Business Context and Reporting Period
Omnicom Group Inc. is a global advertising, marketing and corporate communications holding company operating through agencies in advertising, customer relationship management, public relations and specialty communications. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Revenue | $3,487.4 million | $3,041.2 million | $6,638.8 million | $5,961.2 million |
| Operating income | $488.1 million | $415.4 million | $810.3 million | $706.4 million |
| Operating margin | 14.0% | 13.7% | 12.2% | 11.8% |
| EBITA | $511.4 million | $431.8 million | $854.2 million | $739.1 million |
| EBITA margin | 14.7% | 14.2% | 12.9% | 12.4% |
| Net income attributable to Omnicom | $275.1 million | $243.3 million | $477.0 million | $406.7 million |
| Diluted EPS | $0.96 | $0.79 | $1.65 | $1.30 |
| Dividends declared per share | $0.25 | $0.20 | $0.50 | $0.40 |
Six-month net cash used in operating activities was $262.6 million, compared with $170.6 million in 2010. Investing cash outflow was $342.0 million, including $261.7 million for acquisitions and affiliate interests and $81.1 million for capital expenditures. Financing cash outflow was $754.1 million, including $665.6 million for common-stock repurchases and $129.2 million for dividends.
Cash and cash equivalents were $986.3 million at June 30, 2011, down from $2,288.7 million at December 31, 2010. Short-term investments were $17.0 million. Total debt, including short-term borrowings, senior notes and convertible debt, was approximately $3.2 billion on a carrying-value basis. Omnicom had $2.0 billion of available capacity under its principal credit facility and $744.7 million of available uncommitted lines; none were drawn at quarter-end. Debt-to-EBITDA was 1.8 times and EBITDA-to-interest expense was 11.9 times, within covenant limits.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 14.7%; growth comprised 7.2% organic growth, 5.5% from foreign exchange and 2.0% from acquisitions net of dispositions.
- Six-month revenue increased 11.4%; growth comprised 6.2% organic growth, 3.5% from foreign exchange and 1.7% from acquisitions net of dispositions.
- Q2 operating income increased 17.5%, while operating margin improved 30 basis points to 14.0%. Six-month operating margin improved 40 basis points to 12.2%.
- Q2 net income attributable to Omnicom increased 13.1%, and six-month net income increased 17.3%. Diluted EPS increased 21.5% and 26.9%, respectively, aided by lower weighted-average shares following stock repurchases.
- Revenue growth occurred across all disciplines and geographic regions. Q2 advertising revenue increased 18.5%, CRM 15.1%, public relations 7.1% and specialty communications 2.8%.
- Effective February 1, 2011, Omnicom increased its ownership of Clemenger Group from 46.7% to 73.7%. The transaction generated a non-cash remeasurement gain of $123.4 million.
- Omnicom recorded $131.3 million of first-quarter repositioning charges, including $92.8 million of severance, $15.3 million of real-estate lease termination costs and $23.2 million of asset, goodwill and other write-offs.
- Cash flow from operations became more negative, primarily because of an $813.2 million use of operating capital, including reductions in accounts payable, customer advances and other current liabilities.
Guidance, Outlook, Risks and Unusual Items
Management expected full-year 2011 revenue, excluding foreign-exchange effects, to increase modestly in excess of average nominal GDP growth in its major markets, supported by client spending and new business. Management also stated an objective of improving margins to 2007 levels by the end of 2012 and expected acquisitions to more than offset revenue lost from dispositions completed in 2011. Assuming July 15, 2011 exchange rates remained unchanged, foreign exchange was expected to increase full-year revenue by approximately 3.0%.
Management expected to fund 2011 dividends, capital expenditures, acquisitions and stock repurchases without incurring additional long-term debt. The company noted seasonal cash requirements, particularly in the second quarter, and reliance on commercial paper and other credit sources for day-to-day liquidity.
- Key risks include economic downturns, reductions in client spending, slower client payments, client credit deterioration, competitive pressures, personnel retention, information technology reliance, regulatory changes, foreign-currency volatility and credit-market disruptions.
- Omnicom enters media and production commitments on behalf of clients that can substantially exceed reported revenue. Although the company had not experienced a material loss from these arrangements, losses could increase during a severe downturn.
- Convertible-note holders could put the 2032 notes back to Omnicom for cash beginning August 1, 2011. Management expected available cash and credit commitments to be sufficient to fund any put.
- Contingent purchase-price obligations for acquisitions completed before 2009 were estimated at approximately $71 million, excluding approximately $161 million of fair-value liabilities for obligations related to later acquisitions.
- Unrecognized tax benefits were $163.8 million, of which approximately $64.7 million could affect the effective tax rate upon resolution. A $9.0 million tax accrual related to earlier tax-return examinations was recorded in the first quarter and effectively settled in the second quarter.
- Goodwill was $8.5 billion at June 30, 2011. Management concluded that goodwill was not impaired, but impairment testing depends on assumptions regarding growth rates, margins, discount rates and economic conditions.
- The company reported no material changes to previously disclosed risk factors, no material adverse effect expected from current legal proceedings, and effective disclosure controls as of June 30, 2011.
Important Facts for Investors to Verify
- Whether organic revenue growth and margin improvement continue after separating foreign-exchange and acquisition effects.
- The sustainability of cash generation given negative operating cash flow, working-capital requirements and substantial share repurchases.
- The timing and funding impact of convertible-note puts, contingent acquisition payments and remaining repositioning-related severance payments.
- The sensitivity of the $8.5 billion goodwill balance to changes in growth, discount-rate and operating-margin assumptions.
- The effect of foreign-currency movements, client credit quality and potential media or production commitments on future results.
- The extent to which the $123.4 million Clemenger remeasurement gain and $131.3 million repositioning charges affect comparability of reported earnings.