Omnicom Group Inc. — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Omnicom is a global strategic holding company providing advertising, customer relationship management, public relations, specialty communications, marketing and corporate communications services through multiple agency networks. This unaudited filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | First 9 Months 2011 | First 9 Months 2010 |
|---|---|---|---|---|
| Revenue | $3,380.9 million | $2,994.6 million | $10,019.6 million | $8,955.7 million |
| Operating income | $373.4 million | $314.1 million | $1,183.7 million | $1,020.6 million |
| Operating margin | 11.0% | 10.5% | 11.8% | 11.4% |
| EBITA | $397.1 million | $332.1 million | $1,251.4 million | $1,071.3 million |
| EBITA margin | 11.7% | 11.1% | 12.5% | 12.0% |
| Net income attributable to Omnicom | $203.7 million | $174.6 million | $680.7 million | $581.2 million |
| Diluted EPS | $0.72 | $0.57 | $2.37 | $1.88 |
Third-quarter revenue increased 12.9%, including 7.2% organic growth, a 3.9% foreign-exchange benefit and 1.8% from acquisitions net of dispositions. Nine-month revenue increased 11.9%, including 6.5% organic growth, a 3.6% foreign-exchange benefit and 1.8% from acquisitions net of dispositions.
Q3 revenue growth by discipline was 15.3% in advertising, 14.0% in CRM, 9.7% in public relations and approximately flat in specialty communications. Nine-month growth was 14.0%, 12.7%, 6.9% and 3.8%, respectively.
Cash and cash equivalents were $900.6 million at September 30, 2011, compared with $2,288.7 million at December 31, 2010. Operating cash flow for the first nine months was $0.5 million, versus $43.5 million in the prior-year period, primarily reflecting a $903.9 million use of operating capital. Investing cash flow was negative $412.7 million, including $314.8 million for acquisitions and affiliate interests and $114.2 million of capital expenditures. Financing cash flow was negative $944.7 million, including $717.9 million of share repurchases and $199.0 million of dividends.
Total debt was approximately $3.2 billion at September 30, 2011, including $2.5 billion of senior notes and $659.4 million of convertible debt. Short-term borrowings were $16.4 million. The company had $2.0 billion of available capacity under its credit facility at quarter-end and was in compliance with its covenants, reporting debt to EBITDA of 1.7 times and EBITDA to interest expense of 12.0 times.
Material changes versus the prior comparable period
- Net income attributable to Omnicom increased 16.7% in Q3 and 17.1% for the first nine months.
- Diluted EPS increased 26.3% in Q3 and 26.1% for the first nine months, aided by lower weighted-average shares following stock repurchases.
- Operating and EBITA margins improved in both comparison periods despite higher salary and service costs.
- International revenue growth exceeded U.S. growth, supported by foreign-exchange translation and stronger performance in Asia, Latin America, the United Kingdom and Euro markets.
- Omnicom acquired a controlling interest in Clemenger Group effective February 1, 2011, increasing ownership from 46.7% to 73.7%. The transaction generated a non-cash remeasurement gain of $123.4 million.
- The company recorded $131.3 million of first-quarter repositioning charges, consisting primarily of $92.8 million of severance, $15.3 million of lease termination costs and $23.2 million of asset, goodwill and other write-offs.
- The effective tax rate for the first nine months declined to 32.0% from 34.0%, partly due to the tax effects of repositioning charges, the Clemenger remeasurement gain and a $9.0 million tax-position accrual.
Guidance, outlook, risks and unusual items
Management expected near-term revenue, excluding foreign-exchange effects, to increase modestly above average nominal GDP growth in major markets, driven by client spending and new business. Management also maintained an objective of returning margins to 2007 levels by the end of 2012 and expected acquisitions completed through September 30, 2011 to more than offset revenue lost from dispositions.
On October 12, 2011, after quarter-end, the credit facility was amended to increase capacity from $2.0 billion to $2.5 billion and extend its maturity to October 12, 2016. The financial covenants were unchanged. Holders of certain convertible notes may put approximately $252.7 million of 2032 notes back to the company on July 31, 2012; the next put date for the 2038 notes is June 17, 2013. Management believed available cash and credit capacity would be sufficient to fund potential puts and normal operations.
Key risks include global economic conditions, reduced client spending or slower collections, credit-market disruption, client defaults on media and production commitments, foreign-currency volatility, competition, personnel retention, information-technology reliance, regulatory changes, legal proceedings and goodwill impairment. No material change to previously disclosed risk factors was reported. Goodwill was not impaired as of June 30, 2011, although valuation depends on assumptions including long-term growth rates and discount rates.
Other notable items include settlement of interest-rate swaps in August 2011, producing $38.8 million of cash proceeds and a deferred gain that will reduce interest expense through 2016. Unrecognized tax benefits were $157.6 million at September 30, 2011, of which approximately $59.4 million could affect the effective tax rate if resolved.
Investor verification checklist
- Verify the sustainability of organic growth after separating foreign-exchange and acquisition effects.
- Assess whether margin improvement can continue while salary, freelance labor and incentive compensation costs rise.
- Reconcile weak operating cash flow with reported earnings and monitor working-capital movements.
- Review the cash impact and integration performance of Clemenger and other acquisitions.
- Monitor share repurchases, dividends and their effect on liquidity and EPS.
- Confirm refinancing and liquidity capacity for convertible-note put dates and other contingent acquisition obligations; the latter included approximately $192 million recorded at fair value plus an estimated $42 million of older contingent obligations.
- Evaluate exposure to foreign exchange, client credit quality, media-purchase commitments and goodwill valuation assumptions.