OMNICOM GROUP., INC. EXECUTIVE SUMMARY Impact of the COVID-19 Pandemic on our Business As the impact of the COVID-19 pandemic on the global economy continues to moderate, we experienced an improvement in our business in the third quarter of 2021 as compared to the third quarter of 2020. Revenue for the nine months endedSeptember 30, 2021 increased$1,019.5 million , or 10.8%, compared to the nine months endedSeptember 30, 2020 . The increase in revenue primarily reflects increased client spending in all our disciplines and across all our geographic areas compared to the prior year period and the strengthening of most foreign currencies, primarily the British Pound and the Euro, against theU.S. Dollar. The increase in revenue period-over-period was partially offset by a reduction in acquisition revenue, net of disposition revenue reflecting the sale of our wholly owned subsidiaryICON International , or ICON, a specialty media business, in the second quarter of 2021. Global economic conditions may continue to be volatile as long as the COVID-19 pandemic remains a public health threat, which could negatively impact 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. Results of Operations 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 endedSeptember 30, 2021 , our largest client accounted for 3.1% of our revenue and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 54.1% 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 nine months endedSeptember 30, 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 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 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 14 -------------------------------------------------------------------------------- CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in field marketing. In the third quarter of 2021, most markets continued the recovery from the pandemic that began in the first quarter of 2021, and clients substantially increased their spending on our services compared to the prior year period. The economic and fiscal issues, including the impact related to the 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 endedSeptember 30, 2021 increased$228.5 million , or 7.1%, compared to the prior year quarter, as all our disciplines and regional markets experienced a recovery from the negative effects of the COVID-19 pandemic compared to the third quarter of 2020. Changes in foreign exchange rates in the third quarter of 2021 increased revenue 1.6%, acquisition revenue, net of disposition revenue, reduced revenue 5.9% and organic growth increased revenue 11.5%. The reduction in acquisition revenue, net of disposition revenue, reflects the sale of ICON in the second quarter of 2021. The change in revenue across our principal regional markets was:North America decreased$32.9 million , or 1.8%,Europe increased$149.3 million , or 17.1%,Asia-Pacific increased$88.3 million , or 23.9%, andLatin America increased$10.9 million , or 17.7%. InNorth America , the increase in organic revenue in all our disciplines, especially in our advertising discipline and our CRM Precision Marketing discipline, was offset by a decline in acquisition revenue, net of disposition revenue, resulting from the sale of ICON. InEurope , organic revenue increased in all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Precision Marketing discipline. The strengthening of the British Pound and the Euro against theU.S. Dollar contributed to increased revenue in the region. InLatin America , revenue increased due to organic growth in all countries in the region, especiallyBrazil andColombia , and the strengthening of most currencies against theU.S. Dollar. InAsia-Pacific , revenue increased due to strong organic revenue growth in all our major markets in the region, particularlyAustralia ,China andNew Zealand , and in substantially all disciplines. The strengthening of substantially all currencies against theU.S. Dollar contributed to increased revenue in the region. The change in revenue in the third quarter of 2021 compared to the third quarter of 2020 in our fundamental disciplines was: advertising decreased$7.0 million , CRM Precision Marketing increased$72.3 million ,CRM Commerce and Brand Consulting increased$37.1 million , CRM Experiential increased$44.6 million , CRM Execution & Support increased$23.3 million , public relations increased$33.8 million and healthcare increased$24.4 million . 15 -------------------------------------------------------------------------------- Revenue for the nine months endedSeptember 30, 2021 increased$1,019.5 million , or 10.8%, compared to the nine months endedSeptember 30, 2020 . Changes in foreign exchange rates increased revenue 3.2%, acquisition revenue, net of disposition revenue, reduced revenue 2.8%, and organic growth increased revenue 10.5%. In the first nine months of 2021, our business experienced a recovery from the negative effects of the COVID-19 pandemic in all our disciplines and regional markets as compared to the same period in 2020. The negative effects from the pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020. As a result, the improvement in revenue in the first nine months of 2021 versus the prior year period was driven by the recovery in the second and third quarters of 2021 as compared to the prior year periods. Revenue increased across all of our principal regional markets. The increases in revenue were as follows:North America $235.7 million , or 4.3%,Europe $483.6 million , or 19.1%,Asia-Pacific $256.6 million , or 24.5%, andLatin America $18.3 million , or 9.7%. InNorth America , improved organic growth inthe United States andCanada was partially offset by a decrease in revenue resulting from the disposition of ICON in the second quarter of 2021. Organic revenue growth inthe United States was led by our advertising discipline, on the strength of our media business, CRM Precision Marketing and public relations disciplines, partially offset by a decrease in organic revenue growth in our CRM Experiential discipline. InEurope , organic revenue increased in substantially all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Experiential and public relations disciplines. The strengthening of the British Pound and the Euro against theU.S. Dollar contributed to increased revenue in the region. InLatin America , organic growth in all countries in the region, especiallyBrazil ,Colombia andMexico , primarily in our advertising and public relations businesses, was partially offset by the weakening of the Brazilian Real against theU.S. Dollar. InAsia-Pacific , revenue increased due to strong organic revenue growth in all countries, particularlyChina ,Australia and New Zealand , and in all disciplines. The strengthening of substantially all currencies against theU.S. Dollar contributed to increased revenue in the region. The increases in revenue in the nine months of 2021 compared to the nine months of 2020 in our fundamental disciplines were as follows: advertising$547.8 million , CRM Precision Marketing$189.3 million ,CRM Commerce and Brand Consulting $64.6 million , CRM Experiential$47.2 million , CRM Execution & Support$54.3 million , public relations$65.4 million and healthcare$50.9 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. SG&A expenses increased period-over-period in most 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. Operating expenses for the quarter endedSeptember 30, 2021 increased$188.3 million , or 7.0%, period-over-period. Salary and service costs, which tend to fluctuate with changes in revenue, increased$174.7 million , or 7.6%, compared to the quarter endedSeptember 30, 2020 , reflecting an increase in salary and related service costs of$229.2 million , partially offset by a decrease in third-party service costs of$54.5 million . The increase in salary and related service costs primarily resulted from the increase in organic revenue, as well as the strengthening of most foreign currencies against theU.