UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 20152017
Commission File Number: 1-10551
OMNICOM GROUP INC.
(Exact name of registrant as specified in its charter)
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| New York | | 13-1514814 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 437 Madison Avenue, New York, NY | | 10022 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 415-3600
Securities Registered Pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock, $.15 Par Value | | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o |
Smaller reporting company o | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting and non-voting common stock held by non-affiliates as of June 30, 20152017 was $16,891,929,000.$19,093,687,000.
As of January 27, 2016,31, 2018, there were 239,590,579230,267,646 shares of Omnicom Group Inc. Common Stock outstanding.
Portions of the Omnicom Group Inc. Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 24, 201622, 2018 are incorporated by reference into Part III of this report to the extent described herein.
OMNICOM GROUP INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20152017
TABLE OF CONTENTS
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| | PART I | |
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| Item 4. | | |
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| PART II | |
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| | PART III | |
| Item 10. | Directors, Executive Officers and Corporate Governance | |
| Item 11. | Executive Compensation | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| Item 14. | Principal Accounting Fees and Services | |
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| | PART IV | |
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| Item 16. | Form 10-K Summary | |
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| Selected Quarterly Financial Data | |
| Schedule II - Valuation and Qualifying Accounts | |
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute forward-looking statements, including statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time, the Company or its representatives have made, or may make, forward-looking statements, orally or in writing. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the Company’s management as well as assumptions made by, and information currently available to, the Company’s management. Forward-looking statements may be accompanied by words such as “aim,” “anticipate,” “believe,” “plan,” “could,” “should,” “would,” “estimate,” “expect,” “forecast,” “future,” “guidance,” “intend,” “may,” “will,” “possible,” “potential,” “predict,” “project” or similar words, phrases or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside the Company’s control. Therefore, you should not place undue reliance on such statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include: international, national or local economic conditions that could adversely affect the Company or its clients; losses on media purchases and production costs incurred on behalf of clients; reductions in client spending, a slowdown in client payments and a deterioration in the credit markets; ability to attract new clients and retain existing clients in the manner anticipated; changes in client advertising, marketing and corporate communications requirements; failure to manage potential conflicts of interest between or among clients; unanticipated changes relating to competitive factors in the advertising, marketing and corporate communications industries; ability to hire and retain key personnel; currency exchange rate fluctuations; reliance on information technology systems; changes in legislation or governmental regulations affecting the Company or its clients; risks associated with assumptions the Company makes in connection with its critical accounting estimates and legal proceedings; and the Company’s international operations, which are subject to the risks of currency repatriation restrictions, social or political conditions and regulatory environment. The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that may affect the Company’s business, including those described in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. Except as required under applicable law, the Company does not assume any obligation to update these forward-looking statements.
AVAILABLE INFORMATION
We file annual, quarterly and current reports and any amendments to those reports, proxy statements and other information with the U.S.United States Securities and Exchange Commission, or SEC. Documents we file with the SEC are available free of charge on our website at http://investor.omnicomgroup.com, as soon as reasonably practicable after such material is filed with the SEC. The information included on or available through our website is not part of this or any other report we file with the SEC. Any document that we file with the SEC is available on the SEC’s website at www.sec.gov and also may be read and copied at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information regarding the operation of the Public Reference Room.
PART I
Introduction
This report is our 20152017 annual report to shareholders and our 20152017 Annual Report on Form 10-K, or 20152017 10-K.
Omnicom Group Inc. is a leading global advertising, marketing and corporate communications companywas formed in 1986 and through its branded networks and agencies provides thoseadvertising, marketing and corporate communications services to over 5,000 clients in more than 100 countries. The terms “Omnicom,” “the Company,” “we,” “our” and “us” each refer to Omnicom Group Inc. and its subsidiaries unless the context indicates otherwise.
Item 1. Business
Our Business
Omnicom which was formed in 1986, is a strategic holding company and a leading global provider of advertising, marketing and corporate communications services. We operate in a highly competitive industry and compete against other global, national and regional advertising and marketing services companies, as well as other independent companies. The proliferation of media channels, including the rapid development and integration of interactive technologies and mediums, has fragmented consumer audiences targeted by our clients. These developments make it more complex for marketers to reach their target audiences in a cost-effective way, causing them to turn to global service providers such as Omnicom for a customized mix of advertising and marketing services designed to make the best use of their total marketing expenditure.
Our branded networks and agencies which operate in all major global markets around the world,and provide a comprehensive range of services in fourthe following fundamental disciplines: advertising, customer relationship management, or CRM, public relations and healthcare. In an effort to monitor the changing needs of our clients and to better capture the expanded scope of our services, in the fourth quarter of 2017, we realigned our service disciplines. As a result, our CRM discipline was grouped into two separate categories: CRM Consumer Experience, which includes Omnicom Precision Marketing Group’s digital / direct marketing agencies, as well as our branding agencies, shopper marketing agencies and our experiential marketing agencies; and, CRM Execution & Support, which includes field marketing, sales support, merchandising and point of sale, as well as other specialized marketing and custom communications services. Also, we realigned and renamed our former specialty communications. communications discipline so that it now exclusively includes agencies offering healthcare marketing and communications services.
Although the medium used to reach a client’s target audience may differ across each of these disciplines, we develop and deliver the marketing message in a similar way by providing client-specific advertising, marketing and marketingcorporate communications services. Services included in these fouracross our disciplines are:include:
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| advertising | | interactive marketinginvestor relations |
brand consultancybranding | | investor relationsmarketing research |
| content marketing | | marketing researchmedia planning and buying |
| corporate social responsibility consulting | | media planningmerchandising and buyingpoint of sale |
| crisis communications | | mobile marketing |
| custom publishing | | multi-cultural marketing |
| data analytics | | non-profit marketing |
| database management | | organizational communications |
| digital / direct marketing | | package design |
entertainment marketingdigital transformation | | product placement |
environmental designentertainment marketing | | promotional marketing |
| experiential marketing | | public affairs |
| field marketing | | public relations |
| financial/corporate business-to-business advertising | | reputation consultingretail marketing |
| graphic arts/digital imaging | | retail marketingsales support |
| healthcare marketing and communications | | search engine marketing |
| instore design | | shopper marketing |
| interactive marketing | | social media marketing |
| | | sports and event marketing |
Our business model was built and continues to evolve around our clients. While our networks and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. TheOur fundamental premisebusiness principle is that our clients’ specific marketing requirements are the central focus of how we structure our business is to deliver our servicesservice offerings and allocate our resources based on the specific requirements of our clients. As clients increase their demands for marketing effectiveness and efficiency, they have tended to consolidate their business with larger, multi-disciplinary agencies or integrated groups of agencies. Accordingly, ourresources. This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client networks thatutilizing our key client matrix organization structure. This collaboration allows us to cut across our internal organizational structures to execute against our clients’ specific marketing requirements.requirements in a consistent and comprehensive manner. We believe that this organizational philosophy, and our ability to execute on it and our key client matrix organization structure differentiates us from our competitors.
competition. In addition, during 2017, we continued the process of forming practice areas within our global network structure to bring together agencies operating in common disciplines to leverage existing resources and to create, in close coordination with our key client matrix organization, additional custom client solutions.
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Our networksAs clients increase their demands for marketing effectiveness and agenciesefficiency, they have made it a practice to consolidate their business within one service provider in the pursuit of a single engagement covering all consumer touch points. We have structured our business around this trend. We believe that comprise our virtualkey client networks provide us with the abilitymatrix organization structure approach to integrate services across all disciplinescollaboration and geographies, meaning that the deliveryintegration of our services can, and does, take place across agencies, networkssolutions has provided a competitive advantage to our business in the past and geographic regions simultaneously. Further, we believe that our virtual network strategyexpect this to continue over the medium and long term. Our key client matrix organization structure facilitates bettersuperior client management and allows for greater integration of the services required by the demands of the marketplace for our services.world’s largest brands. Our over-arching business strategy is to continue to use our virtual client networks to grow our business relationships with our clients.largest clients by serving them across our networks, disciplines and geographies.
The various components of our business, including revenue by discipline and geographic area, and material factors that affected us in 20152017 are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, of this report. None of theour acquisitions or dispositions, individually or in the aggregate, in the three year period ended December 31, 20152017 was material to our results of operations or financial position. For information about our acquisitions, see Note 4 to the consolidated financial statements.
Geographic Regions
In 2015, ourOur United States operations representedrepresent approximately 56%54% of our revenue. As discussed more fully in the Critical Accounting Policies section of the MD&A, our branded networks and agencies conduct business on a global basis and operate in the following geographic regions: The Americas, which includes North America and Latin America; EMEA, which includes Europe, the Middle East and Africa; and, Asia Pacific, which includes Australia, China, India, Japan, Korea, New Zealand, Singapore and other Asian countries. The networks have regional reporting units that are responsible for the agencies in their region. Agencies within the regional reporting units serve similar clients in similar industries and in many cases the same clients and have similar economic characteristics. Accordingly, we provide financial information by geographic region is provided in the MD&A and in Note 7 to the consolidated financial statements and segment information in Note 7.statements.
Our Clients
Our clients operate in virtually every industry sector of the global economy. In many cases, multiple agencies or networks serve different brand, and/or product groups, or both within the same client. For example, in 2015,2017 our largest client which represented 2.7%3.0% of revenue and was served by more than 250 of our agencies and ouragencies. Our 100 largest clients, which representedrepresent many of the world's major marketers, comprised approximately 52%51% of revenue and were each served, on average, by more than 50 of our agencies.
Our Employees
At December 31, 2015,2017, we employed approximately 74,90077,300 people.people worldwide. The skill sets of our workforce across our agencies and within each discipline are similar. Common to all is the ability to understand a client’s brand or product and their selling proposition and to develop a unique message to communicate the value of the brand or product to the client’s target audience.audience, whether through traditional channels or emerging digital platforms. Recognizing the importance of this core competency, we have established tailored training and education programs for our client service professionals around this competency. See the MD&A for a discussion of the effect of salary and related costs on our results of operations.
Executive Officers of the Registrant
At January 27, 2016,31, 2018, our executive officers were:
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| Name | Position | Age |
| Bruce Crawford | Chairman of the Board | 8688 |
| John D. Wren | President and Chief Executive Officer | 6365 |
| Philip J. Angelastro | Executive Vice President and Chief Financial Officer | 5153 |
| Peter K. Sherman | Executive Vice President | 54 |
| Michael J. O’Brien | Senior Vice President, General Counsel and Secretary | 5456 |
| Dennis E. Hewitt | Treasurer | 7173 |
| Andrew L. Castellaneta | Senior Vice President, Chief Accounting Officer | 5759 |
| Peter L. Swiecicki | Senior Vice President, Finance and Controller | 5759 |
| Jonathan B. Nelson | CEO, Omnicom Digital | 4850 |
Each executive officer has held his present position for at least five years, except: Mr. Angelastro was named Executive Vice President and Chief Financial Officer in September 2014 and previously served as Senior Vice President Finance and Controller from 2002 until September 2014; Mr. Sherman was named Executive Vice President in April 2014 and previously served as Chief Executive Officer of JWT North America from June 2013 to April 2014 and previously held various positions with BBDO Worldwide from 1997 until 2013; Mr. Castellaneta was named Senior Vice President, Chief Accounting Officer in January 2015 and previously served as Assistant Controller from 2000 until January 2015; and, Mr. Swiecicki was named
Senior Vice President, Finance and Controller in January 2015 and previously served as Director of Business Operations from 2013 until January 2015 and previously held various positions with BBDO Worldwide from 1983 until 2013.
Additional information about our directors and executive officers will appear in our definitive proxy statement, which is expected to be filed with the SEC by April 14, 201612, 2018.
Item 1A. Risk Factors
Adverse economic conditions, a reduction in client spending, a deterioration in the credit markets or a delay in client payments could have a material effect on our business, results of operations and financial position.
Adverse economicEconomic conditions have a direct impact on our business, results of operations and financial position. In particular, aAdverse global or regional economic downturn posesconditions pose a risk that clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications projects. Such actions would reduce the demand for our services and could result in a reduction in our revenue, which would adversely affect our business, results of operations and financial position. Adverse economic conditions, including aA contraction in the availability of credit may make it more difficult for us to meet our working capital requirementsrequirements. In addition, a disruption in the credit markets could adversely affect our clients and such events could cause our clientsthem to delay payment for our services or take other actions that would negatively affect our working capital. In such circumstances, we may need to obtain additional financing to fund our day-to-day working capital requirements, which may not be available on favorable terms, or at all. Even if we take action to respond to adverse economic conditions, and reductions in revenue and disruptions in the credit markets by aligning our cost structure and more efficiently managing our working capital, such actions may not be effective.
In an economic downturn, the risk of a material loss related to media purchases and production costs incurred on behalf of our clients could significantly increase and methods for managing or mitigating such risk may be less available or unavailable.
In the normal course of business, our agencies enter into contractual commitments with media providers and production companies on behalf of our clients at levels that can substantially exceed the revenue from our services. These commitments are included in accounts payable when the services are delivered by the media providers or production companies. If permitted by local law and the client agreement, many of our agencies purchase media and production services for our clients as an agent for a disclosed principal. In addition, while operating practices vary by country, media type and media vendor, in the United States and certain foreign markets, many of our agencies’ contracts with media and production providers specify that our agencies are not liable to the media and production providers under the theory of sequential liability until and to the extent we have been paid by our client for the media or production services.
Where purchases of media and production services are made by our agencies as a principal or are not subject to the theory of sequential liability, the risk of a material loss as a result of payment default by our clients could increase significantly and such a loss could have a material adverse effect on our business, results of operations and financial position.
In addition, our methods of managing the risk of payment default, including obtaining credit insurance, requiring payment in advance, mitigating the potential loss in the marketplace or negotiating with media providers, may be less available or unavailable during a severe economic downturn.
Clients periodically review and change their advertising, marketing and corporate communications requirements and relationships. If we are unable to remain competitive or retain key clients, our business, results of operations and financial position may be adversely affected.
We operate in a highly competitive industry. Key competitive considerations for retaining existing clients and winning new clients include our ability to develop solutions that meet client needs in a rapidly changing environment, the quality and effectiveness of our services and our ability to serve clients efficiently, particularly large multinational clients, on a broad geographic basis. While many of our client relationships are long-standing, from time to time clients put their advertising, marketing and corporate communications business up for competitive review. We have won and lost accounts in the past as a result of these reviews. To the extent that we are not able to remain competitive or retain key clients, our revenue may be adversely affected, which could have a material adverse effect on our business, results of operations and financial position.
The loss of several of our largest clients could have a material adverse effect on our business, results of operations and financial position.
In 2015,Our 100 largest clients represent approximately 52%51% of our revenue came from our 100 largest clients.revenue. Clients generally are able to reduce or cancel their current or future spending on advertising, marketing and corporate communications projects at any time on short notice for any reason. A significant reduction in spending on our services by our largest clients, or the loss of several of our largest clients, if not replaced by new clients or an increase in business from existing clients, would adversely affect our revenue and could have a material adverse effect on our business, results of operations and financial position.
Acquiring new clients and retaining existing clients depends on our ability to avoid and manage conflicts of interest arising from other client relationships, retaining key personnel and maintaining a highly skilled workforce.
Our ability to acquire new clients and to retain existing clients may, in some cases, be limited by clients’ perceptions of, or policies concerning, conflicts of interest arising from other client relationships. If we are unable to maintain multiple agencies to manage multiple client relationships and avoid potential conflicts of interests, our business, results of operations and financial position may be adversely affected.
Our employees are our most important assets and our ability to attract and retain key personnel is an important aspect of our competitiveness. If we are unable to attract and retain key personnel, our ability to provide our services in the manner clients have come to expect may be adversely affected, which could harm our reputation and result in a loss of clients, which could have a material adverse effect on our business, results of operations and financial position.
Currency exchange rate fluctuations could impact our business, results of operations and financial position.
Our international operations represent approximately 44%46% of our revenue. We operate in all major international markets including the European Union,Euro Zone, the United Kingdom, Australia, Brazil, Canada, China and Japan. Our agencies transact business in more than 50 different currencies. Substantially all of our foreign operations transact business in their local currency and accordingly, their financial statements are translated into U.S. Dollars. As a result, both adverse and beneficial fluctuations in foreign exchange rates would impact our business, results of operations and financial position.
In addition, funds transferred to the United States can be adversely or beneficially impacted by foreign currency exchange changes.
We rely extensively on information technology systems and cybersecurity incidents could adversely affect us.
We rely on information technology systems and infrastructure to process, store and transmit data, including personally identifiable information, summarize results, and manage our business including maintainingand maintain client advertising and marketing information. OurIncreased cybersecurity threats and attacks, which are becoming more sophisticated, pose a risk to our systems and networks. Security breaches, improper use of our systems and unauthorized access to our data and information technology systems are potentially vulnerable to system failures and network disruptions, malicious intrusion and random attack. Likewise, data security incidents and breaches by employees and others with or without permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. Additionally,We also may have access to sensitive or personal data or information that is subject to privacy laws and regulations. We install new systems or upgrade our existing systems to prevent, detect, address and mitigate cybersecurity incidents and we provide employee awareness training of cybersecurity risks.Despite our efforts to protect our systems and networks and sensitive and personal data or information, we may be vulnerable to material security breaches, theft, modification or loss of data, employee malfeasance and additional known and unknown threats. Such events could adversely affect our business and reputation. In addition, we use third parties,third-party service providers, including cloud providers, to store, transmit orand process data. There can be no assurance that the measures we have taken to protect our data and information technology systems will prevent system failures or network disruptions or breaches in our systems, or in the systems of third parties we use, and such eventsCybersecurity incidents at these providers could adversely affect our reputation or business.business and reputation.
Government regulation and consumer advocates may limit the scope and content of our services, which could affect our ability to meet our clients’ needs, which could have a material adverse effect on our business, results of operations and financial position.
Government agencies and consumer groups directly or indirectly affect or attempt to affect the scope, content and manner of presentation of advertising, marketing and corporate communications services, through regulation or other governmental action, which could affect our ability to meet our clients’ needs. Such regulation may seek, among other things, to limit the tax deductibility of advertising expenditures by certain industries or for certain products and services. In addition, there has been a tendency on the part of businesses to resort to the judicial system to challenge advertising practices and claims, which could cause our clients affected by such actions to reduce their spending on our services. Any limitationregulatory or judicial action that affects our ability to meet our clients' needs or reduces client spending on our services could have a material adverse effect on our business, results of operations and financial position.
Further, laws and regulations, related to user privacy, use of personal information and Internet tracking technologies have been proposed or enacted in the United States and certaina number of international markets. These laws and regulations could affect the acceptance of new communications technologies and the use of current communications technologies as advertising mediums. These actions could affect our business and reduce demand for certain of our services, which could have a material adverse effect on our business, results of operations and financial position.
As a global business we face certain risks of doing business internationally and we are exposed to risks from operating in high-growth markets and developing countries, which could have a material adverse effect on our business, results of operations and financial position.
We face a number of risks associated with a global business. The operational and financial performance of our international businesses are typically tied toaffected by global and regional economic conditions, competition for new business and talented staff, currency fluctuation, political conditions, regulatory environment and other risks associated with extensive international operations. In addition, we conduct business in numerous high-growth markets and developing countries which tend to have longer billing collection cycles, currency repatriation restrictions and commercial laws that can be undeveloped, vague, inconsistently enforced, retroactively applied or frequently changed. The risks associated with our international operations could have a material adverse effect on our business, results of operations and financial position. Additionally, weour operations are subject to U.S.the United States Foreign Corrupt Practices Act and internationalother anti-corruption and anti-bribery laws including the Foreign Corrupt Practices Act of 1977, in all jurisdictions where we operate.and regulations. These laws and regulations are complex and stringent and any violation of these laws could have an adverse effect on our business and reputation. For financial information by geographic region, see Note 7 to the consolidated financial statements.
We may be unsuccessful in evaluating material risks involved in completed and future acquisitions.
We regularly evaluate potential acquisitions of businesses that are complementary to our businesses and client needs. As part of the evaluation,process, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite our efforts, we may be unsuccessful in ascertaining or evaluating all such risks. As a result, the intended advantages of any given acquisition may not be realized. If we fail to identify certain material risks from one or more acquisitions, our business, results of operations and financial position could be adversely affected.
Our goodwill is an intangible asset that may become impaired, which could have a material adverse effect on our business, results of operations and financial position.
In accordance with generally accepted accounting principles in the United States, or U.S. GAAP or GAAP, we have recorded a significant amount of goodwill related to our acquisitions; a substantial portion of which represents the intangible specialized know-how of the acquired workforce. As discussed in Note 2 to the consolidated financial statements, we review the carrying value of goodwill for impairment annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. While we have concluded, for each year presented in the financial statements included in this report, that our goodwill is not impaired, future events could cause us to conclude that the intangible asset values associated with a given operation may become impaired. Any resulting non-cash impairment charge could have a material adverse effect on our business, results of operations and financial position.
We could be affected by future laws or regulations enacted in response to climate change concerns and other actions.
Generally, our businesses are not directly affected by current cap and trade laws and other regulatory requirements aimed at mitigating the impact of climate change by reducing emissions or otherwise;otherwise, although our businesses could be in the future. However, we could be indirectly affected by increased prices for goods or services provided to us by companies that are directly affected by these laws and regulations and pass their increased costs through to their customers. Further, if our clients are impacted by such laws or requirements, either directly or indirectly, their spending for advertising and marketing services may decline, which could adversely impact our business, results of operations and financial position. Additionally, to comply with potential future changes in environmental laws and regulations, we may need to incur additional costs; therefore, at this time, we cannot estimate what impact such costsregulations may have on our business, results of operations and financial position.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct business inand maintain offices throughout the world. We lease substantially all our office space and theThe facility requirements of our businesses are similar across geographic regions and disciplines. We believe that our facilities are adequate for our current operations and are well maintained. Our principal corporate offices are located at 437 Madison Avenue, New York, New York; One East Weaver Street, Greenwich,1055 Washington Boulevard, Stamford, Connecticut and 525 Okeechobee Boulevard, West Palm Beach, Florida. We also maintain executive offices in London, England; Shanghai, China and Singapore.
We lease substantially all our office space under operating leases that expire at various dates. Lease obligations of our foreign operations are generally denominated in their local currency. Office base rent expense in 2015, 2014was $330.4 million, $334.1 million and 2013 was $331.5 million, $361.9 million in 2017, 2016 and $369.3 million,2015, respectively, net of rent received from non-cancelable third-party subleases of subleases.$11.0 million, $11.2 million and $10.6 million, respectively.
Future minimum office base rent under non-cancelable operating leases, net of rent receivable from existing non-cancelable third-party subleases, is (in millions):
| | | | Net Rent | Net Rent |
| 2016 | $ | 276.8 |
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| 2017 | 207.7 |
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| 2018 | 169.0 |
| $ | 295.6 |
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| 2019 | 145.7 |
| 236.8 |
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| 2020 | 122.5 |
| 191.5 |
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| 2021 | | 165.6 |
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| 2022 | | 142.4 |
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| Thereafter | 419.3 |
| 624.0 |
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| | $ | 1,341.0 |
| $ | 1,655.9 |
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See Note 14 to the consolidated financial statements for a description of our lease commitments, which comprise a significant component of our occupancy and the MD&A for a description of the impact of leases on our operating expenses.other costs.
Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of operations or financial position.
On December 14, 2016, two of our subsidiaries received subpoenas from the U.S. Department of Justice Antitrust Division concerning its ongoing investigation of video production and post-production practices in the advertising industry. The Company is fully cooperating with the investigation. While the ultimate effect of the investigation is inherently uncertain, we do not at this time believe that the investigation will have a material adverse effect on our results of operations or financial position. However, the ultimate resolution of these matters could be different from our current assessment and the differences could be material.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed and traded on the New York Stock Exchange or NYSE, under the symbol “OMC.” As of January 27, 2016,31, 2018, there were 2,1942,074 registered holders of our common stock.
The quarterly high and low sales prices for our common stock reported by the NYSE and dividends paid per share for 20152017 and 20142016 were:
| | | | | High | | Low | | Dividends Paid Per Share | | High | | Low | | Dividends Paid Per Share |
| 2015 | | | | | | | |
| 2017 | | | | | | | |
| First Quarter | | $ | 80.98 |
| | $ | 71.98 |
| | $ | 0.50 |
| | $ | 87.43 |
| | $ | 83.67 |
| | $ | 0.55 |
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| Second Quarter | | 79.28 |
| | 69.02 |
| | 0.50 |
| | 86.71 |
| | 79.86 |
| | 0.55 |
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| Third Quarter | | 74.56 |
| | 64.31 |
| | 0.50 |
| | 83.64 |
| | 71.63 |
| | 0.55 |
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| Fourth Quarter | | 77.57 |
| | 64.44 |
| | 0.50 |
| | 78.70 |
| | 65.32 |
| | 0.60 |
|
| | | | | | | | |
| 2014 | | |
| | |
| | |
| |
| 2016 | | | |
| | |
| | |
|
| First Quarter | | $ | 76.87 |
| | $ | 70.59 |
| | $ | 0.40 |
| | $ | 84.23 |
| | $ | 66.48 |
| | $ | 0.50 |
|
| Second Quarter | | 72.84 |
| | 65.43 |
| | 0.50 |
| | 85.95 |
| | 75.61 |
| | 0.55 |
|
| Third Quarter | | 74.14 |
| | 68.32 |
| | 0.50 |
| | 87.50 |
| | 79.94 |
| | 0.55 |
|
| Fourth Quarter | | 78.49 |
| | 64.03 |
| | 0.50 |
| | 89.66 |
| | 78.67 |
| | 0.55 |
|
StockCommon stock repurchases during the three months ended December 31, 20152017 were:
|
| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 2015 | | 106,826 |
| | $ | 71.50 |
| | — | | — |
| November 2015 | | 4,484 |
| | 72.36 |
| | — | | — |
| December 2015 | | 2,818,733 |
| | 75.12 |
| | — | | — |
| | | 2,930,043 |
| | $ | 74.98 |
| | — | | — |
|
| | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 1 - 31, 2017 | | 49,710 |
| | $ | 75.14 |
| | — | | — |
| November 1 - 30, 2017 | | 103 |
| | 67.15 |
| | — | | — |
| December 1 - 31, 2017 | | 574,365 |
| | 73.72 |
| | — | | — |
| | | 624,178 |
| | $ | 73.83 |
| | — | | — |
During the three months ended December 31, 2015,2017, we purchased 2,800,000560,000 shares of our common stock in the open market for general corporate purposes and withheld 130,04364,178 shares from employees to satisfy estimated statutory income tax obligations related to vesting of restricted stock vestingawards and stock option exercises. The value of the common stock withheld was based on the closing price of our common stock on the applicable vesting or exercise date.
There were no unregistered sales of equity securities during the three months ended December 31, 2015.2017.
For information on securities authorized for issuance under our equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which relevant information will be included under the caption “Equity Compensation Plans” in our definitive proxy statement, which is expected to be filed with the SEC by April 14, 201612, 2018.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements and related notes that begin on page F-1 of this report, as well as the MD&A.
| | | | (In millions, except per share amounts) | (In millions, except per share amounts) |
| For the years ended December 31: | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Revenue | $ | 15,134.4 |
| | $ | 15,317.8 |
| | $ | 14,584.5 |
| | $ | 14,219.4 |
| | $ | 13,872.5 |
| $ | 15,273.6 |
| | $ | 15,416.9 |
| | $ | 15,134.4 |
| | $ | 15,317.8 |
| | $ | 14,584.5 |
|
| Operating Income | 1,920.1 |
| | 1,944.1 |
| | 1,825.3 |
| | 1,804.2 |
| | 1,671.1 |
| |
| Operating Profit | | 2,059.7 |
| | 2,008.9 |
| | 1,920.1 |
| | 1,944.1 |
| | 1,825.3 |
|
| Net Income - Omnicom Group Inc. | 1,093.9 |
| | 1,104.0 |
| | 991.1 |
| | 998.3 |
| | 952.6 |
| 1,088.4 |
| | 1,148.6 |
| | 1,093.9 |
| | 1,104.0 |
| | 991.1 |
|
| Net Income Per Common Share - Omnicom Group Inc.: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Basic | 4.43 |
| | 4.27 |
| | 3.73 |
| | 3.64 |
| | 3.38 |
| 4.68 |
| | 4.80 |
| | 4.43 |
| | 4.27 |
| | 3.73 |
|
| Diluted | 4.41 |
| | 4.24 |
| | 3.71 |
| | 3.61 |
| | 3.33 |
| 4.65 |
| | 4.78 |
| | 4.41 |
| | 4.24 |
| | 3.71 |
|
| Dividends Declared Per Common Share | 2.00 |
| | 1.90 |
| | 1.60 |
| | 1.20 |
| | 1.00 |
| 2.25 |
| | 2.15 |
| | 2.00 |
| | 1.90 |
| | 1.60 |
|
| | (In millions) | (In millions) |
| At December 31: | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Cash and cash equivalents and short-term investments | $ | 2,619.7 |
| | $ | 2,390.3 |
| | $ | 2,728.7 |
| | $ | 2,698.9 |
| | $ | 1,805.0 |
| $ | 3,796.4 |
| | $ | 3,022.8 |
| | $ | 2,619.7 |
| | $ | 2,390.3 |
| | $ | 2,728.7 |
|
| Total Assets | 22,110.7 |
| | 21,428.4 |
| | 21,980.4 |
| | 21,971.4 |
| | 20,323.4 |
| 24,931.2 |
| | 23,165.4 |
| | 22,110.7 |
| | 21,428.4 |
| | 21,980.4 |
|
| Long-Term Obligations: | | | | | | | | | | |
| Long-term debt | 3,564.2 |
| | 4,542.1 |
| | 3,763.3 |
| | 3,768.8 |
| | 2,510.6 |
| 4,912.9 |
| | 4,920.5 |
| | 3,564.2 |
| | 4,542.1 |
| | 3,763.3 |
|
| Convertible debt | — |
| | — |
| | 252.7 |
| | 659.4 |
| | 659.4 |
| — |
| | — |
| | — |
| | — |
| | 252.7 |
|
| Long-term liabilities | 800.5 |
| | 774.3 |
| | 685.1 |
| | 739.9 |
| | 602.0 |
| |
| Long-Term Liabilities | | 1,091.2 |
| | 892.3 |
| | 800.5 |
| | 774.3 |
| | 685.1 |
|
| Total Shareholders’ Equity | 2,452.4 |
| | 2,850.0 |
| | 3,582.4 |
| | 3,460.8 |
| | 3,504.3 |
| 2,615.1 |
| | 2,162.0 |
| | 2,452.4 |
| | 2,850.0 |
| | 3,582.4 |
|
In 2014As discussed in Item 7 below, in 2017 the Tax Cuts and 2013, we incurred $8.8 million and $41.4 million, respectively, of expenses in connection with the proposed merger with Publicis Groupe S.A.,Jobs Act, or Publicis, which were primarily comprised of professional fees. On May 8, 2014, the proposed merger was terminated. Excluding the effect of the merger expenses from both years, Operating Income,Tax Act, reduced Net Incomeincome - Omnicom Group Inc. by $106.3 million and Diluteddiluted Net Incomeincome per Common Shareshare - Omnicom Group Inc. for the years ended December 31, 2014 and 2013 were $1,952.9 million, $1,101.4 million and $4.23 and $1,866.7 million, $1,026.0 million and $3.84, respectively.
As described inby $0.45. See Note 210 to the consolidated financial statements on December 31, 2015, we adopted FASB Accounting Standards Update, or ASU, 2015-03, and FASB ASU 2015-17. As a result, total assets and long-term debt for 2014, 2013, 2012 and 2011 have been adjusted to reflect the retrospective adoption of ASU 2015-03 and ASU 2015-17. The adoption of ASU 2015-03 and ASU 2015-17 did not have any effect on results of operations or total shareholders’ equity.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
We are a strategic holding company providing advertising, marketing and corporate communications services to clients through our branded networks and agencies around the world. On a global, pan-regional and local basis, our networks and agencies provide a comprehensive range of services in fourthe following fundamental disciplines: advertising, CRM,which as described below includes CRM Consumer Experience and CRM Execution & Support, public relations and specialty communications.healthcare. Our business model was built and continues to evolve around our clients. While our networks and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. TheOur fundamental premise of our business principle is that our clients’ specific marketing requirements should beare the central focus inof how we deliverstructure our servicesservice offerings and allocate our resources. This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client networks thatutilizing our key client matrix organization structure. This collaboration allows us to cut across our internal organizational structures to deliver consistent brand messages for a specific client and execute against each of our clients’ specific marketing requirements.requirements in a consistent and comprehensive manner. 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 and have a large and diverse client base. In 2015,2017, our largest client accounted for 2.7%represented 3.0% of our revenue and our 100 largest clients, accounted forwhich represent many of the world's major marketers, comprised approximately 52%51% of our revenue. Our business is spread across a significant numberclients operate in virtually every sector of industry sectorsthe global economy with no one industry comprising more than 13%14% of our revenue in 2015.2017. 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.
As described in more detail below, in 20152017 our revenue decreased $183.4$143.3 million, or 1.2%0.9%, compared to 2014. Beginning in the fourth quarter of 2014 and continuing throughout 2015, substantially all foreign currencies weakened against the U.S. Dollar.2016. Changes in foreign exchange rates negatively impacted revenue in the first six months of 2017. Beginning in the third quarter of 2017, the Euro and a number of other foreign currencies strengthened against the U.S. Dollar. As a result, changes in foreign exchange rates for 2017 had a marginal effect on our revenue. In 2017, changes in foreign exchange rates increased revenue by $42.9 million, or 0.3%. Acquisition revenue, net of disposition revenue, reduced revenue by $1.0 billion or 6.6%, acquisitions, net of dispositions increased revenue $14.6$647.3 million, or 0.1%4.2%, primarily reflecting the sale of our specialty print media and organic growth increased revenue $810.8$461.1 million, or 5.3%3.0%.
Global economic conditions have a direct impact on our business and financial performance. In particular, a contraction inAdverse global or regional economic conditions posespose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services. In 2015,2017, our agencies in North America continued their modest growth as activity in the United States experienced modestvaried across our service disciplines and growth slowed in the second half of the year relative to the first half. Our businesses in the United Kingdom, or the U.K., and Europe had solid performance. However, while improving in 2017, the continuing uncertain economic growth and the major economies of Asia continued their moderate expansion. Economicpolitical conditions in the Euro Zone remain unsettledEuropean Union, or the EU, have been further complicated by the official notification from the U.K. to the European Council to withdraw from the EU. In Brazil, unstable economic and economicpolitical conditions in Brazil continued a downward trend that begancontributed to the continuing volatility in the second quartermarket and our agencies experienced negative growth. Most of 2015.our businesses in Asia continue their modest growth consistent with recent periods. The economic and fiscal issues facing certain countries in the Euro ZoneEurope and Latin America continue to cause economic uncertainty in that market;those regions; however, the impact on our business varies by country. We will continue to monitor economic conditions closely, as well as 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 our working capital. There can be no assurance whether, or to what extent, our efforts to mitigate any impact of future adverse economic conditions, reductions in 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 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,As clients increase their demands for marketing effectiveness and efficiency, they have made it a practice to consolidate their business within one service provider in an effort to gain greater efficiency and effectiveness from their total marketing expenditures, clients continue to require greater coordinationthe pursuit of marketing activities.a single engagement covering all consumer touch points. We have structured our business around these trends. We believe these trendsthat our key client matrix organization structure approach to collaboration and integration of our services and solutions have benefitedprovided a competitive advantage to our business in the past and we expect this to continue over the medium and long term will continueterm. In addition, during 2017, we continued the process of forming practice areas within our global network structure to provide a competitive advantagebring together agencies operating in common disciplines to us.
leverage existing resources and to create, in close coordination with our key client matrix organization, additional custom client solutions. We expect to complete this process in 2018.
