SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
_________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2006
Commission File Number:1-10551
OMNICOM GROUP INC.(Exact name of registrant as specified in its charter)
(212) 415-3600(Registrant’s telephone number, including area code)
Not Applicable (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $0.15 par value — 170,900,000 shares as of October 16, 2006.
OMNICOM GROUP INC. AND SUBSIDIARIES INDEX
Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. These statements relate to future events or future financial performance and involve known and unknown risks and other factors that may cause our actual or our industry’s results, levels of activity or achievement to be materially different from those expressed or implied by any forward-looking statements. These risks and uncertainties, which are described in our 2005 Annual Report on Form 10-K under Item 1A-Risk Factors include, but are not limited to, our future financial condition and results of operations, changes in general economic conditions, competitive factors, changes in client communication requirements, the hiring and retention of human resources and our international operations, which are subject to the risks of currency fluctuations and exchange controls. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of those terms or other comparable terminology. These statements are present expectations. We undertake no obligation to update or revise any forward-looking statement.
Item 1. FINANCIAL STATEMENTS
OMNICOM GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Millions)
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data) (Unaudited)
OMNICOM GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions)(Unaudited)
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The number of shares used in our earnings per share computations were:
OMNICOM GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Executive Summary
We are a strategic holding company. We provide professional services to clients through multiple agencies around the world. On a global, pan-regional and local basis, our agencies provide these services in the following disciplines: traditional media advertising, customer relationship management, public relations and specialty communications. Our business model was built and evolves around clients. While our companies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. The fundamental premise of our business is that our clients’ specific requirements should be the central focus in how we structure our business offerings and allocate our resources. This client-centric business model results in multiple agencies collaborating in formal and informal virtual networks that cut across internal organizational structures to deliver consistent brand messages for a specific client and execute against our clients’ specific marketing requirements. We continually seek to grow our business with our existing clients by maintaining our client-centric approach, as well as expanding our existing business relationships into new markets and new clients. In addition, we pursue selective acquisitions of complementary companies with strong entrepreneurial management teams that typically either currently serve or have the ability to serve our existing client base.
Globally, during the past few years, the overall industry has continued to be affected by geopolitical unrest, lagging economic conditions, lack of consumer confidence and cautious client spending. All of these factors contributed to a difficult business environment and industry-wide margin contraction. Throughout this period, we continued to invest in our businesses and our personnel, and took action to reduce costs at some of our agencies to address the changing economic circumstances. In recent periods, improving economic conditions, coupled with the business trends described below, have had a positive impact on our business.
Several long-term trends continue to positively affect our business, including our clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets. Additionally, in an effort to gain greater efficiency and effectiveness from their marketing dollars, clients are increasingly requiring greater coordination of their traditional advertising and marketing activities and concentrating these activities with a smaller number of service providers.
Given our size and breadth, we manage our business by monitoring several financial indicators. The key indicators that we review focus on our revenues and operating expenses.
Revenue growth is analyzed by reviewing the components and mix of the growth, including growth by major geographic location, growth by major marketing discipline, growth from currency changes, growth from acquisitions and growth from our largest clients.
In recent years, our revenue has been divided almost evenly between domestic and international operations. For the three months ended September 30, 2006, our overall revenue growth was 10.0% as compared to the comparable prior year period. The effect of foreign exchange impacts increased worldwide revenue by 1.9%. The acquisition of entities, net of entities disposed, decreased worldwide revenue by 0.1% and the remaining increase of 8.2% was the result of organic growth. For the nine months ended September 30, 2006, our overall revenue growth was 8.2% as compared to the comparable prior year period. The effect of foreign exchange impacts decreased worldwide revenue by 0.2%. The acquisition of entities, net of entities disposed, increased worldwide revenue by 0.4%. The remaining increase of 8.0% was organic growth.
We measure operating expenses in two distinct cost categories: salary and service costs, and office and general expenses. Salary and service costs are comprised primarily of employee compensation related costs. Office and general expenses are comprised primarily of rent and occupancy costs, technology related costs and depreciation and amortization. Each of our agencies requires service professionals with a skill set that is common across our disciplines. At the core of this skill set is the ability to understand a client’s brand and its selling proposition, and the ability to develop a unique message to communicate the value of the brand to the client’s target audience. The facility requirements of our agencies are also similar across geographic regions and disciplines, and their technology requirements are generally limited to personal computers, servers and off-the-shelf software.
