Omnicom Group Inc. 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
Omnicom is a global provider of advertising, marketing and corporate communications services, including advertising, CRM, public relations and healthcare. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Revenue | $3,859.6 million | $3,790.1 million | $7,489.2 million | $7,377.6 million |
| Operating profit | $582.3 million | $571.5 million | $1,003.9 million | $987.2 million |
| Operating margin | 15.1% | 15.1% | 13.4% | 13.4% |
| Net income attributable to Omnicom | $364.2 million | $328.6 million | $628.3 million | $570.4 million |
| Diluted EPS | $1.60 | $1.40 | $2.73 | $2.42 |
| EBITA margin | 15.8% | 15.8% | 14.1% | 14.2% |
Six-month net cash used in operating activities was $572.9 million, compared with $331.0 million in the prior-year period. The operating cash outflow included a $1.4 billion use of operating capital, primarily reflecting working-capital movements that typically occur in the first half of the year.
- Cash and cash equivalents were $1.913 billion at June 30, 2018, down from $3.796 billion at December 31, 2017.
- Total debt was $4.888 billion, including $4.867 billion of long-term debt. Net debt was $2.969 billion, compared with $1.128 billion at year-end 2017 and $3.075 billion at June 30, 2017.
- Available and unused credit lines totaled $3.721 billion, consisting of a $2.5 billion revolving facility and approximately $1.2 billion of uncommitted credit lines. There were no outstanding commercial paper borrowings or borrowings under these facilities at quarter-end.
- The company paid $278.1 million in common dividends, repurchased $469.2 million of common stock and spent $207.3 million on acquisitions during the first six months.
- The declared common dividend increased to $0.60 per share from $0.55 per share in the comparable 2017 periods.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 1.8%; six-month revenue increased 1.5%. Excluding the ASC 606 presentation impact, management reported Q2 organic growth of 2.0% and six-month organic growth of 2.2%.
- Foreign exchange increased revenue by $78.8 million in Q2 and $229.9 million for the first six months. Net acquisition and disposition activity reduced revenue by $37.6 million and $191.1 million, respectively.
- Revenue growth was strongest in Europe, Asia Pacific and healthcare. Q2 revenue increased 12.8% in Europe and 7.2% in Asia Pacific, while North America declined 3.6% and Latin America declined 5.0%.
- Q2 discipline performance included increases of 2.0% in advertising, 0.8% in CRM Consumer Experience, 3.5% in public relations and 12.5% in healthcare; CRM Execution & Support declined 3.6%.
- Q2 net income attributable to Omnicom rose 10.8%, and six-month net income rose 10.2%. Diluted EPS increased faster than net income because of share repurchases and lower weighted-average shares.
- The six-month effective tax rate declined to 25.2% from 30.8%, primarily because of the Tax Cuts and Jobs Act and approximately $25 million of benefits from resolved foreign tax matters and reduced expected U.S. tax on foreign earnings.
- Interest expense increased, partly because higher floating rates reduced the benefit from interest-rate swaps. The debt portfolio was approximately 75% fixed-rate and 25% floating-rate.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. It reduced reported Q2 revenue by $49.0 million and six-month revenue by $91.4 million versus amounts without adoption, with no material impact on net income or diluted EPS. Opening retained earnings increased by $19.5 million for the transition adjustment.
Guidance, Outlook, Risks and Unusual Items
Management expects revenue to increase modestly for the remainder of 2018, excluding foreign-exchange effects, and expects long-term growth to exceed weighted-average nominal GDP growth in major markets. Management also expects foreign exchange to reduce revenue by approximately 1% in each of the third and fourth quarters and to increase full-year revenue by approximately 1%, assuming exchange rates at July 16, 2018 remained unchanged.
The company was pursuing dispositions, primarily in CRM Execution & Support, and acquisitions, primarily in CRM Consumer Experience. Management expected disposition revenue to exceed acquisition revenue for the remainder of 2018, with an estimated net revenue reduction of approximately 1% to 1.5% in Q3, 3% in Q4 and 2.5% for the full year based on activity expected before September 30, 2018. The timing remained subject to change.
- Management expected operating-efficiency and cost-reduction actions to be completed during Q3 and to substantially offset earnings reductions from contemplated dispositions.
- Goodwill of $9.443 billion was tested at June 30, 2018 and was not impaired. The reporting unit with the smallest cushion had approximately 60% headroom; management stated that a 1% increase in WACC and/or 1% decrease in long-term growth would still pass the impairment test.
- The Department of Justice Antitrust Division continues to investigate video production and post-production practices in the advertising industry. Omnicom is cooperating and does not currently expect a material adverse effect, but acknowledges that the ultimate outcome could be material.
- Key risks include economic weakness and reduced client spending, client payment delays, media and production commitments, client retention and new-business performance, foreign-exchange volatility, interest rates, technology and cybersecurity reliance, regulatory changes, litigation, personnel retention and political or economic instability in international markets.
- The company expects to adopt lease accounting guidance on January 1, 2019, which it expects to significantly increase assets and liabilities with minimal equity impact and no effect on results of operations. The filing does not provide a quantified estimate.
Most Important Facts for Investors to Verify
- Assess the sustainability of organic growth after separating foreign exchange, ASC 606 presentation effects, and acquisition or disposition activity.
- Monitor North American weakness, CRM Execution & Support performance, client losses and changes toward unbundled programmatic services.
- Reconcile the substantial first-half operating cash outflow and working-capital use with expected full-year cash generation.
- Track net debt, commercial paper dependence, interest-rate exposure and compliance with the 3.0x leverage and 5.0x interest-coverage covenants; reported ratios were 2.1x and 10.3x, respectively.
- Verify execution and timing of the planned dispositions, acquisitions and cost reductions, including their effect on full-year revenue and earnings.
- Follow the DOJ investigation, contingent purchase-price obligations of $235.3 million and unrecognized tax benefits of $166.3 million.
- Evaluate the sensitivity of the $9.443 billion goodwill balance to changes in growth, margins, discount rates and regional economic conditions.