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of$68.7 million related to reimbursements and tax credits from governmental programs in several countries. Third-party service costs, which fluctuate with changes in revenue, decreased during the quarter due to our net disposition activity during the year, primarily related to the disposition of ICON, partially offset by the organic growth in revenue as well as the effects of foreign currency exchange rate changes. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased$12.4 million , or 4.5%, period-over-period, due to the strengthening of most foreign currencies against theU.S. Dollar. For the quarter endedSeptember 30, 2021 compared to the prior year period, operating profit increased$40.2 million to$541.6 million , operating margin increased to 15.8% from 15.6%, and EBITA margin remained unchanged at 16.3%. In 2020, operating profit, operating margin and EBITA margin reflect the benefits of reimbursements and tax credits from governmental programs. Operating expenses for the nine months endedSeptember 30, 2021 , increased$428.2 million , or 5.1%, period-over-period. Operating expenses for the nine months endedSeptember 30, 2021 include a reduction of$50.5 million related to the gain from the sale of ICON, and the prior year period included an increase of$277.9 million related to charges we recorded in connection with the actions we took in response to the COVID-19 pandemic. Salary and service costs, which tend to fluctuate with changes in revenue, increased$758.4 million , or 11.1%, compared to the nine months of 2020, reflecting increases in salary and related service costs and third-party service costs of$533.0 million and$225.4 million , respectively. These increases primarily resulted from the increase in organic revenue, as well as the strengthening of most foreign currencies against theU.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of$117.8 million related to reimbursements and tax credits from governmental programs in several countries. Occupancy and other costs, which are less 16 -------------------------------------------------------------------------------- directly linked to changes in revenue than salary and service costs, decreased$1.6 million , or 0.2%. For the nine months endedSeptember 30, 2021 , operating profit increased$591.3 million to$1,575.4 million , operating margin increased to 15.1% from 10.5%, and EBITA margin increased to 15.7% from 11.1%. The increases in operating profit, operating margin and EBITA margin reflect the impact of the organic revenue growth, the positive impact of cost reduction actions taken in the prior year in response to the COVID-19 pandemic, and the negative impact in the prior year period from the net increase in operating expenses recorded in the second quarter of 2020 aggregating$160.1 million , related to the COVID-19 repositioning costs, partially offset by the benefit related to reimbursements and tax credits from governmental programs. Additionally, operating profit, operating margin and EBITA margin for the nine months of 2021 were favorably impacted by the$50.5 million gain recorded in connection with the sale of ICON. In connection with the sale of ICON, in the second quarter of 2021, we recorded a pre-tax gain of$50.5 million . The sale of ICON is part of our continuing realignment of our portfolio of businesses and is consistent with our strategic plan and investment priorities. The disposition is not expected to have a material impact on our ongoing results of operations or financial position. Going forward, the anticipated level of disposition activity is expected to be limited, and we expect to be principally focused on acquisition opportunities. Net interest expense in the third quarter of 2021 decreased$4.8 million period-over-period to$43.7 million . Net interest expense in the nine months of 2021 increased$23.2 million period-over-period to$164.7 million . Interest expense on debt in the third quarter of 2021 decreased$3.8 million to$44.8 million primarily as a result of the benefit from the early redemption inMay 2021 of all the outstanding$1.250 billion principal amount of 3.625% Senior Notes due 2022, or 2022 Notes, which was partially offset by the issuance of$800 million of 2.60% Senior Notes due 2031, or 2031 Notes. Interest expense on debt in the nine months of 2021 increased$15.9 million to$167.4 million compared to the prior year period, primarily arising from a loss of$26.6 million on the early redemption of the 2022 Notes. The impact of this refinancing activity reduced our leverage that had increased in the second quarter of 2020 from the issuance of$600 million of 4.20% Senior Notes due 2030, or 2030 Notes, to increase our liquidity in response to the COVID-19 pandemic. Interest income in the third quarter of 2021 increased$1.1 million period-over-period to$7.0 million and in the nine months of 2021 decreased$5.0 million period-over-period to$20.1 million . Our effective tax rate for the third quarter of 2021 decreased period-over-period to 24.1% from 26.7%. In the third quarter of 2021, income tax expense was reduced by$11.7 million primarily from the favorable settlements of uncertain tax positions in certain jurisdictions. Our effective tax rate for the nine months endedSeptember 30, 2021 decreased period-over-period to 25.2% from 28.5%. In connection with the sale of ICON in the second quarter of 2021, we recorded a pre-tax gain of$50.5 million . The lower effective tax rate for 2021 was predominantly the result of a nominal tax applied against the book gain on the sale of ICON resulting from excess tax over book basis. Our effective tax rate for the nine months endedSeptember 30, 2021 would have been in line with our expectations except for these items. Net income -Omnicom Group Inc. for the third quarter of 2021 was$355.6 million , as compared to$313.3 million in the third quarter of 2020. Net income -Omnicom Group Inc. in the nine months of 2021 increased$444.3 million to$991.6 million from$547.3 million in the nine months of 2020. The period-over-period increase is due to the factors described above. Diluted net income per share -Omnicom Group Inc. for the third quarter of 2021 was$1.65 , as compared to$1.45 in the third quarter of 2020. Diluted net income per share -Omnicom Group Inc. increased to$4.58 in the nine months of 2021, as compared to$2.53 in the nine months of 2020. 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 year, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan. The combined effect of the after-tax gain from the sale of ICON and the loss on the early redemption of the 2022 Notes increased net income -Omnicom Group Inc. for the nine months of 2021 by$31.0 million and increased diluted net income per share -Omnicom Group Inc. for the nine months of 2021 by$0.14 . The net after-tax affect on net income -Omnicom Group Inc. in 2020 from the COVID-19 repositioning costs, decreased net income -Omnicom Group Inc. for the nine months of 2020 by$223.1 million and decreased diluted net income per share -Omnicom Group Inc. for the nine months of 2020 by$1.03 . 17 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - Third Quarter 2021 Compared to Third Quarter 2020 (in millions): 2021 2020 Revenue$ 3,435.0 $ 3,206.5 Operating Expenses: Salary and service costs 2,461.8 2,287.1 Occupancy and other costs 285.5 273.1 Cost of services 2,747.3 2,560.2 Selling, general and administrative expenses 95.0 90.2 Depreciation and amortization 51.1 54.7 2,893.4 2,705.1 Operating Profit 541.6 501.4 Operating Margin % 15.8 % 15.6 % Interest Expense 50.7 54.4 Interest Income 7.0 5.9
