and the
classification of certain assets as held for sale, for which we received minimal
tax benefit, partially offset by positive impacts of $0.10 from various discrete
tax items.
Basic and diluted earnings per share for the year ended December 31, 2018
included negative impacts of $0.16 and $0.15 , respectively, from losses on sales
of businesses and the classification of certain assets as held for sale
primarily in our international markets, negative impacts of $0.10 and $0.09 ,
respectively, from transaction costs directly related to the acquisition of
Acxiom, and negative impacts of $0.09 and $0.08 , respectively, from the
amortization of acquired intangibles, partially offset by positive impacts
of $0.06 and $0.06 , respectively, from various discrete tax items.
Basic and diluted earnings per share for the year ended December 31, 2017
included negative impacts of $0.05 from the amortization of acquired
intangibles, and negative impacts of $0.04 from losses on sales of businesses
and the classification of certain assets as held for sale, offset by net
positive impacts of $0.09 as a result of the Tax Act.
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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 Results of Operations
As discussed in Note 15 to the Consolidated Financial Statements, we have two
reportable segments as of December 31, 2019 : IAN and CMG. We also report results
for the "Corporate and other" group.
IAN
Net Revenue
Components of Change Change
Year ended Net Year ended
December 31, 2018 Foreign Acquisitions/ December 31,
1 Currency (Divestitures) Organic 2019 Organic Total
Consolidated $ 6,767.5 $ (124.5 ) $ 465.5 $ 239.7 $ 7,348.2 3.5 % 8.6 %
Domestic 4,000.4 0.0 471.6 85.5 4,557.5 2.1 % 13.9 %
International 2,767.1 (124.5 ) (6.1 ) 154.2 2,790.7 5.6 % 0.9 %
1 Results for the year ended December 31, 2018 have been recast to conform to
the current-period presentation.
The organic increase was attributable to a combination of net higher spending
from existing clients and net client wins, most notably in the healthcare,
financial services, technology and telecom, and retail sectors, partially offset
by a decrease in the auto and transportation sector. The organic increase in our
domestic market was primarily driven by growth at our advertising and media
businesses as well as our data management business. In our international
markets, the organic increase was primarily driven by strong performance at our
media businesses throughout all geographic regions. In addition, the organic
increase was also driven by growth at our advertising businesses and our digital
specialist agencies in Latin America . Consolidated net acquisitions primarily
includes net revenue during the first nine months ended September 30, 2019 from
Acxiom, which we acquired on October 1, 2018 , partially offset by divestitures,
mostly in our domestic market, Asia Pacific and Continental Europe regions.
Components of Change Change
Year ended Net Year ended
December 31, Foreign Acquisitions/ December 31, 2018
2017 Currency (Divestitures) 1 Organic 1 Organic Total 1
Consolidated
3,660.6 0.0 139.8 200.0 4,000.4 5.5 % 9.3 %
International 2,606.1 6.9 (19.2 ) 173.3 2,767.1 6.6 % 6.2 %
1 Results for the year ended December 31, 2018 have been recast to conform to
the current-period presentation.
The organic increase was attributable to net client wins and net higher spending
from existing clients, most notably in the healthcare sector, partially offset
by decreases in the food and beverage sector. The organic increase in our
domestic market was driven by growth across all of our major networks. The
international organic increase was driven by growth across all geographic
regions and all disciplines, primarily at our media and advertising businesses
and our digital specialist agencies, including strong performance at our
advertising businesses in the United Kingdom and at our media businesses in the
Continental Europe, Latin America and United Kingdom regions. Consolidated net
acquisitions primarily includes net revenue from Acxiom, which we acquired on
October 1, 2018 .
Segment EBITA
Years ended December 31, Change
2019 2018 2017 2019 vs 2018 2018 vs 2017
Segment EBITA 1, 2 $ 1,110.4 $ 1,042.1 $ 891.7 6.6 % 16.9 %
EBITA margin on net revenue 1, 2 15.1 % 15.4 % 14.2 %
1 Segment EBITA and EBITA margin on net revenue include
charges in the year ended
MD&A and Note 11 of Item 8, Financial Statements and Supplementary Data for
further information.
2 Results for the year ended
the current-period presentation.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
EBITA margin decreased during 2019 when compared to 2018, as the increase in
operating expenses, excluding billable expenses and amortization of acquired
intangibles, outpaced the net revenue growth of 8.6%, the organic component of
which was discussed in detail above. The EBITA margin decrease of 0.3% included
restructuring charges of $27.6 , or 0.4% as a percentage of net revenue, during
2019 to better align our cost structure with our revenue. The comparison was
also adversely impacted due to higher allocated service fees, from our Selling,
General and Administrative expenses, to Cost of Services, mainly as a result of
the inclusion of Acxiom. Net revenue growth outpaced the increase in salaries
and related expenses as compared to the prior-year period, primarily driven by
lower percentages of its net revenue in base salaries, benefits and tax,
temporary help expenses and incentive expense. The improved salaries and related
expenses ratio was also attributable to the inclusion of Acxiom, which has a
lower ratio of salaries and related expenses as a percentage of its net revenue
as well as a result of carefully managing our employee costs. The increase in
office and other direct expenses outpaced the growth in net revenue as compared
to the prior-year period, mainly due to the inclusion of Acxiom, which has a
higher ratio of office and other direct expense as a percentage of its net
revenue, driven by client service costs and professional fees. However, overall
office and other direct expenses primarily benefited from leverage on occupancy
expense. Depreciation and amortization, excluding amortization of acquired
intangibles, as a percentage of net revenue increased to 2.3% in
2019 from 2.0% in the prior-year period, primarily due to the inclusion of
Acxiom.
EBITA margin increased during 2018 when compared to 2017, as net revenue growth
of 8.0%, the organic component of which was discussed in detail above, outpaced
the increase in operating expenses, excluding billable expenses and amortization
of acquired intangibles, primarily driven by leverage in base salaries, benefits
and tax and occupancy expense, partially offset by higher incentive expense as a
result of improved financial performance and higher temporary help to support
business growth. Depreciation and amortization, excluding amortization of
acquired intangibles, as a percentage of net revenue increased to 2.0% in
2018 from 1.7% in the prior-year period, primarily due to the inclusion of
Acxiom.
