Omnicom Group Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Omnicom is a global provider of advertising, marketing and corporate communications services through agency networks covering advertising, CRM, public relations and healthcare. The filing reports unaudited results for the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3,468.9 million | $3,629.6 million | Down 4.4% |
| Operating profit | $428.9 million | $421.7 million | Up 1.7% |
| Operating margin | 12.4% | 11.6% | Up 80 basis points |
| EBITA | $450.5 million | $449.2 million | Up 0.3% |
| EBITA margin | 13.0% | 12.4% | Up 60 basis points |
| Net income | $279.7 million | $284.7 million | Down 1.8% |
| Net income attributable to Omnicom | $263.2 million | $264.1 million | Down 0.3% |
| Diluted EPS | $1.17 | $1.14 | Up 2.6% |
| Dividends declared per share | $0.65 | $0.60 | Up 8.3% |
| Operating cash flow | $(395.6) million | $(620.8) million | Improved by $225.2 million |
Revenue was adversely affected by $122.0 million of foreign exchange translation and $130.1 million of lower acquisition revenue, net of dispositions. Organic growth contributed $91.4 million, or 2.5%.
Salary and service costs declined 5.4% to $2,567.6 million, while total operating expenses declined 5.2% to $3,040.0 million. Management attributed the margin improvement to business mix, dispositions of underperforming businesses, 2018 repositioning actions and cost-efficiency initiatives.
The effective tax rate increased to 26.8% from 24.3%. Q1 2018 benefited from a $13.3 million reduction in tax expense related primarily to the resolution of foreign tax claims. The company stated that this item increased Q1 2018 diluted EPS by approximately $0.06.
Revenue mix and material changes
- Advertising revenue increased to $1,921.3 million from $1,901.3 million.
- CRM Consumer Experience revenue declined to $605.8 million from $634.9 million.
- CRM Execution & Support revenue declined to $349.5 million from $508.6 million, primarily reflecting disposition activity and weaker performance.
- Public relations revenue declined to $334.2 million from $346.3 million.
- Healthcare revenue increased to $258.1 million from $238.5 million.
- North American revenue increased modestly to $1,989.2 million, while Europe declined to $945.5 million, primarily because of foreign exchange effects and dispositions.
- International revenue declined 9.4% on a reported basis, while domestic revenue increased 0.2%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $3,449.7 million at March 31, 2019, down $202.7 million from December 31, 2018.
- Operating cash flow was negative because of the normal seasonal use of working capital; operating capital usage was $736.3 million.
- Capital expenditures were $27.2 million. Common dividends paid were $134.8 million, and common stock repurchases were $286.1 million.
- Total debt was $5,497.2 million, consisting of $595.4 million of short-term debt and $4,901.8 million of long-term debt, including the current portion.
- Net debt was $2,042.1 million, compared with $1,233.9 million at December 31, 2018.
- In February 2019, the company issued €520 million of unsecured, non-interest-bearing short-term senior notes maturing August 14, 2019. The notes substantially reduced commercial paper usage during the quarter.
- The company had $3,979.3 million of available and unused credit lines, including a $2.5 billion revolving facility and approximately $1.5 billion of uncommitted credit lines. No commercial paper, revolving-facility borrowings or uncommitted-line borrowings were outstanding at quarter-end.
- The $500 million of 6.25% senior notes due July 15, 2019 was classified as current. Management stated that operating cash flow is expected to be sufficient for the next twelve months’ requirements and discretionary spending.
- Debt covenants were satisfied: leverage ratio was 2.3x versus a maximum of 3.0x, and interest coverage was 9.8x versus a minimum of 5.0x.
Accounting, outlook, risks and unusual items
- On January 1, 2019, Omnicom adopted ASC 842 for leases. The adoption added $1,298.8 million of operating lease right-of-use assets and $1,218.0 million of long-term operating lease liabilities at March 31, 2019. Management reported no significant effect on results of operations or equity.
- Management expects modest organic revenue growth for the remainder of 2019, excluding foreign exchange effects and unforeseen events. It expects net disposition activity to reduce current-year revenue by approximately 3%.
- Management expects to pursue selective acquisitions, invest in high-growth and emerging markets, enhance technology capabilities and dispose of non-strategic or underperforming businesses.
- Key operating risks include client spending reductions, economic weakness, delayed client payments, credit-market disruption, foreign exchange volatility, competition, personnel retention, information-technology dependence, regulatory changes and risks related to international operations.
- Economic and political uncertainty in Europe, including Brexit, weakness and volatility in Brazil, and negative performance in China were identified as regional concerns.
- The company is exposed to potential losses on media and production commitments made on behalf of clients, particularly where sequential-liability protections do not apply or clients default.
- Legal proceedings are described as ordinary-course matters that management does not presently expect to have a material adverse effect.
- Repositioning liabilities declined to $62.1 million from $78.9 million at year-end 2018; substantially all are expected to be paid by the end of 2019.
- No material changes were reported to the risk factors in the 2018 Form 10-K or to market risks since that filing.
Most important facts for investors to verify
- Whether reported revenue weakness is primarily temporary foreign exchange and disposition-related pressure or signals deteriorating organic demand, particularly in CRM Execution & Support.
- Progress toward the company’s modest organic-growth outlook and the expected approximately 3% revenue reduction from net dispositions.
- Funding and refinancing plans for the $500 million senior notes due July 2019 and the €520 million notes maturing August 2019.
- Whether seasonal working-capital use reverses as expected and supports management’s liquidity assessment.
- Sustainability of margin expansion after the 2018 repositioning actions and dispositions.
- Potential effects of foreign exchange, Brexit-related uncertainty, Brazil and China performance, client credit quality and media-purchase commitments.
- The effect of continued share repurchases and dividend increases on leverage, liquidity and per-share earnings.