In the near term, barring unforeseen events and excluding the impact of changes in foreign exchange rates, as a result of continued improvement in operating performance by many of our agencies and new business activities, we expect our 20162018 revenue to increase modestly and over the long term to be in excess of the weighted average nominal GDP growth in our major markets. We expect to continue to identify acquisition opportunities intended to build upon the core capabilities of our strategic disciplines and business platforms, expand our operations in thehigh-growth and emerging markets and enhance our capabilities to leverage new technologies that are being used by marketers today. In addition, we continually evaluate our portfolio of businesses to identify non-strategic or underperforming businesses for disposition.
Given our size and breadth, we manage our business by monitoring several financial indicators. The key indicators that we focus on are revenue and operating expenses. We analyze revenue growth by reviewing the components and mix of the growth, including growth by principal regional market growth byand marketing discipline, the impact from foreign currency fluctuations,exchange rate changes, growth from acquisitions and growth from our largest clients. Operating expenses are comprised of cost of services, selling, general and administrative, or SG&A, expenses and depreciation and amortization.
In 2015, ourThe change in revenue decreased 1.2% compared to 2014. Changes in foreign exchange rates reduced revenue 6.6%, acquisitions, net of dispositions increased revenue 0.1% and organic growth increased revenue 5.3%. Across2017 across our principal regional markets the changes in revenue were: North America increased 4.1%decreased 5.3%, Europe decreased 9.3%increased 5.7%, Latin America decreased 25%increased 16.8% and Asia Pacific decreased 2%increased 0.9%. In North America, moderatemodest growth in the United States and Canada was offset by the disposition of our specialty print media business in the second quarter. In Europe, growth in substantially all markets and the strengthening of the Euro against the U.S. Dollar was partially offset by the weakening of the Canadian DollarBritish Pound against the U.S. Dollar. In Europe, growth in the U.K., Germany and Spain was offset by the weakening of all major European currencies against the U.S. Dollar and negative performance in The Netherlands and France. The decreaseincrease in revenue in Latin America was a result of our acquisition activity in Colombia, growth in Mexico and the weakeningstrengthening of all currenciesthe Brazilian Real against the U.S. Dollar, which was substantially offset by the continued economic weakness in the regionBrazil and negative performance in Chile and Brazil, which offset strong growth in Mexico. In Brazil, the decline resulted from a difficult comparison to the prior year period, which included additional client spending related to the World Cup primarily in the second quarter of 2014 and a recent decline in economic conditions.that market. In Asia Pacific, strong growth in the major economiesmost countries in the region, especially Australia, India, Japan and Singapore, was partially offset by disposition activity.
In an effort to monitor the weakeningchanging needs of our clients and to better capture the currenciesexpanded scope of our services, in the region. fourth quarter of 2017, we realigned our service disciplines. As a result, our CRM discipline was grouped into two separate categories: CRM Consumer Experience, which includes Omnicom Precision Marketing Group’s digital / direct marketing agencies, as well as our branding agencies, shopper marketing agencies and our experiential marketing agencies; and, CRM Execution & Support, which includes field marketing, sales support, merchandising and point of sale, as well as other specialized marketing and custom communications services. Also, we realigned and renamed our former specialty communications discipline so that it now exclusively includes agencies offering healthcare marketing and communications services.
The change in revenue in 20152017 compared to 2014, including the negative impact of currency changes,2016, in our four fundamentalservice disciplines was: advertising increased 1.8%decreased 0.6%, CRM Consumer Experience decreased 5.6%3.2%, CRM Execution & Support decreased 1.6%, public relations decreased 2.3%increased 0.1% and healthcare increased 3.3%. The decrease in advertising primarily reflects the sale of our specialty communications increased 0.8%.
print media business in April 2017.
We measure operating expensescost of services in two distinct cost categories: salary and service costs and officeoccupancy and general expenses.other costs. As a service business, salary and service costs make up the vast majority of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs consist ofinclude employee compensation includingand benefits, freelance labor and relateddirect service costs, which include third-party supplier costs and direct serviceclient-related travel costs. OfficeOccupancy and general expensesother costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, depreciation and amortizationgeneral office expenses and other overhead expenses. Each
SG&A expenses primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our agencies requires professionals with the skill sets that are common across our disciplines. At the core of the skill sets is the ability to understand a client’s brand or productcorporate and its selling propositionexecutive offices, which includes group-wide finance 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 areaccounting, treasury, legal and governance, human resource oversight and similar across geographic regions and disciplines, and their technology requirements are generally limited to personal computers, servers and off-the-shelf software.costs.
Similar to revenue, operatingOperating expenses for 2017 decreased in 20151.4% compared to 2014 as a result of the weakening of substantially all foreign currencies against the U.S. Dollar.2016. Salary and service costs, which normally tend to fluctuate with changes in revenue, increased $11.9decreased $190.9 million, or 0.1%1.7%, in 20152017 compared to 2014, primarily reflecting increases related to changes in the mix of our business during the period. Office2016. Occupancy and general expenses,other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $171.3increased $1.5 million, or 8.5%0.1%, in 20152017 compared to 2014.
2016. Operating margins and earningsprofit increased $50.8 million year-over-year. As a result, operating margin increased year-over-year to 13.5% from 13.0%. Earnings before interest, taxes and amortization of intangible assets, or EBITA margins were unchanged year-over-year at 12.7% and 13.4%margin, in 2017 was 14.2%, respectively.
as compared to 13.8% in 2016.
Net interest expense for 2015 increased $7.47.7 million year-over-year to $141.5 million from $134.1$174.8 million in 2014.2017. Interest expense
increased$14.8 million to $224.5 million in 2017. Interest income increased $3.97.1 million to $181.1$49.7 million in 2015, primarily resulting2017 compared to 2016.
On December 22, 2017, the Tax Act was enacted into law. The Tax Act reduced the U.S. federal statutory income tax rate to 21% from the interest35% for tax years beginning after December 31, 2017 and made several changes to existing tax law that affect our tax assets and liabilities related to previously reported taxable income. The significant changes require that we record tax expense on the $750 million principal amountaccumulated earnings of our foreign subsidiaries and adjust our previously reported deferred tax positions to reflect the impact of the 3.65% Senior Notes due 2024,revised statutory federal rate as of the enactment date. In December 2017, the SEC issued Staff Accounting Bulletin 118, or 2024 Notes, issuedSAB 118, which provides guidance on accounting for the impact of the Tax Act. SAB 118 provides that provisional amounts should be recognized in October 2014,our financial statements where accounting for certain effects of the Tax Act are not complete and a reasonable estimate of the effects of the Tax Act can be made. Accordingly, at December 31, 2017, we have estimated the effect of the Tax Act and recorded a net increase to income tax expense of $106.3 million. Our estimate is based on our understanding of the Tax Act and currently available guidance. We expect to revise this estimate in future periods as further information becomes available. See Note 10 to the consolidated financial statements for additional information.
Our effective tax rate for 2017 was 36.9% compared to 32.6% for 2016. The increase is attributable to the estimated impact of the Tax Act of $106.3 million partially offset by the benefit of the interest rate swaps on the 3.625% Senior Notes due 2022, or 2022 Notes, and the 4.45% Senior Notes due 2020, or 2020 Notes. Interest income decreased $3.5 million to $39.6 million in 2015 resulting from lower interest earned on cash balances in our international treasury centers and the negative impact of changes in foreign exchange rates.
Our effective tax rate was unchanged at 32.8%. Income tax expense for 2014 reflects the recognition of an incomeexcess tax benefit from share-based compensation of approximately $11$20.8 million related to expenses incurred in prior periods in connection withresulting from the proposed merger with Publicis, which was terminated on May 8, 2014. Prioradoption of FASB ASU 2016-09 (see Note 1 to the termination of the merger, the majority of the merger costs, which were incurredconsolidated financial statements). ASU 2016-09 requires that beginning in 2013, were capitalized for income tax purposes and the related2017 excess tax benefits and deficiencies arising from share-based compensation be recognized in results of operations in the period when the restricted stock awards vest or stock options are exercised. In prior years, excess tax benefits and deficiencies from share-based compensation were not recorded. Because the proposed merger was terminated, the merger costs were no longer required to be capitalized for income tax purposes. Excluding the income taxrecorded in additional paid-in capital. The effect of the merger expenses,Tax Act on income tax expense for 2014 would have been $604.5 million.The decrease2017 is presented below in Results of Operations 2017 Compared to 2016. While we are still evaluating the impact of the Tax Act on our 2018 annual effective tax rate, in 2015 fromwe expect the Tax Act to reduce our effective tax rate in 2014, excludingbetween 3.5% and 4.5%, which excludes the incomeimpact of tax benefit related tobenefits or deficiencies on share-based compensation. At this point, we can not predict the proposed merger, is primarily due to a legal entity restructuring of our European operations. As a result of the reorganization, a certain portion of the foreign earnings in the affected countries2018 impact from share-based compensation because it is subject to lower effective tax rates.changes in our share price.
Net income - Omnicom Group Inc. for 20152017 decreased $10.1$60.2 million, or 0.9%5.2%, to $1,093.9$1,088.4 million from $1,104.0$1,148.6 million in 2014.2016. The year-over-year decrease is due to the impact of the Tax Act of $106.3 million, which is partially offset by the after tax increase from the factors described above. Diluted net income per common share - Omnicom Group Inc. increased 4.0%decreased 2.7% to $4.41$4.65 in 2015,2017, compared to $4.24$4.78 in 2014 due to2016. The impact of the factors described above, as well asTax Act reduced diluted net income per share - Omnicom Group Inc. $0.45. In addition, the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock, net of shares issued for restricted stock awards, stock option exercises and shares issued under our employee stock purchase plan.plan improved diluted net income per share - Omnicom Group Inc in 2017 compared to 2016. The effect of the Tax Act on net income - Omnicom Group Inc. and diluted net income per share - Omnicom Group Inc. is presented below in Results of Operations 2017 Compared to 2016.
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 than most of our accounting policies 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
OurWe prepare our financial statements are prepared in conformity with U.S. GAAP and require usare required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expensesreported in the consolidated financial statements and accompanying notes. We use a fair value approach in testing goodwill for impairment and when evaluating our equity method and 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. The valuationevaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings of the target businesses, as well as our experience and judgment.
Business combinations are accounted for using the acquisition method. The assets acquired, including identified intangible assets, 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 a business is acquired, goodwill is recorded as if 100% were acquired. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs are expensed as incurred. Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which are recorded as a liability at the acquisition date fair value. Subsequent changes in the fair value of the liability are recorded in results of operations. The results of operations of acquired businesses are included in results of operations from the acquisition date. In 2015,2017, we completed 8four acquisitions of new subsidiaries.
Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic reach or their service capabilities to better serve our clients. Additional key factors we consider include the competitive position and specialized know-how of the acquisition targets. Accordingly, as is typical in most service businesses, a substantial portion of the intangible asset valueassets we acquire isare intangible assets primarily consisting of the know-how of the people,personnel, which is treated as part of goodwill and under U.S. GAAP is not required to be 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.that are required to be valued separately. A significant portion of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In valuing these identified intangible assets, we typically use an income approach and consider comparable market participant measurements.
We evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. Under FASB ASC Topic 350, Intangibles - Goodwill and Other, we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to the goodwill impairment test. Although not required, we performed the annual impairment test and compared the fair value of each of our reporting units to its respective carrying value, including goodwill. We identified our regional reporting units as components of our operating segments, which are our five global agency networks. The regional reporting units of each agency network are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our client-centric strategykey client matrix organization structure for delivering services to clients in their regions. We have concluded that for each of our operating segments, their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level. Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment Reporting, and the guidance set forth in FASB ASC Topic 350, Intangibles - Goodwill and Other.350. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. In addition, the agencies within our regional reporting units have similar economic characteristics. The main economic components of each agency are employee compensation and related costs and direct service costs and officeoccupancy and generalother costs, which include rent and occupancy costs, technology costs that are generally limited to
personal computers, servers and off-the-shelf software and other overhead expenses. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our virtual client servicenetwork strategy.
Goodwill Impairment Review - Estimates and Assumptions
We use the following valuation methodologies to determine the fair value of our reporting units: (1) the income approach, which utilizes discounted expected future cash flows, (2) comparative market participant multiples for EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions.
In applying the income approach, we use estimates to derive the discounted expected cash flows (“DCF”) for each reporting unit that serves as the basis of our valuation. These estimates and assumptions include revenue growth and operating margin, EBITDA, tax rates, capital expenditures, weighted average cost of capital and related discount rates and expected long-term cash flow growth rates. All of these estimates and assumptions are affected by conditions specific to our businesses, economic conditions related to the industry we operate in, as well as conditions in the global economy. The assumptions that have the most significant effect on our valuations derived using a DCF methodology are: (1) the expected long-term growth rate of our reporting units' cash flows and (2) the weighted average cost of capital (“WACC”).
The assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 20152017 and 20142016 were:
| | | | June 30, | June 30, |
| | 2015 | | 2014 | 2017 | | 2016 |
| Long-Term Growth Rate | 4% | | 4% | 4% | | 4% |
| WACC | 10.1% - 10.7% | | 9.9% - 10.6% | 9.6% - 10.3% | | 9.7% - 10.3% |
Long-term growth rate represents our estimate of the long-term growth rate for our industry and the markets of the global economy we operate in. For the past ten years, the average historical revenue growth rate of our reporting units and the Average Nominal GDP growth of the countries comprising the major markets that account for substantially all of our revenue was approximately 4.8%3.6% and 3.5%4.0%, respectively. We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2015.2017. 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.in, which are similar across our reporting units. For our annual test as of June 30, 2015,2017, we used an estimated long-term growth rate of 4% for our reporting units..
When performing the annual impairment test as of June 30, 20152017 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 2015.2017. In the first half of 2015,2017, we experienced an increase in our revenue of 5.2%3.9%, which excludes growth from acquisitionsexcluded our net disposition activity and the impact from changes in foreign exchange rates. Economic conditions in the Euro Zone are unsettled and the continuing fiscal issues faced by many countries in the European Union has caused economic difficulty in certain of our Euro Zone markets. During 2015,the first half of 2017, weakness in most Latin American economies we operate in has the potential to affect our near-term performance in that region. We considered the effect of these conditions in our annual impairment test.
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.
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 using the acquisition method and as a result, they have a relatively higher amount of goodwill and debt.
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 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 at June 30, 20152017 was not impaired, because the fair value of each of our reporting units was substantially in excess of its 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 74%72%. Notwithstanding our belief that the assumptions we used for WACC and long-term growth rate in our impairment testing 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, 20152017 revealed that if the WACC increased by 1% and/or the long-term growth rate decreased by 1%, the fair value of each of our reporting units would continue to be substantially in excess of its respective net book value 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 impairment test. The estimates used in our goodwill impairment test do not constitute forecasts or projections of future results of operations, but rather are estimates and assumptions based on historical results and assessments of macroeconomic factors affecting our reporting units as of the valuation date. We believe that our estimates and assumptions are reasonable, but they are subject to change from period to period. Actual results of operations and other factors will likely differ from the estimates used in our discounted cash flow valuation and it is possible that differences could be material.significant. A change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail 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.
condition.
Subsequent to the annual impairment test at June 30, 2015,2017 and considering our operating performance in the second half of the year, there were no events or circumstances that triggered the need for an interim impairment test. Additional information about acquisitions and goodwill appears in Notes 2, 4 and 5 to the consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with FASB ASC Topic 605, Revenue Recognition, and applicable SEC Staff Accounting Bulletins. Substantially allOur principal source of our revenue is derived from fees for services based on a rate per hour or equivalentper project basis. Revenue is realized when the service is performed in accordance with the client arrangement and upon the completion of the earnings process. Our primary client arrangements include: fixed fee contracts where revenue is recognized based on the level of effort completed to date, retainer agreements where revenue is recognized on a straight-line basis over the contract period, and media commissions where revenue is recognized when the media is run. Prior to recognizing revenue, persuasive evidence of an arrangement must exist, the sales price must be fixed or determinable, delivery, performance and acceptance must be in accordance with the client arrangement and collection must be reasonably assured. These principles are the foundation of our revenue recognition policy and apply to all client arrangements in each of our service disciplines: advertising, CRM, which includes CRM Consumer Experience and CRM Execution & Support, 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.
healthcare. 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 fourservice 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, in certain markets, 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 the primary obligor. 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 arrangements include performance incentive provisions designed to link a portion of our revenue to our performance relative to 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 the client. We may receive rebates or credits from certain vendors based on transactions entered into on behalf of clients. These rebates or credits are remitted to the clients in accordance with contractual requirements or in certain international markets may be retained by us based on the terms of the client contract or local law. Amounts passed on to clients are recorded as a liability and amounts retained by us are recorded as revenue when earned.
In May 2014, theEffective January 1, 2018, we will adopt FASB issued FASB ASU 2014-09,ASC Topic 606, Revenue from Contracts with Customers,orASU 2014-09, which ASC 606. As a result, we will replace all existingchange our revenue recognition guidance under U.S. GAAP. On July 9, 2015,accounting policy as described below. ASC 606 will be applied using the FASB approved a one year deferral of the effective date of ASU 2014-09 to all annual and interim periods beginning after December 15, 2017, with early application permitted only for annual and interim periods beginning after December 31, 2016. ASU 2014-09 provides for one of two methods of transition:modified retrospective application to each prior period presented; or, recognition ofmethod, where the cumulative effect of retrospectivethe initial application is recognized as an adjustment to opening retained earnings at January 1, 2018 and is not expected to have a material impact on our financial position. ASC 606 provides a five-step model where revenue is recognized when the customer obtains control of the new standardpromised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The adoption of ASC 606 will not have a material impact on how we recognize revenue for fixed fee or retainer based arrangements. Clients typically receive the benefit of our services as we perform. We will continue to recognize revenue over time using inputs or outputs to measure our progress. Revenue for commission based arrangements will continue to be recognized at a point-in-time. ASC 606 also includes additional disclosure requirements.
For certain of our businesses, the beginningadoption of the period of initial application. Presently, we are not yet in a position to conclude on the application date or the transition method weASC 606 will choose. While our implementation effort is ongoing, based on our initial assessment the impact of the application of the new standard will likely result in a change in our accounting policy for certain third-party out-of-pocket costs, which are incurred in connection with our services and are billed to clients. The inclusion of third-party out-of-pocket costs in revenue depends on whether we act as a principal or agent in the timingclient arrangement. Under ASC 606, the principal versus agent assessment is based on whether we control the specified goods or services before they are transferred to the customer. As a result of ourthe adoption of ASC 606, certain third-party costs are no longer included in revenue recognition forand cost of services. In 2017, these third-party out-of-pocket costs were approximately $150 million. This change will reduce reported revenue and will have no impact on operating profit.
In addition, performance incentives received from clients and the recognition ofthat can increase revenue if we meet certain reimbursable out-of-pocket costsquantitative or qualitative objectives in delivering our services will be treated as revenue.variable consideration. Performance incentives are currentlywere recognized in revenue when specific quantitative goals arewere achieved, or when our performance against qualitative goals is determinedwas acknowledged by the client. Under ASC 606, variable consideration is estimated and included in total consideration at contract inception based on either the new standard, we will be required to estimateexpected value method or the amount of the incentive that will be earnedmost likely method. These estimates are based on historical award experience, anticipated performance and our best judgment at the inception oftime. This change will have offsetting effects in each period and the contract and recognize the incentive over the term of the contract. While performance incentives arenet effect will not be material to our revenue, this will resultresults of operations or financial position.
Income Taxes
On December 22, 2017, the Tax Act was enacted into law. In accordance with the guidance provided in an acceleration in revenue recognition for certain contract incentives compared toSEC Staff Accounting Bulletin 118, at December 31, 2017, we made a reasonable estimate of the current method. Certain incidental costs that are reimbursed by our clients and are currently required to be recorded in revenue will likely not be recorded as revenue undereffect of the new standard. We expect this will result in less revenue and related cost recorded inTax Act on our results of operations. While,operations and, as a result, we have not yet completed our assessment, we do notrecorded a net increase to income tax expense of $106.3 million. We expect to revise this change to have a material impact to our revenue and it will not resultestimate in any change to operating income.
Additionalfuture periods as further information about our revenue recognition policy appears inbecomes available. See Note 210 to the consolidated financial statements.
Share-Based Compensation
The majority of our incentive based share awards represent restricted stock awards and performance restricted stock awards, or PRSUs. Share-based compensationstatements for these awards is determined and fixed on the grant date using the closing price of our common stock and we assume that substantially all the PRSUs will vest.
Share-based compensation expense of $99.4 million, $93.5 million and $86.3 million, in 2015, 2014 and 2013, respectively, was primarily attributed to restricted stock awards. Information about our specific awards and stock plans can be found in Note 9 to the consolidated financial statements.additional information.
NEW ACCOUNTING STANDARDS
See Note 220 for information on the adoption of new accounting standards and accounting standards not yet adopted.
RESULTS OF OPERATIONS - 2017 Compared to 2016 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Revenue | $ | 15,273.6 |
| | $ | 15,416.9 |
|
| Operating Expenses: | | | |
| Salary and service costs | 11,249.7 |
| | 11,440.6 |
|
| Occupancy and other costs | 1,232.1 |
| | 1,230.6 |
|
| Cost of services | 12,481.8 |
| | 12,671.2 |
|
| Selling, general and administrative expenses | 450.0 |
| | 443.9 |
|
| Depreciation and amortization | 282.1 |
| | 292.9 |
|
| | 13,213.9 |
| | 13,408.0 |
|
| Operating Profit | 2,059.7 |
| | 2,008.9 |
|
| Operating Margin - % | 13.5 | % | | 13.0 | % |
| Interest Expense | 224.5 |
| | 209.7 |
|
| Interest Income | 49.7 |
| | 42.6 |
|
| Income Before Income Taxes and Income From Equity Method Investments | 1,884.9 |
| | 1,841.8 |
|
| Income Tax Expense | 696.2 |
| | 600.5 |
|
| Income From Equity Method Investments | 3.5 |
| | 5.4 |
|
| Net Income | 1,192.2 |
| | 1,246.7 |
|
| Net Income Attributed To Noncontrolling Interests | 103.8 |
| | 98.1 |
|
| Net Income - Omnicom Group Inc. | $ | 1,088.4 |
| | $ | 1,148.6 |
|
As discussed below, in 2017 the Tax Act reduced Net income - Omnicom Group Inc. by $106.3 million and diluted Net income per share - Omnicom Group Inc. by $0.45. See Note 10 to the consolidated financial statements for a descriptionadditional information.
Non-GAAP Financial Measures
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of accounting standards that were adopted in 2015 and our significant accounting policies and Note 20 for a discussionintangible assets, which primarily consists of accounting standards not yet implemented.
RESULTS OF OPERATIONS - 2015 Compared to 2014 (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Revenue | $ | 15,134.4 |
| | $ | 15,317.8 |
|
| Operating Expenses: | | | |
| Salary and service costs | 11,361.9 |
| | 11,350.0 |
|
| Office and general expenses | 1,852.4 |
| | 2,023.7 |
|
| Total Operating Expenses | 13,214.3 |
| | 13,373.7 |
|
| Add back: Amortization of intangible assets | 109.3 |
| | 107.1 |
|
| | 13,105.0 |
| | 13,266.6 |
|
| Earnings before interest, taxes and amortization of intangible assets (“EBITA”) | 2,029.4 |
| | 2,051.2 |
|
| EBITA Margin - % | 13.4 | % | | 13.4 | % |
| Deduct: Amortization of intangible assets | 109.3 |
| | 107.1 |
|
| Operating Income | 1,920.1 |
| | 1,944.1 |
|
| Operating Margin - % | 12.7 | % | | 12.7 | % |
| Interest Expense | 181.1 |
| | 177.2 |
|
| Interest Income | 39.6 |
| | 43.1 |
|
| Income Before Income Taxes and Income From Equity Method Investments | 1,778.6 |
| | 1,810.0 |
|
| Income Tax Expense | 583.6 |
| | 593.1 |
|
| Income From Equity Method Investments | 8.4 |
| | 16.2 |
|
| Net Income | 1,203.4 |
| | 1,233.1 |
|
| Net Income Attributed To Noncontrolling Interests | 109.5 |
| | 129.1 |
|
| Net Income - Omnicom Group Inc. | $ | 1,093.9 |
| | $ | 1,104.0 |
|
amortization of intangible assets arising from acquisitions. We define 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 financial measures. We userevenue. 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. GAAPare non-GAAP financial measure of Operating Income for the periods presented.measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our businesses. business.
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.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the for the periods presented (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Net Income - Omnicom Group Inc. | $ | 1,088.4 |
| | $ | 1,148.6 |
|
| Net Income Attributed To Noncontrolling Interests | 103.8 |
| | 98.1 |
|
| Net Income | 1,192.2 |
| | 1,246.7 |
|
| Income From Equity Method Investments | 3.5 |
| | 5.4 |
|
| Income Tax Expense | 696.2 |
| | 600.5 |
|
| Income Before Income Taxes and Income From Equity Method Investments | 1,884.9 |
| | 1,841.8 |
|
| Interest Expense | 224.5 |
| | 209.7 |
|
| Interest Income | 49.7 |
| | 42.6 |
|
| Operating Profit | 2,059.7 |
| | 2,008.9 |
|
| Add back: Amortization of intangible assets | 113.8 |
| | 115.2 |
|
| Earnings before interest, taxes and amortization of intangible assets (“EBITA”) | $ | 2,173.5 |
| | $ | 2,124.1 |
|
| | | | |
| Revenue | $ | 15,273.6 |
| | $ | 15,416.9 |
|
| EBITA | $ | 2,173.5 |
| | $ | 2,124.1 |
|
| EBITA Margin - % | 14.2 | % | | 13.8 | % |
Revenue
In 2015,2017, revenue decreased $183.4$143.3 million or 1.2%, to $15,134.4$15,273.6 million from $15,317.8$15,416.9 million in 2014.2016. Changes in foreign exchange rates increased revenue by $42.9 million, or 0.3%. Acquisition revenue, net of disposition revenue, reduced revenue $1.0 billion, acquisitions net$647.3 million, or 4.2%, reflecting the disposition of dispositions increased revenue $14.6 millioncertain non-strategic businesses in the past year, and organic growth increased revenue $810.8 million.$461.1 million, or 3.0%. The reduction in revenue in 2017 resulting from our acquisition and disposition activity arose principally from the sale in the second quarter of our specialty print media business, which operated in North America.
Changes in foreign exchange rates negatively impacted revenue in the first six months of 2017. Beginning in the third quarter of 2017, the Euro and a number of foreign currencies strengthened against the U.S. Dollar. As a result, changes in foreign exchange rates for 2017 had a marginal effect on our revenue. The increase in revenue from changes in foreign exchange rates primarily resulted from the strengthening of the Euro, Brazilian Real, Australian Dollar and Russian Ruble against the U.S. Dollar, mostly offset by the weakening of the British Pound against the U.S. Dollar,
The components of 2015 revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Domestic | | International |
| | $ | | % | | $ | | % | | $ | | % |
| December 31, 2014 | $ | 15,317.8 |
| | | | $ | 8,185.9 |
| | | | $ | 7,131.9 |
| | |
| Components of revenue change: | | | |
| | | | |
| | | | |
|
| Foreign exchange impact | (1,008.8 | ) | | (6.6 | )% | | — |
| | — | % | | (1,008.8 | ) | | (14.1 | )% |
| Acquisitions, net of dispositions | 14.6 |
| | 0.1 | % | | (37.0 | ) | | (0.5 | )% | | 51.6 |
| | 0.7 | % |
| Organic growth | 810.8 |
| | 5.3 | % | | 377.8 |
| | 4.6 | % | | 433.0 |
| | 6.1 | % |
| December 31, 2015 | $ | 15,134.4 |
| | (1.2 | )% | | $ | 8,526.7 |
| | 4.2 | % | | $ | 6,607.7 |
| | (7.4 | )% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Domestic | | International |
| | $ | | % | | $ | | % | | $ | | % |
| December 31, 2016 | $ | 15,416.9 |
| | | | $ | 8,627.8 |
| | | | $ | 6,789.1 |
| | |
| Components of revenue change: | | | |
| | | | |
| | | | |
|
| Foreign exchange rate impact | 42.9 |
| | 0.3 | % | | — |
| | — | % | | 42.9 |
| | 0.6 | % |
Acquisition revenue, net of disposition revenue | (647.3 | ) | | (4.2 | )% | | (474.4 | ) | | (5.5 | )% | | (172.9 | ) | | (2.5 | )% |
| Organic growth | 461.1 |
| | 3.0 | % | | 43.5 |
| | 0.5 | % | | 417.6 |
| | 6.1 | % |
| December 31, 2017 | $ | 15,273.6 |
| | (0.9 | )% | | $ | 8,196.9 |
| | (5.0 | )% | | $ | 7,076.7 |
| | 4.2 | % |
The components and percentages are calculated as follows:
The foreign exchange impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $16,143.2$15,230.7 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($15,134.4($15,273.6 million less $16,143.2$15,230.7 million for the Total column).
Acquisitions, net of dispositionsAcquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquired businesses, lessacquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of any business that was disposed ofdispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the current period.table.
Organic growth is calculated by subtracting both the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($15,317.8($15,416.9 million for the Total column).
ForChanges in the year ended December 31, 2015, changes invalue of foreign exchange rates reduced revenue by 6.6%, or $1.0 billion, compared to 2014. Substantially all currencies have weakened against the U.S. Dollar with the most significant impacts resulting from the weakening of the Euro and British Pound, as well as the Australian Dollar, Brazilian Real, Canadian Dollar and Russian Ruble.
Ouraffect 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. However, forfinancial position. For the most part, because the revenue and expensesexpense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. Assuming exchange rates at February 8, 201612, 2018 remain unchanged, we expectestimate the impact of changes in foreign exchange rates to reduce 2016increase 2018 revenue by approximately 2.0%2%.
Revenue for 20152017 and the percentage change in revenue and organic growth from 20142016 in our principal regional markets were (in millions):
| | | | $ | | % Change | | % Organic Growth | 2017 | | 2016 | | $ Change | | % Change | | % Organic Growth |
| Americas: | | | | | | | | | | | | | | |
| North America | $ | 9,029.2 |
| | 4.1 | % | | 5.4 | % | $ | 8,686.0 |
| | $ | 9,174.0 |
| | $ | (488.0 | ) | | (5.3 | )% | | 0.6 | % |
| Latin America | 329.8 |
| | (25.0 | )% | | (3.3 | )% | 494.8 |
| | 423.6 |
| | 71.2 |
| | 16.8 | % | | 0.6 | % |
| EMEA: | | | | | | | | | | | | | | |
| Europe | 3,942.9 |
| | (9.3 | )% | | 4.9 | % | 4,127.9 |
| | 3,904.2 |
| | 223.7 |
| | 5.7 | % | | 7.0 | % |
| Middle East and Africa | 260.6 |
| | 1.7 | % | | 6.8 | % | 314.6 |
| | 278.9 |
| | 35.7 |
| | 12.8 | % | | 12.5 | % |
| Asia Pacific | 1,571.9 |
| | (2.0 | )% | | 7.9 | % | 1,650.3 |
| | 1,636.2 |
| | 14.1 |
| | 0.9 | % | | 5.8 | % |
| | $ | 15,134.4 |
| | (1.2 | )% | | 5.3 | % | $ | 15,273.6 |
| | $ | 15,416.9 |
| | $ | (143.3 | ) | | (0.9 | )% | | 3.0 | % |
Our primary markets in Europe comprisescomprise the U.K. and the Euro currency countries,Zone. In 2017, the U.K. comprised 9.1% of revenue and the Euro Zone and the other European countries that have not adoptedtogether comprised 17.9% of revenue. In 2017, revenue, including the European Union Monetary standard. In 2015, the percentageimpact of revenue attributed to the U.K. and to the Euro currency and other European countries was 10.0% and 16.1%, respectively. In 2015, revenue increased 0.2%foreign exchange rates, decreased 0.9% in the U.K. and revenue decreased 14.3%increased 9.4% in the Euro currencyZone and the other European countries.
In North America, moderatemodest growth in the United States and Canada was offset by the disposition of our specialty print media business in the second quarter. In Europe, growth in substantially all markets and the strengthening of the Euro against the U.S. Dollar was partially offset by the weakening of the Canadian DollarBritish Pound against the U.S. Dollar. In Europe, growth in the U.K., Germany and Spain was offset by the weakening of all major European currencies against the U.S. Dollar and negative performance in The Netherlands and France. The decreaseincrease in revenue in Latin America was a result of our acquisition activity in Colombia, growth in Mexico and the weakeningstrengthening of all currenciesthe Brazilian Real against the U.S. Dollar, which was substantially offset by the continued economic weakness in the regionBrazil and negative performance in Chile and Brazil, which offset strong growth in Mexico. In Brazil, the decline resulted from a difficult comparison to the prior year period, which included additional client spending related to the World Cup primarily in the second quarter of 2014, and a recent decline in economic conditions.that market. In Asia Pacific, strong growth in the major economiesmost countries in the region, especially Australia, India, Japan and Singapore, was partially offset by the weakening of the currencies in the region.disposition activity.
In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. The net change in 20152017 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with all of our clients. Our largest client represented 2.7% and 2.6%3.0% of revenue in 20152017 and 2014, respectively.2016. Our ten largest and 100 largest clients represented 17.9%19.6% and 52.3%50.5% of revenue in 2015,2017, respectively, and 18.1%18.3% and 50.4%52.4% of revenue in 2014,2016, 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,branding, content marketing, corporate social responsibility consulting, crisis communications, custom publishing, data analytics, database management,
digital / direct marketing, digital transformation, entertainment marketing, environmental design, experiential marketing, field marketing, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare marketing and communications, instore design, interactive marketing, investor relations, marketing research, media planning and buying, merchandising and point of sale, mobile marketing, multi-cultural marketing, non-profit marketing, organizational communications, outsource sales support, package design, product placement, promotional marketing, public affairs, public relations, reputation consulting, retail marketing, sales support, search engine marketing, shopper marketing, social media marketing and sports and event marketing.
In an effort to monitor the changing needs of our clients and to further expandbetter capture the expanded scope of our services, to key clients,in the fourth quarter of 2017, we monitor revenue acrossrealigned our service disciplines. As a broad rangeresult, our CRM discipline was grouped into two separate categories: CRM Consumer Experience, which includes Omnicom Precision Marketing Group’s digital / direct marketing agencies, as well as our branding agencies, shopper marketing agencies and our experiential marketing agencies; and, CRM Execution & Support, which includes field marketing, sales support, merchandising and point of disciplinessale, as well as other specialized marketing and group them into the following four categories: advertising, CRM, public relationscustom communications services. Also, we realigned and renamed our former specialty communications.communications discipline so that it now exclusively includes agencies offering healthcare marketing and communications services.