CMG
Net Revenue
Components of Change Change
Year ended Net Year ended
December 31, Foreign Acquisitions/ December 31,
2018 Currency (Divestitures) Organic 2019 Organic Total
Consolidated $ 1,264.1 $ (18.6 ) $ 2.3 $ 29.1 $ 1,276.9 2.3 % 1.0 %
Domestic 824.6 0.0 (1.7 ) 5.7 828.6 0.7 % 0.5 %
International 439.5 (18.6 ) 4.0 23.4 448.3 5.3 % 2.0 %
The organic increase was primarily attributable to net client wins and net
higher spending from existing clients, most notably in the healthcare and
technology and telecom sectors, partially offset by a decrease in the auto and
transportation sector. The organic increase in our domestic market was primarily
due to growth at our sports marketing business, partially offset by declines at
our event businesses. The international organic increase was driven by growth
across all geographic regions and disciplines, primarily at our public relations
agencies, most notably in the United Kingdom and Continental Europe regions, and
sports marketing business, most notably in the Asia Pacific region.
Components of Change Change
Year ended Net Year ended
December 31, Foreign Acquisitions/ December 31,
2017 Currency (Divestitures) Organic 2018 Organic Total
Consolidated $ 1,206.8 $ 9.0 $ 7.6 $ 40.7 $ 1,264.1 3.4 % 4.7 %
Domestic 798.2 0.0 0.1 26.3 824.6 3.3 % 3.3 %
International 408.6 9.0 7.5 14.4 439.5 3.5 % 7.6 %
The organic increase was attributable to net client wins and net higher spending
from existing clients, most notably in the technology and telecom sector. The
organic increases were driven by growth across all geographic regions, primarily
at our public relations agencies and sports marketing business, most notably in
our domestic market.
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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)Segment EBITA
Years ended December 31, Change
2019 2018 2017 2019 vs 2018 2018 vs 2017
Segment EBITA 1 $ 163.4 $ 180.3 $ 194.4 (9.4 )% (7.3 )%
EBITA margin 1 12.8 % 14.3 % 16.1 %
1 Segment EBITA and EBITA margin on net revenue include
charges in the year ended
MD&A and Note 11 of Item 8, Financial Statements and Supplementary Data for
further information.
EBITA margin decreased during 2019 when compared to 2018, as the increase in operating expenses outpaced net revenue growth of 1.0%, primarily driven by the restructuring charges of$5.6 in the first quarter of 2019, higher salaries and related expenses to support business growth and an increase in year-over-year change in contingent acquisition obligations, partially offset by lower incentive expense. Depreciation and amortization, excluding amortization of acquired intangibles, as a percentage of net revenue remained flat as compared to the prior-year period. EBITA margin decreased during 2018 when compared to 2017, due to the increase in operating expenses, excluding billable expenses, primarily driven by the year-over-year change in contingent acquisition obligations. Depreciation and amortization, excluding amortization of acquired intangibles, as a percentage of net revenue remained relatively flat as compared to the prior-year period. CORPORATE AND OTHER Corporate and other is primarily comprised of selling, general and administrative expenses including corporate office expenses as well as shared service center and certain other centrally managed expenses that are not fully allocated to operating divisions; salaries, long-term incentives, annual bonuses and other miscellaneous benefits for corporate office employees; professional fees related to internal control compliance, financial statement audits and legal, information technology and other consulting services that are engaged and managed through the corporate office; and rental expense for properties occupied by corporate office employees. A portion of centrally managed expenses is allocated to operating divisions based on a formula that uses the planned revenues of each of the operating units. Amounts allocated also include specific charges for information technology-related projects, which are allocated based on utilization. Corporate and other expenses decreased by$74.2 to$101.8 during the year endedDecember 31, 2019 as compared to 2018, primarily attributable to lower professional fees, mainly driven by transaction costs of$35.0 related to the Acxiom acquisition in 2018 and an increase in allocated service fees from Selling, General and Administrative expenses to Cost of Services, mainly as a result of the inclusion of Acxiom. Corporate and other expenses in 2018 increased by$49.4 to$176.0 compared to 2017, primarily due to the transaction costs in 2018. During the year endedDecember 31, 2019 , corporate and other expense includes$0.7 of restructuring charges. See "Restructuring Charges" in MD&A and Note 11 of Item 8, Financial Statements and Supplementary Data for further information. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW OVERVIEW The following tables summarize key financial data relating to our liquidity, capital resources and uses of capital. Years ended December 31, Cash Flow Data 2019 2018 2017
Net income, adjusted to reconcile to net cash provided by operating activities 1
$ 1,115.0 $ 1,013.0 $ 852.1 Net cash provided by (used in) working capital 2 442.8 (431.1 ) 5.3 Changes in other non-current assets and liabilities 3 (28.6 ) (16.8 ) 24.4 Net cash provided by operating activities$ 1,529.2 $ 565.1 $ 881.8 Net cash used in investing activities (161.7 )
(2,491.5 ) (196.2 ) Net cash (used in) provided by financing activities (843.0 ) 1,853.2 (1,004.9 )
1 Reflects net income adjusted primarily for depreciation and amortization of
fixed assets and intangible assets, amortization of restricted stock and
other non-cash compensation, net losses on sales of businesses and deferred
income taxes.
2 Reflects changes in accounts receivable, accounts receivable billable toclients, other current assets, accounts payable and accrued liabilities.
3 Reflects changes in operating lease right-of-use assets and lease liabilities
and other non-current assets and liabilities.
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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)
Operating Activities
Due to the seasonality of our business, we typically use cash from working
capital in the first nine months of a year, with the largest impact in the first
quarter, and generate cash from working capital in the fourth quarter, driven by
the seasonally strong media spending by our clients. Quarterly and annual
working capital results are impacted by the fluctuating annual media spending
budgets of our clients as well as their changing media spending patterns
throughout each year across various countries.
