We provide services to clients that operate in various industry sectors. Revenue by sector for 2017 and 2016 was:
Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. for 2017in 2020 decreased $60.2$393.7 million or 5.2%, to $1,088.4$945.4 million from $1,148.6$1,339.1 million in 2016.2019. 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 share - Omnicom Group Inc. decreased 2.7% to $4.65$4.37 in 2017,2020, compared to $4.78$6.06 in 2016. The impact of2019, due to the Tax Act reduced diluted net income per share - Omnicom Group Inc. $0.45. In addition,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 through March 2020, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan improved diluted net income per share - Omnicom Group Incduring the year. As discussed above and in 2017 comparedNote 1 to 2016.
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business.
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance 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 Incomenet income - Omnicom Group Inc. to EBITA and EBITA Margin for the for the periods presented (in millions):
The components of revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
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 20162019 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with all of our clients. OurIn 2019 and 2018, our largest client represented 3.0% and 2.7% of revenue in 2016 and 2015, respectively.revenue. Our ten largest and 100 largest clients represented 18.3%19.6% and 52.4%51.3% of revenue in 2016,2019, respectively, and 17.9%19.1% and 52.3%50.7% of revenue in 2015,2018, respectively.
We provide services to clients that operate in various industry sectors. Revenue by sector for 2016 and 2015 was:
Net income - Omnicom Group Inc. increased $54.7 million, or 5.0%, to $1,148.6 million in 2016 from $1,093.9 million in 2015. The year-over-year increase is2019 increased, due to the factors described above.above, $12.7 million, or 1.0%, to $1,339.1 million from $1,326.4 million in 2018. The net gain on disposition of subsidiaries and repositioning charges, after the allocated share of $6.9 million to noncontrolling interests, and the additional income tax expense from the finalization of the provisional
LIQUIDITY AND CAPITAL RESOURCES
Although we experienced a decrease in our cash flow from operations, we took numerous proactive steps to strengthen our liquidity and financial position that are intended to mitigate the impact of the COVID-19 pandemic on our liquidity. In February 2020, we issued $600 million of the 2.45% Notes. In March 2020, the net proceeds from the issuance of the 2.45% Notes were used to redeem the remaining $600 million principal amount of the 2020 Notes. As a result, we have no notes maturing until May 2022. In April 2020, we issued $600 million of the 4.20% Notes, and we entered into the $400 million 364 Day Credit facility maturing on April 2, 2021. The 364 Day Credit Facility is in addition to our existing $2.5 billion Credit Facility. Additionally, in March 2020, we suspended our share repurchase activity.
Cash Sources and Requirements
Our primary liquidity sources are our operating cash flow and cash and cash equivalents and short-term investments.equivalents. Additional liquidity sources include our credit facilities and commercial paper program, and access to the capital markets. At December 31, 2017, we have a $2.5 billion revolving credit facility, or Credit Facility expiringmaturing on July 31,February 14, 2025, the $400 million 364 Day Credit Facility maturing on April 2, 2021, the uncommitted domestic and international credit lines aggregating $1.2$1.1 billion, and the ability to issue up to $2 billion of commercial paper.paper and access the capital markets. Our liquidity funds our non-discretionary cash requirements and our discretionary spending.
Borrowings under our credit facilities may use LIBOR as the benchmark interest rate. The LIBOR benchmark rate is expected to be phased out by the end of June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.
Working capital is our principal non-discretionary funding requirement. In addition, we have contractual obligations related
to our senior notes,long-term debt (principal and interest payments), 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. As a result, we typically haveOur typical working capital cycle results in a short-term borrowing requirement that normally peakingpeaks during the second quarter of the year 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, and our discretionary spending for the next twelve months.
Cash and cash equivalents increased $793.8$1,294.8 million from December 31, 2016.2019. The components of the increase, were:including the net increase from our refinancing activities, were (in millions):
|
| | | | | | | |
Sources |
Cash flow from operations | | | $ | 2,023.9 |
|
Less: Increase in operating capital | | | (348.5 | ) |
Principal cash sources | | | 1,675.4 |
|
Uses |
Capital expenditures | $ | (156.0 | ) | | |
Dividends paid to common shareholders | (515.2 | ) | | |
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 | (84.8 | ) | | |
Repurchases of common stock, net of proceeds from stock plans | (557.7 | ) | | |
Principal cash uses | | | (1,415.4 | ) |
Principal cash sources in excess of principal cash uses | | | 260.0 |
|
Foreign exchange rate changes | | | 227.9 |
|
Financing activities and other | | | (42.6 | ) |
Increase in operating capital | | | 348.5 |
|
Increase in cash and cash equivalents | | | $ | 793.8 |
|
| | | | | | | | | | | |
Sources |
Cash flow from operations | | | $ | 1,724.6 | |
Less: Increase in operating capital | | | (30.9) | |
Principal cash sources | | | 1,693.7 | |
Uses |
Capital expenditures | $ | (75.4) | | | |
Dividends paid to common shareholders | (562.7) | | | |
Dividends paid to noncontrolling interest shareholders | (95.5) | | | |
Acquisition payments, including payment of contingent purchase price obligations and acquisition of additional noncontrolling interests, net of proceeds from sale of investments | (117.4) | | | |
Repurchases of common stock, net of proceeds from stock plans | (217.9) | | | |
Principal cash uses | | | (1,068.9) | |
Principal cash sources in excess of principal cash uses | | | 624.8 | |
Effect of foreign exchange rate changes on cash and cash equivalents | | | 114.7 | |
Other net financing and investing activities | | | 524.4 | |
Increase in operating capital | | | 30.9 | |
Increase in cash and cash equivalents | | | $ | 1,294.8 | |
Principal cash sources and principal cash uses amounts are Non-GAAP liquidity 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 liquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies. Additional information regarding our cash flows can be found in our consolidated financial statements.
At December 31, 2020, we have the following contractual obligations:
•Principal payments on long-term debt of $5.8 billion, of which $1.25 billion is due in 2022 and $750 million in due in 2024 (see Note 7 to the consolidated financial statements). Depending on the conditions in the credit markets we may refinance this debt, or we may use cash from operations, including temporally accessing our Credit Facility, to repay this debt.
•Interest payments on long-term debt due within the next five years aggregate $684.1 million, of which $176.4 million is payable in 2021.
