OMNICOM GROUP., INC. EXECUTIVE SUMMARY The COVID-19 pandemic has significantly impacted the global economy. Public health efforts to mitigate the impact of the pandemic include government actions such as travel restrictions, limitations on public gatherings, shelter in place orders and mandatory closures. These actions have negatively impacted many of our clients' businesses, and in turn, clients have reduced or plan to reduce their demand for our services. As a result, we experienced a reduction in our revenue beginning late in the first quarter of 2020, as compared to the same period in 2019, that is expected to continue for the remainder of the year. Such reductions in revenue could adversely impact our ongoing results of operations and financial position and the effects could be material. While we expect the pandemic to affect substantially all of our clients, certain industry sectors have been affected more immediately and more significantly than others, including travel, lodging and entertainment, energy and oil and gas, non-essential retail and automotive. Clients in these industries have already acted to cut costs, including postponing or reducing marketing communication expenditures. While certain industries such as healthcare and pharmaceuticals, technology and telecommunications, financial services and consumer products have fared relatively well to date, conditions are volatile and economic uncertainty cuts across all clients, industries and geographies. Overall, while we have a diversified portfolio of service offerings, clients and geographies, demand for our services can be expected to decline as marketers reduce expenditures in the short-term due to the uncertain impact of the pandemic on the global economy. As a result of the impact on our business, each of our agencies is in the process of aligning their cost structures, including severance actions and furloughs to reduce the workforce, and tailoring their services and capabilities to changes in client demand. Although we are likely to experience a decrease in our cash flow from operations, we have recently taken numerous proactive steps to strengthen our liquidity and financial position that are intended to mitigate the potential impact of the COVID-19 pandemic on our liquidity. InFebruary 2020 , we issued$600 million 2.45% Senior Notes dueApril 30, 2030 , or the 2.45% Notes. InMarch 2020 , the net proceeds from the issuance of the 2.45% Notes were used to redeem the remaining$600 million principal amount of our 4.45% Senior Notes dueAugust 15, 2020 , or the 2020 Notes. As a result, we have no notes maturing untilMay 2022 . Additionally, inApril 2020 , we issued$600 million of 4.20% Senior Notes dueJune 1, 2030 , or the 4.20% Notes, and we entered into a new$400 million 364 Day revolving credit facility, or the 364 Day Credit Facility. The 364 Day Credit Facility is in addition to our existing$2.5 billion multi-currency revolving credit facility, or Credit Facility, expiring inFebruary 2025 . Additionally, inMarch 2020 , we suspended our share repurchase activity. In addition, the impact on the global economy and resulting decline in share prices of common stock, including our share price, was determined to be a trigger event that required us to review our long-lived assets for impairment, primarily related to goodwill, amortizable intangible assets, right-of-use, or ROU, assets and equity method investments. The results of the review of our intangible assets and goodwill is discussed in Note 5 to the unaudited consolidated financial statements. With respect to our ROU assets, which consist mainly of real estate leases for office space, beginning in mid-March in response to the COVID-19 pandemic, we established a global work from home policy. While the overwhelming majority of our workforce temporarily transitioned to working from home, we have not terminated any of our office leases and have concluded that atMarch 31, 2020 our ROU assets were not impaired. In the second quarter, we will implement plans to realign our cost structure with the expected reduction in our revenue and in connection with the actions to reduce the cost of our workforce, we will evaluate our facility requirements and review our ROU assets for impairment. With respect to our equity method investments, we determined that the decline in the fair value of one of our equity method investments was other than temporary. As a result, atMarch 31, 2020 , we recognized a non-cash after-tax charge of$3.9 million to adjust the carrying value of our equity method investments to market value. 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, CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare. 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 withinOmnicom 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 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. 