OMNICOM GROUP., INC. Impact of the COVID-19 Pandemic on our Business The COVID-19 pandemic has significantly impacted our business and results of operations. Public health efforts to mitigate the impact of the pandemic, including government actions to restrict travel, limit public gatherings and shelter in place and mandatory closures of businesses resulted in many of our clients reducing or suspending their spending plans with us. As a result, for the nine months endedSeptember 30, 2020 , revenue decreased$1,398.4 million , or 12.9%, compared to the nine months endedSeptember 30, 2019 , primarily due to the impact of the COVID-19 pandemic. We expect that the negative impact from the pandemic on our revenue will continue for the remainder of the year, and such reduction in revenue could adversely impact our ongoing results of operations and financial position. These effects have been, and may continue to be, material. In the second quarter of 2020, we took actions to align our cost structure and reduce our workforce and facility requirements and continued the review of businesses for disposal and assets for impairment. As a result, we recorded a pre-tax charge of$277.9 million , which is comprised of incremental severance of$150.0 million , real estate operating lease right-of-use, or ROU, asset and other asset impairment charges of$55.8 million , other real estate exit costs of$47.0 million and dispositions and other charges of$25.1 million (see Note 1 to the unaudited consolidated financial statements). These actions reduced headcount by over 6,000 and reduced the related facility requirements, which should result in significant reductions in future operating expenses. As a result, we expect that our margins for the second half of the year will be in line with the prior year. In the third quarter and first nine months of 2020, we reduced salary and service costs by$68.7 million and$117.8 million , respectively, related to reimbursements and tax credits under government programs in several countries, including the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, inthe United States , the Kurzarbeit program inGermany , and other government reimbursement programs in theU.K. ,France ,Canada and other jurisdictions (see Note 1 to the unaudited consolidated financial statements). The COVID-19 pandemic affected substantially all our clients. Certain industry sectors have been affected more immediately and more significantly than others, including travel, lodging and entertainment, energy, oil and gas, non-essential retail and automotive. Clients in these industries have 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, global economic conditions continue to be volatile and such 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 continue to be adversely affected as marketers reduce expenditures in the short term due to the uncertain impact of the pandemic on the global economy. Over the remainder of 2020, we expect global economic performance and our performance to vary by geography. Although we have experienced a decrease in our cash flow from operating activities, we have 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 . 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, which we extended to mature inFebruary 2025 . Further, inMarch 2020 , we suspended our share repurchase activity. 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. 16 -------------------------------------------------------------------------------- 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 nine months endedSeptember 30, 2020 , our largest client accounted for 3.5% of our revenue and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 55% of our revenue. Our business is spread across a number of industry sectors with no one industry comprising more than 17% of our revenue for the nine months endedSeptember 30, 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. 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 the 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 experienced a significant decline in our organic revenue growth in the second and third quarters of 2020, which will likely continue at least through the fourth quarter of 2020. As a result, we expect that we will have negative organic growth and an overall decline in revenue for 2020, as compared to 2019. As described in more detail below, due to the impact of the COVID-19 pandemic, revenue for the nine months endedSeptember 30, 2020 decreased$1,398.4 million , or 12.9%, compared to the nine months endedSeptember 30, 2019 . Changes in foreign exchange rates reduced revenue$93.3 million , or 0.9%, acquisition revenue, net of disposition revenue, reduced revenue$37.9 million , or 0.4%, reflecting the disposition of certain non-strategic businesses, and negative organic growth reduced revenue$1,267.2 million , or 11.7%. 