•The liability for minimum lease payments for operating leases and finance leases due within the next five years aggregate $1.2 billion, of which $363.5 million is due in 2021 (see Note 16 to the consolidated financial statements).
•At December 31, 2020, the obligation for our defined benefit pension plans was $309.3 million and the liability for our postemployment arrangements was $164.6 million. In 2020, we contributed $9.1 million to our defined benefit plans and paid $8.7 million for our postemployment arrangements. We do not expect these payments to increase significantly in 2021 (see Note 12 to the consolidated financial statements).
•The liability of contingent purchase price payments (earn-outs) at December 31, 2020, was $71.9 million, of which $32.1 million is payable in 2021 (see Note 5 to the consolidated financial statements).
•The liability for the transition tax on accumulated foreign earnings due in the next five years is $105.6 million, of which $11.6 million is payable in 2021 (see Note 11 to the consolidated financial statements).
Based on past performance and current expectations, we believe that our operating cash flow will be sufficient to meet our non-discretionary cash requirements for the next twelve months.
Cash Management
Our regional treasury centers in North America, Europe and Asia manage our cash and liquidity. Each day, operations with excess funds invest thesethose funds with their regional treasury center. Likewise, operations that require funds borrow from their regional treasury center. TheTreasury centers with excess cash invest on a short-term basis with third parties, generally with maturities ranging from overnight to less than 90 days. Certain treasury centers aggregatehave notional pooling arrangements that are used to manage their cash and set-off foreign exchange imbalances. The arrangements require each treasury center to have its own notional pool account and to maintain a notional positive account balance. Additionally, under the net position which is either invested with or borrowed from third parties.terms of the arrangement, set-off of foreign exchange positions are limited to the long and short positions within their own account. To the extent that our treasury centers require liquidity, they have the ability to issue up to a total of $2 billion of U.S. Dollar-denominated commercial paper or borrow under the Credit Facility, 364 Day Credit Facility, or the uncommitted credit lines. This process enables us to manage our debt more efficiently and utilize our cash more effectively, as well as manage our risk to foreign exchange rate imbalances. In countries where we either do not conduct treasury operations or it is not feasible for one of our treasury centers to fund net borrowing requirements on an intercompany basis, we arrange for local currency uncommitted credit lines.
We have a policy governing counterparty credit risk with financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to the Credit Facility. These institutions generally have credit ratings equal to or better than our credit ratings. In countries where we do not conduct treasury operations, all cash and cash equivalents are held by counterparties that meet specific minimum credit standards.
At December 31, 2017,2020, our foreign subsidiaries held approximately $937 million$2.3 billion of our total cash and cash equivalents of $3.8$5.6 billion. The majorityMost 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.
OurAt December 31, 2020, our net debt position, which we define as total debt, including short-term debt, less cash and cash equivalents and short-term investments at December 31, 2017 decreased $798.2$624.4 million as compared to December 31, 2016.2019. The decrease in net debt is due to an increase in cash and cash equivalents and short-term investments of $773.6 million primarily arisingresulted from an increase in operating capital of $348.5 million, an increase in principal cash sources inthe excess of principal cash sources over principal cash uses of $260.0 million and the favorable impact of foreign exchange rate changes on cash and cash equivalents of $227.9$624.8 million.
The components of net debt at December 31, 2017 and 2016 were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Short-term debt | $ | 3.9 | | | $ | 10.1 | |
Long-term debt, including current portion | 5,807.3 | | | 5,134.3 | |
Total debt | 5,811.2 | | | 5,144.4 | |
Cash and cash equivalents and short-term investments | 5,600.5 | | | 4,309.3 | |
Net debt | $ | 210.7 | | | $ | 835.1 | |
|
| | | | | | | |
| 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 liquidity measure. This presentation, together with the comparable U.S. GAAP liquidity measures, reflects one of the key metrics used by us to assess our cash management. Non-GAAP liquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies.
Debt Instruments and Related Covenants
At December 31, 2017,On February 19, 2020, we issued $600 million of the total2.45% Notes. The net proceeds from the issuance, after deducting the underwriting discount and offering expenses, were $592.6 million and were used to redeem the remaining $600 million principal amount of ourthe 2020 Notes on March 23, 2020. In connection with the redemption, we recorded a loss on extinguishment of $7.7 million in interest expense. Following the redemption, there were no 2020 Notes outstanding.
On April 1, 2020, in response to the potential effects on market liquidity arising from the COVID-19 pandemic, we issued $600 million of the 4.20% Notes. The net proceeds from the issuance, after deducting the underwriting discount and offering expenses, were $592.5 million and were used for general corporate purposes, which included working capital expenditures, fixed rate senior notes was $4.9 billionasset expenditures and repayment of commercial paper and short-term debt.
The 2.45% Notes and the total notional amount4.20% Notes are senior unsecured obligations of the outstanding fixed-to-floating interest rate swaps was $1.25 billion. The interest rate swaps have the economic effectOmnicom that rank equal in right of converting our long-term debt portfolio to approximately 75% fixed rate obligationspayment with all existing and 25% floating rate obligations. A discussion of our interest rate swaps is included in Note 6 to the consolidated financial statements.future unsecured senior indebtedness.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under all the senior notes. The seniornotes due 2022, 2024 and 2026. These notes are a joint and several liability of usOmnicom and OCI, and weOmnicom unconditionally guaranteeguarantees 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 primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or usOmnicom to obtain funds from our subsidiaries through dividends, loans or advances. Our seniorSuch notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally guaranteed OFHP’s obligations with respect to the Euro denominated notes due 2027 and 2031. OFHP’s assets consist of its investments in several wholly owned finance companies that function as treasury centers that provide funding for various operating companies in Europe, Brazil, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFHP to obtain funds from their subsidiaries through dividends, loans or advances. The Euro denominated notes and the related guarantees are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFHP and each of Omnicom and OCI, respectively.
The Credit Facility containsand the 364 Day Credit Facility each contain a financial covenantscovenant that requirerequires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3 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 53.5 times for the most recently ended 12-month period. On October 26, 2020, we amended the Credit Facility and the 364 Day Credit Facility to provide additional flexibility with respect to the Leverage Ratio covenant. The amendments increase the maximum Leverage Ratio to 4.0 times through December 31, 2021 for the Credit Agreement and to 4.0 times through the maturity for the 364 Day Credit Facility. At December 31, 2017,2020, we were in compliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 10.43.0 times. The Credit Facility doesand the 364 Day Credit Facility do not limit our ability to declare or pay dividends or repurchase our common stock.
