OMNICOM GROUP., INC. EXECUTIVE SUMMARY Impact of the COVID-19 Pandemic on our Business We continued to experience the negative effect on the global economy from the COVID-19 pandemic in the first quarter of 2021. As the COVID-19 pandemic did not negatively impact our major markets until late in the first quarter of 2020, the negative effects on our revenue continued until we completely cycled through the end of the first quarter of 2021. Although the impact was mixed by geography and discipline, revenue for the three months endedMarch 31, 2021 increased$20.0 million , or 0.6%, compared to the three months endedMarch 31, 2020 . The increase in revenue primarily reflects the strengthening of certain foreign currencies, primarily the Euro and the British Pound, against theU.S. Dollar, substantially offset by a decrease in client spending attributable to the COVID-19 pandemic. However, the impact from the COVID-19 pandemic on the global economy appears to be moderating in several of our markets, and we expect to achieve positive organic revenue growth beginning in the second quarter and for the current year. As long as the COVID-19 pandemic remains a public health threat, global economic conditions will continue to be volatile depending on several factors, including new information concerning the severity of the pandemic, government actions to mitigate the effects of the pandemic in the near-term, and the resulting impact on our clients' spending plans. We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy subsides. We will continue to assess the impact of the COVID-19 pandemic on our business and will respond accordingly. Results of Operations for the Quarter EndedMarch 31, 2021 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 branded networks and agencies operate in all major markets and provide services in the following fundamental disciplines: advertising, customer relationship management, or CRM, public relations, and healthcare. Advertising includes creative services, as well as strategic media planning and buying and data analytics 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 clients. In an effort to better capture the expanding scope of our services, effectiveJanuary 1, 2021 , we realigned the classification of certain services primarily within our CRM Consumer Experience discipline. As a result, our CRM discipline has been reclassified into four categories: CRM Precision Marketing, which includes our precision marketing and digital/direct marketing agencies;CRM Commerce and Brand Consulting that is primarily comprised ofOmnicom Commerce Group , including our shopper marketing businesses, and ourBrand Consulting agencies; CRM Experiential, which includes our experiential marketing agencies and events businesses; and CRM Execution & Support, which includes field marketing, merchandising and point of sale, as well as other specialized marketing and custom communications services. 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. 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, 2021 , 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 54% of our revenue. Our business is spread across a number of industry sectors with no one industry comprising more than 16% of our revenue for the three months endedMarch 31, 2021 . 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 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 14 -------------------------------------------------------------------------------- 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. Beginning inMarch 2020 and continuing through the first quarter of 2021, our business experienced the effects from reductions in client spending due to the 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 significantly impacted businesses were our CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in field marketing. 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 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. General business trends impact our business and industry. 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. While the current economic environment caused many clients to reduce spending for our services, 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. We expect this advantage to continue 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, 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. 