Income Before Income Taxes and Income From Equity Method Investments
497.9 452.9
Income Tax Expense 120.0 120.9
Income From Equity Method Investments 2.2 2.9
Net Income 380.1 334.9
Net Income Attributed To Noncontrolling Interests 24.5 21.6
Net Income - Omnicom Group Inc. $
355.6
Non-GAAP Financial Measures We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance 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.$ 355.6 $ 313.3 Net Income Attributed To Noncontrolling Interests 24.5 21.6 Net Income 380.1 334.9 Income From Equity Method Investments 2.2 2.9 Income Tax Expense 120.0 120.9 Income Before Income Taxes and Income From Equity Method Investments 497.9 452.9 Interest Expense 50.7 54.4 Interest Income 7.0 5.9 Operating Profit 541.6 501.4 Add back: Amortization of intangible assets 18.7 20.2 Earnings before interest, taxes and amortization of intangible assets ("EBITA")$ 560.3 $ 521.6 Revenue$ 3,435.0 $ 3,206.5 EBITA$ 560.3 $ 521.6 EBITA Margin % 16.3 % 16.3 % 18
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Revenue
Revenue for the quarter endedSeptember 30, 2021 increased$228.5 million , or 7.1%, compared to the prior year quarter, as all our disciplines and regional markets experienced a recovery from the negative effects of the COVID-19 pandemic compared to the third quarter of 2020. Changes in foreign exchange rates in the third quarter of 2021 increased revenue 1.6%, acquisition revenue, net of disposition revenue, reduced revenue 5.9% and organic growth increased revenue 11.5%. The reduction in acquisition revenue, net of disposition revenue, reflects the sale of ICON in the second quarter of 2021. The change in revenue across our principal regional markets was:North America decreased$32.9 million , or 1.8%,Europe increased$149.3 million , or 17.1%,Asia-Pacific increased$88.3 million , or 23.9%, andLatin America increased$10.9 million , or 17.7%. InNorth America , the increase in organic revenue in all our disciplines, especially in our advertising discipline and our CRM Precision Marketing discipline, was offset by a decline in acquisition revenue, net of disposition revenue, resulting from the sale of ICON. InEurope , organic revenue increased in all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Precision Marketing discipline. The strengthening of the British Pound and the Euro against theU.S. Dollar contributed to increased revenue in the region. InLatin America , revenue increased due to organic growth in all countries in the region, especiallyBrazil andColombia , and the strengthening of most currencies against theU.S. Dollar. InAsia-Pacific , revenue increased due to strong organic revenue growth in all our major markets in the region, particularlyAustralia ,China andNew Zealand , and in substantially all disciplines. The strengthening of substantially all currencies against theU.S. Dollar contributed to increased revenue in the region. The change in revenue in the third quarter of 2021 compared to the third quarter of 2020 in our fundamental disciplines was: advertising decreased$7.0 million , CRM Precision Marketing increased$72.3 million ,CRM Commerce and Brand Consulting increased$37.1 million , CRM Experiential increased$44.6 million , CRM Execution & Support increased$23.3 million , public relations increased$33.8 million and healthcare increased$24.4 million . The components of revenue change for the third quarter of 2021 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % September 30, 2020$ 3,206.5 $ 1,762.9 $ 1,443.6 Components of revenue change: Foreign exchange rate impact 51.8 1.6 % - - % 51.8 3.6 % Acquisition revenue, net of disposition revenue (190.5) (5.9) % (193.7) (11.0) % 3.2 0.2 % Organic growth 367.2 11.5 % 136.0 7.7 % 231.2 16.0 % September 30, 2021$ 3,435.0 7.1 %$ 1,705.2 (3.3) %$ 1,729.8 19.8 % 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$3,383.2 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 ($3,435.0 million less$3,383.2 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 ($3,206.5 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 15, 2021 remain unchanged, we expect the impact of changes in foreign exchange rates to reduce revenue approximately 1% in the fourth quarter of 2021, and to increase revenue by approximately 2% for the full year. Based on our acquisition and disposition activity to date, we expect that the net impact will reduce revenue by 7% for the fourth quarter of 2021 and 4% for the full year. Further, we expect organic revenue growth for the full year to be marginally below organic revenue growth through the nine months endedSeptember 30, 2021 . In addition, we expect operating margin for 19 -------------------------------------------------------------------------------- the full year to improve slightly from operating margin for the nine months endedSeptember 30, 2021 (see page 23, results of operations table and page 24, components of revenue change table). Revenue and organic growth in our principal regional markets were (in millions): Three Months Ended September 30, 2021 2020 $ Change % Organic Growth Americas: North America$ 1,821.8 $ 1,854.7 $ (32.9) 8.3 % Latin America 72.5 61.6 10.9 15.9 % EMEA: Europe 1,024.3 875.0 149.3 13.6 % Middle East and Africa 58.1 45.2 12.9 24.3 % Asia-Pacific 458.3 370.0 88.3 19.6 %$ 3,435.0 $ 3,206.5 $ 228.5 11.5 % Revenue inEurope , which includes our primary markets of theU.K. and theEuro Zone , increased$149.3 million for the third quarter of 2021. Revenue in theU.K. , representing 11.2% of consolidated revenue, increased$64.0 million . Revenue in Continental Europe, which comprises theEuro Zone and the other European countries, representing 18.7% of consolidated revenue, increased$85.3 million . The increase in revenue is due to strong organic growth in all countries and disciplines, as well as the continued strengthening of the British Pound and Euro against theU.S. Dollar. 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 the twelve months endedSeptember 30, 2021 and 2020, our largest client represented 3.1% and 3.3% of revenue, respectively. Our ten largest and 100 largest clients represented 21.9% and 54.1% of revenue for the twelve months endedSeptember 30, 2021 , respectively, and 19.9% and 51.8% of revenue for the twelve months endedSeptember 30, 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. Although all our disciplines improved as compared to the third quarter of 2020, certain of our businesses and markets continue to experience the effects of client spending reductions related to the COVID-19 pandemic. Among the most 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 September 30, 2021 2020 2021 vs. 2020 % of % of % Organic $ Revenue $ Revenue $ Change Growth Advertising$ 1,820.6 53.0 %$ 1,827.6 57.0 %$ (7.0) 8.6 % CRM Precision Marketing 309.4 9.0 % 237.1 7.4 % 72.3 24.3 % CRM Commerce and Brand Consulting 231.3 6.7 % 194.2 6.1 % 37.1 18.0 % CRM Experiential 132.7 3.9 % 88.1 2.7 % 44.6 49.9 % CRM Execution & Support 258.8 7.5 % 235.5 7.3 % 23.3 8.3 % Public Relations 359.4 10.5 % 325.6 10.2 % 33.8 10.5 % Healthcare 322.8 9.4 % 298.4 9.3 % 24.4 6.6 %$ 3,435.0 $ 3,206.5 $ 228.5 11.5 % 20
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We provide services to clients that operate in various industry sectors. Revenue
by sector was:
Three Months Ended September 30,
2021 2020
Food and Beverage 14 % 14 %
Consumer Products 8 % 8 %
Pharmaceuticals and Healthcare 16 % 17 %
Financial Services 7 % 8 %
Technology 11 % 10 %
Auto 10 % 10 %
Travel and Entertainment 5 % 5 %
Telecommunications 6 % 6 %
Retail 7 % 7 %
Services 2 % 2 %
Oil, Gas and Utilities 2 % 1 %
Not-for-Profit 1 % 1 %
Government 3 % 3 %
Education 1 % 1 %
Other 7 % 7 %
100 % 100 %
In 2020, certain industry sectors were more negatively affected by the impact of
the COVID-19 pandemic than others.