At December 31, 2017,2020, our long-term and short-term debt was rated BBB+ and A2 by S&P and Baa1 and P2 by Moody's. Our access to the commercial paper market and the cost of these borrowings are affected by market conditions and our credit ratingsratings. Our long-term debt, Credit Facility and market conditions. Our senior notes andthe 364 Day Credit Facility do not contain provisions that require acceleration of cash payments in the event of a downgrade in our credit ratings are downgraded.ratings.
Credit Markets and Availability of Credit
In light of the uncertainty of future economic conditions, we will continue to take actions available to us to respond to changing economic conditions, and we will continue to actively manage our discretionary expenditures. We have not repurchased any of our common stock since March 13, 2020, and we do not plan to resume our repurchases until we believe economic conditions have begun to stabilize. We will continue to monitor and manage the level of credit made available to our clients. We believe that these actions, in addition to the availability of our Credit Facility and 364 Day Credit Facility, are sufficient to fund our near-term working capital needs and our discretionary spending. For additional information about our credit facilities, see Note 7 to the consolidated financial statements.
We have typically fundfunded our day-to-day liquidity by issuing commercial paper. In the third and fourth quarters of 2020, we reduced our commercial paper issuances as compared to the prior year period primarily as a result of the issuance of the 4.20% Notes in April 2020. In 2019, we issued short-term debt in a private placement to reduce our commercial paper issuances. This short-term debt was redeemed in the third quarter of 2019. Additional liquidity sources include our Credit Facility, 364 Day Credit Facility or the uncommitted credit lines. At December 31, 2017,2020, there were no outstanding commercial paper issuances or borrowings under the Credit Facility, the 364 Day Credit Facility or the uncommitted credit lines.
Commercial paper activity for the three years ended December 31, 2017 was (dollars in millions):
| | | | | | | | | | Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
Average amount outstanding during the year | $ | 902.3 |
| | $ | 861.3 |
| | $ | 964.8 |
| Average amount outstanding during the year | $ | 50.1 | | | $ | 272.3 | | | $ | 411.7 | |
Maximum amount outstanding during the year | $ | 1,769.8 |
| | $ | 1,608.9 |
| | $ | 1,720.7 |
| Maximum amount outstanding during the year | $ | 401.2 | | | $ | 825.0 | | | $ | 1,218.7 | |
Average days outstanding | 13.0 |
| | 11.2 |
| | 13.2 |
| Average days outstanding | 4.6 | | | 4.0 | | | 5.7 | |
Weighted average interest rate | 1.29 | % | | 0.70 | % | | 0.46 | % | Weighted average interest rate | 1.52 | % | | 2.40 | % | | 2.19 | % |
We expect to continue fundingissuing commercial paper to fund our day-to-day liquidity by issuing commercial paper.liquidity. 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, 364 Day Credit Facility or the uncommitted credit lines or access the capital markets if favorable conditions exist. We will continue to monitor closely our liquidity and conditions in the credit markets. We cannot predict with any certainty the impact on us of any 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, 2017 were (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | Obligation Due |
| Total Obligation | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | After 2022 |
Long-term debt: | | | | | | | | | |
Principal | $ | 4,900.0 |
| | $ | — |
| | $ | 1,500.0 |
| | $ | 1,250.0 |
| | $ | 2,150.0 |
|
Interest | 966.2 |
| | 198.8 |
| | 335.4 |
| | 216.0 |
| | 216.0 |
|
Lease obligations | 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 | 41.4 |
| | 41.4 |
| | — |
| | — |
| | — |
|
Defined benefit pension plans benefit obligation | 277.0 |
| | 9.7 |
| | 23.1 |
| | 32.9 |
| | 211.3 |
|
Postemployment arrangements benefit obligation | 127.7 |
| | 9.3 |
| | 14.0 |
| | 12.6 |
| | 91.8 |
|
Uncertain tax positions | 173.7 |
| | 24.3 |
| | 44.7 |
| | 65.7 |
| | 39.0 |
|
| $ | 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) that 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 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 $324.4 million at December 31, 2017. In 2017, we contributed $8.3 million to our defined benefit pension plans and paid $8.8 million in benefits for our postemployment arrangements. We do not expect these payments to increase significantly in 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, 2017 were (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | Commitment Expires |
| Total Commitment | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | After 2022 |
Standby letters of credit | $ | 5.3 |
| | $ | 2.2 |
| | $ | — |
| | $ | 2.0 |
| | $ | 1.1 |
|
Guarantees | 130.3 |
| | 62.7 |
| | 60.5 |
| | 2.9 |
| | 4.2 |
|
| $ | 135.6 |
| | $ | 64.9 |
| | $ | 60.5 |
| | $ | 4.9 |
| | $ | 5.3 |
|
At December 31, 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. We may 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 derivatives 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.
We evaluate the effects of changes in foreign currency exchange rates, interest rates and other relevant market risks on our derivatives. We periodically determine the potential loss from market risk on our derivatives by performing a value-at-risk, or VaR, analysis. VaR is a statistical model that uses 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, 20172020 was not significant.
Foreign Currency Exchange Risk
OurIn 2020, our international operations representrepresented approximately 46%45% of our revenue. Changes in the value of foreign currencies against the U.S. Dollar affect our results of operations and financial position. For the most part, because the revenue and expenseexpenses of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. The effects of foreign currency exchange transactions on our results of operations are discussed in Note 2 to the consolidated financial statements.
While ourWe operate in all major international markets includeincluding the Euro Zone, the United Kingdom,U.K., Australia, Brazil, Canada, China and Japan, ourJapan. 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 notional multicurrency pools to manage the foreign currency 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 borrowing or investing with a treasury center operating in a different currency creates foreign exchange exposure. To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $92.8 million and $99.0 million at December 31, 2017 and 2016, respectively. Additionally,centers. In addition, 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. To manage thatthis risk, at December 31, 2020 and 2019, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $136.3$169.6 million and $94.0$284.2 million, atrespectively. At December 31, 20172020 and 2016, respectively. The2019, the net fair value of the forward foreign contracts at December 31, 2017 and 2016 was a current asset of $0.9 million and a current liability of $1.1 million, respectively.not material (see Note 20 to the consolidated financial statements).