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, 2021 increased$20.0 million , or 0.6%, compared to the quarter endedMarch 31, 2020 . Changes in foreign exchange rates increased revenue 2.8%, acquisition revenue, net of disposition revenue, reduced revenue 0.4% and negative organic growth decreased revenue 1.8% 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$24.8 million ,Europe increased$17.6 million ,Asia-Pacific increased$40.7 million andLatin America decreased$8.2 million . InNorth America , an increase in organic revenue in our advertising discipline, which was lead by our media businesses, and CRM Precision Marketing discipline was offset by a decline in organic revenue primarily in our CRM Experiential business. InEurope , the increase in revenue from the strengthening of the Euro and the British Pound against theU.S. Dollar and an increase in organic revenue in our CRM Precision Marketing discipline, offset a decline in organic revenue in most other businesses due to the impact of the COVID-19 pandemic in our major markets in the region. InLatin America , growth inMexico and other countries in the region was offset by the impact of the COVID-19 pandemic and the continuing unstable economic and political conditions inBrazil , resulting in negative organic growth in the region. Additionally, the weakening of the Brazilian Real against theU.S. Dollar further contributed to the reduction in revenue in the region. InAsia-Pacific , revenue increased from the strengthening of substantially all currencies in the region, organic growth inAustralia andChina and a mixed performance by other countries in the region as the economies in the region began to rebound from the COVID-19 pandemic. The change in revenue in the first quarter of 2021 compared to the first quarter of 2020, in our fundamental disciplines was: advertising increased$70.4 million , CRM Precision Marketing increased$37.5 million ,CRM Commerce and Brand Consulting decreased 15 --------------------------------------------------------------------------------$6.4 million , CRM Experiential decreased$42.9 million , CRM Execution & Support decreased$27.1 million , public relations decreased$16.2 million and healthcare increased$4.7 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 decreased period-over-period in substantially all categories. 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, which includes group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs. For the quarter endedMarch 31, 2021 , salary and service costs, which tend to fluctuate with changes in revenue, increased$11.7 million , or 0.5%, compared to the quarter endedMarch 31, 2020 . Salary and related service costs in the quarter endedMarch 31, 2021 increased$6.8 million , or 0.4%, period-over-period, primarily reflecting an increase arising from the strengthening of certain foreign currencies, primarily the British Pound and Euro, against theU.S. Dollar. In addition, certain businesses that experienced organic revenue growth in the quarter increased their headcount. 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, increased$4.9 million , or 0.6%, period-over-period also reflecting an increase arising from the strengthening of certain foreign currencies, primarily the British Pound and Euro, against theU.S. Dollar. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased$18.0 million , or 5.8%, in the first quarter of 2021 compared to the first quarter of 2020, reflecting the actions we took in the second quarter of 2020 to align our cost structure. Operating profit increased$45.2 million to$465.4 million . Operating margin increased to 13.6% from 12.3%, and EBITA margin increased to 14.2% from 12.9%, period-over-period. The increases in operating profit, operating margin and EBITA margin reflect the impact of the positive effect of the actions taken in the second quarter of 2020 to align our cost structure in response to the COVID-19 pandemic and reduced travel and office expenses resulting from the remote working environment. Net interest expense in the first quarter of 2021 increased$1.7 million period-over-period to$47.5 million . Interest expense on debt in the first quarter of 2021 decreased$5.9 million to$47.9 million , primarily reflecting a reduction in interest expense from our refinancing activity at lower interest rates in the first quarter of 2020 and higher