Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.48M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 20K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 20K
4: EX-32 Certification -- §906 - SOA'02 HTML 19K
10: R1 Cover HTML 78K
11: R2 Consolidated Balance Sheets HTML 142K
12: R3 Consolidated Balance Sheets (Parenthetical) HTML 23K
13: R4 Consolidated Statements of Income HTML 104K
14: R5 Consolidated Statements of Comprehensive Income HTML 71K
15: R6 Consolidated Statements of Equity HTML 91K
16: R7 Consolidated Statements of Cash Flows HTML 94K
17: R8 Presentation of Financial Statements HTML 22K
18: R9 Revenue HTML 65K
19: R10 Net Income per Share HTML 34K
20: R11 Goodwill and Intangible Assets HTML 46K
21: R12 Debt HTML 41K
22: R13 Segment Reporting HTML 34K
23: R14 Income Taxes HTML 22K
24: R15 Pension and Other Postemployment Benefits HTML 36K
25: R16 Charges Arising from the Effects of the War in HTML 18K
Ukraine
26: R17 Supplemental Cash Flow Data HTML 32K
27: R18 Commitments and Contingent Liabilities HTML 19K
28: R19 Accumulated Other Comprehensive Income (Loss) HTML 43K
29: R20 Fair Value HTML 69K
30: R21 New Accounting Standards HTML 28K
31: R22 Subsequent Events HTML 18K
32: R23 Revenue (Tables) HTML 63K
33: R24 Net Income per Share (Tables) HTML 34K
34: R25 Goodwill and Intangible Assets (Tables) HTML 51K
35: R26 Debt (Tables) HTML 34K
36: R27 Segment Reporting (Tables) HTML 29K
37: R28 Pension and Other Postemployment Benefits (Tables) HTML 34K
38: R29 Supplemental Cash Flow Data (Tables) HTML 33K
39: R30 Accumulated Other Comprehensive Income (Loss) HTML 39K
(Tables)
40: R31 Fair Value (Tables) HTML 73K
41: R32 Presentation of Financial Statements (Details) HTML 17K
42: R33 Revenue (Details) HTML 65K
43: R34 Net Income per Share (Details) HTML 54K
44: R35 Goodwill and Intangible Assets (Details) HTML 52K
45: R36 Debt (Details) HTML 80K
46: R37 Segment Reporting (Details) HTML 34K
47: R38 Income Taxes (Details) HTML 29K
48: R39 Pension and Other Postemployment Benefits HTML 43K
(Details)
49: R40 Charges Arising from the Effects of the War in HTML 20K
Ukraine (Details)
50: R41 Supplemental Cash Flow Data (Details) HTML 39K
51: R42 Accumulated Other Comprehensive Income (Loss) HTML 39K
(Details)
52: R43 Fair Value (Details) HTML 75K
55: XML IDEA XML File -- Filing Summary XML 96K
53: XML XBRL Instance -- omc-20220930_htm XML 1.48M
54: EXCEL IDEA Workbook of Financial Reports XLSX 87K
6: EX-101.CAL XBRL Calculations -- omc-20220930_cal XML 173K
7: EX-101.DEF XBRL Definitions -- omc-20220930_def XML 280K
8: EX-101.LAB XBRL Labels -- omc-20220930_lab XML 1.06M
9: EX-101.PRE XBRL Presentations -- omc-20220930_pre XML 571K
5: EX-101.SCH XBRL Schema -- omc-20220930 XSD 100K
56: JSON XBRL Instance as JSON Data -- MetaLinks 316± 452K
57: ZIP XBRL Zipped Folder -- 0000029989-22-000035-xbrl Zip 295K
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐No ☑
_________________________
As of October 12, 2022, there were i203,916,128 shares of Omnicom Group Inc. Common Stock outstanding.
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements, including statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time, the Company or its representatives have made, or may make, forward-looking statements, orally or in writing. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial position, or otherwise, based on current beliefs of the Company’s management as well as assumptions made by, and information currently available to, the Company’s management. Forward-looking statements may be
accompanied by words such as “aim,”“anticipate,”“believe,”“plan,”“could,”“should,”“would,”“estimate,”“expect,”“forecast,”“future,”“guidance,”“intend,”“may,”“will,”“possible,”“potential,”“predict,”“project” or similar words, phrases or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include: adverse economic conditions, including those caused by the the war in Ukraine; the impact of the COVID-19 pandemic; severe and sustained inflation in countries that comprise our major markets;
rising interest rates; supply chain issues affecting the distribution of our clients’ products; international, national or local economic conditions that could adversely affect the Company or its clients; losses on media purchases and production costs incurred on behalf of clients; reductions in client spending, a slowdown in client payments and a deterioration or a disruption in the credit markets; the ability to attract new clients and retain existing clients in the manner anticipated; changes in client advertising, marketing and corporate communications requirements; failure to manage potential conflicts of interest between or among clients; unanticipated changes relating to competitive factors in the advertising, marketing and corporate communications industries; the ability to hire and retain key personnel; currency exchange rate fluctuations; reliance on information technology systems;
changes in legislation or governmental regulations affecting the Company or its clients; risks associated with assumptions the Company makes in connection with its critical accounting estimates and legal proceedings; and the Company’s international operations, which are subject to the risks of currency repatriation restrictions, social or political conditions and regulatory environment. The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that may affect the Company’s business, including those described in Item 1A, “Risk Factors” and Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 and in Item 1A, “Risk Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. Except as required under applicable law, the Company does not assume any obligation to update these forward-looking statements.
The terms “Omnicom,”“the Company,”“we,”“our” and “us” each refer to Omnicom Group Inc. and its subsidiaries, unless the context indicates otherwise. The accompanying unaudited consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP or GAAP, for interim financial information and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosure have been condensed or omitted.
In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation, in all material respects, of the information contained herein. These unaudited consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021, or 2021 10-K. Results for the interim periods are not necessarily indicative of results that may be expected for the year.
Risks and Uncertainties
Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation, rising interest rates, and supply chain disruptions could cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and discipline. We monitor economic conditions closely, as well as client revenue levels and other factors. In response to
reductions in revenue, we can take actions to align our cost structure with changes in client demand and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments.
Impact of the War in Ukraine
Historically, we conducted operations in Russia and Ukraine through local agencies in which we held a majority stake. During the first quarter of 2022, the war in Ukraine required us to suspend our business operations in Ukraine. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affected the cross-border operations of businesses operating in Russia. In addition, Russian regulators imposed currency restrictions and regulations.
All of these actions created uncertainty regarding our ability to recover our investment in our operations in Russia, as well as our ability to exercise control over the operations. Therefore, the ability to continue operations in Russia was uncertain. As a result, we sold, or committed to dispose of, all of our businesses in Russia. Accordingly, in the first quarter of 2022, we recorded pretax charges of $i113.4 million, which primarily consisted of the net investment in our Russian businesses, and included charges related
to the suspension of operations in Ukraine.
Impact of the COVID-19 Pandemic - Update
Beginning in March 2020 and continuing through the first quarter of 2021, our business was impacted by reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by business and geography, the spending reductions impacted all our businesses and markets. Globally, the most impacted businesses were our Experiential discipline, especially in our event marketing businesses, and our Execution & Support discipline, primarily in field marketing. Most of our markets began to improve in April 2021, and the improvement continued through the first nine months of 2022.
2. iRevenue
Nature
of our services
We provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. Our networks and agencies provide a comprehensive range of services in the following fundamental disciplines: Advertising & Media, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare. Advertising & Media includes creative services across digital and traditional media, strategic media planning and buying, and data analytics services. Precision Marketing includes digital and direct marketing, digital transformation and data and analytics. Commerce & Brand Consulting services include brand consulting, strategy and research, retail and ecommerce. Experiential marketing services include live and digital events and experience design and execution.
Execution & Support includes field marketing, sales support, digital and physical merchandising and point-of-sale, as well as other specialized marketing and custom communications services. Public Relations services include corporate communications, crisis management, public affairs, and media and media relations services. Healthcare includes advertising and media services to global healthcare and pharmaceutical clients. At the core of all our services is the ability to create or develop a client’s marketing or corporate communications message into content that can be delivered to a target audience across different communications mediums.
Global economic conditions have a direct impact on our revenue. Adverse economic conditions pose a risk that our clients may reduce, postpone or cancel spending for our services, which would impact our revenue.
iRevenue in our geographic markets was (in millions):
The
Americas is comprised of North America, which includes the United States, Canada and Puerto Rico, and Latin America, which includes South America and Mexico. EMEA is comprised of Europe, the Middle East and Africa. Asia-Pacific includes Australia, Greater China, India, Japan, Korea, New Zealand, Singapore and other Asian countries. Revenue in the United States for the three months ended September 30, 2022 and 2021 was $i1,847.8 million and $i1,705.2
million, respectively, and revenue in the United States for the nine months ended September 30, 2022 and 2021 was $i5,415.2 million and $i5,414.2 million,
respectively.