Foreign currency derivatives 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.exposure. By using these financial instruments, we reducedreduce financial risk of adverse foreign exchange changes by foregoing any gain which might have occurredoccur if the markets movedmove favorably. The terms of our forward foreign exchange contracts are generally less than 90 days.
Interest Rate Risk
We may 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, 2017, the 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 converting2020, our long-term debt portfolio to approximately 75% fixed rate obligations and 25% floating rate obligations. A discussionconsists entirely of our interest rate swaps is included in Note 6 to the consolidated financial statements.fixed-rate debt.
Credit Risk
We provide advertising, marketing and corporate communications services to several thousand clients that operate in nearly every sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client represented 3.0%3.4% of revenue in 2017.2020. 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, 2017.2020. Based on that evaluation, our CEO and CFO concluded that, as of December 31, 2017,2020, 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, 20172020 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, 2017.2020. 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, 2017,2020, dated February 15, 2018,18, 2021, which is included on page F-2 of this 20172020 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 “Item 1 - Election of Directors,” “Stock Ownership Information - Section 16(a) Beneficial Ownership Reporting Compliance”Information” and “Additional Information - Shareholder Proposals and Director Nominations For The 2019for the 2022 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, 2017.2020.
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,” “Item 1 - Election of Directors - Directors' Compensation Forfor Fiscal 2017”Year 2020” and “Item 1 - Election of Directors - Board Policies and 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 “Stock Ownership Information - BeneficialSecurity Ownership of Certain Beneficial Owners and Management” and “Stock Ownership Information - Equity Compensation Plans” 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“Item 1 - Election of Directors - Board Policies and Processes - Transactions with Related Persons” and “Item 1 - Election of Directors - Omnicom Board of Directors”Directors - Director Independence” in our Proxy Statement.
Item 14. Principal AccountingAccountant Fees and Services
The information called for by this Item is incorporated herein by reference to the information to be included under the caption “Item 3 - Ratification of the Appointment of Independent Auditors - Fees Paid to Independent Auditors” in our Proxy Statement.
PART IV
Item 15. Exhibits,Exhibit and Financial Statement Schedules
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(a)(1) | Financial Statements: | Page |
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| Consolidated Balance Sheets at December 31, 20172020 and 20162019 | |
| Consolidated Statements of Income for the Three Years Ended December 31, 20172020 | |
| Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 20172020 | |
| Consolidated Statements of Equity for the Three Years Ended December 31, 20172020 | |
| Consolidated Statements of Cash Flows for the Three Years Ended December 31, 20172020 | |
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(a)(2) | Selected Quarterly Financial Data (Unaudited) | |
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(a)(2) | Financial Statement Schedules: | |
| Schedule II - Valuation and Qualifying Accounts for the Three Years Ended December 31, 20172020 | |
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| All other schedules are omitted because they are not applicable. | |
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(a)(3) | Exhibits: |
Exhibit Number | Description |
3(i) | |
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3(ii) | |
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4.1 | |
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4.2 | |
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4.3 | |
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4.4 | |
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4.54.3 | |
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4.64.4 | |
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4.74.5 | |
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4.8 | |
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4.9 | |
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4.104.6 | |
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4.114.7 | |
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4.124.8 | |
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4.134.9 | |
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4.144.10 | |
4.11 | Base Indenture, dated as of July 8, 2019, among Omnicom Finance Holdings plc, as issuer, Omnicom Group Inc. and Omnicom Capital Inc., as guarantors, and Deutsche Bank Trust Company Americas, as trustee (“2019 Base Indenture”), (Exhibit 4.1 to our Current Report on Form 8-K (File No. 1-10551) dated April 6, 2016July 8, 2019 (“July 8, 2019 8-K”) and incorporated herein by reference). |
4.12 | First Supplemental Indenture to the 2019 Base Indenture, dated as of July 8, 2019, among Omnicom Finance Holdings plc, as issuer, Omnicom Group Inc. and Omnicom Capital Inc., as guarantors, and Deutsche Bank Trust Company Americas, as trustee, in connection with the issuance of €500 million aggregate principal amount of Senior Notes due 2027 and €500 million aggregate principal amount of Senior Notes due 2031 (Exhibit 4.2 to the July 8, 2019 8-K and incorporated herein by reference). |
4.13 | |
4.14 | |
4.15 | |
4.16 | |
4.17 | |
4.18 | |
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10.14.19 | |
4.20 | |
10.1 | Second Amended and Restated Five Year Credit Agreement, dated as of July 31, 2014,February 14, 2020, by and among Omnicom Capital Inc., a Connecticut corporation, Omnicom Finance plc,Limited, a private limited company organized under the laws of England and Wales, Omnicom Group Inc., a New York corporation, any other subsidiary of Omnicom Group Inc. designated for borrowing privileges, the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof, Citigroup Global Markets Inc.Citibank, N.A., J.P. Morgan Securities LLC, HSBC Securities (USA) Inc.JPMorgan Chase Bank, N.A., 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, Bank of America, N.A., BNP Paribas, Barclays Bank PLC, Deutsche Bank Securities Inc. and U.S.HSBC Bank USA, 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, 2014February 19, 2020 and incorporated herein by reference). |
| |
10.2 | Director Equity Plan364-Day Credit Agreement, dated as of April 3, 2020, by and among Omnicom Capital Inc., Omnicom Group Inc., the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof, Citibank, N.A., BofA Securities, Inc., Mizuho Bank, Ltd. and U.S. Bank National Association, as joint lead arrangers and joint book managers, Bank of America, N.A., Mizuho Bank, Ltd. and U.S. Bank National Association, as syndication agents, and Citibank, N.A., as administrative agent for Non-employee Directors (Appendix Bthe lenders (Exhibit 10.1 to our Proxy StatementCurrent Report on Form 8-K (File No. 1-10551) filed on April 23, 20046, 2020 and incorporated herein by reference). |