15 -------------------------------------------------------------------------------- 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 three months endedMarch 31, 2020 , our largest client accounted for 3.8% of our revenue and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 54% of our revenue. Our business is spread across a number of industry sectors with no one industry comprising more than 15% of our revenue for the three months endedMarch 31, 2020 . Although our revenue is generally balanced betweenthe United States and international markets and we have a large and diverse client base, we are not immune to general economic downturns. As described in more detail below, for the three months endedMarch 31, 2020 , revenue decreased$62.0 million , or 1.8%, compared to the three months endedMarch 31, 2019 . Changes in foreign exchange rates reduced revenue$50.0 million , or 1.4%, acquisition revenue, net of disposition revenue, reduced revenue$23.9 million , or 0.7%, reflecting the disposition of certain non-strategic businesses, and organic growth increased revenue$11.9 million , or 0.3%. Global economic conditions have a direct impact on our business and financial performance. Adverse global or regional economic conditions, such as those currently arising from COVID-19 pandemic 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. As a result of the impact related to the COVID-19 pandemic, we expect a significant reduction in our organic revenue growth, which will likely result in a decline in our revenue in the second quarter and the remainder of 2020, as compared to the prior year periods. While we are in the process of compiling, updating and re-evaluating our internal forecasts for the remainder of 2020, we do expect that we will have negative organic growth and overall revenue growth for 2020, as compared to 2019. Certain global events targeted by major marketers for advertising expenditures, such as the FIFA World Cup and theOlympics , and certain national events, such as theU.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, and we have factored the postponement of the 2020Olympics into our previously discussed internal revenue expectations for 2020. As discussed, inMarch 2020 our business began to experience the effects from client spending reductions from the impact related to the COVID-19 pandemic. The spending reductions primarily impacted our events business which is included in our CRM Consumer Experience discipline, certain businesses in our CRM Execution and Support businesses and our advertising and media businesses. The impact varied by geography and client. InNorth America , organic growth in our healthcare and CRM Consumer Experience discipline was offset by negative performance in our advertising and media businesses and disposition activity in 2019, primarily in our CRM Execution & Support discipline. InEurope and theMiddle East andAfrica , while mixed by market and discipline, modest organic growth in theU.K. was offset by the negative impact of changes in foreign exchange rates and negative performance in our advertising and media businesses in most markets in the regions, as well as a negative performance in our CRM Consumer Experience businesses, primarily in theMiddle East . In addition, the economic and political conditions in theEuropean Union , including the status of Brexit, remain uncertain and could negatively impact our businesses in theU.K. and in the region. InLatin America , the continuing unstable economic and political conditions inBrazil , as well as the negative effect of changes in foreign currency exchange rates and disposition activity, resulted in a weak performance in the region. InAsia-Pacific , organic growth inAustralia and New Zealand was offset by the negative impact of changes in foreign exchange rates and negative performance inJapan andChina . The economic and fiscal issues, including the impact related to the COVID-19 pandemic, facing the countries we operate in can cause economic uncertainty and volatility; however, the impact on our business varies by country. We monitor economic conditions closely, as well as client revenue levels and other factors. In response to reductions in our revenue that are expected to continue for the remainder of the year, beginning in the second quarter of 2020, we will take actions available to us to align our cost structure with changes in client demand and manage our working capital. However, there can be no assurance whether, or to what extent, 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 will be effective. Certain business trends have generally had a positive impact on our business and industry. These trends include clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets and integrating traditional and non-traditional marketing channels, as well as utilizing new communications technologies and emerging digital platforms. As clients increase their demands for marketing effectiveness and efficiency, they have made it a practice to consolidate their business within one service provider in the pursuit of a single engagement covering all consumer touch points. We have structured our business around these trends. We believe that our key client matrix organization structure approach to collaboration and integration of our services and solutions has provided a competitive advantage to our business in the past and we expect this to continue over the medium and long term. 16