Work in process includes contract assets, unbilled fees and costs, and media and production costs. Contract liabilities primarily consist of customer advances. iWork
in process and contract liabilities were (in millions):
Work
in process represents accrued costs incurred on behalf of customers, including media and production costs, and fees and other third-party costs that have not yet been billed. Media and production costs are billed during the production process in accordance with the terms of the client contract. Contract assets primarily include incentive fees, which are not material and will be billed to clients in accordance with the terms of the client contract. Substantially all unbilled fees and costs will be billed within the next 30 days. Contract liabilities primarily represent advance billings to customers in accordance with
the terms of the client contracts, principally for the reimbursement of third-party costs that are generally incurred in the near term. There were no impairment losses to the contract assets recorded in the three or nine months ended September 30, 2022 and 2021.
7
3. iNet
Income per Share
iThe computations of basic and diluted net income per share were (in millions, except per share amounts):
Contingent
purchase price obligations of acquired businesses
i8.7
i88.0
Dispositions
(i19.6)
(i21.7)
Foreign
currency translation
(i489.3)
(i118.7)
September 30
$
i9,499.7
$
i9,601.5
/
We
completed our annual goodwill impairment test as of June 30, 2022. The market assumptions used in our assessment reflected the current economic environment (see Note 1- Risks and Uncertainties). Based on the results of our impairment test, we concluded that at June 30, 2022 our goodwill was not impaired.
5. iDebt
Credit
Facilities
We have a $i2.5 billion multi-currency revolving credit facility, or Credit Facility, with a termination date of iFebruary 14,
2025. In addition, we have the ability to issue up to $i2 billion of U.S. Dollar denominated commercial paper and issue up to the equivalent of $i500
million in British Pounds or Euro under a Euro commercial paper program. Certain of our international subsidiaries have uncommitted credit lines aggregating $i556.7 million, which are guaranteed by Omnicom. These facilities provide additional liquidity sources for operating capital and general corporate purposes. During the nine months ended September 30, 2022, there were iino/
borrowings under the Credit Facility, and there were iino/
commercial paper issuances.
iThe Credit Facility contains a financial covenant that requires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3.5 times for the most recently ended 12-month period.iAt
September 30, 2022, we were in compliance with this covenant as our Leverage Ratio was 2.3 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
8
Short-Term Debt
Short-term debt of $i10.2
million and $i9.6 million at September 30, 2022 and December 31, 2021, respectively, represented bank overdrafts and short-term borrowings primarily of our international subsidiaries. Due to the short-term nature of this debt, carrying value approximates fair value.
Unamortized
deferred gain from settlement of interest rate swaps
i0.8
i1.3
$
i5,450.6
$
i5,685.7
/
Our
i2.45% Senior Notes due 2030, i4.20% Senior Notes due 2030 and i2.60%
Senior Notes due 2031 are senior unsecured obligations of Omnicom that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under our i3.65% Senior Notes due 2024 and i3.60%
Senior Notes due 2026. These notes are a joint and several liability of Omnicom and OCI, and Omnicom unconditionally guarantees OCI’s obligations with respect to the notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI’s assets primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or Omnicom to obtain funds from our subsidiaries through dividends, loans or advances. Such notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom
and OCI have, jointly and severally, fully and unconditionally guaranteed the obligations of Omnicom Finance Holdings plc, or OFH, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the €i500 million i0.80%
Senior Notes due 2027 and the €i500 million i1.40% Senior Notes due 2031, collectively the Euro Notes. OFH’s assets consist of its investments in several wholly owned finance companies
that function as treasury centers, providing funding for various operating companies in Europe, Brazil, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFH to obtain funds from their subsidiaries through dividends, loans or advances. The Euro Notes and the related guarantees are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFH and each of Omnicom and OCI, respectively.
Omnicom has fully and unconditionally guaranteed the obligations of Omnicom Capital Holdings plc, or OCH, a U.K.-based
wholly owned subsidiary of Omnicom, with respect to the £i325 million i2.25% Senior Notes due 2033, or the Sterling Notes. OCH’s assets consist of its investments in several wholly
owned finance companies that function as treasury centers, providing funding for various operating companies in EMEA, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom or OCH to obtain funds from their subsidiaries through dividends, loans or advances. The Sterling Notes and the related guarantee are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OCH and Omnicom, respectively.
9
6. iSegment
Reporting
Our branded agency networks operate in the advertising, marketing and corporate communications services industry, and are organized into agency networks, virtual client networks, regional reporting units and operating groups or practice areas. Our networks, virtual client networks and agencies increasingly share clients and provide clients with integrated services. The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs which include rent and occupancy costs, technology costs and other overhead expenses. Therefore, given these similarities, we aggregate our six operating segments, which are our agency networks, into one reporting segment.
The agency networks' regional reporting units comprise three geographic regions: the Americas, EMEA and Asia-Pacific. The regional reporting units
monitor the performance and are responsible for the agencies in their region. Agencies within the regional reporting units serve similar clients in similar industries and, in many cases, the same clients, and have similar economic characteristics.
iRevenue and long-lived assets and goodwill by geographic region were (in millions):
Our effective tax rate for the nine months ended September 30, 2022 increased period-over-period to i28.8% from i25.2%.
The higher effective tax rate for 2022 was predominantly the result of the non-deductibility of the $i113.4 million charges recorded in the first quarter of 2022, arising from the effects of the war in Ukraine, as well as a related additional net charge of $i4.8
million. These charges were partially offset by the tax benefit arising from our share-based compensation awards. The effective tax rate for the nine months ended September 30, 2021 reflects a nominal tax applied to the book gain on the disposition of subsidiary resulting from the excess of tax over book basis and a reduction in income tax expense of $i11.7 million primarily related to the favorable settlements of uncertain tax positions in certain jurisdictions.
On
August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was signed into law. Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock repurchases after December 31, 2022, and provides tax incentives to promote clean energy. Historically, during the year we have made discretionary share repurchases. Beginning in 2023, these purchases would be subject to the excise tax. Based on the historical net repurchase activity the excise tax and the other provisions of the IRA are not expected to have a material impact on our results of operations or financial position. However, we are still in the process of analyzing the provisions of the IRA.
At September 30,
2022, our unrecognized tax benefits were $i162.3 million. Of this amount, approximately $i157.2 million would affect our
effective tax rate upon resolution of the uncertain tax positions.
8. iPension and Other Postemployment Benefits
i
Defined
Benefit Pension Plans
The components of net periodic benefit expense were (in millions):
We
contributed $i0.4 million and $i0.5 million to our defined benefit pension plans in each of the
nine months ended September 30, 2022 and 2021, respectively.
i
Postemployment Arrangements
The components of net periodic benefit expense were (in millions):
9.
iCharges Arising from the Effects of the War in Ukraine
As discussed in Note 1, in the first quarter of 2022, we recorded pretax charges arising from the effects of the war in Ukraine of $i113.4
million, which included cash charges of $i47.6 million, primarily consisting of the loss on the disposition of the net investment in our Russian businesses, as well as impairment and other charges related to the suspension of operations in Ukraine.
10. iSupplemental
Cash Flow Data
iThe change in operating capital was (in millions):
(Increase)
decrease in work in process and other current assets
(i319.2)
(i308.6)
Increase
(decrease) in accounts payable
(i2,048.4)
(i1,071.3)
Increase
(decrease) in customer advances, taxes payable and other current liabilities
(i335.4)
(i86.2)
Change
in other assets and liabilities, net
(i15.5)
i111.8
Increase
(decrease) in operating capital
$
(i1,483.1)
$
(i1,010.7)
Income
taxes paid
$
i341.4
$
i320.2
Interest
paid
$
i103.5
$
i157.4
/
Interest
paid for the nine months ended September 30, 2021 includes a $i37.7 million cash payment on the early redemption in May 2021 of all the outstanding $1.25 billion principal amount of 3.625% Senior Notes due 2022.
iNon-cash
increase in lease liabilities (in millions):
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of operations or financial position.
11
12. iAccumulated
Other Comprehensive Income (Loss)
i
Changes in accumulated other comprehensive income (loss), net of income taxes were (in millions):
Cash Flow Hedge
Defined
Benefit Pension Plans and Postemployment Arrangements
Short-term
investments of $i94.9 million at September 30, 2022 represent time deposits with original maturities ranging from 91 to 364 days. These investments are classified as held-to-maturity securities because we have the positive intent and ability to hold until maturity. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Fair value is based on observable interest rates for similar securities.
The estimated fair value of the foreign currency derivatives is determined
using model-derived valuations, taking into consideration foreign currency rates and counterparty credit risk. The estimated fair value of the contingent purchase price obligations is calculated in accordance with the terms of each acquisition agreement and is discounted. The fair value of debt is based on quoted market prices.
14. iNew Accounting Standards
In
October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, or ASU 2021-08, that requires acquiring companies to apply ASC 606 to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination consistent with those recorded by the acquiring company. ASU 2021-08
is effective January 1, 2023, and early adoption is permitted. Contracts with customers in the advertising and marketing business are typically short duration contracts. To the extent we acquire companies in the advertising and marketing communications business, we do not expect this standard to have a material impact on our results of operations or financial position.
15. iSubsequent
Events
We have evaluated events subsequent to the balance sheet date and determined that there have not been any events that have occurred that would require additional adjustments to or disclosures in these consolidated financial statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
The
unaudited consolidated financial statements and related notes to the unaudited consolidated financial statements, including our critical accounting policies, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report, should be read in conjunction with our 2021 10-K.
Risks and Uncertainties
Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation, rising interest rates, and supply chain disruptions could cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and discipline. We monitor economic conditions closely, as well as client revenue levels and other factors. In response to reductions in revenue, we can take actions to align our cost structure with changes in client demand and manage
our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments.