interest expense in the prior year period arising from a loss of$7.7 million on the early redemption of the remaining$600 million principal amount of the 4.45% Senior Notes due 2020, or 2020 Notes, in the first quarter of 2020. This decrease was partially offset by an increase in the interest expense from the issuance of the 4.20% Senior Notes due 2030, or 4.20% Notes, inApril 2020 . Interest income in the first quarter of 2021 decreased$6.4 million period-over-period to$6.3 million , primarily due to lower rates. Our effective tax rate for the three months of 2021 was in line with our expectations for the year and increased period-over-period to 26.8% from 26.0%. The recognition of certain domestic tax credits in the first quarter of 2020 had the effect of decreasing our effective tax rate for the three months of 2020. Net income -Omnicom Group Inc. for the first quarter of 2021 was$287.8 million as compared to$258.1 million in the first quarter of 2020. The period-over-period increase is due to the factors described above. Diluted income per share -Omnicom Group Inc. was$1.33 in the first quarter of 2021 compared to$1.19 in the first quarter of 2020. The period-over-period change was due to the factors described above. 16 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - First Quarter 2021 Compared to First Quarter 2020 (in millions): 2021 2020 Revenue$ 3,426.9 $ 3,406.9 Operating Expenses: Salary and service costs 2,545.0 2,533.3 Occupancy and other costs 291.6 309.6 Cost of services 2,836.6 2,842.9 Selling, general and administrative expenses 71.6 86.8 Depreciation and amortization 53.3 57.0 2,961.5 2,986.7 Operating Profit 465.4 420.2 Operating Margin % 13.6 % 12.3 % Interest Expense 53.8 58.5 Interest Income 6.3 12.7
Income Before Income Taxes and Income (Loss) From Equity Method Investments
417.9 374.4
Income Tax Expense 111.9 97.4
Income (Loss) From Equity Method Investments - (5.3)
Net Income 306.0 271.7
Net Income Attributed To Noncontrolling Interests 18.2 13.6
Net Income - Omnicom Group Inc. $
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 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): 2021 2020 Net Income - Omnicom Group Inc.$ 287.8 $ 258.1 Net Income Attributed To Noncontrolling Interests 18.2 13.6 Net Income 306.0 271.7 Income (Loss) From Equity Method Investments - (5.3) Income Tax Expense 111.9 97.4 Income Before Income (Loss) Taxes and Income From Equity Method Investments 417.9 374.4 Interest Expense 53.8 58.5 Interest Income 6.3 12.7 Operating Profit 465.4 420.2 Add back: Amortization of intangible assets 19.9 20.8 Earnings before interest, taxes and amortization of intangible assets ("EBITA")$ 485.3 $ 441.0 Revenue$ 3,426.9 $ 3,406.9 EBITA$ 485.3 $ 441.0 EBITA Margin % 14.2 % 12.9 % 17
--------------------------------------------------------------------------------
Revenue
Revenue for the quarter endedMarch 31, 2021 increased$20.0 million , or 0.6%, compared to the quarter endedMarch 31, 2020 . Changes in foreign exchange rates increased revenue 2.8%, acquisition revenue, net of disposition revenue, reduced revenue 0.4% and negative organic growth decreased revenue 1.8% 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$24.8 million ,Europe increased$17.6 million ,Asia-Pacific increased$40.7 million andLatin America decreased$8.2 million . InNorth America , an increase in organic revenue in our advertising discipline, which was lead by our media businesses, and CRM Precision Marketing discipline was offset by a decline in organic revenue primarily in our CRM Experiential business. InEurope , the increase in revenue from the strengthening of the Euro and the British Pound against theU.S. Dollar and an increase in organic revenue in our CRM Precision Marketing discipline, offset a decline in organic revenue in most other businesses due to the impact of the COVID-19 pandemic in our major markets in the region. InLatin America , growth inMexico and other countries in the region was offset by the impact of the COVID-19 pandemic and the continuing unstable economic and political conditions inBrazil , resulting in negative organic growth in the region. Additionally, the weakening of the Brazilian Real against theU.S. Dollar further contributed to the reduction in revenue in the region. InAsia-Pacific , revenue increased from the strengthening of substantially all currencies in the