Omnicom Group(US:OMC)2024-02-07 11:35markdown [Part I](index=4&type=section&id=PART%20I) [Business Overview](index=4&type=section&id=Item%201.%20Business) Omnicom Group Inc. is a strategic holding company providing advertising, marketing, and corporate communications services to over 5,000 clients in more than 70 countries - Omnicom is a strategic holding company providing advertising, marketing, and corporate communications services to over 5,000 clients in more than 70 countries through its global networks (BBDO, DDB, TBWA, etc.) and practice areas[15](index=15&type=chunk)[16](index=16&type=chunk) - The company's services are organized into seven fundamental disciplines: Advertising & Media, Precision Marketing, Commerce & Branding, Experiential, Execution & Support, Public Relations, and Healthcare[18](index=18&type=chunk) - Omnicom's client-centric model utilizes proprietary data and analytics platforms, Annalect and Omni, to provide precision marketing and insights across all service disciplines[19](index=19&type=chunk) - The company's 100 largest clients accounted for approximately **55% of 2023 revenue**, with the largest single client representing **3.0%**[26](index=26&type=chunk) - As of December 31, 2023, Omnicom employed approximately **75,900 people worldwide**, with **24,700** in the United States[30](index=30&type=chunk) - On January 2, 2024, Omnicom acquired Flywheel Digital, a digital commerce business, for a net cash purchase price of approximately **$845 million**, which will be integrated across its service disciplines[24](index=24&type=chunk) [Risk Factors](index=8&type=section&id=Item%201A.%20Risk%20Factors) The company identifies several categories of risks that could materially affect its business - **Economic Risks:** Adverse economic conditions (inflation, high interest rates), reductions in client spending, and potential losses on media purchases on behalf of clients could materially impact business operations and financial position[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) - **Business & Operational Risks:** The company faces risks from intense industry competition, potential loss of key clients (top 100 clients are ~55% of revenue), reliance on information technology systems, and cybersecurity incidents[42](index=42&type=chunk)[45](index=45&type=chunk)[46](index=46&type=chunk) - The adoption of generative AI also presents new risks related to ethics, intellectual property, and regulation[51](index=51&type=chunk) - **International Operations Risks:** With approximately **49% of revenue** from international operations in 2023, the company is exposed to currency exchange rate fluctuations and the political, economic, and regulatory risks of operating in high-growth and developing countries[52](index=52&type=chunk)[53](index=53&type=chunk) - **Acquisition & Goodwill Risks:** The company may be unsuccessful in evaluating risks in acquisitions[54](index=54&type=chunk) - A significant amount of goodwill on the balance sheet is subject to annual impairment testing, and a future non-cash impairment charge could be material[55](index=55&type=chunk) - **Legal & Regulatory Risks:** Evolving laws, particularly around data privacy and information handling, require significant resources for compliance and could limit service offerings[56](index=56&type=chunk) - Failure to comply could result in legal proceedings, fines, and reputational harm[57](index=57&type=chunk) [Cybersecurity](index=12&type=section&id=Item%201C.%20Cybersecurity) Omnicom has implemented a cybersecurity risk management program based on the NIST Cybersecurity Framework and ISO 27001 - The company's cybersecurity risk management program is guided by the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF) and the ISO 27001 framework[65](index=65&type=chunk) - The Board of Directors' Audit Committee oversees the cybersecurity risk management program, receiving periodic reports from management[67](index=67&type=chunk)[68](index=68&type=chunk) - A dedicated management team, including the Chief Information Officer (CIO), Chief Information Security Officer (CISO), and Chief Information Risk Officer (CIRO), is responsible for assessing and managing cybersecurity risks[70](index=70&type=chunk) - While past cybersecurity incidents have not materially affected the company, Omnicom acknowledges that ongoing threats are reasonably likely to have a material effect if realized[66](index=66&type=chunk) [Part II](index=13&type=section&id=PART%20II) [Common Stock and