OMNICOM GROUP INC. quarterly report, Q3 FY2020

Omnicom Group Inc. 2020 Q3 Form 10-Q Summary

Business context and reporting period

Omnicom is a global provider of advertising, marketing and corporate communications services, including advertising, customer relationship management, public relations and healthcare services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the comparable 2019 periods.

Results were materially affected by the COVID-19 pandemic, which reduced client marketing expenditures across substantially all markets and disciplines. Healthcare was the only major discipline reporting revenue growth.

Financial performance and key metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Revenue	$3,206.5 million	$3,623.8 million	$9,414.1 million	$10,812.5 million
Operating profit	$501.4 million	$473.3 million	$984.1 million	$1,475.9 million
Operating margin	15.6%	13.1%	10.5%	13.6%
EBITA margin	16.3%	13.6%	11.1%	14.2%
Net income attributable to Omnicom	$313.3 million	$290.2 million	$547.3 million	$924.1 million
Diluted EPS	$1.45	$1.32	$2.53	$4.17

Q3 revenue declined 11.5%; nine-month revenue declined 12.9%. Nine-month revenue reduction consisted of negative organic growth of 11.7%, unfavorable foreign exchange of 0.9% and acquisition/disposition effects of 0.4%.
Q3 operating profit increased 5.9% despite the revenue decline, primarily because of cost reductions, workforce actions and $68.7 million of government reimbursements and tax credits. Q3 net income attributable to Omnicom included a $52.3 million after-tax benefit, or $0.24 per diluted share, from those programs.
Nine-month operating profit declined 33.3%, reflecting the $277.9 million pre-tax repositioning and disposition charge recorded in the second quarter. The charge reduced nine-month net income by $223.1 million, or $1.03 per diluted share, after tax.
Nine-month net income attributable to Omnicom declined 40.8%, while diluted EPS declined 39.3%. Lower average diluted shares partly offset the earnings decline.
Nine-month effective tax rate increased to 28.5% from 26.0%, mainly because certain repositioning costs were not deductible and 2019 benefited from favorable tax settlements.

Cash flow, liquidity and debt

Net cash used in operating activities was $661.4 million for the first nine months of 2020, compared with $231.9 million used in the 2019 period. The primary driver was a $1.8 billion use of operating capital, including changes in accounts payable and other working-capital balances.
Net cash used in investing activities was $109.1 million, including $50.0 million of capital expenditures and $65.4 million for acquisitions and investments.
Net cash used in financing activities was $187.5 million. The company paid $422.7 million of common dividends and repurchased $219.1 million of common stock, principally before suspending open-market repurchases in March 2020.
Cash and cash equivalents declined to $3.278 billion at September 30, 2020 from $4.306 billion at December 31, 2019. Approximately $1.4 billion was held by foreign subsidiaries, subject to applicable withholding taxes upon repatriation.
Total debt was $5.785 billion and reported net debt was $2.507 billion at September 30, 2020, compared with $835.1 million at December 31, 2019.
Long-term debt increased primarily because Omnicom issued $600 million of 2.45% senior notes due 2030 and $600 million of 4.20% senior notes due 2030. The 2.45% note proceeds refinanced the $600 million of senior notes due 2020.
At September 30, 2020, there were no borrowings under the $2.5 billion revolving credit facility, the $400 million 364-day facility, uncommitted credit lines or commercial paper programs.
The reported leverage ratio was 2.9 times against a 3.5-times covenant limit at September 30, 2020. On October 26, 2020, the facilities were amended to increase the permitted ratio to 4.0 times through specified 2021 or facility-maturity dates.
The company paid $1.95 per common share in dividends during the first nine months, including a quarterly dividend of $0.65 per share.

Material changes versus the prior comparable period

COVID-19 drove broad-based organic revenue declines, particularly in advertising, event marketing, field marketing, merchandising, travel, lodging, entertainment, energy, automotive and non-essential retail-related client businesses.
Q3 revenue declined in every major discipline except healthcare: advertising decreased $241.5 million, CRM Consumer Experience decreased $113.0 million, CRM Execution and Support decreased $60.5 million, and public relations decreased $14.4 million. Healthcare increased $12.1 million.
Nine-month revenue declined across all principal regions, led by North America, down $688.1 million, and Europe, down $404.1 million.
Omnicom reduced its workforce by more than 6,000 employees and reduced facility requirements. Salary and service costs declined 15.4% in Q3 and 13.7% for the nine-month period.
Share repurchases were suspended beginning March 2020. Third-quarter share purchases consisted only of employee share withholdings for tax obligations.
Goodwill and intangible asset impairment testing performed as of June 30, 2020 resulted in no impairment charge. Management stated that a decline of approximately 20% in the fair value of one reporting unit could cause it to fail the goodwill impairment test.

Guidance, outlook, risks and unusual items

Management expects the negative effect of COVID-19 on revenue to continue through at least the fourth quarter of 2020, with negative organic growth and an overall decline in full-year 2020 revenue compared with 2019.
Management expects second-half 2020 margins to be in line with the prior year as cost reductions offset lower revenue. The expected fourth-quarter effective tax rate was approximately 27%, excluding the effects of share-based compensation.
Management stated that current cash, operating resources and available credit facilities should fund near-term working-capital needs and discretionary spending, but warned that credit-market disruptions could require additional financing.
Key risks include further COVID-19-related reductions in client spending, slower client payments and increased credit losses, media and production commitments made on behalf of clients, foreign-exchange volatility, cybersecurity risks associated with remote work, goodwill impairment, legal and regulatory matters, and international political and economic conditions.
The $277.9 million repositioning charge comprised $150.0 million of incremental severance, $55.8 million of right-of-use asset and other impairments, $47.0 million of real-estate exit costs and $25.1 million of disposition and other charges. The company expected the remaining repositioning liabilities to be substantially paid by year-end 2020.
Ordinary-course legal proceedings were not expected to have a material adverse effect on results or financial position. The filing does not identify a material litigation contingency.

Important facts for investors to verify

Whether client spending and organic revenue trends improved or deteriorated after September 30, 2020, particularly in advertising, events, field marketing and travel-related sectors.
Whether cost reductions and government reimbursements were recurring, temporary or non-repeatable, and their effect on normalized margins.
Cash conversion and working-capital requirements, including the sustainability of operating cash flow after the substantial nine-month use of operating capital.
Debt maturities, refinancing needs and compliance with the amended 4.0-times leverage covenant, especially as the $400 million 364-day facility approached maturity.
Whether goodwill or other intangible assets required impairment as economic conditions and Omnicom’s share price changed.
The company’s ability to maintain its $0.65 quarterly dividend while share repurchases remained suspended and net debt remained elevated.