Omnicom Group Inc. 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Omnicom provides global advertising, marketing and corporate communications services through advertising, CRM, public relations and healthcare networks. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $3,714.3 million | $3,719.5 million | $11,203.5 million | $11,097.1 million |
| Operating profit | $502.3 million | $470.2 million | $1,506.3 million | $1,457.4 million |
| Operating margin | 13.5% | 12.6% | 13.4% | 13.1% |
| Net income attributable to Omnicom | $298.9 million | $263.6 million | $927.2 million | $834.0 million |
| Diluted EPS | $1.32 | $1.13 | $4.06 | $3.55 |
| Dividends declared per share | $0.60 | $0.55 | $1.80 | $1.65 |
- Q3 revenue declined 0.1%, while nine-month revenue increased 1.0%. Excluding ASC 606, nine-month organic growth was 2.5%; foreign exchange contributed 1.5%, while acquisitions net of dispositions reduced revenue 2.0%.
- Q3 EBITA was $527.5 million with a 14.2% margin, compared with $498.1 million and 13.4% in the prior-year quarter. Nine-month EBITA was $1,586.0 million with a 14.2% margin, compared with 13.9% in 2017.
- Nine-month net cash used in operating activities was $238.6 million, versus $156.0 million in 2017, primarily reflecting a $1.4 billion use of operating capital.
- Nine-month investing cash outflow was $132.0 million, including $326.3 million for acquisitions, partly offset by $310.5 million of disposition and investment proceeds.
- Nine-month financing cash outflow was $1,176.6 million, including $413.7 million of common dividends and $526.7 million of common-stock repurchases.
- Cash and cash equivalents were $2.1 billion at September 30, 2018, down from $3.8 billion at December 31, 2017. Net debt was $2.76 billion, compared with $1.13 billion at year-end 2017 and $3.12 billion at September 30, 2017.
- Total debt was $4.87 billion, including the $500 million senior notes due July 2019. The company had $3.75 billion of available and unused credit lines and no outstanding commercial paper or revolving-credit borrowings at quarter-end.
- Leverage and interest coverage covenants were satisfied: leverage was 2.0 times versus a maximum of 3.0 times, and interest coverage was 10.2 times versus a minimum of 5.0 times.
Material Changes Versus the Prior Comparable Period
- Q3 operating profit increased 6.8% and nine-month operating profit increased 3.4%, assisted by a $178.4 million net gain on subsidiary dispositions, primarily the sale of Sellbytel.
- The company also recorded $149.4 million of repositioning charges, including $68.4 million of severance, $73.5 million of office lease consolidation and termination costs, and $7.5 million of asset write-offs and other costs.
- Excluding the disposition gain and repositioning charges, Q3 operating margin improved to 12.7% from 12.6%, while EBITA margin was unchanged at 13.4%. For nine months, adjusted operating margin was 13.2% and adjusted EBITA margin was 13.9%.
- By discipline, Q3 organic growth was strongest in CRM Consumer Experience, advertising and healthcare; CRM Execution & Support declined. For nine months, CRM Execution & Support was the only reported discipline with a decline.
- Revenue performance varied geographically: Q3 organic growth was positive in North America, Latin America, Europe and Asia Pacific, but reported revenue was affected by currency movements and dispositions. Nine-month reported revenue declined in North America and Latin America but increased in Europe and Asia Pacific.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. It reduced reported nine-month revenue by $108.5 million relative to the former presentation and reduced operating expenses by $98.1 million; the impact on operating profit was an increase of $10.4 million, while the effect on net income and diluted EPS was not material.
- The effective tax rate declined to 25.4% for nine months from 31.1%, primarily due to the U.S. Tax Cuts and Jobs Act. The period included $28.9 million of additional tax expense from revising provisional Tax Act estimates.
Guidance, Outlook, Risks and Unusual Items
- Management expected modest revenue growth for the remainder of 2018, excluding foreign-exchange changes, and long-term growth above weighted-average nominal GDP growth in major markets.
- Management expected disposition activity to reduce revenue by approximately 2.25% for full-year 2018, 2.5% to 3% in the fourth quarter, and approximately 3% in the first half of 2019.
- Management expected the Tax Act to reduce the 2018 effective tax rate by approximately five percentage points compared with 2017, excluding specified 2017 items.
- Management expected substantially all incremental severance costs to be paid within nine months and substantially all office lease consolidation and termination costs within two years.
- Key risks include client spending reductions, economic and political uncertainty, foreign-exchange volatility, client payment and credit risk, competition and client retention, personnel retention, information-technology dependence, regulatory changes, and risks related to international operations.
- Two subsidiaries received U.S. Department of Justice Antitrust Division subpoenas concerning video production and post-production practices. Omnicom is cooperating and did not expect a material adverse effect, but stated that the ultimate resolution could be material.
- The company expected to adopt the new lease standard on January 1, 2019, with a significant increase in reported assets and liabilities but minimal equity impact and no effect on results of operations. The filing did not provide a quantified estimate.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2018. No material changes to reported risk factors were identified.
Investor Verification Checklist
- Verify the sustainability of organic growth after separating ASC 606, foreign exchange and disposition effects.
- Assess whether the $149.4 million repositioning program produces the expected cost savings and whether additional restructuring charges arise.
- Monitor CRM Execution & Support performance, North American trends, client losses and changes in programmatic media buying arrangements.
- Review cash conversion, working-capital requirements and the expected refinancing or repayment of the $500 million notes due in 2019.
- Track net debt, share repurchases, dividends and acquisition spending against operating cash generation.
- Evaluate the final impact of Tax Act accounting, unresolved tax positions totaling $153.2 million in unrecognized benefits, and future effective tax rates.
- Follow the Department of Justice investigation, currency exposure, economic conditions in Europe and Latin America, and any goodwill impairment indicators.