Interpublic Group of Companies Earnings 2018-09-30

IPG 10Q Quarterly Report

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Balance Sheet	Income Statement	Cash Flow

10-Q 1 ipgq3201810q.htm 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2018



	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-6686

THE INTERPUBLIC GROUP OF COMPANIES, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-1024020
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

909 Third Avenue, New York, New York 10022

(Address of principal executive offices) (Zip Code)

(212) 704-1200

(Registrant’s telephone number, including area code)

(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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the registrant’s common stock outstanding as of October 15, 2018 was 384,351,500.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	6
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	43
INDEX TO EXHIBITS		44
SIGNATURES		46

INFORMATION REGARDING FORWARD-LOOKING DISCLOSURE

This quarterly report on Form 10-Q contains forward-looking statements. Statements in this report that are not historical facts, including statements about management’s beliefs and expectations, constitute forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or comparable terminology are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined under Item 1A, Risk Factors, in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following:


•	potential effects of a challenging economy, for example, on the demand for our advertising and marketing services, on our clients’ financial condition and on our business or financial condition;


•	our ability to attract new clients and retain existing clients;


•	our ability to retain and attract key employees;


•	risks associated with assumptions we make in connection with our critical accounting estimates, including changes in assumptions associated with any effects of a weakened economy;


•	potential adverse effects if we are required to recognize impairment charges or other adverse accounting-related developments;


•	risks associated with the effects of global, national and regional economic and political conditions, including counterparty risks and fluctuations in economic growth rates, interest rates and currency exchange rates;


•	developments from changes in the regulatory and legal environment for advertising and marketing and communications services companies around the world; and


•	failure to realize the anticipated benefits on the acquisition of the Acxiom business.

Investors should carefully consider these factors and the additional risk factors outlined in more detail under Item 1A, Risk Factors, in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q.

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PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements (Unaudited)

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
REVENUE:
Net revenue	$	1,895.7		$	1,832.5		$	5,617.9		$	5,342.4
Billable expenses	401.8			375.7			1,240.5			1,115.4
Total revenue	2,297.5			2,208.2			6,858.4			6,457.8

OPERATING EXPENSES:
Salaries and related expenses	1,251.4			1,218.8			3,874.6			3,699.4
Office and other direct expenses	317.0			302.9			974.1			934.0
Billable expenses	401.8			375.7			1,240.5			1,115.4
Cost of services	1,970.2			1,897.4			6,089.2			5,748.8
Selling, general and administrative expenses	21.6			13.6			85.5			69.1
Depreciation and amortization	44.0			42.2			134.0			124.5
Total operating expenses	2,035.8			1,953.2			6,308.7			5,942.4

OPERATING INCOME	261.7			255.0			549.7			515.4

EXPENSES AND OTHER INCOME:
Interest expense	(27.6		)	(21.0		)	(73.6		)	(67.6		)
Interest income	5.3			4.1			14.0			14.0
Other expense, net	(15.3		)	(9.9		)	(56.0		)	(24.5		)
Total (expenses) and other income	(37.6		)	(26.8		)	(115.6		)	(78.1		)

Income before income taxes	224.1			228.2			434.1			437.3
Provision for income taxes	60.7			54.9			137.0			136.2
Income of consolidated companies	163.4			173.3			297.1			301.1
Equity in net income (loss) of unconsolidated affiliates	0.1			(1.0		)	(1.9		)	0.1
NET INCOME	163.5			172.3			295.2			301.2
Net (income) loss attributable to noncontrolling interests	(2.5		)	(2.6		)	(2.5		)	0.9
NET INCOME AVAILABLE TO IPG COMMON STOCKHOLDERS	$	161.0		$	169.7		$	292.7		$	302.1

Earnings per share available to IPG common stockholders:
Basic	$	0.42		$	0.44		$	0.76		$	0.77
Diluted	$	0.41		$	0.43		$	0.75		$	0.76

Weighted-average number of common shares outstanding:
Basic	382.6			389.5			383.2			391.2
Diluted	388.4			397.2			388.4			398.6

Dividends declared per common share	$	0.21		$	0.18		$	0.63		$	0.54

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

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Millions)

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
NET INCOME	$	163.5		$	172.3		$	295.2		$	301.2