Shareholder Matters](index=13&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Omnicom's common stock trades on the New York Stock Exchange under the symbol OMC - The company's common stock is listed on the New York Stock Exchange under the trading symbol OMC[77](index=77&type=chunk) Common Stock Repurchase Activity (Q4 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 1 - October 31, 2023 | 88,013 | $74.51 | | November 1 - November 30, 2023 | — | — | | December 1 - December 31, 2023 | — | — | | **Total** | **88,013** | **$74.51** | - The 88,013 shares purchased in Q4 2023 were shares withheld from employees to satisfy estimated statutory income tax obligations related to the vesting of restricted stock awards, not part of a publicly announced repurchase plan[77](index=77&type=chunk) [Management's Discussion and Analysis (MD&A)](index=13&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2023, Omnicom's revenue increased by **2.8% to $14.7 billion**, driven by **4.1% organic growth**, partially offset by negative impacts from dispositions and foreign exchange [Financial Performance Summary](index=15&type=section&id=MD%26A%20-%20Financial%20Performance) For the full year 2023, worldwide revenue grew to **$14.69 billion** from **$14.29 billion** in 2022, a **2.8%** increase Consolidated Results of Operations (2023 vs. 2022) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $14,692.2 M | $14,289.1 M | $403.1 M | 2.8% | | Operating Income | $2,104.7 M | $2,083.3 M | $21.4 M | 1.0% | | Operating Margin | 14.3% | 14.6% | | (0.3)% | | Net Income - Omnicom | $1,391.4 M | $1,316.5 M | $74.9 M | 5.7% | | Diluted EPS - Omnicom | $6.91 | $6.36 | $0.55 | 8.6% | | EBITA | $2,185.0 M | $2,163.6 M | $21.4 M | 1.0% | | EBITA Margin | 14.9% | 15.1% | | (0.2)% | - Revenue growth was driven by a **$584.5 million (4.1%)** increase from organic growth, partially offset by a **$28.3 million (0.2%)** reduction from foreign exchange rates and a **$153.1 million (1.1%)** reduction from net dispositions[90](index=90&type=chunk) - 2023 results included a net negative impact of **$127.2 million** to operating income (**$102.6 million** after tax) from repositioning costs, a gain on disposition, and acquisition transaction costs[97](index=97&type=chunk)[98](index=98&type=chunk) - This reduced diluted EPS by **$0.50**[97](index=97&type=chunk)[98](index=98&type=chunk) [Critical Accounting Estimates](index=16&type=section&id=MD%26A%20-%20Critical%20Accounting%20Estimates) The company's critical accounting estimates primarily relate to the valuation of goodwill and intangible assets from acquisitions - The annual goodwill impairment test date was changed from June 30 to May 1, starting in 2023[103](index=103&type=chunk) - Valuation methodologies for goodwill impairment testing include the income approach (discounted cash flows), comparative market participant multiples for EBITDA, and consideration of recent similar transactions[104](index=104&type=chunk) Key Assumptions for Goodwill Impairment Test | Assumption | May 1, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Long-Term Growth Rate | 3.5% | 3.5% | | WACC | 11.0% - 11.4% | 11.1% - 12.0% | - The May 1, 2023 impairment test concluded that goodwill was not impaired[110](index=110&type=chunk) - A sensitivity analysis showed that a **1% increase in WACC** or a **1% decrease in the long-term growth rate** would not have resulted in an impairment[110](index=110&type=chunk) [Revenue Analysis](index=21&type=section&id=MD%26A%20-%20Revenue) In 2023, revenue grew **2.8% to $14.69 billion** Components of Revenue Change (2023 vs. 2022) | Component | Total Change ($M) | % Change | | :--- | :--- | :--- | | Foreign exchange rate impact | (28.3) | (0.2)% | | Acquisition revenue, net | (153.1) | (1.1)% | | Organic growth | 584.5 | 4.1% | | **Total Revenue Change** | **403.1** | **2.8%** | Revenue by Discipline (2023) | Discipline | Revenue ($M) | % of Revenue | % Organic Growth | | :--- | :--- | :--- | :--- | | Advertising & Media | 7,891.2 | 53.7% | 6.5% | | Precision Marketing | 1,473.5 | 10.0% | 3.1% | | Public Relations | 1,578.9 | 10.7% | (0.8)% | | Healthcare | 1,362.7 | 9.4% | 3.8% | | Other Disciplines | 2,385.9 | 16.2% | N/A | Revenue by Geography (2023) | Geography | Revenue ($M) | % of Revenue | % Organic Growth | | :--- | :--- | :--- | :--- | | North America | 7,951.0 | 54.2% | 2.6% | | Europe | 4,266.9 | 29.0% | 6.2% | | Latin America | 386.8 | 2.6% | 13.0% | | Asia-Pacific | 1,777.9 | 12.1% | 6.0% | | Middle East and