Revenue for 20152017 and 20142016 and the percentage change in revenue and organic growth from 20142016 by discipline were (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2015 vs. 2014 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change | | % Organic Growth |
| Advertising | $ | 7,730.2 |
| | 51.1 | % | | $ | 7,593.5 |
| | 49.6 | % | | $ | 136.7 |
| | 1.8 | % | | 9.3 | % |
| CRM | 4,958.2 |
| | 32.7 | % | | 5,254.4 |
| | 34.3 | % | | (296.2 | ) | | (5.6 | )% | | 1.9 | % |
| Public relations | 1,361.0 |
| | 9.0 | % | | 1,393.7 |
| | 9.1 | % | | (32.7 | ) | | (2.3 | )% | | (1.4 | )% |
| Specialty communications | 1,085.0 |
| | 7.2 | % | | 1,076.2 |
| | 7.0 | % | | 8.8 |
| | 0.8 | % | | 2.2 | % |
| | $ | 15,134.4 |
| | | | $ | 15,317.8 |
| | | | $ | (183.4 | ) | | (1.2 | )% | | 5.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2017 vs. 2016 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change | | % Organic Growth |
| Advertising | $ | 8,142.5 |
| | 53.3 | % | | $ | 8,194.5 |
| | 53.2 | % | | $ | (52.0 | ) | | (0.6 | )% | | 3.9 | % |
| CRM Consumer Experience | 2,664.3 |
| | 17.5 | % | | 2,751.1 |
| | 17.8 | % | | (86.8 | ) | | (3.2 | )% | | 0.8 | % |
| CRM Execution & Support | 2,155.6 |
| | 14.1 | % | | 2,191.4 |
| | 14.2 | % | | (35.8 | ) | | (1.6 | )% | | 4.0 | % |
| Public Relations | 1,376.6 |
| | 9.0 | % | | 1,374.8 |
| | 8.9 | % | | 1.8 |
| | 0.1 | % | | 0.3 | % |
| Healthcare | 934.6 |
| | 6.1 | % | | 905.1 |
| | 5.9 | % | | 29.5 |
| | 3.3 | % | | 2.8 | % |
| | $ | 15,273.6 |
| | | | $ | 15,416.9 |
| | | | $ | (143.3 | ) | | (0.9 | )% | | 3.0 | % |
We provide services to clients that operate in a number ofvarious industry sectors. The percentage of revenueRevenue by industry sector for 20152017 and 20142016 was:
| | | | | 2015 | | 2014 | 2017 | | 2016 |
| Food and Beverage | | 13 | % | | 13 | % | 13 | % | | 13 | % |
| Consumer Products | | 9 | % | | 9 | % | 10 | % | | 10 | % |
| Pharmaceuticals and Health Care | | 11 | % | | 10 | % | 12 | % | | 12 | % |
| Financial Services | | 7 | % | | 7 | % | 7 | % | | 7 | % |
| Technology | | 10 | % | | 9 | % | 9 | % | | 9 | % |
| Auto | | 8 | % | | 8 | % | 10 | % | | 8 | % |
| Travel and Entertainment | | 6 | % | | 6 | % | 6 | % | | 7 | % |
| Telecommunications | | 5 | % | | 5 | % | 5 | % | | 5 | % |
| Retail | | 6 | % | | 7 | % | 6 | % | | 6 | % |
| Other | | 25 | % | | 26 | % | 22 | % | | 23 | % |
Operating Expenses
Operating expenses for 20152017 compared to 20142016 were (in millions):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2015 vs. 2014 | 2017 | | 2016 | | 2017 vs. 2016 |
| | $ | | % of Revenue | | % of Total Operating Expenses | | $ | | % of Revenue | | % of Total Operating Expenses | | $ Change | | % Change | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| Revenue | $ | 15,134.4 |
| | | | | | $ | 15,317.8 |
| | | | | | $ | (183.4 | ) | | (1.2 | )% | $ | 15,273.6 |
| | | | $ | 15,416.9 |
| | | | $ | (143.3 | ) | | (0.9 | )% |
| Operating Expenses: | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
|
| Salary and service costs | 11,361.9 |
| | 75.1 | % | | 86.0 | % | | 11,350.0 |
| | 74.1 | % | | 84.9 | % | | 11.9 |
| | 0.1 | % | 11,249.7 |
| | 73.7 | % | | 11,440.6 |
| | 74.2 | % | | (190.9 | ) | | (1.7 | )% |
| Office and general expenses | 1,852.4 |
| | 12.2 | % | | 14.0 | % | | 2,023.7 |
| | 13.2 | % | | 15.1 | % | | (171.3 | ) | | (8.5 | )% | |
| Operating Expenses | 13,214.3 |
| | 87.3 | % | | | | 13,373.7 |
| | 87.3 | % | | | | (159.4 | ) | | (1.2 | )% | |
| Operating Income | $ | 1,920.1 |
| | 12.7 | % | | | | $ | 1,944.1 |
| | 12.7 | % | | | | $ | (24.0 | ) | | (1.2 | )% | |
| Occupancy and other costs | | 1,232.1 |
| | 8.1 | % | | 1,230.6 |
| | 8.0 | % | | 1.5 |
| | 0.1 | % |
| Cost of services | | 12,481.8 |
| | | | 12,671.2 |
| | | | (189.4 | ) | | |
| Selling, general and administrative expenses | | 450.0 |
| | 2.9 | % | | 443.9 |
| | 2.9 | % | | 6.1 |
| | 1.4 | % |
| Depreciation and amortization | | 282.1 |
| | 1.8 | % | | 292.9 |
| | 1.9 | % | | (10.8 | ) | | (3.7 | )% |
| | | 13,213.9 |
| | 86.5 | % | | 13,408.0 |
| | 87.0 | % | | (194.1 | ) | | (1.4 | )% |
| Operating Profit | | $ | 2,059.7 |
| | 13.5 | % | | $ | 2,008.9 |
| | 13.0 | % | | $ | 50.8 |
| | 2.5 | % |
Similar to revenue, operatingOperating expenses decreased $194.1 million, or 1.4%, in 20152017 compared to 2014 as a result of the weakening of substantially all foreign currencies against the U.S. Dollar.2016. Salary and service costs, which normally tend to fluctuate with changes in revenue, increased $11.9decreased $190.9 million, or 1.7%, in 20152017 compared to 2014, primarily reflecting increases related to changes in the mix of our business during the period. Office2016. Occupancy and general expenses,other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $171.3increased $1.5 million, or 0.1%, in 20152017 compared to 2014, reflecting the continuing effort by our agencies2016. SG&A expenses increased $6.1 million year-over-year primarily related to reduceprofessional fees. Operating profit increased $50.8 million year-over-year. As a result, operating costs.margin increased year-over-year to 13.5% from 13.0% and EBITA margin increased year-over-year to 14.2% from 13.8%.
Operating margins and EBITA margins were unchanged year-over-year at 12.7% and 13.4%, respectively. In 2014, we incurred $8.8 million of expenses in connection with the proposed merger with Publicis, which were primarily comprised of professional fees. On May 8, 2014, the proposed merger was terminated.
18
Net Interest Expense
Net interest expense increased $7.47.7 million year-over-year to $174.8 million in 2017. Interest expense increased $14.8 million to $141.5 million in 2015 from $134.1 million in 2014. Interest expense increased $3.9 million to $181.1$224.5 million in 2015,2017, primarily due to a reduced benefit from the fixed-to-floating interest rate swaps resulting from higher rates on the floating rate leg and higher interest expense on commercial paper. Our long-term debt portfolio at December 31, 2017, after taking into consideration our outstanding interest rate swaps, was approximately 75% fixed rate obligations and 25% floating rate obligations and was unchanged from December 31, 2016. A discussion of our interest rate swaps is included in Note 6 to the 2024 Notes, issued in October 2014,consolidated financial statements. In 2017, interest income increased $7.1 million compared to the prior year, resulting from higher interest earned on the cash held by our international treasury centers.
Income Taxes
Our effective tax rate for 2017 was 36.9% compared to 32.6% for 2016. The increase is attributable to the estimated impact of the Tax Act of $106.3 million partially offset by the benefit of the interest rate swaps on the 2022 Notes and 2020 Notes. Interest income decreased $3.5 million to $39.6 million in 2015 resulting from lower interest earned on cash balances in our international treasury centers and the negative impact of changes in foreign exchange rates.
In October 2015, we terminated the swap on the 2020 Notes and reduced the notional amount of the swap on the 2022 Notes to $1 billion. Additionally, we entered into a fixed-to-floating interest rate swap on the $750 million principal amount of the 2024 Notes. On January 19, 2016, we terminated the remaining $1.0 billion notional amount of the swap on the 2022 Notes.
Income Taxes
Our effective tax rate was unchanged at 32.8%. Income tax expense for 2014 reflects the recognition of an incomeexcess tax benefit from share-based compensation of approximately $11$20.8 million related to previously incurred expenses forresulting from the proposed merger with Publicis. On May 8, 2014, the proposed merger was terminated. Prioradoption of FASB ASU 2016-09 (see Note 1 to the terminationconsolidated financial statements). ASU 2016-09 requires that beginning in 2017 excess tax benefits and deficiencies arising from share-based compensation be recognized in results of operations in the period when the restricted stock awards vest or stock options are exercised. In prior years, excess tax benefits and deficiencies from share-based compensation were recorded in additional paid-in capital. The effect of the merger, the majority of the merger costs, which were incurred in 2013, were capitalized for income tax purposes and the related tax benefits were not recorded. Because the merger was terminated, the merger costs were no longer required to be capitalized for income tax purposes. Excluding the income tax benefit of $11 million related to the proposed merger,Tax Act on income tax expense for 2014 would have been $604.5 million. The decrease2017 is presented below in Results of Operations 2017 Compared to 2016. While we are still evaluating the impact of the Tax Act on our 2018 annual effective tax rate, for 2015 fromwe expect the Tax Act to reduce our effective tax rate for 2014 excludingbetween 3.5% and 4.5%, which excludes the incomeimpact of tax benefit related tobenefits or deficiencies on share-based compensation. At this point, we can not predict the proposed merger, is primarily due to a legal entity restructuring of our European operations. As a result of the reorganization, a certain portion of the foreign earnings in the affected countries2018 impact from share-based compensation because it is subject to lower effective tax rates.changes in our share price.
Net Income Per Common Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. for 2017 decreased $10.1$60.2 million, or 0.9%5.2%, to $1,093.9$1,088.4 million from $1,148.6 million in 2015 from $1,104.0 million in 2014.2016. The year-over-year decrease is due to the impact of the Tax Act of $106.3 million, which is partially offset by the after tax increase from the factors described above. Diluted net income per common share - Omnicom Group Inc. increased 4.0%decreased 2.7% to $4.41$4.65 in 2015,2017, compared to $4.24$4.78 in 2014 due to2016. The impact of the factors described above, as well asTax Act reduced diluted net income per share - Omnicom Group Inc. $0.45. In addition, the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock, net of shares issued for restricted stock awards, stock option exercises and shares issued under our employee stock purchase plan. Excludingplan improved diluted net income per share - Omnicom Group Inc in 2017 compared to 2016.
Effect of the netTax Act
The following table presents the effect of the merger, which includes theTax Act on income tax benefit of approximately $11 million,expense, net income - Omnicom Group Inc. and diluted earnings per share Omnicom Group Inc. (in millions):
|
| | | | | | | | | | | |
| | 2017 As Reported | | Effect of Tax Act | | 2017 Excluding Effect of Tax Act |
Income before income taxes and income from equity method investments | $ | 1,884.9 |
| | $ | — |
| | $ | 1,884.9 |
|
| Income tax expense | $ | 696.2 |
| | $ | 106.3 |
| | $ | 589.9 |
|
| Effective tax rate | 36.9 | % | | | | 31.3 | % |
| Net income - Omnicom Group Inc. | $ | 1,088.4 |
| | (106.3 | ) | | $ | 1,194.7 |
|
| Diluted net income per share - Omnicom Group Inc. | $ | 4.65 |
| | $ | (0.45 | ) | | $ | 5.10 |
|
Excluding the effect of the Tax Act from income tax expense, net income Omnicom Group Inc. and diluted net income per common share - Omnicom Group Inc. for 2014 were $1,101.4 million and $4.23, respectively.are Non-GAAP measures. We believe that these measures help investors understand the effect of the Tax Act on our reported results.
RESULTS OF OPERATIONS - 20142016 Compared to 20132015 (in millions):
| | | | 2014 | | 2013 | 2016 | | 2015 |
| Revenue | $ | 15,317.8 |
| | $ | 14,584.5 |
| $ | 15,416.9 |
| | $ | 15,134.4 |
|
| Operating Expenses: | | | | | | |
| Salary and service costs | 11,350.0 |
| | 10,724.4 |
| 11,440.6 |
| | 11,248.7 |
|
| Office and general expenses | 2,023.7 |
| | 2,034.8 |
| |
| Total Operating Expenses | 13,373.7 |
| | 12,759.2 |
| |
| Add back: Amortization of intangible assets | 107.1 |
| | 100.8 |
| |
| Occupancy and other costs | | 1,230.6 |
| | 1,242.7 |
|
| Cost of services | | 12,671.2 |
| | 12,491.4 |
|
| Selling, general and administrative expenses | | 443.9 |
| | 431.8 |
|
| Depreciation and amortization | | 292.9 |
| | 291.1 |
|
| | 13,266.6 |
| | 12,658.4 |
| 13,408.0 |
| | 13,214.3 |
|
| Earnings before interest, taxes and amortization of intangible assets (“EBITA”) | 2,051.2 |
| | 1,926.1 |
| |
| EBITA Margin - % | 13.4 | % | | 13.2 | % | |
| Deduct: Amortization of intangible assets | 107.1 |
| | 100.8 |
| |
| Operating Income | 1,944.1 |
| | 1,825.3 |
| |
| Operating Profit | | 2,008.9 |
| | 1,920.1 |
|
| Operating Margin - % | 12.7 | % | | 12.5 | % | 13.0 | % | | 12.7 | % |
| Interest Expense | 177.2 |
| | 197.2 |
| 209.7 |
| | 181.1 |
|
| Interest Income | 43.1 |
| | 32.8 |
| 42.6 |
| | 39.6 |
|
| Income Before Income Taxes and Income From Equity Method Investments. | 1,810.0 |
| | 1,660.9 |
| |
| Income Before Income Taxes and Income From Equity Method Investments | | 1,841.8 |
| | 1,778.6 |
|
| Income Tax Expense | 593.1 |
| | 565.2 |
| 600.5 |
| | 583.6 |
|
| Income From Equity Method Investments | 16.2 |
| | 15.9 |
| 5.4 |
| | 8.4 |
|
| Net Income | 1,233.1 |
| | 1,111.6 |
| 1,246.7 |
| | 1,203.4 |
|
| Net Income Attributed To Noncontrolling Interests | 129.1 |
| | 120.5 |
| 98.1 |
| | 109.5 |
|
| Net Income - Omnicom Group Inc. | $ | 1,104.0 |
| | $ | 991.1 |
| $ | 1,148.6 |
| | $ | 1,093.9 |
|
In 2014 and 2013, we incurred $8.8 million and $41.4 million of expenses in connection with the proposed merger with Publicis, which were primarily comprised of professional fees. On May 8, 2014, the proposed merger was terminated. Excluding the merger expenses, operating income and operating margin for 2014 and 2013 were $1,952.9 million and 12.7% and $1,866.7 million and 12.8%, respectively, andNon-GAAP Financial Measures
We use EBITA and EBITA margin for 2014 and 2013 were $2,060.0 million and 13.4% and $1,967.5 million and 13.5%, respectively. ExcludingMargin as additional operating performance measures that exclude the income tax effectnon-cash amortization expense of the merger expensesintangible assets, which primarily consists of $11.4 million in 2014 and $6.5 million in 2013, income tax expense was $604.5 million in 2014 and $571.7 million in 2013. Excluding the after-tax effectamortization of the merger expenses, net income - Omnicom Group Inc. was $1,101.4 million in 2014 and $1,026.0 million in 2013.
intangible assets arising from acquisitions. We define 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 financial measures. We userevenue. 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. GAAPare non-GAAP financial measure of Operating Income for the periods presented.measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our businesses. business.
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.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the for the periods presented (in millions):
|
| | | | | | | |
| | 2016 | | 2015 |
| Net Income - Omnicom Group Inc. | $ | 1,148.6 |
| | $ | 1,093.9 |
|
| Net Income Attributed To Noncontrolling Interests | 98.1 |
| | 109.5 |
|
| Net Income | 1,246.7 |
| | 1,203.4 |
|
| Income From Equity Method Investments | 5.4 |
| | 8.4 |
|
| Income Tax Expense | 600.5 |
| | 583.6 |
|
| Income Before Income Taxes and Income From Equity Method Investments | 1,841.8 |
| | 1,778.6 |
|
| Interest Expense | 209.7 |
| | 181.1 |
|
| Interest Income | 42.6 |
| | 39.6 |
|
| Operating Profit | 2,008.9 |
| | 1,920.1 |
|
| Add back: Amortization of intangible assets | 115.2 |
| | 109.3 |
|
| Earnings before interest, taxes and amortization of intangible assets (“EBITA”) | $ | 2,124.1 |
| | $ | 2,029.4 |
|
| | | | |
| Revenue | $ | 15,416.9 |
| | $ | 15,134.4 |
|
| EBITA | $ | 2,124.1 |
| | $ | 2,029.4 |
|
| EBITA Margin - % | 13.8 | % | | 13.4 | % |
Revenue
In 2014,2016, revenue increased $733.3$282.5 million or 5.0%, to $15,317.8$15,416.9 million from $14,584.5$15,134.4 million in 2013.2015. Changes in foreign exchange rates reduced revenue $112.6$283.8 million, acquisitionsacquisition revenue net of dispositionsdisposition revenue, increased revenue by $19.0$38.2 million and organic growth increased revenue $826.9$528.1 million.
The components of 2014 revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
| | | | Total | | Domestic | | International | Total | | Domestic | | International |
| | $ | | % | | $ | | % | | $ | | % | $ | | % | | $ | | % | | $ | | % |
| December 31, 2013 | $ | 14,584.5 |
| | | | $ | 7,569.7 |
| | | | $ | 7,014.8 |
| | | |
| December 31, 2015 | | $ | 15,134.4 |
| | | | $ | 8,526.7 |
| | | | $ | 6,607.7 |
| | |
| Components of revenue change: | | | |
| | | | |
| | | | |
| | | |
| | | | |
| | | | |
|
| Foreign exchange impact | (112.6 | ) | | (0.8 | )% | | — |
| | — | % | | (112.6 | ) | | (1.6 | )% | (283.8 | ) | | (1.9 | )% | | — |
| | — | % | | (283.8 | ) | | (4.3 | )% |
| Acquisitions, net of dispositions | 19.0 |
| | 0.1 | % | | (48.4 | ) | | (0.6 | )% | | 67.4 |
| | 1.0 | % | |
Acquisition revenue, net of disposition revenue | | 38.2 |
| | 0.3 | % | | (56.9 | ) | | (0.7 | )% | | 95.1 |
| | 1.4 | % |
| Organic growth | 826.9 |
| | 5.7 | % | | 664.6 |
| | 8.8 | % | | 162.3 |
| | 2.3 | % | 528.1 |
| | 3.5 | % | | 158.0 |
| | 1.9 | % | | 370.1 |
| | 5.6 | % |
| December 31, 2014 | $ | 15,317.8 |
| | 5.0 | % | | $ | 8,185.9 |
| | 8.1 | % | | $ | 7,131.9 |
| | 1.7 | % | |
| December 31, 2016 | | $ | 15,416.9 |
| | 1.9 | % | | $ | 8,627.8 |
| | 1.2 | % | | $ | 6,789.1 |
| | 2.7 | % |
The components and percentages are calculated as follows:
The foreign exchange impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $15,430.4$15,700.7 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($15,317.815,416.9 million less $15,430.4$15,700.7 million for the Total column).
Acquisitions, net of dispositionsAcquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquired businesses, lessacquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of any business that was disposed ofdispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the current period.table.
Organic growth is calculated by subtracting both the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($14,584.5($15,134.4 million for the Total column).
For the year ended December 31, 2014,In 2016, changes in foreign exchange rates continued to negatively impact revenue but at a more moderate rate as compared to 2015. The impact of foreign exchange rates in 2016 reduced revenue by 0.8%1.9%, or $112.6 million, compared to 2013. The most significant impacts resulted from$283.8 million. While a number of currencies weakened against the weakening of several currencies,U.S. Dollar, including the Australian Dollar, Brazilian Real, Canadian Dollar Japanese Yen,and Russian Ruble, and South African Rand, against the U.S. Dollar. This was partially offset bymost significant impact resulted from the strengtheningweakening of the British Pound against the U.S. Dollar.Pound.
Revenue and organic growth for 20142016 and the percentage change in revenue and organic growth from 20132015 in our principal regional markets were (in millions):
| | | | $ | | % Change | | % Organic Growth | 2016 | | 2015 | | $ Change | | % Change | | % Organic Growth |
| Americas: | | | | | | | | | | | | | | |
| North America | $ | 8,672.0 |
| | 6.3 | % | | 7.3 | % | $ | 9,174.0 |
| | $ | 9,029.2 |
| | $ | 144.8 |
| | 1.6 | % | | 2.4 | % |
| Latin America | 439.7 |
| | 0.5 | % | | 5.7 | % | 423.6 |
| | 329.8 |
| | 93.8 |
| | 28.4 | % | | (0.8 | )% |
| EMEA: | | | | | | | | | | | | | | |
| Europe | 4,346.4 |
| | 4.3 | % | | 2.6 | % | 3,904.2 |
| | 3,942.9 |
| | (38.7 | ) | | (1.0 | )% | | 4.3 | % |
| Middle East and Africa | 256.1 |
| | 7.2 | % | | 10.1 | % | 278.9 |
| | 260.6 |
| | 18.3 |
| | 7.0 | % | | 11.7 | % |
| Asia Pacific | 1,603.6 |
| | 1.5 | % | | 4.6 | % | 1,636.2 |
| | 1,571.9 |
| | 64.3 |
| | 4.1 | % | | 6.9 | % |
| | $ | 15,317.8 |
| | 5.0 | % | | 5.7 | % | $ | 15,416.9 |
| | $ | 15,134.4 |
| | $ | 282.5 |
| | 1.9 | % | | 3.5 | % |
Our primary markets in Europe comprisescomprise the U.K. and the Euro currency countries,Zone. In 2016, the U.K. comprised 9.1% of revenue and the Euro Zone and the other European countries that have not adopted the European Union Monetary standard.together comprised 16.2% of revenue. In 2014, the percentage of2016, revenue attributed to the U.K. and to the Euro currency and other European countries was 9.8% and 18.5%, respectively. In 2014, revenue increased 13.1%decreased 6.8% in the U.K. and revenue increased 0.1%2.6% in the Euro currencyZone and the other European countries.
In North America, moderate growth in the United States and strong growth in Canada was partially offset by the weakening of the Canadian Dollar against the U.S. Dollar. In Europe, growth in the U.K., Spain, Russia and Italy was offset by the weakening of the British Pound and Russian Ruble against the U.S. Dollar and negative performance in the Netherlands. The increase in revenue in Latin America was a result of our acquisition activity in Brazil, which was partially offset by the weakening of most currencies in the region against the U.S. Dollar, especially the Brazilian Real. The continuing uncertainty in the economic and political climate in Brazil resulted in organic revenue declines that partially offset the growth from our acquisition and also overshadowed strong growth in Mexico. In Asia Pacific, growth in the major economies in the region was also partially offset by the weakening of most currencies in the region against the U.S. Dollar.
20
In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. The net change in 20142016 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with all of our clients. Our largest client represented 2.6%3.0% and 2.7% of our revenue in 20142016 and 2013,2015, respectively. Our ten largest and 100 largest clients represented 18.1%18.3% and 50.4%52.4% of revenue in 2014,2016, respectively, and 19.1%17.9% and 51.3%52.3% of revenue in 2013,2015, respectively.
Revenue for 20142016 and 20132015 and the percentage change in revenue and organic growth from 20132015 by discipline were (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2014 vs. 2013 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change | | % Organic Growth |
| Advertising | $ | 7,593.5 |
| | 49.6 | % | | $ | 7,026.1 |
| | 48.2 | % | | $ | 567.4 |
| | 8.1 | % | | 9.1 | % |
| CRM | 5,254.4 |
| | 34.3 | % | | 5,166.6 |
| | 35.4 | % | | 87.8 |
| | 1.7 | % | | 1.9 | % |
| Public relations | 1,393.7 |
| | 9.1 | % | | 1,327.4 |
| | 9.1 | % | | 66.3 |
| | 5.0 | % | | 4.1 | % |
| Specialty communications | 1,076.2 |
| | 7.0 | % | | 1,064.4 |
| | 7.3 | % | | 11.8 |
| | 1.1 | % | | 3.1 | % |
| | $ | 15,317.8 |
| | | | $ | 14,584.5 |
| | | | $ | 733.3 |
| | 5.0 | % | | 5.7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2016 vs. 2015 |
| | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change | | % Organic Growth |
| Advertising | $ | 8,194.7 |
| | 53.2 | % | | $ | 7,824.5 |
| | 51.7 | % | | $ | 370.2 |
| | 4.7 | % | | 5.9 | % |
| CRM Consumer Experience | 2,750.9 |
| | 17.8 | % | | 2,772.5 |
| | 18.3 | % | | (21.6 | ) | | (0.8 | )% | | 1.8 | % |
| CRM Execution & Support | 2,191.4 |
| | 14.2 | % | | 2,359.7 |
| | 15.6 | % | | (168.3 | ) | | (7.1 | )% | | (3.4 | )% |
| Public Relations | 1,374.8 |
| | 8.9 | % | | 1,329.1 |
| | 8.8 | % | | 45.7 |
| | 3.4 | % | | 2.8 | % |
| Healthcare | 905.1 |
| | 5.9 | % | | 848.6 |
| | 5.6 | % | | 56.5 |
| | 6.7 | % | | 7.6 | % |
| | $ | 15,416.9 |
| | | | $ | 15,134.4 |
| | | | $ | 282.5 |
| | 1.9 | % | | 3.5 | % |
We provide services to clients that operate in a number ofvarious industry sectors. The percentage of revenueRevenue by industry sector for 20142016 and 20132015 was:
| | | | | 2014 | | 2013 | | 2016 | | 2015 |
| Food and Beverage | | 13 | % | | 13 | % | | 13 | % | | 13 | % |
| Consumer Products | | 9 | % | | 10 | % | | 10 | % | | 10 | % |
| Pharmaceuticals and Health Care | | 10 | % | | 10 | % | | 12 | % | | 11 | % |
| Financial Services | | 7 | % | | 7 | % | | 7 | % | | 7 | % |
| Technology | | 9 | % | | 10 | % | | 9 | % | | 10 | % |
| Auto | | 8 | % | | 8 | % | | 8 | % | | 8 | % |
| Travel and Entertainment | | 6 | % | | 5 | % | | 7 | % | | 6 | % |
| Telecommunications | | 5 | % | | 6 | % | | 5 | % | | 5 | % |
| Retail | | 7 | % | | 6 | % | | 6 | % | | 6 | % |
| Other | | 26 | % | | 25 | % | | 23 | % | | 24 | % |
Operating Expenses
Operating expenses for 20142016 compared to 20132015 were (in millions):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2014 vs. 2013 | 2016 | | 2015 | | 2016 vs. 2015 |
| | $ | | % of Revenue | | % of Total Operating Expenses | | $ | | % of Revenue | | % of Total Operating Expenses | | $ Change | | % Change | $ | | % of Revenue | | $ | | % of Revenue | | $ Change | | % Change |
| Revenue | $ | 15,317.8 |
| | | | | | $ | 14,584.5 |
| | | | | | $ | 733.3 |
| | 5.0 | % | $ | 15,416.9 |
| | | | $ | 15,134.4 |
| | | | $ | 282.5 |
| | 1.9 | % |
| Operating Expenses: | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
|
| Salary and service costs | 11,350.0 |
| | 74.1 | % | | 84.9 | % | | 10,724.4 |
| | 73.5 | % | | 84.1 | % | | 625.6 |
| | 5.8 | % | 11,440.6 |
| | 74.2 | % | | 11,248.7 |
| | 74.3 | % | | 191.9 |
| | 1.7 | % |
| Office and general expenses | 2,023.7 |
| | 13.2 | % | | 15.1 | % | | 2,034.8 |
| | 14.0 | % | | 15.9 | % | | (11.1 | ) | | (0.5 | )% | |
| Operating Expenses | 13,373.7 |
| | 87.3 | % | | |
| | 12,759.2 |
| | 87.5 | % | | |
| | 614.5 |
| | 4.8 | % | |
| Operating Income | $ | 1,944.1 |
| | 12.7 | % | | |
| | $ | 1,825.3 |
| | 12.5 | % | | |
| | $ | 118.8 |
| | 6.5 | % | |
| Occupancy and other costs | | 1,230.6 |
| | 8.0 | % | | 1,242.7 |
| | 8.2 | % | | (12.1 | ) | | (1.0 | )% |
| Cost of services | | 12,671.2 |
| | | | 12,491.4 |
| | | | | | |
| Selling, general and administrative expenses | | 443.9 |
| | 2.9 | % | | 431.8 |
| | 2.9 | % | | 12.1 |
| | 2.8 | % |
| Depreciation and amortization | | 292.9 |
| | 1.9 | % | | 291.1 |
| | 1.9 | % | | 1.8 |
| | 0.6 | % |
| | | 13,408.0 |
| | 87.0 | % | | 13,214.3 |
| | 87.3 | % | | 193.7 |
| | 1.5 | % |
| Operating Profit | | $ | 2,008.9 |
| | 13.0 | % | | $ | 1,920.1 |
| | 12.7 | % | | $ | 88.8 |
| | 4.6 | % |
Operating expenses increased 1.5% in 2016 compared to 2015. Salary and service costs, which tend to fluctuate with changes in revenue, increased $625.6$191.9 million, or 1.7%, in 20142016 compared to 2013 reflecting growth in revenue2015. Occupancy and increases related to changes in the mix of our business during the period, including increased use of freelance labor. Office and general expenses,other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $11.1$12.1 million, or 1.0%, in 20142016 compared to 2013.
In 20142015, principally resulting from our ongoing efforts to leverage scale and 2013, weenhance efficiency. SG&A expenses increased $12.1 million year-over-year primarily related to professional fees incurred $8.8 million and $41.4 million, respectively, of expenses in connection with the proposed merger with Publicis, which were primarily comprised of professional fees. On May 8, 2014, the proposed merger was terminated.
Operating marginsour acquisition activities. As a result, operating margin in 20142016 increased to 13.0% from 12.7% from 12.5% in 20132015 and EBITA margins in 2014margin increased year-over-year to 13.4%13.8% from 13.2% in 201313.4%. Excluding the merger expenses from both years, operating income and operating margins for 2014 and 2013 were $1,952.9 million and 12.7% and $1,866.7 million and 12.8%, respectively, and EBITA and EBITA margins for 2014 and 2013 were $2,060.0 million and 13.4% and $1,967.5 million and 13.5%, respectively.
Net Interest Expense
Net interest expense decreased $30.3increased $25.6 millionyear-over-year to$167.1 million in 2016. Interest expense increased $28.6 million to $134.1$209.7 million in 20142016, primarily resulting from $164.4 million in 2013. In October 2014, we issued $750 million principal amountthe reduced benefit of the 2024 Notes and in September 2014, we entered into a fixed-to-floating interest rate swap on the 20202022 Notes. In 2014, the benefit from the swap on the 2020 Notes substantially offsetJanuary 2016, we settled the interest expense on the 2024 Notes. Interest expense for 2014 decreased $20.0 million to $177.2 million, primarily resulting from the benefit from therate swap on the 2022 Notes and we were able to lock interest savings over the remaining term of the 2022 Notes by reducing the effective rate to 2.7% from 3.5%. Concurrent with the issuance of $1.4 billion principal amount of 3.60% Notes due 2026 in April 2016, we entered into in May 2014. Thea $500 million fixed-to-floating interest rate swap on the notes. Our long-term debt portfolio at December 31, 2016, after taking into consideration our outstanding interest rate swaps, have the economic effect of converting the 2022 Notes and the 2020 Notes fromwas approximately 75% fixed rate obligations toand 25% floating rate obligations.obligations as compared to 61% fixed rate and 39% floating rate at December 31, 2015 and, as a result, in 2016 there was less floating rate benefit from the interest rate swaps. A discussion of our interest rate swaps is included in Note 6 to the consolidated financial statements. Interest income increased $10.3 million to $43.13.0 million in 2014 resulting from our cash management efforts and interest earned on2016 compared to the prior year, as a result of higher cash balances in our international treasury centers.centers available for investment.
Income Taxes
Our effective tax rate decreasedfor 2016 was 32.6% compared to 32.8% in 2014 from 34.0% in 2013. Income taxes for 2014 and 2013 reflect the recognition of an income tax benefit of $11.4 million and $6.5 million, respectively, related to expenses incurred in connection with the proposed merger with Publicis. Prior to the termination of the proposed merger on May 8, 2014, the majority of the merger costs were capitalized for income tax purposes and the related tax benefits were not recorded. Because the proposed merger was terminated, the merger costs were no longer required to be capitalized for income tax purposes. Excluding the income tax effect of the merger expenses from both years, income tax expense for 2014 and 2013 would have been $604.5 million and $571.7 million, respectively.2015.
Net Income Per Common Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. increased $112.9$54.7 million,, or 11.4%5.0%, to $1,104.0$1,148.6 million in 20142016 from $991.1$1,093.9 million in 2013.2015. The year-over-year decrease in net income - Omnicom Group Inc.increase is due to the factors described above. Diluted net income per common share - Omnicom Group Inc. increased 14.3%8.4% to $4.24$4.78 in 2014,2016, compared to $3.71$4.41 in 20132015 due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock, net of shares issued for the conversion of the Convertible Notes due 2032, or 2032 notes,restricted stock awards and stock option exercises and shares issued under our employee stock purchase plan. In the second quarter of 2014, following the termination of the proposed merger with Publicis, we resumed repurchases of our common stock. Excluding the after-tax effect of the merger expenses from both years, net income - Omnicom Group Inc. for 2014 and 2013 was $1,101.4 million and $1,026.0 million, respectively, and diluted net income per common share - Omnicom Group Inc. was $4.23 and $3.84, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources and Requirements
Our primary source of liquidity issources are our operating cash flow. In addition to ourflow, cash and cash equivalents additionaland short-term investments. Additional liquidity sources include our credit facilities and commercial paper program, and access to the commercial paper market, ourcapital markets. At December 31, 2017, we have a $2.5 billion revolving credit facility, or Credit Facility, expiring on July 31, 2021, uncommitted domestic and international credit lines aggregating $1.2 billion and accessthe ability to the capital markets. These sourcesissue up to $2 billion of commercial paper. Our liquidity fundfunds our non-discretionary cash requirements and our discretionary spending.
Working capital is our principal non-discretionary funding requirement. In addition, we have contractual obligations related to our senior notes, including the repayment of the $1 billion 5.9% Senior Notes due April 15, 2016, or 2016 Notes, recurring business operations, primarily related to lease obligations, and contingent purchase price obligations (earn-outs) from prior acquisitions. Our principal discretionary cash spending includes dividend payments to common shareholders, capital expenditures, strategic acquisitions and repurchases of our common stock. WeAs a result, we typically have a short-term borrowing requirement normally peaking during the second quarter of the year primarily due to the timing of payments for incentive compensation, income taxes and contingent purchase price obligations.
Based on past performance and current expectations, we believe that our operating cash flow will be sufficient to meet our non-discretionary cash requirements, excluding the repayment of the 2016 Notes, and our discretionary spending through 2016. Our cash and cash equivalents, access to the commercial paper market, Credit Facility, uncommitted credit lines and access to the capital markets provide additional sources of liquidity, as well as providing funding for the repayment of the 2016 Notes.next twelve months.