-------------------------------------------------------------------------------- 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 services 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. In the first quarter of 2019, we disposed of certain businesses, primarily in our CRM Execution & Support discipline. 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. As discussed, inMarch 2020 our business began to experience the effects from client spending reductions from the impact related to the COVID-19 pandemic. For the quarter endedMarch 31, 2020 , our revenue decreased 1.8% compared to the quarter endedMarch 31, 2019 . Changes in foreign exchange rates reduced revenue 1.4%, acquisition revenue, net of disposition revenue, reduced revenue 0.7% and organic growth increased revenue 0.3%. The change in revenue across our principal regional markets were:North America increased$8.1 million ,Europe decreased$22.1 million ,Asia-Pacific decreased$6.9 million andLatin America decreased$17.6 million . InNorth America , organic growth in our healthcare and CRM Consumer Experience businesses was offset by negative performance in our advertising and media businesses and disposition activity in 2019 primarily in our CRM Execution & Support discipline. InEurope and theMiddle East andAfrica , while mixed by market and discipline, modest organic growth in theU.K. was offset by the negative impact of changes in foreign exchange rates and negative performance in our advertising and media businesses in most markets in the regions, as well as a negative performance in our CRM Consumer Experience businesses, primarily in theMiddle East . In addition, the economic and political conditions in theEuropean Union , including the status of Brexit, remain uncertain and could negatively impact our businesses in theU.K. and in the region. InLatin America , the continuing unstable economic and political conditions inBrazil , as well as the negative effect of changes in foreign currency exchange rates and disposition activity, resulted in a weak performance in the region. InAsia-Pacific , organic growth inAustralia and New Zealand was offset by the negative impact of changes in foreign exchange rates and negative performance inJapan andChina . The change in revenue in the first quarter of 2020 compared to the first quarter of 2019, in our fundamental disciplines was: advertising decreased$36.8 million , CRM Consumer Experience decreased$16.0 million , CRM Execution & Support decreased$29.9 million , public relations decreased$2.5 million and healthcare increased$23.2 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 direct service costs, which include third-party supplier costs 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. SG&A expenses, which decreased year-over-year, primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices, which includes group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs. Operating expenses in the first quarter of 2020 decreased$53.3 million , or 1.8%, period-over-period. Salary and service costs, which tend to fluctuate with changes in revenue, decreased$34.3 million , or 1.3%, in the first quarter of 2020 compared to the first quarter of 2019. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased$0.4 million , or 0.1%, in the first quarter of 2020 compared to the first quarter of 2019. Operating margin decreased 0.1% to 12.3% and EBITA margin decreased 0.1% to 12.9%, period-over-period. 17 -------------------------------------------------------------------------------- Net interest expense in the first quarter of 2020 decreased$0.2 million period-over-period to$45.8 million . Interest expense on debt decreased$5.4 million to$53.8 million in the first quarter of 2020, primarily reflecting a reduction in interest expense from refinancing activity, principally from the issuance of the Euro notes at lower interest rates in 2019, partially offset by a loss of$7.7 million on the early redemption of the remaining$600 million principal amount of the 2020 Notes. Interest income decreased$4.3 million to$12.7 million period-over-period. Additionally, we took actions to strengthen our liquidity and financial position that are intended to mitigate the potential impact of