Impact of the War in Ukraine
Historically, we conducted operations in Russia and Ukraine through local agencies in which we held a majority stake. During the first quarter of 2022, the war in Ukraine required us to suspend our business operations in Ukraine. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affected the cross-border operations of businesses operating in Russia. In addition, Russian regulators imposed currency restrictions and regulations. All of these actions created uncertainty regarding our ability to recover our investment in our operations
in Russia, as well as our ability to exercise control over the operations. Therefore, the ability to continue operations in Russia was uncertain. As a result, we sold, or committed to dispose of, all of our businesses in Russia. Accordingly, in the first quarter of 2022, we recorded pretax charges of $113.4 million, which primarily consisted of the net investment in our Russian businesses, and included charges related to the suspension of operations in Ukraine.
Impact of COVID-19 Pandemic - Update
Beginning in March 2020 and continuing through the first quarter of 2021, our business was impacted by reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by business and geography, the spending reductions impacted all our businesses and markets. Globally, the most impacted businesses were our Experiential discipline, especially in our event
marketing businesses, and our Execution & Support discipline, primarily in field marketing. Most of our markets began to improve in April 2021, and the improvement continued through the first nine months of 2022.
Our Business
Revenue for the nine months ended September 30, 2022 decreased slightly to $10,420.9 million, compared to $10,433.6 million in the nine months ended September 30, 2021. Organic growth increased revenue $1,069.5 million, or 10.3%, primarily reflecting increased client spending in all our disciplines and across all our geographic markets compared to the prior year period. The increase in organic revenue was offset by a reduction in acquisition revenue, net of disposition revenue of $612.2 million, or 5.9%, reflecting dispositions in the Advertising & Media
discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022 (see Note 1 to the unaudited consolidated financial statements), and the negative impact of changes in foreign currency exchange rates of $470.0 million, or 4.5%.
We are a strategic holding company providing advertising, marketing and corporate communications services to clients through our branded networks and agencies around the world. On a global, pan-regional and local basis, our networks and agencies provide a comprehensive range of services in the following fundamental disciplines: Advertising & Media, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare. Advertising & Media include creative services across digital and traditional media, strategic media planning and buying, and data analytics services. Precision Marketing includes
digital and direct marketing, digital transformation and data and analytics. Commerce & Brand Consulting services include brand consulting, strategy and research, retail and ecommerce. Experiential marketing services include live and digital events and experience design and execution. Execution & Support includes field marketing, sales support, digital and physical merchandising and point-of-sale, as well as other specialized marketing and custom communications services. Public Relations services include corporate communications, crisis management, public affairs and media and media relations services. Healthcare includes advertising and media services to global healthcare and pharmaceutical clients. Our business model was built and continues to evolve around our clients. While our networks and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. Our fundamental business principle
is that our clients’ specific marketing requirements are the central focus of how we structure our service offerings and allocate our resources. This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client networks
utilizing our key client matrix organization structure. This collaboration allows us to cut across our internal organizational structures to execute our clients’ marketing requirements in a consistent and comprehensive manner. We use our client-centric approach to grow our business by expanding our service offerings to existing clients, moving into new markets and obtaining new
14
clients. In addition, we pursue selective
acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or could serve our existing clients.
Driven by our clients’ continuous demand for more effective and efficient marketing activities, we strive to provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. These service offerings include, among others, advertising, brand consulting, content marketing, corporate social responsibility consulting, crisis communications, custom publishing, data analytics, database management, digital/direct marketing, digital transformation, entertainment marketing, experiential marketing, field marketing, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare marketing and communications, in-store design, interactive
marketing, investor relations, marketing research, media planning and buying, merchandising and point of sale, mobile marketing, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, retail marketing, sales support, search engine marketing, shopper marketing, social media marketing and sports and event marketing.
We continually evaluate our portfolio of businesses to identify areas for investment and acquisition opportunities, as well as to identify non-strategic or underperforming businesses for disposition.
As a leading global advertising, marketing and corporate communications company, we operate in all major markets and have a large and diverse client base. For the twelve months ended September 30, 2022, our largest
client accounted for 2.6% of our revenue, and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 52.6% of our revenue. Our clients operate in virtually every sector of the global economy with no one industry representing more than 17% of our revenue for the nine months ended September 30, 2022. Although our revenue is generally balanced between the United States and international markets, and we have a large and diverse client base, we are not immune to general economic downturns.
Certain global events targeted by major marketers for advertising expenditures, such as the FIFA World Cup and the Olympics, and certain national events, such as the U.S. election process, may affect our revenue period-over-period in certain businesses. Typically, these events do not have a significant impact on our revenue in any period.
Global
economic conditions have a direct impact on our business and financial performance. Adverse global or regional economic conditions, such as those arising from the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation in countries that comprise our major markets, rising interest rates, and client supply chain issues, pose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services. Revenue is typically lower in the first and third quarters and higher in the second and fourth quarters, reflecting client spending patterns during the year and additional project work that usually occurs in the fourth quarter.
General marketing communications trends impact our business and industry and, on balance, we believe that these effects are generally positive. These
trends include integrating traditional and non-traditional marketing channels, as well as utilizing new communications technologies and emerging digital platforms, and clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets. As clients increase their demands for marketing effectiveness and efficiency, many of them have made it a practice to consolidate their business within one or a small number of service providers in the pursuit of a single engagement covering all consumer touch points. We have structured our business around these trends. Certain trends such as increased spending on digital marketing platforms, and our key client matrix organization structure approach to collaboration and integration of our services and solutions provide a competitive advantage to our business, and we expect this advantage to continue over the medium and long term.
Given
our size and breadth, we manage our business by monitoring several financial indicators. The key indicators that we focus on are revenue and operating expenses. We analyze revenue growth by reviewing the components and mix of the growth, including growth by principal regional market and marketing discipline, the impact from foreign currency exchange rate changes, growth from acquisitions, net of dispositions, and growth from our largest clients. Operating expenses are comprised of cost of services, selling, general and administrative expenses, or SG&A, and depreciation and amortization.
Results of Operations
Revenue for the quarter ended September 30, 2022 increased slightly to $3,443.4 million, compared to $3,435.0 million in the prior year quarter. Organic growth increased revenue $257.7 million, or 7.5%. Changes in foreign
exchange rates reduced revenue $216.6 million, or 6.3%, and acquisition revenue, net of disposition revenue, reduced revenue $32.7 million, or 1.0%. The reduction in acquisition revenue, net of disposition revenue, primarily reflects the disposition of our businesses in Russia in the first quarter of 2022. The change in revenue across our geographic markets was: North America increased $147.2 million, or 8.1%, Europe decreased $116.1 million, or 11.3%, Asia-Pacific decreased $31.4 million, or 6.9%, and Latin America increased $4.8 million, or 6.6%. In North America, the increase in revenue reflects organic revenue growth across all our disciplines, especially in our Advertising & Media, Precision Marketing and Public Relations disciplines. In Europe, organic revenue increased in substantially all countries and disciplines, especially our Advertising & Media discipline, which was led by our media business, and our Public Relations and Precision Marketing disciplines.
The increase in organic revenue was offset by the weakening of substantially all foreign currencies in the region against the U.S. Dollar, especially the British Pound and the Euro, as well as the disposition of our businesses in Russia in the first quarter of 2022. In Latin America, organic revenue increased in most countries
15
in the region, especially Brazil and Colombia. The increase in organic revenue was partially offset by negative performance in Mexico and the weakening of all currencies in the region against the U.S. Dollar. In Asia-Pacific, organic revenue growth in most of our major markets in the region, particularly Australia, India and Japan, was driven by our Advertising & Media discipline, which was led
by our media business, as well as our Execution & Support, Commerce & Brand Consulting and Precision Marketing disciplines. The increase in organic revenue was offset by the weakening of all currencies in the region against the U.S. Dollar and negative performance in our Experiential discipline, primarily caused by continued COVID-19 lock downs in China. The change in revenue in the third quarter of 2022 compared to the third quarter of 2021 in our fundamental disciplines was: Advertising & Media decreased $58.2 million, Precision Marketing increased $51.6 million, Commerce & Brand Consulting increased $8.3 million, Experiential decreased $9.6 million, Execution & Support decreased $19.0 million, Public Relations increased $31.8 million and Healthcare increased $3.5 million.
