The Interpublic Group of Companies 2002 Annual Report
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THE INTERPUBLIC GROUP OF COMPANIES 2002 ANNUAL REPORT A Letter from the Chairman To Our Shareholders: Each year brings its own triumphs and challenges. In 2002, Interpublic’s accomplishments— of which there were many—went largely unheralded. This was attributable to the intense public focus that we were the subject of, in part due to the recession that once again battered the advertising industry, but equally because of our own disappointing earnings, as well as credit and liquidity concerns surrounding the company. We are working hard and making progress in putting these issues behind us, so as to return attention to our strengths and accomplishments. Notable among these last year were: ■ The continued vitality and competitive strength of our Lowe at Cannes, the industry’s most prestigious creative agencies in every communications discipline, as evident competition, where we also won the Media Grand Prix. in their new business performance. Overall, our compa- Not to mention an additional 22 “Agency of the Year” nies won $3.2 billion of net new billings in 2002, from awards won in 12 markets around the world, by interna- every region in the world. tional offices of FCB, Lowe and McCann on every continent to specialist agencies ranging from healthcare ■ Major awards and recognition from our peers. This communications to interactive digital marketing. included coveted “Agency of the Year” honors won in the United States by Campbell-Ewald, Deutsch and Univer- ■ The flawless execution of the merger between Weber sal McCann and outstanding performance by Bozell and Shandwick and BSMG, which created the largest, most THE INTERPUBLIC GROUP OF COMPANIES ■ 2002 ANNUAL REPORT 1 CHAIRMAN’S MESSAGE (CONTINUED) powerful player in public relations and constituent com- value through the aggressive pursuit of margin improve- munications—one with dramatically higher profitability ment and organic growth. Of course, we will continue despite the shrinking revenue environment. to provide the ideas and solutions that have always made us the most client-centric organization in our industry. ■ Finally, strong working capital disciplines and cash man- agement initiatives that helped reduce our debt by close to $300 million in 2002. 2002 While we are proud of these accomplishments, it is unde- niable that our difficulties were what made news last Results year. Some of the challenges we faced reflected the harsh business environment. Some, notably the company’s The challenges of 2002 began with revenue. We started the unfortunate foray into venue ownership, were the vestige year hoping for a recovery in the broader economy and of acquisitions made in the exuberance of the nineties in our sector. Consequently, we planned for only a modest boom. Others were self-inflicted, such as the erosion revenue decline and budgeted costs accordingly. As the of cost disciplines at a number of our companies, and the year progressed and the recovery failed to materialize, rev- internal accounting errors at McCann in Europe which enue fell by 8.7% to $6.2 billion. we at Interpublic discovered and forcefully addressed. Our advertising and media business, particularly All of these contributed to the company’s unacceptable in the United States, suffered declining revenue beginning financial performance. in 2001. The trend continued into 2002, with revenue In February, your Board of Directors elected me Chair- down 8.9%, as clients curtailed spending and delayed man and Chief Executive Officer. I welcome the challenge, programs due to their own cost pressures. Client spend- to which I will bring enthusiasm, energy and the necessary ing on marketing and communications services, such humility. I feel a deep sense of responsibility to all of our as public relations, direct marketing, sales promotion and stakeholders. And I harbor no illusions about the nature of event planning, resisted the revenue decline until well the task at hand—there is significant work to be done. into 2002. This was in part due to the fact that returns But there are also significant potential rewards. on these efforts are often more immediate, or more A strong vision, coupled with a great sense of urgency, will easily assessed. Ultimately, however, continuing economic be required to set Interpublic on the right path. While the malaise and reduced consumer spending prompted company has experienced recent reversals, I am confident clients to postpone all forms of marketing support, which that by aligning the needs of our clients, employees and caused marketing and communication services revenue investors we will, over time, return Interpublic to its to decline 8.3%. long-standing position as the industry leader in delivering Our traditional cost