OMNICOM GROUP INC. quarterly report, Q3 FY2013

Omnicom Group Inc. 2013 Q3 Form 10-Q Summary

Business context and reporting period

Omnicom is a global provider of advertising, marketing and corporate communications services, operating through five agency networks and reporting as one operating segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods.

Financial performance and key metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Revenue	$3,490.5 million	$3,406.6 million	$10,526.4 million	$10,274.8 million
Operating income	$379.4 million	$387.3 million	$1,274.2 million	$1,256.2 million
Operating margin	10.9%	11.4%	12.1%	12.2%
Net income attributable to Omnicom	$196.0 million	$203.9 million	$690.7 million	$691.2 million
Diluted earnings per share	$0.74	$0.74	$2.58	$2.49
Dividends declared per share	$0.40	$0.30	$1.20	$0.90

Q3 revenue increased 2.5%; organic growth was 4.1%, while acquisitions net of dispositions reduced revenue 1.0% and foreign exchange reduced revenue 0.6%.
First-nine-month revenue increased 2.4%; organic growth was 3.2%, offset by a 0.2% acquisition/disposition impact and a 0.6% foreign-exchange impact.
Q3 EBITA was $405.2 million, or an 11.6% margin. Excluding $28.1 million of merger expenses, EBITA margin was 12.4% and operating margin was 11.7%.
First-nine-month EBITA was $1,350.5 million, or a 12.8% margin. Excluding merger expenses, EBITA margin was 13.1% and operating margin was 12.4%.
The nine-month effective tax rate was 33.8%; excluding the estimated tax effect of merger expenses, Q3 and nine-month rates were 33.6%.
Net interest expense increased to $42.8 million in Q3 and $124.6 million for nine months, primarily reflecting interest on senior notes issued in 2012 and a $2.8 million contingent-interest derivative charge in Q3.

Cash flow, liquidity and debt

Nine-month cash flow from operations was $359.9 million, compared with $300.1 million in the prior-year period. Operating capital consumed $654.2 million.
Investing cash flow was a use of $132.5 million, including $123.3 million of capital expenditures and $26.5 million for acquisitions and affiliate interests.
Financing cash flow was a use of $1,284.3 million, including $406.7 million for convertible-debt redemption, $212.6 million of dividends, $571.3 million of share repurchases and $68.9 million of contingent purchase-price payments.
Cash and cash equivalents declined to $1,521.5 million at September 30, 2013, from $2,678.3 million at December 31, 2012. The decline primarily funded convertible-debt redemption and seasonal working-capital needs.
Total debt carrying value was approximately $4,054.0 million, including $3,782.7 million of long-term notes and $252.7 million of convertible debt. No commercial paper or Credit Agreement borrowings were outstanding at quarter-end.
Available and unused credit facilities totaled $3,583.4 million, including a $2.5 billion committed facility expiring October 12, 2016.
Omnicom was in compliance with its debt covenants: leverage ratio of 1.9 times versus a maximum of 3.0 times, and interest coverage of 10.6 times versus a minimum of 5.0 times.

Material changes versus the prior comparable period

Revenue growth was positive, but Q3 operating income decreased 2.0% and Omnicom net income decreased 3.9%, primarily because of $28.1 million in Publicis merger expenses and higher salary and service costs.
Excluding merger expenses, Q3 and nine-month operating margins improved from the prior-year periods.
Salary and service costs increased $63.4 million in Q3 and $220.0 million for nine months; office and general expenses were broadly flat in Q3 and decreased $14.5 million for nine months.
Diluted nine-month EPS increased 3.6% to $2.58, benefiting from lower weighted-average shares following share repurchases and convertible-note conversions, despite essentially flat net income.
Omnicom called its 2033 and 2038 convertible notes. Substantially all holders converted, resulting in $406.1 million of cash payments and issuance of 1,499,792 shares for the conversion premium. Remaining convertible debt was $252.7 million.
Open-market share repurchases were suspended beginning in Q3 2013.
Accumulated other comprehensive loss increased to $220.6 million from $129.5 million at year-end, primarily reflecting unfavorable foreign-currency translation.

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 unforeseen events and foreign-exchange effects. For the remainder of 2013, management expected revenue growth above nominal GDP growth based on client spending and new business.
Assuming October 15, 2013 exchange rates remained unchanged, management expected foreign exchange to reduce 2013 revenue by approximately 1%.
Management expected significant additional expenses related to the pending combination with Publicis Groupe.
The July 27, 2013 Business Combination Agreement contemplated a merger with Publicis, a new Dutch holding company, and a proposed $2.00 per-share Omnicom special dividend, subject to transaction conditions and applicable law. Completion required shareholder, regulatory and other approvals and was not assured.
Three putative shareholder class actions challenged the Publicis transaction. Omnicom considered the claims without merit and expected no material adverse effect, but stated that outcomes and potential damages could not be estimated.
If the Publicis transaction were terminated under certain circumstances, Omnicom could be required to pay Publicis a $500 million termination fee. The transaction could also divert management attention, affect relationships and result in significant costs without delivering anticipated benefits.
Key ongoing risks include global economic weakness, reduced client spending or delayed collections, client credit exposure for media and production commitments, foreign-exchange movements, credit-market disruption, competition, personnel retention, technology dependence, regulatory matters, litigation and goodwill impairment.
Goodwill was $8,869.0 million at September 30, 2013. The June 30 impairment test identified no impairment; management reported substantial excess fair value over carrying value for each reporting unit.

Important facts for investors to verify

Current status, closing conditions, regulatory approvals, shareholder approvals and termination provisions of the Publicis transaction.
Actual additional merger expenses and their effect on reported and adjusted margins and EPS.
Cash generation and working-capital requirements, particularly accounts payable, work in process and seasonal funding needs.
Liquidity available after the proposed transaction dividend, regular dividends, debt maturities and the July 31, 2014 put right on the 2032 convertible notes.
Foreign-exchange trends and performance in the Euro markets, Asia and Latin America.
Progress in converting organic revenue growth into operating-margin expansion while controlling salary and service costs.
Developments in the shareholder litigation, contingent purchase-price obligations and other legal proceedings.