Africa | 309.6 | 2.1% | (5.8)% | - The top three client industry sectors by revenue in 2023 were Pharmaceuticals and Healthcare (**16%**), Food and Beverage (**15%**), and Auto (**12%**)[144](index=144&type=chunk) [Operating Expenses Analysis](index=25&type=section&id=MD%26A%20-%20Operating%20Expenses) Total operating expenses increased **3.1% to $12.59 billion** in 2023 - Operating expenses in 2023 included **$191.5 million** in real estate and other repositioning costs and were reduced by a **$78.8 million** gain on the disposition of a subsidiary[145](index=145&type=chunk)[147](index=147&type=chunk) Operating Expenses as a Percentage of Revenue | Expense Category | 2023 (% of Revenue) | 2022 (% of Revenue) | | :--- | :--- | :--- | | Salary and service costs | 72.8% | 72.3% | | Occupancy and other costs | 8.0% | 8.2% | | Real estate/repositioning costs | 1.3% | 0.0% | | SG&A | 2.7% | 2.6% | | **Total Operating Expenses** | **85.7%** | **85.4%** | - Salary and related costs increased by only **0.2% to $7.21 billion**, while third-party service costs increased by **12.9% to $2.92 billion**, reflecting a change in business mix[145](index=145&type=chunk)[150](index=150&type=chunk) - In Q1 2023, the company recorded a **$119.2 million** charge to reduce and reposition its office lease portfolio as part of its transition to a flexible hybrid work model[154](index=154&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=MD%26A%20-%20Liquidity%20and%20Capital%20Resources) Omnicom maintains a strong liquidity position with primary sources being **$1.42 billion** in cash from operations and **$4.43 billion** in cash and equivalents at year-end - Primary liquidity sources are cash from operations (**$1.42 billion** in 2023), cash on hand (**$4.43 billion** at year-end), a **$2.5 billion** revolving credit facility, and a new **$600 million** term loan facility (Jan 2024)[171](index=171&type=chunk)[172](index=172&type=chunk) Principal Cash Uses in 2023 | Use of Cash | Amount ($M) | | :--- | :--- | | Dividends paid to common shareholders | (562.7) | | Repurchases of common stock, net | (535.2) | | Acquisition payments & related obligations | (248.6) | | Capital expenditures | (78.4) | | **Total Principal Cash Uses** | **(1,495.8)** | - Net debt (total debt less cash and short-term investments) decreased from **$1.25 billion** at year-end 2022 to **$1.22 billion** at year-end 2023[179](index=179&type=chunk) - The company was in compliance with its primary debt covenant, maintaining a Leverage Ratio of **2.3 times**, well below the maximum of **3.5 times**[184](index=184&type=chunk) [Market Risk Disclosures](index=34&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Omnicom manages market risk, primarily foreign currency exchange risk and interest rate risk, through derivative financial instruments - The company uses derivative instruments, including forward foreign exchange contracts and net investment hedges, to manage foreign exchange risk, as international operations accounted for ~**49% of 2023 revenue**[189](index=189&type=chunk)[191](index=191&type=chunk) - Fixed-to-fixed cross-currency swaps with a notional value of **$150 million** are used to hedge the net investment in Japanese subsidiaries against Yen/U.S. Dollar volatility[194](index=194&type=chunk) - All long-term debt at December 31, 2023, consisted of fixed-rate debt[195](index=195&type=chunk) - The company did not have any interest rate swaps in 2023[376](index=376&type=chunk) - Credit risk is managed through a diversified client base (largest client is **3.0% of revenue**) and practices like sequential liability in media contracts, where the agency is not liable to media vendors until paid by the client[196](index=196&type=chunk)[198](index=198&type=chunk) [Controls and Procedures](index=35&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and its internal control over financial reporting as of December 31, 2023 - The CEO and CFO concluded that as of December 31, 2023, the company's disclosure controls and procedures are effective[202](index=202&type=chunk) - Based on the framework from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that internal control over financial reporting was effective as of December 31, 2023[203](index=203&type=chunk) - KPMG LLP, the independent auditor, issued an attestation report confirming the effectiveness of Omnicom's internal control over financial reporting as of December 31, 2023[204](index=204&type=chunk) [Part III](index=35&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=35&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) The information required for this item, concerning the company's directors, executive officers, and corporate governance practices, is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement[208](index=208&type=chunk) [Executive Compensation](index=35&type=section&id=Item%2011.