Omnicom Group Inc. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Omnicom is a global provider of advertising, marketing and corporate communications services through agencies operating in advertising, customer relationship management, public relations and specialty communications. The filing covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $3,637.0 million | $3,561.0 million | $7,035.9 million | $6,868.2 million |
| Operating income | $523.0 million | $506.4 million | $894.8 million | $868.9 million |
| Operating margin | 14.4% | 14.2% | 12.7% | 12.7% |
| EBITA | $548.3 million | $530.4 million | $945.4 million | $916.8 million |
| EBITA margin | 15.1% | 14.9% | 13.4% | 13.3% |
| Net income attributable to Omnicom | $289.5 million | $282.7 million | $494.7 million | $487.3 million |
| Diluted EPS | $1.09 | $1.02 | $1.85 | $1.74 |
| Dividends declared per share | $0.40 | $0.30 | $0.80 | $0.60 |
Six-month operating cash flow was $66.5 million, down from $157.3 million in 2012, primarily reflecting a $635.7 million use of operating capital. Investing cash flow used $77.3 million, including $69.0 million of capital expenditures. Financing cash flow used $1,113.9 million, including $406.7 million for redemption of convertible debt, $106.7 million of dividends and $556.1 million for common-stock repurchases.
Cash and cash equivalents were $1,399.9 million at June 30, 2013, compared with $2,678.3 million at December 31, 2012. Debt comprised $3,784.8 million of long-term notes, $252.7 million of convertible debt, $12.8 million of short-term borrowings and $0.3 million of current debt. The company had $3,470.9 million of available and unused credit lines, including a $2.5 billion committed facility. It reported a leverage ratio of 1.9 times and interest coverage of 10.8 times, within covenant limits of 3.0 times and at least 5.0 times, respectively.
Material changes versus the prior comparable period
- Q2 revenue increased 2.1%; six-month revenue increased 2.4%. Organic growth was 2.8% in both periods, while foreign exchange reduced revenue by 0.6%.
- Q2 operating income increased 3.3%, and six-month operating income increased 3.0%. Q2 operating and EBITA margins improved, while the six-month operating margin remained 12.7% and EBITA margin increased modestly.
- Q2 net income attributable to Omnicom increased 2.4%; six-month net income increased 1.5%. Diluted EPS rose faster, by 6.9% in Q2 and 6.3% for six months, primarily because of lower weighted-average shares following repurchases and the convertible-note conversion.
- Revenue growth was strongest in specialty communications, public relations and advertising. CRM revenue declined 1.5% in Q2 and 1.4% for six months.
- Revenue increased in the United States, United Kingdom, Asia and Latin America, but declined in Euro markets. Six-month U.S. revenue increased 3.3%, while Euro-market revenue declined 2.3%.
- Interest expense increased to $98.2 million for six months from $82.5 million, primarily due to the 2022 senior notes issued in 2012. Net interest expense increased to $81.7 million from $64.0 million.
- Omnicom redeemed or converted substantially all of its 2033 and 2038 convertible notes. It paid $406.1 million in cash for principal and issued 1,499,792 shares for the conversion premium. Remaining convertible debt was $252.7 million at June 30, 2013.
- Accumulated other comprehensive loss increased to $397.4 million from $129.5 million at year-end 2012, largely because of a $306.6 million six-month foreign-currency translation loss.
Guidance, outlook, risks and unusual items
Management expected 2013 revenue to increase modestly in excess of weighted-average nominal GDP growth in major markets, excluding foreign-exchange effects and absent unforeseen events. Management also expected foreign exchange to reduce 2013 revenue by approximately 1%, assuming July 15, 2013 exchange rates remained unchanged. The company expected to fund 2013 operating requirements and discretionary spending without additional long-term debt, while retaining the ability to access capital markets.
Management cited continuing economic weakness in parts of the Euro Zone, potential reductions in client advertising and marketing spending, slower client payments, foreign-exchange volatility, credit-market disruptions, competition, personnel retention, information-technology dependence, regulatory changes and client conflicts as key risks. Media purchases and production commitments made for clients can exceed Omnicom’s service revenue, although the company reported no material historical losses from these arrangements.
Goodwill of $8,707.7 million was tested at June 30, 2013; no impairment was recorded. Management stated that each reporting unit’s fair value substantially exceeded carrying value, with the least cushion approximately 70%. A 1 percentage-point increase in WACC or decrease in long-term growth rate would still have resulted in each reporting unit passing the impairment test, according to the filing.
The holders of the remaining convertible notes due July 31, 2032 could put those notes to Omnicom for cash on July 31, 2013. Unrecognized tax benefits were $139.6 million, of which approximately $60.9 million could affect the effective tax rate upon resolution. The company expected tax liabilities related to the convertible-note conversion to be paid in the third and fourth quarters of 2013. Management did not expect pending legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether organic revenue growth and management’s above-GDP outlook continued after Q2, particularly in Euro markets and CRM.
- The impact of foreign-exchange movements on reported revenue, comprehensive income and goodwill.
- Cash conversion and working-capital requirements, given only $66.5 million of operating cash flow in the first half.
- Future cash requirements related to the July 31, 2032 convertible-note put right, dividends, repurchases, acquisitions and contingent purchase-price obligations.
- Debt refinancing, interest expense and continued compliance with the leverage and interest-coverage covenants.
- Goodwill valuation sensitivity if economic conditions weaken or reporting-unit growth and margins fall.
- Client spending, client creditworthiness and potential exposure to media and production commitments during an economic downturn.