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OMNICOM GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Executive Summary
We are a strategic holding company. We provide professional services to clients
through multiple agencies around the world. On a global, pan-regional and local
basis, our agencies provide these services in the following disciplines:
advertising, customer relationship management, or CRM, public relations and
specialty communications. Our business model was built and continues to evolve
around our clients. While our agencies operate under different names and frame
their ideas in different disciplines, we organize our services around our
clients. The fundamental premise of our business is that our clients' specific
requirements should be the central focus in how we deliver our services and
allocate our resources. This client-centric business model results in multiple
agencies collaborating in formal and informal virtual networks that cut across
internal organizational structures to deliver consistent brand messages for a
specific client and execute against each of our clients' specific marketing
requirements. We continually seek to grow our business with our existing clients
by maintaining our client-centric approach, as well as expanding our existing
business relationships into new markets and with new clients. In addition, we
pursue selective acquisitions of complementary companies with strong
entrepreneurial management teams that typically currently serve or have the
ability to serve our existing client base.
As a leading global advertising, marketing and corporate communications company,
we operate in all major markets around the world. We have a large and diverse
client base. Our largest client accounted for 2.6% of our 2012 revenue and no
other client accounted for more than 2.6% of our 2012 revenue. Our top 100
clients accounted for approximately 52% of our 2012 revenue. Our business is
spread across a significant number of industry sectors with no one industry
comprising more than 14% of our 2012 revenue. Although our revenue is generally
balanced between the United States and international markets and we have a large
and diverse client base, we are not immune to general economic downturns.
In 2012, our revenue increased 2.5% compared to 2011. The increase reflects
strong operating performance by many of our agencies, partially offset by the
negative impact from changes in foreign exchange rates. Increased revenue in the
United States and continued growth in the emerging markets of Asia and Latin
America was partially offset by the on-going economic weakness in the Euro Zone.
Global economic conditions have a direct impact on our business and financial
performance. In particular, current global economic conditions pose a risk that
our clients may reduce future spending on advertising and marketing services
which could reduce the demand for our services. In 2012, the United States
experienced modest economic growth and the major economies of Asia and Latin
America continued to expand. However, the continuing fiscal issues faced by many
countries in the Euro Zone has caused economic difficulty in certain of our Euro
Zone markets. If economic conditions in these markets do not improve, the demand
for our services could be further reduced. If domestic or global economic
conditions worsen or do not improve, our results of operations and financial
position could be adversely affected. We will continue to closely monitor
economic conditions, client revenue levels and other factors and, in response to
reductions in our client revenue, if necessary, we will take actions available
to us to align our cost structure and manage working capital. There can be no
assurance whether, or to what extent, our efforts to mitigate any impact of
future economic conditions, reductions in our client revenue, changes in client
creditworthiness and other developments will be effective.
Certain business trends have had a positive impact on our business and industry.
These trends include our clients increasingly expanding the focus of their brand
strategies from national markets to pan-regional and global markets and
integrating traditional and non-traditional marketing channels, as well as
utilizing new communications technologies and emerging digital platforms.
Additionally, in an effort to gain greater efficiency and effectiveness from
their total marketing budgets, clients are increasingly requiring greater
coordination of marketing activities and concentrating these activities with a
smaller number of service providers. We believe these trends have benefited our
business in the past and over the medium and long term will continue to provide
a competitive advantage to us.
In the near term, barring unforeseen events and excluding the impact from
changes in foreign exchange, as a result of continued strong operating
performance by many of our agencies and new business activities we expect our
2013 revenue to increase modestly in excess of the weighted average nominal GDP
growth in our major markets. We expect to continue to identify acquisition
opportunities that will build on the core capabilities of our strategic business
platforms, expand our operations in the emerging markets and enhance our
capabilities to leverage new technologies that are being used by marketers
today.
Effective February 1, 2011, we acquired a controlling interest in the Clemenger
Group, our affiliate in Australia and New Zealand increasing our equity
ownership to 73.7% from 46.7%. In connection with this transaction, we recorded
a non-cash gain of $123.4 million in the first quarter of 2011 resulting from
the remeasurement of the carrying value of our equity interest to the
acquisition date fair value. This acquisition has and will continue to help us
to further develop our combined businesses throughout the Asia Pacific region
and further enhance our global capabilities.
We had an objective of improving EBITA margins to 2007 levels for the full year
2012. In connection with this objective, during 2011 we reviewed our businesses
with a focus on enhancing our strategic position, improving our operations and
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rebalancing our workforce. As part of this process, we disposed of certain
non-core and underperforming businesses and repositioned others. As a result of
these actions, we incurred charges of $131.3 million in the first quarter of
2011 for severance, real estate lease terminations and asset and goodwill
write-offs related to disposals and other costs. We continue to perform reviews
of our businesses and we will take actions, where appropriate, to reposition
underperforming businesses. We will also continue to pursue operational
consolidations to further drive efficiencies in our back office functions.
Given our size and breadth, we manage our business by monitoring several
financial indicators. The key indicators that we review focus on revenue and
operating expenses. We analyze revenue growth by reviewing the components and
mix of the growth, including growth by major geographic region, growth by major
marketing discipline, impact from foreign currency fluctuations, growth from
acquisitions and growth from our largest clients. In recent years, our revenue
has been divided almost evenly between our domestic and international
operations.
Revenue in 2012 increased 2.5% compared to 2011, of which 4.0% was organic
growth and 0.7% was related to acquisitions, net of dispositions. Changes in
foreign exchange rates reduced revenue by 2.2%. Across our geographic markets,
revenue increased 4.5% in the United States, 2.3% in the United Kingdom and 9.0%
in our other markets, primarily Asia and Latin America, while revenue decreased
10.4% in our Euro markets. The change in revenue in 2012 compared to 2011 in our
four fundamental disciplines was: advertising increased 4.6%, CRM increased
0.2%, public relations increased 4.9% and specialty communications decreased
2.1%.
We measure operating expenses in two distinct cost categories: salary and
service costs and office and general expenses. Salary and service costs consist
of employee compensation and related costs and direct service costs. Office and
general expenses consist of rent and occupancy costs, technology costs,
depreciation and amortization and other overhead expenses. Each of our agencies
requires professionals with a skill set that is common across our disciplines.
At the core of this skill set is the ability to understand a client's brand or
product and its selling proposition and the ability to develop a unique message
to communicate the value of the brand or product to the client's target
audience. The facility requirements of our agencies are also similar across
geographic regions and disciplines, and their technology requirements are
generally limited to personal computers, servers and off-the-shelf software.
Because we are a service business, we monitor salary and service costs and
office and general costs in relation to revenue.
Salary and service costs tend to fluctuate in conjunction with changes in
revenue. Salary and service costs increased 1.3% in 2012 compared to 2011.
Salary and service costs for 2011 reflect $92.8 million of severance charges
associated with our repositioning actions. The increase in 2012 costs resulted
from growth in our business, as well as increased use of freelance labor,
partially offset by lower compensation costs, including incentive compensation
primarily as a result of the repositioning actions taken in 2011 and tight
controls restricting the frequency of salary increases. Excluding the $92.8
million of severance charges taken in 2011, salary and service costs as a
percentage of revenue in 2012 would have been flat as compared to 2011.
Office and general expenses are less directly linked to changes in revenue than
salary and service costs. Office and general expenses increased 4.3% in 2012
compared to 2011. Office and general expenses for 2011 includes a reduction of
$84.9 million, which reflects the $123.4 million non-cash remeasurement gain
recorded in connection with the acquisition of the controlling interest in the
Clemenger Group and charges of $38.5 million related to our repositioning
actions. Excluding the $84.9 million net decrease, office and general expenses
in 2012 would have been flat as compared to 2011.
Operating margins increased to 12.7% in 2012 from 12.0% in 2011 and EBITA
margins increased to 13.4% in 2012 from 12.7% in 2011. The year-over-year margin
improvement was driven by our revenue growth, as well as lower operating costs
resulting from actions taken in 2011 to improve our operations, rebalance our
workforce and drive efficiencies in our back office functions.
Our effective tax rate for 2012 decreased to 31.8%, compared to 32.7% for 2011.
