OMNICOM GROUP., INC. EXECUTIVE SUMMARY
Risks and Uncertainties
Global economic challenges, including the impact of the war inUkraine , the COVID-19 pandemic, rising inflation 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
We have historically conducted operations in
During the first quarter of 2022, the war inUkraine required us to suspend our business operations inUkraine . The war resulted in the imposition of sanctions bythe United States , theUnited Kingdom , and theEuropean Union , that affect the cross-border operations of businesses operating inRussia . In addition, Russian regulators have imposed currency restrictions and regulations that created uncertainty regarding our ability to recover our investment in our operations inRussia , as well as our ability to exercise control over the operations. Also, many multinational companies, including many of our large clients, ceased or suspended their operations inRussia . Therefore, the ability to continue operations inRussia without additional funding, which we will not provide, is uncertain. As a result, we have sold, or committed to dispose of, all of our businesses inRussia . Accordingly, we recorded pretax charges of$113.4 million in the first quarter of 2022, primarily consisting of the net investment in our Russian businesses, and also including charges related to the suspension of operations inUkraine . We evaluated the effects of the war inUkraine and the geopolitical events in the region on our forecasted consolidated operating performance and concluded that we do not have a trigger event that would result in an update of our evaluation of goodwill for impairment that we performed inJune 2021 . We will continue to monitor these ongoing geopolitical events, evaluate available options to seek to mitigate further risk of loss and continue to evaluate the impact, if any, on our goodwill impairment test, which will be performed inJune 2022 .
Impact of COVID-19 Pandemic - Update
Beginning inMarch 2020 and continuing through the first quarter of 2021, our business experienced the effects from 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 year inApril 2021 , and the improvement continued through the first quarter of 2022 as clients substantially increased their spending on our services.
Results of Operations
Revenue for the three months endedMarch 31, 2022 decreased$16.6 million , or 0.5%, compared to the three months endedMarch 31, 2021 . Organic growth increased revenue$408.0 million , or 11.9%, primarily reflecting increased client spending in all our disciplines and across all our geographic regions compared to the prior year period. The increase in organic revenue was offset by the reduction in acquisition revenue, net of disposition revenue of$339.6 million , or 9.9%, reflecting dispositions in the Advertising & Media discipline in the second quarter of 2021, and the negative impact of changes in foreign currency exchange rates of$85.0 million , or 2.5%. 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, and 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 and retail 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- 14 -------------------------------------------------------------------------------- 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. 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 endedMarch 31, 2022 , our largest client accounted for 3.3% of our revenue and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 51.8% of our revenue. Our clients operate in virtually every sector of the global economy with no one industry representing more than 16% of our revenue for the three months endedMarch 31, 2022 . 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. 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. 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 inUkraine , the COVID-19 pandemic, severe and sustained inflation in countries that comprise our major markets 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. Revenue for the quarter endedMarch 31, 2022 decreased$16.6 million , or 0.5%, compared to the prior year quarter. Organic growth increased revenue$408.0 million , or 11.9%. Changes in foreign exchange rates reduced revenue$85.0 million , or 2.5%, and acquisition revenue, net of disposition revenue, reduced revenue$339.6 million , or 9.9%. The reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021. The change in revenue across our principal regional markets was:North America decreased$133.5 