the COVID-19 pandemic on our liquidity. OnApril 1, 2020 , we issued our 4.20% Notes. For the remainder of the year, we expect the refinancing activity in 2019 and 2020 will more than offset the increase in interest expense from the issuance of the 4.20% Notes inApril 2020 . However, at this time, we expect reductions in interest income compared to the prior year will offset these reductions for the remainder of 2020. Our effective tax rate for the three months endedMarch 31, 2020 decreased period-over-period to 26.0% from 26.8%. The decrease was primarily attributable to recognizing certain domestic tax credits during the quarter. Net income -Omnicom Group Inc. in the first quarter of 2020 decreased$5.1 million , or 1.9%, to$258.1 million from$263.2 million in the first quarter of 2019. The period-over-period decrease is due to the factors described above and a$3.9 million loss included in Loss from Equity Method Investments, related to the impairment of an investment in affiliate. Diluted net income per share -Omnicom Group Inc. was$1.19 in the first quarter of 2020 and increased period-over-period due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan. 18 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - First Quarter 2020 Compared to First Quarter 2019 (in millions): 2020 2019 Revenue$ 3,406.9 $ 3,468.9 Operating Expenses: Salary and service costs 2,533.3 2,567.6 Occupancy and other costs 309.6 309.2 Cost of services 2,842.9 2,876.8 Selling, general and administrative expenses 86.8 103.6 Depreciation and amortization 57.0 59.6 2,986.7 3,040.0 Operating Profit 420.2 428.9 Operating Margin % 12.3 % 12.4 % Interest Expense 58.5 63.0 Interest Income 12.7 17.0
Income Before Income Taxes and Loss From Equity Method Investments 374.4
382.9
Income Tax Expense 97.4 102.7
Loss From Equity Method Investments (5.3) (0.5)
Net Income 271.7 279.7
Net Income Attributed To Noncontrolling Interests 13.6 16.5
Net Income - Omnicom Group Inc. $
258.1
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 withU.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 theU.S. GAAP financial measure of Net Income -Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions): 2020 2019 Net Income - Omnicom Group Inc.$ 258.1 $ 263.2 Net Income Attributed To Noncontrolling Interests 13.6 16.5 Net Income 271.7 279.7 Loss From Equity Method Investments (5.3) (0.5) Income Tax Expense 97.4 102.7 Income Before Income Taxes and Loss From Equity Method Investments 374.4 382.9 Interest Expense 58.5 63.0 Interest Income 12.7 17.0 Operating Profit 420.2 428.9 Add back: Amortization of intangible assets 20.8 21.6 Earnings before interest, taxes and amortization of intangible assets ("EBITA")$ 441.0 $ 450.5 Revenue$ 3,406.9 $ 3,468.9 EBITA$ 441.0 $ 450.5 EBITA Margin % 12.9 % 13.0 % 19
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Revenue
For the three months endedMarch 31, 2020 compared to the prior year period, revenue decreased$62.0 million , or 1.8%, to$3,406.9 million from$3,468.9 million in the first quarter of 2019. Changes in foreign exchange rates reduced revenue$50.0 million , acquisition revenue, net of disposition revenue, reduced revenue$23.9 million , and organic growth increased revenue$11.9 million . The impact of changes in foreign exchange rates reduced revenue 1.4%, or$50.0 million , compared to the first quarter of 2019, primarily resulting from the weakening of substantially all foreign currencies, especially the Euro, British Pound and Australian Dollar, against theU.S. Dollar. The components of revenue change for the first quarter of 2020 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % March 31, 2019$ 3,468.9 $ 1,884.1 $ 1,584.8 Components of revenue change: Foreign exchange rate impact (50.0) (1.4) % - - % (50.0) (3.2) % Acquisition revenue, net of disposition revenue (23.9) (0.7) % (22.7) (1.2) % (1.2) (0.1) % Organic growth 11.9 0.3 % 32.8 1.7 % (20.9) (1.3) % March 31, 2020$ 3,406.9 (1.8) %$ 1,894.2 0.5 %$ 1,512.7 (4.5) % 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$3,456.9 million for the Total column). The foreign exchange impact is the difference between the current period revenue inU.S. Dollars and the current period constant currency revenue ($3,406.9 million less$3,456.9 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 ($3,468.9 million for the Total column). Changes in the value of foreign currencies against theU.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 atApril 24, 2020 remain unchanged, we expect the impact of changes in foreign exchange rates to decrease revenue by approximately 2.0% for the year and 2.5% in the second quarter. Revenue and organic growth in our principal regional markets were (in millions): Three Months Ended March 31, 2020 2019 $ Change % Organic Growth Americas: North America$ 1,997.3 $ 1,989.2 $ 8.1 1.7 % Latin America 71.4 89.0 (17.6) (5.0) % EMEA: Europe 923.4 945.5 (22.1) (0.2) % Middle East and Africa 55.5 79.0 (23.5) (28.4) % Asia-Pacific 359.3 366.2 (6.9) 2.0 %$ 3,406.9 $ 3,468.9 $ (62.0) 0.3 % 20