region, organic growth inAustralia andChina and a mixed performance by other countries in the region as the economies in the region began to rebound from the COVID-19 pandemic. The components of revenue change for the first quarter of 2021 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % March 31, 2020$ 3,406.9 $ 1,894.2 $ 1,512.7 Components of revenue change: Foreign exchange rate impact 95.7 2.8 % - - % 95.7 6.3 % Acquisition revenue, net of disposition revenue (15.1) (0.4) % (7.9) (0.4) % (7.2) (0.5) % Organic growth (60.6) (1.8) % (18.2) (1.0) % (42.4) (2.8) % March 31, 2021$ 3,426.9 0.6 %$ 1,868.1 (1.4) %$ 1,558.8 3.0 % 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$3,331.2 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 ($3,426.9 million less$3,331.2 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 ($3,406.9 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, 2021 remain unchanged, we expect the impact of changes in foreign exchange rates to increase revenue between 3.5% and 4.0% in the second quarter of 2021, and by approximately 2.0% for the full year. 18 -------------------------------------------------------------------------------- Revenue and organic growth in our principal regional markets were (in millions): Three Months Ended March 31, 2021 2020 $ Change % Organic Growth Americas: North America$ 1,972.5 $ 1,997.3 $ (24.8) (1.1) % Latin America 63.2 71.4 (8.2) (2.4) % EMEA: Europe 941.0 923.4 17.6 (4.4) % Middle East and Africa 50.2 55.5 (5.3) (10.2) % Asia-Pacific 400.0 359.3 40.7 2.5 %$ 3,426.9 $ 3,406.9 $ 20.0 (1.8) % Revenue inEurope , which includes our primary markets of theU.K. and theEuro Zone , increased$17.6 million for the first quarter of 2021. Revenue in theU.K. , representing 10.4% of consolidated revenue, increased$11.5 million . Revenue in Continental Europe, which comprises theEuro Zone and the other European countries, representing 17.1% of consolidated revenue, increased$6.1 million . The increase in revenue is due to the strengthening of the British Pound and Euro against theU.S. Dollar and organic growth in our CRM Precision Marketing discipline, substantially offset by negative organic growth in most other businesses in the region attributable to 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 reduction in spending by existing clients resulting from the COVID-19 pandemic offset the benefit of gains of new business in the first quarter of 2021. Under our client-centric approach, we seek to broaden our relationships with all of our clients. For the twelve months endedMarch 31, 2021 and 2020, our largest client represented 3.3% and 3.0% of revenue, respectively. Our ten largest and 100 largest clients represented 21.5% and 54.2% of revenue for the twelve months endedMarch 31, 2021 , respectively, and 19.5% and 50.0% of revenue for the for the twelve months endedMarch 31, 2020 , 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, CRM, public relations and healthcare. In an effort to better capture the expanding scope of our services, effectiveJanuary 1, 2021 , we realigned the classification of certain services primarily within our CRM Consumer Experience discipline. As a result, our CRM discipline has been reclassified into four categories: CRM Precision Marketing, which includes our precision marketing and digital/direct marketing agencies;CRM Commerce and Brand Consulting that is primarily comprised ofOmnicom Commerce Group , including our shopper marketing businesses, and ourBrand Consulting agencies; CRM Experiential, which includes our experiential marketing agencies and events businesses; and CRM Execution & Support, which includes field marketing, merchandising and point of sale, as well as other specialized marketing and custom communications services. Our business experienced the effects from client spending reductions related to the COVID-19 pandemic. The impact varied by discipline and market. The most significantly impacted businesses were our CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing businesses. Revenue and organic growth by discipline were (in millions): Three Months Ended March 31, 2021 2020 2021 vs. 2020 % of % of % Organic $ Revenue $ Revenue $ Change Growth Advertising$ 2,003.7 58.5 %$ 1,933.3 56.7 %$ 70.4 1.2 % CRM Precision Marketing 269.5 7.8 % 232.0 6.8 % 37.5 7.2 % CRM Commerce and Brand Consulting 214.5 6.2 % 220.9 6.5 % (6.4) (4.2) % CRM Experiential 88.4 2.6 % 131.3 3.9 % (42.9) (33.2) % CRM Execution & Support 246.6 7.2 % 273.7 8.0 % (27.1) (13.3) % Public Relations 317.5 9.3 % 333.7 9.8 % (16.2) (3.5) % Healthcare 286.7 8.4 % 282.0 8.3 % 4.7 - %$ 3,426.9 $ 3,406.9 $ 20.0 (1.8) % 19