Our cashCash and cash equivalents increased $217.1$793.8 million to $2.6 billion atfrom December 31, 2015, from $2.4 billion at December 31, 2014.2016. The components of the increase for 2015 are (in millions):were:
| | Sources | Sources | Sources |
| Cash flow from operations | | | | $ | 2,172.3 |
| | | $ | 2,023.9 |
|
| Deduct increase in operating capital | | | | (557.6 | ) | |
| Less: Increase in operating capital | | | | (348.5 | ) |
| Principal cash sources | | | | 1,614.7 |
| | | 1,675.4 |
|
Uses | | Capital expenditures | | $ | (202.7 | ) | | | $ | (156.0 | ) | | |
| Dividends paid to common shareholders | | (496.7 | ) | | | (515.2 | ) | | |
| Dividends paid to shareholders of noncontrolling interests | | (129.4 | ) | | | |
| Dividends paid to noncontrolling interest shareholders | | (101.7 | ) | | |
| Acquisition payments, including payment of contingent purchase price obligations and acquisition of additional noncontrolling interests, net of cash acquired | | (149.6 | ) | | | (84.8 | ) | | |
| Repurchases of common stock, net of proceeds from stock plans and tax benefits. | | (680.2 | ) | | | |
| Repurchases of common stock, net of proceeds from stock plans | | (557.7 | ) | | |
| Principal cash uses | | | | (1,658.6 | ) | | | (1,415.4 | ) |
| Principal cash uses in excess of principal cash sources | | | | (43.9 | ) | |
| Principal cash sources in excess of principal cash uses | | | | 260.0 |
|
| Foreign exchange rate changes | | | | (262.6 | ) | | | 227.9 |
|
| Financing activities and other | | | | (34.0 | ) | | | (42.6 | ) |
| Increase in operating capital | | | | 557.6 |
| | | 348.5 |
|
| Increase in cash and cash equivalents | | | | $ | 217.1 |
| | | $ | 793.8 |
|
Principal cash sources and principal cash uses amounts are Non-GAAP financialliquidity 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 consolidated statement of cash flows. We believe that this presentation is meaningful to understand the primary sources and uses of our cash flow and the effect on our cash and cash equivalents. Non-GAAP financialliquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financialliquidity 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
Our regional treasury centers in North America, Europe and Asia which are structured as wholly owned finance subsidiaries, manage our cash and liquidity. 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 issue up to a total of $2 billion of U.S. Dollar-denominated commercial paper or borrow under the Credit Facility or the uncommitted credit lines. This process enables us to manage our debt more efficiently and utilize our cash more effectively, as well as manage our risk to foreign exchange rate changes.imbalances. In countries where we either do not conduct treasury operations or it is not feasible for one of our treasury centers to fund net borrowing requirements on an intercompany basis, we arrange for local currency uncommitted credit lines.
We have policiesa policy governing counterparty credit risk with financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to the Credit Facility. These institutions generally have credit ratings equal to or better than our credit ratings. In countries where we do not conduct treasury operations, all cash and cash equivalents are held by counterparties that meet specific minimum credit standards.
At December 31, 2017, our foreign subsidiaries held approximately $937 million of our total cash and cash equivalents of $3.8 billion. The majority of the cash is available to us, net of any foreign withholding taxes payable upon repatriation to the United States. See Note 10 to the consolidated financial statements for additional information.
Our net debt position, which we define as total debt, outstandingincluding short-term debt, less cash and cash equivalents and short-term investments, decreased $208.3 millionat December 31, 2015,2017 decreased $798.2 million as compared to December 31, 2014, primarily2016. The decrease in net debt is due to an increase in cash and cash equivalents and short-term investments resultingof $773.6 million primarily arising from an increase in operating capital of $557.6$348.5 million, partially offset by a decreasean increase in foreign cash balances of $262.6 million from the translation of local currencies to U.S. Dollars and principal cash usessources in excess of principal cash sourcesuses of $43.9$260.0 million as described above. and the favorable impact of foreign exchange rate changes on cash and cash equivalents of $227.9 million.
The components of net debt at December 31, 20152017 and 20142016 were (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Debt: | | | |
| Short-term debt | $ | 5.2 |
| | $ | 7.2 |
|
| 5.9% Senior Notes due 2016 | 1,000.0 |
| | 1,000.0 |
|
| 6.25% Senior Notes due 2019 | 500.0 |
| | 500.0 |
|
| 4.45% Senior Notes due 2020 | 1,000.0 |
| | 1,000.0 |
|
| 3.625% Senior Notes due 2022 | 1,250.0 |
| | 1,250.0 |
|
| 3.65% Senior Notes due 2024 | 750.0 |
| | 750.0 |
|
| Other debt | 0.3 |
| | 0.5 |
|
| Unamortized premium (discount) on senior notes, net | 10.1 |
| | 11.1 |
|
| Debt issuance costs | (16.9 | ) | | (20.5 | ) |
| Adjustment to carrying value for interest rate swaps | 72.1 |
| | 51.4 |
|
| Total debt | 4,570.8 |
| | 4,549.7 |
|
| Cash and cash equivalents and short-term investments | (2,619.7 | ) | | (2,390.3 | ) |
| Net debt | $ | 1,951.1 |
| | $ | 2,159.4 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Short-term debt | $ | 11.8 |
| | $ | 28.7 |
|
| Long-term debt, including current portion | 4,912.9 |
| | 4,920.6 |
|
| Total debt | 4,924.7 |
| | 4,949.3 |
|
| Cash and cash equivalents and short-term investments | 3,796.4 |
| | 3,022.8 |
|
| Net debt | $ | 1,128.3 |
| | $ | 1,926.5 |
|
Net debt is a Non-GAAP financialliquidity measure. This presentation, together with the comparable U.S. GAAP liquidity measures, reflects one of the key metrics we useused by us to assess our cash management performance.management. Non-GAAP financialliquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with USU.S. GAAP. Non-GAAP financialliquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies.
At December 31, 2015, our foreign subsidiaries held approximately $1.4 billion of our total cash and cash equivalents of $2.6 billion. The majority of the 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.
Debt Instruments and Related Covenants
At December 31, 2015, as a source2017, the total principal amount of short-term financing, we have a $2.5 billion Credit Facility, which expires on July 31, 2020, domestic and international uncommitted credit lines aggregating $1.2our fixed rate senior notes was $4.9 billion and we can issue upthe total notional amount of the outstanding fixed-to-floating interest rate swaps was $1.25 billion. The interest rate swaps have the economic effect of converting our long-term debt portfolio to $2 billionapproximately 75% fixed rate obligations and 25% floating rate obligations. A discussion of commercial paper.
The Credit Facility containsour interest rate swaps is included in Note 6 to the consolidated financial covenants that require us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA of no more than 3 times for the most recently ended 12-month period (EBITDA is defined as earnings before interest, taxes, depreciation and amortization) and an 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, 2015, we were in compliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 12.2 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.statements.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under all the senior notes. The senior notes are a joint and several liability of us and OCI and we unconditionally guarantee OCI’s obligations with respect to the senior 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 are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
On March 26, 2015,
The Credit Facility contains financial covenants that require us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA of no more than 3 times for the most recently ended 12-month period (EBITDA is defined as earnings before interest, taxes, depreciation and amortization) and an 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, 2017, we were in connectioncompliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 10.4 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
At December 31, 2017, our long-term and short-term debt was rated BBB+ and A2 by S&P and Baa1 and P2 by Moody's. Our access to the maturitycommercial paper market and the cost of these borrowings are affected by our 2016 Notes, we entered into a $1.0 billion forward-starting interest rate swap. The swap mitigates the riskcredit ratings and market conditions. Our senior notes and Credit Facility do not contain provisions that require acceleration of changescash payments in the semi-annual interest payments from inception to May 2, 2016, the contractual termination date of the swap, and effectively locks in the fixed interest rate, excluding the effect ofevent our credit spread, on any refinancing at 2.32%. In October 2015, we terminated the interest rate swap on the 2020 Notes and reduced the notional amount of the interest rate swap on the 2022 Notes to $1.0 billion. Additionally, in October 2015, we entered into a fixed-to-floating interest rate swap on the $750 million principal amount of our 2024 Notes. On January 19, 2016, we terminated the remaining $1.0 billion notional amount of the swap on the 2022 Notes. A complete discussion of our interest rate swaps is included in Note 6 to the consolidated financial statements.ratings are downgraded.
Credit Markets and Availability of Credit
We typically fund our day-to-day liquidity by issuing commercial paper. As an additional source of funding, we may borrow under theAdditional liquidity sources include our Credit Facility or the uncommitted credit lines. At December 31, 2015,2017, there were no outstanding commercial paper issuances or borrowings under the Credit Facility or the uncommitted credit lines.
Commercial paper activity for the three years ended December 31, 20152017 was (dollars in millions):
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Average amount outstanding during the year | $ | 964.8 |
| | $ | 909.0 |
| | $ | 471.7 |
|
| Maximum amount outstanding during the year | $ | 1,720.7 |
| | $ | 1,795.8 |
| | $ | 1,027.5 |
|
| Total issuances during the year | $ | 26,615.5 |
| | $ | 18,539.9 |
| | $ | 11,786.9 |
|
| Average days outstanding | 13.2 |
| | 20.3 |
| | 14.6 |
|
| Weighted average interest rate | 0.46 | % | | 0.29 | % | | 0.33 | % |
Our access to the commercial paper market and the cost of these borrowings are affected by our credit ratings and market conditions. S&P rates our long-term and short-term debt BBB+ and A2, respectively, and Moody’s rates our long-term and short-term debt Baa1 and P2, respectively. Our outstanding senior notes and Credit Facility do not contain provisions that require acceleration of cash payments in the event our debt credit ratings are downgraded. |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Average amount outstanding during the year | $ | 902.3 |
| | $ | 861.3 |
| | $ | 964.8 |
|
| Maximum amount outstanding during the year | $ | 1,769.8 |
| | $ | 1,608.9 |
| | $ | 1,720.7 |
|
| Average days outstanding | 13.0 |
| | 11.2 |
| | 13.2 |
|
| Weighted average interest rate | 1.29 | % | | 0.70 | % | | 0.46 | % |
We expect to continue funding our day-to-day liquidity by issuing commercial paper. However, disruptions in the credit markets may lead to periods of illiquidity in the commercial paper market and higher credit spreads. To mitigate any future disruption in the credit markets and to fund our liquidity, we may borrow under the Credit Facility or access the capital markets if favorable conditions exist. We will continue to monitor closely our liquidity and conditions in the credit markets. We cannot predict with any certainty the impact on us of any future disruptions in the credit markets. In such circumstances, we may need to obtain additional financing to fund our day-to-day working capital requirements. Such additional financing may not be available on favorable terms, or at all.
Contractual Obligations and Other Commercial Commitments
In the normal course of business we enter into numerous contractual and commercial undertakings. The following tables should be read in conjunction with our consolidated financial statements.
Contractual obligations at December 31, 20152017 were (in millions):
| | | | | | Obligation Due | | | Obligation Due |
| | Total Obligation | | 2016 | | 2017 - 2018 | | 2019 - 2020 | | After 2020 | Total Obligation | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | After 2022 |
| Long-term debt: | | | | | | | | | | | | | | | | | | |
| Principal | $ | 4,500.3 |
| | $ | 1,000.3 |
| | $ | — |
| | $ | 1,500.0 |
| | $ | 2,000.0 |
| $ | 4,900.0 |
| | $ | — |
| | $ | 1,500.0 |
| | $ | 1,250.0 |
| | $ | 2,150.0 |
|
| Interest | 862.5 |
| | 165.6 |
| | 296.9 |
| | 234.6 |
| | 165.4 |
| 966.2 |
| | 198.8 |
| | 335.4 |
| | 216.0 |
| | 216.0 |
|
| Lease obligations | 1,444.3 |
| | 323.4 |
| | 420.9 |
| | 277.8 |
| | 422.2 |
| 1,805.1 |
| | 347.3 |
| | 498.1 |
| | 332.6 |
| | 627.1 |
|
| Contingent purchase price obligations | | 215.6 |
| | 92.6 |
| | 47.2 |
| | 75.8 |
| | — |
|
| Transition tax liability on accumulated foreign earnings | | 102.9 |
| | 8.2 |
| | 16.5 |
| | 16.5 |
| | 61.7 |
|
| Deferred tax liability - convertible debt | 197.3 |
| | 65.8 |
| | 131.5 |
| | — |
| | — |
| 41.4 |
| | 41.4 |
| | — |
| | — |
| | — |
|
| Contingent purchase price obligations | 322.0 |
| | 81.5 |
| | 214.8 |
| | 25.7 |
| | — |
| |
| Defined benefit pension plans benefit obligation | 234.8 |
| | 8.5 |
| | 17.7 |
| | 22.0 |
| | 186.6 |
| 277.0 |
| | 9.7 |
| | 23.1 |
| | 32.9 |
| | 211.3 |
|
| Postemployment arrangements benefit obligation | 115.9 |
| | 9.3 |
| | 16.4 |
| | 12.0 |
| | 78.2 |
| 127.7 |
| | 9.3 |
| | 14.0 |
| | 12.6 |
| | 91.8 |
|
| Uncertain tax positions | 113.0 |
| | 18.7 |
| | 28.3 |
| | 66.0 |
| | — |
| 173.7 |
| | 24.3 |
| | 44.7 |
| | 65.7 |
| | 39.0 |
|
| | $ | 7,790.1 |
| | $ | 1,673.1 |
| | $ | 1,126.5 |
| | 2,138.1 |
| | $ | 2,852.4 |
| $ | 8,609.6 |
| | $ | 731.6 |
| | $ | 2,479.0 |
| | $ | 2,002.1 |
| | $ | 3,396.9 |
|
Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which that are recorded as a liability at the acquisition date fair value. Subsequent changes in the fair value of the liability are recorded in our results of operations.
The Tax Act includes a transition tax on accumulated foreign earnings. After taking into consideration available foreign tax credits and other items, we recorded a net cash liability of $102.9 million. We will elect to pay the liability over an eight-year period. See Note 10 to the consolidated financial statements for additional information.
The unfunded benefit obligation for our defined benefit pension plans and liability for our postemployment arrangements was $281.8$324.4 million at December 31, 2015.2017. In 2015,2017, we contributed $4.2$8.3 million to our defined benefit pension plans and paid $8.7$8.8 million in benefits for our postemployment arrangements. We do not expect these payments to increase significantly in 2016.2018.
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.
Commercial commitments at December 31, 20152017 were (in millions):
| | | | | | Commitment Expires | | | Commitment Expires |
| | Total
Commitment | | 2016 | | 2017 - 2018 | | 2019 - 2020 | | After 2020 | Total
Commitment | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | After 2022 |
| Standby letters of credit | $ | 7.8 |
| | $ | 6.4 |
| | $ | 0.8 |
| | $ | — |
| | $ | 0.6 |
| $ | 5.3 |
| | $ | 2.2 |
| | $ | — |
| | $ | 2.0 |
| | $ | 1.1 |
|
| Guarantees | 93.4 |
| | 62.2 |
| | 26.0 |
| | 2.6 |
| | 2.6 |
| 130.3 |
| | 62.7 |
| | 60.5 |
| | 2.9 |
| | 4.2 |
|
| | $ | 101.2 |
| | $ | 68.6 |
| | $ | 26.8 |
| | $ | 2.6 |
| | $ | 3.2 |
| $ | 135.6 |
| | $ | 64.9 |
| | $ | 60.5 |
| | $ | 4.9 |
| | $ | 5.3 |
|
At December 31, 2015,2017, there were no significant off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We manage our exposure to foreign exchange and interest rate risk through various strategies, including the use of derivative financial instruments. We use forward foreign exchange contracts as economic hedges to manage the cash flow volatility arising from foreign exchange rate fluctuations. Additionally, weWe use interest rate swaps to manage our interest expense and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. We do not use derivative instrumentsderivatives for trading or speculative purposes. Utilizing derivative instrumentsUsing derivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. To mitigateWe manage that risk through careful selection and ongoing evaluation of the counterparty credit risk, we have a policy of only entering into derivative 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.derivatives. We periodically determine the potential loss from market risk on our derivative instrumentsderivatives by performing a value-at-risk, or VaR, analysis. VaR is a statistical model that utilizesuses 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 change in the net fair value of our derivative financial instruments at December 31, 20152017 was not significant.
Foreign Exchange Risk
Our international operations represent approximately 46% of our revenue. Changes in the value of foreign currencies against the U.S. Dollar affect 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.financial position. For the most part, because the revenue and expensesexpense of our foreign operations are both denominated in the same local currency, which minimizes the economic impact on our operating margin.margin is minimized. The effects of currency exchange transactions on our results of operations are discussed in Note 2 to the consolidated financial statements.
Our international operations represent approximately 44% of our revenue.
While our major international markets include the European Union,Euro Zone, the United Kingdom, Australia, Brazil, Canada, China and Japan, our agencies transact business in more than 50 different currencies.
As an integral part of our global treasury operations, we centralize our cash and use multicurrency pools to manage the foreign exchange risk that arises from imbalances between subsidiaries and their respective treasury centers from which they borrow or invest funds. However, in certain circumstances, subsidiaries borrowborrowing or investinvesting with a treasury center operating in a different currency. At December 31, 2015,currency creates foreign exchange exposure. To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $22.1$92.8 million to manage the foreign exchange risk associated with these activities.and $99.0 million at December 31, 2017 and 2016, respectively. Additionally, there are circumstances where revenue and expense transactions are not denominated in the same currency. In these instances, amounts are either promptly settled or hedged with forward foreign exchange contracts. At December 31, 2015,To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $85.9$136.3 million to manage and $94.0 million at December 31, 2017 and 2016, respectively. The net fair value of the forward foreign exchange riskcontracts at December 31, 2017 and 2016 was a current asset of these activities.$0.9 million and a current liability of $1.1 million, respectively.
Foreign currency derivative instrumentsderivatives are designated as economic hedges; therefore, any gain or loss in fair value incurred on those instruments is generally offset by decreases or increases in the fair value of the underlying exposures. 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. The terms of our forward foreign exchange contracts are generally less than 90 days.
Interest Rate Risk
We use interest rate swaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. Based on market conditions, we may terminate the swaps to reduce our exposure to rising interest rates or to monetize any gain and lock in a reduction in interest expense over the term of the underlying debt. At December 31, 2015, the total aggregate principal amount of our fixed rate senior notes was $4.5 billion and2017, the total notional amount of the outstanding fixed-to-floating interest rate swaps was $1.75$1.25 billion. The interest rate swaps have the economic effect of converting our long-term debt portfolio to 61%approximately 75% fixed rate obligations and 39%25% floating rate obligations. On January 19, 2016, we terminated the remaining $1.0 billion notional amount of the swap on the 2022 Notes, reducing the outstanding notional amount of the swaps to $750 million.
Also, we are exposed to interest rate volatility on future debt issuances. To manage this risk, we use forward-starting interest rate swaps to lock in the interest rate on future debt issuances. At December 31, 2015, the total notional amount of the forward-starting interest rate swaps was $1.0 billion. Upon settlement of the swap, any gain or loss on the effective portion of the swap will be amortized to interest expense over the term of the new debt or will be recorded in results of operations if the refinancing is not completed.
A complete discussion of our interest rate swaps is included in Note 6 to the consolidated financial statements.
Credit Risk
We provide advertising, marketing and corporate communications services to several thousand clients whothat operate in nearly every industry sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client accounted for 2.7%represented 3.0% of revenue in 2015.2017. However, during periods of economic downturn, the credit profiles of our clients could change.
In the normal course of business, our agencies enter into contractual commitments with media providers and production companies on behalf of our clients at levels that can substantially exceed the revenue from our services. These commitments are included in accounts payable when the services are delivered by the media providers or production companies. If permitted by local law and the client agreement, many of our agencies purchase media and production services for our clients as an agent for a disclosed principal. In addition, while operating practices vary by country, media type and media vendor, in the United States and certain foreign markets, many of our agencies’ contracts with media and production providers specify that our agencies are not liable to the media and production providers under the theory of sequential liability until and to the extent we have been paid by our client for the media or production services.
Where purchases of media and production services are made by our agencies as a principal or are not subject to the theory of sequential liability, the risk of a material loss as a result of payment default by our clients could increase significantly and such a loss could have a material adverse effect on our business, results of operations and financial position.
In addition, our methods of managing the risk of payment default, including obtaining credit insurance, requiring payment in advance, mitigating the potential loss in the marketplace or negotiating with media providers, may be less available or unavailable during a severe economic downturn.
Item 8. Financial Statements and Supplementary Data
See Item 15, “Exhibits, Financial Statement Schedules.”
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within applicable time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is accumulated and communicated to management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate to allow timely decisions regarding required disclosure. Management, including our CEO and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015.2017. Based on that evaluation, our CEO and CFO concluded that, as of December 31, 2015,2017, our disclosure controls and procedures are effective to ensure that decisions can be made timely with respect to required disclosures, as well as ensuring that the recording, processing, summarization and reporting of information required to be included in our Annual Report on Form 10-K for the year ended December 31, 20152017 are appropriate.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, with the participation of our CEO, CFO and our agencies, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our CEO and CFO concluded that our internal control over financial reporting was effective as of December 31, 2015.2017. There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
KPMG LLP, an independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on Omnicom’s internal control over financial reporting as of December 31, 2015,2017, dated February 9, 2016,15, 2018, which is included on page F-3F-2 of this 20152017 10-K.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding Executive Officers of the Registrant is included in Part I, Item 1, “Business.” Additional information called for by this Item, to the extent not included in this document, is incorporated herein by reference to the information to be included under the captions “Corporate Governance,” “Items To Be Voted On - Item“Item 1 - Election of Directors,” “Additional“Stock Ownership Information - Section 16(a) Beneficial Ownership Reporting Compliance” and “Shareholder“Additional Information - Shareholder Proposals and Director Nominations For The 20172019 Annual Meeting” in our definitive proxy statement, or Proxy Statement, which is expected to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015, or our Proxy Statement.2017.
Item 11. Executive Compensation
The information called for by this Item is incorporated herein by reference to the information to be included under the captions “Executive Compensation,” “Directors'“Item 1 - Election of Directors - Directors' Compensation For Fiscal 2015”2017” and “Corporate Governance“Item 1 - Election of Directors - Board Processes - Compensation Committee Interlocks and Insider Participation” in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by this Item is incorporated herein by reference to the information to be included under the captions “Equity“Stock Ownership Information - Beneficial Ownership of Certain Beneficial Owners and Management” and “Stock Ownership Information - Equity Compensation Plans” and “Stock Ownership” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by this Item is incorporated herein by reference to the information to be included under the captions “Additional Information - Transactions with Related Persons” and “Corporate Governance“Item 1 - Election of Directors - Omnicom Board Composition”of Directors” in our Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information called for by this Item is incorporated herein by reference to the information to be included under the caption “Audit Related Matters“Item 3 - Ratification of the Appointment of Independent Auditors - Fees Paid to Independent Auditors” in our Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
| | |
| (a)(1) | Financial Statements: | Page |
| | | |
| | | |
| | | |
| | | |
| Consolidated Balance Sheets at December 31, 20152017 and 20142016 | |
| | Consolidated Statements of Income for the Three Years Ended December 31, 20152017 | |
| | Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 20152017 | |
| | Consolidated Statements of Equity for the Three Years Ended December 31, 20152017 | |
| | Consolidated Statements of Cash Flows for the Three Years Ended December 31, 20152017 | |
| | | |
| | Selected Quarterly Financial Data (Unaudited) | |
| | | |
| (a)(2) | Financial Statement Schedules: | |
| | Schedule II - Valuation and Qualifying Accounts for the Three Years Ended December 31, 20152017 | |
| | |
| | All other schedules are omitted because they are not applicable. | |
|
| |
| (a)(3) | Exhibits: |
Exhibit Number | Description |
| 3(i) | |
| | |
| 3(ii) | |
| |
4.1 | Form of Senior Debt Securities Indenture (Exhibit 4.1 to our Registration Statement on Form S-3 (Registration No. 333-132625) dated March 22, 2006 and incorporated herein by reference). |
| |
4.2 | First Supplemental Indenture to the Form of the Senior Debt Securities Indenture, dated as of March 29, 2006, among Omnicom Group Inc., Omnicom Capital Inc., Omnicom Finance Inc. and JPMorgan Chase Bank, N.A., as trustee, in connection with our issuance of $1 billion 5.9% Notes due14, 2016 (Exhibit 4.23.1 to our Current Report on Form 8-K (File No. 1-10551) dated March 29, 2006 (“March 29, 2006 8-K”)15, 2016 and incorporated herein by reference). |
| | |
4.34.1 | Second Supplemental Indenture to the Form of the Senior Debt Securities Indenture, dated as of July 20, 2012, among Omnicom Group Inc., Omnicom Capital Inc. and Deutsche Bank Trust Company Americas, as trustee, (Exhibit 4.3 to our Current Report on Form 8-K (File No. 1-10551) dated July 20, 2012 (“July 20,2012 8-K”) and incorporated herein by reference). |
| |
4.4 | Form of 5.9% Notes due 2016 (Exhibit 4.3 to the March 29, 2006 8-K and incorporated herein by reference). |
| |
4.5 | |
| | |
4.64.2 | |
| | |
4.74.3 | |
| | |
4.84.4 | |
| | |
4.94.5 | |
| | |
4.104.6 | |
| | |
4.114.7 | |
| | |
4.124.8 | |
| | |
4.134.9 | |
| | |
4.144.10 | |
|
| |
4.154.11 | |
| | |
4.164.12 | |
| | |
| 4.13 | |
| |
| 4.14 | |
|
| |
| 10.1 | Amended and Restated Five Year Credit Agreement, dated as of July 31, 2014, by and among Omnicom Capital Inc., Omnicom Finance plc, Omnicom Group Inc., the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, HSBC Securities (USA) Inc. and Wells Fargo Securities, LLC as lead arrangers and book managers, JPMorgan Chase Bank, N.A., HSBC Securities (USA) Inc. and Wells Fargo Bank, National Association, as syndication agents, BNP Paribas and U.S. Bank National Association, as documentation agents, and Citibank, N.A., as administrative agent for the lenders (Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-10551) filed on August 1, 2014 and incorporated herein by reference). |
| | |
| 10.2 | Instrument of Resignation, Appointment and Acceptance, dated October 5, 2006, among Omnicom Group Inc., Omnicom Capital Inc., Omnicom Finance Inc., JPMorgan Chase Bank, N.A. and Deutsche Bank Trust Company Americas (Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-10551) dated October 11, 2006 and incorporated herein by reference). |
| |
10.3 | |
| | |
10.410.3 | |
| | |
10.510.4 | Standard form of the Director Indemnification Agreement (Exhibit 10.25 to our Annual Report on Form 10-K (File No. 1-10551) for the year ended December 31, 1989 and incorporated herein by reference). |
| | |
10.610.5 | Equity Incentive Plan (Exhibit 4.3 to our Registration Statement on Form S-8 (Registration No. 333-108063) dated August 18, 2003 and incorporated herein by reference). |
| |
10.7 | |
| | |
10.810.6 | |
| | |
10.910.7 | |
| | |
10.1010.8 | |
| | |
10.1110.9 | |
| | |
10.1210.10 | Director Compensation and Deferred Stock Program (Exhibit 10.13 to the 2012 10-K and incorporated herein by reference). |
| |
10.13 | |
| | |
10.1410.11 | |
| | |
10.1510.12 | |
| | |
10.1610.13 | |
|
| |
10.1710.14 | |
| | |
10.1810.15 | |
| | |
10.1910.16 | |
| | |
10.2010.17 | |
| | |
10.2110.18 | |
| | |
10.2210.19 | Separation Agreement |
|
| |
| 12 | |
| | |
| 21 | |
| | |
| 23 | |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32 | |
| | |
| 101 | Interactive Data File.Files. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | | OMNICOM GROUP INC. |
February 9, 201615, 2018 | BY: | /s/ PHILIP J. ANGELASTRO |
| | | Philip J. Angelastro Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | |
| Signature | Title | Date |
| | | |
/s/ BRUCE CRAWFORD | Chairman and Director | February 9, 201615, 2018 |
| Bruce Crawford | | |
| | | |
/s/ JOHN D. WREN | Chief Executive Officer and President and Director (Principal Executive Officer) | February 9, 201615, 2018 |
| John D. Wren | | |
| | | |
/s/ PHILIP J. ANGELASTRO | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 9, 201615, 2018 |
| Philip J. Angelastro | | |
| | | |
/s/ ANDREW L. CASTELLANETA | Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) | February 9, 201615, 2018 |
| Andrew L. Castellaneta | | |
| | | |
/s/ ALAN R. BATKIN | Director | February 9, 201615, 2018 |
| Alan R. Batkin | | |
| | | |
/s/ MARY C. CHOKSI | Director | February 9, 201615, 2018 |
| Mary C. Choksi | | |
| | | |
/s/ ROBERT CHARLES CLARK | Director | February 9, 201615, 2018 |
| Robert Charles Clark | | |
| | | |
/s/ LEONARD S. COLEMAN, JR. | Director | February 9, 201615, 2018 |
| Leonard S. Coleman, Jr. | | |
| | |
/s/ ERROL M. COOK
| Director | February 9, 2016 |
Errol M. Cook | | |
| | | |
/s/ SUSAN S. DENISON | Director | February 9, 201615, 2018 |
| Susan S. Denison | | |
| | | |
/s/ MDICHAELEBORAH A. HJ. KENNINGISSIRE | Director | February 9, 201615, 2018 |
Michael A. HenningDeborah J. Kissire | | |
| | |
/s/ GRACIA C. MARTORE | Director | February 15, 2018 |
| Gracia C. Martore | | |
| | | |
/s/ JOHN R. MURPHY | Director | February 9, 201615, 2018 |
| John R. Murphy | | |
| | | |
/s/ JOHN R. PURCELL | Director | February 9, 201615, 2018 |
| John R. Purcell | | |
| | | |
/s/ LINDA JOHNSON RICE | Director | February 9, 201615, 2018 |
| Linda Johnson Rice | | |
| | | |
/s/ GARYV L. RALERIEMOUBOS. WILLIAMS | Director | February 9, 201615, 2018 |
Gary L. RoubosValerie M. Williams | | |
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for the preparation of the consolidated financial statements and related information of Omnicom Group Inc. (“Omnicom”). Management uses its best judgment to ensure that the consolidated financial statements present fairly, in all material respects, Omnicom’s consolidated financial position and results of operations in conformity with generally accepted accounting principles in the United States.
The financial statements have been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board. Their report expresses the independent accountant’s judgment as to the fairness of management’s reported financial position, results of operations and cash flows. This judgment is based on the procedures described in the second paragraphfourth and fifth paragraphs of their report.
Omnicom management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Management, with the participation of our Chief Executive Officer, or CEO, Chief Financial Officer, or CFO, and our agencies, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our CEO and CFO concluded that our internal control over financial reporting was effective as of December 31, 2015.2017. There have not been any changes in our internal control over financial reporting during our fourth fiscal quarter that have materially affected or are reasonably likely to affect our internal control over financial reporting.
KPMG LLP, an independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on Omnicom’s internal control over financial reporting as of December 31, 2015,2017, dated February 9, 2016.15, 2018.
The Board of Directors of Omnicom has an Audit Committee comprised of fivesix independent directors. The Audit Committee meets periodically with financial management, Internal Audit and the independent auditors to review accounting, control, audit and financial reporting matters.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors and Shareholders of
Omnicom Group Inc.:
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Omnicom Group Inc. and subsidiaries (the “Company”) as of December 31, 20152017 and 2014, and2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 20152017. In connection with our audits of, and the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statementsrelated notes and financial statement schedule areII (collectively, the responsibility“consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.Treadway Commission.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Omnicom Group Inc. and subsidiaries as of December 31, 20152017 and 2014,2016, and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended December 31, 2015,2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule on page S-1, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,Company maintained, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Omnicom Group Inc. and subsidiaries'effective internal control over financial reporting as of December 31, 2015,2017, based on criteria established in Internal Control -Integrated Framework (2013) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 9, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.Commission.
Basis for Opinions
/s/ KPMG LLP
New York, New York
February 9, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Omnicom Group Inc.:
We have audited Omnicom Group Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying ManagementManagement’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit.