-------------------------------------------------------------------------------- Revenue inEurope , which includes our primary markets of theU.K. and theEuro Zone , decreased$22.1 million for the first quarter of 2020. Revenue in theU.K. , representing 10.1% of total revenue, increased$6.3 million . Revenue in Continental Europe, which comprises theEuro Zone and the other European countries, representing 17.0% of total revenue, decreased$28.4 million , primarily due to the unfavorable impact from changes in foreign exchange rates. InNorth America , organic growth in our healthcare and CRM Consumer Experience businesses was offset by negative performance in our advertising and media businesses and disposition activity in 2019 primarily in our CRM Execution & Support discipline. InEurope and theMiddle East andAfrica , while mixed by market and discipline, modest organic growth in theU.K. was offset by the negative impact of changes in foreign exchange rates and negative performance in our advertising and media businesses in most markets in the regions, as well as a negative performance in our CRM Consumer Experience businesses, primarily in theMiddle East . In addition, the economic and political conditions in theEuropean Union , including the status of Brexit, remain uncertain and could negatively impact our businesses in theU.K. and in the region.InLatin America , the continuing unstable economic and political conditions inBrazil , as well as the negative effect of changes in foreign currency exchange rates and disposition activity, resulted in a weak performance in the region. InAsia-Pacific , organic growth inAustralia and New Zealand was offset by the negative impact of changes in foreign exchange rates and negative performance inJapan andChina . In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. The net change in the first quarter of 2020 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with all of our clients. In the first quarter of 2020 and 2019, our largest client represented 3.8% and 3.2% of revenue, respectively. Our ten largest and 100 largest clients represented 21.6% and 54.1% of revenue for the first quarter of 2020, respectively, and 19.2% and 51.8% of revenue for the first quarter of 2019, respectively. In an effort 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, CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare. Revenue and organic growth by discipline were (in millions): Three Months Ended March 31, 2020 2019 2020 vs. 2019 % of % of % Organic $ Revenue $ Revenue $ Change Growth Advertising$ 1,892.8 55.6 %$ 1,929.6 55.6 %$ (36.8) (0.1) % CRM Consumer Experience 583.1 17.1 % 599.1 17.3 % (16.0) (1.3) % CRM Execution & Support 318.1 9.3 % 348.0 10.1 % (29.9) (0.9) % Public Relations 331.6 9.7 % 334.1 9.6 % (2.5) 0.2 % Healthcare 281.3 8.3 % 258.1 7.4 % 23.2 9.6 %$ 3,406.9 $ 3,468.9 $ (62.0) 0.3 % We provide services to clients that operate in various industry sectors. Revenue by sector was: Three Months Ended March 31, 2020 2019 Food and Beverage 14 % 14 % Consumer Products 7 % 9 % Pharmaceuticals and Health Care 14 % 14 % Financial Services 8 % 9 % Technology 8 % 7 % Auto 11 % 10 % Travel and Entertainment 9 % 8 % Telecommunications 6 % 5 % Retail 7 % 6 % Services 2 % 2 % Oil, Gas and Utilities 2 % 2 % Not-for-Profit 1 % 2 % Government 2 % 2 % Education 1 % 1 % Other 8 % 9 % 100 % 100 % 21
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Operating Expenses
Operating expenses were (in millions):
Three Months Ended March 31,
2020 2019 2020 vs. 2019
% %
of of $ %
$ Revenue $ Revenue Change Change
Revenue $ 3,406.9 $ 3,468.9 $ (62.0) (1.8) %
Operating Expenses:
Salary and service costs 2,533.3 74.4 % 2,567.6 74.0 % (34.3) (1.3) %
Occupancy and other costs 309.6 9.1 % 309.2 8.9 % 0.4 0.1 %
Cost of services 2,842.9 2,876.8 (33.9) (1.2) %
Selling, general and administrative
expenses 86.8 2.5 % 103.6 3.0 % (16.8) (16.2) %
Depreciation and amortization 57.0 1.7 % 59.6 1.7 % (2.6) (4.4) %
2,986.7 87.7 % 3,040.0 87.6 % (53.3) (1.8) %
Operating Profit $ 420.2 12.3 % $ 428.9 12.4 % $ (8.7) (2.0) %
Operating expenses in the first quarter of 2020 decreased $53.3 million , or
1.8%, period-over-period. Salary and service costs, which tend to fluctuate with
changes in revenue, decreased $34.3 million , or 1.3%, in the first quarter of
2020 compared to the first quarter of 2019. Occupancy and other costs, which are
less directly linked to changes in revenue than salary and service costs,
increased $0.4 million , or 0.1%, in the first quarter of 2020 compared to the
first quarter of 2019. Operating margin decreased 0.1% to 12.3% and EBITA margin
decreased 0.1% to 12.9%, period-over-period.
