Omnicom Group Inc. 10-Q Summary
Business Context and Reporting Period
Omnicom is a global provider of advertising, marketing and corporate communications services, including traditional media advertising, customer relationship management, public relations and specialty communications. The unaudited filing covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods.
The company operates as one reporting segment through five agency networks. The largest client represented 3.2% of six-month revenue, no other client exceeded 2.3%, and the top 100 clients represented approximately 50.6% of revenue.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Revenue | $3,041.2 million | $2,870.7 million | $5,961.2 million | $5,617.3 million |
| Operating income | $415.4 million | $398.1 million | $706.4 million | $680.5 million |
| Operating margin | 13.7% | 13.9% | 11.8% | 12.1% |
| Net income attributable to Omnicom | $243.3 million | $233.4 million | $406.7 million | $397.9 million |
| Diluted EPS | $0.79 | $0.75 | $1.30 | $1.27 |
| Declared dividend per share | $0.20 | $0.15 | $0.40 | $0.30 |
Six-month net cash used in operating activities was $170.6 million, compared with $109.4 million of cash provided in the prior-year period. Investing activities used $140.5 million, including $63.1 million of capital expenditures and $76.4 million for acquisitions and affiliate interests. Financing activities used $671.1 million, including $565.5 million for share repurchases and $108.4 million for dividends.
Cash and cash equivalents declined to $533.7 million at June 30, 2010 from $1,587.0 million at December 31, 2009. Accounts receivable were $5,140.6 million and work in process was $711.1 million. Total assets were $16,329.2 million.
Debt outstanding totaled approximately $2,207.4 million, including $1,512.2 million of senior notes and other long-term notes, $659.5 million of convertible debt and $35.7 million of short-term borrowings. The company had no borrowings under its $2.5 billion revolving credit facility and no commercial paper outstanding at quarter-end. Debt fair value was $2,356.0 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5.9%, including 6.0% organic growth; foreign exchange reduced revenue by 0.2% and acquisitions net of dispositions added 0.1%.
- Six-month revenue increased 6.1%, consisting of 4.1% organic growth, a 2.0% foreign-exchange benefit and no material net acquisition contribution.
- Second-quarter revenue growth was strongest in specialty communications, up 11.4%, followed by public relations up 7.2%, CRM up 5.9% and traditional media advertising up 4.6%.
- Salary and service costs increased faster than revenue, reaching 70.8% of second-quarter revenue and 72.4% for the six-month period, primarily due to business mix and higher freelance labor costs.
- Office and general expenses improved as a percentage of revenue, declining to 15.5% in the quarter and 15.8% for the six months.
- Operating margin declined by 0.2 percentage points in the quarter and 0.3 percentage points for the six months, despite higher revenue.
- Net income attributable to Omnicom increased 4.2% in the quarter but only 2.2% for the six months. Diluted EPS benefited from lower weighted-average shares following 2010 repurchases.
- Share repurchases totaled $565.5 million during the first six months; 7.45 million shares were purchased in the open market during the second quarter.
- Comprehensive income attributable to Omnicom declined to $135.8 million for the first six months from $612.2 million, primarily because of unfavorable foreign-currency translation adjustments.
Guidance, Outlook, Risks and Unusual Items
Management expected modest revenue growth for the remainder of 2010, excluding foreign-exchange effects, driven by increased client spending in the United States and Asia and easier comparisons. Management estimated that the previously announced loss of a large automotive client would reduce second-half 2010 revenue by approximately 1% versus the prior year. Assuming July 15, 2010 exchange rates remained unchanged, foreign exchange was expected to reduce second-half revenue by approximately 3%.
Management identified risks from uncertain global economic conditions, reduced client spending, slower client payments, client credit deterioration, media-purchase exposure, competition, personnel retention, regulation, foreign-exchange movements and renewed credit-market disruption. Seasonal working-capital requirements can fluctuate by more than $1.5 billion.
The $2.5 billion credit facility expires June 23, 2011. The company was in compliance with its financial covenants at quarter-end, with debt to EBITDA of 1.4 times versus a 3.0-times maximum and EBITDA to interest expense of 12.9 times versus a 5.0-times minimum. Convertible notes totaling $252.7 million were classified as current because of the facility’s upcoming expiration and the August 2, 2010 put date for the 2032 Notes.
In June 2010, holders of $60.8 million of 2038 Notes put the notes back to the company, and $403.2 million of holders consented to indenture amendments in exchange for a $20.2 million supplemental interest payment. Goodwill declined $170.3 million from year-end, primarily from foreign-exchange effects; management concluded that goodwill was not impaired. The principal securities litigation disclosed in prior filings was concluded in March 2010, and management did not expect ordinary-course legal proceedings to have a material adverse effect.
Important Facts for Investors to Verify
- Whether operating-margin pressure from salary, service and freelance labor costs persists as revenue grows.
- The company’s ability to fund seasonal working-capital needs after the substantial share repurchases and negative operating cash flow in the first half.
- Renewal or replacement of the $2.5 billion credit facility before its June 2011 expiration.
- Cash requirements and refinancing risk associated with convertible-note put dates, particularly the August 2, 2010 date for the 2032 Notes.
- The effect of foreign-exchange movements and the expected second-half revenue reduction from the lost automotive client.
- Client payment performance, media-purchase exposure and contingent acquisition obligations estimated at approximately $169 million.
- The assumptions supporting goodwill valuations, including the 4.0% long-term growth rate and 10.3% to 10.9% WACC range.