Revenue for the nine months ended September 30, 2022 decreased slightly to $10,420.9
million, compared to $10,433.6 million in the prior year period. Organic growth increased revenue $1,069.5 million, or 10.3%. Changes in foreign exchange rates reduced revenue $470.0 million, or 4.5%, and acquisition revenue, net of disposition revenue, reduced revenue $612.2 million, or 5.9%. The reduction in acquisition revenue, net of disposition revenue, primarily reflects dispositions in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022. The change in revenue across our geographic markets was: North America increased $25.8 million, or 0.4%, Europe decreased $84.4 million, or 2.8%, Asia-Pacific decreased $21.1 million, or 1.6%, and Latin America increased $18.8 million, or 9.1%. In North America, increased organic revenue across all our disciplines, especially in our Advertising & Media, Precision Marketing and Public Relations disciplines, was substantially offset
by a reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021. In Europe, organic revenue increased in substantially all countries and disciplines, especially our Advertising & Media discipline, which was led by our media business, our Experiential discipline, as it continues to recover from the impact of the pandemic, and our Precision Marketing and Public Relations disciplines. The increase in organic revenue was offset by the weakening of substantially all foreign currencies against the U.S. Dollar, especially the British Pound and the Euro, as well as the disposition of our businesses in Russia in the first quarter of 2022. In Latin America, organic revenue increased in most countries in the region, especially Brazil and Colombia. The increase in organic revenue was partially offset by negative performance in Mexico and the weakening of most currencies in
the region against the U.S. Dollar. In Asia-Pacific, organic revenue increased in most disciplines, especially our Advertising & Media discipline, which was led by our media business, and in most of our major markets in the region, particularly Australia, India and Japan. The increase in organic revenue was offset by the weakening of all currencies in the region against the U.S. Dollar and negative performance in our Experiential discipline, primarily caused by continued COVID-19 lock downs in China. The change in revenue in the nine months of 2022 compared to the nine months of 2021 in our fundamental disciplines was as follows: Advertising & Media decreased $476.0 million, Precision Marketing increased $186.7 million, Commerce & Brand Consulting increased $44.7 million, Experiential increased $75.1 million, Execution & Support decreased $11.7 million, Public Relations increased $121.5 million and Healthcare increased $47.0 million.
We
measure cost of services in two distinct categories: salary and service costs and occupancy and other costs. As a service business, salary and service costs make up the significant portion of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs include employee compensation and benefits, freelance labor and third-party service costs, which include third-party supplier costs when we act as principal in providing services to our clients and client-related travel costs. Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses. Adverse and beneficial fluctuations in foreign currencies from period to period impact our results of operations and financial position when we translate our financial statements
from local foreign currencies to the U.S. Dollar. However, substantially all of our foreign operations transact business in their local currency mitigating the impact of changes in foreign currency exchange rates on our operating margin percentage.
Operating expenses for the quarter ended September 30, 2022 increased slightly to $2,897.4 million from $2,893.4 million period-over-period, despite the weakening of most foreign currencies, especially the British Pound and Euro, against the U.S. Dollar, which reduced operating expenses for the quarter ended September 30, 2022 as compared to the prior year period. The reduction in operating expenses due to the weakening of foreign currencies was in line with the percentage impact on revenue. Salary and service costs, which tend to fluctuate with changes in revenue, increased $14.3
million, compared to the quarter ended September 30, 2021, reflecting an increase in salary and related service costs of $18.8 million, partially offset by a decrease in third-party service costs of $4.5 million. The increase in salary and related service costs primarily resulted from the increase in organic revenue and an increase in headcount, as well as an increase in travel and related costs, reflecting the continuing return to the office. Third-party service costs decreased during the quarter, primarily due to the disposition of our businesses in Russia in the first quarter of 2022. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $4.5 million, period-over-period, due to lower rent and other occupancy costs, partially offset by an increase in general office expenses and other costs resulting from the return of our workforce to the office. For
the quarter ended September 30, 2022 compared to the prior year period, operating profit increased slightly to $546.0 million, operating margin increased to 15.9% from 15.8%, and EBITA margin increased to 16.4% from 16.3%.
16
Operating expenses for the nine months ended September 30, 2022, increased $122.1 million, or 1.4%, to $8,980.3 million period-over-period. Operating expenses for 2022 reflect charges arising from the effects of the war in Ukraine of $113.4 million. Operating expenses in 2021 were favorably impacted by the $50.5 million gain recorded in connection with the dispositions in the Advertising & Media discipline.
The weakening of most foreign currencies, especially the British Pound and Euro, against the U.S. Dollar reduced operating expenses for the nine months ended September 30, 2022 as compared to the prior year period, which was in-line with the percentage reduction from changes in foreign currencies on revenue. Salary and service costs, which tend to fluctuate with changes in revenue, decreased $76.0 million, compared to the nine months of 2021, reflecting a decrease in third-party service costs of $319.3 million, partially offset by an increase in salary and related service costs of $243.3 million. Third-party service costs decreased during the period primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022. The increase in salary and related service costs primarily resulted from the increase in organic
revenue and an increase in headcount, as well as an increase in travel and related costs, reflecting the continuing return to the office. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $3.2 million, period-over-period, primarily due to an increase in general office expenses and other costs resulting from the return of our workforce to the office, partially offset by lower rent and other occupancy costs. For the nine months ended September 30, 2022 compared to the prior year period, operating profit decreased $134.8 million to $1,440.6 million, operating margin decreased to 13.8% from 15.1%, and EBITA margin decreased to 14.4% from 15.7%. Operating profit, operating margin and EBITA margin for 2022 were negatively impacted by the $113.4 million charges arising from the effects of the war in Ukraine. Operating profit, operating margin and EBITA margin
for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the dispositions in the Advertising & Media discipline.
SG&A expenses primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices, including group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs. SG&A expenses increased $24.1 million in the nine months of 2022 period-over-period, primarily due to increased marketing costs and professional fees.
Net interest expense in the third quarter of 2022 decreased $14.6 million period-over-period to $29.1 million, and in the nine months of 2022 decreased $52.7 million period-over-period to $112.0 million. Interest expense in the third quarter of 2022 increased $1.3 million period-over period
to $52.0 million, primarily as a result of issuance the £325 million 2.25% Senior Notes due 2033, or the Sterling Notes, in November 2021. Interest expense on debt in the nine months of 2022 decreased $25.2 million period-over-period to $142.2 million, primarily as a result of the benefit from the early redemption in May 2021 of all the outstanding $1.25 billion principal amount of 3.625% Senior Notes due 2022, or 2022 Notes, which was partially offset by the issuance of the $800 million 2.60% Senior Notes due 2031 in May 2021, and the issuance of the Sterling Notes in November 2021. Interest expense for the nine months of 2021 includes a loss of $26.6 million on the early redemption of the 2022 Notes. Interest income in the third quarter of 2022 increased $15.9 million period-over-period to $22.9 million, and in the nine months of 2022, increased $22.1 million period-over-period to $42.2 million, primarily as a result of
higher interest rates on cash balances and the purchase of short-term investments.
Our effective tax rate for the nine months ended September 30, 2022 increased period-over-period to 28.8% from 25.2%. The higher effective tax rate for 2022 was predominantly the result of the non-deductibility of the $113.4 million charges arising from the effects of the war in Ukraine, as well as a related additional net charge of $4.8 million. These charges were partially offset by the tax benefit arising from our share-based compensation awards. The effective tax rate for the nine months ended September 30, 2021 reflects a nominal tax applied to the book gain on the disposition of subsidiary resulting from the excess of tax over book basis and a reduction in income tax expense of $11.7 million primarily related to the favorable settlements of
uncertain tax positions in certain jurisdictions.
Net income - Omnicom Group Inc. for the third quarter of 2022 increased to $364.5 million from $355.6 million in the third quarter of 2021 and for the nine months ended September 30, 2022 decreased $104.9 million to $886.7 million from $991.6 million for the nine months ended September 30, 2021. Diluted net income per share - Omnicom Group Inc. for the third quarter of 2022 increased $0.12 to $1.77, from $1.65 in the third quarter of 2021 and decreased to $4.27 in the nine months of 2022, from $4.58 in the nine months of 2021. The period-over-period changes were due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock during the year, net of shares issued for restricted
stock awards, stock option exercises and the employee stock purchase plan. The impact of the after-tax charges arising from the effects of the war in Ukraine reduced net income - Omnicom Group Inc. for the nine months ended September 30, 2022 by $118.2 million and diluted net income per share - Omnicom Group Inc. by $0.57 per share.
The combined effect of the after-tax gain on the disposition of subsidiary and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc. for the nine months ended September 30, 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc. by $0.14.
17
RESULTS
OF OPERATIONS - Third Quarter 2022 Compared to Third Quarter 2021 (in millions):
2022
2021
Revenue
$
3,443.4
$
3,435.0
Operating Expenses:
Salary
and service costs
2,476.1
2,461.8
Occupancy and other costs
281.0
285.5
Cost of services
2,757.1
2,747.3
Selling,
general and administrative expenses
86.4
95.0
Depreciation and amortization
53.9
51.1
2,897.4
2,893.4
Operating Profit
546.0
541.6
Operating
Margin %
15.9
%
15.8
%
Interest Expense
52.0
50.7
Interest Income
22.9
7.0
Income Before Income Taxes and Income From Equity Method Investments
516.9
497.9
Income
Tax Expense
134.7
120.0
Income From Equity Method Investments
1.1
2.2
Net Income
383.3
380.1
Net Income Attributed To Noncontrolling Interests
18.8
24.5
Net
Income - Omnicom Group Inc.
$
364.5
$
355.6
Non-GAAP Financial Measures
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures
should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions):
2022
2021
Net Income - Omnicom Group Inc.