The timing of media buying on behalf of our clients across various countries
affects our working capital and operating cash flow and can be volatile. 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, which substantially exceed our revenues, primarily affect the level of
accounts receivable, accounts payable, accrued liabilities and contract
liabilities. Our assets include both cash received and accounts receivable from
clients for these pass-through arrangements, while our liabilities include
amounts owed on behalf of clients to media and production suppliers. Our accrued
liabilities are also affected by the timing of certain other payments. For
example, while annual cash incentive awards are accrued throughout the year,
they are generally paid during the first quarter of the subsequent year.
Net cash provided by operating activities during 2019 was $1,529.2 , which was an
increase of $964.1 as compared to 2018, and the comparison includes $442.8
generated from working capital in 2019, compared with $431.1 used in working
capital in 2018. Working capital in 2019 was primarily impacted by the variation
in the timing of collections and payments around the reporting period, of which
the timing that was unfavorable in late 2018 compared to 2017 was a benefit in
2019, as well as the spending levels and pattern of our clients as compared to
2018.
Net cash provided by operating activities during 2018 was $565.1 , which was a
decrease of $316.7 as compared to 2017, primarily as a result of an increase in
working capital usage of $436.4 . Working capital in 2018 was impacted by the
spending levels of our clients as compared to 2017. The working capital usage in
both periods was primarily attributable to our media businesses.
Investing Activities
Net cash used in investing activities during 2019 consisted primarily of
payments for capital expenditures of $198.5 , related mostly to leasehold
improvements and computer hardware and software.
Net cash used in investing activities during 2018 consisted of payments for
acquisitions of $2,309.8 , related mostly to the acquisition of Acxiom, and
payments for capital expenditures of $177.1 , related mostly to leasehold
improvements and computer hardware and software.
Financing Activities
Net cash used in financing activities during 2019 was driven by repayment of
long-term debt of $403.3 and the payment of dividends of $363.1 .
Net cash provided by financing activities during 2018 was driven by net proceeds
from long-term debt of $2,494.2 primarily to finance the acquisition of Acxiom,
partially offset by the payment of dividends of $322.1 , the repurchase of 5.1
shares of our common stock for an aggregate cost of $117.1 , including fees, and
the repayment of long-term debt of $104.8 .
Foreign Exchange Rate Changes
The effect of foreign exchange rate changes on cash, cash equivalents and
restricted cash included in the Consolidated Statements of Cash Flows resulted
in a net decrease of $6.0 in 2019.
The effect of foreign exchange rate changes on cash, cash equivalents and
restricted cash included in the Consolidated Statements of Cash Flows resulted
in a net decrease of $47.3 in 2018. The decrease was primarily a result of the
U.S. Dollar being stronger than several foreign currencies, including the
Australian Dollar, South African Rand, and Indian Rupee as of December 31, 2018
compared to December 31, 2017 .
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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)
LIQUIDITY OUTLOOK
We expect our cash flow from operations and existing cash and cash equivalents
to be sufficient to meet our anticipated operating requirements at a minimum for
the next twelve months. We also have a commercial paper program, a committed
corporate credit facility and uncommitted lines of credit to support our
operating needs. Borrowings under our commercial paper program are supported by
our committed credit agreement. We continue to maintain a disciplined approach
to managing liquidity, with flexibility over significant uses of cash, including
our capital expenditures, cash used for new acquisitions, our common stock
repurchase program and our common stock dividends.
From time to time, we evaluate market conditions and financing alternatives for
opportunities to raise additional funds or otherwise improve our liquidity
profile, enhance our financial flexibility and manage market risk. Our ability
to access the capital markets depends on a number of factors, which include
those specific to us, such as our credit ratings, and those related to the
financial markets, such as the amount or terms of available credit. There can be
no guarantee that we would be able to access new sources of liquidity, or
continue to access existing sources of liquidity, on commercially reasonable
terms, or at all.
Funding Requirements
Our most significant funding requirements include our operations, non-cancelable
operating lease obligations, capital expenditures, acquisitions, common stock
dividends, taxes and debt service. Additionally, we may be required to make
payments to minority shareholders in certain subsidiaries if they exercise their
options to sell us their equity interests.
Notable funding requirements include:
• Debt service - Our 3.50% Senior Notes in aggregate principal amount of
$500.0 mature on October 1, 2020 . We expect to use available cash as well
as commercial paper as needed to fund the principal repayment. As of
December 31, 2019 , we had outstanding short-term borrowings of $52.4 fromour uncommitted lines of credit used primarily to fund short-term working
capital needs. The remainder of our debt is primarily long-term, with
maturities scheduled from 2021 through 2048. On October 1, 2018 , in orderto fund the acquisition of Acxiom, we entered into financing arrangements
with third-party lenders under a three-year term loan agreement (the "Term
Loan Agreement"). We fully paid off the outstanding balance under the Term
Loan Agreement as of
and
respectively. See Note 4 in Item 8, Financial Statements and Supplementary
Data for further information.
• Acquisitions - We paid cash of
We also paid
well as ownership increases in our consolidated subsidiaries. In addition
to potential cash expenditures for new acquisitions, we expect to pay
approximately $46.0 in 2020 related to prior-year acquisitions. We may
also be required to pay approximately
held by minority shareholders if exercised. We will continue to evaluate
strategic opportunities to grow and continue to strengthen our market
position, particularly in our digital and marketing services offerings,
and to expand our presence in high-growth and key strategic world markets.
• Dividends - During 2019, we paid four quarterly cash dividends of
per share on our common stock, which corresponded to aggregate dividend
payments of
Directors (the "Board") had declared a common stock cash dividend of
close of business on
of $0.255 per share and there is no significant change in the number of
outstanding shares as of December 31, 2019 , we would expect to pay
approximately $395.0 over the next twelve months.
