Omnicom Group Inc. — 2009 Q3 Form 10-Q Summary
Business Context and Reporting Period
Omnicom is a global strategic holding company providing advertising, marketing and corporate communications services through multiple agencies. The unaudited report covers the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods.
Financial Performance and Position
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Revenue | $2,837.6 million | $3,316.2 million | $8,454.9 million | $9,988.5 million |
| Operating income | $294.8 million | $373.4 million | $975.3 million | $1,241.0 million |
| Operating margin | 10.4% | 11.3% | 11.5% | 12.4% |
| Net income attributable to Omnicom | $165.6 million | $213.6 million | $563.5 million | $729.3 million |
| Diluted EPS | $0.53 | $0.68 | $1.80 | $2.28 |
| Dividends declared per share | $0.15 | $0.15 | $0.45 | $0.45 |
- Q3 revenue decreased 14.4%; nine-month revenue decreased 15.4%.
- Q3 operating expenses declined 13.6% to $2,542.8 million, less than the revenue decline, contributing to lower margins.
- Net interest expense increased to $28.9 million in Q3 and $72.1 million for nine months, compared with $20.7 million and $50.4 million, respectively, in the prior-year periods.
- The effective tax rate was 34.0% in Q3 and 34.2% for nine months, compared with 33.5% and 33.6%, respectively.
- Cash provided by operations was $453.1 million for the first nine months, versus $234.4 million in 2008.
- Cash and cash equivalents were $597.4 million at September 30, 2009, down from $1,097.3 million at December 31, 2008. Total assets were $16.2 billion.
- At September 30, 2009, debt included $174.5 million of short-term borrowings, $1,510.0 million of long-term debt and $726.0 million of convertible debt.
- The company had no borrowings under its $2.5 billion revolving credit facility and reported $2,356.5 million of available capacity.
Material Changes Versus the Prior Comparable Period
- Organic revenue declined 10.7% in Q3 and 9.4% for the first nine months; foreign exchange reduced reported revenue by 2.9% and 5.9%, respectively.
- Management attributed approximately one-third of the Q3 organic decline and one-quarter of the nine-month organic decline to reduced spending by automotive clients. Events, promotions and recruitment advertising also weakened.
- Revenue declines were broad-based: Q3 U.S. revenue fell 13.2%, international revenue fell 15.8%; nine-month U.S. revenue fell 11.4% and international revenue fell 19.6%.
- Q3 revenue declined across traditional media advertising, CRM, public relations and specialty communications, with specialty communications down 19.3%, the largest percentage decline.
- Salary and service costs represented 72.2% of Q3 revenue and 71.9% of nine-month revenue. Severance expense was $32.7 million in Q3 and $101.8 million for nine months, substantially above the comparable 2008 levels.
- Office and general expenses declined in dollars but increased as a percentage of revenue to 17.4% in Q3 and 16.6% for nine months.
- Cash spending was more conservative: first-nine-month share repurchases were $13.3 million versus $846.0 million in 2008, while acquisition payments were $124.9 million versus $389.4 million.
- Convertible debt declined from $2,041.5 million at December 31, 2008 to $726.0 million at September 30, 2009, primarily following repurchases of the 2031 and 2032 notes. The company issued $500 million of 6.25% senior notes due 2019.
Guidance, Outlook, Risks and Unusual Items
- Management stated that industry prospects had begun to stabilize but warned that economic uncertainty, lower consumer spending and reduced client budgets could cause further revenue and profit declines. No formal earnings guidance was provided.
- Based on exchange rates in effect on October 20, 2009, management expected foreign exchange to increase revenue by approximately 3.5% to 4.5% for the remainder of 2009 compared with the fourth quarter of 2008.
- Management believes operating cash flow, cash on hand and available credit are sufficient for near-term requirements, including potential cash puts of convertible notes. Holders may put the 2033 and 2038 notes in June 2010 and the 2032 notes in July 2010.
- Debt covenants require debt-to-EBITDA of no more than 3.0 times and EBITDA-to-interest expense of at least 5.0 times. Reported ratios were 1.5 times and 13.7 times, respectively, at September 30, 2009.
- Contingent acquisition obligations were estimated at approximately $188 million, including $11 million for the remainder of 2009, $103 million in 2010 and $46 million in 2011. Actual amounts may vary materially with business performance and currency rates.
- Goodwill was not impaired as of June 30, 2009. The company identified sensitivity to discount rates, long-term growth assumptions and future cash flows; a material deterioration could result in a non-cash impairment charge.
- Unrecognized tax benefits were $149.7 million, of which approximately $65.3 million could affect the effective tax rate upon resolution. The IRS examination of 2005–2007 federal returns was ongoing.
- A securities class-action appeal remained pending. Management stated that the allegations were baseless, but the outcome and potential financial effect could not be determined.
- Key risks include client spending reductions, client credit deterioration, media purchase exposure, foreign currency fluctuations, personnel and competitive pressures, credit-market disruption, tax matters and litigation.
Important Facts for Investors to Verify
- Whether client spending and organic revenue trends stabilized or deteriorated after September 30, 2009, particularly in automotive, events, promotions and recruitment advertising.
- The timing and funding of potential convertible-note puts in 2010 and the effect on interest expense, liquidity and credit-facility availability.
- Whether severance and other restructuring costs decline and whether cost reductions are sufficient to protect operating margins.
- The subsequent resolution of the pending securities litigation, federal tax examination and unrecognized tax positions.
- Whether goodwill valuation assumptions remain supportable if revenue, margins or capital-market conditions weaken.
- The company’s ability to maintain commercial-paper access and revolving-credit availability during periods of credit-market stress.