Net Interest Expense
Net interest expense in the first quarter of 2020 decreased $0.2 million
period-over-period to $45.8 million . Interest expense on debt decreased $5.4
million to $53.8 million in the first quarter of 2020, primarily reflecting a
reduction in interest expense from refinancing activity, principally from the
issuance of the Euro notes at lower interest rates in 2019, partially offset by
a loss of $7.7 million on the early redemption of the remaining $600 million
principal amount of the 2020 Notes. Interest income decreased $4.3 million to
$12.7 million period-over-period. Additionally, we took actions to strengthen
our liquidity and financial position that are intended to mitigate the potential
impact of the COVID-19 pandemic on our liquidity. On April 1, 2020 , we issued
our 4.20% Notes. For the remainder of the year, we expect the refinancing
activity in 2019 and 2020 will more than offset the increase in interest expense
from the issuance of the 4.20% Notes in April 2020 . However, at this time, we
expect reductions in interest income compared to the prior year will offset
these reductions for the remainder of 2020.
Income Taxes
Our effective tax rate for the three months ended March 31, 2020 decreased
period-over-period to 26.0% from 26.8%. The decrease was primarily attributable
to recognizing certain domestic tax credits during the quarter.
Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. in the first quarter of 2020 decreased $5.1
million , or 1.9%, to $258.1 million from $263.2 million in the first quarter of
2019. The period-over-period decrease is due to the factors described above, and
a $3.9 million loss included in Loss from Equity Method Investments, related to
the impairment of an investment in affiliate. Diluted net income per share -
Omnicom Group Inc. was $1.19 in the first quarter of 2020 and increased
period-over-period 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, net of shares issued for restricted stock
awards, stock option exercises and the employee stock purchase plan.
CRITICAL ACCOUNTING POLICIES
For a more complete understanding of our accounting policies, the unaudited
consolidated financial statements and the related Management's Discussion and
Analysis of Financial Condition and Results of Operations, readers are
encouraged to consider this information together with Note 1 to the unaudited
consolidated financial statements regarding the impact of the COVID-19 pandemic
and Note 5 to the unaudited consolidated financial statements related to the
impairment testing of our goodwill and other intangible assets, and with our
discussion of our critical accounting policies under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2019 10-K.
NEW ACCOUNTING STANDARDS
Notes 1 and 3 to the unaudited consolidated financial statements provide
information regarding new accounting standards.