Operating Expenses
Operating expenses were (in millions):
Three Months Ended September 30,
2021 2020 2021 vs. 2020
% of % of $ %
$ Revenue $ Revenue Change Change
Revenue $ 3,435.0 $ 3,206.5 $ 228.5 7.1 %
Operating Expenses:
Salary and service costs:
Salary and related service costs 1,730.3 50.4 % 1,501.1 46.8 % 229.2 15.3 %
Third-party service costs 731.5 21.3 % 786.0 24.5 % (54.5) (6.9) %
2,461.8 71.7 % 2,287.1 71.3 % 174.7 7.6 %
Occupancy and other costs 285.5 8.3 % 273.1 8.5 % 12.4 4.5 %
Cost of services 2,747.3 2,560.2 187.1 7.3 %
Selling, general and administrative
expenses 95.0 2.8 % 90.2 2.8 % 4.8 5.3 %
Depreciation and amortization 51.1 1.5 % 54.7 1.7 % (3.6) (6.6) %
2,893.4 84.2 % 2,705.1 84.4 % 188.3 7.0 %
Operating Profit $ 541.6 15.8 % $ 501.4 15.6 % $ 40.2 8.0 %
Operating expenses for the quarter ended September 30, 2021 increased $188.3
million , or 7.0%, period-over-period. Salary and service costs, which tend to
fluctuate with changes in revenue, increased $174.7 million , or 7.6%, compared
to the quarter ended September 30, 2020 , reflecting an increase in salary and
related service costs of $229.2 million , partially offset by a decrease in
third-party service costs of $54.5 million . The increase in salary and related
service costs primarily resulted from the increase in organic revenue, as well
as the strengthening of most foreign currencies against the U.S. Dollar,
especially the British Pound and Euro. The prior year period reflects a
reduction in salary and service costs of $68.7 million related to reimbursements
and tax credits from governmental programs in several countries. Third-party
service costs, which fluctuate with changes in revenue, decreased during the
quarter due to our net disposition activity during the year, primarily related
to the disposition of ICON, partially offset by the organic growth in revenue as
well as the effects of foreign currency exchange rate changes. Occupancy and
other costs, which are less directly linked to changes in revenue than salary
and service costs, increased $12.4 million , or 4.5%, period-over-period, due to
the strengthening of most foreign currencies against the U.S. Dollar. For the
quarter ended September 30, 2021 compared to the prior year period, operating
profit increased $40.2 million to $541.6 million , operating
21
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margin increased to 15.8% from 15.6%, and EBITA margin remained unchanged at
16.3%. In 2020, operating profit, operating margin and EBITA margin reflect the
benefits of reimbursements and tax credits from governmental programs.
Net Interest Expense
Net interest expense in the third quarter of 2021 decreased $4.8 million
period-over-period to $43.7 million . Interest expense on debt in the third
quarter of 2021 decreased $3.8 million to $44.8 million primarily as a result of
the benefit from the early redemption in May 2021 of all the outstanding $1.250
billion principal amount of the 2022 Notes, which was partially offset by the
issuance of $800 million of the 2031 Notes (see Note 5 to the unaudited
consolidated financial statements). Interest income in the third quarter of 2021
increased $1.1 million period-over-period to $7.0 million .
Income Taxes
Our effective tax rate for the third quarter of 2021 decreased
period-over-period to 24.1% from 26.7%. In the third quarter of 2021, income tax
expense was reduced by $11.7 million primarily from the favorable settlements of
uncertain tax positions in certain jurisdictions.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. for the third quarter of 2021 was $355.6
million , as compared to $313.3 million in the third quarter of 2020. The
period-over-period increase is due to the factors described above. Diluted net
income per share - Omnicom Group Inc. for the third quarter of 2021 was $1.65 ,
as compared to $1.45 in the third quarter of 2020. 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 year, net of shares issued for
restricted stock awards, stock option exercises and the employee stock purchase
plan.