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Omnicom Group Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Omnicom Group Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 9, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
New York, New York
February 9, 201615, 2018
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| | | | December 31, | December 31, |
| | 2015 | | 2014 | 2017 | | 2016 |
| ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | $ | 2,605.2 |
| | $ | 2,388.1 |
| $ | 3,796.0 |
| | $ | 3,002.2 |
|
| Short-term investments, at cost | 14.5 |
| | 2.2 |
| 0.4 |
| | 20.6 |
|
| Accounts receivable, net of allowance for doubtful accounts of $22.5 and $24.9 | 7,220.9 |
| | 6,524.7 |
| |
| Accounts receivable, net of allowance for doubtful accounts of $32.1 and $24.9 | | 8,083.8 |
| | 7,510.8 |
|
| Work in process | 1,122.7 |
| | 1,166.6 |
| 1,110.6 |
| | 1,125.4 |
|
| Other current assets | 1,017.2 |
| | 998.1 |
| 1,125.2 |
| | 1,063.0 |
|
| Total Current Assets | 11,980.5 |
| | 11,079.7 |
| 14,116.0 |
| | 12,722.0 |
|
| Property and Equipment at cost, less accumulated depreciation of $1,206.6 and $1,221.2 | 692.7 |
| | 708.0 |
| |
| Property and Equipment at cost, less accumulated depreciation of $1,279.2 and $1,233.4 | | 690.9 |
| | 674.8 |
|
| Equity Method Investments | 136.6 |
| | 148.2 |
| 120.3 |
| | 120.4 |
|
| Goodwill | 8,676.4 |
| | 8,822.2 |
| 9,337.5 |
| | 8,976.1 |
|
| Intangible Assets, net of accumulated amortization of $680.7 and $611.4 | 344.8 |
| | 389.4 |
| |
| Intangible Assets, net of accumulated amortization of $879.9 and $777.6 | | 368.4 |
| | 427.4 |
|
| Other Assets | 279.7 |
| | 280.9 |
| 298.1 |
| | 244.7 |
|
| TOTAL ASSETS | $ | 22,110.7 |
| | $ | 21,428.4 |
| $ | 24,931.2 |
| | $ | 23,165.4 |
|
| LIABILITIES AND EQUITY | | | | | | |
| Current Liabilities: | | | | | | |
| Accounts payable | $ | 9,812.0 |
| | $ | 8,797.5 |
| $ | 11,574.6 |
| | $ | 10,476.7 |
|
| Customer advances | 1,283.5 |
| | 1,180.9 |
| 1,266.7 |
| | 1,186.6 |
|
| Current portion of debt | 1,001.4 |
| | 0.4 |
| — |
| | 0.1 |
|
| Short-term debt | 5.2 |
| | 7.2 |
| 11.8 |
| | 28.7 |
|
| Taxes payable | 319.1 |
| | 301.1 |
| 330.0 |
| | 349.6 |
|
| Other current liabilities | 1,798.4 |
| | 1,774.0 |
| 1,925.8 |
| | 1,969.2 |
|
| Total Current Liabilities | 14,219.6 |
| | 12,061.1 |
| 15,108.9 |
| | 14,010.9 |
|
| Long-Term Debt | 3,564.2 |
| | 4,542.1 |
| 4,912.9 |
| | 4,920.5 |
|
| Long-Term Liabilities | 800.5 |
| | 774.3 |
| 1,091.2 |
| | 892.3 |
|
| Long-Term Deferred Tax Liabilities | 469.1 |
| | 543.9 |
| |
| Commitments and Contingent Liabilities (See Note 16) |
| |
|
| |
| Deferred Tax Liabilities | | 483.6 |
| | 480.5 |
|
| Commitments and Contingent Liabilities (Note 16) | |
| |
|
|
| Temporary Equity - Redeemable Noncontrolling Interests | 167.9 |
| | 185.7 |
| 182.4 |
| | 201.6 |
|
| Equity: | | | | | | |
| Shareholders’ Equity: | | | | | | |
| Preferred stock, $1.00 par value, 7.5 million shares authorized, none issued | — |
| | — |
| — |
| | — |
|
| Common stock, $0.15 par value, 1.0 billion shares authorized, 397.2 million shares issued, 239.7 million and 246.7 million shares outstanding | 59.6 |
| | 59.6 |
| |
| Common stock, $0.15 par value, 1.0 billion shares authorized, 297.2 million shares issued, 230.1 million and 234.7 million shares outstanding | | 44.6 |
| | 44.6 |
|
| Additional paid-in capital | 859.9 |
| | 818.6 |
| 828.3 |
| | 798.3 |
|
| Retained earnings | 10,178.2 |
| | 9,576.9 |
| 6,210.6 |
| | 5,677.2 |
|
| Accumulated other comprehensive income (loss) | (1,015.4 | ) | | (618.2 | ) | (963.0 | ) | | (1,356.0 | ) |
| Treasury stock, at cost, 157.5 million and 150.5 million shares | (7,629.9 | ) | | (6,986.9 | ) | |
| Treasury stock, at cost, 67.1 million and 62.5 million shares | | (3,505.4 | ) | | (3,002.1 | ) |
| Total Shareholders’ Equity | 2,452.4 |
| | 2,850.0 |
| 2,615.1 |
| | 2,162.0 |
|
| Noncontrolling interests | 437.0 |
| | 471.3 |
| 537.1 |
| | 497.6 |
|
| Total Equity | 2,889.4 |
| | 3,321.3 |
| 3,152.2 |
| | 2,659.6 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 22,110.7 |
| | $ | 21,428.4 |
| $ | 24,931.2 |
| | $ | 23,165.4 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Revenue | $ | 15,134.4 |
| | $ | 15,317.8 |
| | $ | 14,584.5 |
| $ | 15,273.6 |
| | $ | 15,416.9 |
| | $ | 15,134.4 |
|
| Operating Expenses | 13,214.3 |
| | 13,373.7 |
| | 12,759.2 |
| |
| Operating Expenses: | | | | | | |
| Salary and service costs | | 11,249.7 |
| | 11,440.6 |
| | 11,248.7 |
|
| Occupancy and other costs | | 1,232.1 |
| | 1,230.6 |
| | 1,242.7 |
|
| Cost of services | | 12,481.8 |
| | 12,671.2 |
| | 12,491.4 |
|
| Selling, general and administrative expenses | | 450.0 |
| | 443.9 |
| | 431.8 |
|
| Depreciation and amortization | | 282.1 |
| | 292.9 |
| | 291.1 |
|
| | | | | | | 13,213.9 |
| | 13,408.0 |
| | 13,214.3 |
|
| Operating Income | 1,920.1 |
| | 1,944.1 |
| | 1,825.3 |
| |
| | | | | | | |
| Operating Profit | | 2,059.7 |
| | 2,008.9 |
| | 1,920.1 |
|
| Interest Expense | 181.1 |
| | 177.2 |
| | 197.2 |
| 224.5 |
| | 209.7 |
| | 181.1 |
|
| Interest Income | 39.6 |
| | 43.1 |
| | 32.8 |
| 49.7 |
| | 42.6 |
| | 39.6 |
|
| | | | | | | |
| Income Before Income Taxes and Income From Equity Method Investments | 1,778.6 |
| | 1,810.0 |
| | 1,660.9 |
| 1,884.9 |
| | 1,841.8 |
| | 1,778.6 |
|
| Income Tax Expense | 583.6 |
| | 593.1 |
| | 565.2 |
| 696.2 |
| | 600.5 |
| | 583.6 |
|
| Income From Equity Method Investments | 8.4 |
| | 16.2 |
| | 15.9 |
| 3.5 |
| | 5.4 |
| | 8.4 |
|
| Net Income | 1,203.4 |
| | 1,233.1 |
| | 1,111.6 |
| 1,192.2 |
| | 1,246.7 |
| | 1,203.4 |
|
| Net Income Attributed To Noncontrolling Interests | 109.5 |
| | 129.1 |
| | 120.5 |
| 103.8 |
| | 98.1 |
| | 109.5 |
|
| Net Income - Omnicom Group Inc. | $ | 1,093.9 |
| | $ | 1,104.0 |
| | $ | 991.1 |
| $ | 1,088.4 |
| | $ | 1,148.6 |
| | $ | 1,093.9 |
|
| | | | | | | | | | | |
| Net Income Per Share - Omnicom Group Inc.: | | | | | | | | | | |
| Basic | $ | 4.43 |
| | $ | 4.27 |
| | $ | 3.73 |
| $ | 4.68 |
| | $ | 4.80 |
| | $ | 4.43 |
|
| Diluted | $ | 4.41 |
| | $ | 4.24 |
| | $ | 3.71 |
| $ | 4.65 |
| | $ | 4.78 |
| | $ | 4.41 |
|
| | | | | | | | | | | |
| Dividends Declared Per Common Share | $ | 2.00 |
| | $ | 1.90 |
| | $ | 1.60 |
| $ | 2.25 |
| | $ | 2.15 |
| | $ | 2.00 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net Income | $ | 1,192.2 |
| | $ | 1,246.7 |
| | $ | 1,203.4 |
|
| Other Comprehensive Income (Loss): | | | | | |
| Cash flow hedge: | | | | | |
| Loss for the period | — |
| | (48.9 | ) | | (5.6 | ) |
| Amortization of loss included in interest expense | 5.3 |
| | 4.0 |
| | — |
|
| Income tax effect | (2.1 | ) | | 18.7 |
| | 2.3 |
|
| | 3.2 |
| | (26.2 | ) | | (3.3 | ) |
| Defined benefit pension plans and postemployment arrangements: | | | | | |
| Unrecognized actuarial losses and prior service cost for the period | (12.2 | ) | | (18.3 | ) | | (7.8 | ) |
| Amortization of prior service cost and actuarial losses included in periodic benefit expense | 16.1 |
| | 14.0 |
| | 14.8 |
|
| Income tax effect | (1.7 | ) | | 1.6 |
| | (2.8 | ) |
| | 2.2 |
| | (2.7 | ) | | 4.2 |
|
| Available-for-sale securities: | | | | | |
| Unrealized gain for the period | 0.8 |
| | 0.2 |
| | 0.4 |
|
| Income tax effect | (0.3 | ) | | (0.1 | ) | | (0.1 | ) |
| | 0.5 |
| | 0.1 |
| | 0.3 |
|
| | | | | | |
| Foreign currency translation adjustment | 412.7 |
| | (319.4 | ) | | (427.2 | ) |
| Other Comprehensive Income (Loss) | 418.6 |
| | (348.2 | ) | | (426.0 | ) |
| Comprehensive Income | 1,610.8 |
| | 898.5 |
| | 777.4 |
|
| Comprehensive Income Attributed To Noncontrolling Interests | 129.4 |
| | 90.5 |
| | 80.7 |
|
| Comprehensive Income - Omnicom Group Inc. | $ | 1,481.4 |
| | $ | 808.0 |
| | $ | 696.7 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEEQUITY
Three Years Ended December 31, 2017
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Omnicom Group Inc. | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | |
Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Par Value | | | | | |
| Balance as of December 31, 2014 | 397.2 |
| | $ | 59.6 |
| | $ | 818.6 |
| | $ | 9,576.9 |
| | $ | (618.2 | ) | | $ | (6,986.9 | ) | | $ | 2,850.0 |
| | $ | 471.3 |
| | $ | 3,321.3 |
|
| Net income | | | | | | | 1,093.9 |
| | | | | | 1,093.9 |
| | 109.5 |
| | 1,203.4 |
|
| Other comprehensive income (loss) | | | | | | | | | (397.2 | ) | | | | (397.2 | ) | | (28.8 | ) | | (426.0 | ) |
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (129.4 | ) | | (129.4 | ) |
| Acquisition of noncontrolling interests | | | | | (38.8 | ) | | | | | | | | (38.8 | ) | | (24.2 | ) | | (63.0 | ) |
| Increase in noncontrolling interests from business combinations | | | | |
| | | | | | | | | | 38.6 |
| | 38.6 |
|
| Change in temporary equity |
| | | | 11.9 |
| | |
| | | | | | 11.9 |
| | |
| | 11.9 |
|
| Common stock dividends declared ($2.00 per share) | | | | | | | (492.6 | ) | | | | | | (492.6 | ) | | | | (492.6 | ) |
| Share-based compensation | | | | | 99.4 |
| | | | | | | | 99.4 |
| | | | 99.4 |
|
| Stock issued, share-based compensation | | | | | (31.2 | ) | | | | | | 84.5 |
| | 53.3 |
| | | | 53.3 |
|
| Common stock repurchased | | | | | | | | | | | (727.5 | ) | | (727.5 | ) | | | | (727.5 | ) |
| Balance as of December 31, 2015 | 397.2 |
| | 59.6 |
| | 859.9 |
| | 10,178.2 |
| | (1,015.4 | ) | | (7,629.9 | ) | | 2,452.4 |
| | 437.0 |
| | 2,889.4 |
|
| Net income | | | | | | | 1,148.6 |
| | | | | | 1,148.6 |
| | 98.1 |
| | 1,246.7 |
|
| Other comprehensive income (loss) | | | | | | | | | (340.6 | ) | | | | (340.6 | ) | | (7.6 | ) | | (348.2 | ) |
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (87.2 | ) | | (87.2 | ) |
| Acquisition of noncontrolling interests | | | | | (87.7 | ) | | | | | | | | (87.7 | ) | | (16.0 | ) | | (103.7 | ) |
| Increase in noncontrolling interests from business combinations | | | | | | | | | | | | | | | 73.3 |
| | 73.3 |
|
| Change in temporary equity | | | | | (33.0 | ) | | | | | | | | (33.0 | ) | | | | (33.0 | ) |
| Common stock dividends declared ($2.15 per share) | | | | | | | (513.9 | ) | | | | | | (513.9 | ) | | | | (513.9 | ) |
| Share-based compensation | | | | | 93.4 |
| | | | | | | | 93.4 |
| | | | 93.4 |
|
| Stock issued, share-based compensation | | | | | (34.3 | ) | | | | | | 79.3 |
| | 45.0 |
| | | | 45.0 |
|
| Common stock repurchased | | | | | | | | | | | (602.2 | ) | | (602.2 | ) | | | | (602.2 | ) |
| Treasury stock retired | (100.0 | ) | | (15.0 | ) | | | | (5,135.7 | ) | | | | 5,150.7 |
| | — |
| | | | — |
|
| Balance as of December 31, 2016 | 297.2 |
| | 44.6 |
| | 798.3 |
| | 5,677.2 |
| | (1,356.0 | ) | | (3,002.1 | ) | | 2,162.0 |
| | 497.6 |
| | 2,659.6 |
|
| Cumulative effect of accounting changes | | | | | 4.5 |
| | (31.6 | ) | | | | | | (27.1 | ) | | — |
| | (27.1 | ) |
| Net income | | | | | | | 1,088.4 |
| | | | | | 1,088.4 |
| | 103.8 |
| | 1,192.2 |
|
| Other comprehensive income (loss) | | | | | | | | | 393.0 |
| | | | 393.0 |
| | 25.6 |
| | 418.6 |
|
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (101.7 | ) | | (101.7 | ) |
| Acquisition of noncontrolling interests | | | | | (25.7 | ) | | | | | | | | (25.7 | ) | | (8.2 | ) | | (33.9 | ) |
| Increase in noncontrolling interests from business combinations | | | | | | | | | | | | | | | 20.0 |
| | 20.0 |
|
| Change in temporary equity | | | | | 27.1 |
| | | | | | | | 27.1 |
| | | | 27.1 |
|
| Common stock dividends declared ($2.25 per share) | | | | | | | (523.4 | ) | | | | | | (523.4 | ) | |
|
| | (523.4 | ) |
| Share-based compensation | | | | | 80.2 |
| | | | | | | | 80.2 |
| |
|
| | 80.2 |
|
| Stock issued, share-based compensation | | | | | (56.1 | ) | | | | | | 65.1 |
| | 9.0 |
| |
|
| | 9.0 |
|
| Common stock repurchased | | | | | | | | | | | (568.4 | ) | | (568.4 | ) | |
|
| | (568.4 | ) |
| Balance as of December 31, 2017 | 297.2 |
| | $ | 44.6 |
| | $ | 828.3 |
| | $ | 6,210.6 |
| | $ | (963.0 | ) | | $ | (3,505.4 | ) | | $ | 2,615.1 |
| | $ | 537.1 |
| | $ | 3,152.2 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Net Income | $ | 1,203.4 |
| | $ | 1,233.1 |
| | $ | 1,111.6 |
|
| Unrealized gain (loss) on cash flow hedge, net of income taxes of ($2.3) | (3.3 | ) | | — |
| | — |
|
| Unrealized gain (loss) on available-for-sale securities, net of income taxes of $0.1 and $0.2 and $0.2 for 2015, 2014 and 2013, respectively | 0.3 |
| | 0.4 |
| | 0.4 |
|
| Foreign currency translation adjustment, net of income taxes of ($220.0) and ($227.9) and ($62.3) for 2015, 2014 and 2013, respectively | (427.2 | ) | | (442.4 | ) | | (120.6 | ) |
| Defined benefit pension and postemployment plans adjustment, net of income taxes of $2.8 and ($15.5) and $14.1 for 2015, 2014 and 2013, respectively | 4.2 |
| | (23.3 | ) | | 21.0 |
|
| Other Comprehensive Income (Loss) | (426.0 | ) | | (465.3 | ) | | (99.2 | ) |
| Comprehensive Income | 777.4 |
| | 767.8 |
| | 1,012.4 |
|
| Comprehensive Income Attributed To Noncontrolling Interests | 80.7 |
| | 90.4 |
| | 83.4 |
|
| Comprehensive Income - Omnicom Group Inc. | $ | 696.7 |
| | $ | 677.4 |
| | $ | 929.0 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net income | $ | 1,192.2 |
| | $ | 1,246.7 |
| | $ | 1,203.4 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 168.3 |
| | 177.7 |
| | 181.8 |
|
| Amortization of intangible assets | 113.8 |
| | 115.2 |
| | 109.3 |
|
| Amortization of deferred gain on interest rate swaps | (12.9 | ) | | (15.4 | ) | | (9.2 | ) |
| Share-based compensation | 80.2 |
| | 93.4 |
| | 99.4 |
|
| Impact of Tax Act | 106.3 |
| | — |
| | — |
|
| Other, net | 27.5 |
| | 32.0 |
| | 55.3 |
|
| Increase in operating capital | 348.5 |
| | 302.8 |
| | 559.5 |
|
| Net Cash Provided By Operating Activities | 2,023.9 |
| | 1,952.4 |
| | 2,199.5 |
|
| Cash Flows from Investing Activities: | | | | | |
| Capital expenditures | (156.0 | ) | | (165.5 | ) | | (202.7 | ) |
| Acquisition of businesses and interests in affiliates, net of cash acquired | (26.3 | ) | | (308.8 | ) | | (60.3 | ) |
| Sale (purchase) of investments, net | 66.9 |
| | (7.3 | ) | | (0.5 | ) |
| Net Cash Used In Investing Activities | (115.4 | ) | | (481.6 | ) | | (263.5 | ) |
| Cash Flows from Financing Activities: | | | | | |
| Change in short-term debt | (18.1 | ) | | (1.2 | ) | | (1.1 | ) |
| Proceeds from borrowings | — |
| �� | 1,389.6 |
| | — |
|
| Repayment of debt | — |
| | (1,000.0 | ) | | — |
|
| Dividends paid to common shareholders | (515.2 | ) | | (505.4 | ) | | (496.7 | ) |
| Repurchases of common stock | (568.4 | ) | | (602.2 | ) | | (727.5 | ) |
| Proceeds from stock plans | 10.7 |
| | 26.8 |
| | 20.1 |
|
| Acquisition of additional noncontrolling interests | (17.0 | ) | | (72.7 | ) | | (33.5 | ) |
| Dividends paid to noncontrolling interest shareholders | (101.7 | ) | | (87.2 | ) | | (129.4 | ) |
| Payment of contingent purchase price obligations | (108.4 | ) | | (110.5 | ) | | (55.3 | ) |
| Other, net | (24.5 | ) | | (35.5 | ) | | (32.9 | ) |
| Net Cash Used In Financing Activities | (1,342.6 | ) | | (998.3 | ) | | (1,456.3 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | 227.9 |
| | (75.5 | ) | | (262.6 | ) |
| Net Increase in Cash and Cash Equivalents | 793.8 |
| | 397.0 |
| | 217.1 |
|
| Cash and Cash Equivalents at the Beginning of Year | 3,002.2 |
| | 2,605.2 |
| | 2,388.1 |
|
| Cash and Cash Equivalents at the End of Year | $ | 3,796.0 |
| | $ | 3,002.2 |
| | $ | 2,605.2 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Three Years Ended December 31, 2015
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Omnicom Group Inc. | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Par Value | | | | | |
| Balance as of December 31, 2012 | 397.2 |
| | $ | 59.6 |
| | $ | 836.6 |
| | $ | 8,394.4 |
| | $ | (129.5 | ) | | $ | (5,700.3 | ) | | $ | 3,460.8 |
| | $ | 495.5 |
| | $ | 3,956.3 |
|
| Net Income | | | | | | | 991.1 |
| | | | | | 991.1 |
| | 120.5 |
| | 1,111.6 |
|
| Other comprehensive income (loss) | | | | | | | | | (62.1 | ) | | | | (62.1 | ) | | (37.1 | ) | | (99.2 | ) |
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (100.6 | ) | | (100.6 | ) |
| Acquisition of noncontrolling interests | | | | | (16.8 | ) | | | | | | | | (16.8 | ) | | (8.2 | ) | | (25.0 | ) |
| Increase in noncontrolling interests from business combinations | | | | |
| | | | | | | | | | 15.4 |
| | 15.4 |
|
| Change in temporary equity |
| | | | (3.6 | ) | | |
| | | | | | (3.6 | ) | | |
| | (3.6 | ) |
| Shares issued for conversion of convertible notes | | | | | (34.3 | ) | | | | | | 68.8 |
| | 34.5 |
| | | | 34.5 |
|
| Common stock dividends declared ($1.60 per share) | | | | | | | (424.3 | ) | | | | | | (424.3 | ) | | | | (424.3 | ) |
| Share-based compensation | | | | | 86.3 |
| | | | | | | | 86.3 |
| | | | 86.3 |
|
| Stock issued, share-based compensation | | | | | (51.1 | ) | | | | | | 142.9 |
| | 91.8 |
| | | | 91.8 |
|
| Common stock repurchased | | | | | | | | | | | (575.3 | ) | | (575.3 | ) | | | | (575.3 | ) |
| Balance as of December 31, 2013 | 397.2 |
| | 59.6 |
| | 817.1 |
| | 8,961.2 |
| | (191.6 | ) | | (6,063.9 | ) | | 3,582.4 |
| | 485.5 |
| | 4,067.9 |
|
| Net Income | | | | | | | 1,104.0 |
| | | | | | 1,104.0 |
| | 129.1 |
| | 1,233.1 |
|
| Other comprehensive income (loss) | | | | | | | | | (426.6 | ) | | | | (426.6 | ) | | (38.7 | ) | | (465.3 | ) |
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (111.3 | ) | | (111.3 | ) |
| Acquisition of noncontrolling interests | | | | | (64.5 | ) | | | | | | | | (64.5 | ) | | (27.8 | ) | | (92.3 | ) |
| Increase in noncontrolling interests from business combinations | | | | | | | | | | | | | | | 34.5 |
| | 34.5 |
|
| Change in temporary equity | | | | | 7.9 |
| | | | | | | | 7.9 |
| | | | 7.9 |
|
| Shares issued for conversion of convertible notes | | | | | (25.5 | ) | | | | | | 57.7 |
| | 32.2 |
| | | | 32.2 |
|
| Common stock dividends declared ($1.90 per share) | | | | | | | (488.3 | ) | | | | | | (488.3 | ) | | | | (488.3 | ) |
| Share-based compensation | | | | | 93.5 |
| | | | | | | | 93.5 |
| | | | 93.5 |
|
| Stock issued, share-based compensation | | | | | (9.9 | ) | | | | | | 82.3 |
| | 72.4 |
| | | | 72.4 |
|
| Common stock repurchased | | | | | | | | | | | (1,063.0 | ) | | (1,063.0 | ) | | | | (1,063.0 | ) |
| Balance as of December 31, 2014 | 397.2 |
| | 59.6 |
| | 818.6 |
| | 9,576.9 |
| | (618.2 | ) | | (6,986.9 | ) | | 2,850.0 |
| | 471.3 |
| | 3,321.3 |
|
| Net Income | | | | | | | 1,093.9 |
| | | | | | 1,093.9 |
| | 109.5 |
| | 1,203.4 |
|
| Other comprehensive income (loss) | | | | | | | | | (397.2 | ) | | | | (397.2 | ) | | (28.8 | ) | | (426.0 | ) |
| Dividends to noncontrolling interests | | | | | | | | | | | | | | | (129.4 | ) | | (129.4 | ) |
| Acquisition of noncontrolling interests | | | | | (38.8 | ) | | | | | | | | (38.8 | ) | | (24.2 | ) | | (63.0 | ) |
| Increase in noncontrolling interests from business combinations | | | | | | | | | | | | | | | 38.6 |
| | 38.6 |
|
| Change in temporary equity | | | | | 11.9 |
| | | | | | | | 11.9 |
| | | | 11.9 |
|
| Common stock dividends declared ($2.00 per share) | | | | | | | (492.6 | ) | | | | | | (492.6 | ) | |
|
| | (492.6 | ) |
| Share-based compensation | | | | | 99.4 |
| | | | | | | | 99.4 |
| |
|
| | 99.4 |
|
| Stock issued, share-based compensation | | | | | (31.2 | ) | | | | | | 84.5 |
| | 53.3 |
| |
|
| | 53.3 |
|
| Common stock repurchased | | | | | | | | | | | (727.5 | ) | | (727.5 | ) | |
|
| | (727.5 | ) |
| Balance as of December 31, 2015 | 397.2 |
| | $ | 59.6 |
| | $ | 859.9 |
| | $ | 10,178.2 |
| | $ | (1,015.4 | ) | | $ | (7,629.9 | ) | | $ | 2,452.4 |
| | $ | 437.0 |
| | $ | 2,889.4 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
| Cash Flows from Operating Activities: | | | | | |
| Net income | $ | 1,203.4 |
| | $ | 1,233.1 |
| | $ | 1,111.6 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation | 181.8 |
| | 187.3 |
| | 184.0 |
|
| Amortization of intangible assets | 109.3 |
| | 107.1 |
| | 100.8 |
|
| Amortization of deferred gain from termination of interest rate swaps | (9.2 | ) | | (7.2 | ) | | (7.3 | ) |
| Share-based compensation | 99.4 |
| | 93.5 |
| | 86.3 |
|
| Excess tax benefit from share-based compensation | (27.2 | ) | | (29.6 | ) | | (37.8 | ) |
| Deferred gain from termination of interest rate swaps | 50.4 |
| | — |
| | — |
|
| Other, net | 6.8 |
| | (1.5 | ) | | 20.1 |
|
| Change in operating capital | 557.6 |
| | (106.2 | ) | | 351.3 |
|
| Net Cash Provided By Operating Activities | 2,172.3 |
| | 1,476.5 |
| | 1,809.0 |
|
| Cash Flows from Investing Activities: | | | | | |
| Capital expenditures | (202.7 | ) | | (213.0 | ) | | (212.0 | ) |
| Acquisition of businesses and interests in affiliates, net of cash acquired | (60.3 | ) | | (74.9 | ) | | (32.8 | ) |
| Other, net | (0.5 | ) | | 21.0 |
| | 16.6 |
|
| Net Cash Used In Investing Activities | (263.5 | ) | | (266.9 | ) | | (228.2 | ) |
| Cash Flows from Financing Activities: | | | | | |
| Proceeds from (repayment of) short-term debt | (1.1 | ) | | 2.1 |
| | (0.4 | ) |
| Proceeds from borrowings | — |
| | 747.6 |
| | — |
|
| Redemption of convertible debt | — |
| | (252.7 | ) | | (406.7 | ) |
| Dividends paid to common shareholders | (496.7 | ) | | (468.0 | ) | | (318.4 | ) |
| Repurchases of common stock | (727.5 | ) | | (1,063.0 | ) | | (575.3 | ) |
| Proceeds from stock plans | 20.1 |
| | 39.3 |
| | 52.3 |
|
| Acquisition of additional noncontrolling interests | (33.5 | ) | | (69.5 | ) | | (8.9 | ) |
| Dividends paid to noncontrolling interest shareholders | (129.4 | ) | | (111.3 | ) | | (100.6 | ) |
| Payment of contingent purchase price obligations | (55.3 | ) | | (83.2 | ) | | (70.5 | ) |
| Excess tax benefit from share-based compensation | 27.2 |
| | 29.6 |
| | 37.8 |
|
| Other, net | (32.9 | ) | | (29.0 | ) | | (29.1 | ) |
| Net Cash Used In Financing Activities | (1,429.1 | ) | | (1,258.1 | ) | | (1,419.8 | ) |
| | | | | | |
| Effect of foreign exchange rate changes on cash and cash equivalents | (262.6 | ) | | (273.9 | ) | | (128.8 | ) |
| | | | | | |
| Net Increase (Decrease) in Cash and Cash Equivalents | 217.1 |
| | (322.4 | ) | | 32.2 |
|
| Cash and Cash Equivalents at the Beginning of Year | 2,388.1 |
| | 2,710.5 |
| | 2,678.3 |
|
| Cash and Cash Equivalents at the End of Year | $ | 2,605.2 |
| | $ | 2,388.1 |
| | $ | 2,710.5 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Presentation of Financial Statements
The terms “Omnicom,” “the Company,” “we,” “our” and “us” each refer to Omnicom Group Inc. and its subsidiaries, unless the context indicates otherwise. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States, (“or U.S. GAAP”GAAP or “GAAP”).GAAP. All intercompany balances and transactions have been eliminated.
The preparation ofWe prepare our financial statements in conformity with U.S. GAAP requires usand are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Accounting Changes
On January 1, 2017, we adopted FASB ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09, which requires that beginning in 2017 excess tax benefits and deficiencies related to share-based compensation be recorded in results of operations upon vesting of restricted stock awards or exercise of stock options. Excess tax benefits and deficiencies represent the difference between the actual compensation deduction for tax purposes, which is calculated as the difference between the grant date price of the award and the price of our common stock on the vesting or exercise date, and compensation expense recognized for financial reporting purposes. In prior years, excess tax benefits and deficiencies were recorded in additional paid-in capital. In 2017 we recognized an excess tax benefit of $20.8 million.
ASU 2016-09 requires that cash flows related to the excess tax benefits or deficiencies be classified in operating activities. Accordingly, we retrospectively adjusted the statement of cash flows for 2016 and 2015 to conform to the current year presentation, resulting in an increase in net cash provided by operating activities and a corresponding decrease in net cash used in financing activities of $21.2 million and $27.2 million, respectively. Further, ASU 2016-09 permits a policy election to either continue to estimate the number of awards that will be forfeited or to account for forfeitures as they occur. We elected to account for forfeitures as they occur. Accordingly, we recorded a cumulative catch-up adjustment to increase additional paid-in capital and reduce opening retained earnings by $4.5 million reflecting the estimate of unvested awards at December 31, 2016 that were not expected to vest.
On January 1, 2017, we adopted FASB ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory, or ASU 2016-16, which requires that the income tax effects of intra-entity transfers of assets other than inventory are recognized when the transfer occurs. We adopted ASU 2016-16 using the modified retrospective method and recorded a cumulative catch-up adjustment to reduce opening retained earnings by $27.1 million reflecting the elimination of the deferred tax asset related to intercompany asset transfers.
On December 31, 2017, we adopted FASB ASU 2017-12, Derivatives and Hedging, or ASU 2017-12, which amended the hedge accounting and recognition and presentation requirements. The adoption of ASU 2017-12 did not have any impact on our existing hedges, financial position or results of operations.
2. Significant Accounting Policies
Accounting Changes. On December 31, 2015, we retrospectively adopted FASB Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) and FASB ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-03 requires that debt issuance costs be presented as a direct reduction from the carrying amount of debt and ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent. As a result of the adoption of ASU 2015-03 and ASU 2015-17, the balance sheet at December 31, 2014 was adjusted to reflect the reclassification of $ 20.5 million from other assets to long-term notes payable and $110.8 million from other current assets to long-term deferred tax liabilities.
Revenue Recognition. We recognize revenue in accordance with FASB Accounting Standards Codification, (“or FASB ASC”)ASC, Topic 605, Revenue Recognition, and applicable SEC Staff Accounting Bulletins. Substantially allOur principal source of our revenue is derived from fees for services based on a rate per hour or equivalentper project basis. Revenue is realized when the service is performed in accordance with the client arrangement and upon the completion of the earnings process. Our primary client arrangements include: fixed fee contracts where revenue is recognized based on the level of effort completed to date, retainer agreements where revenue is recognized on a straight-line basis over the contract period, and media commissions where revenue is recognized when the media is run. Prior to recognizing revenue, persuasive evidence of an arrangement must exist, the sales price must be fixed or determinable, delivery, performance and acceptance must be in accordance with the client arrangement and collection must be reasonably assured. These principles are the foundation of our revenue recognition policy and apply to all client arrangements in each of our service disciplines: advertising, customer relationship management, public relations and specialty communications. Certain of our businesses earn a portion of their revenue as commissions based on performance in accordance with client arrangements.healthcare. 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 of our revenue recognition policy apply to client arrangements in each of our four disciplines. Revenue is recorded net of sales, use and value added taxes.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, in certain markets, 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 the primary obligor. 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 arrangements include performance incentive provisions designed to link a portion of our revenue to our performance relative to 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 the client. We may receive rebates or credits from certain vendors forbased on transactions entered into on behalf of clients. These rebates or credits are remitted to the clients in accordance with contractual requirements or in certain international markets may be retained by us based on the terms of the client contract or local law. Amounts passed on to clients are recorded as a liability and amounts retained by us are recorded as revenue when earned.
See Note 20 for a discussion of the adoption of ASU 2014-09, Revenue from Contracts with Customers ASC Topic 606.
Operating Expenses.Operating expenses representare comprised of cost of services, selling, general and administrative, or SG&A, expenses and depreciation and amortization. We measure cost of services in two distinct categories: salary and service costs and officeoccupancy and general expenses.other costs. As a service business, salary and service costs make up the vast majority of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs consist ofinclude employee compensation and related costsbenefits, freelance labor and direct service costs, which include third-party supplier costs and client-related travel costs. OfficeOccupancy and generalother costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, depreciation and amortizationgeneral office expenses and other overhead expenses.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating SG&A expenses for the three years ended primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices, which includes group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs.December 31, 2015 were (in millions):
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Salary and service costs | $ | 11,361.9 |
| | $ | 11,350.0 |
| | $ | 10,724.4 |
|
| Office and general expenses | 1,852.4 |
| | 2,023.7 |
| | 2,034.8 |
|
| | $ | 13,214.3 |
| | $ | 13,373.7 |
| | $ | 12,759.2 |
|
Cash and Cash Equivalents.Highly Cash equivalents consist of highly liquid investments consisting of interest-bearing time deposits with original maturities of three months or less are classified as cash equivalents.less. Due to the short-term nature of these investments, carrying value approximates fair value. We have policiesa policy governing counterparty credit risk for financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution.
Short-Term Investments. Short-term investments consist of interest-bearing time deposits with maturities of less than twelve months. Short-term investments are carried at cost, which approximates fair value.
Work in Process. Work in process includes costs incurred on behalf of clients in providing advertising and marketing services, including media and production costs, and fees that have not yet been billed. Media and production costs are billed during the production process and fees are normally billed within the next 30 days.days or when the services are performed.
Property and Equipment. Property and equipment are carried at cost and are depreciated over the estimated useful lives of the assets using the straight-line method. The estimated useful lives range from seven to ten years for furniture and three to five years for equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the related lease term or the estimated useful life of the asset. Property under capital lease is depreciated on a straight-line basis over the lease term.
Equity Method Investments. Investments in companies where we exercise significant influence over the operating and financial policies of the investee and own less than 50% of the equity are accounted for using the equity method. Our proportionate share of the net income or loss of equity method investments is included in results of operations and any dividends received reduce the carrying value of the investment. The excess of the cost of our investment over our proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill and included in the carrying amount of the investment. Goodwill in the equity method investments is not amortized. Gains and losses from changes in equity method investmentsour ownership interests are recorded in results of operations until control is achieved. In circumstances where theWhere a change in our ownership interest results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in results of operations.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost Method Investments. Investments in companies where we do not exercise significant influence over the operating and financial policies of the investee and own less than 20% of the equity are accounted for using the cost method. Cost method investments are are included in other assets and are carried at cost, which approximates or is less than fair value. The carrying value of our cost method investments was $21.5$14.4 million and $21.8$14.2 million at December 31, 20152017 and 2014,2016, respectively.
We periodically review the carrying value of the equity method and cost method investments to determine if there has been an other-than-temporary decline in carrying value. A variety of factors are considered when determining if a decline in carrying value is other-than-temporary, including the financial condition and business prospects of the investee, as well as our investment intent.
Available-for-Sale Securities. Investments in common stock of publicly traded companies are classified as available-for-sale securities. These investments are included in other assets and are carried at fair value using quoted market prices. Unrealized gains and losses are recorded in accumulated other comprehensive income. The carrying value of the available-for-sale securities was $4.8$1.4 million and $4.9$4.3 million at December 31, 20152017 and 2014,2016, respectively.
Goodwill and Intangible Assets. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired. Goodwill is not amortized, but is periodically reviewed for impairment. Intangible assets which consist primarily ofcomprise customer relationships, including the related customer contracts and trade names, and purchased and internally developed software and are amortized over their estimated useful lives ranging from five to tentwelve years. We consider a number of factors in determining the useful lives and amortization method, including the pattern in which the economic benefits are consumed, as well as trade name recognition and customer attrition. There is no estimated residual value for the intangible assets.
We review the carrying value of goodwill for impairment annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. The impairment evaluation utilizes a two-step test. The first step compares the fair value of each reporting unit, which we identified as our five agency networks, to its carrying value, including goodwill. If the fair value of the reporting unit is equal to or greater than its carrying value,
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
goodwill is not impaired and no further testing is required. If the carrying value exceeds fair value, then the second step of the impairment test is performed in order to determine if the implied fair value of the goodwill of the reporting unit exceeds the carrying value of that goodwill.impaired. Goodwill is impaired when the carrying value of the goodwillreporting unit exceeds its implied fair value. Impaired goodwillGoodwill is written down to its implied fair value withthrough a chargenon-cash expense recorded in results of operations in the period the impairment is identified.
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 monitor the performance and 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 had 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. The main economic components of each agency are employee compensation and related costs and direct service costs and officeoccupancy and generalother 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 costs. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our client service strategy. 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 of EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions.
Based on the results of the annual impairment test, we concluded that at June 30, 20152017 and 20142016 our goodwill was not impaired because the fair value of each of our reporting units wereunit was substantially in excess of theirits respective net book value. Subsequent to the annual impairment test of goodwill at June 30, 2015,2017, there were no events or circumstances that triggered the need for an interim impairment test.
Debt Issuance Costs. Debt issuance costs are capitalized and amortized toin interest expense over the life of the related debt and are presented as a direct reduction fromto the carrying amount of debt.