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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)
The following summarizes our estimated contractual cash obligations and
commitments as of
Years ended December 31,
2020 2021 2022 2023 2024 Thereafter Total
Long-term debt 1 $ 502.0 $ 501.4 $ 248.9 $ 498.3 $ 497.8 $ 1,025.5 $ 3,273.9
Interest payments on
long-term debt 1 134.2 116.4 93.9 73.6 56.4 728.6 1,203.1
Non-cancelable operating
lease obligations 2 333.5 300.7 267.5 209.7 183.5 716.1 2,011.0
Contingent acquisition
payments 3 71.9 68.3 39.8 10.6 4.9 0.2 195.7
Uncertain tax positions 4 14.0 169.8 35.7 81.6 29.8 14.4 345.3
Total $ 1,055.6 $ 1,156.6 $ 685.8 $ 873.8 $ 772.4 $ 2,484.8 $ 7,029.0
1 Amounts represent maturity at book value and interest payments based on
contractual obligations. We may at our option and at any time redeem all or
some of any outstanding series of our senior notes reflected in this table at
the redemption prices set forth in the applicable supplemental indentures
under which such senior notes were issued. See Note 4 in Item 8, Financial
Statements and Supplementary Data for further information.
2 Non-cancelable operating lease obligations are presented net of future
receipts on contractual sublease arrangements. See Note 3 in Item 8,
Financial Statements and Supplementary Data for further information.
3 We have structured certain acquisitions with additional contingent purchase
price obligations based on factors including future performance of the
acquired entity. See Note 6 and Note 16 in Item 8, Financial Statements and
Supplementary Data for further information.
4 The amounts presented are estimates due to inherent uncertainty of tax
settlements, including the ability to offset liabilities with tax loss
carryforwards.
Share Repurchase Program
On July 2, 2018 , in connection with the announcement of the Acxiom acquisition,
we announced that share repurchases will be suspended for a period of time in
order to reduce the increased debt levels incurred in conjunction with the
acquisition. As of December 31, 2019 , $338.4 , excluding fees, remains available
for repurchase under the share repurchase programs. There is no expiration date
associated with the share repurchase programs.
FINANCING AND SOURCES OF FUNDS
Substantially all of our operating cash flow is generated by our agencies. Our
cash balances are held in numerous jurisdictions throughout the world, primarily
at the holding company level and at our largest subsidiaries.
At December 31, 2019 , we held $323.6 of cash, cash equivalents and marketable
securities in foreign subsidiaries. The Company has historically asserted that
its unremitted foreign earnings are permanently reinvested, and therefore has
not recorded any deferred taxes on such amounts. During the third quarter ended
September 30, 2018 , the Company re-evaluated its global cash needs and as a
result determined that approximately $435.0 of undistributed foreign earnings
from certain international entities were no longer subject to the permanent
reinvestment assertion, of which $155.4 remains undistributed as of December 31,
2019 . We have not changed our permanent reinvestment assertion with respect to
any other international entities as we intend to use the related historical
earnings and profits to fund international operations and investments.
Credit Agreements
We maintain a committed corporate credit facility, originally dated as of July
18, 2008 , which has been amended and restated from time to time (the "Credit
Agreement"). We use our Credit Agreement to increase our financial flexibility,
to provide letters of credit primarily to support obligations of our
subsidiaries and to support our commercial paper program. On November 1, 2019 ,
we amended and restated (the "Amendment") the Credit Agreement. Under the
Amendment, among other things, the maturity date of the Credit Agreement was
extended to November 1, 2024 and the cost structure of the credit agreement was
changed. The Amendment also removed the interest coverage ratio financial
covenant; however, the Company remains subject to the leverage ratio financial
covenant, among other customary covenants. At the election of the Company, the
leverage ratio financial covenant may be changed to not more than 4.00 to 1.00
for four consecutive fiscal quarters, beginning with the fiscal quarter in which
there is an occurrence of one or more acquisitions with an aggregate purchase
price of at least $200.0 .
The Credit Agreement is a revolving facility under which amounts borrowed by us
or any of our subsidiaries designated under the Credit Agreement may be repaid
and reborrowed, subject to an aggregate lending limit of $1,500.0 , or the
equivalent in other currencies. The Company has the ability to increase the
commitments under the Credit Agreement from time to time by an additional amount
of up to $250.0 , provided the Company receives commitments for such increases
and satisfies certain other conditions. The aggregate available amount of
letters of credit outstanding may decrease or increase, subject to a sublimit of
$50.0 , or the equivalent in other currencies. Our obligations under the Credit
Agreement are unsecured. As of December 31, 2019 , there were
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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)
no borrowings under the Credit Agreement; however, we had $8.4 of letters of
credit under the Credit Agreement, which reduced our total availability to
$1,491.6 .
Under the Credit Agreement, we can elect to receive advances bearing interest
based on either the Base Rate or the Eurocurrency rate (each as defined in the
Credit Agreement) plus an applicable margin that is determined based on our
credit ratings. As of December 31, 2019 , the applicable margin was 0.125% for
Base Rate advances and 1.125% for Eurocurrency Rate borrowings. Letter of credit
fees accrue on the average daily aggregate amount of letters of credit
outstanding, at a rate equal to the applicable margin for Eurocurrency rate
advances, and fronting fees accrue on the aggregate amount of letters of credit
outstanding at an annual rate of 0.25%. We also pay a facility fee on each
lender's revolving commitment of 0.125%, which is an annual rate determined
based on our credit ratings.
The table below sets forth the financial covenant in effect as of December 31,
2019 , which applies to the Credit Agreement.
Four Quarters Ended Four Quarters Ended
Financial Covenants 1 December 31, 2019 EBITDA Reconciliation 1 December 31, 2019
Leverage ratio (not Operating income
greater than) 3.75x 1,086.0
Actual leverage ratio 2.28x Add:
Depreciation and
amortization 369.8
EBITDA $ 1,455.8
1 The leverage ratio is defined as debt as of the last day of such fiscal
quarter to EBITDA (as defined in the Credit Agreement) for the four quarters
then ended. Pursuant to the
Agreement, the maximum leverage ratio decreased from 4.00x to 3.75x on the
last day of the fourth full fiscal quarter ending after the Acxiom closing
date on October 1, 2018 .
As of December 31, 2019 , we were in compliance with our covenants in the Credit
Agreement. If we were unable to comply with our covenants in the future, we
would seek an amendment or waiver from the applicable lenders, but there is no
assurance that our lenders would grant an amendment or waiver. If we were unable
to obtain the necessary amendment or waiver, these facilities could be
terminated and our lenders could accelerate payments of any outstanding
principal. In addition, under those circumstances we could be required to
deposit funds with one of our lenders in an amount equal to any outstanding
letters of credit under the Credit Agreement.