%20Executive%20Compensation) The information required for this item, detailing the compensation of the company's executives, is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement[209](index=209&type=chunk) [Part IV](index=36&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=36&type=section&id=Item%2015.%20Exhibit%20and%20Financial%20Statement%20Schedules) This section contains the consolidated financial statements, the independent auditor's report, and a schedule of valuation and qualifying accounts [Report of Independent Registered Public Accounting Firm](index=42&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG LLP issued an unqualified opinion, stating that Omnicom's consolidated financial statements are presented fairly in all material respects and conform with U.S. GAAP - The auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[230](index=230&type=chunk) - A Critical Audit Matter (CAM) was identified related to the evaluation of the sufficiency of audit evidence over revenue recognition, due to the high volume and complexity of contracts across numerous agencies[236](index=236&type=chunk)[238](index=238&type=chunk) [Consolidated Financial Statements](index=44&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements present Omnicom's financial position as of December 31, 2023 and 2022, and its results of operations and cash flows for the three years ended December 31, 2023 Consolidated Balance Sheet Highlights (December 31, 2023) | Account | Amount ($M) | | :--- | :--- | | Total Current Assets | 15,384.2 | | Goodwill | 10,082.3 | | **Total Assets** | **28,044.6** | | Total Current Liabilities | 16,246.0 | | Long-Term Debt | 4,889.1 | | **Total Liabilities** | **23,819.5** | | **Total Equity** | **4,225.1** | Consolidated Statement of Income Highlights (Year Ended Dec 31, 2023) | Account | Amount ($M) | | :--- | :--- | | Revenue | 14,692.2 | | Operating Income | 2,104.7 | | Net Income | 1,473.2 | | Net Income - Omnicom Group Inc. | 1,391.4 | | Diluted EPS | $6.91 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, 2023) | Account | Amount ($M) | | :--- | :--- | | Net Cash Provided By Operating Activities | 1,421.9 | | Net Cash Provided By (Used In) Investing Activities | 79.1 | | Net Cash Used In Financing Activities | (1,387.8) | | **Net Increase in Cash** | **150.2** | [Notes to Consolidated Financial Statements](index=50&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on significant accounting policies, including revenue recognition, goodwill impairment testing, and lease accounting - **Revenue Recognition (Note 3):** Revenue is recognized over time for most services using input measures (e.g., staff effort) or on a straight-line basis for stand-ready obligations[256](index=256&type=chunk) - Revenue from media commissions is recognized at a point in time when the media runs[258](index=258&type=chunk) - **Business Combinations (Note 5):** The company acquired Flywheel Digital on Jan 2, 2024, for a net cash price of ~**$845 million**[307](index=307&type=chunk) - Transaction costs of **$14.5 million** were incurred in Q4 2023[308](index=308&type=chunk) - Contingent purchase price obligations (earn-outs) for all acquisitions totaled **$229.5 million** at year-end[307](index=307&type=chunk)[308](index=308&type=chunk) - **Goodwill and Intangibles (Note 6):** Goodwill increased from **$9.73 billion to $10.08 billion** in 2023, primarily due to acquisitions and foreign currency translation[311](index=311&type=chunk) - No impairment losses were recorded[311](index=311&type=chunk) - **Debt (Note 7):** As of Dec 31, 2023, the company had **$5.67 billion** in gross long-term debt, with **$750 million** due in 2024[312](index=312&type=chunk)[314](index=314&type=chunk) - The company maintains a **$2.5 billion** credit facility and established a new **$600 million** term loan facility in January 2024[316](index=316&type=chunk) - **Repositioning Costs (Note 13):** In 2023, the company recorded **$191.5 million** in charges related to reducing its office lease portfolio and rebalancing its workforce to increase efficiencies[357](index=357&type=chunk)[358](index=358&type=chunk)