22
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RESULTS OF OPERATIONS - Nine Months of 2021 Compared to Nine Months of 2020 (in
millions):
2021 2020
Revenue $ 10,433.6 $ 9,414.1
Operating Expenses:
Salary and service costs 7,609.9 6,851.5
Occupancy and other costs 871.0 872.6
Gain on disposition of subsidiary (50.5) -
COVID-19 repositioning costs - 277.9
Cost of services 8,430.4 8,002.0
Selling, general and administrative expenses 269.9 259.2
Depreciation and amortization 157.9 168.8
8,858.2 8,430.0
Operating Profit 1,575.4 984.1
Operating Margin % 15.1 % 10.5 %
Interest Expense 184.8 166.6
Interest Income 20.1 25.1Income Before Income Taxes and Income (Loss) From Equity Method Investments
1,410.7 842.6
Income Tax Expense 355.1 240.2
Income (Loss) From Equity Method Investments 2.1 (10.1)
Net Income 1,057.7 592.3
Net Income Attributed To Noncontrolling Interests 66.1 45.0
Net Income - Omnicom Group Inc. $
991.6
Non-GAAP Financial Measures We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance 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.$ 991.6 $ 547.3 Net Income Attributed To Noncontrolling Interests 66.1 45.0 Net Income 1,057.7 592.3 Income (Loss) From Equity Method Investments 2.1 (10.1) Income Tax Expense 355.1 240.2 Income Before Income Taxes and Income (Loss) From Equity Method Investments 1,410.7 842.6 Interest Expense 184.8 166.6 Interest Income 20.1 25.1 Operating Profit 1,575.4 984.1 Add back: Amortization of intangible assets 59.8 62.4 Earnings before interest, taxes and amortization of intangible assets ("EBITA")$ 1,635.2 $ 1,046.5 Revenue$ 10,433.6 $ 9,414.1 EBITA$ 1,635.2 $ 1,046.5 EBITA Margin % 15.7 % 11.1 % 23
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Revenue
Revenue for the nine months endedSeptember 30, 2021 increased$1,019.5 million , or 10.8%, compared to the nine months endedSeptember 30, 2020 . Changes in foreign exchange rates increased revenue 3.2%, acquisition revenue, net of disposition revenue, reduced revenue 2.8%, and organic growth increased revenue 10.5%. In the first nine months of 2021, our business experienced a recovery from the negative effects of the COVID-19 pandemic in all our disciplines and regional markets as compared to the same period in 2020. The negative effects from the pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020. As a result, the improvement in revenue in the first nine months of 2021 versus the prior year period was driven by the recovery in the second and third quarters of 2021 as compared to the prior year periods. Revenue increased across all of our principal regional markets. The increases in revenue were as follows:North America $235.7 million , or 4.3%,Europe $483.6 million , or 19.1%,Asia-Pacific $256.6 million , or 24.5%, andLatin America $18.3 million , or 9.7%. InNorth America , improved organic growth inthe United States andCanada was partially offset by a decrease in revenue resulting from the disposition of ICON in the second quarter of 2021. Organic revenue growth inthe United States was led by our advertising discipline, on the strength of our media business, CRM Precision Marketing and public relations disciplines, partially offset by a decrease in organic revenue growth in our CRM Experiential discipline. InEurope , organic revenue increased in substantially all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Experiential and public relations disciplines. The strengthening of the British Pound and the Euro against theU.S. Dollar contributed to increased revenue in the region. InLatin America , organic growth in all countries in the region, especiallyBrazil ,Colombia andMexico , primarily in our advertising and public relations businesses, was partially offset by the weakening of the Brazilian Real against theU.S. Dollar. InAsia-Pacific , revenue increased due to strong organic revenue growth in all countries, particularlyChina ,Australia and New Zealand , and in all disciplines. The strengthening of substantially all currencies against theU.S. Dollar contributed to increased revenue in the region. The increases in revenue in the nine months of 2021 compared to the nine months of 2020 in our fundamental disciplines were as follows: advertising$547.8 million , CRM Precision Marketing$189.3 million ,CRM Commerce and Brand Consulting $64.6 million , CRM Experiential$47.2 million , CRM Execution & Support$54.3 million , public relations$65.4 million and healthcare$50.9 million . The components of revenue change for the nine months of 2021 inthe United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % September 30, 2020$ 9,414.1 $ 5,244.7 $ 4,169.4 Components of revenue change: Foreign exchange rate impact 298.3 3.2 % - - % 298.3 7.2 % Acquisition revenue, net of disposition revenue (267.5) (2.8) % (264.0) (5.0) % (3.5) (0.1) % Organic growth 988.7 10.5 % 433.5 8.3 % 555.2 13.3 % September 30, 2021$ 10,433.6 10.8 %$ 5,414.2 3.2 %$ 5,019.4 20.4 % The components and percentages are calculated as follows: •Foreign exchange rate impact is calculated by translating the current period's local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case$10,135.3 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 ($10,433.6 million less$10,135.3 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 ($9,414.1 million for the Total column). 24
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Revenue and organic growth in our principal regional markets were (in millions):
Nine Months Ended September 30,
2021 2020 $ Change % Organic Growth
Americas :
North America $ 5,751.7 $ 5,516.0 $ 235.7 8.7 %
Latin America 206.1 187.8 18.3 10.4 %
EMEA:
Europe 3,009.5 2,525.9 483.6 11.9 %
Middle East and Africa 160.6 135.3 25.3 14.9 %
Asia-Pacific 1,305.7 1,049.1 256.6 16.3 %
$ 10,433.6 $ 9,414.1 $ 1,019.5 10.5 %
Revenue in Europe , which includes our primary markets of the U.K. and the Euro
Zone , increased $483.6 million for the nine months of 2021 as compared to the
prior year period. Revenue in the U.K. , representing 10.7% of total revenue,
increased $189.7 million . Revenue in Continental Europe, which comprises the
Euro Zone and the other European countries, representing 18.1% of total revenue,
increased $293.9 million . The increase in revenue is due to strong organic
growth in all countries and disciplines, as well as the continued strengthening
of the British Pound and Euro against the U.S. Dollar.
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 through the nine
months of 2021 was an overall gain in new business. Under our client-centric
approach, we seek to broaden our relationships with all of our clients.
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, effective January 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 of Omnicom Commerce Group , including our shopper marketing
businesses, and our Brand 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.
Certain of our businesses and markets continue to experience the effects of
client spending reductions related to the COVID-19 pandemic. Among the most
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):
Nine Months Ended September 30,
2021 2020 2021 vs. 2020
% of % of % Organic
$ Revenue $ Revenue $ Change Growth
Advertising $ 5,838.8 56.0 % $ 5,291.0 56.2 % $ 547.8 12.0 %
CRM Precision Marketing 872.4 8.4 % 683.1 7.2 % 189.3 18.7 %
CRM Commerce and Brand Consulting 667.4 6.4 % 602.8 6.4 % 64.6 9.0 %
CRM Experiential 345.1 3.3 % 297.9 3.2 % 47.2 14.1 %
CRM Execution & Support 756.3 7.2 % 702.0 7.5 % 54.3 3.8 %
Public Relations 1,022.8 9.8 % 957.4 10.2 % 65.4 7.1 %
Healthcare 930.8 8.9 % 879.9 9.3 % 50.9 3.8 %
$ 10,433.6 $ 9,414.1 $ 1,019.5 10.5 %
25
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We provide services to clients that operate in various industry sectors. Revenue
by sector was:
Nine Months Ended September 30,
2021 2020
Food and Beverage 14 % 14 %
Consumer Products 8 % 8 %
Pharmaceuticals and Healthcare 16 % 16 %
Financial Services 7 % 8 %
Technology 10 % 9 %
Auto 10 % 10 %
Travel and Entertainment 8 % 7 %
Telecommunications 5 % 6 %
Retail 7 % 7 %
Services 2 % 2 %
Oil, Gas and Utilities 1 % 1 %
Not-for-Profit 1 % 1 %
Government 3 % 3 %
Education 1 % 1 %
Other 7 % 7 %
100 % 100 %
In 2020, certain industry sectors were more negatively affected by the impact of
the COVID-19 pandemic than others.