We also have uncommitted lines of credit with various banks that permit
borrowings at variable interest rates and that are primarily used to fund
working capital needs. We have guaranteed the repayment of some of these
borrowings made by certain subsidiaries. If we lose access to these credit
lines, we would have to provide funding directly to some of our operations. As
of December 31, 2019 , the Company had uncommitted lines of credit in an
aggregate amount of $1,056.0 , under which we had outstanding borrowings of
$52.4 classified as short-term borrowings on our Consolidated Balance Sheet. The
average amount outstanding during 2019 was $88.0 , with a weighted-average
interest rate of approximately 5.2%.
Commercial Paper
The Company is authorized to issue unsecured commercial paper up to a maximum
aggregate amount outstanding at any time of $1,500.0 . Borrowings under the
commercial paper program are supported by the Credit Agreement described above.
Proceeds of the commercial paper are used for working capital and general
corporate purposes, including the repayment of maturing indebtedness and other
short-term liquidity needs. The maturities of the commercial paper vary but may
not exceed 397 days from the date of issue. As of December 31, 2019 , there
was no commercial paper outstanding. The average amount outstanding under the
program was $312.9 in 2019, with a weighted-average interest rate of 2.5% and a
weighted-average maturity of thirteen days.
Cash Pooling
We aggregate our domestic cash position on a daily basis. Outside the United
States , we use cash pooling arrangements with banks to help manage our liquidity
requirements. In these pooling arrangements, several IPG agencies agree with a
single bank that the cash balances of any of the agencies with the bank will be
subject to a full right of set-off against amounts other agencies owe the bank,
and the bank provides for overdrafts as long as the net balance for all 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, 2019 and 2018 the amounts netted were
$2,274.9 and $2,065.8 , respectively.
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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)
DEBT CREDIT RATINGS
Our debt credit ratings as of February 13, 2020 are listed below.
Moody's Investors Service S&P Global Ratings Fitch Ratings
Short-term rating P-2 A-2 F2
Long-term rating Baa2 BBB BBB+
Outlook Stable Negative Stable
A credit rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the assigning credit rating
agency. The rating of each credit rating agency should be evaluated
independently of any other rating. Credit ratings could have an impact on
liquidity, either adverse or favorable, because, among other things, they could
affect funding costs in the capital markets or otherwise. For example, our
Credit Agreement fees and borrowing rates are based on a credit ratings grid,
and our access to the commercial paper market is contingent on our maintenance
of sufficient short-term debt ratings.
CRITICAL ACCOUNTING ESTIMATES
Our Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America .
Preparation of the Consolidated Financial Statements and related disclosures
requires us to make judgments, assumptions and estimates that affect the amounts
reported and disclosed in the accompanying financial statements and footnotes.
Our significant accounting policies are discussed in Note 1 to the Consolidated
Financial Statements. We believe that of our significant accounting policies,
the following critical accounting estimates involve management's most difficult,
subjective or complex judgments. We consider these accounting estimates to be
critical because changes in the underlying assumptions or estimates have the
potential to materially impact our Consolidated Financial Statements. Management
has discussed with our Audit Committee the development, selection, application
and disclosure of these critical accounting estimates. We regularly evaluate our
judgments, assumptions and estimates based on historical experience and various
other factors that we believe to be relevant under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.
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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)
Revenue Recognition
Our revenues are primarily derived from the planning and execution of
multi-channel advertising and communications, marketing services, including
public relations, meeting and event production, sports and entertainment
marketing, corporate and brand identity, strategic marketing consulting, and
providing marketing data and technology services around the world.
Most of our client contracts are individually negotiated and, accordingly, the
terms of client engagements and the basis on which we earn fees and commissions
vary significantly. Our contracts generally provide for termination by either
party on relatively short notice, usually 30 to 90 days, although our data
management contracts typically have non-cancelable terms of more than one year.
Our payment terms vary by client, and the time between invoicing date and due
date is typically not significant. We generally have the legally enforceable
right to payment for all services provided through the end of the contract or
termination date.
We recognize revenue when we determine our customer obtains control of promised
goods or services, in an amount that reflects the consideration which we expect
to receive in exchange for those goods or services. To determine revenue
recognition, we perform the following five steps: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to
the performance obligations in the contract; and (v) recognize revenue as or
when we satisfy the performance obligation. We only apply the five-step model to
contracts when it is probable that IPG will collect the consideration it is
entitled to in exchange for the goods or services it transfers to the customer.
At contract inception, we assess the goods or services promised within each
contract and determine those that are distinct performance obligations. We then
assess whether we act as an agent or a principal for each identified performance
obligation and include revenue within the transaction price for third-party
costs when we determine that we act as principal.
Net revenue, primarily consisting of fees, commissions and performance
incentives, represents the amount of our gross billings excluding billable
expenses charged to a client. Generally, our compensation is based on a
negotiated fixed price, rate per hour, a retainer, commission or volume. The
majority of our fees are recognized over time as services are performed, either
utilizing a function of hours incurred and rates per hour, as compared to
periodically updated estimates to complete, or ratably over the term of the
contract. For certain less-frequent commission-based contracts which contain
clauses allowing our clients to terminate the arrangement at any time for no
compensation, revenue is recognized at a point in time, typically the date of
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 mutually agreed-upon qualitative and/or quantitative metrics. Performance
incentives are treated as variable consideration which is estimated at contract
inception and included in revenue based on the most likely amount earned out of
a range of potential outcomes. Our estimates are based on a combination of
historical award experience, anticipated performance and our best judgment.
These estimates are updated on a periodic basis and are not expected to result
in a reversal of a significant amount of the cumulative revenue recognized.
The predominant component of billable expenses are third-party vendor costs
incurred for performance obligations where we have determined that we are acting
as principal. These third-party expenses are generally billed back to our
clients. Billable expenses also includes incidental costs incurred in the
performance of our services including airfare, mileage, hotel stays, out-of-town
meals and telecommunication charges. We record these billable expenses within
total revenue with a corresponding offset to operating expenses.