10.3 | Amendment No. 1 to the Credit Agreement, dated October 26, 2020, to the Second Amended and Restated Five Year Credit Agreement, dated as of February 14, 2020, by and among Omnicom Capital Inc., Omnicom Finance Limited, Omnicom Group Inc., any other subsidiary of Omnicom Group Inc. designated for borrowing privileges, the banks, financial institutions and other institutional lenders party thereto, Citibank, N.A., JPMorgan Chase Bank, N.A., and Wells Fargo Securities, LLC, as lead arrangers and book managers, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as syndication agents, Bank of America, N.A., BNP Paribas, Barclays Bank PLC, Deutsche Bank Securities Inc. and HSBC Bank USA, National Association, as documentation agents, and Citibank, N.A., as administrative agent for the lenders (Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 1-10551) for the quarter ended September 30, 2020 ("September 30, 2020 10-Q") and incorporated herein by reference). |
10.310.4 | Amendment No. 1 to the Credit Agreement, dated October 26, 2020, to the 364-Day Credit Agreement, dated as of April 3, 2020, by and among Omnicom Capital Inc., Omnicom Group Inc., the banks, financial institutions and other institutional lenders party thereto, Citibank, N.A., BofA Securities, Inc., Mizuho Bank, Ltd. and U.S. Bank National Association, as joint lead arrangers and joint book managers, Bank of America, N.A., Mizuho Bank, Ltd. and U.S. Bank National Association, as syndication agents, and Citibank, N.A., as administrative agent for the lenders (Exhibit 10.2 to the September 30, 2020 10-Q and incorporated herein by reference). |
10.5 | |
10.6 | |
10.7 | |
10.4 | 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). |
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10.510.8 | |
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10.610.9 | |
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10.710.10 | |
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10.810.11 | |
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10.910.12 | |
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10.1010.13 | |
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10.1110.14 | |
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10.1210.15 | |
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10.1310.16 | |
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10.1410.17 | |
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10.1510.18 | |
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10.1610.19 | |
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10.1710.20 | |
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10.1810.21 | |
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10.1910.22 | |
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12 | |
10.23 | |
2110.24 | |
21 | |
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23 | |
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31.1 | |
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31.2 | |
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32 | |
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data Files.File (formatted as inline XBRL and contained in Exhibit 101) |
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 15, 201818, 2021 | 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 |
| | |
Signature | Title | Date |
| | |
/s/ BRUCE CRAWFORDJOHN D. WREN | Chairman and Director | February 15, 2018 |
Bruce Crawford | | |
| | |
/s/ JOHN D. WREN
| Chief Executive Officer and President and Director (Principal Executive Officer) | February 15, 201818, 2021 |
John D. Wren | | |
| | |
/s/ PHILIP J. ANGELASTRO | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 15, 201818, 2021 |
Philip J. Angelastro | | |
| | |
/s/ ANDREW L. CASTELLANETA | Senior Vice President, Chief Accounting Officer (Principal (Principal Accounting Officer) | February 15, 201818, 2021 |
Andrew L. Castellaneta | | |
| | |
/s/ ALAN R. BATKINMARY C. CHOKSI | Director | February 15, 201818, 2021 |
Alan R. BatkinMary C. Choksi | | |
| | |
/s/ MARY C.s/ LEONARD S. CHOKSIOLEMAN, JR. | Director | February 15, 201818, 2021 |
Mary C. Choksi | | |
| | |
/s/ ROBERT CHARLES CLARK
| Director | February 15, 2018 |
Robert Charles Clark | | |
| | |
/s/ LEONARD S. COLEMAN, JR.
| Director | February 15, 2018 |
Leonard S. Coleman, Jr. | | |
| | |
/s/ SUSAN S. DENISON | Director | February 15, 201818, 2021 |
Susan S. Denison | | |
| | |
/s/ RONNIES.HAWKINS | Director | February 18, 2021 |
Ronnie S. Hawkins | | |
| | |
/s/ DEBORAH J. KISSIRE | Director | February 15, 201818, 2021 |
Deborah J. Kissire | | |
| | |
/s/ GRACIA C. C. MARTORE | Director | February 15, 201818, 2021 |
Gracia C. Martore | | |
| | |
/s/ LINDAJOHN R. MURPHYOHNSON RICE | Director | February 15, 201818, 2021 |
John R. MurphyLinda Johnson Rice | | |
| | |
/s/ JOHN R. PURCELLVALERIEM. WILLIAMS | Director | February 15, 201818, 2021 |
John R. Purcell | | |
| | |
/s/ LINDA JOHNSON RICE
| Director | February 15, 2018 |
Linda Johnson Rice | | |
| | |
/s/ VALERIEM. WILLIAMS
| Director | February 15, 2018 |
Valerie 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”)., or 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 fourthfifth and fifthsixth 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, 2017.2020. 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, 2017,2020, dated February 15, 2018.
18, 2021.
The Board of Directors of Omnicom has an Audit Committee comprised of sixfour 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
TheTo the Shareholders and Board of Directors of
Omnicom Group Inc.:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated balance sheets of Omnicom Group Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172020 and 2016,2019, 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, 2017, 2020, and the related notes and financial statement schedule II (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Omnicom Group Inc. and subsidiariesthe Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 16 to the consolidated financial statements, the Company has changed its method of accounting for leases effective January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinions
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 Management’sManagement 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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits 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 overall 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’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’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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the sufficiency of audit evidence over revenue recognition
As discussed in Note 3 to the consolidated financial statements, the Company provides an extensive range of advertising, marketing and corporate communication services through its branded networks and agencies, which operate in all major markets throughout the Americas, EMEA and Asia Pacific regions. Consolidated revenues across all disciplines and global economic markets was $13,171.1 million for the year-ended December 31, 2020.