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. Beginning inMarch 2020 and continuing through the third quarter of 2020, our business experienced the effects from reductions in client spending due to the impact related to the COVID-19 pandemic. The spending reductions impacted all our businesses and markets. The most significantly impacted businesses were our advertising discipline, primarily in our media businesses, our CRM Consumer Experience discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing and merchandising businesses. InNorth America , we experienced a decline in organic revenue in all our disciplines, except healthcare. InEurope and theMiddle East andAfrica , almost all businesses and regions experienced a decline in organic revenue resulting from the economic impact attributed to the COVID-19 pandemic. In addition, the economic and political conditions in theEuropean Union , including the status of Brexit, remain uncertain and could further negatively impact our businesses in theU.K. and in the region. InLatin America , the impact of the COVID-19 pandemic compounded the continuing unstable economic and political conditions inBrazil , and we experienced negative organic growth inBrazil and throughout the region. In addition, the weakening of foreign currency exchange rates in all countries in the region against theU.S. Dollar further contributed to the reduction in revenue in the region. InAsia-Pacific , almost all our businesses in the region experienced negative organic growth as a result of the COVID-19 pandemic, and substantially all currencies weakened against theU.S. Dollar. The economic and fiscal issues, including the impact related to the COVID-19 pandemic, facing the countries we operate in can be expected to continue to 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 at least through the fourth quarter of 2020, beginning in the second quarter of 2020, we took actions 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 or that additional actions will not be necessary. Prior to the COVID-19 pandemic, certain business trends had generally 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 beyond the current COVID-19 pandemic over the medium and long term. 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, 17 -------------------------------------------------------------------------------- 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 and second quarters 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. Revenue for the quarter endedSeptember 30, 2020 decreased$417.3 million , or 11.5%, compared to the quarter endedSeptember 30, 2019 . Changes in foreign exchange rates increased revenue 0.5%, acquisition revenue, net of disposition revenue, reduced revenue 0.3% and negative organic growth decreased revenue 11.7% as all our markets were negatively impacted by the COVID-19 pandemic. The change in revenue across our principal regional markets were:North America decreased$241.8 million ,Europe decreased$73.6 million ,Asia-Pacific decreased$48.9 million andLatin America decreased$38.6 million . InNorth America , while our performance was mixed, we experienced a decline in organic revenue in all disciplines, except healthcare. InEurope , the decline in organic revenue in most businesses and regions was partially offset by the strengthening of the Euro and the British Pound against theU.S. Dollar. InLatin America , we experienced negative organic growth in almost all businesses in the region, especially inBrazil . In addition, the weakening of all currencies in the region against theU.S. Dollar further contributed to the reduction in revenue in the region. InAsia-Pacific , negative organic growth in almost all countries in the region was partially offset by the strengthening of most currencies in the region against theU.S. Dollar. The change in revenue in the third quarter of 2020 compared to the third quarter of 2019, in our fundamental disciplines was: advertising decreased$241.5 million , CRM Consumer Experience decreased$113.0 million , CRM Execution & Support decreased$60.5 million , public relations decreased$14.4 million and healthcare increased$12.1 million . Revenue for the nine months of 2020 decreased$1,398.4 million , or 12.9%, to$9,414.1 million from$10,812.5 million in the nine months of 2019. Changes in foreign exchange rates reduced revenue 0.9%, acquisition revenue, net of disposition revenue, reduced revenue 0.4% and negative organic growth decreased revenue 11.7%. Primarily as a result of the negative impact on our revenue