Because we are a service business, we monitor these costs on a percentage of revenue basis. Salary and service costs tend to fluctuate in conjunction with changes in revenue whereas office and general expenses, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenue increases because a significant portion of these expenses are relatively fixed in nature. During the third quarter of 2006, as a percentage of revenue, salary and service costs decreased slightly to 72.4% from 72.5% of revenue during the third quarter of 2005, as the related cost increases were in line with the increase in revenue. Office and general expenses declined to 16.5% of revenue in the third quarter of 2006 from 16.7% in the third quarter of 2005, as a result of period-over-period revenue growth and our continuing efforts to leverage fixed costs and better align these costs with business levels on a location-by-location basis. During the first nine months of 2006, salary and service costs increased slightly to 71.2% of revenue from 71.1% of revenue in the first nine months of 2005, and office and general expenses declined to 16.4% of revenue in the first nine months of 2006 from 16.8% in the first nine months of 2005.
Our net income for the third quarter of 2006 increased by 9.5% to $177.1 million from $161.7 million in the third quarter of 2005. Our net income for the first nine months of 2006 increased by 9.1% to $586.8 million from $538.1 million in the first nine months of 2005. Included in our 2006 first nine months net income is a $2.0 million benefit resulting from the cumulative effect of the adoption of SFAS 123R and the requirement to provide an estimate for forfeitures on all unvested stock-based compensation awards as of January 1, 2006. In prior years, in accordance with SFAS 123, we recorded forfeitures when they actually occurred. Our
diluted earnings per share increased by 15.6% to $1.04 from $0.90 in the third quarter of 2006 and it increased by 14.6% to $3.38 from $2.95 in the first nine months of 2005. The increases in our diluted earnings per share were impacted by the reduction during 2006 in our weighted average shares outstanding. This reduction was the result of our purchases of treasury shares, net of option exercises and share issuances under our employee stock purchase plan.
Results of Operations: Third Quarter 2006 Compared to Third Quarter 2005
Revenue:Our third quarter of 2006 consolidated worldwide revenue increased 10.0% to $2,774.3 million from $2,522.9 million in the comparable period last year. The effect of foreign exchange impacts increased worldwide revenue by $47.9 million. Acquisitions, net of disposals, decreased worldwide revenue by $4.4 million in the third quarter of 2006 and organic growth increased worldwide revenue by $207.9 million. The components of the third quarter 2006 revenue growth in the U.S. (“domestic”) and the remainder of the world (“international”) are summarized below ($ in millions):
The components and percentages are calculated as follows:
The components of revenue and revenue growth in our primary geographic markets for the third quarter of 2006 compared to the third quarter of 2005 are summarized below ($ in millions):
As indicated, foreign exchange impacts increased our international revenue by 1.9%, or $47.9 million during the quarter ended September 30, 2006. The most significant impacts resulted from the strength of the Euro, British Pound, Canadian Dollar and Brazilian Real against the U.S. Dollar, which was partially offset by the decline of the Japanese Yen and New Zealand Dollar against the U.S. Dollar.
Driven by our clients’ continuous demand for more effective and efficient branding activities, we strive to provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. These services include advertising, brand consultancy, crisis communications, custom publishing, database management, digital and interactive marketing, direct marketing, directory advertising, entertainment marketing, environmental design, experiential marketing, field marketing, financial/corporate business-to-business advertising, graphic arts, healthcare communications, instore design, investor relations, marketing research, media planning and buying, mobile marketing services, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, real estate advertising and marketing, recruitment communications, reputation consulting, retail marketing, search engine marketing and sports and event marketing. In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following four categories as summarized below: traditional media advertising, customer relationship management (referred to as CRM), public relations and specialty communications ($ in millions).