In international markets, we may receive rebates or credits from vendors based
on transactions entered into on behalf of clients. Rebates and credits are
remitted back to our clients in accordance with our contractual requirements
or may be retained by us based on the terms of a particular client contract and
local law. Amounts owed back to clients are recorded as a liability and amounts
retained by us are recorded as revenue when earned.
In certain international markets, our media contracts may allow clients to
terminate our arrangement at any time for no compensation to the extent that
media has not yet run. For those contracts, we do not recognize revenue until
the media runs which is the point in time at which we have a legally enforceable
right to compensation.
Performance Obligations
Our client contracts may include various goods and services that are capable of
being distinct, are distinct within the context of the contract and are
therefore accounted for as separate performance obligations. We allocate revenue
to each performance obligation in the contract at inception based on its
relative standalone selling price.
Our advertising businesses include a wide range of services that involve the
creation of an advertising idea, concept, campaign, or marketing strategy in
order to promote the client's brand ("creative services"), and to act as an
agent to facilitate the production of advertisements by third-party suppliers
("production services"). Our clients can contract us to perform one or both of
these services, as they can derive stand-alone benefit from each. Production
services can include formatting creative material for different media and
communication mediums including digital, large-scale reproduction such as
printing and adaptation services, talent
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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)
engagement and acquisition, television and radio production, and outdoor
billboard production. Our contracts that include both services are typically
explicit in the description of which activities constitute the creative
advertising services and those that constitute the production services. Both the
creative and production services are sold separately, the client can derive
utility from each service on its own, we do not provide a significant service of
integrating these activities into a bundle, the services do not significantly
modify one another, and the services are not highly interrelated or
interdependent. As such, we typically identify two performance obligations in
the assessment of our advertising contracts.
Our media businesses include services to formulate strategic media plans ("media
planning services") and to act as an agent to purchase media (e.g., television
and radio spots, outdoor advertising, digital banners, etc.) from vendors on our
clients' behalf ("media buying services"). Our contracts that include both
services are typically explicit in the description of which activities
constitute the planning services and those that constitute the buying services.
Both the planning and buying services are sold separately, the client can derive
utility from each service on its own, we do not provide a significant service of
integrating these activities into a bundle, the services do not significantly
modify one another, and the services are not highly interrelated or
interdependent. As such, we typically identify two performance obligations in
the assessment of our media contracts.
Our events businesses include creative services related to the conception and
planning of custom marketing events as well as activation services which entail
the carrying out of the event, including, but not limited to, set-up, design and
staffing. Additionally, our public relations businesses include a broad range of
services, such as strategic planning, social media strategy and the monitoring
and development of communication strategies, among others. While our contracts
in these businesses may include some or all of these services, we typically
identify only one performance obligation in the assessment of our events and
public relations contracts as we provide a significant service of integrating
the individual services into a combined service for which the customer has
contracted.
Our data and technology services businesses include data management, data and
data strategy, identity resolution, and measurement and analytics products and
services. While our contracts in these businesses may include some or all of
these services, we typically identify each product and service as an individual
performance obligation.
Principal vs. Agent
When a third-party is involved in the delivery of our services to the client, we
assess whether or not we are acting as a principal or an agent in the
arrangement. The assessment is based on whether we control the specified
services at any time before they are transferred to the customer. We have
determined that in our events and public relations businesses, we generally act
as a principal as our agencies provide a significant service of integrating
goods or services provided by third parties into the specified deliverable to
our clients. In addition, we have determined that we are responsible for the
performance of the third-party suppliers, which are combined with our own
services, before transferring those services to the customer. We have also
determined that we act as principal when providing creative services and media
planning services, as we perform a significant integration service in these
transactions. For performance obligations in which we act as principal, we
record the gross amount billed to the customer within total revenue and the
related incremental direct costs incurred as billable expenses.
When a third-party is involved in the production of an advertising campaign and
for media buying services, we have determined that we act as the agent and are
solely arranging for the third-party suppliers to provide services to the
customer. Specifically, we do not control the specified services before
transferring those services to the customer, we are not primarily responsible
for the performance of the third-party services, nor can we redirect those
services to fulfill any other contracts. We do not have inventory risk or
discretion in establishing pricing in our contracts with customers. For
performance obligations for which we act as the agent, we record our revenue as
the net amount of our gross billings less amounts remitted to third parties.
Income Taxes
The provision for income taxes includes U.S. federal, state, local and foreign
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences of temporary differences between the financial statement
carrying amounts and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which the temporary differences are expected to be
reversed. Changes to enacted tax rates would result in either increases or
decreases in the provision for income taxes in the period of change.
We are required to evaluate the realizability of our deferred tax assets, which
is primarily dependent on future earnings. A valuation allowance shall be
recognized when, based on available evidence, it is "more likely than not" that
all or a portion of the deferred tax assets will not be realized. The factors
used in assessing valuation allowances include all available evidence, such as
past operating results, estimates of future taxable income and the feasibility
of tax planning strategies. In circumstances where there is negative evidence,
establishment of a valuation allowance must be considered. We believe that
cumulative losses in the most recent three-year period represent significant
negative evidence when evaluating a decision to establish a valuation allowance.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
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.
The authoritative guidance for uncertainty in income taxes prescribes a
recognition threshold and measurement criteria for the financial statement
reporting of a tax position that an entity takes or expects to take in a tax
return. Additionally, guidance is provided for de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The assessment of recognition and measurement requires critical
estimates and the use of complex judgments. We evaluate our tax positions using
the "more likely than not" recognition threshold and then apply a measurement
assessment to those positions that meet the recognition threshold. We have
established tax reserves that we believe to be adequate in relation to the
potential for additional assessments in each of the jurisdictions in which we
are subject to taxation. We regularly assess the likelihood of additional tax
assessments in those jurisdictions and adjust our reserves as additional
information or events require.
Goodwill and Other Intangible Assets
We account for our business combinations using the acquisition accounting
method, which requires us to determine the fair value of net assets acquired and
the related goodwill and other intangible assets. Determining the fair value of
assets acquired and liabilities assumed requires management's judgment and
involves the use of significant estimates, including projections of future cash
inflows and outflows, discount rates, asset lives and market multiples.