from the COVID-19 pandemic in the second and third quarters of 2020, the decrease in revenue across our principal regional markets were:North America decreased$688.1 million ,Europe decreased$404.1 million ,Asia-Pacific decreased$143.7 million andLatin America decreased$98.2 million . InNorth America , while our performance was mixed, we experienced a decline in organic revenue in all disciplines, except healthcare. The change in revenue in the nine months of 2020 compared to the nine months of 2019, in our fundamental disciplines was: advertising decreased$880.7 million , CRM Consumer Experience decreased$303.7 million , CRM Execution & Support decreased$186.8 million , public relations decreased$70.4 million and healthcare increased$43.2 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 third-party 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 period-over-period, 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. For the quarter endedSeptember 30, 2020 , salary and service costs, which tend to fluctuate with changes in revenue, decreased$417.6 million , or 15.4%, compared to the quarter endedSeptember 30, 2019 . Salary and related service costs in the quarter endedSeptember 30, 2020 decreased$223.4 million , or 13.0%, period-over-period, primarily as a result of the severance and furlough actions we took in the second quarter of 2020. In addition, in the third quarter of 2020, we reduced salary and service costs by$68.7 million related to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). Third-party service costs, which are included in salary and service costs and include expenses incurred with third-party vendors primarily when we act as a principal when performing services for our clients, decreased$194.2 million , or 19.8%, period-over-period reflecting the decrease in revenue and the impact of actions we took to align our cost structure. Occupancy and other costs, which are less directly linked to changes in revenue than salary 18 -------------------------------------------------------------------------------- and service costs, decreased$17.6 million , or 6.1%, in the third quarter of 2020 compared to the third quarter of 2019. Operating profit increased$28.1 million to$501.4 million . Operating margin increased to 15.6% from 13.1% and EBITA margin increased to 16.3% from 13.6%, period-over-period, including the reduction in salary and service costs by$68.7 million related to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). For the nine months endedSeptember 30, 2020 , salary and service costs, which tend to fluctuate with changes in revenue, decreased$1,086.0 million , or 13.7%, compared to the nine months of 2019. Salary and related service costs in the nine months of 2020 decreased$482.5 million , or 9.6%, period-over-period, primarily as a result of the severance and furlough actions we took in the second quarter of 2020. In addition, in the third quarter of 2020, we reduced salary and service costs by$117.8 million related to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). Third-party service costs, which include expenses incurred with third-party vendors primarily when we act as a principal when performing services for our clients, decreased$603.5 million , or 20.9%, period-over-period reflecting the decrease in revenue and the impact of actions we took to align our cost structure. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased$42.8 million , or 4.7%, in the nine months of 2020 compared to the nine months of 2019. Operating profit decreased$491.8 million to$984.1 million . Operating margin decreased to 10.5% from 13.6% and EBITA margin decreased to 11.1% from 14.2%, period-over-period, including the net decrease aggregating$160.1 million due to repositioning costs of$277.9 million recorded in the second quarter of 2020, partially offset by the$117.8 million increase related to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). Net interest expense in the third quarter of 2020 decreased$0.8 million period-over-period to$48.5 million . Net interest expense in the nine months of 2020 decreased$4.0 million period-over-period to$141.5 million . Interest expense on debt decreased$10.0 million to$48.6 million in the third quarter of 2020 and decreased$28.8 million to$151.5 million in the nine months of 2020, primarily reflecting a reduction in interest expense from our refinancing activity at lower interest rates in the second half of 2019 and the first quarter of 2020, partially offset by a loss of$7.7 million on the early redemption of the remaining$600 million principal amount of the 2020 Notes in the first quarter of 2020 and the interest expense from the issuance of the 4.20% Notes