Operating Expenses: Our third quarter 2006 worldwide operating expenses increased $218.5 million, or 9.7%, to $2,466.9 million from $2,248.4 million in the third quarter of 2005, as shown below ($ in millions):
Because we provide professional services, salary and service costs represent the largest part of our operating expenses. During the third quarter of 2006, we continued to invest in our businesses and their professional personnel. As a percentage of total operating expenses, salary and service costs were 81.4% in the third quarter of 2006 and 81.3% in the third quarter of 2005. These costs are comprised of salary and related costs and direct service costs. Most, or $181.0 million and 82.8%, of the $218.5 million increase in total operating expenses in the third quarter of 2006 resulted from increases in salary and service costs. This increase was attributable to the increase in our revenue in the third quarter of 2006 and the required increases in the direct costs necessary to deliver our services and pursue new business initiatives, including direct salaries, salary related costs and direct service costs, including freelance labor costs and direct administrative costs, such as travel. This increase was partially offset by reductions in severance expense and employee stock-based compensation expense. Salary and service costs as a percentage of revenue was 72.4% in the third quarter of 2006, which was slightly lower than 72.5% in the third quarter of 2005.
Office and general expenses represented 18.6% and 18.7% of our operating expenses in the third quarter of 2006 and 2005, respectively. These costs are comprised of office and equipment rent, technology costs and depreciation, amortization of identifiable intangible assets, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased from 16.7% in the third quarter of 2005 to 16.5% in the third quarter of 2006 because these costs are relatively fixed in nature and decrease as a percentage of revenue as revenue increases. In addition, this quarter-over-quarter decrease resulted from our continuing efforts to better align these costs with business levels on a location-by-location basis.
During the third quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense from the resolution of uncertainties related to changes in certain foreign tax laws. The aggregate impact of these events as presented below was a decrease in profit before tax of $0.5 million, a decrease in tax expense of $1.8 million and an increase in net income of $1.3 million ($ in millions):
The table above is intended to facilitate the above discussion regarding the results of our operations. As a result of the adjustments above, the “Adjusted” numbers are non-GAAP measures. We believe that by making the adjustments above, the “Adjusted” numbers are more comparable to previous quarters and thus more meaningful for the purpose of this analysis. The impact on revenue of this disposal activity is included in our discussion of changes in the Revenue section on page 14.
Net Interest Expense: Our net interest expense increased in the third quarter of 2006 to $26.7 million, as compared to $16.3 million in the third quarter of 2005. Our gross interest expense increased by $13.7 million to $33.6 million. This increase was primarily impacted by $15.1 million of additional interest costs related to the issuance of our 5.90% Senior Notes and $6.7 million of incremental interest cost related to the amortization, in accordance with EITF No. 96-19, of supplemental interest payments we made during first quarter of 2006 to holders of our Liquid Yield Option Notes due 2031 (“2031 Notes”) who did not put their notes back to us. These increases were partially offset by interest expense savings relative to our Euro-denominated (“€”) 152.4 million 5.20% Notes that were redeemed upon their maturity in June
2005, as well as interest expense savings under our commercial paper program compared to the prior year. The increase in interest income is the result of increased levels of cash and short-term investments on hand during the quarter as well as increases in short-term interest rates.
We expect interest expense resulting from the amortization, in accordance with EITF 96-16, of the supplemental interest payments made with respect to our 2031 Notes and our 2032 Notes to increase by $4.2 million in the fourth quarter of 2006 compared to the fourth quarter of 2005. We also expect interest expense for the remainder of the year to be increased by interest expense related to our $1.0 billion 5.90% Senior Notes that we issued in late March 2006.
Income Taxes: Our consolidated effective income tax rate was 33.1% in the third quarter of 2006, which is slightly lower than our tax rate of 33.7% for the third quarter of 2005. The decrease in the tax rate is the result of the following activity. During the third quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense resulting from the resolution of uncertainties related to changes in foreign tax laws. Excluding this activity, our tax rate for the quarter would have been 33.7%, which is in line with our reported tax rate of 33.7% for the third quarter of 2005.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the third quarter of 2006 increased $15.4 million, or 9.5%, to $177.1 million from $161.7 million in the third quarter of 2005. Diluted earnings per share increased 15.6% to $1.04 in the third quarter of 2006, as compared to $0.90 in the prior year period. This period-over-period increase resulted from the 9.5% increase in net income and the reduction in our weighted average common shares outstanding. The reduction in our weighted average common shares outstanding was the result of our purchases during 2006 of treasury shares, net of shares issued upon stock option exercises and shares issued under our employee stock purchase plan.
