Omnicom Group Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Omnicom is a global provider of advertising, marketing, customer relationship management, public relations, healthcare and corporate communications services. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company operates as one reportable segment across the Americas, EMEA and Asia Pacific.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $3,629.6 million | $3,587.4 million | Up 1.2% |
| Operating profit | $421.7 million | $415.7 million | Up 1.4% |
| Operating margin | 11.6% | 11.6% | Flat |
| EBITA | $449.2 million | $446.1 million | Up 0.7% |
| EBITA margin | 12.4% | 12.4% | Flat |
| Net income attributable to Omnicom | $264.1 million | $241.8 million | Up 9.2% |
| Diluted EPS | $1.14 | $1.02 | Up 11.8% |
| Dividends declared per share | $0.60 | $0.55 | Up 9.1% |
| Net cash used in operating activities | $620.8 million | $195.3 million | Greater use of cash |
Cash and cash equivalents were $2,568.1 million at March 31, 2018, compared with $3,796.0 million at December 31, 2017. Total debt was $4,893.6 million, including $4,885.0 million of long-term debt. Net debt increased to $2,323.6 million from $1,128.3 million at year-end 2017, primarily because of seasonal working-capital use.
The company had $3,707.4 million of available and unused credit lines, consisting of a $2.5 billion revolving facility and approximately $1.2 billion of uncommitted lines. No commercial paper, revolving-facility borrowings or uncommitted-line borrowings were outstanding at March 31, 2018. The company remained in compliance with debt covenants, with a leverage ratio of 2.1x versus a maximum of 3.0x and interest coverage of 10.4x versus a minimum of 5.0x.
Operating cash flow reflected a $996.1 million use of operating capital, largely from changes in accounts payable, customer advances and other working-capital accounts. Investing cash use was $207.5 million, including $178.3 million for acquisitions. Financing cash use was $426.9 million, including $138.9 million of common dividends and $232.7 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue increased $42.2 million, or 1.2%. Foreign exchange added $151.1 million, organic growth added $86.9 million, and acquisition activity net of dispositions reduced revenue by $153.3 million. ASC 606 reduced reported revenue by $42.5 million.
- Excluding the ASC 606 presentation effect, organic growth was 2.4% overall, including 7.4% in Europe and 7.3% in Asia Pacific. North America declined 0.1% on an organic basis, while Latin America increased 3.1% and the Middle East and Africa declined 8.5%.
- CRM Consumer Experience revenue increased 6.9% organically, healthcare increased 2.7%, CRM Execution & Support increased 1.2%, public relations increased 0.7% and advertising increased 1.6%.
- Operating expenses increased 1.1%, but remained 88.4% of revenue; operating and EBITA margins were unchanged.
- The effective tax rate declined to 24.3% from 29.2%, primarily because of the U.S. Tax Cuts and Jobs Act and approximately $13 million of benefit from the resolution of foreign tax claims.
- Diluted EPS benefited from higher earnings and a lower weighted-average share count following repurchases. Omnicom repurchased approximately 3.1 million shares in the quarter for general corporate purposes and employee tax withholding.
Accounting, Outlook, Risks and Unusual Items
- Effective January 1, 2018, Omnicom adopted ASC 606 using the modified retrospective method. The standard reduced first-quarter reported revenue by $42.5 million and operating expenses by $36.0 million, with no material impact on net income or diluted EPS. Management expects an approximately $150 million full-year revenue reduction with an immaterial operating-profit effect.
- The company also adopted ASU 2017-07, which increased operating profit by $6.2 million through presentation changes but had no effect on income before taxes, net income or EPS.
- Management expects revenue to increase modestly in 2018, excluding foreign-exchange effects, and expects long-term growth to exceed weighted-average nominal GDP growth in major markets. Management also expects foreign exchange rates, if unchanged from April 16, 2018 levels, to increase full-year revenue by approximately 2.5% and second-quarter revenue by approximately 3%.
- Management expects the Tax Act to reduce the 2018 effective tax rate by approximately 4 percentage points compared with 2017, excluding specified 2017 tax effects and share-based compensation benefits.
- Management believes operating cash flow will be sufficient for the next twelve months' non-discretionary and discretionary requirements, but expects seasonal borrowing needs to typically peak in the second quarter.
- Principal risks include client spending reductions, delayed client payments, economic weakness, credit-market disruption, media and production commitments, foreign-exchange volatility, interest-rate exposure, technology and cybersecurity dependence, regulatory changes, talent retention and acquisition-related obligations.
- Two subsidiaries received subpoenas from the U.S. Department of Justice Antitrust Division concerning video production and post-production practices. Omnicom is cooperating and does not currently expect a material adverse effect, although the ultimate outcome remains uncertain and could be material.
- The company expects to adopt the new lease standard on January 1, 2019, which it expects will significantly increase reported assets and liabilities with minimal equity impact and no effect on operating results.
Important Facts for Investors to Verify
- Assess underlying organic growth separately from the substantial foreign-exchange benefit and the revenue reduction from ASC 606.
- Monitor North American performance, including the effect of the specialty print media disposition and negative Canadian performance.
- Evaluate cash conversion and seasonal working-capital requirements, particularly the $620.8 million first-quarter operating cash outflow.
- Review leverage, interest-rate exposure and the effect of higher floating-rate costs; approximately 25% of debt was floating rate after swaps.
- Track acquisition spending, contingent purchase price obligations and the resulting increase in goodwill and net debt.
- Confirm the sustainability of the lower tax rate, including the Tax Act benefit and the one-time foreign tax resolution benefit.
- Follow developments in the DOJ antitrust investigation and other legal contingencies.