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation:
Foreign currency translation adjustments	(27.9		)	30.3			(121.9		)	116.2
Reclassification adjustments recognized in net income	3.3			1.5			16.7			1.8
	(24.6		)	31.8			(105.2		)	118.0

Available-for-sale securities:
Changes in fair value of available-for-sale securities	0.0			(0.1		)	0.0			0.0
Recognition of previously unrealized gains included in net income	0.0			(0.7		)	0.0			(0.7		)
Income tax effect	0.0			0.1			0.0			0.1
	0.0			(0.7		)	0.0			(0.6		)

Derivative instruments:
Recognition of previously unrealized losses in net income	0.6			0.5			1.7			1.6
Income tax effect	(0.2		)	(0.2		)	(0.5		)	(0.6		)
	0.4			0.3			1.2			1.0

Defined benefit pension and other postretirement plans:
Net actuarial gains (losses) for the period	0.0			8.2			(1.4		)	9.0
Amortization of unrecognized losses, transition obligation and prior service cost included in net income	1.8			1.7			5.7			5.2
Settlement and curtailment losses included in net income	0.1			4.0			0.3			4.0
Other	0.0			0.0			(0.4		)	(0.6		)
Income tax effect	(0.1		)	(2.8		)	0.0			(3.4		)
	1.8			11.1			4.2			14.2
Other comprehensive (loss) income, net of tax	(22.4		)	42.5			(99.8		)	132.6
TOTAL COMPREHENSIVE INCOME	141.1			214.8			195.4			433.8
Less: comprehensive income (loss) attributable to noncontrolling interests	2.0			2.5			0.2			(0.3		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO IPG	$	139.1		$	212.3		$	195.2		$	434.1

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

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Millions)

(Unaudited)



	September 30, 2018			December 31, 2017
ASSETS:
Cash and cash equivalents	$	1,860.2		$	790.9
Accounts receivable, net of allowance of $46.5 and $42.7, respectively	4,009.1			4,585.0
Accounts receivable, billable to clients	1,995.9			1,747.4
Assets held for sale	5.7			5.7
Other current assets	459.6			346.5
Total current assets	8,330.5			7,475.5
Property and equipment, net of accumulated depreciation of $1,026.8 and $1,036.2, respectively	602.9			650.4
Deferred income taxes	270.2			234.0
Goodwill	3,784.7			3,820.4
Other non-current assets	524.8			524.4
TOTAL ASSETS	$	13,513.1		$	12,704.7

LIABILITIES:
Accounts payable	$	5,515.1		$	6,420.2
Accrued liabilities	571.0			674.7
Contract liabilities	514.4			484.7
Short-term borrowings	82.6			84.9
Current portion of long-term debt	0.1			2.0
Liabilities held for sale	8.5			8.8
Total current liabilities	6,691.7			7,675.3
Long-term debt	3,261.4			1,285.6
Deferred compensation	438.5			476.6
Other non-current liabilities	791.6			768.8
TOTAL LIABILITIES	11,183.2			10,206.3

Redeemable noncontrolling interests (see Note 5)	159.7			252.1

STOCKHOLDERS’ EQUITY:
Common stock	39.1			38.6
Additional paid-in capital	1,041.8			955.2
Retained earnings	2,158.4			2,104.5
Accumulated other comprehensive loss, net of tax	(925.3		)	(827.8		)
	2,314.0			2,270.5
Less: Treasury stock	(176.1		)	(59.0		)
Total IPG stockholders’ equity	2,137.9			2,211.5
Noncontrolling interests	32.3			34.8
TOTAL STOCKHOLDERS’ EQUITY	2,170.2			2,246.3
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	13,513.1		$	12,704.7

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

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Millions) (Unaudited)



