Omnicom Group Inc. — 2016 Q2 Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2016. Omnicom is a global provider of advertising, marketing and corporate communications services through five agency networks, operating across the Americas, EMEA and Asia Pacific. The filing was unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Change |
|---|
| Revenue | $3,884.9 million | $3,805.3 million | +2.1% |
| Operating income | $561.8 million | $538.6 million | +4.3% |
| Operating margin | 14.5% | 14.2% | +0.3 percentage points |
| EBITA | $590.3 million | $565.7 million | +4.4% |
| EBITA margin | 15.2% | 14.9% | +0.3 percentage points |
| Net income attributable to Omnicom | $326.1 million | $313.9 million | +3.9% |
| Diluted EPS | $1.36 | $1.26 | +7.9% |
| Dividend declared per share | $0.55 | $0.50 | +10.0% |
| Metric | Six months 2016 | Six months 2015 | Change |
|---|
| Revenue | $7,384.0 million | $7,274.5 million | +1.5% |
| Operating income | $953.9 million | $916.3 million | +4.1% |
| Operating margin | 12.9% | 12.6% | +0.3 percentage points |
| EBITA | $1,010.7 million | $970.8 million | +4.1% |
| EBITA margin | 13.7% | 13.3% | +0.4 percentage points |
| Net income attributable to Omnicom | $544.5 million | $523.0 million | +4.1% |
| Diluted EPS | $2.25 | $2.09 | +7.7% |
Revenue drivers and business trends
- Q2 organic growth was 3.4%, while foreign exchange reduced reported revenue by $62.6 million, or 1.6%; acquisitions net of dispositions added $13.2 million.
- Six-month organic growth was 3.6%; foreign exchange reduced reported revenue by $159.2 million, or 2.2%, and acquisitions net of dispositions added $9.0 million.
- Q2 revenue growth was strongest in advertising, up 6.1%, and specialty communications, up 3.1%. CRM declined 4.3% and public relations increased 1.1%.
- For the first six months, advertising increased 5.1%, specialty communications increased 2.1%, CRM declined 3.8% and public relations declined 0.1%.
- Q2 regional revenue increased 2.1% in North America, 1.5% in Europe, 1.4% in Asia Pacific and 19.7% in Latin America. Latin American reported growth was substantially driven by acquisitions and offset by weak organic performance, particularly in Brazil.
- Advertising represented 53.2% of Q2 revenue and 52.4% of six-month revenue. The largest client represented 2.8% of six-month revenue; the 100 largest clients represented approximately 52.7%.
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $391.1 million, compared with negative $52.0 million in the prior-year period. The principal driver was a $1.1269 billion use of operating capital, including reductions in accounts payable and customer advances.
- Investing cash flow was negative $560.2 million, including $267.0 million for acquisitions, net of cash acquired, and $77.9 million of capital expenditures.
- Financing cash flow was negative $397.3 million. The company paid $242.9 million in common dividends, repurchased $383.5 million of common stock and paid $48.1 million of contingent purchase price obligations. It also received $1.3896 billion of borrowings and repaid $1.0 billion of debt.
- Cash and cash equivalents were $1.3057 billion at June 30, 2016, versus $2.6052 billion at December 31, 2015. Short-term investments were $231.0 million, producing total cash and short-term investments of $1.5367 billion.
- Total debt was $5.0339 billion and net debt, defined by the company as total debt less cash and short-term investments, was $3.4972 billion, compared with $1.9511 billion at December 31, 2015.
- On April 6, 2016, Omnicom issued $1.4 billion of 3.60% senior notes due 2026 and used part of the proceeds to retire $1.0 billion of 5.9% notes due 2016.
- The company had $3.6643 billion of available and unused credit lines, including a $2.5 billion revolving credit facility and approximately $1.2 billion of uncommitted lines. No commercial paper or revolving-credit borrowings were outstanding at June 30.
- Debt covenants were satisfied: the leverage ratio was 2.2x versus a maximum of 3.0x, and interest coverage was 11.4x versus a minimum of 5.0x.
Material changes and unusual items
- Interest expense increased $16.2 million in the first six months, primarily because settling the interest-rate swap on the 2022 notes reduced the benefit from floating-rate swaps. Net interest expense increased to $84.9 million from $68.8 million.
- The company settled a forward-starting interest-rate swap at a $54.5 million loss, which is being amortized over the term of the 2026 notes. It also realized a $54.2 million gain from settling the swap on the 2022 notes, which is being amortized over that debt’s remaining term.
- Goodwill increased to $9.0684 billion from $8.6764 billion at year-end, primarily reflecting acquisitions, acquired noncontrolling interests and contingent purchase price adjustments. No goodwill impairment was recorded.
- Management’s annual goodwill impairment test at June 30 concluded that fair value substantially exceeded carrying value for each reporting unit. The filing states that the reporting unit with the lowest cushion would require an approximate 77% decline in fair value to fail the test.
- Accumulated other comprehensive loss increased to $1.0615 billion, principally reflecting foreign currency translation losses.
- New accounting standards for revenue recognition, leases, stock compensation and credit losses were disclosed. The company expects the lease standard to significantly increase reported assets and liabilities, with minimal equity impact, but had not yet quantified the full effects of the other standards.
Outlook, risks and contingencies
- Management expects 2016 revenue to increase modestly in excess of weighted-average nominal GDP growth in its major markets, excluding foreign-exchange effects and absent unforeseen events.
- Based on July 13, 2016 exchange rates, management expected foreign exchange to reduce full-year and third-quarter 2016 revenue by approximately 1.5%.
- Management believed operating cash flow, existing liquidity and access to commercial paper, credit facilities and capital markets would be sufficient to fund requirements and planned discretionary spending through 2016.
- Key risks include reductions or delays in client spending, client payment defaults, economic weakness in Europe and Latin America, foreign-currency volatility, credit-market disruptions, media-purchase and production-cost exposures, client retention and new-business performance, personnel retention, technology dependence, regulatory changes and litigation or accounting-estimate uncertainty.
- Legal proceedings were described as ordinary-course matters not presently expected to materially affect operations or financial position. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
Investor verification points
- Assess whether reported revenue growth can continue after the negative currency effect and whether organic growth remains above nominal GDP growth.
- Monitor CRM and public-relations performance, along with Brazil and other economically challenged markets.
- Verify the sustainability of operating-margin expansion as salary and service costs rise and acquisition activity continues.
- Review the impact of higher net debt, negative first-half operating cash flow and continued dividends, repurchases and acquisitions on liquidity.
- Track interest expense and the fixed-versus-floating debt mix following the 2026 notes issuance and swap settlements.
- Evaluate acquisition earn-outs and contingent purchase price obligations, which totaled $430.4 million at June 30, 2016.
- Consider the sensitivity of the goodwill valuation to changes in revenue growth, operating margins, discount rates and broader economic conditions.