In the fourth quarter of 2012, income tax expense was reduced by $53 million,
primarily resulting from a reduction in the deferred tax liabilities for
unremitted foreign earnings of certain of our operating companies located in the
Asia Pacific region, as well as lower statutory tax rates in other foreign
jurisdictions. In an effort to support our continued expansion and pursue
operational efficiencies in the Asia Pacific region, we completed a legal
reorganization in certain countries within the region. As a result of the
reorganization, our unremitted foreign earnings in the affected countries are
subject to lower effective tax rates as compared to the U.S. statutory tax
rate. Therefore we recorded a reduction in our deferred tax liabilities to
reflect the lower tax rate that these earnings are subject to. In future periods
we expect an ongoing annual reduction in income tax expense of approximately $11
million. The reduction in income tax expense was partially offset by a charge of
approximately $16 million resulting from U.S. state and local tax accruals
recorded for uncertain tax positions, net of U.S. federal income tax benefit.
In the fourth quarter of 2012, we determined, based on the financial condition
and prospects of our equity investee in Egypt, that there was an
other-than-temporary decline in its carrying value. As a result, we recorded a
$29.2 million impairment charge to reduce the carrying value of the investment
to fair value. The impairment charge is included in income (loss) from equity
method investments in our income statement.
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Net income - Omnicom Group Inc. in 2012 increased $45.7 million, or 4.8%, to
$998.3 million from $952.6 million in 2011. The year-over-year increase in net
income - Omnicom Group Inc. is due to the factors described above. Diluted net
income per common share - Omnicom Group Inc. increased 8.4% to $3.61 in 2012,
compared to $3.33 in 2011 due to the factors described above, as well as the
reduction in our weighted average common shares outstanding. This reduction was
the result of repurchases of our common stock, net of stock option exercises and
shares issued under our employee stock purchase plan.
Critical Accounting Policies and New Accounting Standards
Critical Accounting Policies
The following summary of our critical accounting policies provides a better
understanding of our financial statements and the related discussion in this
MD&A. We believe that the following policies may involve a higher degree of
judgment and complexity in their application and represent the critical
accounting policies used in the preparation of our financial statements. Readers
are encouraged to consider this summary together with our financial statements
and the related notes, including Note 2, Significant Accounting Policies, for a
more complete understanding of the critical accounting policies discussed below.
Estimates: Our financial statements are prepared in conformity with U.S. GAAP
and require us to make estimates and assumptions that affect the amounts of
assets, liabilities, revenue and expenses that are reported in the consolidated
financial statements and accompanying notes. We use a fair value approach in
testing goodwill for impairment and when evaluating our cost-method investments
to determine if an other-than-temporary impairment has occurred. Actual results
could differ from those estimates and assumptions.
Acquisitions and Goodwill: We have made and expect to continue to make selective
acquisitions. In making acquisitions, the valuation of potential acquisitions is
based on various factors, including specialized know-how, reputation,
competitive position, geographic coverage and service offerings of the target
businesses, as well as our experience and judgment.
Business combinations are accounted for using the acquisition method and,
accordingly, the assets acquired, including identified intangible assets, the
liabilities assumed and any noncontrolling interest in the acquired business are
recorded at their acquisition date fair values. In circumstances where control
is obtained and less than 100% of an entity is acquired, we record 100% of the
goodwill acquired. Acquisition-related costs, including advisory, legal,
accounting, valuation and other costs, are expensed as incurred. Certain of our
acquisitions are structured with contingent purchase price obligations
(earn-outs). Contingent purchase price obligations are recorded as liabilities
at the acquisition date fair value. Subsequent changes in the fair value of the
liability are recorded in our results of operations. The results of operations
of acquired businesses are included in our results of operations from the
acquisition date. In 2012, we completed 13 acquisitions of new subsidiaries and
made additional investments in businesses in which we had an existing minority
ownership interest. Goodwill from these transactions was $235.1 million. In
addition, for acquisitions completed prior to January 1, 2009, we made
contingent purchase price payments (earn-outs) of $40.4 million, which were
included in goodwill. Contingent purchase price obligations for acquisitions
completed prior to January 1, 2009 are accrued, in accordance with U.S. GAAP,
when the contingency is resolved and payment is certain. At December 31, 2012,
the amount we could be required to pay for earn-outs for acquisitions completed
prior to January 1, 2009 is $15.7 million.
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 and/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 intangible asset value we
acquire is the know-how of the people, which is treated as part of goodwill and
is not valued separately. For each acquisition, we undertake a detailed review
to identify other intangible assets and a valuation is performed for all such
identified assets. 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.
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. We identified our regional reporting units as
components of our operating segments, which are our five 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 client-centric strategy 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 the guidance set forth in FASB ASC Topic 350, Intangibles
- Goodwill and Other. 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
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employee compensation and related costs and direct service costs and office and
general 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 across multiple agencies and regions as they work together to
integrate the acquired agency into our client service 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 purchase acquisition transactions.
In applying the income approach, we use estimates to derive the expected
discounted 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").
The range of assumptions used for the long-term growth rate and WACC in our
evaluations as of June 30, 2012 and 2011 were:
June 30,
2012 2011
Long-Term Growth Rate 4.0% 4.0%
WACC 10.3% - 10.9% 10.5% - 11.2%
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. The average
historical revenue growth rate of our reporting units for the past ten years was
approximately 7.5% and the Average Nominal GDP growth of the countries
comprising our major markets that account for substantially all of our revenue
was 4.3% over the same period. We considered this history when determining the
long-term growth rates used in our annual impairment test at June 30, 2012. We
believe marketing expenditures over the long term have a high correlation to
GDP. We also believe, based on our historical performance, that our long-term
growth rate will exceed Average Nominal GDP growth in the markets we operate in.
For our annual test as of June 30, 2012, we used an estimated long-term growth
rate of 4% for our reporting units.
When performing our annual impairment test as of June 30, 2012 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 2012. In the first half of 2012, we experienced an increase in our
revenue of 5.1%, which excludes growth from acquisitions and the impact from
changes in foreign exchange rates. However, the continuing fiscal issues faced
by many countries in the Euro Zone has caused economic difficulty in certain of
our Euro Zone markets. We considered the effect of these conditions in our
annual impairment test. As a result, we estimated growth rates for the next six
years that reflect a reduction from current business results.
The risk-adjusted discount rate used in our DCF analysis represents the
estimated after-tax WACC for each of our reporting units and ranged from 10.3%
to 10.9%. 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 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. The decrease in the WACC at June 30, 2012 compared to June 30,
2011 was primarily the result of a decrease in the long-term U.S. Treasury bond,
the risk-free rate of return used as a component that we use in determining the
WACC.
Our five 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 two agency networks were built through a
combination of internal growth and acquisitions that were accounted for as
purchase transactions and as a result, they have a relatively higher amount of
goodwill and debt.
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Goodwill Impairment Review - Conclusion: Under U.S. GAAP, we have the option of
either assessing qualitative factors to determine whether it is
more-likely-than-not that the carrying value of of our reporting units exceeds
their respective fair value or proceeding directly to Step 1 of the goodwill
impairment test. Although not required, we performed Step 1 of the annual
impairment test and compared the fair value of each of our reporting units to
its respective carrying value, including goodwill. Based on the results of our
impairment test, we concluded that our goodwill was not impaired at June 30,
2012, because the fair value of each of our reporting units was substantially in
excess of their respective net book value. The minimum decline in fair value
that one of our reporting units would need to experience in order to fail Step 1
of the goodwill impairment test was approximately 70%. Notwithstanding our
belief that the assumptions we used in our impairment testing for our WACC and
long-term growth rate are 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, 2012 revealed that if WACC increased by 1% and/or
long-term growth rate decreased by 1%, the fair value of each of our reporting
units would continue to be substantially in excess of their respective net book
values and would pass Step 1 of 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
evaluation for impairment. The estimates we use in testing our goodwill for
impairment 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. 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 material. 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 Step 1 of 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 position.
Subsequent to our annual evaluation of the carrying value of goodwill at
June 30, 2012, there were no events or circumstances that triggered the need for
an interim evaluation for impairment. At December 31, 2012, given the current
economic climate we reviewed the assumptions used in our June 30, 2012 annual
impairment test for revenue growth, cash flows, WACC and long-term growth rate.
Our actual 2012 results for revenue growth and cash flows approximated the
forecast for revenue growth and cash flows that we used in our impairment test
at June 30, 2012. Our assumptions for revenue growth and cash flows for 2013
approximate our current 2013 forecast. We also reviewed the assumptions used for
WACC and long-term growth rate. Using data at December 31, 2012, the assumptions
are within the 1% change used in our sensitivity analysis at June 30, 2012.
Based on these factors, we did not perform an interim evaluation for impairment
on the carrying value of goodwill at December 31, 2012. Additional information
about acquisitions and goodwill appears in Notes 2 and 5 to our consolidated
financial statements.
Revenue Recognition: We recognize revenue in accordance with FASB ASC Topic 605,
Revenue Recognition, and applicable SEC Staff Accounting Bulletins.