	Nine months ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	295.2		$	301.2
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	134.0			124.5
Provision for uncollectible receivables	9.4			9.5
Amortization of restricted stock and other non-cash compensation	59.7			59.8
Net amortization of bond discounts and deferred financing costs	4.2			4.2
Deferred income tax (benefit) provision	(22.9		)	18.8
Net losses on sales of businesses	50.0			20.9
Other	4.2			16.1
Changes in assets and liabilities, net of acquisitions and divestitures, providing (using) cash:
Accounts receivable	443.6			875.8
Accounts receivable, billable to clients	(303.0		)	(166.9		)
Other current assets	(100.6		)	(63.9		)
Accounts payable	(766.9		)	(961.7		)
Accrued liabilities	(186.5		)	(287.8		)
Contract liabilities	46.1			(68.1		)
Other non-current assets and liabilities	6.8			(21.4		)
Net cash used in operating activities	(326.7		)	(139.0		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(105.7		)	(108.7		)
Acquisitions, net of cash acquired	(12.0		)	(22.6		)
Other investing activities	1.1			(9.2		)
Net cash used in investing activities	(116.6		)	(140.5		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt	1,994.2			0.0
Exercise of stock options	9.1			12.1
Common stock dividends	(241.6		)	(211.2		)
Repurchases of common stock	(117.1		)	(216.0		)
Acquisition-related payments	(30.4		)	(49.1		)
Tax payments for employee shares withheld	(28.8		)	(38.4		)
Distributions to noncontrolling interests	(13.4		)	(16.9		)
Repayment of long-term debt	(4.9		)	(23.6		)
Net (decrease) increase in short-term borrowings	(4.6		)	429.9
Other financing activities	(11.9		)	0.1
Net cash provided by (used in) financing activities	1,550.6			(113.1		)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(35.3		)	0.4
Net increase (decrease) in cash, cash equivalents and restricted cash	1,072.0			(392.2		)
Cash, cash equivalents and restricted cash at beginning of period	797.7			1,100.2
Cash, cash equivalents and restricted cash at end of period	$	1,869.7		$	708.0

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

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in Millions)

(Unaudited)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Tax			Treasury Stock			Total IPG Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2017	386.2		$	38.6		$	955.2		$	2,104.5		$	(827.8	)	$	(59.0	)	$	2,211.5		$	34.8		$	2,246.3
Net income									292.7									292.7			2.5			295.2
Other comprehensive loss												(97.5		)				(97.5		)	(2.3		)	(99.8		)
Reclassifications related to redeemable noncontrolling interests																					7.1			7.1
Distributions to noncontrolling interests																					(13.4		)	(13.4		)
Change in redemption value of redeemable noncontrolling interests						41.8			4.5									46.3						46.3
Repurchases of common stock															(117.1		)	(117.1		)				(117.1		)
Common stock dividends									(241.6		)							(241.6		)				(241.6		)
Stock-based compensation	4.7		0.5			63.3												63.8						63.8
Exercise of stock options	1.4		0.1			9.1												9.2						9.2
Shares withheld for taxes	(1.2	)	(0.1		)	(28.9		)										(29.0		)				(29.0		)
Other						1.3			(1.7		)							(0.4		)	3.6			3.2
Balance at September 30, 2018	391.1		$	39.1		$	1,041.8		$	2,158.4		$	(925.3	)	$	(176.1	)	$	2,137.9		$	32.3		$	2,170.2

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

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THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in Millions)

(Unaudited)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Tax			Treasury Stock			Total IPG Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2016	394.3		$	39.4		$	1,199.2		$	1,839.9		$	(964.4	)	$	(63.3	)	$	2,050.8		$	39.6		$	2,090.4
Net income									302.1									302.1			(0.9		)	301.2
Other comprehensive income												132.0						132.0			0.6			132.6
Reclassifications related to redeemable noncontrolling interests																					7.3			7.3
Distributions to noncontrolling interests																					(17.5		)	(17.5		)
Change in redemption value of redeemable noncontrolling interests									(4.6		)							(4.6		)				(4.6		)
Repurchases of common stock															(216.0		)	(216.0		)				(216.0		)
Common stock dividends									(211.2		)							(211.2		)				(211.2		)
Stock-based compensation	5.6		0.6			62.9												63.5						63.5
Exercise of stock options	1.1		0.1			12.1												12.2						12.2
Shares withheld for taxes	(1.6	)	(0.2		)	(38.5		)										(38.7		)				(38.7		)
Other									(1.1		)							(1.1		)	(2.3		)	(3.4		)
Balance at September 30, 2017	399.4		$	39.9		$	1,235.7		$	1,925.1		$	(832.4	)	$	(279.3	)	$	2,089.0		$	26.8		$	2,115.8

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

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Notes to Consolidated Financial Statements

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

Note 1: Basis of Presentation

The unaudited Consolidated Financial Statements have been prepared by The Interpublic Group of Companies, Inc. and its subsidiaries (the "Company," "IPG," "we," "us" or "our") in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for reporting interim financial information on Form 10-Q. Accordingly, they do not include certain information and disclosures required for complete financial statements. The preparation of financial statements in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported and disclosed. Actual results could differ from these estimates and assumptions. The consolidated results for interim periods are not necessarily indicative of results for the full year and should be read in conjunction with our 2017 Annual Report on Form 10-K.