We identified the evaluation of the sufficiency of audit evidence over revenue recognition as a critical audit matter. Revenue is recognized from contracts with customers that are based on statements of work which are typically separately negotiated with the client at a local agency level and local agencies execute tens of thousands of contracts per year. Evaluating the sufficiency of audit evidence obtained required a high degree of auditor judgment because of the volume of contracts entered into across the branded networks and agencies for which revenue was recorded. This included selecting the locations where testing would be performed and the supervision and review of procedures performed at those locations.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the scope of agencies at which we performed audit procedures and the nature and extent of the procedures performed at each location. At each agency where procedures over revenue were performed, we (1) evaluated the design and tested the operating effectiveness of certain internal controls over revenue recognition, including controls to check that local agencies recorded revenue in accordance with the Company’s accounting policies and billings were recorded and presented in accordance with client agreements, (2) examined a selection of contracts and assessed that the Company’s accounting policies were applied consistently and accurately, and (3) assessed the recording of revenue by selecting certain transactions and comparing the amounts recognized for consistency with the underlying documentation including contracts with customers. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed over revenue recognition.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
New York, New York
February 15, 2018
18, 2021
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 5,600.5 | | | $ | 4,305.7 | |
Short-term investments, at cost | 0 | | | 3.6 | |
Accounts receivable, net of allowance for doubtful accounts of $30.4 and $21.5 | 7,813.4 | | | 7,829.0 | |
Work in process | 1,101.2 | | | 1,257.6 | |
Other current assets | 1,075.0 | | | 1,188.8 | |
Total Current Assets | 15,590.1 | | | 14,584.7 | |
Property and Equipment at cost, less accumulated depreciation of $1,156.7 and $1,142.8 | 585.2 | | | 663.4 | |
Operating Lease Right-Of-Use Assets | 1,223.4 | | | 1,398.3 | |
Equity Method Investments | 85.3 | | | 106.8 | |
Goodwill | 9,609.7 | | | 9,440.5 | |
Intangible Assets, net of accumulated amortization of $817.2 and $759.2 | 298.5 | | | 338.2 | |
Other Assets | 255.0 | | | 251.5 | |
TOTAL ASSETS | $ | 27,647.2 | | | $ | 26,783.4 | |
LIABILITIES AND EQUITY | | | |
Current Liabilities: | | | |
Accounts payable | $ | 11,513.0 | | | $ | 11,768.4 | |
Customer advances | 1,361.3 | | | 1,215.3 | |
Current portion of debt | 0 | | | 602.4 | |
Short-term debt | 3.9 | | | 10.1 | |
Taxes payable | 244.5 | | | 252.8 | |
Other current liabilities | 2,402.4 | | | 2,131.9 | |
Total Current Liabilities | 15,525.1 | | | 15,980.9 | |
Long-Term Liabilities | 970.7 | | | 1,006.8 | |
Long-Term Liability - Operating Leases | 1,114.0 | | | 1,274.7 | |
Long-Term Debt | 5,807.3 | | | 4,531.9 | |
Deferred Tax Liabilities | 443.5 | | | 408.1 | |
Commitments and Contingent Liabilities (Note 18) | 0 | | 0 |
Temporary Equity - Redeemable Noncontrolling Interests | 209.7 | | | 207.3 | |
Equity: | | | |
Shareholders’ Equity: | | | |
Preferred stock, $1.00 par value, 7.5 million shares authorized, NaN issued | 0 | | | 0 | |
Common stock, $0.15 par value, 1.0 billion shares authorized, 297.2 million shares issued, 215.0 million and 217.1 million shares outstanding | 44.6 | | | 44.6 | |
Additional paid-in capital | 747.8 | | | 760.9 | |
Retained earnings | 8,190.6 | | | 7,806.3 | |
Accumulated other comprehensive income (loss) | (1,213.8) | | | (1,197.6) | |
Treasury stock, at cost, 82.2 million and 80.1 million shares | (4,684.8) | | | (4,560.3) | |
Total Shareholders’ Equity | 3,084.4 | | | 2,853.9 | |
Noncontrolling interests | 492.5 | | | 519.8 | |
Total Equity | 3,576.9 | | | 3,373.7 | |
TOTAL LIABILITIES AND EQUITY | $ | 27,647.2 | | | $ | 26,783.4 | |
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
ASSETS | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 3,796.0 |
| | $ | 3,002.2 |
|
Short-term investments, at cost | 0.4 |
| | 20.6 |
|
Accounts receivable, net of allowance for doubtful accounts of $32.1 and $24.9 | 8,083.8 |
| | 7,510.8 |
|
Work in process | 1,110.6 |
| | 1,125.4 |
|
Other current assets | 1,125.2 |
| | 1,063.0 |
|
Total Current Assets | 14,116.0 |
| | 12,722.0 |
|
Property and Equipment at cost, less accumulated depreciation of $1,279.2 and $1,233.4 | 690.9 |
| | 674.8 |
|
Equity Method Investments | 120.3 |
| | 120.4 |
|
Goodwill | 9,337.5 |
| | 8,976.1 |
|
Intangible Assets, net of accumulated amortization of $879.9 and $777.6 | 368.4 |
| | 427.4 |
|
Other Assets | 298.1 |
| | 244.7 |
|
TOTAL ASSETS | $ | 24,931.2 |
| | $ | 23,165.4 |
|
LIABILITIES AND EQUITY | | | |
Current Liabilities: | | | |
Accounts payable | $ | 11,574.6 |
| | $ | 10,476.7 |
|
Customer advances | 1,266.7 |
| | 1,186.6 |
|
Current portion of debt | — |
| | 0.1 |
|
Short-term debt | 11.8 |
| | 28.7 |
|
Taxes payable | 330.0 |
| | 349.6 |
|
Other current liabilities | 1,925.8 |
| | 1,969.2 |
|
Total Current Liabilities | 15,108.9 |
| | 14,010.9 |
|
Long-Term Debt | 4,912.9 |
| | 4,920.5 |
|
Long-Term Liabilities | 1,091.2 |
| | 892.3 |
|
Deferred Tax Liabilities | 483.6 |
| | 480.5 |
|
Commitments and Contingent Liabilities (Note 16) |
| |
|
|
Temporary Equity - Redeemable Noncontrolling Interests | 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, 297.2 million shares issued, 230.1 million and 234.7 million shares outstanding | 44.6 |