million , or 6.8%,Europe increased$51.0 million , or 5.4%,Asia-Pacific increased$29.7 million , or 7.4%, andLatin America increased$4.5 million , or 7.1%. InNorth America , the increase in organic revenue across all our disciplines, especially in our Advertising & Media and Precision Marketing disciplines, was offset by a reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline. InEurope , organic revenue increased in substantially all countries and in all disciplines, especially 15 -------------------------------------------------------------------------------- our Advertising & Media discipline, which was led by our media business, and our Experiential discipline, as it continues to recover from the impact of the pandemic. The increase in organic revenue was partially offset by the strengthening of theU.S. Dollar against the British Pound and the Euro. InLatin America , revenue increased due to organic growth in most countries in the region, especiallyBrazil andColombia , which was partially offset by negative performance inMexico . The strengthening of theU.S. Dollar against most currencies in the region partially offset the increase in organic growth. InAsia-Pacific , revenue increased due to strong organic revenue growth in all our major markets in the region, particularlyAustralia ,Greater China andIndia , and in all disciplines. The strengthening of theU.S. Dollar against substantially all currencies in the region partially offset the increase in organic revenue in the region. The change in revenue in the first quarter of 2022 compared to the first quarter of 2021 in our fundamental disciplines was: Advertising & Media decreased$234.3 million , Precision Marketing increased$66.6 million ,Commerce & Brand Consulting increased$23.4 million , Experiential increased$54.1 million , Execution & Support increased$7.7 million , Public Relations increased$43.4 million and Healthcare increased$22.5 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. Operating expenses for the quarter endedMarch 31, 2022 increased$95.8 million , or 3.2%, period-over-period. Operating expenses reflect pretax charges arising from the effects of the war inUkraine of$113.4 million . Salary and service costs, which tend to fluctuate with changes in revenue, decreased$53.2 million , or 2.1%, compared to the quarter endedMarch 31, 2021 , reflecting an increase in salary and related service costs of$145.4 million , offset by a decrease in third-party service costs of$198.6 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, partially offset by the weakening of most foreign currencies, especially the British Pound and Euro, against theU.S. Dollar. Third-party service costs, which fluctuate with changes in revenue, decreased during the quarter primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased$8.6 million , or 2.9%, period-over-period, primarily due to an increase in office and other costs resulting from the return of our workforce to the office. For the quarter endedMarch 31, 2022 compared to the prior year period, operating profit decreased$112.4 million to$353.0 million , operating margin decreased to 10.4% from 13.6%, and EBITA margin decreased to 10.9% from 14.2%, primarily as a result of the charges arising from the effects of the war inUkraine of$113.4 million , which reduced both operating margin and EBITA margin by 3.3%. 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 period-over-period primarily due to increased third-party marketing costs and professional fees. Net interest expense in the first quarter of 2022 decreased$4.7 million period-over-period to$42.8 million . Interest expense on debt in the first quarter of 2022 decreased$0.9 million to$47.0 million , primarily as a result of the benefit from the early redemption inMay 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$800 million 2.60% Senior Notes due 2031, or the 2031 Notes, inMay 2021 and the issuance of £325 million 2.25% Senior Notes due 2033, or the Sterling Notes, inNovember 2021 . Interest income in the first quarter of 2022 increased$1.9 million period-over-period to$8.2 million . Our effective tax rate for the three months endedMarch 31, 2022 increased period-over-period to 37.2% from 26.8%. 