As of January 1, 2018, the Company has revised the presentation of its Consolidated Statements of Operations, which disaggregates net revenue and billable expenses within total revenue and separately presents cost of services; selling, general and administrative expenses; and depreciation and amortization within operating expenses. The revised presentation does not impact total revenue, operating expenses or operating income.

Cost of services is comprised of the expenses of our revenue-producing operating segments, Integrated Agency Networks ("IAN") and Constituency Management Group ("CMG"), including salaries and related expenses, office and other direct expenses and billable expenses, and includes an allocation of the centrally managed expenses of our Corporate and other group. Office and other direct expenses include rent expense, professional fees, certain expenses incurred by our staff in servicing our clients and other costs directly attributable to client engagements.

Selling, general and administrative expenses are primarily the unallocated expenses of our Corporate and other group, as disclosed further in Note 12, excluding depreciation and amortization.

Depreciation and amortization of the fixed assets and intangible assets of the Company is disclosed as a separate operating expense.

In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments, consisting only of normal and recurring adjustments necessary for a fair statement of the information for each period contained therein. Certain reclassifications and immaterial revisions have been made to prior-period financial statements to conform to the current-period presentation.

Note 2: Summary of Significant Accounting Policies

Effective January 1, 2018, IPG adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, ("ASC 606") using the full retrospective transition method. Under this method, the Company will revise its consolidated financial statements for the years ended December 31, 2016 and 2017, and applicable interim periods within the year ended December 31, 2017, as if ASC 606 had been effective for those periods. ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, 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 when (or as) the entity satisfies a 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, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are distinct performance obligations. We then assess whether IPG acts 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.

Revenue Recognition

We recognize revenue when the control to promised goods or services transfers to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. Our revenues are primarily derived from the planning and execution of multi-channel advertising and communications and marketing services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity, and strategic marketing consulting around the world. Our revenues are directly dependent upon the advertising, marketing and corporate communications requirements of our existing clients and our ability to win new clients. Depending on the terms of the client contract, revenue is derived from

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Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

diverse arrangements involving fees for services performed, commissions, performance incentive provisions and combinations of the three.

Net revenue, primarily consisting of fees, commissions and performance incentives, represents the amount of our gross billings excluding pass-through expenses charged to a client. Revenues for the creation, planning and placement of advertising are determined primarily on a negotiated fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. 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 or quantitative metrics, or both. Commissions are earned based on services provided and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate; the difference is the commission that we earn, which we either retain in full or share with the client depending on the nature of the applicable services agreement. We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, sports and entertainment marketing, and corporate and brand identity services.

Billable expenses predominantly include pass-through expenses related to event and advertising production costs for performance obligations where we have determined that we are acting as principal that are rebilled to our clients, as well as out-of-pocket costs. Out-of-pocket costs often include expenses related to airfare, mileage, hotel stays, out-of-town meals and telecommunication charges for client service staff. We record these billable expenses within total revenue with a corresponding offset to operating expenses.

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. As is customary in the industry, our contracts generally provide for termination by either party on relatively short notice, usually 30 to 90 days. Our payment terms vary by client, and the time between invoicing date and due date is typically not significant. We generally have right to payment for all services provided through the end of the contract or termination date.

Our client contracts may include provisions for incentive compensation and vendor rebates and credits. Our largest clients are multinational entities and, as such, we often provide services to these clients out of multiple offices and across many of our agencies. In arranging for such services, it is possible that we will enter into global, regional and local agreements. Agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved.

For media contracts that can be canceled by the customer at any time without compensation, the entity does not have an enforceable right to the payment until media airs, at which point revenue is recognized.

Timing of Recognition

We have determined that we generally satisfy our performance obligations over time, except for certain less-frequent commission-based contracts, which are recognized at a point in time, typically the date of broadcast or publication. Fees are generally recognized based on proportional performance utilizing periodically updated estimates to complete.

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 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 there is a significant integration of these services into a combined output such that they are not distinct within the context of the contract.