| | 44.6 |
|
Additional paid-in capital | 828.3 |
| | 798.3 |
|
Retained earnings | 6,210.6 |
| | 5,677.2 |
|
Accumulated other comprehensive income (loss) | (963.0 | ) | | (1,356.0 | ) |
Treasury stock, at cost, 67.1 million and 62.5 million shares | (3,505.4 | ) | | (3,002.1 | ) |
Total Shareholders’ Equity | 2,615.1 |
| | 2,162.0 |
|
Noncontrolling interests | 537.1 |
| | 497.6 |
|
Total Equity | 3,152.2 |
| | 2,659.6 |
|
TOTAL LIABILITIES AND EQUITY | $ | 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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Revenue | $ | 13,171.1 | | | $ | 14,953.7 | | | $ | 15,290.2 | |
Operating Expenses: | | | | | |
Salary and service costs | 9,572.8 | | | 10,972.2 | | | 11,306.1 | |
Occupancy and other costs | 1,138.5 | | | 1,221.8 | | | 1,309.6 | |
COVID-19 repositioning costs | 277.9 | | | 0 | | | 0 | |
Net gain on disposition of subsidiaries | 0 | | | 0 | | | (178.4) | |
Cost of services | 10,989.2 | | | 12,194.0 | | | 12,437.3 | |
Selling, general and administrative expenses | 360.5 | | | 405.9 | | | 455.4 | |
Depreciation and amortization | 222.6 | | | 231.5 | | | 264.0 | |
| 11,572.3 | | | 12,831.4 | | | 13,156.7 | |
Operating Profit | 1,598.8 | | | 2,122.3 | | | 2,133.5 | |
Interest Expense | 221.8 | | | 244.3 | | | 266.4 | |
Interest Income | 32.3 | | | 60.3 | | | 57.2 | |
Income Before Income Taxes and Income (Loss) From Equity Method Investments | 1,409.3 | | | 1,938.3 | | | 1,924.3 | |
Income Tax Expense | 381.7 | | | 504.4 | | | 492.7 | |
Income (Loss) From Equity Method Investments | (6.8) | | | 2.0 | | | 8.9 | |
Net Income | 1,020.8 | | | 1,435.9 | | | 1,440.5 | |
Net Income Attributed To Noncontrolling Interests | 75.4 | | | 96.8 | | | 114.1 | |
Net Income - Omnicom Group Inc. | $ | 945.4 | | | $ | 1,339.1 | | | $ | 1,326.4 | |
| | | | | |
Net Income Per Share - Omnicom Group Inc.: | | | | | |
Basic | $ | 4.38 | | | $ | 6.09 | | | $ | 5.85 | |
Diluted | $ | 4.37 | | | $ | 6.06 | | | $ | 5.83 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Revenue | $ | 15,273.6 |
| | $ | 15,416.9 |
| | $ | 15,134.4 |
|
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 Profit | 2,059.7 |
| | 2,008.9 |
| | 1,920.1 |
|
Interest Expense | 224.5 |
| | 209.7 |
| | 181.1 |
|
Interest Income | 49.7 |
| | 42.6 |
| | 39.6 |
|
Income Before Income Taxes and Income From Equity Method Investments | 1,884.9 |
| | 1,841.8 |
| | 1,778.6 |
|
Income Tax Expense | 696.2 |
| | 600.5 |
| | 583.6 |
|
Income From Equity Method Investments | 3.5 |
| | 5.4 |
| | 8.4 |
|
Net Income | 1,192.2 |
| | 1,246.7 |
| | 1,203.4 |
|
Net Income Attributed To Noncontrolling Interests | 103.8 |
| | 98.1 |
| | 109.5 |
|
Net Income - Omnicom Group Inc. | $ | 1,088.4 |
| | $ | 1,148.6 |
| | $ | 1,093.9 |
|
| | | | | |
Net Income Per Share - Omnicom Group Inc.: | | | | | |
Basic | $ | 4.68 |
| | $ | 4.80 |
| | $ | 4.43 |
|
Diluted | $ | 4.65 |
| | $ | 4.78 |
| | $ | 4.41 |
|
| | | | | |
Dividends Declared Per Common Share | $ | 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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Net Income | $ | 1,020.8 | | | $ | 1,435.9 | | | $ | 1,440.5 | |
Other Comprehensive Income (Loss): | | | | | |
Cash flow hedge: | | | | | |
Amortization of loss included in interest expense | 5.5 | | | 5.5 | | | 5.6 | |
Income tax effect | (1.6) | | | (1.6) | | | (1.6) | |
| 3.9 | | | 3.9 | | | 4.0 | |
Defined benefit pension plans and postemployment arrangements: | | | | | |
Unrecognized actuarial gains (losses) and prior service cost for the period | (29.5) | | | (45.5) | | | 10.4 | |
Amortization of prior service cost and actuarial losses | 13.9 | | | 8.7 | | | 16.6 | |
Income tax effect | 4.5 | | | 10.7 | | | (7.9) | |
| (11.1) | | | (26.1) | | | 19.1 | |
Available-for-sale securities: | | | | | |
Reclassification | 0 | | | 0 | | | 0.3 | |
| | | | | |
Foreign currency translation adjustment | (5.0) | | | 74.9 | | | (319.1) | |
| | | | | |
Other Comprehensive Income (Loss) | (12.2) | | | 52.7 | | | (295.7) | |
| | | | | |
Comprehensive Income | 1,008.6 | | | 1,488.6 | | | 1,144.8 | |
Comprehensive Income Attributed To Noncontrolling Interests | 79.5 | | | 96.3 | | | 83.9 | |
Comprehensive Income - Omnicom Group Inc. | $ | 929.1 | | | $ | 1,392.3 | | | $ | 1,060.9 | |
|
| | | | | | | | | | | |
| 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 EQUITY
Three Years Ended December 31, 2017
(In millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Common Stock, shares | 297.2 | | | 297.2 | | | 297.2 | |
| | | | | |
Common Stock, par value | $ | 44.6 | | | $ | 44.6 | | | $ | 44.6 | |
Additional Paid-in Capital: | | | | | |
Beginning balance | 760.9 | | | 728.8 | | | 828.3 | |
| | | | | |
Acquisition of noncontrolling interests | 5.7 | | | (22.3) | | | (39.7) | |
Change in temporary equity | 3.3 | | | 38.2 | | | (71.1) | |
Share-based compensation | 71.0 | | | 72.5 | | | 70.5 | |
Stock issued, share-based compensation | (93.1) | | | (56.3) | | | (59.2) | |
Ending balance | 747.8 | | | 760.9 | | | 728.8 | |
Retained Earnings: | | | | | |
Beginning balance | 7,806.3 | | | 7,016.1 | | | 6,210.6 | |
Cumulative effect of accounting changes | 0 | | | 22.3 | | | 23.6 | |
Net income | 945.4 | | | 1,339.1 | | | 1,326.4 | |
Common stock dividends declared | (561.1) | | | (571.2) | | | (544.5) | |
Ending balance | 8,190.6 | | | 7,806.3 | | | 7,016.1 | |
Accumulated Other Comprehensive Income (Loss): | | | | | |
Beginning balance | (1,197.6) | | | (1,228.5) | | | (963.0) | |
Cumulative effect of accounting changes | 0 | | | (22.3) | | | 0 | |
Other comprehensive income (loss) | (16.2) | | | 53.2 | | | (265.5) | |
Ending balance | (1,213.8) | | | (1,197.6) | | | (1,228.5) | |
Treasury Stock: | | | | | |