Considering the characteristics of advertising, specialized marketing and
communication services companies, our acquisitions usually do not have
significant amounts of tangible assets, as the principal asset we typically
acquire is creative talent. As a result, a substantial portion of the purchase
price is allocated to goodwill and other intangible assets.
We review goodwill and other intangible assets with indefinite lives not subject
to amortization as of October 1st each year and whenever events or significant
changes in circumstances indicate that the carrying value may not be
recoverable. We evaluate the recoverability of goodwill at a reporting unit
level. We have 12 reporting units that were subject to the 2019 annual
impairment testing. Our annual impairment review as of October 1, 2019 did not
result in an impairment charge at any of our reporting units.
In performing our annual impairment review, we first assess qualitative factors
to determine whether it is "more likely than not" that the goodwill or
indefinite-lived intangible assets are impaired. Qualitative factors to consider
may include macroeconomic conditions, industry and market considerations, cost
factors that may have a negative effect on earnings, financial performance, and
other relevant entity-specific events such as changes in management, key
personnel, strategy or clients, as well as pending litigation. If, after
assessing the totality of events or circumstances such as those described above,
an entity determines that it is "more likely than not" that the goodwill or
indefinite-lived intangible asset is impaired, then the entity is required to
determine the fair value and perform the quantitative impairment test by
comparing the fair value with the carrying value. Otherwise, no additional
testing is required.
For reporting units not included in the qualitative assessment, or for any
reporting units identified in the qualitative assessment as "more likely than
not" that the fair value is less than its carrying value, a quantitative
impairment test is performed. For our annual impairment test, we compare the
respective fair value of our reporting units' equity to the carrying value of
their net assets. 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 quantitative impairment test is failed, and impaired goodwill is
written down to its fair value with a charge to expense in the period the
impairment is identified.
For our 2019 and 2018 annual impairment tests, we performed a qualitative
impairment assessment for seven and ten reporting units and performed the
quantitative impairment test for five and three reporting units, respectively.
For the qualitative analysis we took into consideration all the relevant events
and circumstances, including financial performance, macroeconomic conditions and
entity-specific factors such as client wins and losses. Based on this
assessment, we have concluded that for each of our reporting units subject to
the qualitative assessment, it is not "more likely than not" that its fair value
was less than its carrying value; therefore, no additional testing was required.
The 2019 and 2018 fair values of reporting units for which we performed
quantitative impairment tests were 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. We generally applied an equal weighting to the income and
market approaches 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.
These estimates and assumptions may vary between each reporting unit depending
on the facts and circumstances specific to that reporting unit. The discount
rate for each reporting unit is influenced by general market conditions as well
as factors specific to the reporting unit. For the 2019 test, the discount rate
we used for our reporting units tested ranged between 10.5% and 11.5%,
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
and the terminal value growth rate was 3.0%. The terminal value growth rate
represents the expected long-term growth rate for our industry, which
incorporates the type of services each reporting unit provides as well as the
global economy. For the 2019 test, the revenue growth rates for our reporting
units used in our analysis were generally between 3.0% and 9.0%. Factors
influencing the revenue growth rates include the nature of the services the
reporting unit provides for its clients, the geographic locations in which the
reporting unit conducts business and the maturity of the reporting unit. 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, significant client
losses, changes in spending levels of our existing clients or a different
economic outlook 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 also perform 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 increases discount rates by 0.5%, and the high
end of the range 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 quantitative impairment test.
The table below displays the midpoint of the fair value range for each reporting
unit tested in the 2019 and 2018 annual impairment tests, indicating that the
fair value exceeded the carrying value for all reporting units by greater than
20%.
2019 Impairment Test 2018 Impairment Test
Fair value Fair value
exceeds carrying exceeds carrying
Reporting Unit Goodwill value by: Reporting Unit Goodwill value by:
A $ 533.5 > 20% A $ 462.1 > 40%
B $ 209.1 > 30% B $ 638.5 > 280%
C $ 182.1 > 25% C $ 182.1 > 20%
D $ 668.5 > 45%
E $ 1,216.8 > 205%
Based on the analysis described above, for the reporting units for which we
performed the quantitative impairment test, we concluded that our goodwill was
not impaired as of October 1, 2019 , because these reporting units passed the
test as the fair values of each of the reporting units were substantially in
excess of their respective net book values.
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 asset groups. These asset groups 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.
Pension and Postretirement Benefit Plans
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 a significant assumption that impacts our net pension and
postretirement benefit costs and obligations. We determine our discount rates
for our domestic pension and postretirement benefit plans and significant
foreign pension plans based on either a bond selection/settlement approach or
bond yield curve approach. Using the bond selection/settlement approach, we
determine the discount rate by selecting a portfolio of corporate bonds
appropriate to provide for the projected benefit payments. Using the bond yield
curve approach, we determine the discount rate by matching the plans' cash flows
to spot rates developed from a yield curve. Both approaches utilize high-quality
AA-rated corporate bonds and the plans' projected cash flows to develop a
discounted value of the benefit payments, which is then used to develop a single
discount rate. In countries where markets for high-quality long-term AA
corporate bonds are not well developed, a portfolio of long-term government
bonds is used as a basis to develop hypothetical corporate bond yields, which
serve as a basis to derive the discount rate.
The discount rate used to calculate net pension and postretirement benefit costs
is determined at the beginning of each year. For the year ended December 31,
2019 , discount rates of 4.35% for the domestic pension plan and 4.30% for the
domestic
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
postretirement benefit plan and a weighted-average discount rate of 2.61% for
the significant foreign pension plans were used to calculate 2019 net pension
and postretirement benefit costs. A 25 basis-point increase in the discount rate
would have decreased the 2019 net pension and postretirement benefit cost by
$0.1 . A 25 basis-point decrease in the discount rate would not have impacted our
net pension and postretirement benefit cost.
The discount rate used to measure our benefit obligations is determined at the
end of each year. As of December 31, 2019 , we used discount rates of 3.35% for
the domestic pension plan and 3.25% for the domestic postretirement benefit plan
and a weighted-average discount rate of 1.84% for our significant foreign
pension plans to measure our benefit obligations. A 25 basis-point increase or
decrease in the discount rate would have decreased or increased the December 31,
2019 benefit obligation by approximately $25.0 and $26.0 , 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. Our expected rate of return considers asset class index returns
over various market and economic conditions, current and expected 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 select a
long-term rate of return assumption that matches the duration of our
liabilities.