--------------------------------------------------------------------------------
We provide services to clients that operate in various industry sectors. Revenue
by sector was:
Three Months Ended March 31,
2021 2020
Food and Beverage 14 % 14 %
Consumer Products 8 % 7 %
Pharmaceuticals and Healthcare 15 % 14 %
Financial Services 7 % 8 %
Technology 9 % 8 %
Auto 10 % 11 %
Travel and Entertainment 10 % 9 %
Telecommunications 5 % 6 %
Retail 7 % 7 %
Services 2 % 2 %
Oil, Gas and Utilities 1 % 2 %
Not-for-Profit 1 % 1 %
Government 3 % 2 %
Education 1 % 1 %
Other 7 % 8 %
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 March 31,
2021 2020 2021 vs. 2020
% of % of $ %
$ Revenue $ Revenue Change Change
Revenue $ 3,426.9 $ 3,406.9 $ 20.0 0.6 %
Operating Expenses:
Salary and service costs:
Salary and related service costs 1,649.2 48.1 % 1,642.4 48.2 % 6.8 0.4 %
Third-party service costs 895.8 26.1 % 890.9 26.1 % 4.9 0.6 %
2,545.0 74.3 % 2,533.3 74.4 % 11.7 0.5 %
Occupancy and other costs 291.6 8.5 % 309.6 9.1 % (18.0) (5.8) %
Cost of services 2,836.6 2,842.9 (6.3) (0.2) %
Selling, general and administrative
expenses 71.6 2.1 % 86.8 2.5 % (15.2) (17.5) %
Depreciation and amortization 53.3 1.6 % 57.0 1.7 % (3.7) (6.5) %
2,961.5 86.4 % 2,986.7 87.7 % (25.2) (0.8) %
Operating Profit $ 465.4 13.6 % $ 420.2 12.3 % $ 45.2 10.8 %
For the quarter ended March 31, 2021 , salary and service costs, which tend to
fluctuate with changes in revenue, increased $11.7 million , or 0.5%, compared to
the quarter ended March 31, 2020 . Salary and related service costs in the
quarter ended March 31, 2021 increased $6.8 million , or 0.4%,
period-over-period, primarily reflecting an increase arising from the
strengthening of certain foreign currencies, primarily the British Pound and
Euro, against the U.S. Dollar. In addition, certain businesses that experienced
organic revenue growth in the quarter increased their headcount. 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, increased $4.9 million , or 0.6%,
period-over-period also reflecting an increase arising from the strengthening of
certain foreign currencies, primarily the British Pound and Euro, against the
U.S. Dollar. Occupancy and other costs, which are less directly linked to
changes in revenue than salary and service costs, decreased $18.0 million , or
5.8%, in the first quarter of 2021 compared to the first quarter of 2020,
reflecting the actions we took in the second quarter of 2020 to align our cost
structure. Operating profit increased $45.2 million to $465.4 million . Operating
margin increased to 13.6% from 12.3%, and EBITA margin increased to 14.2% from
12.9%, period-over-period. The increases in operating profit, operating
20
--------------------------------------------------------------------------------
margin and EBITA margin reflect the impact of the positive effect of the actions
taken in the second quarter of 2020 to align our cost structure in response to
the COVID-19 pandemic and reduced travel and office expenses resulting from the
remote working environment.
Net Interest Expense
Net interest expense in the first quarter of 2021 increased $1.7 million
period-over-period to $47.5 million . Interest expense on debt in the first
quarter of 2021 decreased $5.9 million to $47.9 million , primarily reflecting a
reduction in interest expense from our refinancing activity at lower interest
rates in the first quarter of 2020 and higher interest expense in the prior year
period arising from a loss of $7.7 million on the early redemption of the
remaining $600 million principal amount of the 4.45% Senior Notes due 2020, or
2020 Notes, in the first quarter of 2020. This decrease was partially offset by
an increase in the interest expense from the issuance of the 4.20% Senior Notes
due 2030, or 4.20% Notes, in April 2020 . Interest income in the first quarter of
2021 decreased $6.4 million period-over-period to $6.3 million , primarily due to
lower rates.
Income Taxes
Our effective tax rate for the three months of 2021 was in line with our
expectations for the year and increased period-over-period to 26.8% from 26.0%.