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 inUkraine , as well as an additional net charge of$4.8 million in connection with these charges. These charges were partially offset by the tax benefit arising from our share-based compensation awards. We expect our tax rate for the remainder of the year to approximate 26.5%, similar to the rate for this quarter after adjusting for the charges arising for the effect of the war inUkraine . Net income -Omnicom Group Inc. in the first quarter of 2022 decreased$114.0 million to$173.8 million from$287.8 million in the first quarter of 2021. The period-over-period decrease is due to the factors described above. Diluted net income per share -Omnicom Group Inc. for the first quarter of 2022 was$0.83 , as compared to$1.33 in the first quarter of 2021. The period-over-period change was due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of 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 impact of the after-tax charges arising from the effects of the war inUkraine reduced net income -Omnicom Group Inc. in the first quarter of 2021 by$118.2 million and diluted net income per share -Omnicom Group Inc. by$0.56 per share. 16 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - First Quarter 2022 Compared to First Quarter 2021 (in millions): 2022 2021 Revenue$ 3,410.3 $ 3,426.9 Operating Expenses: Salary and service costs 2,491.8 2,545.0 Occupancy and other costs 300.2 291.6 Charges arising from the effects of the war in Ukraine 113.4 - Cost of services 2,905.4 2,836.6 Selling, general and administrative expenses 96.7 71.6 Depreciation and amortization 55.2 53.3 3,057.3 2,961.5 Operating Profit 353.0 465.4 Operating Margin % 10.4 % 13.6 % Interest Expense 51.0 53.8 Interest Income 8.2 6.3
Income Before Income Taxes and Loss From Equity Method Investments 310.2
417.9
Income Tax Expense 115.5 111.9
Loss From Equity Method Investments (0.1) -
Net Income 194.6 306.0
Net Income Attributed To Noncontrolling Interests 20.8 18.2
Net Income - Omnicom Group Inc. $ 173.8 $ 287.8
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
2022 2021
Net Income - Omnicom Group Inc. $ 173.8 $ 287.8
Net Income Attributed To Noncontrolling Interests 20.8 18.2
Net Income 194.6 306.0
Loss From Equity Method Investments (0.1) -
Income Tax Expense 115.5 111.9
Income Before Income Taxes and Loss From Equity Method Investments 310.2 417.9
Interest Expense 51.0 53.8
Interest Income 8.2 6.3
Operating Profit 353.0 465.4
Add back: Amortization of intangible assets 19.4 19.9
Earnings before interest, taxes and amortization of intangible
assets ("EBITA") $ 372.4 $ 485.3
Revenue $ 3,410.3 $ 3,426.9
EBITA $ 372.4 $ 485.3
EBITA Margin % 10.9 % 14.2 %
17
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Revenue
Revenue for the quarter endedMarch 31, 2022 decreased$16.6 million , or 0.5%, compared to the prior year quarter. Organic growth increased revenue$408.0 million , or 11.9%. Changes in foreign exchange rates reduced revenue$85.0 million , or 2.5%, and acquisition revenue, net of disposition revenue, reduced revenue$339.6 million , or 9.9%. The reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline in the second quarter of 2021. The change in revenue across our principal regional markets was:North America decreased$133.5 million , or 6.8%,Europe increased$51.0 million , or 5.4%,Asia-Pacific increased$29.7 million , or 7.4%, andLatin America increased$4.5 million , or 7.1%. InNorth America , the increase in organic revenue across all our disciplines, especially in our Advertising & Media and Precision Marketing disciplines, was offset by a reduction in acquisition revenue, net of disposition revenue, primarily due to dispositions in the Advertising & Media discipline. InEurope , organic revenue increased in substantially all countries and in all disciplines, especially our Advertising & Media discipline, which was led by our media business, and our Experiential discipline, as it continues to recover from the impact of the pandemic. The increase in organic revenue was partially offset by the strengthening of theU.S. Dollar against the British Pound and the Euro. InLatin America , revenue increased due to organic growth in most countries in the region, especiallyBrazil andColombia , which was partially offset by negative performance inMexico . The strengthening of theU.S. Dollar against most currencies in the region partially offset the increase in organic growth. InAsia-Pacific , revenue increased due to strong organic revenue growth in all our major markets in the region, particularlyAustralia ,Greater China andIndia , and in all disciplines. The strengthening of theU.S. Dollar against substantially all currencies in the region partially offset the increase