Results of Operations: First Nine Months 2006 Compared to First Nine Months 2005
Revenue:Our consolidated worldwide revenue for the first nine months of 2006 increased 8.2% to $8,160.7 million from $7,541.7 million in the comparable period last year. The effect of foreign exchange impacts decreased worldwide revenue by $13.4 million. Acquisitions, net of disposals, increased worldwide revenue by $29.2 million in the first nine months of 2006 and organic growth increased worldwide revenue by $603.2 million. The components of the first nine months of 2006 revenue growth in the U.S. (“domestic”) and the remainder of the world (“international”) are summarized below ($ in millions):
The components of revenue and revenue growth in our primary geographic markets for the first nine months of 2006 compared to the first nine months of 2005 are summarized below ($ in millions):
As indicated, foreign exchange impacts decreased our international revenue by 0.2%, or $13.4 million, during the nine months ended September 30, 2006. The most significant impacts resulted from the decline of the Euro, the British Pound and the Japanese Yen against the U.S. Dollar, which was partially offset by the strength of the Canadian Dollar and Brazilian Real against the U.S. Dollar.
In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following four categories as summarized below: traditional media advertising, CRM, public relations and specialty communications ($ in millions).
Operating Expenses: Our worldwide operating expenses for the first nine months of 2006 increased $523.4 million, or 7.9%, to $7,151.4 million from $6,628.0 million in the first nine months of 2005, as shown below ($ in millions).
Because we provide professional services, salary and service costs represent the largest part of our operating expenses. During the first nine months of 2006, we continued to invest in our businesses and their professional personnel. As a percentage of total operating expenses, salary and service costs were 81.3% in the first nine months of 2006 and 80.9% in the first nine months of 2005. These costs are comprised of salary and related costs and direct service costs. Most, or $451.6 million and 86.3%, of the $523.4 million increase in total operating expenses in the first nine months of 2006 resulted from increases in salary and service costs. This increase was attributable to the increase in our revenue in the first nine months of 2006 and the required increases in the direct costs necessary to deliver our services and pursue new business initiatives, including direct salaries, salary related costs and direct service costs, including freelance labor costs and direct administrative costs, such as travel. In addition, cash-based incentive compensation expense increased as compared to the prior year period which was partially offset by a decrease in stock-based compensation expense. As a result, salary and service costs as a percentage of revenue was 71.2% in the first nine months of 2006 and 71.1% in the first nine months of 2005.
Office and general expenses represented 18.7% and 19.1% of our operating expenses in the first nine months of 2006 and 2005, respectively. These costs are comprised of office and equipment rent, technology costs and depreciation, amortization of identifiable intangible assets, professional fees and other overhead expenses. As a percentage of revenue, office and general expenses decreased from 16.8% in the first nine months of 2005 to 16.4% in the first nine months of 2006 because these costs are relatively fixed in nature and decrease as a percentage of revenue as revenue increases. In addition, this period-over-period decrease resulted from our continuing efforts to better align these costs with business levels on a location-by-location basis.
Net Interest Expense: Our net interest expense increased in the first nine months of 2006 to $67.4 million, as compared to $42.7 million in the first nine months of 2005. Our gross interest expense increased by $35.8 million to $91.3 million. This increase was primarily impacted by $30.4 million of additional interest costs related to the recent issuance of our 5.90% Senior Notes and $17.2 million of incremental interest expense related to the amortization, in accordance with EITF 96-19, of supplemental interest payments made with respect to our 2031 Notes. These increases were partially offset by interest expense savings relative to our Euro-denominated (“€”) 152.4 million 5.20% Notes that were redeemed upon their maturity in June 2005, as well as interest expense savings under our commercial paper program compared to the prior year. The increase in interest income is the result of increased levels of cash and short-term investments on hand during the first nine months as well as increases in short-term interest rates.