$
364.5
$
355.6
Net
Income Attributed To Noncontrolling Interests
18.8
24.5
Net Income
383.3
380.1
Income From Equity Method Investments
1.1
2.2
Income Tax Expense
134.7
120.0
Income
Before Income Taxes and Income From Equity Method Investments
516.9
497.9
Interest Expense
52.0
50.7
Interest Income
22.9
7.0
Operating Profit
546.0
541.6
Add
back: Amortization of intangible assets
20.1
18.7
Earnings before interest, taxes and amortization of intangible assets (“EBITA”)
$
566.1
$
560.3
Revenue
$
3,443.4
$
3,435.0
EBITA
$
566.1
$
560.3
EBITA
Margin %
16.4
%
16.3
%
18
Revenue
Revenue for the quarter ended September 30, 2022 increased slightly to $3,443.4 million, compared to $3,435.0 million in the prior year quarter. Organic growth increased revenue $257.7 million, or 7.5%. Changes in foreign exchange rates reduced revenue $216.6 million, or 6.3%, and acquisition revenue, net of disposition revenue, reduced
revenue $32.7 million, or 1.0%. The reduction in acquisition revenue, net of disposition revenue, primarily reflects the disposition of our businesses in Russia in the first quarter of 2022. The change in revenue across our geographic markets was: North America increased $147.2 million, or 8.1%, Europe decreased $116.1 million, or 11.3%, Asia-Pacific decreased $31.4 million, or 6.9%, and Latin America increased $4.8 million, or 6.6%. In North America, the increase in revenue reflects organic revenue growth across all our disciplines, especially in our Advertising & Media, Precision Marketing and Public Relations disciplines. In Europe, organic revenue increased in substantially all countries and disciplines, especially our Advertising & Media discipline, which was led by our media business, and our Public Relations and Precision Marketing disciplines. The increase in organic revenue was offset by the weakening of substantially all foreign currencies in the region
against the U.S. Dollar, especially the British Pound and the Euro, as well as the disposition of our businesses in Russia in the first quarter of 2022. In Latin America, organic revenue increased in most countries in the region, especially Brazil and Colombia. The increase in organic revenue was partially offset by negative performance in Mexico and the weakening of all currencies in the region against the U.S. Dollar. In Asia-Pacific, organic revenue growth in most of our major markets in the region, particularly Australia, India and Japan, was driven by our Advertising & Media discipline, which was led by our media business, as well as our Execution & Support, Commerce & Brand Consulting, and Precision Marketing disciplines. The increase in organic revenue was offset by the weakening of all currencies in the region against the U.S. Dollar and negative performance in our Experiential discipline, primarily caused by continued COVID-19 lock downs in China.
The change in revenue in the third quarter of 2022 compared to the third quarter of 2021 in our fundamental disciplines was: Advertising & Media decreased $58.2 million, Precision Marketing increased $51.6 million, Commerce & Brand Consulting increased $8.3 million, Experiential decreased $9.6 million, Execution & Support decreased $19.0 million, Public Relations increased $31.8 million and Healthcare increased $3.5 million.
The components of revenue change for the third quarter of 2022 in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
The
components and percentages are calculated as follows:
•Foreign exchange rate impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $3,660.0 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($3,443.4 million less $3,660.0 million for the Total column).
•Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent
to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table.
•Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
•The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($3,435.0 million for the Total column).
19
Changes
in the value of foreign currencies against the U.S. Dollar affect our results of operations and financial position. For the most part, because the revenue and expense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. Assuming exchange rates at October 12, 2022 remain unchanged, we expect the impact of changes in foreign exchange rates to reduce revenue in the fourth quarter and for the full year by approximately 6.5% and 5.25%, respectively. In addition, based on acquisition and disposition activity to date, including the disposition of our businesses in Russia, we expect the effect of net acquisitions and dispositions to reduce revenue in the fourth quarter and full year 2022 by approximately 1.4% and 4.7%, respectively.
The change in revenue period-over-period and organic growth in the current period
in our geographic markets were (in millions):
Revenue
in Europe, which includes our primary markets of the United Kingdom, or the U.K., and the Euro Zone, decreased $116.1 million for the third quarter of 2022, primarily resulting from the disposition of our businesses in Russia in the first quarter of 2022. Revenue in the U.K., representing 10.7% of revenue, decreased $15.0 million. Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 15.7% of revenue, decreased $101.1 million. The organic revenue growth in Europe of 8.1% reflects organic growth in all disciplines and substantially all countries. The organic revenue growth was offset by the weakening of most currencies in the region against the U.S. Dollar, especially the British Pound and the Euro, and the disposition of our businesses in Russia in the first quarter of 2022.
In the normal course of business, our agencies both gain and lose business from clients each year
due to a variety of factors. Under our client-centric approach, we seek to broaden our relationships with all of our clients. Our largest client represented 2.6% and 3.1% of revenue for the twelve months ended September 30, 2022 and 2021, respectively. Our ten largest and 100 largest clients represented 19.4% and 52.6% of revenue for the twelve months ended September 30, 2022, respectively, and 21.9% and 54.1% of revenue for the twelve months ended September 30, 2021, respectively.
To monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories: Advertising & Media, Precision Marketing,
Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare. The change in revenue period-over-period and organic growth in the current period by discipline were (in millions):
Operating
expenses for the quarter ended September 30, 2022 increased slightly to $2,897.4 million from $2,893.4 million period-over-period, despite the weakening of most foreign currencies, especially the British Pound and Euro, against the U.S. Dollar, which reduced operating expenses for the quarter ended September 30, 2022 as compared to the prior year period. The reduction in operating expenses due to the weakening of foreign currencies was in line with the percentage impact on revenue. Salary and service costs, which tend to fluctuate with changes in revenue, increased $14.3 million, compared to the quarter ended September 30, 2021, reflecting an increase in salary and related service costs of $18.8 million, partially offset by a decrease in third-party service costs of $4.5 million. The increase in salary and related service
costs primarily resulted from the increase in organic revenue and an increase in headcount, as well as an increase in travel and related costs, reflecting the continuing return to the office. Third-party service costs decreased during the quarter, primarily due to the disposition of our businesses in Russia in the first quarter of 2022. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $4.5 million, period-over-period, due to lower rent and other occupancy costs, partially offset by an increase in general office expenses and other costs resulting from the return of our workforce to the office. For the quarter ended September 30, 2022 compared to the prior year period, operating profit increased slightly to $546.0 million, operating margin increased to 15.9% from 15.8%, and EBITA margin increased to 16.4% from 16.3%.
21
Net
Interest Expense
Net interest expense in the third quarter of 2022 decreased $14.6 million period-over-period to $29.1 million. Interest expense in the third quarter of 2022 increased $1.3 million period-over period to $52.0 million, primarily as a result of the issuance of the Sterling Notes in November 2021. Interest income in the third quarter of 2022 increased $15.9 million period-over-period to $22.9 million, primarily as a result of higher interest rates on cash balances and the purchase of short-term investments.
Income Taxes
Our effective tax rate for the third quarter of 2022 increased period-over-period to 26.1% from 24.1%. The third quarter of 2021 reflects a reduction in income tax expense of $11.7 million primarily related to the favorable settlements of uncertain tax positions
in certain jurisdictions.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. in the third quarter of 2022 increased to $364.5 million from $355.6 million in the third quarter of 2021. Diluted net income per share - Omnicom Group Inc. for the third quarter of 2022 increased $0.12 to $1.77, from $1.65 in the third quarter of 2021, due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock during the quarter, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan. The translation of our financial statements from local currencies to the U.S. Dollar had a negative effect of approximately 5% on our diluted net income per share for the three months ended September
30, 2022 as compared to the prior year period, in-line with the percentage reduction from changes in foreign currencies on our revenue.
22
RESULTS OF OPERATIONS - Nine Months of 2022 Compared to Nine Months of 2021 (in millions):
2022
2021
Revenue
$
10,420.9
$
10,433.6
Operating
Expenses:
Salary and service costs
7,533.9
7,609.9
Occupancy and other costs
874.2
871.0
Charges arising from the effects of the war in Ukraine
113.4
—
Gain
on disposition of subsidiary
—
(50.5)
Cost of services
8,521.5
8,430.4
Selling, general and administrative expenses
294.0
269.9
Depreciation and amortization
164.8
157.9
8,980.3
8,858.2
Operating
Profit
1,440.6
1,575.4
Operating Margin %
13.8
%
15.1
%
Interest Expense
154.2
184.8
Interest Income
42.2
20.1
Income
Before Income Taxes and Income From Equity Method Investments
1,328.6
1,410.7
Income Tax Expense
383.3
355.1
Income From Equity Method Investments
2.6
2.1
Net Income
947.9
1,057.7
Net
Income Attributed To Noncontrolling Interests
61.2
66.1
Net Income - Omnicom Group Inc.
$
886.7
$
991.6
Non-GAAP Financial Measures
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest,
taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions):
2022
2021
Net
Income - Omnicom Group Inc.