inApril 2020 (see Note 6 to the unaudited consolidated financial statements). Interest income in the third quarter of 2020 decreased$7.6 million period-over-period to$5.9 million and in the nine months of 2020 decreased$21.8 million period-over-period to$25.1 million , primarily due to lower rates. Our effective tax rate for the third quarter of 2020 was 26.7%, which is in line with our expectations. Our effective tax rate for the nine months of 2020 increased period-over-period to 28.5% from 26.0%. The non-deductibility in certain jurisdictions of a portion of the repositioning costs and net loss on dispositions recorded in the second quarter of 2020 had the effect of increasing our effective tax rate for the nine months of 2020. In 2019, income tax expense was reduced by$10.8 million primarily from the net favorable settlements of uncertain tax positions in certain jurisdictions. After considering these items, our effective rate for the nine-month period 2020 would have approximated the rate for the same period in 2019. Net income -Omnicom Group Inc. for the third quarter of 2020 was$313.3 million as compared to$290.2 million in the third quarter of 2019. The period-over-period increase is due to the factors described above. Diluted income per share -Omnicom Group Inc. was$1.45 in the third quarter of 2020 compared to$1.32 in the third quarter of 2019. The period-over-period change was due to the factors described above. Net income -Omnicom Group Inc. and diluted net income per share -Omnicom Group Inc. for the three months of 2020 include the net after-tax increase of$52.3 million and$0.24 , respectively, attributable to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). Net income -Omnicom Group Inc. in the nine months of 2020 decreased$376.8 million to$547.3 million from$924.1 million in the nine months of 2019. The period-over-period decrease is due to the factors described above. Diluted net income per share -Omnicom Group Inc. decreased to$2.53 in the nine months of 2020, compared to$4.17 in the nine months of 2019, 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 throughMarch 2020 , net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan. Net income -Omnicom Group Inc. and diluted net income per share -Omnicom Group Inc. for the nine months of 2020 include a net after-tax decrease aggregating$223.1 million and$1.03 , respectively, for the repositioning costs and net loss on dispositions recorded in the second quarter of 2020, partially offset by the$89.2 million and$0.41 , respectively, net after-tax increase attributable to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). 19 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - Third Quarter 2020 Compared to Third Quarter 2019 (in millions): 2020 2019 Revenue$ 3,206.5 $ 3,623.8 Operating Expenses: Salary and service costs 2,287.1 2,704.7 Occupancy and other costs 273.1 290.7 Repositioning costs and net loss on dispositions - - Cost of services 2,560.2 2,995.4 Selling, general and administrative expenses 90.2 97.2 Depreciation and amortization 54.7 57.9 2,705.1 3,150.5 Operating Profit 501.4 473.3 Operating Margin % 15.6 % 13.1 % Interest Expense 54.4 62.8 Interest Income 5.9 13.5
Income Before Income Taxes and Income From Equity Method Investments
452.9 424.0
Income Tax Expense 120.9 112.3
Income From Equity Method Investments 2.9 0.5
Net Income 334.9 312.2
Net Income Attributed To Noncontrolling Interests 21.6 22.0
Net Income - Omnicom Group Inc. $
313.3
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.$ 313.3 $ 290.2 Net Income Attributed To Noncontrolling Interests 21.6 22.0 Net Income 334.9 312.2 Income From Equity Method Investments 2.9 0.5 Income Tax Expense 120.9 112.3 Income Before Income Taxes and Income From Equity Method Investments 452.9 424.0 Interest Expense 54.4 62.8 Interest Income 5.9 13.5 Operating Profit 501.4 473.3 Add back: Amortization of intangible assets 20.2 21.2 Earnings before interest, taxes and amortization of intangible assets ("EBITA")$ 521.6 $ 494.5 Revenue$ 3,206.5 $ 3,623.8 EBITA$ 521.6 $ 494.5 EBITA Margin % 16.3 % 13.6 % 20
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Revenue