Substantially all of our revenue is derived from fees for services or a rate per
hour or equivalent basis. Revenue is realized when the service is performed in
accordance with terms of each client arrangement, upon completion of the
earnings process and when collection is reasonably assured. Prior to recognizing
revenue, persuasive evidence of an arrangement must exist, the sales price must
be fixed or determinable and delivery, performance and acceptance must be in
accordance with the client arrangement. These principles are the foundation of
our revenue recognition policy and apply to all client arrangements in each of
our service disciplines: advertising, CRM, public relations and specialty
communications. Certain of our businesses earn a portion of their revenue as
commissions based upon performance in accordance with client arrangements.
Because the services that we provide across each of our disciplines are similar
and delivered to clients in similar ways, all of the key elements in revenue
recognition apply to client arrangements in each of our four disciplines.
In the majority of our businesses, we act as an agent and record revenue equal
to the net amount retained when the fee or commission is earned. Although we may
bear credit risk with respect to these activities, the arrangements with our
clients are such that we act as an agent on their behalf. In these cases, costs
incurred with third-party suppliers are excluded from our revenue. In certain
arrangements, we act as principal and we contract directly with third-party
suppliers and media providers and production companies and we are responsible
for payment. In these circumstances, revenue is recorded at the gross amount
billed since revenue has been earned for the sale of goods or services.
Some of our client contractual arrangements include performance incentive
provisions designed to link a portion of our revenue to our performance relative
to both quantitative and qualitative goals. We recognize performance incentives
in revenue when the specific quantitative goals are achieved, or when our
performance against qualitative goals is determined by our clients.
Additional information about our revenue recognition policy appears in Note 2 to
our consolidated financial statements.
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Share-Based Compensation: Share-based compensation is measured at the grant date
fair value based on the fair value of the award. We use the Black-Scholes option
valuation model to determine the fair value of stock option awards. This
valuation model uses several assumptions and estimates such as expected life,
rate of risk free interest, volatility and dividend yield. If different
assumptions and estimates were used to determine the fair value, our actual
results of operations and cash flows would likely differ from the estimates used
and it is possible that differences could be material. The fair value of
restricted stock awards is determined using the closing price of our common
stock on the grant date. Additional information about these assumptions and
estimates appears in Note 2 to our consolidated financial statements.
Share-based compensation expense was $80.8 million, $74.5 million and $69.3
million, in 2012, 2011 and 2010, respectively. Information about our specific
awards and stock plans can be found in Note 10 to our consolidated financial
statements.
New Accounting Standards
Additional information regarding new accounting guidance can be found in Note 20
to our consolidated financial statements. Note 2 to our consolidated financial
statements provides a summary of our significant accounting policies.
Results of Operations - 2012 Compared to 2011 (In millions):
2012 2011
Revenue $ 14,219.4 $ 13,872.5
Operating Expenses:
Salary and service costs 10,380.7 10,250.6
Office and general expenses 2,034.5 1,950.8
Total Operating Expenses 12,415.2 12,201.4
Add back: Amortization of intangible assets 101.1 91.4
12,314.1 12,110.0
Earnings before interest, taxes and amortization of
intangible assets ("EBITA")
1,905.3 1,762.5
EBITA Margin - % 13.4 % 12.7 %
Deduct: Amortization of intangible assets 101.1 91.4
Operating Income 1,804.2 1,671.1
Operating Margin - % 12.7 % 12.0 %
Interest Expense 179.7 158.1
Interest Income 35.1 36.0Income Before Income Taxes and Income (Loss) From Equity
Method Investments
1,659.6 1,549.0
Income Tax Expense 527.1 505.8
Income (Loss) From Equity Method Investments (15.0 ) 17.2
Net Income 1,117.5 1,060.4
Less: Net Income Attributed To Noncontrolling Interests 119.2
107.8
Net Income - Omnicom Group Inc. $ 998.3 $ 952.6
EBITA, which we define as earnings before interest, taxes and amortization of
intangible assets, and EBITA Margin, which we define as EBITA divided by
Revenue, are Non-GAAP measures. We use EBITA and EBITA Margin as additional
operating performance measures, which exclude the non-cash amortization expense
of acquired intangible assets. The table above reconciles EBITA and EBITA Margin
to the U.S. GAAP financial measure of Operating Income for the periods
presented. We believe that EBITA and EBITA Margin are useful measures to
evaluate the performance of our businesses. Non-GAAP financial measures should
not be considered in isolation from or as a substitute for financial information
presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by
us may not be comparable to similarly titled amounts reported by other
companies.
Revenue: Revenue in 2012 increased 2.5%, to $14,219.4 million from $13,872.5
million in 2011. Organic growth increased revenue by $561.9 million and
acquisitions, net of dispositions, increased revenue by $95.0 million. Changes
in foreign exchange rates reduced revenue by $310.0 million.
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--------------------------------------------------------------------------------The components of 2012 revenue change in the United States ("Domestic") and the
remainder of the world ("International") were (in millions):
Total Domestic International
$ % $ % $ %
December 31, 2011 $ 13,872.5 $ 7,048.7 $ 6,823.8
Components of revenue change:
Foreign exchange impact (310.0 ) (2.2 )% - - % (310.0 ) (4.5 )%
Acquisitions, net of dispositions 95.0 0.7 % (2.8 ) - % 97.8 1.4 %
Organic growth 561.9 4.0 % 317.8 4.5 % 244.1 3.6 %
December 31, 2012 $ 14,219.4 2.5 % $ 7,363.7 4.5 % $ 6,855.7 0.5 %
The components and percentages are calculated as follows:
• The foreign exchange impact is calculated by first converting the current
period's local currency revenue using the average exchange rates from the
equivalent prior period to arrive at a constant currency revenue (in this
case $14,529.4 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period revenue
in U.S. dollars and the current period revenue in constant currency
($14,219.4 million less $14,529.4 million for the Total column in the
table).
• The acquisition component is calculated by aggregating the applicable
prior period revenue of the acquired businesses, less revenue of any
business included in the prior period revenue that was disposed of
subsequent to the period.
• Organic growth is calculated by subtracting both the foreign exchange and
acquisition 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 ($13,872.5
million for the Total column in the table).
Revenue for 2012 and the percentage change in revenue and organic growth from
2011 in our primary geographic markets were (in millions):
$ % Change % Organic Growth
United States $ 7,363.7 4.5 % 4.5 %
Euro Markets 2,311.9 (10.4 )% (1.8 )%
United Kingdom 1,255.1 2.3 % 1.5 %
Rest of the world 3,288.7 9.0 % 9.0 %
$ 14,219.4 2.5 % 4.0 %
In 2012, changes in foreign exchange rates reduced revenue by 2.2%, or $310.0
million, compared to 2011. The most significant impacts resulted from the
strengthening of the U.S. Dollar against the Euro, Brazilian Real and British
Pound.
Assuming exchange rates at February 1, 2013 remain unchanged, we expect changes
in foreign exchange rates to have a marginally positive impact on 2013 revenue.
Due to a variety of factors, in the normal course, our agencies both gain and
lose business from clients each year. The net result in 2012 was an overall gain
in new business. Under our client-centric approach, we seek to broaden our
relationships with our largest clients. Revenue from our largest client
represented 2.6% of our revenue in each of 2012 and 2011. No other client
represented more than 2.6% of our revenue in 2012 or more than 2.1% of our
revenue in 2011. Our ten largest and 100 largest clients represented 19.0% and
51.7% of 2012 revenue, respectively and 18.0% and 50.3% of 2011 revenue,
respectively.
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 advertising, brand consultancy, corporate social responsibility
consulting, crisis communications, custom publishing, data analytics, database
management, direct marketing, entertainment marketing, environmental design,
experiential marketing, field marketing, financial/corporate
business-to-business advertising, interactive marketing, marketing research,
media planning and buying, mobile marketing, multi-cultural marketing,
non-profit marketing, public affairs, public relations, recruitment
communications, reputation consulting, retail
15
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marketing, search engine marketing, social media marketing and sports and event
marketing. In an effort to monitor the changing needs of our clients and to
further expand the scope of our services to key clients, we monitor revenue
across a broad range of disciplines and group them into the following four
categories: advertising, CRM, public relations and specialty communications.