Principal vs. Agent

For each identified performance obligation in the contract with the customer, we assess whether our agency or the third-party supplier is the principal or agent. We control the specified services before transferring those services to the customer and act as the principal if we are primarily responsible for the integration of products and services into the deliverable to our customer, have inventory risk, or discretion in establishing pricing. 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. We have determined that we primarily act as principal for creative, media planning, in-house production, event, public relations and branding services, where we control the specified services before transferring those services to the customer because we are primarily

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

responsible for the integration of products and services into the deliverable to our customer. We generally do not have inventory risk or discretion in establishing pricing in our contracts with customers.

If the third-party supplier, rather than IPG, is primarily responsible for the performance and deliverable to our customer, then we generally act as the agent and solely arrange for the third-party supplier to provide services to the customer. For performance obligations for which we act as the agent, we record our revenue as the net amount of our gross billings less pass-through expenses charged to a customer.

Variable Consideration

Revenue for our services is measured based on the consideration specified in a contract with a customer. Contractual arrangements with clients may also include performance incentive provisions designed to link a portion of our revenue to our performance relative to either qualitative or quantitative metrics, or both.

Incentive compensation is estimated using the most likely amount and is included in revenue up to the amount that is not expected to result in a reversal of a significant amount of cumulative revenue recognized. We recognize revenue related to performance incentives as we satisfy the performance obligation to which performance incentives are related.

Practical Expedients

As part of our adoption of ASC 606, we apply the practical expedient and do not disclose information about remaining performance obligations that have original expected durations of one year or less. Amounts related to those performance obligations with expected durations of greater than one year are immaterial.

We apply the practical expedient and do not capitalize costs to obtain a contract as these amounts would generally be recognized over less than one year and are not material.

Additionally, we report revenue net of taxes assessed by governmental authorities that are directly imposed on our revenue-producing transactions.

Note 3: Revenue

Adoption of ASC 606

Effective with the adoption of ASC 606 on January 1, 2018 using the full retrospective transition method, the Company will revise its consolidated financial statements for the years ended December 31, 2016 and 2017, and applicable interim periods within the year ended December 31, 2017, as if ASC 606 had been effective for those periods. ASC 606, which accelerates the recognition of revenue primarily as a result of estimating variable consideration, mostly impacts the timing of revenue recognition between quarters, but also can affect, to a lesser extent, the amount of annual revenue recognized. Although ASC 606 results in an increase in the number of performance obligations within certain of our contractual arrangements, the amount or timing of revenue recognized is not materially impacted. ASC 606 also results in an increase in third-party costs being included in revenue and costs, primarily in connection with our events businesses, which has no impact on operating income, net income or cash flows. The increases to retained earnings as of December 31, 2017 and 2016 as a result of adopting ASC 606 were not material. The following tables summarize the effects of adopting ASC 606.

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

CONSOLIDATED STATEMENT OF OPERATIONS



	Three months ended September 30, 2017								Nine months ended September 30, 2017
	As Revised ¹			ASC 606 Adjustments		As Adjusted			As Revised ¹			ASC 606 Adjustments		As Adjusted
REVENUE:
Net revenue	$	1,796.6		$	35.9	$	1,832.5		$	5,282.3		$	60.1	$	5,342.4
Billable expenses	106.0			269.7		375.7			259.1			856.3		1,115.4
Total revenue	1,902.6			305.6		2,208.2			5,541.4			916.4		6,457.8

OPERATING EXPENSES:
Salaries and related expenses	1,218.8			—		1,218.8			3,699.4			—		3,699.4
Office and other direct expenses	302.9			—		302.9			934.0			—		934.0
Billable expenses	106.0			269.7		375.7			259.1			856.3		1,115.4
Cost of services	1,627.7			269.7		1,897.4			4,892.5			856.3		5,748.8
Selling, general and administrative expenses	13.6			—		13.6			69.1			—		69.1
Depreciation and amortization	42.2			—		42.2			124.5			—		124.5
Total operating expenses	1,683.5			269.7		1,953.2			5,086.1			856.3		5,942.4

OPERATING INCOME	219.1			35.9		255.0			455.3			60.1		515.4

EXPENSES AND OTHER INCOME:
Interest expense	(21.0		)	—		(21.0		)	(67.6		)	—		(67.6		)
Interest income	4.1			—		4.1			14.0			—		14.0
Other expense, net	(9.9		)	—		(9.9		)	(24.5		)	—		(24.5		)
Total (expenses) and other income	(26.8		)	—		(26.8		)	(78.1		)	—		(78.1		)