in organic revenue in the region. The change in revenue in the first quarter of 2022 compared to the first quarter of 2021 in our fundamental disciplines was: Advertising & Media decreased$234.3 million , Precision Marketing increased$66.6 million ,Commerce & Brand Consulting increased$23.4 million , Experiential increased$54.1 million , Execution & Support increased$7.7 million , Public Relations increased$43.4 million and Healthcare increased$22.5 million . The components of revenue change for the first quarter of 2022 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % March 31, 2021$ 3,426.9 $ 1,868.1 $ 1,558.8 Components of revenue change: Foreign exchange rate impact (85.0) (2.5) % - - % (85.0) (5.5) % Acquisition revenue, net of disposition revenue (339.6) (9.9) % (341.6) (18.3) % 2.0 0.1 % Organic growth 408.0 11.9 % 198.1 10.6 % 209.9 13.5 % March 31, 2022$ 3,410.3 (0.5) %$ 1,724.6 (7.7) %$ 1,685.7 8.1 % 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$3,495.3 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 ($3,410.3 million less$3,495.3 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 ($3,426.9 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 15, 2022 remain unchanged, we expect the impact of changes in foreign exchange rates to reduce revenue for the full year by approximately 2% to 2.5%. In addition, based on acquisition and disposition activity to date, including the disposition of our businesses inRussia (see Note 1 to the unaudited consolidated financial statements), we expect the effect of net acquisitions and dispositions to reduce revenue for the second quarter of 2022 and for the full year by approximately 6.5% and 4.5%, respectively. 18 --------------------------------------------------------------------------------
Revenue and organic growth in our geographic markets were (in millions):
Three Months Ended March 31,
2022 2021 $ Change % Organic Growth
Americas :
North America $ 1,839.0 $ 1,972.5 $ (133.5) 10.6 %
Latin America 67.7 63.2 4.5 9.3 %
EMEA:
Europe 992.0 941.0 51.0 12.5 %
Middle East and Africa 81.9 50.2 31.7 63.8 %
Asia-Pacific 429.7 400.0 29.7 11.1 %
$ 3,410.3 $ 3,426.9 $ (16.6) 11.9 %
Revenue in Europe , which includes our primary markets of the United Kingdom , or
the U.K. , and the Euro Zone , increased $51.0 million for the first quarter of
2022. Revenue in the U.K. , representing 11.4% of consolidated revenue, increased
$32.2 million . Revenue in Continental Europe, which comprises the Euro Zone and
the other European countries, representing 17.7% of consolidated revenue,
increased $18.8 million . The increase in revenue in Europe is due to strong
organic growth in all disciplines and substantially all countries, partially
offset by the strengthening of the U.S. Dollar against the British Pound and the
Euro.
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. For both
the twelve months ended March 31, 2022 and 2021, our largest client represented
3.3% of revenue. Our ten largest and 100 largest clients represented 21.1% and
51.8% of revenue for the twelve months ended March 31, 2022 , respectively, and
21.5% and 54.2% of revenue for the twelve months ended March 31, 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.
Revenue and organic growth by discipline were (in millions):
Three Months Ended March 31,
2022 2021 2022 vs. 2021
% of % of % Organic
$ Revenue $ Revenue $ Change Growth
Advertising & Media $ 1,769.4 51.9 % $ 2,003.7 58.5 % $ (234.3) 9.1 %
Precision Marketing 336.1 9.8 % 269.5 7.8 % 66.6 20.3 %
Commerce & Brand Consulting 237.9 7.0 % 214.5 6.2 % 23.4 13.8 %
Experiential 142.5 4.2 % 88.4 2.6 % 54.1 68.0 %
Execution & Support 254.3 7.4 % 246.6 7.2 % 7.7 6.3 %
Public Relations 360.9 10.6 % 317.5 9.3 % 43.4 14.0 %
Healthcare 309.2 9.1 % 286.7 8.4 % 22.5 7.7 %
$ 3,410.3 $ 3,426.9 $ (16.6) 11.9 %
19
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We provide services to clients that operate in various industry sectors. Revenue by sector was:
Three Months Ended March 31,
2022 2021
Pharmaceuticals and Healthcare 15 % 15 %
Food and Beverage 14 % 14 %
Technology 11 % 9 %
Auto 10 % 10 %
Consumer Products 8 % 8 %
Financial Services 7 % 7 %
Travel and Entertainment 6 % 10 %
Retail 7 % 7 %
Telecommunications 5 % 5 %
Government 3 % 3 %
Services 2 % 2 %
Oil, Gas and Utilities 2 % 1 %
Not-for-Profit 1 % 1 %
Education 1 % 1 %
Other 8 % 7 %
100 % 100 %
Operating Expenses
Operating expenses were (in millions):
Three Months Ended March 31,
2022 2021 2022 vs. 2021