Revenue for 2012 and 2011 and the percentage change in revenue and organic
growth from 2011 by discipline was (in millions):
Year Ended December 31,
2012 2011 2012 vs 2011
% of % of $ %
$ Revenue $ Revenue Change Change % Organic Growth
Advertising $ 6,762.8 47.6 % $ 6,464.9 46.6 % $ 297.9 4.6 % 6.6 %
CRM 5,122.5 36.0 % 5,111.9 36.8 % 10.6 0.2 % 2.3 %
Public relations 1,290.8 9.1 % 1,230.3 8.9 % 60.5 4.9 % 3.3 %
Specialty
communications 1,043.3 7.3 % 1,065.4 7.7 % (22.1 ) (2.1 )% (2.3 )%
$ 14,219.4 $ 13,872.5 $ 346.9 2.5 % 4.0 %
We operate in a number of industry sectors. The percentage of our revenue by
industry sector for 2012 and 2011 was:
Industry 2012 2011
Food and Beverage 13.3 % 13.6 %
Consumer Products 9.4 % 9.3 %
Pharmaceuticals and Health Care 9.7 % 10.1 %
Financial Services 8.7 % 9.5 %
Technology 9.1 % 8.7 %
Auto 8.4 % 7.5 %
Travel and Entertainment 5.9 % 5.9 %
Telecommunications 6.4 % 7.1 %
Retail 7.5 % 6.6 %
Other 21.6 % 21.7 %
Operating Expenses: Operating expenses for 2012 compared to 2011 were (in
millions):
Year Ended December 31,
2012 2011 2012 vs 2011
% of % of
% Total % Total
of Operating of Operating $ %
$ Revenue Expenses $ Revenue Expenses Change Change
Revenue $ 14,219.4 $ 13,872.5 $ 346.9 2.5 %
Operating Expenses:
Salary and service
costs 10,380.7 73.0 % 83.6 % 10,250.6 73.9 % 84.0 % 130.1 1.3 %
Office and general
expenses 2,034.5 14.3 % 16.4 % 1,950.8 14.1 % 16.0 % 83.7 4.3 %
Operating Expenses 12,415.2 87.3 % 12,201.4 88.0 % 213.8 1.8 %
Operating Income $ 1,804.2 12.7 % $ 1,671.1 12.0 % $ 133.1 8.0 %
Repositioning Actions and Remeasurement Gain: In the first quarter of 2011, we
recorded $131.3 million of charges related to our repositioning actions.
Additionally, in the first quarter of 2011 we recorded a $123.4 million
remeasurement gain related to the acquisition of the controlling interest in the
Clemenger Group, our affiliate in Australia and New Zealand.
16
--------------------------------------------------------------------------------The impact on operating expenses of these transactions for the year ended
December 31, 2011 was (in millions):
Increase (Decrease)
Repositioning Remeasurement
Actions Gain
Salary and service costs $ 92.8
Office and general expenses 38.5 $ (123.4 )
$ 131.3 $ (123.4 )
Operating Expenses: Salary and service costs tend to fluctuate in conjunction
with changes in revenue. Salary and service costs increased 1.3% in 2012
compared to 2011. Salary and service costs for 2011 reflects $92.8 million of
charges related to our repositioning actions. The increase in 2012 costs
resulted from growth in our business, as well as increased use of freelance
labor, partially offset by lower compensation costs, including incentive
compensation primarily as a result of the repositioning actions taken in 2011
and tight controls restricting the frequency of salary increases. Excluding the
$92.8 million of severance charges taken in 2011, salary and service costs as a
percentage of revenue in 2012 would have been flat as compared to 2011.
Office and general expenses are less directly linked to changes in our revenue
than salary and service costs. Office and general expenses increased 4.3% in
2012 compared to 2011. Office and general expenses for 2011 included a reduction
of $84.9 million, which reflects the $123.4 million non-cash remeasurement gain
recorded in connection with the acquisition of the controlling interest in the
Clemenger Group and charges of $38.5 million related to our repositioning
actions. Excluding the $84.9 million net decrease, office and general expenses
in 2012 would have been flat as compared to 2011.
Operating margins increased to 12.7% in 2012 from 12.0% in 2011 and EBITA
margins increased to 13.4% in 2012 from 12.7% in 2011. Excluding the $131.3
million attributable to our repositioning actions and the $123.4 million
remeasurement gain, operating margin and EBITA margin for 2011 would have been
12.1% and 12.8%, respectively. The year-over-year margin improvement was driven
by our revenue growth, as well as lower operating costs resulting from the
actions taken in 2011 to improve our operations, rebalance our workforce and
drive efficiencies in our back office functions.
Net Interest Expense: Net interest expense increased to $144.6 million in 2012,
compared to $122.1 million in 2011. Interest expense increased $21.6 million to
$179.7 million. The increase in interest expense is primarily attributable to
increased interest expense resulting from the issuance of $750 million of our
3.625% Senior Notes due May 1, 2022, or the 2022 Notes, in April 2012 and $500
million of the 2022 Notes in August 2012. The total outstanding principal amount
of the 2022 Notes is $1.25 billion. The 2022 Notes issued in August were issued
at an issue price of 105.287% reflecting a yield to maturity of 2.99%. The
increase in interest expense was partially offset by lower commercial paper
issuances in 2012. Interest income increased $0.9 million to $35.1 million in
2012. See "Liquidity and Capital Resources" and "Quantitative and Qualitative
Disclosures About Market Risk" for a discussion of our indebtedness and related
matters.
Income Taxes: Our effective tax rate for 2012 decreased to 31.8%, compared to
32.7% for 2011. In the fourth quarter of 2012, income tax expense was reduced by
$53 million, primarily resulting from a reduction in the deferred tax
liabilities for unremitted foreign earnings of certain of our operating
companies located in the Asia Pacific region, as well as lower statutory tax
rates in other foreign jurisdictions. In an effort to support our continued
expansion and pursue operational efficiencies in the Asia Pacific region, we
completed a legal reorganization in certain countries within the region. As a
result of the reorganization, our unremitted foreign earnings in the
affected countries are subject to lower effective tax rates as compared to the
U.S. statutory tax rate. Therefore we recorded a reduction in our deferred tax
liabilities to reflect the lower tax rate that these earnings are subject to. In
future periods we expect an ongoing annual reduction in income tax expense of
approximately $11 million. The reduction in income tax expense was partially
offset by a charge of approximately $16 million resulting from U.S. state and
local tax accruals recorded for uncertain tax positions, net of U.S. federal
income tax benefit. We expect our effective tax rate for 2013 to approximate
33.6%.
Income tax expense for 2011 reflects a number of items that were recorded in the
first quarter of 2011. These items include a $39.5 million tax benefit related
to charges incurred in connection with our repositioning actions, a provision of
$2.8 million related to the remeasurement gain and a provision of $9.0 million
for agreed upon adjustments to income tax returns that were under examination in
2011. Excluding these items, our effective tax rate for 2011 would have been
34.3%.
Income (Loss) From Equity Method Investments: In the fourth quarter of 2012, we
determined, based on the financial condition and prospects of our equity
investee in Egypt, that there was an other-than-temporary decline in its
carrying value. As a result, we recorded a $29.2 million impairment charge to
reduce the carrying value of the investment to fair value. Excluding the
impairment charge, income from equity method investments decreased $3.0 million
to $14.2 million in 2012 from $17.2 million 2011.
17
--------------------------------------------------------------------------------
Net Income Per Common Share - Omnicom Group Inc.: For the foregoing reasons, net
income - Omnicom Group Inc. in 2012 increased $45.7 million, or 4.8%, to $998.3
million, compared to $952.6 million in 2011. Diluted net income per common share
- Omnicom Group Inc. increased 8.4% to $3.61 in 2012, compared to $3.33 in 2011
due to the factors described above, as well as the impact of the reduction in
our weighted average common shares outstanding. This reduction was the result of
repurchases of our common stock, net of stock option exercises and shares issued
under our employee stock purchase plan.
Results of Operations - 2011 Compared to 2010 (In millions):
2011 2010
Revenue $ 13,872.5 $ 12,542.5
Operating Expenses:
Salary and service costs 10,250.6 9,214.2
Office and general expenses 1,950.8 1,868.1
Total Operating Expenses 12,201.4 11,082.3
Add back: Amortization of intangible assets 91.4 70.8
12,110.0 11,011.5
Earnings before interest, taxes and amortization of
intangible assets ("EBITA")
1,762.5 1,531.0
EBITA Margin - % 12.7 % 12.2 %
Deduct: Amortization of intangible assets 91.4 70.8
Operating Income 1,671.1 1,460.2
Operating Margin - % 12.0 % 11.6 %
Interest Expense 158.1 134.7
Interest Income 36.0 24.9Income Before Income Taxes and Income From Equity Method
Investments.