Operating Expenses
Operating expenses were (in millions):
Nine Months Ended September 30,
2021 2020 2021 vs. 2020
% of % of $ %
$ Revenue $ Revenue Change Change
Revenue $ 10,433.6 $ 9,414.1 $ 1,019.5 10.8 %
Operating Expenses:
Salary and service costs:
Salary and related service costs 5,101.2 48.9 % 4,568.2 48.5 % 533.0 11.7 %
Third-party service costs 2,508.7 24.0 % 2,283.3 24.3 % 225.4 9.9 %
7,609.9 72.9 % 6,851.5 72.8 % 758.4 11.1 %
Occupancy and other costs 871.0 8.3 % 872.6 9.3 % (1.6) (0.2) %
Gain on sale of subsidiary (50.5) (0.5) % - -
COVID-19 repositioning costs - 277.9 3.0 % -
Cost of services 8,430.4 8,002.0 428.4 5.4 %
Selling, general and administrative expenses 269.9 2.6 % 259.2 2.8 % 10.7 4.1 %
Depreciation and amortization 157.9 1.5 % 168.8 1.8 % (10.9) (6.5) %
8,858.2 84.9 % 8,430.0 89.5 % 428.2 5.1 %
Operating Profit $ 1,575.4 15.1 % $ 984.1 10.5 % $ 591.3 60.1 %
Operating expenses for the nine months ended September 30, 2021 , increased
$428.2 million , or 5.1%, period-over-period. Operating expenses for the nine
months ended September 30, 2021 include a reduction of $50.5 million related to
the gain from the sale of ICON, and the prior year period included an increase
of $277.9 million related to charges we recorded in connection with the actions
we took in response to the COVID-19 pandemic. Salary and service costs, which
tend to fluctuate with changes in revenue, increased $758.4 million , or 11.1%,
compared to the nine months of 2020, reflecting increases in salary and related
service costs and third-party service costs of $533.0 million and $225.4
million , respectively. These increases primarily resulted from the increase in
organic revenue, as well as the strengthening of most foreign currencies against
the U.S. Dollar, especially the British Pound and Euro. The prior year period
reflects a reduction in salary and service costs of $117.8 million related to
reimbursements and tax credits from governmental programs in several countries.
Occupancy and other costs, which are less directly linked to changes in revenue
than salary and service costs, decreased $1.6 million , or 0.2%. For the nine
months ended
26
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September 30, 2021 , operating profit increased $591.3 million to $1,575.4
million , operating margin increased to 15.1% from 10.5%, and EBITA margin
increased to 15.7% from 11.1%. The increases in operating profit, operating
margin and EBITA margin reflect the impact of the organic revenue growth, the
positive impact of cost reduction actions taken in the prior year in response to
the COVID-19 pandemic, and the negative impact in the prior year period from the
net increase in operating expenses recorded in the second quarter of 2020
aggregating $160.1 million , related to the COVID-19 repositioning costs,
partially offset by the benefit related to reimbursements and tax credits from
governmental programs. Additionally, operating profit, operating margin and
EBITA margin for the nine months of 2021 were favorably impacted by the $50.5
million gain recorded in connection with the sale of ICON.
Net Interest Expense
Net interest expense in the nine months of 2021 increased $23.2 million
period-over-period to $164.7 million . Interest expense on debt in the nine
months of 2021 increased $15.9 million to $167.4 million compared to the prior
year period, primarily arising from a loss of $26.6 million on the early
redemption in May 2021 of all the outstanding $1.250 billion of 2022 Notes,
which was partially offset by the benefit from the issuance of $800 million of
2031 Notes at a lower rate. The impact of this refinancing activity reduced our
leverage that increased in the second quarter of 2020 from the issuance of the
$600 million of 2030 Notes, to increase our liquidity in response to the
COVID-19 pandemic (see Note 5 to the unaudited consolidated financial
statements). Interest income in the nine months of 2021 decreased $5.0 million
period-over-period to $20.1 million .
Income Taxes
Our effective tax rate for the nine months ended September 30, 2021 decreased
period-over-period to 25.2% from 28.5%. In connection with the sale of ICON in
the second quarter of 2021, we recorded a pre-tax gain of $50.5 million . The
lower effective tax rate for 2021 was predominantly the result of a nominal tax
applied against the book gain on the sale of ICON resulting from excess tax over
book basis. In addition, in the third quarter of 2021, income tax expense was
reduced by $11.7 million primarily from the favorable settlements of uncertain
tax positions in certain jurisdictions. Our effective tax rate for the nine
months ended September 30, 2021 would have been in line with our expectations
except for these items.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. in the nine months of 2021 increased $444.3
million to $991.6 million from $547.3 million in the nine months of 2020. The
period-over-period increase is due to the factors described above. Diluted net
income per share - Omnicom Group Inc. increased to $4.58 in the nine months of
2021, compared to $2.53 in the nine months of 2020, 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 year, net of shares issued for restricted stock awards, stock
option exercises and the employee stock purchase plan.
The combined effect of the after-tax gain from the sale of ICON and the loss on
the early redemption of the 2022 Notes increased net income - Omnicom Group Inc.
for the nine months of 2021 by $31.0 million and increased diluted net income
per share - Omnicom Group Inc. for the nine months of 2021 by $0.14 . The net
after-tax effect on net income - Omnicom Group Inc. in 2020 from the COVID-19
repositioning costs, decreased net income - Omnicom Group Inc. for the nine
months of 2020 by $223.1 million and decreased diluted net income per share -
Omnicom Group Inc. for the nine months of 2020 by $1.03 .
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 2020 10-K.
Acquisitions and Goodwill
We have made and expect to continue to make selective acquisitions. The
evaluation of potential acquisitions is based on various factors, including
specialized know-how, reputation, geographic coverage, competitive position and
service offerings of the target businesses, as well as our experience and
judgment.