The recognition of certain domestic tax credits in the first quarter of 2020 had
the effect of decreasing our effective tax rate for the three months of 2020.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. for the first quarter of 2021 was $287.8 million
as compared to $258.1 million in the first quarter of 2020. The
period-over-period increase is due to the factors described above. Diluted
income per share - Omnicom Group Inc. was $1.33 in the first quarter of 2021
compared to $1.19 in the first quarter of 2020. The period-over-period change
was due to the factors described above.
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 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 2020 10-K.
NEW ACCOUNTING STANDARDS
Note 1 to the unaudited consolidated financial statements provides information
regarding new accounting standards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources and Requirements
Our primary 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 on
February 14, 2025 , uncommitted credit lines aggregating $1.0 billion , and the
ability to issue up to $2 billion of commercial paper and access the capital
markets. Our liquidity funds our non-discretionary cash requirements and our
discretionary spending.
In the second quarter of 2020, we took steps to strengthen our liquidity and
financial position that were intended to mitigate any potential impact of the
COVID-19 pandemic on our liquidity. Among other things, we issued $600 million
4.20% Senior Notes due 2030, entered into a $400 million 364-day revolving
credit facility, or 364 Day Credit Facility, and suspended our share repurchase
activity. The 364 Day Credit facility expired on April 2, 2021 without being
drawn, and we anticipate resuming our share repurchase activity at some point in
2021 assuming the effects of the COVID-19 pandemic continue to stabilize in the
economies in our major markets.
Borrowings under the Credit Facility may use LIBOR as the benchmark interest
rate. The LIBOR benchmark rate is expected to be phased out by the end of June
2023 . We do not expect that the discontinuation of the LIBOR rate will have a
material impact on our liquidity or results of operations.
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. Our typical working
capital cycle results in a short-term borrowing 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.
21
--------------------------------------------------------------------------------
Cash and cash equivalents decreased $703.2 million from December 31, 2020 .
During the first three months of 2021, we used $460.9 million of cash in
operating activities, which included the use for operating capital of $843.5
million , primarily related to our typical working capital requirement during the
period and the impact of foreign exchange rate changes, as compared to the prior
year period. Our discretionary spending for the first three months of 2021 was
$172.5 million as compared to $387.0 million for the first three months of 2020.
Discretionary spending for the first three months of 2021 is comprised of:
capital expenditures of $12.4 million ; dividends paid to common shareholders of
$140.1 million ; dividends paid to shareholders of noncontrolling interests of
$13.6 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 $2.7 million ; and acquisition payments, including
payment of contingent purchase price obligations and acquisition of additional
shares of noncontrolling interests, net of cash acquired, of $9.1 million . In
addition, the impact of foreign exchange rate changes reduced cash and cash
equivalents by $55.8 million .
Cash Management
Our regional treasury centers in North America , Europe and Asia manage our cash
and liquidity. Each day, operations with excess funds invest those funds with
their regional treasury center. Likewise, operations that require funds borrow
from their regional treasury center. Treasury centers with excess cash invest on
a short-term basis with third parties, generally with maturities ranging from
overnight to less than 90 days. Certain treasury centers have notional pooling
arrangements that are used to manage their cash and set-off foreign exchange
imbalances. The arrangements require each treasury center to have its own
notional pool account and to maintain a notional positive account balance.
Additionally, under the terms of the arrangement, set-off of foreign exchange
positions are limited to the long and short positions within their own account.
To the extent that our treasury centers require liquidity, they have the ability
to issue up to a total of $2 billion of U.S. Dollar-denominated commercial paper
or borrow under the Credit Facility, or the uncommitted credit lines. This
process enables us to manage our debt more efficiently and utilize our cash more
effectively, as well as manage our risk to foreign exchange rate imbalances. In
countries where we either do not conduct treasury operations or it is not
feasible for one of our treasury centers to fund net borrowing requirements on
an intercompany basis, we arrange for local currency uncommitted credit lines.