Income Taxes: Our consolidated effective income tax rate was 33.5% in the first nine months of 2006, which is lower than our tax rate of 34.1% for the first nine months of 2005. The 33.5% tax rate for the nine months of 2006 was impacted by the following activity. During the third quarter of 2006, we disposed of a U.S. based healthcare business and several small businesses. The sale of the healthcare business resulted in a high book tax rate primarily caused by the non-deductibility of goodwill. This increase in income tax expense was more than offset by a one-time reduction of income tax expense resulting from the resolution of uncertainties
related to changes in foreign tax laws. Excluding this activity our tax rate for the 2006 quarter and first nine months would have been 33.7%. The 34.1% tax rate for the first nine months of 2005 was high as it was impacted by the sale in the first quarter of 2005 of a majority-owned business in Australia and New Zealand that resulted in a gain and an unusually high book tax rate on that gain. Excluding the effect of the gain and the related tax impact, our first nine months 2005 tax rate would also have been 33.7%.
Earnings Per Share (EPS): For the foregoing reasons, our net income in the first nine months of 2006 increased $48.7 million, or 9.1%, to $586.8 million from $538.1 million in the first nine months of 2005. Diluted earnings per share increased 14.6% to $3.38 in the first nine months of 2006, as compared to $2.95 in the prior year period. This period-over-period increase resulted from the 9.1% increase in net income and the reduction in our weighted average common shares outstanding. The reduction in our weighted average common shares outstanding was the result of our purchases of treasury shares, net of shares issued upon stock option exercises and shares issued under our employee stock purchase plan. A substantial portion of our treasury share repurchases were made in connection with the ASR program described in Note 11 to our condensed consolidated financial statements.
Critical Accounting Policies
For a more complete understanding of all of our accounting policies, our financial statements and the related management’s discussion and analysis of those results, investors are encouraged to consider this information together with our discussion of our critical accounting policies under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2005 Form 10-K, as well as our consolidated financial statements and the related notes included in our 2005 Form 10-K.
New Accounting Pronouncements
Effective January 1, 2006, we adopted SFAS 123R using the modified prospective application transition method. In July 2006, the FASB released FIN 48, which we will adopt in the first quarter of 2007. In September 2006, the FASB released SFAS 157, which we will adopt in the first quarter of 2008 and SFAS 158 which we will adopt as of December 31, 2006. See Note 9 to our condensed consolidated financial statements for additional information.
Contingent Acquisition Obligations
Certain of our acquisitions are structured with contingent purchase price obligations, often referred to as earn-outs. We utilize contingent purchase price structures in an effort to minimize the risk to us associated with potential future negative changes in the performance of the acquired entity during the post-acquisition transition period. These payments are not contingent upon future employment. The aggregate amount of future contingent purchase price payments that we would be required to pay for prior acquisitions, assuming that the businesses perform over the relevant future periods at their current profit levels, is approximately $443 million as of September 30, 2006. The ultimate amounts payable cannot be predicted with reasonable certainty because they are dependent upon future results of operations of subject businesses and are subject to changes in foreign currency exchange rates. In accordance with U.S. GAAP, we have not recorded a liability for these items on our balance sheet since the definitive amount is not determinable or distributable. Actual results can differ from these estimates and the actual amounts that we pay are likely to be different from these estimates. Our obligations change from period to period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. These differences could be significant. The contingent purchase price obligations as of September 30, 2006, calculated assuming that the acquired businesses perform over the relevant future periods at their current profit levels, are as follows ($ in millions):
In addition, owners of interests in certain of our subsidiaries or affiliates have the right in certain circumstances to require us to purchase additional ownership stakes in those companies. Assuming that the subsidiaries and affiliates perform over the relevant periods at their current profit levels, the aggregate amount we could be required to pay in future periods is approximately $273 million, $183 million of which relates to obligations that are currently exercisable. If these rights are exercised, there would be an increase in our net income as a result of our increased ownership and the reduction of minority interest expense. The ultimate amount payable relating to these transactions will vary because it is primarily dependent on the future results of operations of the subject businesses, the timing of the exercise of these rights and changes in foreign currency exchange rates. The actual amount that we pay is likely to be different from this estimate and the difference could be significant. The obligations that exist for these agreements as of September 30, 2006, calculated using the assumptions above, are as follows ($ in millions):
Liquidity and Capital Resources
Historically, substantially all of our non-discretionary cash requirements have been funded from operating cash flow and cash on hand. However, as discussed below, during the year we manage liquidity by utilizing our credit facilities. Our principal non-discretionary funding requirement is our working capital. In addition, we have contractual obligations related to our debt and convertible notes, our recurring business operations primarily related to lease obligations, as well as certain contingent acquisition obligations related to acquisitions made in prior years.