% of % of $ %
$ Revenue $ Revenue Change Change
Revenue $ 3,410.3 $ 3,426.9 $ (16.6) (0.5) %
Operating Expenses:
Salary and service costs:
Salary and related service costs 1,794.6 52.6 % 1,649.2 48.1 % 145.4 8.8 %
Third-party service costs 697.2 20.4 % 895.8 26.1 % (198.6) (22.2) %
2,491.8 73.1 % 2,545.0 74.3 % (53.2) (2.1) %
Occupancy and other costs 300.2 8.8 % 291.6 8.5 % 8.6 2.9 %
Charges arising from the effects of the
war in Ukraine 113.4 3.3 % - - % 113.4 - %
Cost of services 2,905.4 2,836.6 68.8 2.4 %
Selling, general and administrative
expenses 96.7 2.8 % 71.6 2.1 % 25.1 35.1 %
Depreciation and amortization 55.2 1.6 % 53.3 1.6 % 1.9 3.6 %
3,057.3 89.6 % 2,961.5 86.4 % 95.8 3.2 %
Operating Profit $ 353.0 10.4 % $ 465.4 13.6 % $ (112.4) (24.2) %
Operating expenses for the quarter ended March 31, 2022 increased $95.8 million ,
or 3.2%, period-over-period. Operating expenses reflect pretax charges arising
from the effects of the war in Ukraine of $113.4 million . Salary and service
costs, which tend to fluctuate with changes in revenue, decreased $53.2 million ,
or 2.1%, compared to the quarter ended March 31, 2021 , reflecting an increase in
salary and related service costs of $145.4 million , offset by a decrease in
third-party service costs of $198.6 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,
partially offset by the weakening of most foreign currencies, especially the
British Pound and Euro, against the U.S. Dollar. Third-party service costs,
which fluctuate with changes in revenue, decreased during the quarter primarily
due to dispositions in the Advertising & Media discipline in the second quarter
of 2021. Occupancy and other costs, which are less directly linked to changes in
revenue than salary and service costs, increased $8.6 million , or 2.9%,
period-over-period, primarily due to an increase in office and other costs
resulting from the return of our workforce to the office. For the quarter ended
March 31, 2022 compared to the prior year period, operating profit decreased
$112.4 million to $353.0 million , operating margin decreased to 10.4% from
13.6%, and EBITA margin decreased to 10.9% from 14.2%, primarily as a result of
the charges arising from the effects of the war in Ukraine of $113.4 million ,
which reduced both operating margin and EBITA margin by 3.3%.
20
--------------------------------------------------------------------------------Net Interest Expense
Net interest expense in the first quarter of 2022 decreased$4.7 million period-over-period to$42.8 million . Interest expense on debt in the first quarter of 2022 decreased$0.9 million to$47.0 million primarily as a result of the benefit from the early redemption inMay 2021 of all the outstanding 2022 Notes, which was partially offset by the issuance of the 2031 Notes inMay 2021 and the issuance of the Sterling Notes inNovember 2021 . Interest income in the first quarter of 2022 increased$1.9 million period-over-period to$8.2 million .
Income Taxes
Our effective tax rate for the three months endedMarch 31, 2022 increased period-over-period to 37.2% from 26.8%. 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 inUkraine , as well as an additional net charge of$4.8 million in connection with these charges. These charges were partially offset by the tax benefit arising from our share-based compensation awards. We expect our tax rate for the remainder of the year to approximate 26.5%, similar to the rate for the this quarter after adjusting for the charges arising for the effect of the war inUkraine .
Net Income and Net Income Per Share -
Net income -Omnicom Group Inc. in the first quarter of 2022 decreased$114.0 million to$173.8 million from$287.8 million in the first quarter of 2021. The period-over-period decrease is due to the factors described above. Diluted net income per share -Omnicom Group Inc. for the first quarter of 2022 was$0.83 , as compared to$1.33 in the first quarter of 2021. The period-over-period change was due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of 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 impact of the after-tax charges arising from the effects of the war inUkraine reduced net income -Omnicom Group Inc. in the first quarter of 2021 by$118.2 million and diluted net income per share -Omnicom Group Inc. by$0.56 per share. 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 our discussion of our critical accounting policies under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 10-K.