1,549.0 1,350.4
Income Tax Expense 505.8 460.2
Income From Equity Method Investments 17.2 33.5
Net Income 1,060.4 923.7
Less: Net Income Attributed To Noncontrolling Interests 107.8
96.0
Net Income - Omnicom Group Inc. $ 952.6 $ 827.7
EBITA, which we define as earnings before interest, taxes and amortization of
intangible assets, and EBITA Margin, which we define as EBITA divided by
Revenue, are Non-GAAP measures. We use EBITA and EBITA Margin as additional
operating performance measures, which exclude the non-cash amortization expense
of acquired intangible assets. The table above reconciles EBITA and EBITA Margin
to the U.S. GAAP financial measure of Operating Income for the periods
presented. We believe that EBITA and EBITA Margin are useful measures to
evaluate the performance of our businesses. Non-GAAP financial measures should
not be considered in isolation from or as a substitute for financial information
presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by
us may not be comparable to similarly titled amounts reported by other
companies.
Revenue: Revenue in 2011 increased 10.6% to $13,872.5 million from $12,542.5
million in 2010. Organic growth increased revenue by $770.6 million,
acquisitions, net of dispositions, increased revenue by $236.0 million and
changes in foreign exchange rates increased revenue by $323.4 million.
The components of 2011 revenue change in the United States ("Domestic") and the
remainder of the world ("International") were (in millions):
Total Domestic International
$ % $ % $ %
December 31, 2010 $ 12,542.5 $ 6,683.1 $ 5,859.4
Components of revenue change:
Foreign exchange impact 323.4 2.6 % - - % 323.4 5.5 %
Acquisitions, net of dispositions 236.0 1.9 % (21.9 ) (0.3 )% 257.9 4.4 %
Organic growth 770.6 6.1 % 387.5 5.8 % 383.1 6.5 %
December 31, 2011 $ 13,872.5 10.6 % $ 7,048.7 5.5 % $ 6,823.8 16.5 %
18--------------------------------------------------------------------------------The components and percentages are calculated as follows:
• The foreign exchange impact is calculated by first converting the current
period's local currency revenue using the average exchange rates from the
equivalent prior period to arrive at a constant currency revenue (in this
case $13,549.1 million for the Total column in the table). The foreign
exchange impact equals the difference between the current period revenue
in U.S. Dollars and the current period revenue in constant currency
($13,872.5 million less $13,549.1 million for the Total column in the
table).
• The acquisition component is calculated by aggregating the applicable
prior period revenue of the acquired businesses, less revenue of any
business included in the prior period revenue that was disposed of
subsequent to the prior period.
• Organic growth is calculated by subtracting both the foreign exchange and
acquisition 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 ($12,542.5
million for the Total column in the table).
Revenue in 2011 and the percentage change in revenue and organic growth from
2010 in our primary geographic markets were (in millions):
$ % Change % Organic Growth
United States $ 7,048.7 5.5 % 5.8 %
Euro Markets 2,579.5 4.9 % 0.5 %
United Kingdom 1,227.0 12.5 % 7.9 %
Rest of the world 3,017.3 30.7 % 12.3 %
$ 13,872.5 10.6 % 6.1 %
In 2011, changes in foreign exchange rates increased our revenue by 2.6%, or
$323.4 million, compared to 2010. The most significant impacts resulted from the
weakening of the U.S. Dollar against the Euro, Australian Dollar and British
Pound.
Due to a variety of factors, in the normal course, our agencies both gain and
lose business from clients each year. The net result in 2011 was an overall gain
in new business. Under our client-centric approach, we seek to broaden our
relationships with our largest clients. Revenue from our largest client
represented 2.6% and 3.0% of our revenue in 2011 and 2010, respectively. No
other client represented more than 2.1% of our revenue in 2011 or more than 2.4%
of our revenue in 2010. Our ten largest and 100 largest clients represented
18.0% and 50.3% of 2011 revenue, respectively, and 18.0% and 50.6% of 2010
revenue, respectively.
Revenue for 2011 and 2010 and the percentage change in revenue and organic
growth from 2010 by discipline was (in millions):
Year Ended December 31,
2011 2010 2011 vs 2010
% of % of $ %
$ Revenue $ Revenue Change Change % Organic Growth
Advertising $ 6,464.9 46.6 % $ 5,738.9 45.8 % $ 726.0 12.7 % 7.6 %
CRM 5,111.9 36.8 % 4,582.6 36.5 % 529.3 11.6 % 7.3 %Public relations 1,230.3 8.9 % 1,154.8 9.2 % 75.5 6.5 %
2.4 %
Specialty
communications 1,065.4 7.7 % 1,066.2 8.5 % (0.8 ) (0.1 )% (2.4 )%
$ 13,872.5 $ 12,542.5 $ 1,330.0 10.6 % 6.1 %
19--------------------------------------------------------------------------------We operate in a number of industry sectors. The percentage of our revenue by
industry sector for 2011 and 2010 was:
Industry 2011 2010
Food and Beverage 13.6 % 13.6 %
Consumer Products 9.3 % 9.8 %
Pharmaceuticals and Health Care 10.1 % 10.9 %
Financial Services 9.5 % 8.3 %
Technology 8.7 % 8.7 %
Auto 7.5 % 7.2 %
Travel and Entertainment 5.9 % 6.0 %
Telecommunications 7.1 % 7.1 %
Retail 6.6 % 6.5 %
Other 21.7 % 21.9 %
Operating Expenses: Operating expenses for 2011 compared to 2010 were (in
millions):
Year Ended December 31,
2011 2010 2011 vs 2010
% of % of
% Total % Total
of Operating of Operating $ %
$ Revenue Expenses $ Revenue Expenses Change Change
Revenue $ 13,872.5 $ 12,542.5 $ 1,330.0 10.6 %
Operating
Expenses:
Salary and
service costs 10,250.6 73.9 % 84.0 % 9,214.2 73.5 % 83.1 % 1,036.4 11.2 %
Office and
general expenses 1,950.8 14.1 % 16.0 % 1,868.1 14.9 % 16.9 % 82.7 4.4 %
Operating
Expenses 12,201.4 88.0 % 11,082.3 88.4 % 1,119.1 10.1 %
Operating Income $ 1,671.1 12.0 % $ 1,460.2 11.6 % $ 210.9 14.4 %
Repositioning Actions and Remeasurement Gain: In the first quarter of 2011, we
recorded $131.3 million of charges related to our repositioning actions.
Additionally, in the first quarter of 2011 we recorded a $123.4 million
remeasurement gain related to the acquisition of the controlling interest in the
Clemenger Group, our affiliate in Australia and New Zealand.
The impact on operating expenses of these transactions for the year ended
December 31, 2011 was (in millions):
Increase (Decrease)
Repositioning Remeasurement
Actions Gain
Salary and service costs $ 92.8
Office and general expenses 38.5 $ (123.4 )
$ 131.3 $ (123.4 )
Operating Expenses: Salary and services costs tend to fluctuate in conjunction
with changes in revenue. Salary and service costs increased 11.2% in 2011
compared to 2010. This increase reflects growth in our business, as well as
increased compensation costs, including freelance labor and incentive
compensation and an increase in severance of approximately $100 million to $201
million, including our repositioning actions in the first quarter of 2011. The
increase in salary and service costs was partially offset by the associated cost
savings from these head count reductions.
Office and general expenses are less directly linked to changes in our revenue
than salary and service costs. Office and general expenses increased 4.4% in
2011 compared to 2010, reflecting a decrease of $123.4 million related to the
non-cash remeasurement gain recorded in connection with the acquisition of the
controlling interest in the Clemenger Group in the first quarter of 2011,
partially offset by $38.5 million of charges related to our repositioning
actions in the first quarter of 2011. Excluding the net decrease of $84.9
million related to the remeasurement gain and the charges for our repositioning
actions, office and general expenses were $2,035.7 million in 2011, an increase
of 9.0%.
20
--------------------------------------------------------------------------------
As a result of the above changes, operating margins increased to 12.0% in 2011
from 11.6% in 2010 and EBITA margins increased to 12.7% in 2011 from 12.2% in
2010.
Net Interest Expense: Net interest expense increased to $122.1 million in 2011,
as compared to $109.8 million in 2010. Interest expense increased $23.4 million
to $158.1 million. The increase in interest expense was primarily due to
increased interest expense resulting from the issuance of our 4.45% Senior Notes
due 2020 in August 2010, partially offset by a net reduction in interest expense
resulting from the interest rate swaps on our 2016 Notes entered into in August
2010. The interest rate swaps were settled with the counterparties in August
2011 resulting in a deferred gain of $33.2 million that is being amortized over
the remaining life of the 2016 Notes as a reduction of interest expense.
