Omnicom Group Inc. — Q2 2019 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 quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results are unaudited and presented under U.S. GAAP.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3,719.8 million | $3,859.6 million | $7,188.7 million | $7,489.2 million |
| Operating profit | $573.7 million | $582.3 million | $1,002.6 million | $1,003.9 million |
| Operating margin | 15.4% | 15.1% | 13.9% | 13.4% |
| Net income attributable to Omnicom | $370.7 million | $364.2 million | $633.9 million | $628.3 million |
| Diluted EPS | $1.68 | $1.60 | $2.85 | $2.73 |
| EBITA margin | 16.0% | 15.8% | 14.5% | 14.1% |
Six-month net income was $673.9 million, including $40.0 million attributable to noncontrolling interests. Net interest expense was $50.2 million in the second quarter and $96.2 million for the six months. The six-month effective tax rate increased to 25.7% from 25.2%.
Revenue decreased 3.6% in the quarter and 4.0% for the six months. For the six months, foreign exchange reduced revenue by $222.4 million, net disposition activity reduced revenue by $277.7 million, and organic growth contributed $199.6 million, or 2.7%.
Six-month cash flow from operating activities was negative $492.9 million, including a $1,306.6 million use of operating capital. Investing activities provided $24.7 million, while financing activities used $296.7 million. Capital expenditures were $48.8 million, common dividends paid were $280.4 million, and common stock repurchases were $527.6 million.
Cash and cash equivalents were $2,898.1 million at June 30, 2019, compared with $3,652.4 million at December 31, 2018. Total debt was $5,533.9 million and net debt was $2,630.4 million, compared with $1,233.9 million at year-end 2018. Available and unused credit lines totaled $3,988.2 million. The company reported a 2.4x leverage ratio and 9.6x interest coverage ratio, within its covenant limits.
Material changes versus the prior comparable period
- Revenue declined despite 2.8% quarterly and 2.7% six-month organic growth, primarily because of foreign exchange headwinds and dispositions.
- CRM Execution & Support revenue declined 34.6% in the quarter and 32.9% for the six months, reflecting disposition activity and operating weakness.
- Advertising and healthcare performed comparatively well. Six-month revenue increased 1.2% in advertising and 7.9% in healthcare, while CRM Consumer Experience, public relations and CRM Execution & Support declined.
- North America was relatively resilient, while Europe, Latin America and Asia-Pacific experienced reported declines due to currency effects, dispositions and selected market weaknesses.
- Operating margins improved because expenses declined faster than revenue, supported by business mix, dispositions of underperforming businesses, repositioning actions and cost management.
- Diluted EPS increased faster than net income because of lower weighted-average shares resulting from share repurchases.
- Omnicom adopted ASC 842 on January 1, 2019, recognizing $1,435.3 million of operating lease right-of-use assets and $1,317.9 million of long-term operating lease liabilities at June 30. The adoption materially increased reported assets and liabilities but did not materially affect earnings or equity.
Guidance, outlook, risks and unusual items
Management expected modest organic revenue growth for the remainder of 2019, excluding foreign exchange effects, and long-term organic growth above weighted-average nominal GDP growth in its major markets. Management also expected net disposition activity to reduce current-year revenue by approximately 3%, with related earnings pressure substantially offset by cost savings, operating efficiencies and acquisition activity.
Based on exchange rates at July 11, 2019, management expected foreign exchange to reduce full-year revenue by approximately 2.0% and third-quarter revenue by approximately 1.0%.
On July 8, 2019, the company issued €500 million of 0.80% senior notes due 2027 and €500 million of 1.40% senior notes due 2031, generating approximately $1.1 billion of net proceeds. The proceeds were used partly to retire the $500 million notes due July 15, 2019 and were intended partly to redeem $400 million of the $1.0 billion notes due 2020.
The filing identifies risks from economic downturns, reductions or delays in client spending and payments, client credit exposure, media and production commitments, foreign currency volatility, interest rates, credit-market disruptions, competition, personnel retention, information technology, regulation, international political and economic conditions, litigation and goodwill impairment estimates. Goodwill was tested at June 30, 2019 and was not impaired; the filing states that the most sensitive reporting unit could withstand an approximately 65% decline in fair value before failing the impairment test under the stated assumptions.
The company recorded a $10.8 million tax benefit in the second quarter from favorable settlements of uncertain tax positions. Repositioning liabilities declined to $42.3 million from $78.9 million at year-end 2018, with substantially all expected to be paid by the end of 2019. Management does not expect current legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether organic growth can continue to offset the effects of dispositions, foreign exchange and weakness in CRM Execution & Support.
- The sustainability of operating-margin improvement after repositioning benefits and disposition-related cost reductions.
- Cash conversion and working-capital requirements, particularly the recurring first-half use of operating capital.
- Debt refinancing and the effect of the July 2019 note issuance, the retired 2019 notes and the planned 2020 note redemption.
- Exposure to client payment defaults and media or production commitments that may exceed Omnicom’s service revenue.
- The sensitivity of the $9.4 billion goodwill balance to changes in growth rates, discount rates and regional operating performance.
- The impact of ongoing currency weakness, Brexit-related uncertainty, Latin American conditions and China performance.
- The effect of the $10.8 million tax benefit and other tax settlements on the comparability of future earnings.