Revenue for the quarter endedSeptember 30, 2020 decreased$417.3 million , or 11.5%, compared to the quarter endedSeptember 30, 2019 . Changes in foreign exchange rates increased revenue 0.5%, acquisition revenue, net of disposition revenue, reduced revenue 0.3% and negative organic growth decreased revenue 11.7% as all our markets were negatively impacted by the COVID-19 pandemic. The change in revenue across our principal regional markets were:North America decreased$241.8 million ,Europe decreased$73.6 million ,Asia-Pacific decreased$48.9 million andLatin America decreased$38.6 million . InNorth America , while our performance was mixed, we experienced a decline in organic revenue in all disciplines, except healthcare. InEurope , the decline in organic revenue in most businesses and regions was partially offset by the strengthening of the Euro and the British Pound against theU.S. Dollar. InLatin America , we experienced negative organic growth in almost all businesses in the region, especially inBrazil . In addition, the weakening of all currencies in the region against theU.S. Dollar further contributed to the reduction in revenue in the region. InAsia-Pacific , negative organic growth in almost all countries in the region was partially offset by the strengthening of most currencies in the region against theU.S. Dollar. The components of revenue change for the third quarter of 2020 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % September 30, 2019$ 3,623.8 $ 1,993.5 $ 1,630.3 Components of revenue change: Foreign exchange rate impact 18.3 0.5 % - - % 18.3 1.1 % Acquisition revenue, net of disposition revenue (11.3) (0.3) % (3.8) (0.2) % (7.5) (0.5) % Organic growth (424.3) (11.7) % (226.8) (11.4) % (197.5) (12.1) % September 30, 2020$ 3,206.5 (11.5) %$ 1,762.9 (11.6) %$ 1,443.6 (11.5) % 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$3,188.2 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 ($3,206.5 million less$3,188.2 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 ($3,623.8 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 atOctober 26, 2020 remain unchanged, we expect the impact of changes in foreign exchange rates to increase revenue by approximately 0.5% in the fourth quarter and decrease revenue by approximately 0.5% for the year. 21 --------------------------------------------------------------------------------
Revenue and organic growth in our principal regional markets were (in millions):
Three Months Ended
2020 2019 $ Change % Organic Growth
Americas : North America$ 1,854.7 $ 2,096.5 $ (241.8) (11.2) % Latin America 61.6 100.2 (38.6) (22.3) % EMEA: Europe 875.0 948.6 (73.6) (10.7) % Middle East and Africa 45.2 59.6 (14.4) (21.4) % Asia-Pacific 370.0 418.9 (48.9) (12.8) %$ 3,206.5 $ 3,623.8 $ (417.3) (11.7) % Revenue inEurope , which includes our primary markets of theU.K. and theEuro Zone , decreased$73.6 million for the third quarter of 2020. Revenue in theU.K. , representing 10.0% of revenue, decreased$26.8 million . Revenue in Continental Europe, which comprises theEuro Zone and the other European countries, representing 17.3% of revenue, decreased$46.8 million . The decrease in revenue is due to negative organic growth resulting from the impact of the COVID-19 pandemic. 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 third 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 third quarter of 2020 and 2019, our largest client represented 3.3% and 3.4% of revenue, respectively. Our ten largest and 100 largest clients represented 19.9% and 54.7% of revenue for the third quarter of 2020, respectively, and 19.7% and 52.5% of revenue for the third 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. Our business experienced the effects from client spending reductions related to the COVID-19 pandemic. The spending reductions impacted all our businesses and markets. The most significantly impacted businesses were our advertising discipline, our CRM Consumer Experience discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing and merchandising businesses. Revenue and organic growth by discipline were (in millions): Three Months Ended September 30, 2020 2019 2020 vs. 2019 % of % of % Organic $ Revenue $ Revenue $ Change Growth Advertising$ 1,792.9 55.9 %$ 2,034.4 56.1 %$ (241.5) (11.7) % CRM Consumer Experience 516.2 16.1 % 629.2 17.4 % (113.0) (19.3) % CRM Execution & Support 276.9 8.6 % 337.4 9.3 % (60.5) (19.4) % Public Relations 322.8 10.1 % 337.2 9.3 % (14.4) (3.4) % Healthcare 297.7 9.3 % 285.6 7.9 % 12.1 3.8 %$ 3,206.5 $ 3,623.8 $ (417.3) (11.7) % 22
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We provide services to clients that operate in various industry sectors. Revenue
by sector was:
Three Months Ended September 30,
2020 2019
Food and Beverage 14 % 14 %
Consumer Products 8 % 9 %
Pharmaceuticals and Healthcare 17 % 14 %
Financial Services 8 % 9 %
Technology 10 % 7 %
Auto 10 % 11 %
Travel and Entertainment 5 % 8 %
Telecommunications 6 % 6 %
Retail 7 % 7 %
Services 2 % 2 %
Oil, Gas and Utilities 1 % 1 %
Not-for-Profit 1 % 2 %
Government 3 % 2 %
Education 1 % 1 %
Other 7 % 7 %
100 % 100 %
Certain industry sectors have been negatively affected by the impact of the
COVID-19 pandemic more significantly than others.