Our acquisition strategy is focused on acquiring the expertise of an assembled
workforce in order to continue to build upon the core capabilities of our
various strategic business platforms and agency brands through the expansion of
their geographic reach or their service capabilities to better serve our
clients. Additional key factors we consider include the competitive position and
specialized know-how of the acquisition targets. Accordingly, as is typical in
most service businesses, a substantial portion of the assets we acquire are
intangible assets primarily consisting of the know-how of the personnel, which
is treated as part of goodwill and is not required to be valued separately under
U.S. GAAP. For each acquisition, we undertake a detailed review to identify
other intangible assets that are required to be valued separately. A significant
portion of the identifiable intangible assets acquired is derived from customer
relationships, including the related customer contracts, as well as trade names.
In valuing these identified intangible assets, we typically use an income
approach and consider comparable market participant measurements.
27
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We evaluate goodwill for impairment at least annually at the end of the second
quarter of the year and whenever events or circumstances indicate the carrying
value may not be recoverable. Under FASB ASC Topic 350, Intangibles - Goodwill
and Other, we have the option of either assessing qualitative factors to
determine whether it is more-likely-than-not that the carrying value of our
reporting units exceeds their respective fair value or proceeding directly to
the goodwill impairment test. We performed the annual impairment test and
compared the fair value of each of our reporting units to its respective
carrying value, including goodwill. During the second quarter of 2021, we
reorganized the management of one of our agency networks, effectively combining
certain practice areas into a new reporting unit that primarily comprises our
Omnicom Public Relations Group practice area. As a result of the reorganization,
the number of operating segments increased from five to six in 2021. We
identified our regional reporting units as components of our operating segments,
which are our six global agency networks. The regional reporting units of each
agency network are responsible for the agencies in their region. They report to
the segment managers and facilitate the administrative and logistical
requirements of our key client matrix organization structure for delivering
services to clients in their regions. We have concluded that for each of our
operating segments, their regional reporting units have similar economic
characteristics and should be aggregated for purposes of testing goodwill for
impairment at the operating segment level. Our conclusion was based on a
detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280,
Segment Reporting, and in FASB ASC Topic 350. Consistent with our fundamental
business strategy, the agencies within our regional reporting units serve
similar clients in similar industries, and in many cases the same clients. In
addition, the agencies within our regional reporting units have similar economic
characteristics. The main economic components of each agency are employee
compensation and related costs and direct service costs and occupancy and other
costs, which include rent and occupancy costs, technology costs that are
generally limited to personal computers, servers and off-the-shelf software and
other overhead expenses. Finally, the expected benefits of our acquisitions are
typically shared by multiple agencies in various regions as they work together
to integrate the acquired agency into our virtual client network strategy.
Goodwill Impairment Review - Estimates and Assumptions
We use the following valuation methodologies to determine the fair value of our
reporting units: (1) the income approach, which utilizes discounted expected
future cash flows, (2) comparative market participant multiples for EBITDA
(earnings before interest, taxes, depreciation and amortization) and (3) when
available, consideration of recent and similar acquisition transactions.
In applying the income approach, we use estimates to derive the discounted
expected cash flows ("DCF") for each reporting unit that serves as the basis of
our valuation. These estimates and assumptions include revenue growth and
operating margin, EBITDA, tax rates, capital expenditures, weighted average cost
of capital and related discount rates and expected long-term cash flow growth
rates. All of these estimates and assumptions are affected by conditions
specific to our businesses, economic conditions related to the industry we
operate in, as well as conditions in the global economy. The assumptions that
have the most significant effect on our valuations derived using a DCF
methodology are: (1) the expected long-term growth rate of our reporting units'
cash flows and (2) the weighted average cost of capital ("WACC") for each
reporting unit.
At June 30, 2021 we adjusted our assumptions to reflect the economic conditions
in light of the impact on our business related to the COVID-19 pandemic.
The assumptions used for the long-term growth rate and WACC in our evaluations
as of June 30, 2021 and 2020 were:
2021 2020
Long-Term Growth Rate 3.5% 3.0%
WACC 9.8% - 10.4% 10.6% - 10.8%
Long-term growth rate represents our estimate of the long-term growth rate for
our industry and the markets of the global economy we operate in. For the past
ten years, the average historical revenue growth rate of our reporting units and
the Average Nominal GDP, or NGDP, growth of the countries comprising the major
markets that account for substantially all of our revenue was approximately 3.2%
and 3.4%, respectively. We considered this history when determining the
long-term growth rates used in our annual impairment test at June 30, 2021 , and
included in the 10-year history is the full year 2020 that reflected the impact
of the COVID-19 pandemic on the global economy. We believe marketing
expenditures over the long term have a high correlation to NGDP. Based on our
historical performance, we also believe that our long-term growth rate will
exceed NGDP growth in the short-term in the markets we operate in, which are
similar across our reporting units. Accordingly, for our annual test as of
June 30, 2021 , we used an estimated long-term growth rate of 3.5%.
When performing the annual impairment test as of June 30, 2021 and estimating
the future cash flows of our reporting units, we considered the current
macroeconomic environment, as well as industry and market specific conditions at
mid-year 2021. In the first half of 2021, our revenue increased 10.0%, which
excluded our net disposition activity and the impact from changes in foreign
exchange rates.
The WACC is comprised of: (1) a risk-free rate of return, (2) a business risk
index ascribed to us and to companies in our industry comparable to our
reporting units based on a market derived variable that measures the volatility
of the share price of equity securities relative to the volatility of the
overall equity market, (3) an equity risk premium that is based on the rate of
return
28
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on equity of publicly traded companies with business characteristics comparable
to our reporting units, and (4) a current after-tax market rate of return on
debt of companies with business characteristics similar to our reporting units,
each weighted by the relative market value percentages of our equity and debt.
Our six reporting units vary in size with respect to revenue and the amount of
debt allocated to them. These differences drive variations in fair value among
our reporting units. In addition, these differences as well as differences in
book value, including goodwill, cause variations in the amount by which fair
value exceeds book value among the reporting units. The reporting unit goodwill
balances and debt vary by reporting unit primarily because our three legacy
agency networks were acquired at the formation of Omnicom and were accounted for
as a pooling of interests that did not result in any additional debt or goodwill
being recorded. The remaining three agency networks were built through a
combination of internal growth and acquisitions that were accounted for using
the acquisition method and as a result, they have a relatively higher amount of
goodwill and debt. Finally, the allocation of goodwill when components are
transferred between reporting units is based on relative fair value at the time
of transfer.