$
886.7
$
991.6
Net Income Attributed To Noncontrolling Interests
61.2
66.1
Net Income
947.9
1,057.7
Income From Equity Method Investments
2.6
2.1
Income
Tax Expense
383.3
355.1
Income Before Income Taxes and Income From Equity Method Investments
1,328.6
1,410.7
Interest Expense
154.2
184.8
Interest Income
42.2
20.1
Operating
Profit
1,440.6
1,575.4
Add back: Amortization of intangible assets
60.3
59.8
Earnings before interest, taxes and amortization of intangible assets (“EBITA”)
$
1,500.9
$
1,635.2
Revenue
$
10,420.9
$
10,433.6
EBITA
$
1,500.9
$
1,635.2
EBITA
Margin %
14.4
%
15.7
%
23
Revenue
Revenue for the nine months ended September 30, 2022 decreased slightly to $10,420.9 million, compared to $10,433.6 million in the prior year period. Organic growth increased revenue $1,069.5 million, or 10.3%. Changes in foreign exchange rates reduced revenue $470.0 million, or 4.5%, and acquisition revenue, net of disposition
revenue, reduced revenue $612.2 million, or 5.9%. The reduction in acquisition revenue, net of disposition revenue, primarily reflects dispositions in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022. The change in revenue across our geographic markets was: North America increased $25.8 million, or 0.4%, Europe decreased $84.4 million, or 2.8%, Asia-Pacific decreased $21.1 million, or 1.6%, and Latin America increased $18.8 million, or 9.1%. In North America, increased organic revenue across all our disciplines, especially in our Advertising & Media, Precision Marketing and Public Relations disciplines, was substantially offset by a reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021. In Europe, organic revenue increased in substantially all countries and disciplines,
especially our Advertising & Media discipline, which was led by our media business, our Experiential discipline, as it continues to recover from the impact of the pandemic, and our Precision Marketing and Public Relations disciplines. The increase in organic revenue was offset by the weakening of substantially all foreign currencies against the U.S. Dollar, especially the British Pound and the Euro, as well as the disposition of our businesses in Russia in the first quarter of 2022. In Latin America, organic revenue increased in most countries in the region, especially Brazil and Colombia. The increase in organic revenue was partially offset by negative performance in Mexico and the weakening of most currencies in the region against the U.S. Dollar. In Asia-Pacific, organic revenue increased in most disciplines, especially our Advertising & Media discipline, which was led by our media business, and in most of our major markets in the region, particularly Australia,
India and Japan. The increase in organic revenue was offset by the weakening of all currencies in the region against the U.S. Dollar and negative performance in our Experiential discipline, primarily caused by continued COVID-19 lock downs in China. The change in revenue in the nine months of 2022 compared to the nine months of 2021 in our fundamental disciplines was as follows: Advertising & Media decreased $476.0 million, Precision Marketing increased $186.7 million, Commerce & Brand Consulting increased $44.7 million, Experiential increased $75.1 million, Execution & Support decreased $11.7 million, Public Relations increased $121.5 million and Healthcare increased $47.0 million.
The components of revenue change for the nine months of 2022 in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
The
components and percentages are calculated as follows:
•Foreign exchange rate impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $10,890.9 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($10,420.9 million less $10,890.9 million for the Total column).
•Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent
to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table.
•Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
•The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($10,433.6 million for the Total column).
24
The
change in revenue period-over-period and organic growth in the current period in our geographic markets were (in millions):
Revenue
in Europe, which includes our primary markets of the U.K. and the Euro Zone, decreased $84.4 million for the nine months of 2022 as compared to the prior year period. Revenue in the U.K., representing 11.0% of total revenue, increased $23.9 million. Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 17.1% of total revenue, decreased $108.3 million. The organic revenue in Europe of 11.5% reflects growth in all disciplines and substantially all countries. The organic revenue growth was offset by the weakening of most currencies in the region against the U.S. Dollar, especially the British Pound and the Euro and the disposition of our businesses in Russia.
The change in revenue period-over-period and organic growth in the current period by discipline were (in millions):
Charges arising from the effects of the war in Ukraine
113.4
1.1
%
—
113.4
Gain
on sale of subsidiary
—
(50.5)
(0.5)
%
50.5
Cost
of services
8,521.5
8,430.4
91.1
1.1
%
Selling, general and administrative expenses
294.0
2.8
%
269.9
2.6
%
24.1
8.9
%
Depreciation
and amortization
164.8
1.6
%
157.9
1.5
%
6.9
4.4
%
8,980.3
86.2
%
8,858.2
84.9
%
122.1
1.4
%
Operating
Profit
$
1,440.6
13.8
%
$
1,575.4
15.1
%
$
(134.8)
(8.6)
%
Operating expenses for the nine months ended September 30, 2022, increased
$122.1 million, or 1.4%, to $8,980.3 million period-over-period. Operating expenses for 2022 reflect charges arising from the effects of the war in Ukraine of $113.4 million. Operating expenses in 2021 were favorably impacted by the $50.5 million gain recorded in connection with the dispositions in the Advertising & Media discipline. The weakening of most foreign currencies, especially the British Pound and Euro, against the U.S. Dollar reduced operating expenses for the nine months ended September 30, 2022 as compared to the prior year period, which was in-line with the percentage reduction from changes in foreign currencies on revenue. Salary and service costs, which tend to fluctuate with changes in revenue, decreased $76.0 million, compared to the nine months of 2021, reflecting a decrease in third-party service costs of $319.3 million, partially offset by an increase in salary and related service costs of $243.3
million. Third-party service costs decreased during the period primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022. The increase in salary and related service costs primarily resulted from the increase in organic revenue and an increase in headcount, as well as an increase in travel and related costs, reflecting the continuing return to the office. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $3.2 million, period-over-period, primarily due to an increase in general office expenses and other costs resulting from the return of our workforce to the office, partially offset by lower rent and other occupancy costs. For the nine months ended September 30, 2022 compared to the prior year period, operating profit decreased $134.8
million to $1,440.6 million, operating margin decreased to 13.8% from 15.1%, and EBITA margin decreased to 14.4% from 15.7%. Operating profit, operating margin and EBITA margin for 2022 were negatively impacted by the $113.4 million charges arising from the effects of the war in Ukraine. Operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the dispositions in the Advertising & Media discipline.
Net Interest Expense
Net interest expense in the nine months of 2022 decreased $52.7 million period-over-period to $112.0 million. Interest expense on debt in the nine months of 2022 decreased $25.2 million period-over-period to $142.2 million, primarily as a result of the benefit from the early redemption in May 2021 of all the outstanding 2022 Notes, partially offset by the issuance of the 2031 Notes
in May 2021 and the issuance of the Sterling Notes in November 2021. Interest expense for the nine months of 2021 includes a loss of $26.6 million on the early redemption of the 2022 Notes. Interest income in the nine months of 2022 increased $22.1 million period-over-period to $42.2 million, reflecting higher interest rates on cash balances and the purchase of short-term investments.
Income Taxes
Our effective tax rate for the nine months ended September 30, 2022 increased period-over-period to 28.8% from 25.2%. The higher effective tax rate for 2022 was predominantly the result of the non-deductibility of the $113.4 million charges recorded in the first quarter of 2022 arising from the effects of the war in Ukraine, as well as a related additional net charge of $4.8 million. These charges were partially offset by the tax benefit
arising from our share-based compensation awards. The effective tax rate for the nine months ended September 30, 2021 reflects a nominal tax applied to the book gain on the disposition of subsidiary resulting
26
from the excess of tax over book basis and a reduction in income tax expense of $11.7 million primarily related to the favorable settlements of uncertain tax positions in certain jurisdictions.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. in the nine months of 2022 decreased $104.9 million to $886.7 million from $991.6 million in the nine
months of 2021. The period-over-period decrease is due to the factors described above. Diluted net income per share - Omnicom Group Inc. decreased to $4.27 in the nine months of 2022, from $4.58 in the nine months of 2021, due to the factors described above, partially offset by the impact of the reduction in our weighted average common shares outstanding resulting from the repurchases of our common stock during the year, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan. The impact of the after-tax charges arising from the effects of the war in Ukraine reduced net income - Omnicom Group Inc. for the nine months ended September 30, 2022 by $118.2 million and diluted net income per share - Omnicom Group Inc. by $0.57.
The combined effect of the after-tax gain on the disposition of subsidiary and the loss on the early
redemption of the 2022 Notes increased net income - Omnicom Group Inc. for the nine months ended September 30, 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc. by $0.14.
CRITICAL ACCOUNTING POLICIES
Acquisitions and Goodwill
We have made and expect to continue to make selective acquisitions. The evaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings of the target businesses, as well as our experience
and judgment.
Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic reach or their service capabilities to better serve our clients. Additional key factors we consider include the competitive position and specialized know-how of the acquisition targets. Accordingly, as is typical in most service businesses, a substantial portion of the assets we acquire are intangible assets primarily consisting of the know-how of the personnel, which is treated as part of goodwill and is not required to be valued separately under U.S. GAAP. For each acquisition, we undertake a detailed review to identify other intangible assets that are required to be valued separately. A significant portion of the identifiable intangible assets acquired is derived
from customer relationships, including the related customer contracts, as well as trade names. In valuing these identified intangible assets, we typically use an income approach and consider comparable market participant measurements.
We evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. Under FASB ASC Topic 350, Intangibles - Goodwill and Other, we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value (Step 0) or proceeding directly to the quantitative goodwill impairment test. While there were no trigger events that required us
to perform a quantitative test, we performed the annual quantitative impairment test and compared the fair value of each of our reporting units to its respective carrying value, including goodwill. We identified our regional reporting units as components of our operating segments, which are our six global agency networks. The regional reporting units of each agency network are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our key client matrix organization structure for delivering services to clients in their regions. We have concluded that for each of our operating segments, their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level. Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment
Reporting, and in FASB ASC Topic 350. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. In addition, the agencies within our regional reporting units have similar economic characteristics and the employees share similar skill sets. The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs, which include rent and occupancy costs, technology costs that are generally limited to personal computers, servers and off-the-shelf software and other overhead expenses. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our virtual client network strategy.