Interest income increased $11.1 million to $36.0 million in 2011. This increase
in interest income was attributable to higher foreign cash balances available
for investment.
Income Taxes: Our effective tax rate for 2011 decreased to 32.7%, compared to
34.1% in 2010. The decrease in the effective tax rate was caused by the
following items recorded in the first quarter of 2011 (in millions):
Increase (Decrease)
Income Before Income
Income Tax
Taxes Expense
Repositioning actions $ (131.3 ) $ (39.5 )
Remeasurement gain 123.4 2.8
Charge for uncertain tax positions - 9.0
$ (7.9 ) $ (27.7 )
The tax benefit on the repositioning actions was calculated based on the
jurisdictions where the charges were incurred and reflects the likelihood that
we will be unable to obtain a tax benefit for all charges incurred. The
remeasurement gain resulting from the acquisition of the controlling interest in
Clemenger created a difference between the book basis and tax basis of our
investment. Because this basis difference is not expected to reverse, no
deferred taxes were provided and the tax provision recorded represents the
incremental U.S. tax on acquired historical unremitted earnings. The $9.0
million charge resulted from adjustments to U.S. income tax returns for calendar
years 2005, 2006 and 2007, that were agreed upon and recorded in the first
quarter of 2011. The examination of those returns is closed.
Net Income Per Common Share - Omnicom Group Inc.: For the foregoing reasons, net
income - Omnicom Group Inc. in 2011 increased $124.9 million, or 15.1%, to
$952.6 million compared to $827.7 million in 2010. Diluted net income per common
share - Omnicom Group Inc. increased 23.3% to $3.33 in 2011, as compared to
$2.70 in 2010 due to the factors described above, as well as the impact of the
reduction in our weighted average common shares outstanding. This reduction was
the result of repurchases of our common stock during the fourth quarter of 2010
through 2011, net of stock option exercises and shares issued under our employee
stock purchase plan.
Liquidity and Capital Resources
Cash Sources and Requirements, Including Contractual Obligations
Historically, the majority of our non-discretionary cash requirements have been
funded from operating cash flow and cash on hand. Working capital is our
principal non-discretionary funding requirement. In addition, we have
contractual obligations related to our senior notes and convertible notes, our
recurring business operations, primarily related to lease obligations, as well
as contingent purchase price obligations (earn-outs) related to acquisitions
made in prior years.
Our principal discretionary cash uses include dividend payments, capital
expenditures, payments for strategic acquisitions and repurchases of our common
stock. In December 2012, we paid the fourth quarter dividend on our common stock
that historically has been paid in January of the following year. Our
discretionary spending is funded from operating cash flow and cash on hand. In
addition, depending on the level of our discretionary activity and conditions in
the capital markets, we may use other available sources of funding such as
issuing commercial paper, borrowing under our Credit Agreement or other
long-term borrowings to finance these activities. We expect that we should be
able to fund both our non-discretionary cash requirements and our discretionary
spending for 2013 without incurring additional long-term debt. However, we may
access the capital markets at any time if favorable conditions exist. To take
advantage of historically low borrowing rates, in April 2012, we issued $750
million aggregate principal amount of our 2022 Notes at an issue price of
99.567%. In August 2012, we issued an additional $500 million of our 2022 Notes
at an issue price of 105.287% reflecting a yield to maturity of 2.99%. As a
result of these issuances, we were able to reduce our total commercial paper
issuances in 2012 by 39% compared to 2011, as well as increase our cash balances
from December 31, 2011.
21
--------------------------------------------------------------------------------
We have a seasonal cash requirement normally peaking during the second quarter
primarily due to the timing of payments for incentive compensation, income taxes
and contingent purchase price obligations. This typically results in a net
borrowing requirement that decreases over the course of the year.
At December 31, 2012, our cash and cash equivalents increased by $897.1 million
from December 31, 2011. The components of the increase for 2012 are (in
millions):
Sources
Cash flow from operations $ 1,451.3
Less change in working capital 25.2
Principal cash sources 1,426.1
Uses
Capital expenditures $ (226.3 )
Dividends paid (397.8 )Dividends paid to shareholders of noncontrolling interests (98.4 )
Acquisition payments, including contingent purchase price
obligations of $32.2 and acquisition of additional shares of
noncontrolling interests of $32.0, net of cash acquired,
less net proceeds from sale of investments of $8.6
(188.3 )
Repurchase of common stock of $1,136.5, net of proceeds from
stock option exercises and stock
sold to our employee stock purchase plan of $219.2 and tax
benefits of $85.3
(832.0 )
Principal cash uses (1,742.8 )
Principal cash uses in excess of principal cash sources (316.7 )
Foreign exchange rate changes 16.3
Financing activities and other 1,172.3
Add back change in working capital 25.2
Increase in cash and cash equivalents $ 897.1
Principal Cash Sources and Principal Cash Uses amounts are Non-GAAP financial
measures. These amounts exclude changes in working capital and other investing
and financing activities, including commercial paper issuances and redemptions
used to fund working capital changes. This presentation reflects the metrics
used by us to assess our sources and uses of cash and was derived from our
statement of cash flows. We believe that this presentation is meaningful for
understanding the primary sources and primary uses of our cash flow. Non-GAAP
financial measures should not be considered in isolation from, or as a
substitute for, financial information presented in compliance with U.S. GAAP.
Non-GAAP financial measures as reported by us may not be comparable to similarly
titled amounts reported by other companies. Additional information regarding our
cash flows can be found in our consolidated financial statements.
Cash Management
We manage our cash and liquidity centrally through our regional treasury centers
in North America, Europe and Asia. The treasury centers are managed by our
wholly-owned finance subsidiaries. Each day, operations with excess funds invest
these funds with their regional treasury center. Likewise, operations that
require funds borrow from their regional treasury center. The treasury centers
aggregate the net position which is either invested with or borrowed from third
parties. To the extent that our treasury centers require liquidity, they have
the ability to access local currency uncommitted lines of credit, the Credit
Agreement or issue up to a total of $1.5 billion of U.S. Dollar-denominated
commercial paper. This process enables us to manage our debt balances more
efficiently and utilize our cash more effectively, as well as better manage our
risk to foreign exchange rate changes. 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 lines of credit.
Our cash and cash equivalents increased $897.1 million and our short-term
investments decreased $3.2 million from December 31, 2011. Short-term
investments principally consist of time deposits with financial institutions
that we expect to convert into cash within our current operating cycle,
generally one year.
22
--------------------------------------------------------------------------------
At December 31, 2012, our foreign subsidiaries held $2,021.1 million of our
total cash and cash equivalents of $2,678.3 million. The majority of this cash
is available to us, net of any taxes payable upon repatriation to the United
States. Changes in international tax rules or changes in U.S. tax rules and
regulations covering international operations and foreign tax credits may affect
our future reported financial results or the way we conduct our business.
We have policies governing counterparty credit risk with financial institutions
that hold our cash and cash equivalents. In countries where we conduct treasury
operations, generally the counterparties are either branches or subsidiaries of
institutions that are party to our Credit Agreement. These financial
institutions generally have credit ratings equal to or better than our credit
ratings. We have deposit limits for each of these institutions. In countries
where we do not conduct treasury operations, we ensure that all cash is held by
counterparties that meet specific minimum credit standards.
Our cash and cash equivalents and short-term investments increased $893.9
million from the prior year end, partially reflecting the issuance of $1.25
billion of our 2022 Notes. As a result, our net debt position, which we define
as total debt outstanding less cash and cash equivalents and short-term
investments, increased $368.3 million as compared to the prior year-end, as
follows (in millions):
2012 2011
Debt:
Short-term borrowings, due in less than one year $ 6.4 $ 9.5
5.90% Senior Notes due April 15, 2016 1,000.0 1,000.0
6.25% Senior Notes due July 15, 2019 500.0 500.0
4.45% Senior Notes due August 15, 2020 1,000.0 1,000.0
3.625% Senior Notes due May 1, 2022 1,250.0 -
Convertible Notes due July 31, 2032 252.7 252.7
Convertible Notes due June 15, 2033 0.1 0.1
Convertible Notes due July 1, 2038 406.6 406.6
Other debt 0.4 1.3
Unamortized premium (discount) on Senior Notes, net 16.0 (7.6 )
Deferred gain from termination of interest rate swaps on
Senior Notes due 2016 23.1 30.5
Total debt 4,455.3 3,193.1Cash and cash equivalents and short-term investments 2,698.9
1,805.0
Net debt $ 1,756.4 $ 1,388.1
Net Debt is a Non-GAAP financial measure. This presentation, together with the
comparable U.S. GAAP measures, reflects one of the key metrics used by us to
assess our cash management performance. Non-GAAP financial measures should not
be considered in isolation from, or as a substitute for, financial information
presented in compliance with US GAAP. Non-GAAP financial measures as reported by
us may not be comparable to similarly titled amounts reported by other
companies.