Our principal discretionary cash requirements include dividend payments to our shareholders, repurchases of our common stock, payments for strategic acquisitions and capital expenditures. Typically, our discretionary spending is also funded from operating cash flow and cash on hand. However, in any given year, depending on the level of discretionary activity, we may use other sources of available funding to finance these activities, such as the liquidation of short-term investments, the issuance of commercial paper or accessing the capital markets. The repurchases of our stock during the third quarter of 2006 are summarized in Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” of this report.
We have a seasonal working capital cycle. Working capital requirements are lowest at year-end. The fluctuation in working capital requirements between the lowest and highest points during the course of the year can be more than $1.5 billion. This cycle occurs because our businesses incur costs on behalf of our clients, including when we place media and incur production costs. We generally require collection from our clients prior to our payment for the media and production cost obligations.
Liquidity:Our cash and cash equivalents were $808.3 million at September 30, 2006, a decrease of $27.5 million from the balance at December 31, 2005. We also had short-term investments of $40.5 million at September 30, 2006, a decrease of $333.6 million from the balance at December 31, 2005.
During the first nine months of 2006, we generated $390.3 million of cash flow from operations and in March 2006 we issued $1.0 billion principal amount of 5.90% Senior Notes providing $995.1 million in gross proceeds. Our spending during the period was comprised primarily of: repurchases of our stock amounting to $915.6 million, net of proceeds received from employee stock compensation plans; repurchases of our convertible debt, as discussed below, of $299.2 million; purchases of equity interests in subsidiaries, encompassing new acquisitions as well as obligations related to existing subsidiaries, of $208.6 million; dividend payments of $133.1 million; and capital expenditures of $119.5 million. Consistent with prior year patterns, we expect our cash and short-term investment balances to increase during the fourth quarter of 2006.
Capital Resources: On June 23, 2006, we amended and extended our five-year credit facility to June 23, 2011 and increased the amount available from $2.1 billion to $2.4 billion with substantially the same bank consortium. In conjunction with this amendment and extension, we terminated our $400.0 million 364-day revolving credit facility that was due to expire on June 29, 2006. Subsequently in September 2006, the facility was increased from $2.4 billion to $2.5 billion.
In funding our day-to-day liquidity, we are an active participant in the commercial paper market with a $1.5 billion program. Our credit facility provides credit support for commercial paper issued under this program, as well as providing back-up liquidity in the event any of our convertible notes are put back to us. As of September 30, 2006, we had no commercial paper outstanding. Accordingly, we have the ability to classify outstanding borrowings, if any, under our five-year credit facility as long-term debt.
Our five-year credit facility is provided by a bank syndicate, which includes large global banks such as Citibank, JP Morgan Chase, HSBC, ABN Amro, Bank of America, Societe Generale, Deutsche and BBVA. We also include large regional banks in the U.S. such as Wachovia, US Bancorp, Northern Trust, PNC and Wells Fargo. Additionally, we include banks that have a major presence in countries where we conduct business such as Sumitomo in Japan, Fortis in Belgium, San Paolo in Italy, Scotia in Canada and Westpac in Australia.
Debt:We had short-term bank loans of $11.8 million and $15.0 million, as of September 30, 2006 and December 31, 2005, respectively. The short-term bank loans consisted of bank overdrafts of our international subsidiaries and are treated as unsecured loans pursuant to our bank agreements.
In March 2006, we issued $1.0 billion principal amount of 5.90% Senior Notes due April 15, 2016. The gross proceeds from the issuance were $995.1 million. The gross proceeds less fees resulted in a 6.05% yield to maturity. The 5.90% Senior Notes were issued by Omnicom Group Inc. and two of our wholly-owned finance subsidiaries, Omnicom Capital Inc. and Omnicom Finance Inc., as co-obligors, similar to our Convertible Notes. The 5.90% Senior Notes are senior unsecured notes that rank in equal right of payment with all existing and future unsecured indebtedness and as a joint and several liability of the issuer and the co-obligors.