Operating Expenses
Operating expenses were (in millions):
Three Months Ended September 30,
2020 2019 2020 vs. 2019
% of % of $ %
$ Revenue $ Revenue Change Change
Revenue $ 3,206.5 $ 3,623.8 $ (417.3) (11.5) %
Operating Expenses:
Salary and service costs:
Salary and related service costs 1,501.1 46.8 % 1,724.5 47.6 % (223.4) (13.0) %
Third-party service costs 786.0 24.5 % 980.2 27.0 % (194.2) (19.8) %
2,287.1 71.3 % 2,704.7 74.6 % (417.6) (15.4) %
Occupancy and other costs 273.1 8.5 % 290.7 8.0 % (17.6) (6.1) %
Repositioning costs and net loss on
dispositions - - % - - % - - %
Cost of services 2,560.2 2,995.4 (435.2) (14.5) %
Selling, general and administrative
expenses 90.2 2.8 % 97.2 2.7 % (7.0) (7.2) %
Depreciation and amortization 54.7 1.7 % 57.9 1.6 % (3.2) (5.5) %
2,705.1 84.4 % 3,150.5 86.9 % (445.4) (14.1) %
Operating Profit $ 501.4 15.6 % $ 473.3 13.1 % $ 28.1 5.9 %
For the quarter ended September 30, 2020 , salary and service costs, which tend
to fluctuate with changes in revenue, decreased $417.6 million , or 15.4%,
compared to the quarter ended September 30, 2019 . Salary and related service
costs in the quarter ended September 30, 2020 decreased $223.4 million , or
13.0%, period-over-period, primarily as a result of the severance and furlough
actions we took in the second quarter of 2020. In addition, in the third quarter
of 2020, we reduced salary and service costs by $68.7 million related to
reimbursements and tax credits under government programs in several countries
(see Note 1 to the unaudited consolidated financial statements). Third-party
service costs, which are included in salary and service costs and include
expenses incurred with third-party vendors primarily when we act as a principal
when performing services for our clients, decreased $194.2 million , or 19.8%,
period-over-period reflecting the decrease in revenue and the impact of actions
we took to align our cost structure. Occupancy and other costs, which are less
directly linked to changes in revenue than salary and service costs, decreased
$17.6 million , or 6.1%, in the third quarter of 2020 compared to the third
quarter of 2019, primarily
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reflecting the impact of actions we took to align our cost structure and savings in office expenses related to to the remote working environment arising from the COVID-19 pandemic. Operating profit increased$28.1 million to$501.4 million . Operating margin increased to 15.6% from 13.1% and EBITA margin increased to 16.3% from 13.6%, period-over-period, including the reduction in salary and service costs by$68.7 million related to reimbursements and tax credits under government programs in several countries (see Note 1 to the unaudited consolidated financial statements). Net Interest Expense Net interest expense in the third quarter of 2020 decreased$0.8 million period-over-period to$48.5 million . Interest expense on debt decreased$10.0 million to$48.6 million in the third 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 the second half of 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 and the interest expense from the issuance of the 2.45% Notes inFebruary 2020 (see Note 6 to the unaudited consolidated financial statements). Interest income decreased$7.6 million period-over-period to$5.9 million , primarily due to lower rates. Income Taxes Our effective tax rate for the third quarter of 2020 increased marginally period-over-period to 26.7% from 26.5%. Net Income Per Share -Omnicom Group Inc. Net income -Omnicom Group Inc. for the third quarter of 2020 was$313.3 million
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