Omnicom Group Inc. — 2009 Q2 Form 10-Q Summary
Business Context and Reporting Period
Omnicom is a global provider of advertising, marketing and corporate communications services through multiple agency networks. This unaudited Form 10-Q covers the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. Management reported that the global recession, reduced client spending and currency translation materially affected results.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | Six Months 2009 | Six Months 2008 |
|---|---|---|---|---|
| Revenue | $2,870.7 million | $3,476.9 million | $5,617.3 million | $6,672.3 million |
| Operating income | $398.1 million | $516.8 million | $680.5 million | $867.6 million |
| Operating margin | 13.9% | 14.9% | 12.1% | 13.0% |
| Net income | $253.8 million | $341.9 million | $432.0 million | $574.6 million |
| Net income attributable to Omnicom | $233.4 million | $307.0 million | $397.9 million | $515.6 million |
| Diluted EPS | $0.75 | $0.95 | $1.27 | $1.59 |
| Declared dividend per share | $0.15 | $0.15 | $0.30 | $0.30 |
Q2 revenue declined 17.4%; operating income declined 23.0%; Omnicom-attributable net income declined 24.0%; and diluted EPS declined 21.1%. For the first six months, revenue declined 15.8%, operating income declined 21.6%, attributable net income declined 22.8%, and diluted EPS declined 20.1%.
Q2 revenue changes comprised a $234.7 million foreign-exchange reduction, a $5.6 million acquisition-related increase net of dispositions, and a $377.1 million organic decline. Six-month changes comprised a $487.0 million foreign-exchange reduction, a $19.7 million acquisition-related increase, and a $587.7 million organic decline.
By discipline, Q2 revenue declined 15.5% in traditional media advertising, 18.7% in CRM, 18.5% in public relations and 20.1% in specialty communications. The decline was broad-based, with particularly weak spending from automotive clients and reduced events, promotions, recruitment and charitable-cause advertising.
Operating expenses declined 16.5% in Q2 and 15.0% for the first six months, but expenses declined less rapidly than revenue. Salary and service costs were 70.1% of Q2 revenue and 71.7% for the first six months, each 0.6 percentage point above the comparable 2008 period. Office and general expenses were 16.1% of Q2 revenue and 16.2% for the first six months, versus 15.6% and 15.9%, respectively, in 2008. The company recorded $31.4 million of Q2 severance expense and $69.1 million for the first six months.
Cash Flow, Debt and Liquidity
| Balance or cash-flow item | June 30, 2009 | December 31, 2008 or prior period |
|---|---|---|
| Cash and cash equivalents | $399.9 million | $1,097.3 million |
| Short-term investments | $12.0 million | $15.1 million |
| Long-term debt | $1,213.2 million | $1,012.8 million |
| Convertible debt | $1,200.3 million | $2,041.5 million |
| Short-term borrowings | $42.0 million | $16.2 million |
| Credit facility borrowings | $200.0 million | None reported |
| Available credit facility capacity | $2.3 billion | Not stated |
Operating cash flow was $109.4 million for the first six months of 2009, compared with cash used in operations of $91.5 million in 2008. Investing cash flow used $121.8 million, including $63.3 million of capital expenditures and $61.0 million for acquisitions and affiliate interests. Financing cash flow used $766.5 million, including $842.0 million of convertible-debt repayments and $93.5 million of dividends. Cash decreased $697.4 million during the period, partly offset by an $81.5 million foreign-exchange benefit.
On February 9, 2009, holders put $841.2 million of the 2031 convertible notes. Omnicom retired $295.2 million and a consolidated partnership purchased the remaining $546.0 million. At June 30, 2009, only $5.8 million of the 2031 notes remained outstanding. Management stated that the company was in compliance with its credit covenants: debt to EBITDA was 1.4 times versus a 3.0-times maximum, and EBITDA to interest expense was 14.2 times versus a 5.0-times minimum.
Material Changes and Unusual Items
- Revenue and profitability contracted materially because of the global recession, lower client marketing expenditures and unfavorable foreign-exchange translation.
- Management reduced workforce and incentive compensation, but severance expenses increased substantially year over year.
- Net interest expense increased to $21.9 million in Q2 and $43.3 million for the first six months, primarily because of lower interest income and amortization of supplemental interest payments on convertible notes.
- The Q2 effective tax rate was 34.5%, compared with 33.6% in 2008. A $12.9 million increase in tax expense from resolving a foreign uncertain tax position was substantially offset by an $11.0 million tax benefit from recognizing foreign tax credits.
- Goodwill of $7,446.6 million was tested as of June 30, 2009. Management concluded that goodwill was not impaired and stated that each reporting unit remained substantially above its carrying value, including under disclosed sensitivity scenarios.
- Accounting changes adopted in 2009 included business-combination, redeemable noncontrolling-interest, derivative-disclosure and subsequent-event guidance. Prior periods were retrospectively adjusted for certain accounting standards, including noncontrolling interests, participating securities and convertible debt.
Outlook, Risks and Contingencies
Management provided no formal revenue or earnings guidance. It reported limited near-term visibility into client spending and expected continued pressure from economic conditions. Based on exchange rates prevailing on July 15, 2009, management estimated that currency translation could reduce revenue by approximately 0.5% to 1.5% for the remainder of 2009 compared with the last six months of 2008.
Management expected cost controls, workforce reductions, cash management and the $2.5 billion credit facility to support near-term requirements. The company stated that it expected sufficient cash and unused commitments to fund potential future puts of its 2033 and 2038 convertible notes in June 2010, although refinancing could increase interest expense.
Key risks include further reductions in client spending, delayed client payments, client credit deterioration, media-purchase exposure, competitive pressures, personnel retention, currency fluctuations, credit-market disruption, foreign operations and potential goodwill impairment if valuation assumptions deteriorate.
Contingent acquisition obligations for pre-2009 acquisitions were estimated at approximately $234 million, assuming acquired businesses perform at current profit levels. Redeemable noncontrolling-interest obligations had an estimated maximum future amount of approximately $194 million, including approximately $132 million currently exercisable. A securities litigation appeal remained pending; the company stated that the outcome and financial effect could not be determined.
Subsequent to quarter-end, Omnicom issued $500 million of 6.25% senior notes due 2019, with proceeds intended primarily to reduce credit-facility borrowings and for general corporate purposes. Holders also put $474.3 million of the 2032 convertible notes; $252.7 million remained outstanding after the repurchase. These events were not recognized in the June 30 financial statements.
Investor Verification Checklist
- Verify the sustainability of revenue, organic growth and client spending trends after the sharp Q2 decline.
- Assess whether cost reductions and workforce actions can protect margins if revenue remains weak.
- Reconcile cash balances, credit-facility usage and future convertible-note put obligations, including the post-quarter-end 2032-note repurchase.
- Review the effect of the 2019 senior-note issuance and any refinancing on interest expense, leverage and covenant headroom.
- Evaluate goodwill sensitivity to lower growth, higher discount rates and continued recessionary conditions.
- Monitor contingent acquisition obligations, redeemable noncontrolling interests and the unresolved securities-litigation appeal.
- Confirm the effect of foreign-exchange movements and the company’s stated 0.5%–1.5% second-half revenue translation estimate.