WPP

WPP Plc: 2003 Annual Report (Form 20-F) Summary

Business Context and Reporting Period

Company: WPP Plc (WPP Group plc)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: One of the world's largest advertising and marketing services groups, operating through approximately 1,400 offices in 106 countries with roughly 54,000 employees. The Group is organized into four segments: Advertising and Media investment management; Information, insight and consultancy; Public relations and public affairs; and Branding and identity, Healthcare and Specialist communications.
Accounting Basis: Financial statements prepared under UK GAAP with reconciliations to US GAAP.

Key Financial Metrics (UK GAAP)

Note: Under US GAAP, 2003 Net Income was £110.3 million compared to £208.4 million under UK GAAP, primarily due to differences in goodwill accounting and executive compensation treatment.

Material Changes vs. Prior Period

• Profit Surge: Operating profit increased by 52.4% and Net Income by 136.8%. This significant improvement was driven by reduced goodwill impairment charges (£48.2 million in 2003 vs. £145.7 million in 2002), lower interest expenses, and improved operational performance.
• Revenue Growth: Reported revenue grew 5.1%. On a constant currency basis, revenue increased by 7.3%. Like-for-like revenue growth was 0.7% (1.5% excluding the Cordiant acquisition).
• Acquisitions: The Group completed the acquisition of Cordiant Communications Group plc in August 2003. Total cash spent on acquisitions and investments in 2003 was £398.6 million (net of proceeds from the sale of Zenith Optimedia).
• Cost Management: Operating costs excluding goodwill amortisation and impairment rose 4.2%. The Group successfully reduced property costs and increased the proportion of variable staff costs to 6.3% of revenue.
• Debt Reduction: Net debt decreased significantly from £723 million in 2002 to £362 million in 2003, aided by strong free cash flow of £447 million.

Guidance, Outlook, and Risks

Outlook and Guidance:

• 2004 Margins: Management budgets for operating margins (excluding goodwill amortisation and impairment) to increase to 13.8% in 2004.
• Long-term Targets: The long-term goal remains a 20% operating margin. The Group aims to increase the geographic share of revenues from Asia Pacific, Latin America, Africa, and the Middle East to one-third of total revenues.
• Share Repurchases: The Company intends to continue repurchasing up to 2% of its share base annually, with an approximate cost of £150 million, when market conditions are appropriate.
• Dividends: A 20% increase in the final dividend was declared, bringing the total 2003 dividend to 6.48p per share.

• Client Concentration: The top 10 clients accounted for approximately 26% of 2003 revenues. Loss of a major client or reduction in advertising budgets could materially impact results.
• Goodwill Impairment: The balance sheet holds significant goodwill. Future impairment charges could materially affect financial condition if economic conditions deteriorate or cash flow projections are not met.
• Acquisition Integration: Risks associated with integrating acquired businesses (e.g., Cordiant, Young & Rubicam, Tempus) and realizing expected synergies.
• Foreign Exchange: Significant exposure to currency fluctuations, particularly the US dollar and Euro, as a substantial portion of revenues and costs are incurred outside the UK.
• Regulatory Environment: Subject to regulations regarding advertising content, data privacy, and industry self-regulation in multiple jurisdictions.

Key Facts for Investor Verification

• Goodwill Accounting Differences: Verify the reconciliation between UK GAAP and US GAAP net income (£208.4m vs. £110.3m). The difference is largely due to the treatment of goodwill amortisation and impairment, which is more restrictive under US GAAP (SFAS 142).
• Client Concentration: Confirm the stability of the top 10 clients (Altria, American Express, AT&T, Colgate-Palmolive, Ford, GlaxoSmithKline, IBM, Nestle, Pfizer, Unilever) which represent 26% of revenue.
• Debt Covenants: Review compliance with financial covenants on the $750 million Revolving Credit Facility (Interest coverage ratio > 5.0:1; Borrowed funds to EBITDA < 3.5:1).
• Pension Obligations: Assess the defined benefit pension scheme deficit, which stood at £198.9 million at year-end, and the associated future contribution requirements.
• Acquisition Performance: Monitor the post-acquisition performance of Cordiant Communications Group plc and the integration of its assets into the Group's network.