Temporary Equity - Redeemable Noncontrolling Interests. Owners of noncontrolling equity interests in some of our subsidiaries have the right in certain circumstances to require us to purchase all or a portion of their equity interests at fair value as defined in the applicable agreements. The intent of the parties is to approximate fair value at the time of redemption by using a multiple of earnings that is consistent with generally accepted valuation practices used by market participants in our industry. These contingent redemption rights are embedded in the equity security at issuance, are not free-standing instruments, do not represent a de facto financing and are not under our control.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Treasury Stock. CommonRepurchases ofour common stock repurchases are accounted for at cost and are recorded as treasury stock. Reissued treasury stock, primarily in connection with share-based compensation plans, is accounted for at average cost. Gains or losses on reissued treasury stock arising from the difference between the average cost and the fair value of the award are recorded in additional paid-in capital and do not affect results of operations.
Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired, including identified intangible assets, liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values.value. In circumstances where control is obtained and less than 100% of a business is acquired, goodwill is recorded as if 100% were acquired. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs are expensed as incurred. Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which are recorded as a liability at the acquisition date fair value using the discount rate in effect on the acquisition date. Subsequent changes in the fair value of the liability are recorded in results of operations. Generally, there is no cap on the amount that can beAmounts earned under the contingent purchase price arrangements may be subject to a maximum and payments arepayment is not contingent upon future employment. The results of operations of acquired businesses are included in results of operations from the acquisition date.
Noncontrolling Interests. Noncontrolling interests represent equity interests in consolidatedcertain subsidiaries held by third-parties. Noncontrolling interests are presented as a component of equity and the proportionate share of net income attributed to the noncontrolling interests is recorded in results of operations. Changes in noncontrolling interests that do not result in a loss of control are accounted for in equity. Gains and losses resulting from the changes in noncontrolling interests that result in a loss of control are recorded in results of operations.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation and Transactions. Substantially all of our foreign subsidiaries use their local currency as their functional currency. Assets and liabilities are translated into U.S. Dollars at the exchange rate on the balance sheet date and revenue and expenses are translated at the average exchange rate for the period. Translation adjustments are recorded in accumulated other comprehensive income. Net foreign currency transaction gains and (losses) recorded in results of operations in 2015, 2014were $(7.8) million, $12.7 million and 2013 were $4.7 million, $8.7 million in 2017, 2016 and $2.7 million,2015, respectively.
Share-Based Compensation. Share-based compensation for restricted stock and stock option awards is measured at the grant date fair value. The fair value of restricted stock awards is determined and fixed on the grant date using the closing price of our common stock on the grant date and is recorded in additional paid-in capital. The fair value of stock option awards is determined using the Black-Scholes option valuation model. For awards that have a service only vesting condition, compensation expense is recognized on a straight-line basis over the requisite service period. For awards with a performance vesting condition, compensation expense is recognized on a graded-vesting basis. Typically, all share-based awards are settled with treasury stock. See Note 9 for additional information regarding our specific award plans and estimates and assumptions used to determine the fair value of our share-based compensation awards.plans.
Salary Continuation Agreements. Arrangements with certain present and former employees provide for continuing payments for periods up to ten years after cessation of full-time employment in consideration for agreement by the employees not to compete with us and to render consulting services during the postemployment period. Such payments, which are subject to certain limitations, including our operating performance during the postemployment period, represent the fair value of the services rendered and are expensed in such periods.
Severance. The liability for one-time termination benefits, such as severance pay or benefit payouts, is measured and recognized at fair value in the period the liability is incurred. Subsequent changes to the liability are recognized in results of operations in the period of change.
Defined Benefit Pension Plans and Postemployment Arrangements. The funded status of our defined benefit plans is recorded as an asset or liability. Funded status is the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date, determined on a plan-by-plan basis. The benefit obligation for the defined benefit plans is the projected benefit obligation (“PBO”), which represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The fair value of plan assets represents the current market value. Overfunded plans where the fair value of plan assets exceeds the benefit obligation are aggregated and recorded as a prepaid pension asset equal to the excess. Underfunded plans where the benefit obligation exceeds the fair value of plan assets are aggregated and recorded as a liability equal to the excess. We record the liability for our postemployment arrangements. The benefit obligation of our postemployment arrangements is the PBO and these arrangements are not funded. The current portion of the benefit obligation for the defined benefit plans and postemployment arrangements, which represents the actuarial present value of benefits payable in the next twelve months that exceed the fair value of plan assets, is recorded in other current liabilities and the long-term portion is recorded in long-term liabilities.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation. Some of our subsidiaries have individual deferred compensation arrangements with certain executives that provide for payments over varying terms upon retirement, cessation of employment or death. The cost of these arrangements is accrued during the employee’s service period.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable for the current period and the deferred taxes recognized during the period. Deferred income taxes reflect the temporary difference between assets and liabilities that are recognized for financial reporting purposes and income tax purposes and are recorded as noncurrent. Deferred income taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Deferred tax assets result from recording expenses in the financial statements which are not currently deductible for tax purposes, such as share-based compensation expense, tax loss and credit carryforwards and differences between the tax basis and book basis of assets and liabilities recorded in connection with acquisitions. Deferred tax liabilities result principally from basis differences arising from deductible goodwill and intangible assets, interest expense on financial instruments which is currently deductible for tax purposes but have not been expensed in the financial statements and tax rate differentials on unremitted foreign earnings. Valuation allowances are recorded where it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we evaluate factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have provided U.S. federal and state income taxes on earnings of foreign operations that have not been indefinitely reinvested and we have not provided U.S. federal and state income taxes on the cumulative earnings of foreign subsidiaries that have been indefinitely reinvested. Interest and penalties related to tax positions taken in our tax returns are recorded in income tax expense. We record a liability for uncertain tax positions that reflects the treatment of certain tax positions taken in our tax returns, or planned to be taken in a future tax returns, which have not been reflected in income tax expense. Until these positions are sustained by the taxing authorities or the statute of limitations concerning such issues lapses, we do not generally recognize the tax benefits resulting from such positions.
In December 2017, the Tax Cuts and Jobs Act, or Tax Act, was enacted into law. As a result, tax positions related to the accumulated earnings of our foreign subsidiaries are reflected under the provisions of the Tax Act. See Note 10 for additional information.
Net Income Per Common Share. Basic net income per common share is based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is based on the weighted average number of common shares outstanding, plus, the dilutive effect of common share equivalents, which include outstanding stock options and restricted stock.stock awards.
Net income per common share is computed using the two-class method, which is an earnings allocation method for computing net income per common share when a company's capital structure includes common stock and participating securities. The majorityCertain of the unvested restricted stock awards receive non-forfeitable dividends at the same rate as the common stock and therefore are considered participating securities. Under the two-class method, basic and diluted net income per common share is reduced for a presumed hypothetical distribution of earnings to holders of the unvested restricted stock awards receiving non-forfeitable dividends.
Concentration of Credit Risk. We provide advertising, marketing and corporate communications services to several thousand clients whothat operate in nearly every industry sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client accounted for 2.7%3.0% of revenue in 2015.2017.
Derivative Financial Instruments. All derivative instruments, including certain derivative instruments embedded in other contracts, are recorded at fair value. Derivatives qualify for hedge accounting if: (1) the hedging instrument is designated as a hedge, at inception, (2) the hedged exposure is specifically identifiable, and exposes us to risk and (3) a change in fair value of the derivative financial instrument and an opposite change in the fair value of the hedged exposure have a high degree of correlation. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented at hedge inception.documented. Hedge effectiveness is assessed and hedge ineffectiveness is measured at least quarterly throughout the designated hedge period. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through results of operations or recognized in other comprehensive income until the hedged item is recognized in results of operations. The ineffective portion of the change in fair value of a derivative used as hedge is recognized in results of operations. We do not use derivative financial instrumentsderivatives for trading or speculative purposes. Using derivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. We manage that risk through careful selection and ongoing evaluation of the counterparty financial institutions based on specific minimum credit standards and other factors.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value. We apply the fair value measurement guidance in FASB ASC Topic 820, Fair Value Measurements and Disclosures, for our financial assets and liabilities that are required to be measured at fair value and for our nonfinancial assets and liabilities that are not required to be measured at fair value on a recurring basis, which includes goodwill and other identifiable intangible assets. The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical assets or liabilities in markets that are not active; and model-derived valuations with observable inputs.
Level 3 - Unobservable inputs for the asset or liability.
We use unadjusted quoted market prices to determine the fair value of our financial assets and liabilities and classify such items in Level 1. We use unadjusted quoted market prices for similar assets and liabilities in active markets and model-derived valuations and classify such items in Level 2.
In determining the fair value of financial assets and liabilities, we consider certain market valuation adjustments that market participants would consider in determining fair value, including: counterparty credit risk adjustments applied to financial assets and liabilities, taking into account the actual credit risk of the counterparty when valuing assets measured at fair value and credit risk adjustments applied to reflect our credit risk when valuing liabilities measured at fair value. 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.
Reclassifications. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
3. Net Income per Share
The computations of basic and diluted net income per share for the three years ended December 31, 2017 were (in millions, except per share amounts):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net Income Available for Common Shares: | | | | | |
| Net income - Omnicom Group Inc. | $ | 1,088.4 |
| | $ | 1,148.6 |
| | $ | 1,093.9 |
|
| Net income allocated to participating securities | (1.6 | ) | | (6.5 | ) | | (12.4 | ) |
| | $ | 1,086.8 |
| | $ | 1,142.1 |
| | $ | 1,081.5 |
|
| Weighted Average Shares: | | | | | |
| Basic | 232.3 |
| | 237.9 |
| | 244.2 |
|
| Dilutive stock options and restricted shares | 1.6 |
| | 1.3 |
| | 1.0 |
|
| Diluted | 233.9 |
| | 239.2 |
| | 245.2 |
|
| | | | | | |
| Anti-dilutive stock options and restricted shares | 1.0 |
| | — |
| | 0.1 |
|
| Net Income per Share - Omnicom Group Inc.: | | | | | |
| Basic | $ | 4.68 |
| | $ | 4.80 |
| | $ | 4.43 |
|
| Diluted | $ | 4.65 |
| | $ | 4.78 |
| | $ | 4.41 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Net Income per Common Share
The computations of basic and diluted net income per common share for the three years ended December 31, 2015 were (in millions, except per share amounts):
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Net Income Available for Common Shares: | | | | | |
| Net income - Omnicom Group Inc. | $ | 1,093.9 |
| | $ | 1,104.0 |
| | $ | 991.1 |
|
| Net income allocated to participating securities | (12.4 | ) | | (20.4 | ) | | (25.1 | ) |
| | $ | 1,081.5 |
| | $ | 1,083.6 |
| | $ | 966.0 |
|
| Weighted Average Shares: | | | | | |
| Basic | 244.2 |
| | 253.9 |
| | 258.9 |
|
| Dilutive stock options and restricted shares | 1.0 |
| | 1.4 |
| | 1.5 |
|
| Diluted | 245.2 |
| | 255.3 |
| | 260.4 |
|
| | | | | | |
| Anti-dilutive stock options and restricted shares | 0.1 |
| | 0.6 |
| | 0.7 |
|
| | | | | | |
| Net Income per Common Share - Omnicom Group Inc.: | | | | | |
| Basic | $ | 4.43 |
| | $ | 4.27 |
| | $ | 3.73 |
|
| Diluted | $ | 4.41 |
| | $ | 4.24 |
| | $ | 3.71 |
|
4. Business Combinations
In 2015,2017, we completed 8four acquisitions, of new subsidiaries, which increased goodwill $144.7$65.3 million. Approximately $28.3 million of the goodwill recorded in 2015 is expected to be deductible for income tax purposes. Further,Also, we acquired additional equity interests in certain majority owned subsidiaries in 2017, which are accounted for as equity transactions and no additional goodwill was recorded. None of thethese acquisitions, in 2015, either individually or in the aggregate, was material to our results of operations or financial position.
The valuationevaluation of the acquired businessespotential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings, as well as our experience and judgment. Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our strategic business platforms and agency brands, through the expansion of their geographic area or their service capabilities to better serve our clients. Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which are derived using the performance of the acquired entity and are based on predetermined formulas. The liability for contingentContingent purchase price obligations was $322.0at December 31, 2017 and 2016 were $215.6 million and $300.7$386.1 million, at December 31, 2015 and 2014, respectively, of which $81.5$92.6 million and $105.5$190.8 million, respectively, isare included in other current liabilities.
For each acquisition, we undertake a detailed review to identify other intangible assets and a valuation is performed for all such identified assets.that are required to be valued separately. We use several market participant measurements to determine fair value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies and when available and as appropriate, we use comparative market multiples to supplement our analysis. As is typical for most service businesses, a substantial portion of the intangible asset value we acquire is the specialized know-how of the workforce, which is treated as part of goodwill and is not valued separately. A significant portion of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. One of the primary drivers in executing our acquisition strategy is the existence of, or the ability to, expand our existing client relationships. The expected benefits of our acquisitions are typically shared across multiple agencies and regions.
5. Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2017 and 2016 were (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Goodwill | $ | 9,871.8 |
| | $ | (534.3 | ) | | $ | 9,337.5 |
| | $ | 9,481.4 |
| | $ | (505.3 | ) | | $ | 8,976.1 |
|
| Intangible assets: | | | | | | | | | | | |
| Purchased and internally developed software | $ | 368.2 |
| | $ | (303.0 | ) | | $ | 65.2 |
| | $ | 342.6 |
| | $ | (270.2 | ) | | $ | 72.4 |
|
| Customer related and other | 880.1 |
| | (576.9 | ) | | 303.2 |
| | 862.4 |
| | (507.4 | ) | | 355.0 |
|
| | $ | 1,248.3 |
| | $ | (879.9 | ) | | $ | 368.4 |
| | $ | 1,205.0 |
| | $ | (777.6 | ) | | $ | 427.4 |
|
Changes in goodwill for the years ended December 31, 2017 and 2016 were (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| January 1 | $ | 8,976.1 |
| | $ | 8,676.4 |
|
| Acquisitions | 19.3 |
| | 311.7 |
|
| Noncontrolling interests in acquired businesses | 18.9 |
| | 74.0 |
|
| Contingent purchase price obligations of acquired businesses | 27.1 |
| | 152.8 |
|
| Foreign currency translation and other | 296.1 |
| | (238.8 | ) |
| December 31 | $ | 9,337.5 |
| | $ | 8,976.1 |
|
There were no goodwill impairment losses recorded in 2017 or 2016 and there are no accumulated goodwill impairment losses.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2015 and 2014 were (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 |
| | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Goodwill | $ | 9,205.7 |
| | $ | (529.3 | ) | | $ | 8,676.4 |
| | $ | 9,377.6 |
| | $ | (555.4 | ) | | $ | 8,822.2 |
|
| Intangible assets: | | | | | | | | | | | |
| Purchased and internally developed software | $ | 310.5 |
| | $ | (239.9 | ) | | $ | 70.6 |
| | $ | 298.7 |
| | $ | (221.4 | ) | | $ | 77.3 |
|
| Customer related and other | 715.0 |
| | (440.8 | ) | | 274.2 |
| | 702.1 |
| | (390.0 | ) | | 312.1 |
|
| | $ | 1,025.5 |
| | $ | (680.7 | ) | | $ | 344.8 |
| | $ | 1,000.8 |
| | $ | (611.4 | ) | | $ | 389.4 |
|
Changes in goodwill for the years ended December 31, 2015 and 2014 were (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| January 1 | $ | 8,822.2 |
| | $ | 8,916.0 |
|
| Acquisitions | 144.7 |
| | 222.4 |
|
| Dispositions | (3.0 | ) | | (3.0 | ) |
| Foreign currency translation | (287.5 | ) | | (313.2 | ) |
| December 31 | $ | 8,676.4 |
| | $ | 8,822.2 |
|
There were no goodwill impairment losses recorded in 2015 or 2014 and there are no accumulated goodwill impairment losses. Goodwill for acquisitions completed in 2015 and 2014 includes $19.3 million and $43.5 million, respectively, of goodwill attributed to noncontrolling interests in the acquired businesses.
6. Debt
Credit Facilities
As a source ofAt December 31, 2017, our short-term financing, we haveliquidity sources include a $2.5 billion revolving credit facility, (“or Credit Facility”), domestic and internationalFacility, expiring on July 31, 2021, uncommitted credit lines aggregating $1.2 billion and we canthe ability to issue up to $2 billion of commercial paper. In July 2015, we extended the term of our Credit Facility to July 31, 2020. The uncommitted credit lines aggregate $1.2 billion and $937.8 million at December 31, 2015 and 2014, respectively.
There were no outstanding commercial paper issuances or borrowings under the Credit Facility or the uncommitted credit lines at December 31, 20152017 and 2014.
2016. Available and unused credit lines at December 31, 20152017 and 20142016 were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| Credit Facility | $ | 2,500.0 |
| | $ | 2,500.0 |
| $ | 2,500.0 |
| | $ | 2,500.0 |
|
| Uncommitted credit lines | 1,157.7 |
| | 937.8 |
| 1,181.0 |
| | 1,132.0 |
|
| Available and unused credit lines | $ | 3,657.7 |
| | $ | 3,437.8 |
| $ | 3,681.0 |
| | $ | 3,632.0 |
|
The Credit Facility contains financial covenants that require us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA of no more than 3 times for the most recently ended 12-month period (EBITDA is defined as earnings before interest, taxes, depreciation and amortization) and an 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, 2015,2017 we were in compliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 12.210.4 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
Short-Term Debt
Short-term debt at December 31, 2017 and 2016 of $11.8 million and $28.7 million, respectively consists of bank overdrafts and short-term borrowings of our international subsidiaries. The weighted average interest rate was 2.6% and 9.8%, respectively. Due to the short-term nature of this debt, carrying value approximates fair value.
Long-Term Debt
Long-term debt at December 31, 2017 and 2016 was (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| 6.25% Senior Notes due 2019 | $ | 500.0 |
| | $ | 500.0 |
|
| 4.45% Senior Notes due 2020 | 1,000.0 |
| | 1,000.0 |
|
| 3.625% Senior Notes due 2022 | 1,250.0 |
| | 1,250.0 |
|
| 3.65% Senior Notes due 2024 | 750.0 |
| | 750.0 |
|
| 3.60% Senior Notes due 2026 | 1,400.0 |
| | 1,400.0 |
|
| Other debt | — |
| | 0.1 |
|
| | 4,900.0 |
| | 4,900.1 |
|
| Unamortized premium (discount), net | 6.2 |
| | 7.6 |
|
| Unamortized debt issuance costs | (20.3 | ) | | (24.2 | ) |
| Unamortized deferred gain from settlement of interest rate swaps | 66.4 |
| | 84.7 |
|
| Fair value adjustment attributed to outstanding interest rate swaps | (39.4 | ) | | (47.6 | ) |
| | 4,912.9 |
| | 4,920.6 |
|
| Current portion | — |
| | (0.1 | ) |
| Long-term debt | $ | 4,912.9 |
| | $ | 4,920.5 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Debt
Short-term debt at December 31, 2015 and 2014, of $5.2 million and $7.2 million, respectively, represents bank overdrafts of our international subsidiaries. Due to the short-term nature of this debt, carrying value approximates fair value. At December 31, 2015 and 2014, the weighted average interest rate on this debt was 3.7% and 6.0%, respectively.
Long-Term Debt
Long-term debt at December 31, 2015 and 2014 was (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| 5.9% Senior Notes due 2016 | $ | 1,000.0 |
| | $ | 1,000.0 |
|
| 6.25% Senior Notes due 2019 | 500.0 |
| | 500.0 |
|
| 4.45% Senior Notes due 2020 | 1,000.0 |
| | 1,000.0 |
|
| 3.625% Senior Notes due 2022 | 1,250.0 |
| | 1,250.0 |
|
| 3.65% Senior Notes due 2024 | 750.0 |
| | 750.0 |
|
| Other debt | 0.3 |
| | 0.5 |
|
| | 4,500.3 |
| | 4,500.5 |
|
| Unamortized premium (discount) on senior notes, net | 10.1 |
| | 11.1 |
|
| Debt issuance costs | (16.9 | ) | | (20.5 | ) |
| Adjustment to carrying value for interest rate swaps | 72.1 |
| | 51.4 |
|
| | 4,565.6 |
| | 4,542.5 |
|
| Current portion | (1,001.4 | ) | | (0.4 | ) |
| Long-term debt | $ | 3,564.2 |
| | $ | 4,542.1 |
|
The contractual maturities of our long-term debt at December 31, 2015 are (in millions):
|
| | | |
| 2016 | $ | 1,000.3 |
|
| 2017 | — |
|
| 2018 | — |
|
| 2019 | 500.0 |
|
| 2020 | 1,000.0 |
|
| Thereafter | 2,000.0 |
|
| | $ | 4,500.3 |
|
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc. (“OCI”), or OCI, are co-obligors under all the senior notes. The senior notes are a joint and several liability of us and OCI and we unconditionally guarantee OCI’s obligations with respect to the senior 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 are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
On March 26, 2015, in connection with the maturityThe contractual maturities of our 5.9% Senior Notes on April 15, 2016 (“2016 Notes”), we entered into a $1.0 billion forward-starting interest rate swap. The swap mitigates the risk of changes in the semi-annual interest payments from inception to May 2, 2016, the contractual termination date, and is designated as a cash flow hedge. The swap effectively locks in the fixed interest rate, excluding the effect of our credit spread, on any refinancinglong-term debt at 2.32%. The swap is carried at fair value and any net gain or loss is recorded in accumulated other comprehensive income. Upon settlement of the swap, any gain or loss on the effective portion of the swap will be amortized to interest expense over the term of the new debt or will be recorded in results of operations if the refinancing is not completed. At December 31, 2015, we recorded a liability of $5.6 million, which is included in other current liabilities and the related loss of $3.3 million, net of income taxes, is recorded in accumulated other comprehensive income, and almost no hedge ineffectiveness is recorded. The 2016 Notes2017 are classified as current.(in millions):
|
| | | |
| 2018 | $ | — |
|
| 2019 | 500.0 |
|
| 2020 | 1,000.0 |
|
| 2021 | — |
|
| 2022 | 1,250.0 |
|
| Thereafter | 2,150.0 |
|
| | $ | 4,900.0 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, we entered into aWe use fixed-to-floating interest rate swap on the $1.25 billion principal amountswaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of the 3.625% Senior Notes due 2022 (“2022 Notes”). In September 2014 we entered into a fixed-to-floating interestfixed rate swap on the $1 billion principal amount of the 4.45 % Senior Notes due 2020 (“2020 Notes”).
In October 2015, we terminated the swap on the 2020 Notes and realized a gain of $36.9 million and we reduced the notional amount of the swap on the 2022 Notes to $1.0 billion and realized a gain of $13.5 million. The gains will be amortized to interest expense over the remaining term of the notes. Additionally, in October 2015, we entered into a fixed-to-floating interestfloating rate swap on the $750 million principal amount of the 3.65% Senior Notes due 2024 (“2024 Notes”). Thedebt. Interest rate swaps hedge the risk of changes in fair value of the underlying senior notes attributable to changes in the benchmark LIBOR interest rate. We receive fixedThe interest rate payments equal to the coupon interest rate on the notes and pay a variable interest rate equal to three month LIBOR, plus a spread of 1.05% on the 2022 Notes and a spread of 1.72% on the 2024 Notes. The swaps qualify and are designated as fair value hedges on the 2022 Notes and 2024 Notesunderlying senior notes and have the economic effect of converting the notes fromunderlying fixed rate obligationssenior notes to floating rate obligations. Gains and losses attributed to changes in the fair value of the swaps substantially offset changes in the fair value of the underlying senior notes attributed to changes in the benchmark interest rate. The netAccordingly, any hedge ineffectiveness is not material to our results of operations.
In October 2015, we entered into a $750 million interest settlement is recorded in interest expense. At December 31, 2015, we recorded a receivable of $32.2 million, which is included in other assets, on therate swap on the 2022our 3.65% Senior Notes and a liability of $10.0 million, which is included in long-term liabilities, on the swap of thedue 2024, or 2024 Notes. We receive fixed interest payments of 3.65% and pay a variable interest equal to three-month LIBOR, plus a spread of 1.72%.
In April 2016, concurrent with the issuance of our 3.60% Senior Notes due 2026, or 2026 Notes, we entered into a $500 million interest rate swap. We receive fixed interest payments of 3.60% and pay a variable interest equal to three-month LIBOR, plus a spread of 1.982%.
At December 31, 20142017, we recorded a receivablelong-term liabilities of $42.7$14.7 million which is included in other assets, on the swaps on the 2020 Notes and the 2022 Notes. The receivable and liability represent$24.7 million representing the fair value of the swaps that is substantially offset by the change in the carrying value of the notes reflecting the change in fair value of the notes. Accordingly, any hedge ineffectiveness was not material to our results of operations. On January 19, 2016, we terminated the remaining $1.0 billion notional amount of the swap on the 2022 Notes.
Convertible Debt
There was no convertible debt outstanding2024 Notes and 2026 Notes, respectively and at December 31, 20152016, we recorded long-term liabilities of $17.1 million and 2014.
On July 31, 2014, we redeemed$30.5 million, respectively. The interest rate swaps have the outstanding Convertible Notes due July 31, 2032 ("2032 Notes") for $252.7 million in cash. Prioreconomic effect of converting our long-term debt portfolio to redemption, the noteholders converted their notes into 1,217,112 shares of our common stock. On June 17, 2013, we redeemed the outstanding Convertible Notes due 2033 (“2033 Notes”)approximately 75% fixed rate obligations and the Convertible Notes due 2038 (“2038 Notes”) for $406.1 million in cash. Prior to redemption, the noteholders converted their notes into 1,499,792 shares of our common stock.25% floating rate obligations.
Interest Expense
Interest expense for the three years ended December 31, 20152017 is composed of (in millions):
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Long-term debt | $ | 210.2 |
| | $ | 192.7 |
| | $ | 182.0 |
| $ | 201.6 |
| | $ | 205.5 |
| | $ | 210.2 |
|
| Interest rate swaps | (53.3 | ) | | (37.7 | ) | | (7.3 | ) | (7.2 | ) | | (13.1 | ) | | (44.1 | ) |
| Amortization of deferred gain on interest rate swaps | | (12.9 | ) | | (15.4 | ) | | (9.2 | ) |
| Commercial paper | 4.8 |
| | 2.9 |
| | 1.7 |
| 12.5 |
| | 6.8 |
| | 4.8 |
|
| Fees | 5.7 |
| | 6.2 |
| | 6.5 |
| 5.6 |
| | 5.6 |
| | 5.7 |
|
| Other | 13.7 |
| | 13.1 |
| | 14.3 |
| 24.9 |
| | 20.3 |
| | 13.7 |
|
| | $ | 181.1 |
| | $ | 177.2 |
| | $ | 197.2 |
| $ | 224.5 |
| | $ | 209.7 |
| | $ | 181.1 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Reporting
Our five branded agency networks operate in the advertising, marketing and corporate communications services industry, and are organized into agency networks, virtual client networks, regional reporting units and operating groups. Our networks, virtual client networks and agencies increasingly share clients and provide clients with integrated services. The main economic components of each agency are employee compensation and related costs and direct service costs and officeoccupancy and generalother costs which include rent and occupancy costs, technology costs and other overhead expenses. Therefore, given these similarities, we aggregate our operating segments, which are our five agency networks, into one reporting segment.
The agency networks' regional reporting units comprise three principal regions; the Americas, EMEA and Asia Pacific. The regional reporting units monitor the performance and are responsible for the agencies in their region. Agencies within the regional reporting units serve similar clients in similar industries and in many cases the same clients and have similar economic characteristics.
Revenue and long-lived assets and goodwill by geographic region as ofat and for the three years ended December 31, 20152017 were (in millions):
| | | | | Americas | | EMEA | | Asia Pacific | | Americas | | EMEA | | Asia Pacific |
| 2017 | | 2017 | | | | | |
| Revenue | | Revenue | $ | 9,180.8 |
| | $ | 4,442.5 |
| | $ | 1,650.3 |
|
| Long-lived assets and goodwill | | Long-lived assets and goodwill | 6,633.8 |
| | 2,840.8 |
| | 553.8 |
|
| 2016 | | 2016 | | | | | |
| Revenue | | Revenue | $ | 9,597.6 |
| | $ | 4,183.1 |
| | $ | 1,636.2 |
|
| Long-lived assets and goodwill | | Long-lived assets and goodwill | 6,662.7 |
| | 2,469.1 |
| | 519.1 |
|
| 2015 | 2015 | | | | | | 2015 | | | | | |
| Revenue | Revenue | $ | 9,359.0 |
| | $ | 4,203.5 |
| | $ | 1,571.9 |
| Revenue | $ | 9,359.0 |
| | $ | 4,203.5 |
| | $ | 1,571.9 |
|
| Long-lived assets and goodwill | Long-lived assets and goodwill | 6,103.4 |
| | 2,737.8 |
| | 527.9 |
| Long-lived assets and goodwill | 6,103.4 |
| | 2,737.8 |
| | 527.9 |
|
| 2014 | | | | | | |
| Revenue | $ | 9,111.7 |
| | $ | 4,602.5 |
| | $ | 1,603.6 |
| |
| Long-lived assets and goodwill | 6,157.8 |
| | 2,800.8 |
| | 571.6 |
| |
| 2013 | | | | | | |
| Revenue | $ | 8,597.1 |
| | $ | 4,407.4 |
| | $ | 1,580.0 |
| |
| Long-lived assets and goodwill | 6,082.6 |
| | 2,984.6 |
| | 586.2 |
| |
The Americas comprises North America, which includes the United States, Canada and Puerto Rico, and Latin America, which includes Mexico. EMEA comprises the United Kingdom, the Euro currency countries, other European countries that have not adopted the European Union Monetary standard,Europe, the Middle East and Africa. Asia Pacific comprises Australia, China, India, Japan, Korea, New Zealand, Singapore and other Asian countries. Revenue in the United States in 2015, 2014was $8,196.9 million, $8,627.8 million and 2013 was $8,526.7 million $8,185.9 millionin 2017, 2016 and $7,569.7 million,2015, respectively. The reduction in revenue in 2017 for North America and the United States primarily reflects the sale of our specialty print media business in the second quarter.
8. Equity Method Investments
Income from our equity method investments in 2015, 2014was $3.5 million, $5.4 million and 2013 was $8.4 million, $16.2 million in 2017, 2016 and $15.9 million, respectively, and our2015, respectively. Our proportionate share in their net assets at December 31, 20152017 and 20142016 was $45.3$40.7 million and $49.0$38.6 million, respectively. Our equity method investments are not material to our results of operations or financial position; therefore, summarized financial information is not required to be presented.
9. Share-Based Compensation Plans
Share-based incentive awards are granted to employees under the 2013 Incentive Award Plan, (“or 2013 Plan”),Plan, which is administered by the Compensation Committee of the Board of Directors, (“or Compensation Committee”).Committee. Awards include stock options, restricted stock and other stock awards. The maximum number of shares of common stock that can be granted under the 2013 Plan is 33 million shares plus any shares awarded under the 2013 Plan and any prior plan that have been forfeited or have expired. Stock option awards reduce the number of shares available for grant on a one-for-one basis and all other awards reduce the number of shares available for grant by 3.5 shares for each share awarded. The terms of each award and the exercise date are determined by the Compensation Committee. The 2013 Plan does not permit the holder of an award to elect cash settlement under any circumstances. At December 31, 2015,2017, there were 31,635,82928,684,234 shares available for grant under the 2013 Plan. If all shares available for grant were for awards other than stock options, shares available for grant would be 9,038,8088,195,495.
Share-based compensation expense was $80.2 million, $93.4 million and $99.4 million in 2017, 2016 and 2015, respectively. At December 31, 2017, unamortized share-based compensation that will be expensed over the next five years is $177.6 million.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation expense in 2015, 2014 and 2013 was $99.4 million, $93.5 million and $86.3 million, respectively. At December 31, 2015, unamortized share-based compensation that will be expensed over the next five years is $185.7 million. We record a deferred tax asset for the share-based compensation expense recognized for financial reporting purposes that has not been deducted on our income tax return. If the actualOn January 1, 2017, we adopted ASU 2016-09,(see Note 1), which requires that beginning in 2017 excess tax deduction exceeds the deferred tax asset, the difference is recorded in additional paid-in capital (“APIC Pool”). If the actual tax deduction is less than the deferred tax assetbenefits and no APIC Pool exists, the difference isdeficiencies related to share-based compensation be recorded in results of operations. Tooperations upon vesting of restricted stock awards or exercise of stock options. Excess tax benefits and deficiencies represent the extent that futuredifference between the actual compensation deduction for tax deductions are less thanpurposes, which is calculated as the deferred tax assets recorded,difference between the grant date price of the award and the price of our common stock on the vesting or exercise date, and compensation expense recognized for financial reporting purposes. In 2017 we expect to have sufficientrecognized an excess tax benefits within the APIC Pool available to offset any potential future shortfall.benefit of $20.8 million.
Stock Options
The exercise price of stock option awards cannot be less than 100% of the market price of our common stock on the grant date and the option term cannot exceed ten years from the grant date. Generally, stockThe 2017 option awards vest 30% per year in the first two years and are fully vested100% three years from the grant date.date and have a maximum contractual life of six years. All prior option awards have a maximum contractual life of 10 years.
Stock option activity for the three years ended December 31, 20152017 was:
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| January 1 | 1,652,140 |
| | $27.97 | | 2,643,680 |
| | $26.39 | | 5,590,880 |
| | $25.72 | 719,757 |
| | $27.88 | | 1,140,547 |
| | $28.86 | | 1,652,140 |
| | $27.97 |
| Granted | — |
| | 60,000 |
| | $66.16 | | 60,000 |
| | $70.68 | 1,000,000 |
| | $84.94 | | — |
| |
| | — |
| |
|
| Exercised | (511,593 | ) | | $25.98 | | (1,046,540 | ) | | $26.19 | | (3,021,200 | ) | | $26.01 | (102,335 | ) | | $23.40 | | (420,790 | ) | | $30.56 | | (511,593 | ) | | $25.98 |
| (Forfeited) reinstated | — |
| | (5,000 | ) | | $23.40 | | 14,000 |
| | $23.40 | |
| Forfeited | | (24,000 | ) | | $84.94 | | — |
| |
| | — |
| |
|
| December 31 | 1,140,547 |
| | $28.86 | | 1,652,140 |
| | $27.97 | | 2,643,680 |
| | $26.39 | 1,593,422 |
| | $63.11 | | 719,757 |
| | $27.88 | | 1,140,547 |
| | $28.86 |
| | | | | | | | | | | | | |
| Exercisable December 31 | 1,074,547 |
| | $26.47 | | 1,526,140 |
| | $24.95 | | 2,505,680 |
| | $24.67 | 617,422 |
| | $28.61 | | 695,757 |
| | $26.54 | | 1,074,547 |
| | $26.47 |
Options outstanding and exercisable at December 31, 20152017 were:
|
| | | | | | | | | | | | | | |
| | | | | Options Outstanding | | Options Exercisable |
| Exercise Price Range | | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| $23.40 | to | $29.99 | | 978,547 |
| | 3.2 years | | $23.40 | | 978,547 |
| | $23.40 |
| $30.00 | to | $44.99 | | 21,000 |
| | 5.9 years | | $43.49 | | 21,000 |
| | $43.49 |
| $45.00 | to | $59.99 | | 30,000 |
| | 6.8 years | | $49.65 | | 30,000 |
| | $49.65 |
| $60.00 | to | $70.68 | | 111,000 |
| | 8.3 years | | $68.60 | | 45,000 |
| | $69.78 |
| | | | | 1,140,547 |
| | | | | | 1,074,547 |
| | |
|
| | | | | | | | | | | | | | |
| | | | | Options Outstanding | | Options Exercisable |
| Exercise Price Range | | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| $23.00 | to | $24.00 | | 545,422 |
| | 1.2 years | | $23.40 | | 545,422 |
| | $23.40 |
| $66.00 | to | $71.00 | | 72,000 |
| | 6.4 years | | $68.04 | | 72,000 |
| | $68.04 |
| $84.00 | to | $85.00 | | 976,000 |
| | 5.2 years | | $84.94 | | — |
| | |
| | | | | 1,593,422 |
| | | | | | 617,422 |
| | |
The 2017 option award grant date fair value of each grant$9.87 was determined on the grant date using the Black-Scholes option valuation model. The Black-Scholes assumptions (withoutfor the model, without adjusting for the risk of forfeiture and lack of liquidity)liquidity, were: expected life - 4.5 years, risk free interest rate - 2.0%, expected volatility - 16.3% and dividend yield - 2.6%.