We have a policy governing counterparty credit risk with financial institutions
that hold our cash and cash equivalents and we have deposit limits for each
institution. In countries where we conduct treasury operations, generally the
counterparties are either branches or subsidiaries of institutions that are
party to the Credit Facility. These institutions generally have credit ratings
equal to or better than our credit ratings. In countries where we do not conduct
treasury operations, all cash and cash equivalents are held by counterparties
that meet specific minimum credit standards
At March 31, 2021 , our foreign subsidiaries held approximately $2.0 billion of
our total cash and cash equivalents of $4.9 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, 2021 , our net debt position, which we define as total debt,
including short-term debt, less cash and cash equivalents increased $863.0
million as compared to $210.7 million at December 31, 2020 . The increase in net
debt primarily resulted from the use of cash of $843.5 million for operating
capital principally related to our typical working capital requirements during
the period. In addition, the impact of foreign exchange rate changes decreased
cash and cash equivalents by $55.8 million , as compared to December 31, 2020 .
Net debt decreased $1.5 billion from $2.4 billion at March 31, 2020 due to
conservative management of our cash during the COVID-19 pandemic, including the
suspension of share buybacks.
The components of net debt were (in millions):
December 31,
March 31, 2021 2020 March 31, 2020
Short-term debt $ 5.9 $ 3.9 $ 10.9
Long-term debt, including current portion 5,754.4 5,807.3 5,093.4
Total debt 5,760.3 5,811.2 5,104.3
Less: Cash and cash equivalents and short-term
investments 4,897.3 5,600.5 2,694.1
Net debt $ 863.0 $ 210.7 $ 2,410.2
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
The 2.45% Senior Notes and the 4.20% Senior Notes are senior unsecured
obligations of Omnicom that rank equal in right of payment with all existing and
future unsecured senior indebtedness.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc. , or OCI,
are co-obligors under 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
22
--------------------------------------------------------------------------------
proceeds to our operating subsidiaries. OCI's assets primarily consist of cash
and cash equivalents and intercompany loans made to our operating subsidiaries,
and the related interest receivable. There are no restrictions on the ability of
OCI or Omnicom to obtain funds from our subsidiaries through dividends, loans or
advances. Such notes are senior unsecured obligations that rank equal in right
of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally
guaranteed OFHP's obligations with respect to the Euro denominated notes due
2027 and 2031. OFHP's assets consist of its investments in several wholly owned
finance companies that function as treasury centers that 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 contains and,prior to its expiration, the 364 Day Credit
Facility contained, a financial covenant that requires us to maintain a Leverage
Ratio of consolidated indebtedness to consolidated EBITDA (earnings before
interest, taxes, depreciation, amortization and non-cash charges) of no more
than 3.5 times for the most recently ended 12-month period. On October 26, 2020 ,
we amended the Credit Facility and the 364 Day Credit Facility to provide
additional flexibility with respect to the Leverage Ratio covenant. The
amendments increase the maximum Leverage Ratio to 4.0 times through December 31,
2021 for the Credit Agreement and to 4.0 times through the maturity of the 364
Day Credit Facility. At March 31, 2021 , we were in compliance with these
covenants as our Leverage Ratio was 2.8 times. The Credit Facility does not
limit our ability to declare or pay dividends or repurchase our common stock.
At March 31, 2021 , 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.
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 actively 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. For additional information about our credit
facilities, see Note 5 to the unaudited consolidated financial statements.
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 2021, we substantially reduced our commercial paper issuances as compared to
the prior year periods primarily as a result of the issuance of the 4.20% Notes
in April 2020 . Additional liquidity sources include our Credit Facility, or the
uncommitted credit lines. At March 31, 2021 , there were no commercial paper
issuances during the quarter or borrowings under the Credit Facility or the
uncommitted credit lines.
Commercial paper activity was (dollars in millions):
Three
Months Ended
2021 2020
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
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.
23--------------------------------------------------------------------------------
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 the twelve months endedMarch 31, 2021 . 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, inthe 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.
© Edgar Online, source