Goodwill Impairment Review
- Estimates and Assumptions
We use the following valuation methodologies to determine the fair value of our reporting units: (1) the income approach, which utilizes discounted expected future cash flows, (2) comparative market participant multiples for EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions.
In applying the income approach, we use estimates to derive the discounted expected cash flows (“DCF”) for each reporting unit that serves as the basis of our valuation. These estimates and assumptions include revenue growth and operating margin, EBITDA, tax rates, capital expenditures, weighted average cost of capital and related discount rates and expected long-term cash
27
flow
growth rates. All of these estimates and assumptions are affected by conditions specific to our businesses, economic conditions related to the industry we operate in, as well as conditions in the global economy. The assumptions that have the most significant effect on our valuations derived using a DCF methodology are: (1) the expected long-term growth rate of our reporting units' cash flows and (2) the weighted average cost of capital (“WACC”) for each reporting unit.
The assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 2022 and 2021 were:
2022
2021
Long-Term
Growth Rate
3.5%
3.5%
WACC
11.1% - 12.0%
9.8% - 10.4%
Long-term growth rate represents our estimate of the long-term growth rate for our industry and the markets of the global economy we operate in. For the past ten years, the average historical revenue growth rate of our reporting units and the Average Nominal GDP, or NGDP, growth of the countries comprising the major markets that account for substantially all of our revenue was approximately 3.6% and 3.8%, respectively. We considered this history when
determining the long-term growth rates used in our annual impairment test at June 30, 2022, and included in the 10-year history is the full year 2020 that reflected the negative impact of the COVID-19 pandemic on the global economy and our revenue. We believe marketing expenditures over the long term have a high correlation to NGDP. Based on our past performance, we also believe that our growth rate can exceed NGDP growth in the short-term, notwithstanding the current inflationary environment, in the markets we operate in, which are similar across our reporting units. Accordingly, for our annual test as of June 30, 2022, we used an estimated long-term growth rate of 3.5%.
When performing the annual impairment test as of June 30, 2022 and estimating the future cash flows of our
reporting units, we considered the current macroeconomic environment, as well as industry and market specific conditions at mid-year 2022. In the first half of 2022, our organic revenue increase was 11.6%, which excluded our net disposition activity and the impact from changes in foreign exchange rates.
The WACC is comprised of: (1) a risk-free rate of return, (2) a business risk index ascribed to us and to companies in our industry comparable to our reporting units based on a market derived variable that measures the volatility of the share price of equity securities relative to the volatility of the overall equity market, (3) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, and (4) a current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted
by the relative market value percentages of our equity and debt.
Our six reporting units vary in size with respect to revenue and the amount of debt allocated to them. These differences drive variations in fair value among our reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds book value among the reporting units. The reporting unit goodwill balances and debt vary by reporting unit primarily because our three legacy agency networks were acquired at the formation of Omnicom and were accounted for as a pooling of interests that did not result in any additional debt or goodwill being recorded. The remaining three agency networks were built through a combination of internal growth and acquisitions that were accounted for using the acquisition method and as a result, they have a relatively higher amount of goodwill and
debt. Finally, the allocation of goodwill when components are transferred between reporting units is based on relative fair value at the time of transfer.
Goodwill Impairment Review - Conclusion
Based on the results of our impairment test, we concluded that our goodwill at June 30, 2022 was not impaired, because the fair value of each of our reporting units was in excess of its respective net book value. For our reporting units with negative book value, we concluded that the fair value of their total assets was in excess of book value. The minimum decline in fair value that one of our reporting units would need to experience in order to fail the goodwill impairment test was approximately 46%. Notwithstanding our belief that the assumptions we used for WACC and long-term growth rate in our impairment testing were reasonable, we performed
a sensitivity analysis for each of our reporting units. The results of this sensitivity analysis on our impairment test as of June 30, 2022 revealed that if the WACC increased by 1% and/or the long-term growth rate decreased by 1%, the fair value of each of our reporting units would continue to be in excess of its respective net book value and would pass the impairment test.
We will continue to perform our impairment test at the end of the second quarter of each year unless events or circumstances trigger the need for an interim impairment test. The estimates used in our goodwill impairment test do not constitute forecasts or projections of future results of operations, but rather are estimates and assumptions based on historical results and assessments of macroeconomic factors affecting our reporting units as of the valuation date. We believe that our estimates and assumptions
are reasonable, but they are subject to change from period to period. Actual results of operations and other factors will likely differ from the estimates used in our discounted cash flow valuation, and it is possible that differences could be significant. A change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail our goodwill impairment test if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. A large decline in estimated fair
28
value of a reporting unit could result in a non-cash impairment
charge and may have an adverse effect on our results of operations and financial condition.
NEW ACCOUNTING STANDARDS
Note 14 to the unaudited consolidated financial statements provides information regarding new accounting standards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources and Requirements
Our primary short-term liquidity sources are our operating cash flow, cash and cash equivalents and short-term investments. Additional liquidity sources include our $2.5 billion multi-currency revolving credit facility, or Credit
Facility, with a termination date of February 14, 2025, the ability to issue up to $2 billion of U.S. Dollar denominated commercial paper and issue up to the equivalent of $500 million in British Pounds or Euro under a Euro commercial paper program, and access to the capital markets. Certain of our international subsidiaries have uncommitted credit lines aggregating $556.7 million, which are guaranteed by Omnicom. Our liquidity funds our non-discretionary cash requirements and our discretionary spending.
Working capital is our principal non-discretionary funding requirement. Our typical working capital cycle results in a short-term funding requirement that normally peaks during the second quarter of the year due to the timing of payments for incentive compensation, income taxes and contingent
purchase price obligations. In addition, we have contractual obligations related to our long-term debt (principal and interest payments), recurring business operations, primarily related to lease obligations, and acquisition related obligations. Our principal discretionary cash spending includes dividend payments to common shareholders, capital expenditures, strategic acquisitions and repurchases of our common stock.
Cash and cash equivalents decreased $2,118.3 million from December 31, 2021. During the first nine months of 2022, we used $250.6 million of cash in operating activities, which included the use for operating capital of $1,483.1 million, primarily related to our typical working capital requirement during the period. Discretionary spending for the first nine months of 2022 was $1,382.3 million as compared to $866.6 million for the prior year period. Discretionary spending
for the first nine months of 2022 is comprised of capital expenditures of $65.6 million, dividends paid to common shareholders of $437.7 million, dividends paid to shareholders of noncontrolling interests of $62.9 million, repurchases of our common stock, net of proceeds from stock option exercises and related tax benefits and common stock sold to our employee stock purchase plan, of $485.9 million, and net acquisition payments, including payment of contingent purchase price obligations and acquisition of additional shares of noncontrolling interests of $330.2 million. In addition, we purchased $94.9 million of short-term investments with original maturities ranging from 91 to 364 days, which reduced our cash and cash equivalents but had no impact on our liquidity. The impact of foreign exchange rate changes reduced cash and cash equivalents by $371.2 million.
Based on past performance and current expectations, we believe that
our operating cash flow will be sufficient to meet our non-discretionary cash requirements for the next twelve months and that the availability of our Credit Facility will be sufficient to meet our long-term liquidity requirements.
Cash Management
Our regional treasury centers in North America, Europe and Asia manage our cash and liquidity. Each day, operations with excess funds invest those funds with their regional treasury center. Likewise, operations that require funds borrow from their regional treasury center. Treasury centers with excess cash invest on a short-term basis with third parties, generally with maturities ranging from overnight to less than 90 days. In 2022, we purchased $94.9 million of short-term investments. Certain treasury centers have notional pooling arrangements that are used to manage their cash and set-off foreign exchange imbalances. The arrangements require
each treasury center to have its own notional pool account and to maintain a notional positive account balance. Additionally, under the terms of the arrangement, set-off of foreign exchange positions are limited to the long and short positions within their own account. To the extent that our treasury centers require liquidity, they have the ability to issue up to a total of $2 billion of U.S. Dollar-denominated commercial paper and issue up to the equivalent of $500 million in British Pounds or Euro under a Euro commercial paper program, or borrow under the Credit Facility or the uncommitted credit lines. This process enables us to manage our debt more efficiently and utilize our cash more effectively, as well as manage our risk to foreign exchange rate imbalances. In countries where we either do not conduct treasury operations or it is not feasible for one of our treasury centers to fund net borrowing requirements on an intercompany basis, we arrange for local currency
uncommitted credit lines. We have a policy governing counterparty credit risk with financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to the Credit Facility. These institutions generally have credit ratings equal to or better than our credit ratings. In countries where we do not conduct treasury operations, all cash and cash equivalents are held by counterparties that meet specific minimum credit standards.
At September 30, 2022, our foreign subsidiaries held approximately $1.5 billion of our total
cash and cash equivalents of $3.2 billion. Most of the cash is available to us, net of any foreign withholding taxes payable upon repatriation to the United States.
