"net Debt" Misleads, Say Analysts

“Net debt” means a company’s debt minus cash and cash equivalents. The cash might not be available for repaying the debt, say the analysts, especially if there is a downturn in the economy.
The 2006 Omnicom annual report said “net debt” at the end of 2006 was $1.13 billion and total debt was $3.06B. It says that “net debt is a non-GAAP financial measure.”

This means that it is not covered under the “Generally Accepted Accounting Principles” that are supposed to apply to financial reports.

OMC adds: “We believe this presentation is meaningful for understanding our net debt position and it reflects one of the key metrics used by us to assess our cash management.”

A guideline of the National Investor Relations Institute is that if non-GAAP numbers are reported the company must also report the GAAP number.

It recommends that the “real” quarterly income figures be reported before any “pro-forma” calculations.

OMC stock is currently around $50, which is below its high of $53.50 reached on Dec. 17, 1999. More than 40 million of the 372 million shares outstanding have recently been purchased by the company.

OMC’s interest payments rose 60% ($46.9M) in 2006 from $78M to $124.9M. CEO John Wren was paid $13.4M in 2006. His options include 3,000,000 shares exercisable at $40 that vested in full on April 4, 2007 and are worth an immediate profit of about $30M if exercised.

Barron’s in 2005 called OMC “a beleaguered stock” and said too much insider selling was one of the reasons.

WPP Only Reports “Net Debt”

WPP Group, unlike OMC, only reports net debt and “average net debt.” Analysts say it’s hard to figure out the exact real debt of WPP although Bloomberg said it was $4.8B at the end of 2006 (on revenues of about $12B).

WPP, whose primary listing is on the London Stock Exchange, put its “net debt” at about $2.4B at the end of 2006.

The report also showed WPP to have “net tangible assets of -$5.2B (because it is carrying $11.6B in good will). Its payables of $12.1B exceeded receivables of $8.8B.

Analysts say that AT&T’s “net debt” figure is 38% smaller than its real debt of $17.5B. AT&T does this by counting cash on hand and excluding $1B in debt that is related to changes in foreign-exchange rates. The U.S. dollar has weakened lately against the euro and the U.K. pound.

Verizon reported “net debt” of $49.9B for the first quarter without mentioning its total long-term and short-term debt of $54.1B.
Dana’s reported second-quarter “net debt” of $2B counted $546M the company had in cash. Also counted was $841M in debt in its Dana Credit Corp. unit and $86M in cash in the unit.

Dana is the object of a hostile takeover and isn’t free to spend its cash, say analysts.
Another abuse, say analysts, is claiming “non-recurring” costs when such costs occur on a regular basis.

PR Figures Withheld by WPP
WPP, in its 2006 annual report, gives positive reports about its PR units in 2006 but provides no figures.

Hill & Knowlton, the report says, had its “strongest revenue growth in over six years” while Cohn & Wolfe had “another stellar year with significant growth in both top and bottom lines.”

GCI had a “strong year” and Ogilvy PR “enjoyed continued global expansion of client engagements throughout 2006.”

Burson-Marsteller saw “continued improvement” in profitability and revenue growth” and Robinson Lerer & Montgomery “turned in excellent financial results.”

The profit margin on PR, headed by Howard Paster, went from just over 10% “several years ago” to 15%, the report says.
PR fees of WPP units grew 5.9% in 2006 not counting acquisitions and were $1.15B or 10.1% of WPP’s revenues. PR growth including acquisitions was 12%.

The WPP annual report highlights awards won by PR and advertising units, the Ogilvy One direct response and digital unit reporting it won 595 awards in 2006. Ogilvy has declined to supply a list of those awards.