Debt Instruments and Related Covenants
We have committed and uncommitted lines of credit. We have a $2.5 billion
committed line of credit, or Credit Agreement, with a consortium of banks
expiring on October 12, 2016. We have the ability to classify borrowings under
the Credit Agreement as long-term. The Credit Agreement provides support for up
to $1.5 billion of commercial paper issuances, as well as back-up liquidity in
the event that any of our convertible notes are put back to us.
Depending on market conditions at the time, we typically fund our day-to-day
liquidity by issuing commercial paper, borrowing under our uncommitted lines of
credit or borrowing under our Credit Agreement. At December 31, 2012, there were
no outstanding commercial paper issuances or borrowings under the Credit
Agreement.
Commercial paper activity for the three years ended December 31, 2012 was
(dollars in millions):
2012 2011 2010
Average amount outstanding during the year $ 288.5 $ 626.5 $
406.5
Maximum amount outstanding during the year $ 837.2 $ 1,132.9 $ 1,050.6
Total issuances during the year
$ 13,935.1 $ 22,843.9 $ 13,319.2
Average days outstanding 7.6 10.0 11.1
Weighted average interest rate 0.41 % 0.36 % 0.40 %
23--------------------------------------------------------------------------------
The reduction in commercial paper borrowings in 2012 as compared to 2011 is a
result of the issuance of our 2022 Notes.
At December 31, 2012, short-term borrowings of $6.4 million represent bank
overdrafts and lines of credit of our international subsidiaries. These bank
overdrafts and lines of credit are treated as unsecured loans pursuant to the
agreements supporting the facilities.
The Credit Agreement contains financial covenants that restrict our ability to
incur indebtedness as defined in the agreement. These financial covenants limit
the Leverage Ratio of total consolidated indebtedness to total consolidated
EBITDA to no more than 3 times for the most recently ended 12-month period
(under the Credit Agreement, EBITDA is defined as earnings before interest,
taxes, depreciation and amortization). We are also required to maintain a
minimum Interest Coverage Ratio of consolidated EBITDA to interest expense of at
least 5 times for the most recently ended 12-month period. At December 31, 2012
we were in compliance with these covenants, as our Leverage Ratio was 2.1 times
and our Interest Coverage Ratio was 11.6 times. The Credit Agreement does not
limit our ability to declare or pay dividends.
S&P rates our long-term debt BBB+ and Moody's rates our long-term debt Baa1. Our
short-term debt credit ratings are A2 and P2 by the respective rating agencies.
Our outstanding 5.90% Senior Notes due April 15, 2016, 6.25% Senior Notes due
July 15, 2019, 4.45% Senior Notes due August 15, 2020 and 3.625% Senior Notes
due May 1, 2022, collectively the Senior Notes, convertible notes and Credit
Agreement do not contain provisions that require acceleration of cash payments
should our debt credit ratings be downgraded. However, the interest rates and
fees on the Credit Agreement will increase if our long-term debt credit ratings
are lowered.
Omnicom Capital Inc., or OCI, our wholly-owned finance subsidiary, together with
us, is a co-obligor under our Senior Notes and convertible notes. Our Senior
Notes and convertible notes are a joint and several liability of us and OCI and
we unconditionally guarantee OCI's obligations with respect to the Senior Notes
and the convertible notes. OCI provides funding for our operations by incurring
debt and lending the proceeds to our operating subsidiaries. OCI's assets
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 us to obtain funds from our subsidiaries
through dividends, loans or advances. Our Senior Notes and convertible notes are
senior unsecured obligations that rank in equal right of payment with all
existing and future unsecured senior indebtedness.
At December 31, 2012, the carrying value of our debt and amounts available under
the Credit Agreement were (in millions):
Debt Available Credit
Short-term borrowings, due in less than one year $ 6.4 $
-
Outstanding Commercial Paper issuances - -
Borrowings under the Credit Agreement - 2,500.0
5.90% Senior Notes due April 15, 2016 1,000.0 -
6.25% Senior Notes due July 15, 2019 500.0 -
4.45% Senior Notes due August 15, 2020 1,000.0 -
3.625% Senior Notes due May 1, 2022 1,250.0 -
Convertible Notes due July 31, 2032 252.7 -
Convertible Notes due June 15, 2033 0.1 -
Convertible Notes due July 1, 2038 406.6 -
Other debt 0.4 -
4,416.2
Unamortized premium (discount) on Senior Notes, net 16.0 -
Deferred gain from termination of interest rate swaps
on Senior Notes due 2016 23.1 -
$ 4,455.3 $ 2,500.0
Credit Markets and Availability of Credit
We will continue to take actions available to us to respond to changing economic
conditions and actively manage our discretionary expenditures and we will
continue to monitor and manage the level of credit made available to our
clients. We believe that these actions, in addition to operating cash from and
the availability of our Credit Agreement, are sufficient to fund our working
capital needs and our discretionary spending.
In funding our day-to-day liquidity, we have historically been a participant in
the commercial paper market. We expect to continue funding our day-to-day
liquidity through the commercial paper market. However, prior disruptions in the
credit markets led to periods of illiquidity in the commercial paper market and
higher credit spreads. During these periods of
24
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disruption, we used our uncommitted lines of credit and borrowed under our
Credit Agreement to mitigate these conditions and to fund our day-to-day
liquidity. We will continue to closely monitor our liquidity and the credit
markets. We cannot predict with any certainty the impact on us of any future
disruptions in the credit markets.
On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for
repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put
back to us for repurchase. If our convertible notes are put back to us, based on
our current financial condition and expectations, we expect to have sufficient
available cash and unused credit commitments to fund any repurchase. Although
such borrowings would reduce the amount available under our Credit Agreement to
fund our cash requirements, we believe that we have sufficient capacity under
these commitments to meet our cash requirements for the normal course of our
business operations after any repurchase.
Contractual Obligations and Other Commercial Commitments
We enter into numerous contractual and commercial undertakings in the normal
course of business. The following tables should be read in conjunction with our
consolidated financial statements.
Contractual obligations at December 31, 2012 were (in millions):
Obligation Due
Total
Obligation 2013 2014 - 2015 2016 - 2017 After 2017
Long-term notes payable:
Principal $ 3,750.4 $ 0.4 $ - $ 1,000.0 $ 2,750.0
Interest 1,160.9 180.1 360.1 259.3 361.4
Convertible Notes 659.4 - - 659.4 -
Lease obligations 1,642.5 416.2 542.1 321.9 362.3
Contingent purchase price
obligations 266.2 83.2 135.1 43.6 4.3
Defined benefit pension plans 188.4 4.8 12.1 13.9 157.6
Postemployment arrangements 118.7 9.9 17.7 15.8 75.3
Uncertain tax positions 188.6 23.1 51.3 114.2 -
$ 7,975.1 $ 717.7 $ 1,118.4 $ 2,428.1 $ 3,710.9
Contractual commitments at December 31, 2012 were (in millions):
Commitment Expires
Total
Commitment 2013 2014 - 2015 2016 - 2017 After 2017
Standby letters of credit $ 6.5 $ 0.1 $ 3.5 $ 2.9 $ -
Guarantees 98.7 63.5 20.7 9.3 5.2
$ 105.2 $ 63.6 $ 24.2 $ 12.2 $ 5.2
On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for
repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put
back to us for repurchase. If these rights were exercised at the earliest
possible future date $659.4 million of convertible notes could be due in 2013.
At December 31, 2012, we classified our convertible notes as long-term in our
balance sheet because our Credit Agreement does not expire until October 2016
and it is our intention to fund any repurchase with the Credit Agreement.
Consistent with our acquisition strategy and past practice, certain of our
acquisitions include an initial payment at closing and provide for future
additional contingent purchase price payments (earn-outs). We use contingent
purchase price structures in an effort to minimize the risk to us associated
with potential future negative changes in the performance of the acquired
business during the post-acquisition transition period. Contingent purchase
price obligations are recorded as liabilities at the acquisition date fair
value. Subsequent changes in the fair value of the liability are recorded in our
results of operations.
The unfunded benefit obligation for our defined benefit pension plans and
liability for our postemployment arrangements was $244.4 million at December 31,
2012. In 2012, we contributed $9.1 million to our defined benefit pension plans
and paid $10.3 million in benefits for our postemployment arrangements. We do
not expect these payments to increase significantly in 2013.
