OMNICOM GROUP INC. quarterly report, Q3 FY2015

Omnicom Group Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015. Omnicom is a global provider of advertising, marketing, public relations, CRM and specialty communications services through five agency networks. The statements are unaudited and prepared under U.S. GAAP.

Financial performance and position

MetricQ3 2015Q3 20149M 20159M 2014
Revenue$3,706.6 million$3,749.6 million$10,981.1 million$11,122.7 million
Operating income$428.3 million$433.6 million$1,344.6 million$1,364.7 million
Operating margin11.6%11.6%12.2%12.3%
EBITA margin12.3%12.3%13.0%13.0%
Net income attributable to Omnicom$239.3 million$243.8 million$762.3 million$774.5 million
Diluted EPS$0.97$0.95$3.06$2.95
  • Revenue drivers: Q3 revenue declined 1.1%, reflecting a 7.2% foreign-exchange reduction, $1.4 million of net acquisition contribution and 6.1% organic growth. For the first nine months, revenue declined 1.3%, reflecting a 7.0% foreign-exchange reduction, 0.2% acquisition contribution and 5.5% organic growth.
  • Regional trends: Q3 revenue increased 4.8% in North America but declined 8.4% in Europe, 32.6% in Latin America and 4.7% in Asia Pacific. Nine-month revenue changes were North America +4.5%, Europe -10.2%, Latin America -24.0% and Asia Pacific -2.5%.
  • Cost structure: Q3 salary and service costs increased 0.7%, while office and general expenses decreased 11.4%. For the nine months, salary and service costs increased 0.2% and office and general expenses decreased 8.8%.
  • Cash flow: Operating cash flow was $440.8 million for the first nine months, compared with $33.1 million in the prior-year period. Capital expenditures were $145.6 million, and investing cash outflow was $168.7 million.
  • Capital allocation: The company paid $373.9 million of common dividends, repurchased $507.9 million of common stock and paid $99.5 million for acquisitions, contingent purchase price obligations and additional noncontrolling interests.
  • Liquidity: Cash and cash equivalents were $1,427.5 million at September 30, 2015, down from $2,388.1 million at December 31, 2014. Available and unused credit lines totaled $3,767.7 million, including a $2.5 billion revolving facility extended to July 2020.
  • Debt: Total debt was approximately $4,615.3 million, including $1,003.4 million classified as current. The $1.0 billion 5.9% Senior Notes mature April 15, 2016. The company reported a 2.1x leverage ratio and 12.6x interest coverage ratio, versus covenant limits of 3.0x and a minimum of 5.0x.
  • Balance sheet: Total assets were $20,457.3 million and total equity was $2,903.6 million at September 30, 2015. Goodwill was $8,682.7 million and no goodwill impairment was recorded.

Material changes versus the prior comparable period

  • Reported revenue and operating income declined modestly because of foreign-currency translation, although organic growth remained positive.
  • Net income attributable to Omnicom declined 1.8% in Q3 and 1.6% for the first nine months. Diluted EPS increased because of the reduction in weighted-average shares from stock repurchases.
  • Operating margin was unchanged in Q3 but declined 10 basis points for the nine-month period. EBITA margin was stable at 13.0% for the nine months.
  • Operating cash flow improved substantially, primarily reflecting less unfavorable working-capital changes than in the prior year.
  • Foreign-currency translation reduced accumulated other comprehensive income and contributed to a $210.7 million reduction in cash during the nine months.
  • Prior-year results included approximately $8.8 million of Publicis merger expenses and an approximately $11 million related tax benefit; the proposed merger was terminated in May 2014.
  • The effective tax rate was 32.8% for the first nine months, compared with 32.6% reported in 2014 and 33.5% excluding the prior-year merger-related tax benefit.

Guidance, outlook, risks and unusual items

  • Management expected 2015 revenue, excluding foreign-exchange effects, to increase modestly in excess of weighted-average nominal GDP growth in its major markets.
  • Based on exchange rates at October 15, 2015, management expected foreign exchange to reduce full-year revenue by approximately 6% and fourth-quarter revenue by approximately 5%.
  • Management expected sufficient liquidity to fund working capital and discretionary spending through 2015. Refinancing or other funding may be required for the 2016 Notes maturity.
  • Key risks include client spending reductions, slower client payments, media and production commitments made on behalf of clients, economic weakness in Europe and Latin America, foreign-currency volatility, credit-market disruption, client concentration and reliance on key personnel and information technology.
  • Legal proceedings are described as ordinary-course matters that are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
  • The company entered into a $1.0 billion forward-starting interest-rate swap intended to mitigate interest-rate risk associated with refinancing the 2016 Notes.
  • ASU 2015-02 and ASU 2015-03 were scheduled for adoption January 1, 2016; management did not expect a significant effect on results or financial position. The expected impact of the new revenue standard had not yet been determined.

Important facts for investors to verify

  • Timing and terms of refinancing the $1.0 billion 2016 Notes.
  • Whether organic growth can offset continued foreign-exchange pressure, particularly in Europe and Latin America.
  • Working-capital trends, cash conversion and the company’s net debt position after seasonal cash requirements.
  • Sustainability of cost reductions in office and general expenses without impairing agency capabilities.
  • Potential effects of client spending changes, client payment delays and media-production commitments on liquidity and credit exposure.
  • Future goodwill impairment sensitivity if economic conditions, growth assumptions or discount rates deteriorate.