Goodwill Impairment Review - Conclusion
Based on the results of our impairment test, we concluded that our goodwill at
June 30, 2021 was not impaired, because the fair value of each of our reporting
units was in excess of its respective net book value. For our reporting units
with negative book value, we concluded that the fair value of their total assets
was in excess of book value. The minimum decline in fair value that one of our
reporting units would need to experience in order to fail the goodwill
impairment test was approximately 34%. Notwithstanding our belief that the
assumptions we used for WACC and long-term growth rate in our impairment testing
were reasonable, we performed a sensitivity analysis for each of our reporting
units. The results of this sensitivity analysis on our impairment test as of
June 30, 2021 revealed that if the WACC increased by 1% and/or the long-term
growth rate decreased by 1%, the fair value of each of our reporting units would
continue to be in excess of its respective net book value and would pass the
impairment test.
We will continue to perform our impairment test at the end of the second quarter
of each year unless events or circumstances trigger the need for an interim
impairment test. The estimates used in our goodwill impairment test do not
constitute forecasts or projections of future results of operations, but rather
are estimates and assumptions based on historical results and assessments of
macroeconomic factors affecting our reporting units as of the valuation date. We
believe that our estimates and assumptions are reasonable, but they are subject
to change from period to period. Actual results of operations and other factors
will likely differ from the estimates used in our discounted cash flow
valuation, and it is possible that differences could be significant. A change in
the estimates we use could result in a decline in the estimated fair value of
one or more of our reporting units from the amounts derived as of our latest
valuation and could cause us to fail our goodwill impairment test if the
estimated fair value for the reporting unit is less than the carrying value of
the net assets of the reporting unit, including its goodwill. A large decline in
estimated fair value of a reporting unit could result in a non-cash impairment
charge and may have an adverse effect on our results of operations and financial
condition.
NEW ACCOUNTING STANDARDS
Note 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 $915.6 million , 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.
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. 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 $1,169.3 million from December 31, 2020 .
During the first nine months of 2021, we generated $238.6 million of cash in
operating activities, which included the use for operating capital of $1,010.7
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 nine months of 2021 was
$866.6 million as compared
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to $851.0 million for the first nine months of 2020. Discretionary spending for
the first nine months of 2021 is comprised of: capital expenditures of $42.6
million ; dividends paid to common shareholders of $443.0 million ; dividends paid
to shareholders of noncontrolling interests of $69.8 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 $264.7
million ; and net acquisition payments, including payment of contingent purchase
price obligations and acquisition of additional shares of noncontrolling
interests of $46.5 million . In addition, the impact of foreign exchange rate
changes reduced cash and cash equivalents by $117.6 million . We are in the
process of closing on several acquisitions, which will not have a material
impact on our liquidity.
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 September 30, 2021 , our foreign subsidiaries held approximately $2.0 billion
of our total cash and cash equivalents of $4.4 billion . Most of the cash is
available to us, net of any foreign withholding taxes payable upon repatriation
to the United States .
At September 30, 2021 , our net debt position, which we define as total debt,
including short-term debt, less cash and cash equivalents increased to $850.7
million as compared to $210.7 million at December 31, 2020 . The increase in net
debt primarily resulted from the use of cash of $1,010.7 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 $117.6 million , as compared to December 31, 2020 .
Net debt decreased $1.7 billion from $2.5 billion at September 30, 2020 due to
conservative management of our cash during the COVID-19 pandemic and the impact
of our refinancing activity in the second quarter of 2021 discussed below.
The components of net debt were (in millions):
September 30, December 31, September 30,
2021 2020 2020
Short-term debt $ 10.2 $ 3.9 $ 23.6
Long-term debt 5,271.7 5,807.3 5,761.5
Total debt 5,281.9 5,811.2 5,785.1
Less: Cash and cash equivalents and short-term
investments 4,431.2 5,600.5 3,278.3
Net debt $ 850.7 $ 210.7 $ 2,506.8
In May 2021 , we issued $800 million of 2031 Notes. The net proceeds from the
issuance, after deducting the underwriting discount and offering expenses, were
$791.7 million . The net proceeds plus cash on hand were used to redeem all the
outstanding $1.250 billion of 2022 Notes in May 2021 . In connection with the
redemption of the 2022 Notes, we recorded a loss on extinguishment of $26.6
million in interest expense. The impact of this refinancing activity reduced our
leverage that had increased from the issuance of $600 million of 2030 Notes in
the second quarter of 2020 to increase our liquidity in response to the COVID-19
pandemic, and is expected to result in lower interest expense for the remainder
of 2021 as compared to the prior year periods.
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.
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Debt Instruments and Related Covenants
Our 2.45% Senior Notes issued in February 2020 , the 4.20% Senior Notes issued in
April 2020 and the 2.60% Senior Notes issued in April 2021 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 3.65% Senior Notes and the 3.60% Senior Notes. These
notes are a joint and several liability of Omnicom and OCI, and Omnicom
unconditionally guarantees OCI's obligations with respect to the notes. OCI
provides funding for our operations by incurring debt and lending the proceeds
to our operating subsidiaries. OCI's assets primarily consist of cash and cash
equivalents and intercompany loans made to our operating subsidiaries, and the
related interest receivable. There are no restrictions on the ability of OCI or
Omnicom to obtain funds from our subsidiaries through dividends, loans or
advances. Such notes are senior unsecured obligations that rank equal in right
of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally
guaranteed 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.
Note 5 to the unaudited consolidated financial statements provides information
regarding our debt instruments.
The Credit Facility contains a financial covenant that requires us to maintain a
Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings
before interest, taxes, depreciation, amortization and non-cash charges) of no
more than 3.5 times for the most recently ended 12-month period. In October
2020 , we amended the Credit Facility to increase the maximum Leverage Ratio to
4.0 times through December 31, 2021 . At September 30, 2021 , we were in
compliance with this covenant as our Leverage Ratio was 2.2 times. The Credit
Facility does not limit our ability to declare or pay dividends or repurchase
our common stock.
At September 30, 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. Note 5 to the unaudited consolidated financial
statements provides information regarding our credit facilities.
We have typically funded our day-to-day liquidity by issuing commercial paper.
Beginning in the third quarter of 2020 and continuing through the second 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 $600 million of
2030 Notes. Additional liquidity sources include our Credit Facility and the
uncommitted credit lines.
Commercial paper activity was (dollars in millions):
Three
Months Ended
2021 2020
Average amount outstanding during the quarter $ 2.7 $ 29.0
Maximum amount outstanding during the quarter $ 250.0 $ 167.0
Average days outstanding 1.0 5.8
Weighted average interest rate 0.15 % 0.22 %
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
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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 3.1% of revenue for the twelve months endedSeptember 30, 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.
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