For 2019, the weighted-average expected rates of return of 7.00% and 4.76% were
used in the calculation of net pension costs for the domestic and significant
foreign pension plans, respectively. For 2020, we plan to use expected rates of
return of 6.00% and 4.70% for the domestic and significant foreign pension
plans, respectively. Changes in the rates are typically due to lower or higher
expected future returns based on the mix of assets held. A lower expected rate
of return would 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 2019 net pension cost by approximately $1.0 .
RECENT ACCOUNTING STANDARDS
See Note 17 in Item 8, Financial Statements and Supplementary Data for further
information on certain accounting standards that have been adopted during 2019
or that have not yet been required to be implemented and may be applicable to
our future operations.
NON-GAAP FINANCIAL MEASURE
This MD&A includes both financial measures in accordance with U.S. GAAP, as well
as a non-GAAP financial measure. The non-GAAP financial measure represents Net
Income Available to IPG Common Stockholder before Provision for Income Taxes,
Total (Expenses) and Other Income, Equity in Net Income (Loss) of Unconsolidated
Affiliates, Net Income Attributable to Noncontrolling Interests and Amortization
of Acquired Intangibles which we refer to as "EBITA".
EBITA should be viewed as supplemental to, and not as an alternative for Net
Income Available to IPG Common Stockholders calculated in accordance with U.S.
GAAP ("net income") or operating income calculated in accordance with U.S. GAAP
("operating income"). This section also includes reconciliation of this non-GAAP
financial measure to the most directly comparable U.S. GAAP financial measures,
as presented below.
EBITA is used by our management as an additional measure of our Company's
performance for purposes of business decision-making, including developing
budgets, managing expenditures, and evaluating potential acquisitions or
divestitures. Period-to-period comparisons of EBITA help our management identify
additional trends in our Company's financial results that may not be shown
solely by period-to-period comparisons of net income or operating income. In
addition, we may use EBITA in the incentive compensation programs applicable to
some of our employees in order to evaluate our Company's performance. Our
management recognizes that EBITA has inherent limitations because of the
excluded items, particularly those items that are recurring in nature.
Management also reviews operating income and net income as well as the specific
items that are excluded from EBITA, but included in net income or operating
income, as well as trends in those items. The amounts of those items are set
forth, for the applicable periods, in the reconciliation of EBITA to net income
that accompany our disclosure documents containing non-GAAP financial measures,
including the reconciliations contained in this MD&A.
We believe that the presentation of EBITA is useful to investors in their
analysis of our results for reasons similar to the reasons why our management
finds it useful and because it helps facilitate investor understanding of
decisions made by management in light of the performance metrics used in making
those decisions. In addition, as more fully described below, we believe that
providing EBITA, together with a reconciliation of this non-GAAP financial
measure to net income, helps investors make comparisons between our Company and
other companies that may have different capital structures, different effective
income tax rates and tax attributes, different capitalized asset values and/or
different forms of employee compensation. However, EBITA is intended to provide
a supplemental way of comparing our Company with other public companies and is
not intended as a substitute
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - (continued)
(Amounts in Millions, Except Per Share Amounts)
for comparisons based on net income or operating income. In making any
comparisons to other companies, investors need to be aware that companies may
use different non-GAAP measures to evaluate their financial performance.
Investors should pay close attention to the specific definition being used and
to the reconciliation between such measures and the corresponding U.S. GAAP
measures provided by each company under the applicable rules of the U.S.
Securities and Exchange Commission .
The following is an explanation of the items excluded by us from EBITA but
included in net income:
• Total (Expense) and Other Income, Provision for Income Taxes, Equity in
Net Income (Income) of Unconsolidated Affiliates and Net Income
Attributable to Noncontrolling Interests. We exclude these items
(i) because these items are not directly attributable to the performance
of our business operations and, accordingly, their exclusion assists
management and investors in making period-to-period comparisons of
operating performance and (ii) to assist management and investors in
making comparisons to companies with different capital structures.
Investors should note that these items will recur in future periods.
• Amortization of Acquired Intangibles. Amortization of acquired intangibles
is a non-cash expense relating to intangible assets arising from
acquisitions that are expensed on a straight-line basis over the estimated
useful life of the related assets. We exclude amortization of acquired
intangibles because we believe that (i) the amount of such expenses in any
specific period may not directly correlate to the underlying performance
of our business operations and (ii) such expenses can vary significantly
between periods as a result of new acquisitions and full amortization of
previously acquired intangible assets. Accordingly, we believe that this
exclusion assists management and investors in making period-to-period
comparisons of operating performance. Investors should note that the use
of acquired intangible assets contributed to revenue in the periods
presented and will contribute to future revenue generation and should also
note that such expense may recur in future periods.
The following table presents the reconciliation of Net Income Available to IPG Common Stockholders to EBITA for the years endedDecember 31, 2019 , 2018 and 2017. Years ended December 31, 2019 2018 2017 Net Revenue$ 8,625.1 $ 8,031.6 $ 7,473.5 EBITA Reconciliation: Net Income Available to IPG Common Stockholders 1$ 656.0 $ 618.9 $ 554.4 Add Back: Provision for Income Taxes 204.8 199.2 271.3 Subtract: Total (Expenses) and Other Income (207.7 ) (170.8 ) (97.6 ) Equity in Net Income (Loss) of Unconsolidated Affiliates 0.4 (1.1 ) 0.9 Net Income Attributable to Noncontrolling Interests (17.9 ) (18.8 ) (16.0 ) Operating Income 1 1,086.0 1,008.8 938.4 Add Back: Amortization of Acquired Intangibles 86.0 37.6 21.1 EBITA 1$ 1,172.0 $ 1,046.4 $ 959.5 EBITA Margin on Net Revenue 1 13.6 % 13.0 % 12.8 %
1 Calculations include restructuring charges of
costs of $35.0 related to the Acxiom acquisition in 2018.
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