22
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LIQUIDITY AND CAPITAL RESOURCES
Although we are likely to experience a decrease in our cash flow from
operations, we have recently taken numerous proactive steps to strengthen our
liquidity and financial position that are intended to mitigate the potential
impact of the COVID-19 pandemic on our liquidity. In February 2020 , we issued
$600 million of the 2.45% Notes. In March 2020 , the net proceeds from the
issuance of the 2.45% Notes were used to redeem the remaining $600 million
principal amount of the 2020 Notes. As a result, we have no notes maturing until
May 2022 . Additionally, in April 2020 , we issued $600 million of the 4.20%
Notes, and we entered into a new $400 million 364 Day Credit Facility. The 364
Day Credit Facility is in addition to our existing $2.5 billion Credit Facility
expiring in February 2025 . Additionally, in March 2020 we suspended our share
repurchase activity.
Cash Sources and Requirements
Our primary liquidity sources are our operating cash flow, cash and cash
equivalents and short-term investments. Additional liquidity sources include our
$2.5 billion Credit Facility, uncommitted credit lines aggregating $1.1 billion ,
the ability to issue up to $2 billion of commercial paper and access to the
capital markets. On February 14, 2020 , we amended our Credit Facility to extend
the term to February 14, 2025 . On April 3, 2020 we entered into the $400 million
364 Day Credit Facility, expiring on April 2, 2021 . Our liquidity funds our
non-discretionary cash requirements and our discretionary spending.
Borrowings under our credit facilities may use LIBOR as the benchmark interest
rate. The LIBOR benchmark rate is expected to be phased out after the end of
2021. We do not expect that the discontinuation of the LIBOR rate will have a
material impact on our liquidity or results of operations.
Working capital is our principal non-discretionary funding requirement. 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 contingent purchase price obligations
(earn-outs) from acquisitions. Our principal discretionary cash spending
includes dividend payments to common shareholders, capital expenditures,
strategic acquisitions and repurchases of our common stock. We typically have a
short-term borrowing requirement normally peaking during the second quarter of
the year due to the timing of payments for incentive compensation, income taxes
and contingent purchase price obligations.
Cash and cash equivalents decreased $1.6 billion from December 31, 2019 , and
short-term investments decreased $2.0 million from December 31, 2019 . During the
first three months of 2020, we used $987.2 million of cash in operating
activities, which included the use for operating capital of $1.3 billion ,
primarily related to our typical working capital requirement during the period,
the timing of working capital activity and the reduction in client spending late
in the first quarter of 2020. Our discretionary spending during the first three
months of 2020 was: capital expenditures of $26.4 million ; dividends paid to
common shareholders of $141.7 million ; dividends paid to shareholders of
noncontrolling interests of $10.4 million ; repurchases of our common stock,
which we have suspended in March 2020 , net of proceeds from stock option
exercises and related tax benefits and common stock sold to our employee stock
purchase plan, of $198.6 million ; and acquisition payments, including payment of
contingent purchase price obligations and acquisition of additional shares of
noncontrolling interests, net of cash acquired, of $11.8 million . In addition,
the impact of foreign exchange rate changes reduced cash and cash equivalents by
$210.5 million .
On February 19, 2020 , we issued $600 million of the 2.45% Notes. The net
proceeds from the issuance, after deducting the underwriting discount and
offering expenses, were $592.6 million . The 2.45% Notes are senior unsecured
obligations of Omnicom that rank equal in right of payment with all existing and
future unsecured senior indebtedness. On March 23, 2020 , the net proceeds from
the issuance were used to redeem the remaining $600 million principal amount of
the 2020 Notes. In connection with the redemption, we recorded a loss on
extinguishment of $7.7 million in interest expense. Following the redemption,
there were no 2020 Notes outstanding.
On April 1, 2020 , we issued $600 million of the 4.20% Notes. The net proceeds
from the issuance, after deducting the underwriting discount and offering
expenses, were $592.5 million . The 4.20% Notes are senior unsecured obligations
of Omnicom that rank equal in right of payment with all existing and future
unsecured senior indebtedness. The net proceeds from the issuance will be used
for general corporate purposes, which could include working capital
expenditures, fixed asset expenditures, acquisitions, repayment of commercial
paper and short-term debt, refinancing of other debt, or other capital
transactions.