Income before income taxes	192.3			35.9		228.2			377.2			60.1		437.3
Provision for income taxes	42.5			12.4		54.9			115.8			20.4		136.2
Income of consolidated companies	149.8			23.5		173.3			261.4			39.7		301.1
Equity in net (loss) income of unconsolidated affiliates	(1.0		)	—		(1.0		)	0.1			—		0.1
NET INCOME	148.8			23.5		172.3			261.5			39.7		301.2
Net (income) loss attributable to noncontrolling interests	(2.6		)	—		(2.6		)	0.9			—		0.9
NET INCOME AVAILABLE TO IPG COMMON STOCKHOLDERS	$	146.2		$	23.5	$	169.7		$	262.4		$	39.7	$	302.1

Earnings per share available to IPG common stockholders:
Basic	$	0.38		$	0.06	$	0.44		$	0.67		$	0.10	$	0.77
Diluted	$	0.37		$	0.06	$	0.43		$	0.66		$	0.10	$	0.76

Weighted-average number of common shares outstanding:
Basic	389.5			—		389.5			391.2			—		391.2
Diluted	397.2			—		397.2			398.6			—		398.6

Dividends declared per common share	$	0.18				$	0.18		$	0.54				$	0.54


1	These amounts have been revised for the new presentation as described in Note 1.

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

CONSOLIDATED BALANCE SHEET



	December 31, 2017
	As Reported			ASC 606 Adjustments			As Adjusted
ASSETS:
Cash and cash equivalents	$	790.9		$	—		$	790.9
Accounts receivable, net of allowance of $42.7	4,585.0			—			4,585.0
Expenditures billable to clients	1,747.4			(1,747.4		)	—
Accounts receivable, billable to clients	—			1,747.4			1,747.4
Assets held for sale	5.7			—			5.7
Other current assets	335.1			11.4			346.5
Total current assets	7,464.1			11.4			7,475.5
Property and equipment, net of accumulated depreciation of $1,036.2	650.4			—			650.4
Deferred income taxes	236.0			(2.0		)	234.0
Goodwill	3,820.4			—			3,820.4
Other non-current assets	524.3			0.1			524.4
TOTAL ASSETS	$	12,695.2		$	9.5		$	12,704.7

LIABILITIES:
Accounts payable	$	6,907.8		$	(487.6	)	$	6,420.2
Accrued liabilities	674.7			—			674.7
Contract liabilities	—			484.7			484.7
Short-term borrowings	84.9			—			84.9
Current portion of long-term debt	2.0			—			2.0
Liabilities held for sale	8.8			—			8.8
Total current liabilities	7,678.2			(2.9		)	7,675.3
Long-term debt	1,285.6			—			1,285.6
Deferred compensation	476.6			—			476.6
Other non-current liabilities	766.9			1.9			768.8
TOTAL LIABILITIES	10,207.3			(1.0		)	10,206.3

Redeemable noncontrolling interests	252.1			—			252.1

STOCKHOLDERS’ EQUITY:
Common stock	38.6			—			38.6
Additional paid-in capital	955.2			—			955.2
Retained earnings	2,093.6			10.9			2,104.5
Accumulated other comprehensive loss, net of tax	(827.4		)	(0.4		)	(827.8		)
	2,260.0			10.5			2,270.5
Less: Treasury stock	(59.0		)	—			(59.0		)
Total IPG stockholders’ equity	2,201.0			10.5			2,211.5
Noncontrolling interests	34.8			—			34.8
TOTAL STOCKHOLDERS’ EQUITY	2,235.8			10.5			2,246.3
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	12,695.2		$	9.5		$	12,704.7