29
At September 30, 2022, our net debt position, which we define as total debt, including short-term debt, less cash and cash equivalents and short-term investments increased $1,788.9 million to $2,167.4 million from December 31, 2021. The increase in net debt primarily resulted from the use of cash of $250.6 million for operating activities, which included the use for operating capital of $1,483.1 million, primarily related to our typical working capital requirement
during the period, discretionary spending of $1,382.3 million (see Cash Sources and Requirements above), and a reduction in cash and cash equivalents of $371.2 million from the changes in foreign exchange rates, partially offset by a reduction of long-term debt of approximately $240 million attributed to the impact of foreign exchange rate changes.
Net debt is a Non-GAAP liquidity measure. This presentation, together with the comparable U.S. GAAP liquidity measures, reflects one of the key metrics used
by us to assess our cash management. Non-GAAP liquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies.
Debt Instruments and Related Covenants
Our 2.45% Senior Notes due 2030, 4.20% Senior Notes due 2030 and 2.60% Senior Notes due 2031 are senior unsecured obligations of Omnicom that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under our 3.65% Senior Notes due 2024 and 3.60% Senior Notes due 2026. These notes are a joint and several liability of Omnicom and OCI, and Omnicom unconditionally
guarantees OCI’s obligations with respect to the notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI’s assets primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or Omnicom to obtain funds from our subsidiaries through dividends, loans or advances. Such notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally
guaranteed the obligations of Omnicom Finance Holdings plc, or OFH, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the €500 million 0.80% Senior Notes due 2027 and the €500 million 1.40% Senior Notes due 2031, collectively the Euro Notes. OFH’s assets consist of its investments in several wholly owned finance companies that function as treasury centers, providing funding for various operating companies in Europe, Brazil, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFH to obtain funds from their subsidiaries through dividends, loans or advances. The Euro Notes and the related guarantees
are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFH and each of Omnicom and OCI, respectively.
Omnicom has fully and unconditionally guaranteed the obligations of Omnicom Capital Holdings plc, or OCH, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the £325 million 2.25% Senior Notes due 2033, or the Sterling Notes. OCH’s assets consist of its investments in several wholly owned finance companies that function as treasury centers, providing funding for various operating companies in EMEA, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom or OCH to obtain funds
from their subsidiaries through dividends, loans or advances. The Sterling Notes and the related guarantee are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OCH and Omnicom, respectively.
The Credit Facility contains a financial covenant that requires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3.5 times for the most recently ended 12-month period. At September 30, 2022, we were in compliance with this covenant as our Leverage Ratio was 2.3 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
30
Borrowings
under the Credit Facility may use LIBOR as the benchmark interest rate. The LIBOR benchmark rate is expected to be phased out by June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.
At September 30, 2022, our long-term and short-term debt was rated BBB+ and A2 by S&P and Baa1 and P2 by Moody's. Our access to the commercial paper market and the cost of these borrowings are affected by market conditions and our credit ratings. The long-term debt indentures and the Credit Facility do not contain provisions that require acceleration of cash payments in the event of a downgrade in our credit ratings.
Credit Markets and Availability of Credit
In
light of the uncertainty of future economic conditions, we will continue to take actions available to us to respond to changing economic conditions, and we will continue to manage our discretionary expenditures. We will continue to monitor and manage the level of credit made available to our clients. We believe that these actions, in addition to the availability of our Credit Facility, are sufficient to fund our near-term working capital needs and our discretionary spending. Note 5 to the unaudited consolidated financial statements provides information regarding our Credit Facility.
We have typically funded our day-to-day liquidity by issuing commercial paper. Beginning in the third quarter of 2020 and continuing through the third quarter of 2022, we substantially reduced our commercial paper issuances as compared to prior years primarily as a result of our cash management during the recovery from the pandemic. We did not issue
commercial paper in each of the nine months ended September 30, 2022 and 2021. Additional liquidity sources include our Credit Facility and the uncommitted credit lines.
We expect to resume issuing commercial paper to fund our day-to-day liquidity when needed. However, disruptions in the credit markets may lead to periods of illiquidity in the commercial paper market and higher credit spreads. To mitigate any disruption in the credit markets and to fund our liquidity, we may borrow under the Credit Facility or the uncommitted credit lines or access the capital markets if favorable conditions exist. We will continue to monitor closely our liquidity and conditions in the credit markets. We cannot predict with any certainty the impact on us of any disruptions in the credit markets. In such circumstances, we may need to obtain additional
financing to fund our day-to-day working capital requirements. Such additional financing may not be available on favorable terms, or at all.
CREDIT RISK
We provide advertising, marketing and corporate communications services to several thousand clients that operate in nearly every sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client represented 2.6% and 3.1% of revenue for the twelve months ended September 30, 2022 and 2021, respectively. However, during periods of economic
downturn, the credit profiles of our clients could change.
In the normal course of business, our agencies enter into contractual commitments with media providers and production companies on behalf of our clients at levels that can substantially exceed the revenue from our services. These commitments are included in accounts payable when the services are delivered by the media providers or production companies. If permitted by local law and the client agreement, many of our agencies purchase media and production services for our clients as an agent for a disclosed principal. In addition, while operating practices vary by country, media type and media vendor, in the United States and certain foreign markets, many of our agencies’ contracts with media and production providers specify that our agencies are not liable to the media and production
providers under the theory of sequential liability until and to the extent we have been paid by our client for the media or production services.
Where purchases of media and production services are made by our agencies as a principal or are not subject to the theory of sequential liability, the risk of a material loss as a result of payment default by our clients could increase significantly and such a loss could have a material adverse effect on our business, results of operations and financial position.
In addition, our methods of managing the risk of payment default, including obtaining credit insurance, requiring payment in advance, mitigating the potential loss in the marketplace or negotiating with media providers, may be insufficient, less available, or unavailable during a severe economic downturn.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We manage our exposure to foreign exchange rate risk and interest rate risk through various strategies, including the use of derivative financial instruments. We use forward foreign exchange contracts as economic hedges to manage the cash flow volatility arising from foreign exchange rate fluctuations. We do not use derivatives for trading or speculative purposes. Using derivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. We manage that risk through careful selection and ongoing evaluation of the counterparty financial institutions based on specific minimum credit standards and other factors. Our 2021 10-K provides
a detailed discussion of the market risks affecting our operations. No material change has occurred in our market risks since the disclosure contained in our 2021 10-K.
31
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within applicable time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is accumulated and communicated to management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure. Management, including our CEO and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on that evaluation, our CEO and CFO concluded that, as of September 30, 2022, our disclosure controls and procedures are effective to ensure that decisions can be made timely with respect to required disclosures, as well as ensuring that the recording, processing, summarization and reporting of information required to be included in our Quarterly Report on Form 10-Q for the quarter ended September 30,
2022 are appropriate.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, with the participation of our CEO, CFO and our agencies, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our CEO and CFO concluded that our internal control over financial reporting was effective as of September 30, 2022. There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
KPMG LLP, an independent registered public accounting firm that audited our consolidated financial statements included in our 2021 10-K, has issued an attestation report on Omnicom’s internal control over financial reporting as of December 31, 2021, dated February 9, 2022.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We
do not presently expect that these proceedings will have a material adverse effect on our results of operations or financial position.
Item 1A. Risk Factors
Except as described below, there have been no material changes to the risk factors disclosed in Item 1A in our 2021 10-K.
The war in Ukraine has negatively impacted our business, results of operations and financial position, and could adversely impact our business, results of operations and financial position in the future.
Historically, we conducted operations in Russia and Ukraine through local agencies in which we held a majority stake. During the first quarter of 2022, the war in Ukraine required us to suspend our business
operations in Ukraine. The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affected the cross-border operations of businesses operating in Russia. In addition, Russian regulators imposed currency restrictions and regulations. All of these actions created uncertainty regarding our ability to recover our investment in our operations in Russia, as well as our ability to exercise control over the operations. Therefore, the ability to continue operations in Russia was uncertain. As a result, we sold, or committed to dispose of, all of our businesses in Russia.
The war in Ukraine is ongoing and its duration is uncertain. We cannot predict the outcome of the war in Ukraine or its impact on the broader region, as the conflict and related government actions are evolving and are beyond our control. The extent and duration of the military action, sanctions and resulting
market disruptions, which may include increased energy costs and further supply chain disruptions, could be significant and could adversely impact our business, results of operations and financial position in the future. Our clients’ businesses, results or operations and financial positions could also be adversely impacted by the war in Ukraine, which could impact client spending on our services.
A period of sustained inflation across all the major markets in which we operate could result in higher operating costs.
Our principal operating expenses are salary and service costs and occupancy and related expenses. Inflationary pressures typically result in increases to our operating expenses. While we would take actions, wherever possible, to reduce the impact of the effects of inflation; in cases of sustained inflation across several of our major markets it
becomes increasingly difficult to effectively control the increases to our costs. In addition, the effects of inflation on consumers budgets could result in the reduction of our clients’ spending plans on the marketing and communication services we provide them. If we are unable to increase our fees or take other actions to mitigate the effect of the resulting higher costs, our profitability and financial position could be negatively impacted.
32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Common stock repurchases during the three months
ended September 30, 2022 were:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
During the three months ended September 30,
2022, we purchased 1,079,177 shares of our common stock in the open market for general corporate purposes, and we withheld 352,285 shares from employees to satisfy estimated statutory income tax obligations related to the vesting of restricted stock awards. The value of the common stock withheld was based on the closing price of our common stock on the applicable exercise and vesting dates. There were no unregistered sales of equity securities during the three months ended September 30, 2022.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