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 and cash and cash equivalents. Additional liquidity sources include our$2.5 billion multi-currency revolving credit facility, or Credit Facility, maturing onFebruary 14, 2025 , uncommitted credit lines aggregating$807.5 million , the ability to issue up to$2 billion ofU.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. 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 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. Cash and cash equivalents decreased$1,391.3 million fromDecember 31, 2021 . During the first three months of 2022, we used$544.5 million of cash in operating activities, which included the use for operating capital of$884.2 million , primarily related to our typical working capital requirement during the period. Our discretionary spending for the first three months of 2022 was$822.3 million as compared to$172.5 million for the first three months of 2021. Discretionary spending for the first three months of 2022 is comprised of capital expenditures of$23.2 million , dividends paid to common shareholders of$147.4 million , dividends paid to shareholders of noncontrolling interests of$14.0 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$286.8 million , and net acquisition payments, including payment of contingent purchase price obligations and acquisition of additional shares of noncontrolling interests of$258.9 million . In addition, we purchased short-term investments of$92.7 million , 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$8.7 million . 21 --------------------------------------------------------------------------------
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 inNorth America ,Europe andAsia 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. During the quarter, we purchased$92.7 million of short-term investments that mature at various times during the year. 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 ofU.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. AtMarch 31, 2022 , our foreign subsidiaries held approximately$1.8 billion of our total cash and cash equivalents of$3.9 billion . Most of the cash is available to us, net of any foreign withholding taxes payable upon repatriation tothe United States . AtMarch 31, 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$1,262.1 million to$1,640.6 million fromDecember 31, 2021 . The increase in net debt primarily resulted from the use of cash of$884.2 million for operating capital principally related to our typical working capital requirements during the period, acquisition payments of$246.6 million and repurchases of our common stock of$300.3 million .
The components of net debt were (in millions):
December 31,
March 31, 2022 2021 March 31, 2021
Short-term debt $ 12.4 $ 9.6 $ 5.9
Long-term debt 5,646.4 5,685.7 5,754.4
Total debt 5,658.8 5,695.3 5,760.3
Less: Cash and cash equivalents 3,925.5 5,316.8 4,897.3
Less: Short-term investments 92.7 - -
Net debt $ 1,640.6 $ 378.5 $ 863.0
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 ofOmnicom 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 ofOmnicom and OCI, andOmnicom 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 orOmnicom 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 ofOmnicom Finance Holdings plc , or OFH, aU.K. -based wholly owned subsidiary ofOmnicom , with respect to the €500 million 0.80% Senior Notes 22 -------------------------------------------------------------------------------- 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, which provide funding for various operating companies inEurope ,Brazil ,Australia and other countries in theAsia-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 ofOmnicom , 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 ofOmnicom and OCI, respectively.Omnicom has fully and unconditionally guaranteed the obligations ofOmnicom Capital Holdings plc , or OCH, aU.K. -based wholly owned subsidiary ofOmnicom , 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, which provide funding for various operating companies in EMEA,Australia and other countries in theAsia-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 ofOmnicom 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 andOmnicom , 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 3.0 times for the most recently ended 12-month period. AtMarch 31, 2022 , we were in compliance with this covenant as our Leverage Ratio was 2.4 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock. Borrowings under the Credit Facility may use LIBOR as the benchmark interest rate. The LIBOR benchmark rate is expected to be phased out byJune 2023 . We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations. AtMarch 31, 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 first 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. Additional liquidity sources include our Credit Facility and the uncommitted credit lines. We did not issue commercial paper in each of the three months endedMarch 31, 2022 and 2021. 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 3.3% of revenue for both the twelve months endedMarch 31, 2022 . 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
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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.
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