Omnicom Group Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Omnicom is a global provider of advertising, marketing and corporate communications services, including advertising, CRM, public relations and healthcare services. The filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. The company operates as one reportable segment across the Americas, EMEA and Asia-Pacific.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $3,623.8 million | $3,714.3 million | $10,812.5 million | $11,203.5 million |
| Operating profit | $473.3 million | $502.3 million | $1,475.9 million | $1,506.3 million |
| Operating margin | 13.1% | 13.5% | 13.6% | 13.4% |
| Net income attributable to Omnicom | $290.2 million | $298.9 million | $924.1 million | $927.2 million |
| Diluted EPS | $1.32 | $1.32 | $4.17 | $4.06 |
| EBITA margin | 13.6% | 14.2% | 14.2% | 14.2% |
For the nine months, net cash used in operating activities was $231.9 million, compared with $238.6 million in 2018. Operating cash flow was reduced by $1.44 billion of operating-capital use, primarily reflecting working-capital timing. Capital expenditures were $77.0 million, common dividends paid were $422.5 million, and common-stock repurchases were $545.2 million.
Cash and cash equivalents were $2.440 billion at September 30, 2019, down from $3.652 billion at December 31, 2018. Total debt was $5.118 billion, producing reported net debt of $2.673 billion versus $1.234 billion at year-end 2018. Available and unused credit lines totaled $3.766 billion, including a $2.5 billion revolving facility. No commercial paper, revolving-facility borrowings or uncommitted-line borrowings were outstanding at quarter-end.
Material changes versus the prior comparable period
- Q3 revenue declined 2.4%; foreign exchange reduced revenue by 1.5%, net dispositions reduced it by 3.1%, and organic growth contributed 2.2%.
- Nine-month revenue declined 3.5%; foreign exchange reduced revenue by 2.5%, net dispositions reduced it by 3.5%, and organic growth contributed 2.5%.
- Q3 net income attributable to Omnicom declined 2.9%, while nine-month net income declined 0.3%. Nine-month diluted EPS increased 2.7% because of lower weighted-average shares following repurchases.
- Advertising and healthcare grew in both reported revenue and organic performance, while CRM Execution & Support declined substantially. Nine-month reported CRM Execution & Support revenue fell 31.2%.
- Reported Q3 operating margin decreased because the 2018 comparison included a $178.4 million gain on subsidiary dispositions. Excluding the unusual 2018 disposition and repositioning effects, management stated that Q3 operating margin improved to 13.1% from 12.7% and nine-month operating margin improved to 13.6% from 13.2%.
- Omnicom adopted ASC 842 leases on January 1, 2019, recognizing $1.383 billion of operating lease right-of-use assets and $1.551 billion of operating lease liabilities at September 30, 2019. Management stated that the adoption did not materially affect earnings, cash flows or equity.
Guidance, outlook, risks and unusual items
Management expected modest organic revenue growth for the remainder of 2019 and stated that long-term organic growth should exceed weighted-average nominal GDP growth in major markets. Management expected net disposition activity to reduce revenue by approximately 3% for full-year 2019 and 1.5% in the fourth quarter. Assuming October 10, 2019 exchange rates remained unchanged, foreign exchange was expected to reduce full-year revenue by approximately 2.3% and fourth-quarter revenue by 1.5%.
Management cited ongoing opportunities from integrated marketing services, digital platforms, data analytics and client consolidation, while continuing selective acquisitions and dispositions. Key challenges included economic and political uncertainty in Europe, Brexit, weakness in Brazil and China, foreign-exchange volatility, client spending reductions, client payment delays, competition, personnel retention, technology dependence and potential losses on media or production commitments made on behalf of clients.
During 2019, Omnicom issued €1.0 billion of senior notes, used proceeds to retire $500 million of 2019 notes and redeem $400 million of 2020 notes, and classified the remaining $600 million of 2020 notes as current. The company settled interest-rate swaps, leaving its long-term debt portfolio entirely fixed-rate, although Euro-denominated debt remains subject to non-cash foreign-exchange effects. The company recorded a $6.3 million loss on extinguishment related to the partial redemption.
The company was in compliance with its debt covenants at September 30, 2019, with a leverage ratio of 2.2 times versus a maximum of 3.0 times and interest coverage of 9.6 times versus a minimum of 5.0 times. Repositioning liabilities declined to $36.1 million from $78.9 million at December 31, 2018, and were expected to be substantially paid by year-end. Legal proceedings were not expected to have a material adverse effect. Management identified no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth can offset continued revenue pressure from dispositions, foreign exchange and weakness in CRM Execution & Support.
- The sustainability of reported margin improvement after excluding unusual 2018 disposition and repositioning items.
- Working-capital seasonality and the conversion of earnings into positive operating cash flow after the nine-month $231.9 million operating cash outflow.
- The effect of the $2.673 billion net debt position, the $600 million current debt maturity and future refinancing needs.
- Exposure to currency movements, especially through Euro-denominated debt and international operations.
- Client spending, payment behavior and potential agency obligations for media and production commitments.
- Management’s 2019 organic-growth and disposition-revenue expectations, which are forward-looking and subject to economic, competitive and execution risks.