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. The treasury centers aggregate the net
position which is either invested with or borrowed from third parties. 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 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
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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 March 31, 2020 , our foreign subsidiaries held approximately $1.1 billion of
our total cash and cash equivalents of $2.7 billion . Most of the cash is
available to us, net of any foreign withholding taxes payable upon repatriation
to the United States .
At March 31, 2020 , our net debt position, which we define as total debt,
including short-term debt, less cash and cash equivalents and short-term
investments increased $1.6 billion as compared to December 31, 2019 . The
increase in net debt primarily resulted from the use of cash of $1.3 billion for
operating capital principally related to our typical working capital
requirements during the period, the timing of working capital activity and the
reduction in client spending late in the first quarter. In addition, the impact
of foreign exchange rate changes reduced cash and cash equivalents by over $200
million , as compared to December 31, 2019 and March 31, 2019 .
The components of net debt were (in millions):
March 31, 2020 December 31, 2019 March 31, 2019
Short-term debt $ 10.9 $ 10.1 $ 595.4
Long-term debt, including current portion 5,093.4 5,134.3 4,901.8
Total debt 5,104.3 5,144.4 5,497.2
Less: Cash and cash equivalents and short-term
investments 2,694.1 4,309.3 3,455.1
Net debt $ 2,410.2 $ 835.1 $ 2,042.1
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
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc. , or OCI,
are co-obligors under the senior notes due 2022, 2024 and 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. The 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 OFHP's obligations with respect to the Euro notes due 2027 and 2031.
OFHP's assets consist of its investments in several wholly owned finance
companies that function as treasury centers, which provide 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 OFHP to obtain funds from
their subsidiaries through dividends, loans or advances. The Euro denominated
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 OFHP and each of Omnicom and OCI, respectively.
The Credit Facility and the 364 Day Credit Facility contain a financial covenant
that requires us to maintain a Leverage Ratio of consolidated indebtedness to
consolidated EBITDA of no more than 3.5 times for the most recently ended
12-month period (EBITDA is defined as earnings before interest, taxes,
depreciation, amortization and non-cash charges). With respect to the Credit
Facility, at March 31, 2020 , we were in compliance with this covenant as our
Leverage Ratio was 2.1. The Credit Facility and the 364 Day Credit Facility do
not limit our ability to declare or pay dividends or repurchase our common
stock.
At March 31, 2020 , 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. Our long-term debt and Credit Facility do not contain provisions that
require acceleration of cash payments in the event of a downgrade in our credit
ratings.
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-------------------------------------------------------------------------------- Credit Markets and Availability of Credit In light of the uncertainty of future economic conditions, we continue to seek to take actions available to us to respond to changing economic conditions, and we will continue to actively manage our discretionary expenditures. We have not repurchased any of our common stock sinceMarch 13, 2020 and we do not plan to resume our repurchases until we believe economic conditions have begun to stabilize. 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$2.5 billion Credit Facility, and 364 Day Credit Facility are sufficient to fund our near-term working capital needs and our discretionary spending. For additional information about our credit facilities, see Note 6 to our consolidated financial statements. We have typically funded our day-to-day liquidity by issuing commercial paper. In the first half of 2019, we issued short-term debt in a private placement to reduce our commercial paper issuances. This short-term debt was redeemed in the third quarter of 2019. Additional liquidity sources include our Credit Facility or the uncommitted credit lines. AtMarch 31, 2020 , there were no outstanding commercial paper issuances or borrowings under the Credit Facility or the uncommitted credit lines. Commercial paper activity was (dollars in millions):
Three Months Ended
2020 2019
Average amount outstanding during the quarter $ 64.4 $ -
Maximum amount outstanding during the quarter $ 361.7 $ -
Average days outstanding 1.9 -
Weighted average interest rate 1.64 % - %
We expect to continue issuing commercial paper to fund our day-to-day liquidity.
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 3.8% of revenue in 2020. 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
less available or unavailable during a severe economic downturn.
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