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

CONSOLIDATED STATEMENT OF CASH FLOWS



	Nine months ended September 30, 2017
	As Reported			ASC 606 Adjustments			As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	261.5		$	39.7		$	301.2
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	124.5			—			124.5
Provision for uncollectible receivables	9.5			—			9.5
Amortization of restricted stock and other non-cash compensation	59.8			—			59.8
Net amortization of bond discounts and deferred financing costs	4.2			—			4.2
Deferred income tax provision	(1.6		)	20.4			18.8
Net losses on sales of businesses	20.9			—			20.9
Other	16.1			—			16.1
Changes in assets and liabilities, net of acquisitions and divestitures, providing (using) cash:
Accounts receivable	875.8			—			875.8
Expenditures billable to clients	(165.9		)	165.9			—
Accounts receivable, billable to clients	—			(166.9		)	(166.9		)
Other current assets	(48.2		)	(15.7		)	(63.9		)
Accounts payable	(986.4		)	24.7			(961.7		)
Accrued liabilities	(287.8		)	—			(287.8		)
Contract liabilities	—			(68.1		)	(68.1		)
Other non-current assets and liabilities	(21.4		)	—			(21.4		)
Net cash used in operating activities	(139.0		)	—			(139.0		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities	(140.5		)	—			(140.5		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities	(113.1		)	—			(113.1		)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	0.4			—			0.4
Net decrease in cash, cash equivalents and restricted cash	(392.2		)	—			(392.2		)
Cash, cash equivalents and restricted cash at beginning of period	1,100.2			—			1,100.2
Cash, cash equivalents and restricted cash at end of period	$	708.0		$	—		$	708.0

Retained earnings as of December 31, 2016 and September 30, 2017 increased by $35.6 and $75.3, respectively, as a result of the adoption of ASC 606. Accumulated other comprehensive loss, net of tax, as of December 31, 2016 and September 30, 2017 decreased by $1.9 and increased by $0.3, respectively, as a result of the adoption of the ASC 606.

Disaggregation of Revenue

The following is a description of the principal activities, by reportable segment, from which we generate revenue. For more detailed information about reportable segments, see Note 12.

Integrated Agency Networks

The IAN segment of IPG principally generates revenue from providing advertising and media services as well as a comprehensive array of global communications and marketing services. Within IAN’s advertising business, we typically identify two performance obligations for creative and production services. Depending on the arrangement, we typically act as the principal for our creative services and as the agent for our production services. Within our media business, we also identify two performance obligations for media planning and media buying services. We typically act as the principal for our media planning services and

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

as the agent for media buying services. Generally, our branding arrangements consist of two performance obligations, and we act as the principal for both performance obligations.

Constituency Management Group

The CMG segment generates revenue from providing events and public relations services as well as sports and entertainment marketing, corporate and brand identity, and strategic marketing consulting. In CMG’s events and public relations arrangements, we typically identify one performance obligation, for which we act as the principal in most arrangements. Generally, our branding arrangements consist of two performance obligations, and we act as the principal for both performance obligations.

Principal Geographic Markets

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



	Three months ended September 30,				Nine months ended September 30,
Total revenue:	2018		2017		2018		2017
United States	$	1,407.1	$	1,340.8	$	4,203.5	$	4,006.8
International:
United Kingdom	220.9		201.7		626.9		542.7
Continental Europe	177.5		171.6		564.3		506.1
Asia Pacific	267.3		259.9		803.0		740.7
Latin America	95.3		94.9		267.8		265.2
Other	129.4		139.3		392.9		396.3
Total International	890.4		867.4		2,654.9		2,451.0
Total Consolidated	$	2,297.5	$	2,208.2	$	6,858.4	$	6,457.8



	Three months ended September 30,				Nine months ended September 30,
Net revenue:	2018		2017		2018		2017
United States	$	1,160.9	$	1,109.6	$	3,424.7	$	3,294.3
International:
United Kingdom	174.0		160.0		513.2		436.9
Continental Europe	152.0		150.7		489.4		446.2
Asia Pacific	210.6		203.7		603.6		582.7
Latin America	84.0		86.9		239.9		241.6
Other	114.2		121.6		347.1		340.7
Total International	734.8		722.9		2,193.2		2,048.1
Total Consolidated	$	1,895.7	$	1,832.5	$	5,617.9	$	5,342.4

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)



IAN	Three months ended September 30,				Nine months ended September 30,
Total revenue:	2018		2017		2018		2017
United States	$	1,064.2	$	1,006.2	$	3,150.6	$	2,998.4
International	710.5		696.6		2,122.1		1,983.5
Total IAN	$	1,774.7	$	1,702.8	$	5,272.7	$	4,981.9

Net revenue:
United States	$	952.9	$	913.1	$	2,814.2	$	2,701.4
International	627.6		618.3		1,876.7		1,755.1
Total IAN	$	1,580.5	$	1,531.4	$	4,690.9	$	4,456.5



CMG	Three months ended September 30,				Nine months ended September 30,
Total revenue:	2018		2017		2018		2017
United States	$	342.9	$	334.6	$	1,052.9	$	1,008.4
International	179.9		170.8		532.8		467.5
Total CMG	$	522.8	$	505.4	$	1,585.7	$	1,475.9

Net revenue:
United States	$	208.0	$	196.5	$	610.5	$	592.9
International	107.2		104.6		316.5		293.0
Total CMG	$	315.2	$	301.1	$	927.0	$	885.9

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.