Restricted Stock
Restricted stock activity for the weighted average fair value per share for options granted were:three years ended December 31, 2017 was:
|
| | | | | | | |
| | 2014 | | 2013 |
| Expected option lives | 5 years | | 5 years |
| Risk free interest rate | 1.4% | | 1.4% |
| Expected volatility | 22.3% | | 26.0% |
| Dividend yield | 3.0% | | 2.0% |
| Weighted average fair value per option granted | $10.50 | | $14.50 |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| January 1 | 3,802,105 |
| | 4,349,105 |
| | 5,040,641 |
|
| Granted | 966,919 |
| | 1,100,396 |
| | 1,208,964 |
|
| Vested | (1,757,269 | ) | | (1,438,386 | ) | | (1,631,343 | ) |
| Forfeited | (152,382 | ) | | (209,010 | ) | | (269,157 | ) |
| December 31 | 2,859,373 |
| | 3,802,105 |
| | 4,349,105 |
|
| | | | | | |
| Weighted average grant date fair value of shares granted in the period | $74.10 | | $73.16 | | $64.49 |
| | | | | | |
| Weighted average grant date fair value at December 31 | $68.85 | | $61.72 | | $55.08 |
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
Restricted stock activity for the three years ended December 31, 2015 was:
|
| | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| January 1 | 5,040,641 |
| | 6,090,697 |
| | 7,241,490 |
|
| Granted | 1,208,964 |
| | 915,922 |
| | 706,900 |
|
| Vested | (1,631,343 | ) | | (1,619,444 | ) | | (1,490,786 | ) |
| Forfeited | (269,157 | ) | | (346,534 | ) | | (366,907 | ) |
| December 31 | 4,349,105 |
| | 5,040,641 |
| | 6,090,697 |
|
| | | | | | |
| Weighted average grant date fair value of shares granted in the period | $64.49 | | $64.92 | | $60.98 |
| | | | | | |
| Weighted average grant date fair value at December 31 | $55.08 | | $50.98 | | $47.47 |
Generally, restricted shares vest 20% per year and are fully vestedratably over five years from the grant date provided the employee remains employed by us. Restricted shares may not be sold, transferred, pledged or otherwise encumbered until the forfeiture restrictions lapse. Under most circumstances, the employee forfeits the shares if employment ceases prior to the end of the restriction period.
Performance Restricted Stock Units
The Compensation Committee grants certain employees performance restricted stock units, (“PRSUs”).or PRSU. Each PRSU represents the right to receive one share of common stock on vesting. The ultimate number of PRSUs received by the employee depends on the Company's average return on equity over a three year period compared to the average return on equity of a peer group of four principal competitors over the same period. Generally, theThe PRSUs vest three years from the grant date. The PRSUs have a service and performance vesting condition and compensation expense is recognized on a graded-vesting basis. Over the performance period, compensation expense is adjusted upward or downward based on our estimate of the probability of
achieving the performance target for the portion of the awards subject to the performance vesting condition. We assumehave assumed that substantially all the PRSUs will vest.
PRSU activity offor the three years ended December 31, 20152017 was:
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| January 1 | 622,859 |
| | $ | 56.16 |
| | 681,555 |
| | $ | 51.19 |
| | 538,948 |
| | $ | 48.74 |
| 462,381 |
| | $ | 77.05 |
| | 534,456 |
| | $ | 66.05 |
| | 622,859 |
| | $ | 56.16 |
|
| Granted | 161,625 |
| | 77.68 |
| | 188,621 |
| | 69.89 |
| | 183,998 |
| | 57.77 |
| 173,770 |
| | 84.94 |
| | 153,492 |
| | 83.23 |
| | 161,625 |
| | 77.68 |
|
| Distributed | (239,387 | ) | | 48.94 |
| | (165,562 | ) | | 48.56 |
| | (41,391 | ) | | 48.56 |
| (147,264 | ) | | 69.89 |
| | (225,567 | ) | | 55.20 |
| | (239,387 | ) | | 48.94 |
|
| Forfeited | (10,641 | ) | | 48.87 |
| | (81,755 | ) | | 61.76 |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (10,641 | ) | | 48.87 |
|
| December 31 | 534,456 |
| | $ | 66.05 |
| | 622,859 |
| | $ | 56.16 |
| | 681,555 |
| | $ | 51.19 |
| 488,887 |
| | $ | 82.01 |
| | 462,381 |
| | $ | 77.05 |
| | 534,456 |
| | $ | 66.05 |
|
ESPP
Employee Stock Purchase Plan
We have anThe employee stock purchase plan, (“ESPP”) thator ESPP, enables employees to purchase our common stock through payroll deductions over each plan quarter at 95% of the market price on the last trading day of the plan quarter. Purchases are limited to 10% of eligible compensation as defined by the Employee Retirement Income Security Act of 1974, (“ERISA”). In 2015, 2014 and 2013,or ERISA. Our employees purchased 101,862 shares, 97,935 shares and 111,849 shares 113,293 sharesin 2017, 2016 and 175,002 shares,2015, respectively. All shares purchased were treasury stock, for which we received $7.87.6 million, $8.07.8 million and $9.97.8 million, respectively. At December 31, 2015,2017, there were 8,966,2348,766,437 shares available forunder the ESPP.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
We file a consolidated U.S. federal income tax return and income tax returns in various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions. Our principal foreign jurisdictions include the United Kingdom, France and Germany. The Internal Revenue Service has completed its examination of our federal tax returns through 2010.2012. Tax returns in the United Kingdom, France and Germany have been examined through 2012, 20102013, 2013 and 2009, respectively.
On December 22, 2017, the Tax Act was enacted into law. The Tax Act reduced the U.S. federal statutory income tax rate to 21% from 35% for tax years beginning after December 31, 2017 and made several changes to existing tax law that affect our tax assets and liabilities related to previously reported taxable income. The significant changes require that we record tax expense on the accumulated earnings of our foreign subsidiaries and adjust our previously reported deferred tax positions to reflect the impact of the revised statutory federal rate as of the enactment date. In December 2017, the SEC issued Staff Accounting Bulletin 118, or SAB 118, which provides guidance on accounting for the impact of the Tax Act. SAB 118 provides that provisional amounts should be recognized in our financial statements where accounting for certain effects of the Tax Act are not complete and a reasonable estimate of the effects of the Tax Act can be made. Accordingly, at December 31, 2017, we have estimated the effect of the Tax Act and recorded a net increase to income tax expense of $106.3 million. Our estimate is based on our understanding of the Tax Act and currently available guidance. However, we are still analyzing the impact of the Tax Act and we expect the estimate to change. Any adjustment to the provisional amounts through December 22, 2018 will be recorded in results of operations in the period when the analysis is complete.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are required to account for effect of U.S. federal tax rate changes on our deferred tax balances by measuring deferred tax assets and liabilities at the rate at which they are expected to reverse in the future, which as a result of the Tax Act is 21%. The provisional amount for the remeasurement of our deferred tax assets and liabilities reduced income tax expense by $173.3 million.
The territorial tax system will allow us to repatriate future earnings of our foreign subsidiaries without incurring additional U.S. tax by providing a 100% dividend exemption. However, while the change to a territorial system limits U.S. federal income tax to domestic earnings, foreign source income is subject to tax by the appropriate foreign jurisdiction at the local rate, which, in certain jurisdictions, may be higher than the U.S. federal statutory income tax rate of 21%. As a result, the foreign tax rate differential will cause our effective tax rate to be higher than the U.S. federal statutory income tax rate.
The Tax Act imposes a one-time transition tax on our accumulated foreign earnings at December 31, 2017. We recorded a provisional amount of $192.1 million in income tax expense for the transition tax. The portion of the foreign earnings comprising cash and other specified assets is taxed at a 15.5% rate and any remaining amount is taxed at an 8% rate. The provisional amount can change as we obtain additional information related to our foreign subsidiaries. After taking into consideration available foreign tax credits and other items, we recorded a net cash liability of $102.9 million, which we will elect to pay over an eight year period. Although the adoption of a territorial tax system allows for the repatriation of foreign earnings after December 31, 2017 without incurring U.S. income tax, withholding taxes by the foreign jurisdictions will be applied to any dividends remitted to the U.S. As a result, we recorded a charge of $87.5 million related to these withholding taxes.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income, or GILTI, provisions of the Tax Act. We have elected to account for any GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2017.
Income before income taxes for the three years ended December 31, 20152017 was (in millions):
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Domestic | $ | 803.3 |
| | $ | 739.9 |
| | $ | 629.4 |
| $ | 832.4 |
| | $ | 805.2 |
| | $ | 803.3 |
|
| International | 975.3 |
| | 1,070.1 |
| | 1,031.5 |
| 1,052.5 |
| | 1,036.6 |
| | 975.3 |
|
| | $ | 1,778.6 |
| | $ | 1,810.0 |
| | $ | 1,660.9 |
| $ | 1,884.9 |
| | $ | 1,841.8 |
| | $ | 1,778.6 |
|
Income tax expense (benefit) for the three years ended December 31, 20152017 was (in millions): | | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Current: | | | | | | | | | | |
| Federal | $ | 342.3 |
| | $ | 356.1 |
| | $ | 246.3 |
| $ | 458.8 |
| | $ | 381.8 |
| | $ | 342.3 |
|
| State and local | 29.9 |
| | 38.1 |
| | 30.6 |
| 36.5 |
| | 12.6 |
| | 29.9 |
|
| International | 324.5 |
| | 344.8 |
| | 336.5 |
| 280.2 |
| | 332.1 |
| | 324.5 |
|
| | 696.7 |
| | 739.0 |
| | 613.4 |
| 775.5 |
| | 726.5 |
| | 696.7 |
|
| Deferred: | | | | | | | | | | |
| Federal | (86.7 | ) | | (106.4 | ) | | 0.3 |
| (205.5 | ) | | (88.2 | ) | | (86.7 | ) |
| State and local | 12.1 |
| | (2.3 | ) | | (3.6 | ) | 11.1 |
| | 12.0 |
| | 12.1 |
|
| International | (38.5 | ) | | (37.2 | ) | | (44.9 | ) | 115.1 |
| | (49.8 | ) | | (38.5 | ) |
| | (113.1 | ) | | (145.9 | ) | | (48.2 | ) | (79.3 | ) | | (126.0 | ) | | (113.1 | ) |
| | $ | 583.6 |
| | $ | 593.1 |
| | $ | 565.2 |
| $ | 696.2 |
| | $ | 600.5 |
| | $ | 583.6 |
|
The reconciliation from the statutory U.S. federal income tax rate to our effective tax rate is: | | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State and local income taxes, net of federal income tax benefit | 1.5 |
| | 1.3 |
| | 1.0 |
| 1.3 |
| | 0.9 |
| | 1.5 |
|
| Effect of Tax Act | | 5.6 |
| | — |
| | — |
|
| International tax rate differentials | (3.7 | ) | | (3.3 | ) | | (3.0 | ) | (3.8 | ) | | (4.0 | ) | | (3.7 | ) |
| Other | — |
| | (0.2 | ) | | 1.0 |
| (1.2 | ) | | 0.7 |
| | — |
|
| Effective tax rate | 32.8 | % | | 32.8 | % | | 34.0 | % | 36.9 | % | | 32.6 | % | | 32.8 | % |
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The international tax rate differentials are primarily attributed to our earnings in the U.K., Germany, France,Canada, the United Arab Emirates, Brazil and Singapore being taxed at different rates than the U.S. statutory tax rate. Income tax expense for 2014 reflects the recognition of an income tax benefit of approximately $11 million related to previously incurred expenses for the proposed merger with Publicis Groupe S.A. (“Publicis”). On May 8, 2014, the proposed merger was terminated. Prior to the termination of the merger, the majority of the merger costs, which were incurred in 2013, were capitalized for income tax purposes and the related tax benefits were not recorded. Because the merger was terminated, the merger costs were no longer required to be capitalized for income tax purposes. Excluding the income tax benefit of $11 million related to the proposed merger, income tax expense for 2014 would have been $604.5 million. The decrease in the effective tax rate for 2015 from the effective tax rate for 2014, excluding the income tax benefit related to the proposed merger, is primarily due to a legal entity restructuring of our European operations. As a result of the reorganization, a certain portion of the foreign earnings in the affected countries is subject to lower effective tax rates.
Income tax expense forin 2017, 2016 and 2015 includes $2.5 million, 2015, 2014 and 2013 includes $1.1 million, $1.72.3 million and $1.61.1 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 20152017 and 2014, the2016, accrued interest and penalties were $8.416.1 million and $14.211.9 million, respectively.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred tax assets and liabilities at December 31, 20152017 and 20142016 were (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Deferred tax assets: | | | |
| Compensation and severance | $ | 293.8 |
| | $ | 311.9 |
|
| Tax loss and credit carryforwards | 113.3 |
| | 95.6 |
|
| Basis differences from acquisitions | 37.1 |
| | 38.0 |
|
| Basis differences from short-term assets and liabilities | 27.2 |
| | 27.8 |
|
| Other | 26.9 |
| | 33.0 |
|
| Deferred tax assets | 498.3 |
| | 506.3 |
|
| Valuation allowance | (35.3 | ) | | (34.1 | ) |
| Net deferred tax assets | $ | 463.0 |
| | $ | 472.2 |
|
| Deferred tax liabilities: | | | |
| Goodwill and intangible assets | $ | 729.5 |
| | $ | 706.1 |
|
| Financial instruments | 197.3 |
| | 263.1 |
|
| Unremitted foreign earnings | 9.9 |
| | 51.1 |
|
| Basis differences from investments | (4.6 | ) | | (4.2 | ) |
| Deferred tax liabilities | $ | 932.1 |
| | $ | 1,016.1 |
|
| | | | |
| Long-term deferred tax liabilities | $ | 469.1 |
| | $ | 543.9 |
|
Long-term deferred tax liabilities at December 31, 2014 were adjusted to reflect the retrospective adoption of ASU 2015-17 (See Note 2). |
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Compensation | $ | 173.7 |
| | $ | 307.5 |
|
| Tax loss and credit carryforwards | 40.3 |
| | 88.5 |
|
| Basis differences from acquisitions | 18.0 |
| | 24.3 |
|
| Basis differences from short-term assets and liabilities | 39.5 |
| | 36.2 |
|
| Other | 17.8 |
| | 18.7 |
|
| Deferred tax assets | 289.3 |
| | 475.2 |
|
| Valuation allowance | (3.3 | ) | | (3.0 | ) |
| Net deferred tax assets | $ | 286.0 |
| | $ | 472.2 |
|
| Deferred tax liabilities: | | | |
| Goodwill and intangible assets | $ | 562.2 |
| | $ | 802.7 |
|
| Unremitted foreign earnings | 94.9 |
| | 15.9 |
|
| Financial instruments | 41.4 |
| | 132.3 |
|
| Basis differences from investments | 9.8 |
| | 1.8 |
|
| Deferred tax liabilities | $ | 708.3 |
| | $ | 952.7 |
|
| | | | |
| Long-term deferred tax assets | $ | 61.3 |
| | $ | — |
|
| | | | |
| Long-term deferred tax liabilities | $ | 483.6 |
| | $ | 480.5 |
|
The American Recovery and Reinvestment Act of 2009 provided an election where qualifying cancellation of indebtedness income for debt reacquired in 2009 and 2010 was deferred and included in taxable income from 2014 to 2018. In 2009 and 2010, we redeemed $1.4 billion of our debt resulting in a tax liability of approximately $329 million. Through December 31, 2015,2017, we paid $132$263 million of the liability and the remainder will be paid from 2016 through 2018. Substantially all the deferred tax liability for financial instruments at December 31, 2015 and 2014, relates to the reacquired debt.
In 2014, as a result of the conversion of the 2032 Notes (See Note 6), we paid $66.2 million, representing the excess of the accreted value of the notes for income tax purposes over the conversion value and reclassified $32.2 million, representing the difference between the issue price of the notes and the conversion value from long-term deferred tax liabilities to additional paid-in capital.liability. As a result of the conversion ofTax Act, the 2033 Notesremaining liability was revalued to $41.4 million and 2038 Noteswill be paid in 2013 (See Note 6), in 2014 we paid $52.7 million, representing the excess of the accreted value of the notes for income tax purposes over the conversion value and in 2013 reclassified $34.5 million, representing the tax effect of the difference between the issue price of the notes and the conversion value from long-term deferred tax liabilities to additional paid-in capital.2018.
We have concluded that it is more likely than not that we will be able to realize our net deferred tax assets in future periods because results of future operations are expected to generate sufficient taxable income. The valuation allowance of $35.33.3 million and $34.13.0 million at December 31, 20152017 and 2014,2016, respectively, relates to tax loss and credit carryforwardslosses in the United States and international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 20162018 to 2035,2037, which is longer than the forecasted utilization of such carryforwards.
We have not provided U.S. federal income and foreign withholding taxes on approximately $2.1 billion of cumulative undistributed earnings of certain foreign subsidiaries. We intend to indefinitely reinvest these earnings in our international operations for working capital requirements and expansion in the region and we currently have no plans to repatriate these funds. We cannot determine the amount of taxes and foreign tax credits associated with the future repatriation of such earnings and therefore cannot quantify the tax liability.
In 2015, the weakening of substantially all foreign currencies against the U.S. Dollar impacted the translation of approximately $1.1 billion of the cumulative undistributed earnings of certain foreign operations that are not indefinitely reinvested. The foreign tax credits on those earnings substantially offset the U.S. federal tax liability on any repatriation. We have provided $9.9 million of residual U.S. taxes on those earnings. 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.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of our unrecognized tax benefits at December 31, 20152017 and 20142016 is (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| January 1 | $ | 139.8 |
| | $ | 137.8 |
| $ | 116.9 |
| | $ | 113.0 |
|
| Additions: | | | | | | |
| Current year tax positions | 5.8 |
| | 6.0 |
| 67.1 |
| | 20.0 |
|
| Prior year tax positions | 0.2 |
| | 1.0 |
| 5.5 |
| | 6.5 |
|
| Reduction of prior year tax positions | (25.1 | ) | | 0.5 |
| (16.5 | ) | | (21.9 | ) |
| Settlements | (6.0 | ) | | (0.8 | ) | — |
| | (0.7 | ) |
| Lapse of statute of limitations | — |
| | (2.9 | ) | |
| Foreign currency translation | (1.7 | ) | | (1.8 | ) | 0.7 |
| | — |
|
| December 31 | $ | 113.0 |
| | $ | 139.8 |
| $ | 173.7 |
| | $ | 116.9 |
|
The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 20152017 and 2014,2016, approximately $52.2$142.8 million and $58.671.0 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Pension and Other Postemployment Benefits
Defined Contribution Plans
Our domestic and international subsidiaries provide retirement benefits for their employees primarily through defined contribution profit sharing and savings plans. Contributions to the plans vary by subsidiary and have generally been in amounts up to the maximum percentage of total eligible compensation of participating employees that is deductible for income tax purposes. Contribution expense in 2015, 2014was $112.9 million, $108.5 million and 2013 was $105.7 million, $108.4 million in 2017, 2016 and $109.3 million,2015, respectively.
Defined Benefit Pension Plans
Two of our U.S. businesses and several of our non-U.S. businesses sponsor noncontributory defined benefit pension plans. These plans provide benefits to employees based on formulas recognizing length of service and earnings. The U.S. plans cover approximately 1,200900 participants, are closed to new participants and do not accrue future benefit credits. The non-U.S. plans, which include plans required by local law, cover approximately 6,5006,200 participants and are not covered bysubject to ERISA.
We have a Senior Executive Restrictive Covenant and Retention Plan, (“or Retention Plan”)Plan, for certain executive officers of Omnicom selected by the Compensation Committee. The Retention Plan is a non-qualified deferred compensation severance plan that was adopted to secure non-competition, non-solicitation, non-disparagement and ongoing consulting services from such executive officers and to strengthen the retention aspect of executive officer compensation. The Retention Plan provides annual payments upon termination following at least seven years of service with Omnicom or its subsidiaries to the participants or to their beneficiaries. A participant’s annual benefit is payable for 15 consecutive calendar years following termination, but in no event prior to age 55. The annual benefit is equal to the lesser of (i) the participant’s final average pay times an applicable percentage, which is based upon the executive’s years of service as an executive officer, not to exceed 35% or (ii) $1.5 million adjusted for cost-of-living, beginning with the second annual payment, not to exceed 2.5% per year. The Retention Plan is not funded and benefits are paid when due.
The components of net periodic benefit costexpense for the three years ended December 31, 20152017 were (in millions):
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Service cost | $ | 5.3 |
| | $ | 6.8 |
| | $ | 4.6 |
| $ | 10.1 |
| | $ | 7.8 |
| | $ | 5.3 |
|
| Interest cost | 7.6 |
| | 8.2 |
| | 7.3 |
| 7.9 |
| | 7.8 |
| | 7.6 |
|
| Expected return on plan assets | (4.0 | ) | | (4.2 | ) | | (3.7 | ) | (3.6 | ) | | (3.7 | ) | | (4.0 | ) |
| Amortization of prior service cost | 4.3 |
| | 4.3 |
| | 3.6 |
| 4.6 |
| | 4.5 |
| | 4.3 |
|
| Amortization of actuarial (gains) losses | 5.7 |
| | 2.3 |
| | 3.5 |
| |
| Amortization of actuarial losses | | 7.0 |
| | 5.3 |
| | 5.7 |
|
| | $ | 18.9 |
| | $ | 17.4 |
| | $ | 15.3 |
| $ | 26.0 |
| | $ | 21.7 |
| | $ | 18.9 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in accumulated other comprehensive income at December 31, 20152017 and 20142016 were unrecognized actuarial gains and losses and unrecognized prior service cost of $95.090.0 million, $59.0 million net of tax, and $91.0 million, ($56.0 million net of tax,income taxes) and $98.0 million ($60.0 million net of income taxes), respectively, that have not yet been recognized in net periodic benefit cost. The unrecognized actuarial gains and losses and unrecognized prior service cost included in accumulated other comprehensive income and expected to be recognized in net periodic benefit cost in 20162018 is $9.411.4 million.
The weighted average assumptions used to determine net periodic benefit costexpense for the three years ended December 31, 20152017 were:
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Discount rate | 3.5 | % | | 4.5 | % | | 3.9 | % | 3.5 | % | | 3.7 | % | | 3.5 | % |
| Compensation increases | 1.9 | % | | 1.8 | % | | 1.6 | % | 2.0 | % | | 2.0 | % | | 1.9 | % |
| Expected return on plan assets | 5.7 | % | | 5.8 | % | | 5.3 | % | 5.3 | % | | 4.8 | % | | 5.7 | % |
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected long-term rate of return for plan assets for the U.S. plans is based on several factors, including current and expected asset allocations, historical and expected returns on various asset classes and current and future market conditions. A total return investment approach using a mix of equities and fixed income investments maximizes the long-term return. This strategy is intended to minimize plan expense by achieving long-term returns in excess of the growth in plan liabilities over time. The discount rate used to compute net periodic benefit cost is based on yields of available high-quality bonds and reflects the expected cash flow as of the measurement date. The expected returns on plan assets and discount rates for the non-U.S. plans are based on local factors, including each plan’s investment approach, local interest rates and plan participant profiles.
Experience gains and losses and the effects of changes in actuarial assumptions are generally amortized over a period no longer than the expected average future service of active employees.
Our funding policy is to contribute amounts sufficient to meet minimum funding requirements in accordance with the applicable employee benefit and tax laws that the plans are subject to, plus such additional amounts as we may determine to be appropriate. In 2015, 2014We contributed $8.3 million, $6.6 million and 2013, we contributed $4.2 million, $3.2 million, $5.5 million, in 2017, 2016 and 2015, respectively, to our defined benefit pension plans and weplans. We do not expect our 2016contributions for 2018 to differ materially from our 20152017 contributions.
At December 31, 20152017 and 2014,2016, the benefit obligation, fair value of plan assets and funded status of our defined benefit pension plans were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| Benefit Obligation: | | | | | | |
| January 1 | $ | 222.7 |
| | $ | 185.7 |
| $ | 251.1 |
| | $ | 234.8 |
|
| Service cost | 5.3 |
| | 6.8 |
| 10.1 |
| | 7.8 |
|
| Interest cost | 7.6 |
| | 8.2 |
| 7.9 |
| | 7.8 |
|
| Actuarial (gains) losses | 5.9 |
| | 31.3 |
| |
| Amendments, curtailments and settlements | | 0.3 |
| | — |
|
| Actuarial losses | | 6.8 |
| | 13.3 |
|
| Benefits paid | (7.2 | ) | | (5.0 | ) | (9.1 | ) | | (9.4 | ) |
| Foreign currency translation and other | 0.5 |
| | (4.3 | ) | |
| Foreign currency translation | | 9.9 |
| | (3.2 | ) |
| December 31 | $ | 234.8 |
| | $ | 222.7 |
| $ | 277.0 |
| | $ | 251.1 |
|
| | | | | |
| Fair Value of Plan Assets: | | | | | | |
| January 1 | $ | 74.4 |
| | $ | 72.2 |
| $ | 68.6 |
| | $ | 68.9 |
|
| Actual return on plan assets | (0.5 | ) | | 6.5 |
| 6.3 |
| | 4.9 |
|
| Employer contributions | 4.2 |
| | 3.2 |
| 8.3 |
| | 6.6 |
|
| Benefits paid | (7.2 | ) | | (5.0 | ) | (9.1 | ) | | (9.4 | ) |
| Foreign currency translation and other | (2.0 | ) | | (2.5 | ) | 6.2 |
| | (2.4 | ) |
| December 31 | $ | 68.9 |
| | $ | 74.4 |
| $ | 80.3 |
| | $ | 68.6 |
|
| | | | | | | |
| Funded Status December 31 | $ | (165.9 | ) | | $ | (148.3 | ) | $ | (196.7 | ) | | $ | (182.5 | ) |
At December 31, 2017 and 2016, the funded status was classified as follows (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Other assets | $ | 6.0 |
| | $ | 4.2 |
|
| Other current liabilities | (5.1 | ) | | (5.1 | ) |
| Long-term liabilities | (197.6 | ) | | (181.6 | ) |
| | $ | (196.7 | ) | | $ | (182.5 | ) |
The accumulated benefit obligation for our defined benefit pension plans at December 31, 2017 and 2016, was $264.5 million and $240.8 million, respectively.
At December 31, 2017 and 2016, plans with benefit obligations in excess of plan assets were (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Benefit obligation | $ | 253.8 |
| | $ | 241.3 |
|
| Plan assets | 51.1 |
| | 54.6 |
|
| | $ | 202.7 |
| | $ | 186.7 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015 and 2014, the funded status was classified as follows (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Other assets | $ | 5.4 |
| | $ | 4.6 |
|
| Other current liabilities | (4.6 | ) | | (4.4 | ) |
| Long-term liabilities | (166.7 | ) | | (148.5 | ) |
| | $ | (165.9 | ) | | $ | (148.3 | ) |
The accumulated benefit obligation for our defined benefit pension plans at December 31, 2015 and 2014, was $226.0 million and $210.0 million, respectively.
At December 31, 2015 and 2014, plans with benefit obligations in excess of plan assets were (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Benefit obligation | $ | 215.9 |
| | $ | 212.0 |
|
| Plan assets | 44.6 |
| | 59.0 |
|
| | $ | 171.3 |
| | $ | 153.0 |
|
The weighted average assumptions used to determine the benefit obligation at December 31, 20152017 and 2014,2016, were:
| | | | 2015 | | 2014 | | | | |
| | | | | 2017 | | 2016 |
| Discount rate | 3.8 | % | | 3.5 | % | 3.1 | % | | 3.5 | % |
| Compensation increases | 2.0 | % | | 1.8 | % | 2.0 | % | | 2.0 | % |
At December 31, 2015,2017, the estimated benefits expected to be paid over the next 10 years are (in millions):
| | | 2016 | $ | 8.5 |
| |
| 2017 | 9.2 |
| |
| 2018 | 8.5 |
| $ | 9.7 |
|
| 2019 | 10.2 |
| 10.8 |
|
| 2020 | 11.8 |
| 12.3 |
|
| 2021 - 2025 | 82.7 |
| |
| 2021 | | 16.1 |
|
| 2022 | | 16.8 |
|
| 2023 - 2027 | | 99.6 |
|
The fair value of plan assets at December 31, 20152017 and 20142016 was (in millions):
| | | 2015 | Level 1 | | Level 2 | | Level 3 | | Total | |
| 2017 | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash | $ | 1.8 |
| | | | | | $ | 1.8 |
| $ | 1.0 |
| | | | | | $ | 1.0 |
|
| Mutual funds | 39.7 |
| | | | | | 39.7 |
| 41.5 |
| | | | | | 41.5 |
|
| Unit trusts | 22.9 |
| | | | | | 22.9 |
| 28.2 |
| | | | | | 28.2 |
|
| Insurance contracts | | | | | $ | 4.2 |
| | 4.2 |
| | | | | $ | 8.6 |
| | 8.6 |
|
| Other | | | $ | 0.3 |
| | | | 0.3 |
| | | $ | 1.0 |
| | | | 1.0 |
|
| | $ | 64.4 |
| | $ | 0.3 |
| | $ | 4.2 |
| | $ | 68.9 |
| $ | 70.7 |
| | $ | 1.0 |
| | $ | 8.6 |
| | $ | 80.3 |
|
| | | 2014 | | | | | | | | |
| 2016 | | | | | | | | |
| Cash | $ | 2.6 |
| | | | | | $ | 2.6 |
| $ | 1.6 |
| | | | | | $ | 1.6 |
|
| Mutual funds | 43.4 |
| | | | | | 43.4 |
| 39.0 |
| | | | | | 39.0 |
|
| Unit trusts | 24.4 |
| | | | | | 24.4 |
| 23.5 |
| | | | | | 23.5 |
|
| Insurance contracts | | | | | $ | 3.7 |
| | 3.7 |
| | | | | $ | 4.3 |
| | 4.3 |
|
| Other | | | $ | 0.3 |
| | | | 0.3 |
| | | $ | 0.2 |
| | | | 0.2 |
|
| | $ | 70.4 |
| | $ | 0.3 |
| | $ | 3.7 |
| | $ | 74.4 |
| $ | 64.1 |
| | $ | 0.2 |
| | $ | 4.3 |
| | $ | 68.6 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mutual funds and unit trusts are publicly traded and are valued using quoted market prices. The mutual funds and unit trusts include investments in equity and fixed income securities. Insurance contracts primarily consist of guaranteed investment contracts. Other investments primarily consist of commingled short-term investment funds.
Changes in the fair value of plan assets measured using Level 3 inputs at December 31, 20152017 and 20142016 were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| January 1 | $ | 3.7 |
| | $ | 3.4 |
| $ | 4.3 |
| | $ | 4.2 |
|
| Actual return on assets | 0.1 |
| | 0.1 |
| 0.2 |
| | 0.2 |
|
| Purchases, sales and settlements, net | 0.4 |
| | 0.2 |
| 4.1 |
| | (0.1 | ) |
| December 31 | $ | 4.2 |
| | $ | 3.7 |
| $ | 8.6 |
| | $ | 4.3 |
|
The weighted average asset allocations at December 31, 20152017 and 20142016 were:
| | | | 2015 | | 2014 | 2017 | | 2016 |
| | Target Allocation | | Actual Allocation | | Actual Allocation | Target Allocation | | Actual Allocation | | Actual Allocation |
| Cash | 4 | % | | 3 | % | | 3 | % | 4 | % | | 1 | % | | 3 | % |
| Mutual funds | 54 | % | | 58 | % | | 58 | % | 48 | % | | 52 | % | | 57 | % |
| Unit trusts | 34 | % | | 33 | % | | 33 | % | 34 | % | | 35 | % | | 34 | % |
| Insurance contracts | 6 | % | | 6 | % | | 5 | % | 11 | % | | 11 | % | | 6 | % |
| Other | 2 | % | | — | % | | 1 | % | 3 | % | | 1 | % | | — | % |
| | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % |
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk tolerance for these plans is established through consideration of plan liabilities, funded status and evaluation of the overall investment environment. The investment portfolios containcomprise a diversified blendmix of equity and fixed-income investments. Equity investments are diversified across geography and market capitalization through investment in large and medium capitalization U.S. and international equities andequities. Fixed income investments include a mix of U.S. and international debt securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, and periodic asset/liability studies and investment portfolio reviews.
Postemployment Arrangements
We have executive retirement agreements under which benefits will be paid to participants or to their beneficiaries over periods up to ten years beginning after cessation of full-time employment. Our postemployment arrangements are unfunded and benefits are paid when due.
The components of net periodic benefit costexpense for the three years ended December 31, 20152017 were (in millions):
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Service cost | $ | 4.8 |
| | $ | 3.8 |
| | $ | 4.1 |
| $ | 4.4 |
| | $ | 3.9 |
| | $ | 4.8 |
|
| Interest cost | 4.3 |
| | 4.5 |
| | 4.3 |
| 3.7 |
| | 3.5 |
| | 4.3 |
|
| Amortization of prior service cost | 3.2 |
| | 2.1 |
| | 1.9 |
| 3.5 |
| | 3.1 |
| | 3.2 |
|
| Amortization of actuarial (gains) losses | 1.6 |
| | 0.9 |
| | 1.5 |
| |
| Amortization of actuarial losses | | 1.0 |
| | 1.1 |
| | 1.6 |
|
| | $ | 13.9 |
| | $ | 11.3 |
| | $ | 11.8 |
| $ | 12.6 |
| | $ | 11.6 |
| | $ | 13.9 |
|
Included in accumulated other comprehensive income at December 31, 20152017 and 20142016 were unrecognized actuarial gains and losses and unrecognized prior service cost of $49.054.0 million, ($29.033.0 million net of income taxes,taxes) and $60.051.0 million, ($36.030.0 million net of income taxes,taxes), respectively, that have not yet been recognized in the net periodic benefit cost. The unrecognized actuarial gains and losses and unrecognized prior service cost included in accumulated other comprehensive income and expected to be recognized in net periodic benefit cost in 20162018 is $4.25.2 million.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average assumptions used to determine net periodic benefit costexpense for the three years ended December 31, 20152017 were:
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Discount rate | 3.8 | % | | 4.7 | % | | 4.1 | % | 3.9 | % | | 4.1 | % | | 3.8 | % |
| Compensation increases | 3.5 | % | | 3.5 | % | | 3.5 | % | 3.5 | % | | 3.5 | % | | 3.5 | % |
Experience gains and losses and effects of changes in actuarial assumptions are amortized over a period no longer than the expected average future service of active employees.