In February 2006, we offered to pay a supplemental interest payment of $46.25 per $1,000 principal amount of notes to holders of our Liquid Yield Option Notes due 2031 (“2031 Notes”) as of February 2, 2006 to not put their notes back to us. The noteholders were paid $39.2 million on February 8, 2006. This payment is being amortized ratably over a 12-month period to the next put date in accordance with EITF No. 96-19.
In June 2006, we offered to pay a supplemental interest payment of $27.50 per $1,000 of our Zero Coupon Zero Yield Convertible Notes due 2033 to holders that did not put their notes back to us and consented to the amendments to the notes and related indenture as of June 27, 2006. The principal amendment extended the maturity of the notes from June 15, 2033 to July 1,
2038. The additional amendments conformed other terms of the notes for the extension of the maturity date, as well as amending the comparable yield. On June 21, 2006, we repurchased $132.5 million of notes that were put to us. With respect to the remaining $467.5 million of notes as of June 30, 2006, noteholders holding a combined amount of $428.1 million of notes consented to the amendments, were paid $27.50 per $1,000 note and their notes were amended. The total supplemental interest payment of $11.7 million is being amortized ratably over a 24-month period to the next put date in accordance with EITF No. 96-19. The next put date for these notes is June 15, 2008. The remaining noteholders, comprising $39.4 million aggregate principal amount of notes, did not consent to the amendments. As a result, these notes are still outstanding and were not amended and these noteholders were not paid the supplemental interest payment.
In July 2006, we offered to pay a supplemental interest payment of $32.50 per $1,000 principal amount of notes to holders of our 2032 Notes as of August 1, 2006 to not put their notes back to us. On August 4, 2006, we repurchased $165.2 million of our 2032 Notes that were put to us. With respect to the remaining $727.0 million of notes, noteholders were paid a total of $23.6 million on August 2, 2006, that is being amortized ratably over a 12-month period to the next put date in accordance with EITF No. 96-19.
Our outstanding debt and amounts available under our credit facilities as of September 30, 2006 were as follows ($ in millions):
We believe that our operating cash flow combined with our available lines of credit and our access to the capital markets are sufficient to support our foreseeable cash requirements arising from working capital, outstanding debt, capital expenditures, dividends and acquisitions.
Market Risk
Our results of operations are subject to risk from the translation to the U.S. Dollar of the revenue and expenses of our foreign operations, which are generally denominated in the local currency. For the most part, our revenues and the expenses incurred related to those revenues are denominated in the same currency. This minimizes the impact that fluctuations in exchange rates will have on our net income.
During the first quarter of 2006, we entered into Japanese Yen-based cross-currency interest rate swaps, with an aggregate notional principal amount of 22.0 billion Yen that mature in 2013. These swaps effectively hedge our net investment in certain Japanese Yen based denominated assets.
Our 2005 Form 10-K provides a more detailed discussion of the market risks affecting our operations. Except as discussed above, as of September 30, 2006, no material change had occurred in our market risks from the disclosure contained in our 2005 Form 10-K.
We have established and continue to maintain disclosure controls and procedures and internal control over financial reporting designed to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within applicable time periods. We conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2006. Based on that evaluation, our CEO and CFO concluded that as of September 30, 2006 our disclosure controls and procedures are effective to ensure that decisions can be made timely with respect to required disclosures, as well as ensuring that the recording, processing, summarization and reporting of information required to be included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 is appropriate. KPMG LLP, an independent registered public accounting firm that audited our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005, has issued an attestation report on management’s assessment of Omnicom’s internal control over financial reporting as of December 31, 2005, dated February 24, 2006. There have not been any changes in our internal control over financial reporting that occurred during our third fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Item 1. Legal Proceedings
The information regarding legal proceedings described in Note 10 to the condensed consolidated financial statements set forth in Part I of this Report is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table presents information with respect to purchases of our common stock made during the three months ended September 30, 2006 by us or any of our “affiliated purchasers.”
Item 6. Exhibits
(a) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.