discipline dictates that revenue financial returns to its shareholders. declines must be matched by commensurate cost reduc- To that end, we are working on an aggressive turn- tions. When significant revenue is derived from project around plan built on these key strategic priorities: work, as Interpublic’s is, accurate revenue forecasting and strengthening the balance sheet, bolstering financial proactive expense controls are imperative. Although many reliability and accountability, as well as driving shareholder of our agencies moved aggressively to protect profit 2 THE INTERPUBLIC GROUP OF COMPANIES ■ 2002 ANNUAL REPORT margins in 2002, some of our largest operating units between one and four percent in 2003, adjusted for asset moved too slowly. sales or dispositions. In 2002, salaries and related expenses declined by 6.8%—significantly lagging the rate of our revenue decline— and our resulting profit margin remained well The Road below acceptable levels. Operating income was $405.8 million in 2002, compared to a loss of $243.6 million in 2001. Results in 2002 reflect the benefit of significantly Ahead lower restructuring and asset impairment charges, as well as the absence of goodwill amortization, in accordance Our company faces significant challenges, stemming from with new accounting rules. So, although earnings per the past two years of severe weakness in our sector, exacer- share of $.26 cents seemingly compared favorably to last bated by the strategy of acquisition-driven growth that year’s loss of $1.45 per share, we regard this performance Interpublic pursued prior to the slowdown. To right the as a disappointment. ship, we will focus on the financial fundamentals that pre- Despite poor earnings performance, Interpublic viously made us an industry leader, complemented by a generated significant cash flow in 2002. This allowed us company-wide commitment to organic growth. to fund important expenditures related to efficiency A strong sense of purpose now drives Interpublic. The improvements, finance modest strategic acquisitions that management team understands and is responsive to the improved and expanded our service offerings, pay needs of clients and shareholders alike. The new vision for $145.6 million in cash dividends, and retire $271 million our company is built on four strategic imperatives. in debt. Debt reduction continues as a primary goal. First, we will continue to be relentless in our efforts to Looking to 2003, it is clear clients remain cautious. strengthen the balance sheet. We have already made signif- Revenue visibility will therefore be poor. Geopolitical icant strides in this area. Improvements in cash risks appear to have stalled many sectors of the economy. management and working capital disciplines have allowed As a result, marketers and consumers alike have settled us to reduce debt significantly, from 61.3% of capital into a “wait-and-see” attitude. We have limited confidence to 55.7% in just one year. Achieving the appropriate debt that a meaningful economic recovery will develop in level is vital to our organization. As in any service busi- 2003 and have built our operating budgets accordingly. ness, a flexible balance sheet will give us the ability Specifically, we are estimating that revenue will decline to succeed in any economic climate. Equally important, “We are working on an aggressive turnaround plan built on these key strategic priorities: strengthening the balance sheet, bolstering financial reliability and accountability, as well as driving shareholder value through the aggressive pursuit of margin improvement and organic growth.” THE INTERPUBLIC GROUP OF COMPANIES ■ 2002 ANNUAL REPORT 3 CHAIRMAN’S MESSAGE (CONTINUED) a strong financial position will allow us to best serve organic growth is without doubt the most powerful driver clients by attracting world-class professional talent. of shareholder value. Second, we will further upgrade our information sys- An improved balance sheet, increased financial relia- tems, communications and operating-unit financial man- bility, margin improvement and organic growth—these agement to ensure financial reliability and accountability. are the yardsticks we will use to measure our progress and Third, we will focus on margin improvement. The our success. exceptional quality of professional service being delivered In addition to these fundamental drivers, I pledge by our companies to clients demands that we achieve to you that a sense of urgency will permeate everything margins equal to those of our leading competitors. Our we do, that we will promote accountability throughout people and our shareholders deserve this. the organization and that we will remain committed This is an area in which a number of our units to aggressively communicating with all internal and exter- lost their way in 2002.