At December 31, 20152017 and 2014,2016, the benefit obligation was (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| January 1 | $ | 122.1 |
| | $ | 104.2 |
| $ | 120.3 |
| | $ | 115.9 |
|
| Service cost | 4.8 |
| | 3.8 |
| 4.4 |
| | 3.9 |
|
| Interest cost | 4.3 |
| | 4.5 |
| 3.7 |
| | 3.5 |
|
| Amendments | (0.6 | ) | | 7.5 |
| — |
| | 5.6 |
|
| Actuarial (gains) losses | (6.0 | ) | | 11.3 |
| |
| Actuarial (gain) loss | | 8.1 |
| | 0.6 |
|
| Benefits paid | (8.7 | ) | | (9.2 | ) | (8.8 | ) | | (9.2 | ) |
| December 31 | $ | 115.9 |
| | $ | 122.1 |
| $ | 127.7 |
| | $ | 120.3 |
|
At December 31, 20152017 and 2014,2016, the liability was classified as follows (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| Other current liabilities | $ | 9.3 |
| | $ | 8.7 |
| $ | 9.3 |
| | $ | 8.1 |
|
| Long-term liabilities | 106.6 |
| | 113.4 |
| 118.4 |
| | 112.2 |
|
| | $ | 115.9 |
| | $ | 122.1 |
| $ | 127.7 |
| | $ | 120.3 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average assumptions used to determine the benefit obligation at December 31, 20152017 and 20142016 were:
| | | | 2015 | | 2014 | 2017 | | 2016 |
| Discount rate | 4.1 | % | | 3.8 | % | 3.4 | % | | 3.9 | % |
| Compensation increases | 3.5 | % | | 3.5 | % | 3.5 | % | | 3.5 | % |
At December 31, 2015,2017, the estimated benefits expected to be paid over the next 10 years are (in millions):
| | | 2016 | $ | 9.3 |
| |
| 2017 | 8.3 |
| |
| 2018 | 8.1 |
| $ | 9.3 |
|
| 2019 | 6.5 |
| 7.4 |
|
| 2020 | 5.5 |
| 6.6 |
|
| 2021 - 2025 | 29.0 |
| |
| 2021 | | 6.1 |
|
| 2022 | | 6.5 |
|
| 2023 - 2027 | | 33.2 |
|
12. Supplemental Cash Flow Data
The increase in operating capital for the three years ended December 31, 2017 was (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| (Increase) decrease in accounts receivable | $ | (341.6 | ) | | $ | (376.5 | ) | | $ | (1,063.6 | ) |
| (Increase) decrease in work in process and other current assets | 5.4 |
| | (89.7 | ) | | (79.6 | ) |
| Increase (decrease) in accounts payable | 763.2 |
| | 741.9 |
| | 1,443.7 |
|
Increase (decrease) in customer advances, taxes payable and other current liabilities | 4.8 |
| | 31.6 |
| | 243.9 |
|
| Change in other assets and liabilities, net | (83.3 | ) | | (4.5 | ) | | 15.1 |
|
| | $ | 348.5 |
| | $ | 302.8 |
| | $ | 559.5 |
|
| | | | | | |
| Income taxes paid | $ | 566.0 |
| | $ | 570.4 |
| | $ | 540.1 |
|
| Interest paid | $ | 226.2 |
| | $ | 216.7 |
| | $ | 173.9 |
|
13. Noncontrolling Interests
Changes in the ownership interests in our less than 100% owned subsidiaries for the three years ended December 31, 2017 were (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net income attributed to Omnicom Group Inc. | $ | 1,088.4 |
| | $ | 1,148.6 |
| | $ | 1,093.9 |
|
| Transfers (to) from noncontrolling interests: | | | | | |
| Increase in additional paid-in capital from sale of shares in noncontrolling interests | 1.8 |
| | 2.0 |
| | 1.7 |
|
| Decrease in additional paid-in capital from purchase of shares in noncontrolling interests | (27.5 | ) | | (89.7 | ) | | (40.5 | ) |
| Net transfers (to) from noncontrolling interests | (25.7 | ) | | (87.7 | ) | | (38.8 | ) |
Change from net income attributed to Omnicom Group Inc. and transfers (to) from noncontrolling interests | $ | 1,062.7 |
| | $ | 1,060.9 |
| | $ | 1,055.1 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Supplemental Cash Flow Data
The change in operating capital for the three years ended December 31, 2015 was (in millions):
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| (Increase) decrease in accounts receivable | $ | (1,063.6 | ) | | $ | (227.1 | ) | | $ | 244.8 |
|
| (Increase) decrease in work in process and other current assets | (74.7 | ) | | (14.2 | ) | | (413.9 | ) |
| Increase (decrease) in accounts payable | 1,443.7 |
| | 231.3 |
| | 236.6 |
|
| Increase (decrease) in customer advances and other current liabilities | 203.9 |
| | (24.0 | ) | | 159.6 |
|
| Change in other assets and liabilities, net | 48.3 |
| | (72.2 | ) | | 124.2 |
|
| | $ | 557.6 |
| | $ | (106.2 | ) | | $ | 351.3 |
|
| | | | | | |
| Income taxes paid | $ | 540.1 |
| | $ | 610.1 |
| | $ | 472.4 |
|
| | | | | | |
| Interest paid | $ | 173.9 |
| | $ | 188.6 |
| | $ | 192.8 |
|
In 2014, as a result of the conversion of the 2032 Notes (See Note 6), we issued 1,217,112 shares of our common stock to satisfy the conversion premium. Based on the closing prices of our common stock on the settlement dates, the issuances resulted in a non-cash pretax financing activity of $89.2 million, net of the cash tax benefit of $32.2 million (See Note 10).
In 2013, as a result of the conversion of the 2033 Notes and the 2038 Notes (See Note 6), we issued 1,499,792 shares of our common stock to satisfy the conversion premium. Based on the closing prices of our common stock on the settlement dates, the issuances resulted in a non-cash pretax financing activity of $95.4 million, net of the cash tax benefit of $34.5 million (See Note 10).
13. Noncontrolling Interests
Changes in the ownership interests in our less than 100% owned subsidiaries during the three years ended December 31, 2015 were (in millions):
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| Net income attributed to Omnicom Group Inc. | $ | 1,093.9 |
| | $ | 1,104.0 |
| | $ | 991.1 |
|
| Transfers (to) from noncontrolling interests: | | | | | |
| Increase in additional paid-in capital from sale of shares in noncontrolling interests | 1.7 |
| | 6.3 |
| | 5.2 |
|
| Decrease in additional paid-in capital from purchase of shares in noncontrolling interests | (40.5 | ) | | (70.8 | ) | | (22.0 | ) |
| Net transfers (to) from noncontrolling interests | (38.8 | ) | | (64.5 | ) | | (16.8 | ) |
Change from net income attributed to Omnicom Group Inc. and transfers (to) from noncontrolling interests | $ | 1,055.1 |
| | $ | 1,039.5 |
| | $ | 974.3 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Leases
We lease substantially all our office space under operating leases and our equipment under operating and capital leases. Office leases may include renewal options. In circumstances where the exercise of a renewal option is reasonably assured at the inception of the lease, the renewal period is included in the determination of the lease term. Office leases may also include scheduled rent increases and concessions, such as rent abatements and landlord incentives and tenant improvement allowances. Scheduled rent increases are recognized on a straight-line basis over the lease term and concessions are recorded as deferred rent and are amortized toin rent expense on a straight-line basis over the lease term. Certain office leases require payment of real estate taxes and other occupancy costs and these costs are not included in rent expense. Leasehold improvements made at inception or during the lease term are amortized over the shorter of the asset life or the lease term, which may include renewal periods where the renewal is reasonably assured.
Rent expense for the three years ended December 31, 20152017 was (in millions):
| | | | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Office base rent | $ | 342.5 |
| | $ | 373.1 |
| | $ | 379.9 |
| $ | 336.7 |
| | $ | 339.7 |
| | $ | 342.5 |
|
| Third party sublease rent | (11.0 | ) | | (11.2 | ) | | (10.6 | ) | (6.3 | ) | | (5.6 | ) | | (11.0 | ) |
| Net office rent | 331.5 |
| | 361.9 |
| | 369.3 |
| 330.4 |
| | 334.1 |
| | 331.5 |
|
| Equipment rent | 22.6 |
| | 27.9 |
| | 33.1 |
| 20.1 |
| | 21.0 |
| | 22.6 |
|
| | $ | 354.1 |
| | $ | 389.8 |
| | $ | 402.4 |
| $ | 350.5 |
| | $ | 355.1 |
| | $ | 354.1 |
|
FutureThe aggregate minimum lease payments under non-cancelable operating leases, reduced by third party sublease rent receivable from existing non-cancelable subleases, and capital leases are (in millions):
| | | | Operating Leases | | Capital Leases | Operating Leases | | Capital Leases |
| 2016 | $ | 305.0 |
| | $ | 23.7 |
| |
| 2017 | 224.5 |
| | 16.1 |
| |
| 2018 | 176.0 |
| | 9.1 |
| $ | 317.8 |
| | $ | 34.5 |
|
| 2019 | 147.1 |
| | 5.0 |
| 249.7 |
| | 30.0 |
|
| 2020 | 122.7 |
| | 3.3 |
| 198.3 |
| | 26.4 |
|
| 2021 | | 169.4 |
| | 17.1 |
|
| 2022 | | 144.2 |
| | 6.4 |
|
| Thereafter | 419.4 |
| | 2.8 |
| 627.2 |
| | 3.1 |
|
| Minimum lease payments | 1,394.7 |
| | 60.0 |
| |
| Total | | 1,706.6 |
| | 117.5 |
|
| Sublease rent | (10.4 | ) | | | (19.0 | ) | | |
| Net rent | $ | 1,384.3 |
| | | |
| Net operating lease payments | | $ | 1,687.6 |
| | |
| Interest component | | | (2.0 | ) | | | (7.0 | ) |
| Present value of minimum lease payments | | | $ | 58.0 |
| |
| Present value of minimum capital lease payments | | | | $ | 110.5 |
|
Property under capital lease and capital lease obligations as of at December 31, 20152017 and 20142016 were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| Property under capital lease: | | | | | | |
| Cost | $ | 154.6 |
| | $ | 146.3 |
| $ | 229.3 |
| | $ | 184.8 |
|
| Accumulated depreciation | (100.4 | ) | | (90.6 | ) | (121.0 | ) | | (110.2 | ) |
| | $ | 54.2 |
| | $ | 55.7 |
| $ | 108.3 |
| | $ | 74.6 |
|
| Capital lease obligations: | | | | | | |
| Current | $ | 22.8 |
| | $ | 23.2 |
| $ | 31.6 |
| | $ | 24.2 |
|
| Long-term | 35.2 |
| | 34.0 |
| 78.9 |
| | 49.8 |
|
| | $ | 58.0 |
| | $ | 57.2 |
| $ | 110.5 |
| | $ | 74.0 |
|
Depreciation expense for property under capital lease in 2015, 2014was $31.1 million, $27.2 million and 2013 was $26.5 million, $26.1 million in 2017, 2016 and $26.4 million,2015, respectively.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Temporary Equity - Redeemable Noncontrolling Interests
Owners of noncontrolling equity interests in some of our subsidiaries have the right in certain circumstances to require us to purchase all or a portion of their equity interestsinterest at fair value as defined in the applicable agreements. Assuming that the subsidiaries perform over the relevant periods at their current profit levels, at December 31, 20152017 the aggregate estimated maximum amount we could be required to pay in future periods is $167.9$182.4 million,, of which $131.9130.5 million is currently exercisable by the holders. If these rights are exercised, there would be an increase in the net income attributable to Omnicom as a result of our increased ownership interest and the reduction of net income attributable to noncontrolling interests. The ultimate amount paid could be significantly different because the redemption amount is primarily dependentdepends on the future results of operations of the subject businesses, the timing of the exercise of these rights and changes in foreign currency exchange rates.
16. Commitments and Contingent Liabilities
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of operations or financial position.
On December 14, 2016, two of our subsidiaries received subpoenas from the U.S. Department of Justice Antitrust Division concerning its ongoing investigation of video production and post-production practices in the advertising industry. The Company is fully cooperating with the investigation. While the ultimate effect of the investigation is inherently uncertain, we do not at this time believe that the investigation will have a material adverse effect on our results of operations or financial position. However, the ultimate resolution of these matters could be different from our current assessment and the differences could be material.
17. Changes in Accumulated Other Comprehensive Income (Loss)
17. Equity
The changesChanges in accumulated other comprehensive income (loss), net of income taxes, for the years ended December 31, 20152017 and 20142016 were (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| 2015 | Unrealized Gain (Loss) on Cash Flow Hedge | | Unrealized Gain (Loss) on Available-for-Sale Securities | | Defined Benefit Pension and Postemployment Plans | | Foreign Currency Translation | | Total |
| January 1 | $ | — |
| | $ | (1.2 | ) | | $ | (92.1 | ) | | $ | (524.9 | ) | | $ | (618.2 | ) |
| Other comprehensive income (loss) before reclassifications | (3.3 | ) | | 0.3 |
| | — |
| | (398.4 | ) | | (401.4 | ) |
| Amounts reclassified (to) from accumulated other comprehensive income (loss) | — |
| | — |
| | 4.2 |
| | — |
| | 4.2 |
|
| Other comprehensive income (loss) | (3.3 | ) | | 0.3 |
| | 4.2 |
| | (398.4 | ) | | (397.2 | ) |
| December 31 | $ | (3.3 | ) | | $ | (0.9 | ) | | $ | (87.9 | ) | | $ | (923.3 | ) | | $ | (1,015.4 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Cash Flow Hedge | | Available-for-Sale Securities | | Defined Benefit Pension Plans and Postemployment Arrangements | | Foreign Currency Translation | | Total |
| January 1, 2016 | $ | (3.3 | ) | | $ | (0.9 | ) | | $ | (87.9 | ) | | $ | (923.3 | ) | | $ | (1,015.4 | ) |
Other comprehensive income (loss) before reclassifications | (28.5 | ) | | 0.1 |
| | (11.0 | ) | | (311.8 | ) | | (351.2 | ) |
Reclassification from accumulated other comprehensive income (loss) | 2.3 |
| | — |
| | 8.3 |
| | — |
| | 10.6 |
|
| December 31, 2016 | (29.5 | ) | | (0.8 | ) | | (90.6 | ) | | (1,235.1 | ) | | (1,356.0 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 0.5 |
| | (7.2 | ) | | 387.1 |
| | 380.4 |
|
Reclassification from accumulated other comprehensive income (loss) | 3.2 |
| | — |
| | 9.4 |
| | — |
| | 12.6 |
|
| December 31, 2017 | $ | (26.3 | ) | | $ | (0.3 | ) | | $ | (88.4 | ) | | $ | (848.0 | ) | | $ | (963.0 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| 2014 | | | | | | | | | |
| January 1 | $ | — |
| | $ | (1.6 | ) | | $ | (68.8 | ) | | $ | (121.2 | ) | | $ | (191.6 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| | 0.4 |
| | — |
| | (403.7 | ) | | (403.3 | ) |
| Amounts reclassified (to) from accumulated other comprehensive income (loss) | — |
| | — |
| | (23.3 | ) | | — |
| | (23.3 | ) |
| Other comprehensive income (loss) | — |
| | 0.4 |
| | (23.3 | ) | | (403.7 | ) | | (426.6 | ) |
| December 31 | $ | — |
| | $ | (1.2 | ) | | $ | (92.1 | ) | | $ | (524.9 | ) | | $ | (618.2 | ) |
Reclassifications from accumulated other comprehensive income (loss) for the year ended December 31, 2015 and 2014 were (in millions):
|
| | | | | | | |
| | 2015 | | 2014 |
| Amortization of defined benefit pension and postemployment plans: | | | |
| Prior service cost | $ | 7.5 |
| | $ | 6.4 |
|
| Actuarial (gains) losses | 7.3 |
| | 3.2 |
|
| Net periodic benefit cost (Note 11) | 14.8 |
| | 9.6 |
|
| Income taxes | 5.9 |
| | 3.8 |
|
| Periodic benefit cost, net of income tax | $ | 8.9 |
| | $ | 5.8 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Fair Value
Financial assets and liabilities measured at fair value on a recurring basis at December 31, 20152017 and 20142016 were (in millions):
| | | 2015 | Level 1 | | Level 2 | | Level 3 | | Total | |
| 2017 | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2,605.2 |
| | | | | | $ | 2,605.2 |
| $ | 3,796.0 |
| | | | | | $ | 3,796.0 |
|
| Short-term investments | 14.5 |
| | | | | | 14.5 |
| 0.4 |
| | | | | | 0.4 |
|
| Available-for-sale securities | 4.8 |
| | | | | | 4.8 |
| 1.4 |
| | | | | | 1.4 |
|
| Interest rate and foreign currency derivative instruments | | | $ | 32.4 |
| | | | 32.4 |
| |
| Foreign currency derivatives | | | | $ | 1.0 |
| | | | 1.0 |
|
| Liabilities: | |
| | | | | | |
| |
| | | | | | |
|
| Interest rate and foreign currency derivative instruments | | | $ | 15.9 |
| | | | $ | 15.9 |
| |
| Interest rate and foreign currency derivatives | | | | $ | 39.5 |
| | | | $ | 39.5 |
|
| Contingent purchase price obligations | | | | | $ | 322.0 |
| | 322.0 |
| | | | | $ | 215.6 |
| | 215.6 |
|
| | | 2014 | | | | | | | | |
| 2016 | | | | | | | | |
| Assets: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2,388.1 |
| | | | | | $ | 2,388.1 |
| $ | 3,002.2 |
| | | | | | $ | 3,002.2 |
|
| Short-term investments | 2.2 |
| | | | | | 2.2 |
| 20.6 |
| | | | | | 20.6 |
|
| Available-for-sale securities | 4.9 |
| | | | | | 4.9 |
| 4.3 |
| | | | | | 4.3 |
|
| Interest rate and foreign currency derivative instruments | | | $ | 43.1 |
| | | | 43.1 |
| |
| Foreign currency derivatives | | | | $ | 0.2 |
| | | | 0.2 |
|
| Liabilities: | | | | | | | | | | | | | | |
| Foreign currency derivative instruments | | | $ | 0.4 |
| | | | $ | 0.4 |
| |
| Interest rate and foreign currency derivatives | | | | $ | 48.9 |
| | | | $ | 48.9 |
|
| Contingent purchase price obligations | | | | | $ | 300.7 |
| | 300.7 |
| | | | | $ | 386.1 |
| | 386.1 |
|
The changes
Changes in contingent purchase price obligations for the years ended December 31, 20152017 and 20142016 were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| January 1 | $ | 300.7 |
| | $ | 220.2 |
| $ | 386.1 |
| | $ | 322.0 |
|
| Acquisitions | 98.9 |
| | 167.1 |
| 31.9 |
| | 165.3 |
|
| Revaluation and interest | 21.8 |
| | 11.0 |
| (27.4 | ) | | 18.0 |
|
| Payments | (58.6 | ) | | (83.2 | ) | (187.0 | ) | | (103.7 | ) |
| Deferred payment | (21.4 | ) | | — |
| |
| Foreign currency translation | (19.4 | ) | | (14.4 | ) | 12.0 |
| | (15.5 | ) |
| December 31 | $ | 322.0 |
| | $ | 300.7 |
| $ | 215.6 |
| | $ | 386.1 |
|
The carrying amount and fair value of our financial assets and liabilities at December 31, 20152017 and 20142016 were (in millions):
| | | | 2015 | | 2014 | 2017 | | 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Assets: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2,605.2 |
| | $ | 2,605.2 |
| | $ | 2,388.1 |
| | $ | 2,388.1 |
| $ | 3,796.0 |
| | $ | 3,796.0 |
| | $ | 3,002.2 |
| | $ | 3,002.2 |
|
| Short-term investments | 14.5 |
| | 14.5 |
| | 2.2 |
| | 2.2 |
| 0.4 |
| | 0.4 |
| | 20.6 |
| | 20.6 |
|
| Available-for-sale securities | 4.8 |
| | 4.8 |
| | 4.9 |
| | 4.9 |
| 1.4 |
| | 1.4 |
| | 4.3 |
| | 4.3 |
|
| Interest rate and foreign currency derivative instruments | 32.4 |
| | 32.4 |
| | 43.1 |
| | 43.1 |
| |
| Foreign currency derivatives | | 1.0 |
| | 1.0 |
| | 0.2 |
| | 0.2 |
|
| Cost method investments | 21.5 |
| | 21.5 |
| | 21.8 |
| | 21.8 |
| 14.4 |
| | 14.4 |
| | 14.2 |
| | 14.2 |
|
| Liabilities: | | | | | | | | | | | | | | |
| Short-term debt | $ | 5.2 |
| | $ | 5.2 |
| | $ | 7.2 |
| | $ | 7.2 |
| $ | 11.8 |
| | $ | 11.8 |
| | $ | 28.7 |
| | $ | 28.7 |
|
| Interest rate and foreign currency derivative instruments | 15.9 |
| | 15.9 |
| | 0.4 |
| | 0.4 |
| |
| Interest rate and foreign currency derivatives | | 39.5 |
| | 39.5 |
| | 48.9 |
| | 48.9 |
|
| Contingent purchase price obligations | 322.0 |
| | 322.0 |
| | 300.7 |
| | 300.7 |
| 215.6 |
| | 215.6 |
| | 386.1 |
| | 386.1 |
|
| Long-term debt, including current portion | 4,565.6 |
| | 4,655.9 |
| | 4,542.5 |
| | 4,754.9 |
| 4,912.9 |
| | 5,056.9 |
| | 4,920.6 |
| | 5,035.1 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the foreign currency and interest rate derivative instruments is determined using model-derived valuations, taking into consideration foreign currency rates for the foreign currency derivatives and readily observable inputs for LIBOR interest rates and yield curves to derive the present value of the future cash flows for the interest rate swap derivatives and counterparty credit risk for each. The estimated fair value of the contingent purchase price obligations is calculated in accordance with the terms of each acquisition agreement and is discounted. The fair value of long-term debt is based on quoted market prices.
19. Derivative Instruments and Hedging Activities
We manage our exposure to foreign exchange and interest rate risk through various strategies, including the use of derivative financial instruments. We use forward foreign exchange contracts as economic hedges to manage the cash flow volatility arising from foreign exchange rate fluctuations. Additionally, weWe use interest rate swaps to manage our interest expense and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. We do not use derivative instrumentsderivatives for trading or speculative purposes. Using derivative instrumentsderivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. To mitigateWe manage that risk through careful selection and ongoing evaluation of the counterparty credit risk, we have a policy of only entering into derivative 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.derivatives. We periodically determine the potential loss from market risk on our derivative instrumentsderivatives by performing a value-at-risk, or VaR, analysis. VaR is a statistical model that utilizesuses 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 change in the net fair value of our derivative financial instruments at December 31, 20152017 was not significant.
Foreign Exchange Risk
As an integral part of our global treasury operations, we centralize our cash and use multicurrency pools to manage the foreign exchange risk that arises from imbalances between subsidiaries and their respective treasury centers from which they borrow or invest funds. However, in certain circumstances, subsidiaries borrowborrowing or investinvesting with a treasury center operating in a different currency. At December 31, 2015 and 2014,currency creates foreign exchange exposure. To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $22.1$92.8 million and $113.1$99.0 million respectively, to manage the foreign exchange risk associated with these activities.at December 31, 2017 and 2016, respectively. Additionally, there are circumstances where revenue and expense transactions are not denominated in the same currency. In these instances, amounts are either promptly settled or hedged with forward foreign exchange contracts. At December 31, 2015 and 2014,To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $85.9$136.3 million and $44.0$94.0 million respectively, to manage the foreign exchange risk of these activities. See Note 18 for a discussion of theat December 31, 2017 and 2016, respectively. The net fair value of these instruments. The termsthe forward foreign contracts at December 31, 2017 and 2016 was a current asset of our forward contracts are generally less than 90 days.$0.9 million and a current liability of $1.1 million, respectively.
Foreign currency derivative instrumentsderivatives are designated as fair value hedges; therefore, any gain or loss in fair value incurred on those instruments is recorded in results of operations and is generally offset by decreases or increases in the fair value of the underlying exposures. 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. The terms of our forward foreign exchange contracts are generally less than 90 days.
Interest Rate Risk
We use interest rate swaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. Based on market conditions, we may terminate the swaps to reduce our exposure to rising interest rates or to monetize any gain and lock in a reduction in interest expense over the term of the underlying debt. At December 31, 2015 and 2014, theThe total notional amount of the outstanding fixed-to-floating interest rate swaps was $1.75 billion and $2.25 billion, respectively. On January 19, 2016, we terminated the remaining $1.0 billion notional amount of the swap on the 2022 Notes.
Also, we are exposed to interest rate volatility on future debt issuances. To manage this risk, we use forward-starting interest rate swaps to lock in the interest rate on future debt issuances. Atat December 31, 2015, the total notional amount of the forward-starting interest rate swaps2017 and 2016, was $1.0$1.25 billion.
See Note 6 for a complete discussion of our interest rate swaps.
20. New Accounting Standards
Effective January 1, 2018, we will adopt FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. As a result, we will change our revenue recognition accounting policy as described below. ASC 606 will be applied using the modified retrospective method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018 and is not expected to have a material impact on our financial position. ASC 606 provides a five-step model where revenue is recognized when the customer obtains control of the promised goods or services in an
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. New Accounting Standards
In May 2014,amount that reflects the FASB issued FASB ASU 2014-09, consideration that we expect to receive in exchange for those goods or services. The adoption of ASC 606 will not have a material impact on how we recognize revenue for fixed fee or retainer based arrangements. Clients typically receive the benefit of our services as we perform. We will continue to recognize revenue over time using inputs or outputs to measure our progress. Revenue from Contracts with Customers (“ASU 2014-09”), whichfor commission based arrangements will replace all existing revenue recognition guidance under U.S. GAAP. On July 9, 2015,continue to be recognized at a point-in-time. ASC 606 also includes additional disclosure requirements.
For certain of our businesses, the FASB approved a one year deferraladoption of the effective date of ASU 2014-09 all annual and interim periods beginning after December 15, 2017, with early application permitted only for annual and interim periods beginning after December 31, 2016. ASU 2014-09 provides for one of two methods of transition: retrospective application to each prior period presented; or, recognition of the cumulative effect of retrospective application of the new standard as of the beginning of the period of initial application. Presently, we are not yet in a position to conclude on the application date or the transition method weASC 606 will choose. Based on our initial assessment, the impact of the application of the new standard will likely result in a change in our accounting policy for certain third-party out-of-pocket costs, which are incurred in connection with our services and are billed to clients. The inclusion of third-party out-of-pocket costs in revenue depends on whether we act as a principal or agent in the timingclient arrangement. Under ASC 606, the principal versus agent assessment is based on whether we control the specified goods or services before they are transferred to the customer. As a result of ourthe adoption of ASC 606, certain third-party costs are no longer included in revenue recognition forand cost of services. This change will reduce reported revenue and will have no impact on operating profit.
In addition, performance incentives received from clients and the recognition ofthat can increase revenue if we meet certain reimbursable out-of-pocket costsquantitative or qualitative objectives in delivering our services will be treated as revenue.variable consideration. Performance incentives are currentlywere recognized in revenue when specific quantitative goals arewere achieved, or when our performance against qualitative goals is determinedwas acknowledged by the client. Under ASC 606, variable consideration is estimated and included in total consideration at contract inception based on either the new standard, we will be required to estimateexpected value method or the amount of the incentive that will be earnedmost likely method. These estimates are based on historical award experience, anticipated performance and our best judgment at the inception oftime. This change will have offsetting effects in each period and the contract and recognize the incentive over the term of the contract. While performance incentives arenet effect will not be material to our revenue, this will result in an acceleration in revenue recognition for certain contract incentives compared to the current method. Certain incidental costs that are reimbursed by our clients and are currently required to be recorded in revenue will likely not be recorded as revenue under the new standard. We expect this will result in less revenue and related cost recorded in our results of operations. While, we have not yet completed our assessment, we do not expect this change to have a material impact to our revenue and it will not result in any change to operating income.
operations or financial position.
In February 2015,2016, the FASB issued FASB ASU 2015-02,2016-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”)Leases, or ASU 2016-02, which changeswill supersede the consolidation analysiscurrent guidance for bothlease accounting and will require lessees to recognize the variable interest modelright-to-use assets and forrelated lease liabilities on the voting model for limited partnerships and similar entities.balance sheet. ASU 2015-022016-02 is effective for annual and interim periods beginning after December 15, 20152018 and early applicationadoption is permitted. ASU 2015-022016-02 provides for one of two methods of transition:a modified retrospective application to each priorfor leases existing at, or entered into after, the earliest comparative period presented; or, recognition of the cumulative effect of retrospective application of the new standardpresented in the period of initial application.financial statements. We appliedwill adopt ASU 2015-022016-02 on January 1, 2016 and2019. While we are not yet in a position to assess the full impact of the application of the new standard, did notwe expect that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on our total assets and liabilities with a minimal impact on our equity and no effect on results of operations or financial position.operations.
In January 2016, the FASB issued FASB ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities(“ASU 2016-01”), or ASU 2016-01, which will requirerevises the classification and measurement of investments in equity securities. ASU 2016-01 requires equity investments, except those accounted for under the equity method investments, toof accounting, be measured at fair value and any changes in fair value will be recognized in net income. ASU 2016-01 is effective on January 1, 2018 using a cumulative-effect adjustment to opening retained earnings. We do not expect that the adoption of ASU 2016-01 will not have a significant impact on our financial position or results of operations.
In June 2016, the FASB issued ASU 2016-012016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 20172019 and early applicationadoption is permitted for annual and interim periods beginning after December 15, 2018. We will adopt ASU 2016-13 on January 1, 2020. However, we are not permitted. ASU 2016-01 provides foryet in a position to assess the recognition of the cumulative effect of retrospective applicationimpact of the new standard in the period of initial application. We will apply ASU 2016-01 on January 1, 2018 and we expect that the application of the new standard will not have a significant impact on our results of operations or financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits, or ASU 2017-07, which requires that only the service cost component of periodic benefit cost is recorded in salary and service cost. All other components of net periodic benefit cost are presented separately and are excluded from operating profit. ASU 2017-07 is effective on January 1, 2018 using the full retrospective method. The adoption of ASU 2017-07 will have the affect of increasing operating profit but will have no effect on income before income taxes and equity method investments, net income or earnings per share.
21. Subsequent Events
We have evaluated events subsequent to the balance sheet date and determined there have not been any other events that have occurred that would require adjustment to or disclosure in the consolidated financial statements.
OMNICOM GROUP INC. AND SUBSIDIARIES
Selected Quarterly Financial Data (Unaudited)
(In millions, except per share amounts)
The Company’s unaudited selected quarterly financial data for the years ended December 31, 20152017 and 20142016 were: |
| | | | | | | | | | | | | | | |
| | Quarter |
| | First | | Second | | Third | | Fourth |
| Revenue | | | | | | | |
| 2015 | $ | 3,469.2 |
| | $ | 3,805.3 |
| | $ | 3,706.6 |
| | $ | 4,153.3 |
|
| 2014 | 3,502.2 |
| | 3,870.9 |
| | 3,749.6 |
| | 4,195.1 |
|
| Operating Expenses | | | | | | | |
| 2015 | 3,091.5 |
| | 3,266.7 |
| | 3,278.3 |
| | 3,577.8 |
|
| 2014 | 3,119.5 |
| | 3,322.5 |
| | 3,316.0 |
| | 3,615.7 |
|
| Operating Income | | | | | | | |
| 2015 | 377.7 |
| | 538.6 |
| | 428.3 |
| | 575.5 |
|
| 2014 | 382.7 |
| | 548.4 |
| | 433.6 |
| | 579.4 |
|
| Net Income - Omnicom Group Inc. | | | | | | | |
| 2015 | 209.1 |
| | 313.9 |
| | 239.3 |
| | 331.6 |
|
| 2014 | 205.5 |
| | 325.2 |
| | 243.8 |
| | 329.5 |
|
| Net Income Per Share Omnicom Group Inc. - Basic | | | | | | | |
| 2015 | 0.84 |
| | 1.27 |
| | 0.97 |
| | 1.35 |
|
| 2014 | 0.78 |
| | 1.24 |
| | 0.95 |
| | 1.30 |
|
| Net Income Per Share Omnicom Group Inc. - Diluted | | | | | | | |
| 2015 | 0.83 |
| | 1.26 |
| | 0.97 |
| | 1.35 |
|
| 2014 | 0.77 |
| | 1.23 |
| | 0.95 |
| | 1.30 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter |
| | First | | Second | | Third | | Fourth |
| Revenue | | | | | | | |
| 2017 | $ | 3,587.4 |
| | $ | 3,790.1 |
| | $ | 3,719.5 |
| | $ | 4,176.6 |
|
| 2016 | 3,499.1 |
| | 3,884.9 |
| | 3,791.1 |
| | 4,241.8 |
|
| Operating Expenses | | | | | | | |
| 2017 | 3,177.5 |
| | 3,224.6 |
| | 3,255.3 |
| | 3,556.5 |
|
| 2016 | 3,107.0 |
| | 3,323.1 |
| | 3,338.0 |
| | 3,639.9 |
|
| Operating Profit | | | | | | | |
| 2017 | 409.9 |
| | 565.5 |
| | 464.2 |
| | 620.1 |
|
| 2016 | 392.1 |
| | 561.8 |
| | 453.1 |
| | 601.9 |
|
| Net Income - Omnicom Group Inc. | | | | | | | |
| 2017 | 241.8 |
| | 328.6 |
| | 263.6 |
| | 254.4 |
|
| 2016 | 218.4 |
| | 326.1 |
| | 253.8 |
| | 350.3 |
|
| Net Income Per Share Omnicom Group Inc. - Basic | | | | | | | |
| 2017 | 1.03 |
| | 1.41 |
| | 1.14 |
| | 1.10 |
|
| 2016 | 0.90 |
| | 1.36 |
| | 1.06 |
| | 1.47 |
|
| Net Income Per Share Omnicom Group Inc. - Diluted | | | | | | | |
| 2017 | 1.02 |
| | 1.40 |
| | 1.13 |
| | 1.09 |
|
| 2016 | 0.90 |
| | 1.36 |
| | 1.06 |
| | 1.47 |
|
In the first and second quarters of 2014, we incurred $7.0 million and $1.8 million, respectively, of expenses in connection with the proposed merger with Publicis which were primarily comprised of professional fees. On May 8, 2014, the proposed merger was terminated. Excluding the effect of the merger expenses, Operating Income, Net Income - Omnicom Group Inc. and Diluted Net Income per Common Share - Omnicom Group Inc. for the first and second quarters of 2014 were $389.7 million and $550.2 million, $212.3 million and $315.8 million, and $0.80 and $1.20, respectively.
OMNICOM GROUP INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 20152017
(In millions)
| | | Description | Balance Beginning of Period | | Charged to Costs and Expenses | | Removal of Uncollectible Receivables | | Translation Adjustment Increase (Decrease) | | Balance End of Period | Balance Beginning of Period | | Charged to Costs and Expenses | | Removal of Uncollectible Receivables | | Translation Adjustment Increase (Decrease) | | Balance End of Period |
| Valuation accounts deducted from assets: | | | | | | | | | | | | | | | | | | |
| Allowance for Doubtful Accounts: | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | $ | 24.9 |
| | $ | 15.1 |
| | $ | (8.2 | ) | | $ | 0.3 |
| | $ | 32.1 |
|
| December 31, 2016 | | 22.5 |
| | 10.2 |
| | (7.4 | ) | | (0.4 | ) | | 24.9 |
|
| December 31, 2015 | $ | 24.9 |
| | $ | 4.4 |
| | $ | (5.4 | ) | | $ | (1.4 | ) | | $ | 22.5 |
| 24.9 |
| | 4.4 |
| | (5.4 | ) | | (1.4 | ) | | 22.5 |
|
| December 31, 2014 | 32.6 |
| | 8.5 |
| | (14.9 | ) | | (1.3 | ) | | 24.9 |
| |
| December 31, 2013 | 35.9 |
| | 9.7 |
| | (12.8 | ) | | (0.2 | ) | | 32.6 |
| |