25
--------------------------------------------------------------------------------
The liability for uncertain tax positions is subject to uncertainty as to when
or if the liability will be paid. We have assigned the liability to the periods
presented based on our judgment as to when these liabilities will be resolved by
the appropriate taxing authorities.
In the normal course of business, we often enter into contractual commitments
with media providers and agreements with production companies on behalf of our
clients at levels that can substantially exceed the revenue from our services.
Many of our agencies purchase media for our clients and act as an agent for a
disclosed principal. These commitments are included in accounts payable when the
media services are delivered by the media providers. While operating practices
vary by country, media type and media vendor, in the United States and certain
foreign markets, many of our contracts with media providers specify that if our
client defaults on its payment obligation, then we are not liable to the media
providers under the theory of sequential liability until we have been paid for
the media by our client. In other countries, we manage our risk in other ways,
including evaluating and monitoring our clients' creditworthiness and, in many
cases, obtaining credit insurance or requiring payment in advance. Further, in
cases where we are committed to a media purchase and it becomes apparent that a
client may be unable to pay for the media, options are potentially available to
us in the marketplace, in addition to those cited above to mitigate the
potential loss, including negotiating with media providers. In addition, our
agencies incur production costs on behalf of clients. We usually act as an agent
for a disclosed principal in the procurement of these services. We manage the
risk of payment default by the client by having the production companies be
subject to sequential liability or requiring at least partial payment in advance
from our client. However, the agreements entered into, as well as the production
costs incurred, are unique to each client. We have not experienced a material
loss related to media purchases or production costs incurred on behalf of our
clients. However, the risk of a material loss could significantly increase in a
severe economic downturn.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a global service business, we operate in multiple foreign currencies and
issue debt in the capital markets. In the normal course of business, we are
exposed to foreign currency fluctuations and the impact of interest rate
changes. We limit these risks through risk management policies and procedures,
including the use of derivatives. For foreign currency exposure, derivatives are
used to better manage the cash flow volatility arising from foreign exchange
rate fluctuations. For interest rate exposure, derivatives have been used to
manage the related cost of debt.
As a result of using derivative instruments, we are exposed to the risk that
counterparties to derivative contracts will fail to meet their contractual
obligations. To mitigate the counterparty credit risk, we have a policy of only
entering into contracts with carefully selected major financial institutions
based on specific minimum credit standards and other factors.
We evaluate the effects of changes in foreign currency exchange rates, interest
rates and other relevant market risks on our derivative instruments. We
periodically determine the potential loss from market risk on our derivative
instruments by performing a value-at-risk analysis, or VaR. VaR is a statistical
model that utilizes historical currency exchange and interest rate data to
measure the potential impact on future earnings of our derivative financial
instruments assuming normal market conditions. The VaR model is not intended to
represent actual losses but is used as a risk estimation and management tool.
Based on the results of the model, we estimate with 95% confidence a maximum
one-day loss in fair value on our derivative financial instruments at
December 31, 2012 was not material.
Because we use foreign currency instruments for hedging purposes, the loss in
fair value incurred on those instruments is generally offset by increases in the
fair value of the underlying exposures.
Foreign Exchange Risk
Our results of operations are subject to risk from the translation to U.S.
Dollars of the revenue and expenses of our foreign operations, which are
generally denominated in their local currency. The effects of currency exchange
rate fluctuation on the translation of our results of operations are discussed
in Note 19 of our consolidated financial statements. For the most part, revenue
and the expenses associated with that revenue are denominated in the same
currency. This minimizes the impact of fluctuations in exchange rates on our
results of operations.
While our major non-U.S. currency markets are the European Monetary Union, or
the EMU, the United Kingdom, Australia, Brazil, Canada, China, and Japan, our
agencies conduct business in more than 50 different currencies. As an integral
part of our treasury operations, we centralize our cash and use multicurrency
pool arrangements to manage the foreign exchange risk between subsidiaries and
their respective treasury centers from which they borrow or invest funds.
In certain circumstances, instead of using a multicurrency pool, operations can
borrow or invest on an intercompany basis with a treasury center operating in a
different currency. To manage the foreign exchange risk associated with these
transactions, we use forward foreign exchange contracts. At December 31, 2012,
we had forward foreign exchange contracts outstanding with an aggregate notional
amount of $181.5 million mitigating the foreign exchange risk of the
intercompany borrowing and investment activities.
26
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Also, we use forward foreign exchange contracts to mitigate the foreign currency
risk associated with activities when revenue and expenses are not denominated in
the same currency. In these instances, amounts are promptly settled or hedged
with forward contracts. At December 31, 2012, we had forward foreign exchange
contracts outstanding with an aggregate notional amount of $63.6 million
mitigating the foreign exchange risk of these activities.
By using these financial instruments, we reduced financial risk of adverse
foreign exchange changes by foregoing any gain (reward) which might have
occurred if the markets moved favorably.
Interest Rate Risk
From time to time, we issue debt in the capital markets. In prior years we have
used interest rate swaps to manage our overall interest cost. At December 31,
2012, there were no interest rate swaps outstanding.
On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for
repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put
back to us for repurchase. As we have done on prior occasions, we may offer a
supplemental interest payment or other incentives to the noteholders to induce
them not to put their notes to us. If we decide to pay a supplemental interest
payment, the amount offered would be based on a combination of market factors at
the time of the put date, including the price of our common stock, short-term
interest rates and a factor for credit risk.
If our convertible notes are put back to us, based on our current financial
condition and expectations, we expect to have sufficient available cash and
unused credit commitments to fund any repurchase. Although such borrowings would
reduce the amount available under our Credit Agreement to fund our cash
requirements, we believe that we have sufficient capacity under these
commitments to meet our cash requirements for the normal course of operations
after the repurchase. Additionally, if the convertible notes are put back to us,
our interest expense will change. The extent, if any, of the increase or
decrease in interest expense will depend on the portion of the amount
repurchased that is refinanced, when we refinance, the type of instrument we use
to refinance and the term of the refinancing.
Even if we were to replace the convertible notes with another form of debt on a
dollar-for-dollar basis, it would have no impact on either our Leverage Ratio or
our debt to capital ratio. If we were to replace our convertible notes with
interest-bearing debt at prevailing rates, this may result in an increase in
interest expense that would negatively impact our Interest Coverage Ratio.
However, the Leverage Ratio and Interest Coverage Ratio are currently well
within the covenant thresholds. If either our Leverage Ratio was to increase 40%
or our Interest Coverage Ratio was to halve, we would still be in compliance
with these covenants. Therefore, based on our current ratios, our present
expectations of our future operating cash flows and expected access to debt and
equity capital markets, we believe any increase in the Interest Coverage Ratio
and reduction in the Leverage Ratio would still place us comfortably above the
covenant requirements.
Credit Risk
We provide advertising, marketing and corporate communications services to
several thousand clients who operate in nearly every industry sector of the
global economy and in the normal course of business, we grant credit to
qualified clients. 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 accounted for 2.6% of our 2012 revenue and no other client accounted for
more than 2.6% of our 2012 revenue. However, during periods of economic
downturn, the credit profiles of our clients could change.
In the normal course of business, we often enter into contractual commitments
with media providers and agreements with production companies on behalf of our
clients at levels that can substantially exceed the revenue from our services.
Many of our agencies purchase media for our clients and act as an agent for a
disclosed principal. These commitments are included in accounts payable when the
media services are delivered by the media providers. While operating practices
vary by country, media type and media vendor, in the United States and certain
foreign markets, many of our contracts with media providers specify that if our
client defaults on its payment obligation, then we are not liable to the media
providers under the theory of sequential liability until we have been paid for
the media by our client. In other countries, we manage our risk in other ways,
including evaluating and monitoring our clients' creditworthiness and, in many
cases, obtaining credit insurance or requiring payment in advance. Further, in
cases where we are committed to a media purchase and it becomes apparent that a
client may be unable to pay for the media, options are potentially available to
us in the marketplace, in addition to those cited above to mitigate the
potential loss, including negotiating with media providers. In addition, our
agencies incur production costs on behalf of clients. We usually act as an agent
for a disclosed principal in the procurement of these services. We manage the
risk of payment default by the client by having the production companies be
subject to sequential liability or requiring at least partial payment in advance
from our client. However, the agreements entered into, as well as the production
costs incurred, are unique to each client. We have not experienced a material
loss related to media purchases or production costs incurred on behalf of our
clients. However, the risk of a material loss could significantly increase in a
severe economic downturn.
27--------------------------------------------------------------------------------
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