	September 30, 2018		December 31, 2017
Accounts receivable, net of allowance of $46.5 and $42.7, respectively	$	4,009.1	$	4,585.0
Accounts receivable, billable to clients	1,995.9		1,747.4
Contract assets	57.8		11.5
Contract liabilities (deferred revenue)	514.4		484.7

Contract assets are primarily comprised of contract incentives that are generally satisfied annually under the terms of our contracts and are transferred to accounts receivable when the right to payment becomes unconditional. Contract liabilities relate to advance consideration received from customers under the terms of our contracts primarily related to reimbursements of third party expenses, whether we act as principal or agent, and to a lesser extent, periodic retainer fees, both of which are generally recognized shortly after billing.

Table of Contents

Notes to Consolidated Financial Statements – (continued)

(Amounts in Millions, Except Per Share Amounts)

(Unaudited)

Note 4: Debt and Credit Arrangements

Long-Term Debt

A summary of the carrying amounts and fair values of our long-term debt is listed below.



	Effective Interest Rate	September 30, 2018				December 31, 2017
	Effective Interest Rate	Book Value		Fair Value ¹		Book Value		Fair Value ¹
3.50% Senior Notes due 2020 (less unamortized discount and issuance costs of $0.9 and $2.9, respectively)	3.89%	$	496.2	$	500.1	$	—	$	—
3.75% Senior Notes due 2021 (less unamortized discount and issuance costs of $0.3 and $3.2, respectively)	3.98%	496.5		500.8		—		—
4.00% Senior Notes due 2022 (less unamortized discount and issuance costs of $1.1 and $0.9, respectively)	4.13%	248.0		249.9		247.6		259.0
3.75% Senior Notes due 2023 (less unamortized discount and issuance costs of $0.7 and $1.8, respectively)	4.32%	497.5		494.9		497.1		513.2
4.20% Senior Notes due 2024 (less unamortized discount and issuance costs of $0.6 and $2.3, respectively)	4.24%	497.1		501.6		496.7		524.2
4.65% Senior Notes due 2028 (less unamortized discount and issuance costs of $1.7 and $4.4, respectively)	4.78%	493.9		500.6		—		—
5.40% Senior Notes due 2048 (less unamortized discount and issuance costs of $2.8 and $5.6, respectively)	5.48%	491.6		497.3		—		—
Other notes payable and capitalized leases		40.7		40.7		46.2		46.2
Total long-term debt		3,261.5				1,287.6
Less: current portion		0.1				2.0
Long-term debt, excluding current portion		$	3,261.4			$

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$23.66	384	$9,090

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-02-19	Earnings, Exhibits
8-K	2019-02-13	Earnings, Exhibits
8-K	2018-11-13	Other Events
8-K	2018-10-19	Earnings, Exhibits
8-K	2018-10-19	Earnings, Exhibits
8-K	2018-10-01	Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K	2018-09-18	Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K	2018-07-27	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2018-07-24	Earnings, Exhibits
8-K	2018-07-24	Earnings, Exhibits
8-K	2018-07-02	Enter Agreement, Regulation FD, Exhibits
8-K	2018-05-24	Shareholder Vote
8-K	2018-04-27	Earnings, Exhibits
8-K	2018-04-23	Regulation FD, Exhibits
8-K	2018-02-14	Earnings, Exhibits

OMC	Omnicom Group
WPP	WPP
ANGI	Angi Homeservices
GRPN	Groupon
CRTO	Criteo
QUOT	Quotient Technology
NCMI	National Cinemedia
FLNT	Fluent
SRAX	Social Reality
AMCN	Airmedia Group

EX-12.1	ipgq3201810qex121.htm
EX-31.1	ipgq3201810qex311.htm
EX-31.2	ipgq3201810qex312.htm
EX-32	ipgq3201810qex32.htm