Beginning balance | (4,560.3) | | | (4,013.9) | | | (3,505.4) | |
Stock issued, share-based compensation | 97.5 | | | 63.8 | | | 72.8 | |
Common stock repurchased | (222.0) | | | (610.2) | | | (581.3) | |
Ending balance | (4,684.8) | | | (4,560.3) | | | (4,013.9) | |
Shareholders’ Equity | 3,084.4 | | | 2,853.9 | | | 2,547.1 | |
Noncontrolling Interests: | | | | | |
Beginning balance | 519.8 | | | 559.8 | | | 537.1 | |
Cumulative effect of accounting changes | 0 | | | 0 | | | 0.4 | |
Net income | 75.4 | | | 96.8 | | | 114.1 | |
Other comprehensive income (loss) | 4.1 | | | (0.5) | | | (30.2) | |
Dividends to noncontrolling interests | (95.5) | | | (97.3) | | | (134.9) | |
Acquisition of noncontrolling interests | (42.0) | | | (54.4) | | | (42.3) | |
Increase in noncontrolling interests from business combinations | 30.7 | | | 15.4 | | | 115.6 | |
Ending balance | 492.5 | | | 519.8 | | | 559.8 | |
Total Equity | $ | 3,576.9 | | | $ | 3,373.7 | | | $ | 3,106.9 | |
| | | | | |
Dividends Declared Per Common Share | $ | 2.60 | | | $ | 2.60 | | | $ | 2.40 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Cash Flows from Operating Activities: | | | | | |
Net income | $ | 1,020.8 | | | $ | 1,435.9 | | | $ | 1,440.5 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization of right-of-use assets | 139.5 | | | 147.7 | | | 161.5 | |
Amortization of intangible assets | 83.1 | | | 83.8 | | | 102.5 | |
Amortization of net deferred gain on interest rate swaps | (8.1) | | | (14.8) | | | (12.9) | |
Share-based compensation | 70.8 | | | 72.5 | | | 70.5 | |
COVID-19 repositioning costs | 277.9 | | | 0 | | | 0 | |
Net gain from disposition of subsidiaries | 0 | | | 0 | | | (178.4) | |
Impact of Tax Act | 0 | | | 0 | | | 28.9 | |
Other, net | 109.7 | | | 5.8 | | | 29.2 | |
Increase in operating capital | 30.9 | | | 125.1 | | | 80.5 | |
Net Cash Provided By Operating Activities | 1,724.6 | | | 1,856.0 | | | 1,722.3 | |
Cash Flows from Investing Activities: | | | | | |
Capital expenditures | (75.4) | | | (102.2) | | | (195.7) | |
Acquisition of businesses and interests in affiliates, net of cash acquired | (67.1) | | | (10.0) | | | (350.4) | |
Proceeds from disposition of subsidiaries | 3.2 | | | 79.4 | | | 308.4 | |
| | | | | |
| | | | | |
Proceeds from sale of investments and other | 3.2 | | | 1.9 | | | 15.9 | |
| | | | | |
Net Cash Used In Investing Activities | (136.1) | | | (30.9) | | | (221.8) | |
Cash Flows from Financing Activities: | | | | | |
Proceeds from borrowings | 1,186.6 | | | 1,112.4 | | | 0 | |
Repayment of debt | (600.0) | | | (900.0) | | | 0 | |
Change in short-term debt | (5.6) | | | 2.0 | | | 0 | |
Dividends paid to common shareholders | (562.7) | | | (564.3) | | | (548.5) | |
Repurchases of common stock | (222.0) | | | (610.2) | | | (581.3) | |
Proceeds from stock plans | 4.1 | | | 6.5 | | | 13.0 | |
Acquisition of additional noncontrolling interests | (22.3) | | | (51.4) | | | (43.6) | |
Dividends paid to noncontrolling interest shareholders | (95.5) | | | (97.3) | | | (134.9) | |
Payment of contingent purchase price obligations | (31.2) | | | (64.6) | | | (99.0) | |
Other, net | (59.8) | | | (55.1) | | | (46.8) | |
Net Cash Used In Financing Activities | (408.4) | | | (1,222.0) | | | (1,441.1) | |
Effect of foreign exchange rate changes on cash and cash equivalents | 114.7 | | | 50.2 | | | (203.0) | |
Net Increase (Decrease) in Cash and Cash Equivalents | 1,294.8 | | | 653.3 | | | (143.6) | |
Cash and Cash Equivalents at the Beginning of Year | 4,305.7 | | | 3,652.4 | | | 3,796.0 | |
Cash and Cash Equivalents at the End of Year | $ | 5,600.5 | | | $ | 4,305.7 | | | $ | 3,652.4 | |
|
| | | | | | | | | | | |
| 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
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 or GAAP. All intercompany balances and transactions have been eliminated.
We prepare our financial statements in conformity with U.S. GAAP and 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 ChangesRisks and Uncertainties
On January 1, 2017,Impact of the COVID-19 Pandemic on our Business
In 2020, the COVID-19 pandemic negatively impacted our business and results of operations. Efforts to mitigate the impact of the pandemic, including government actions to restrict travel, limit public gatherings, shelter-in-place orders and mandatory closures of businesses, resulted in many of our clients reducing or suspending their spending for our advertising, marketing and corporate communication services. As a result, for the year ended December 31, 2020, revenue decreased $1,782.6 million, or 11.9%, compared to 2019, primarily due to the impact of the COVID-19 pandemic. The impact of the COVID-19 pandemic on our revenue has been, and may continue to be, material, depending on several factors, including the potential for prolonged or additional governmental actions to mitigate the effects of the pandemic in the near-term, and the intermediate and long-term impact on marketers' spending plans.
In response to the impact of the COVID-19 pandemic, in the second quarter of 2020, we adopted FASB ASU 2016-09, Compensation - Stock Compensation: Improvementstook actions to Employee Share-Based Payment Accounting,align our cost structure and reduce our workforce and facility requirements and continued the review of businesses for disposal and assets for impairment. As a result, we recorded a pre-tax charge of $277.9 million, which is comprised of incremental severance of $150.0 million, real estate operating lease right-of-use, or ASU 2016-09, which requires that beginning in 2017 excess tax benefitsROU, asset and deficienciesother asset impairment charges of $55.8 million, other exit costs of $47.0 million and dispositions and other charges of $25.1 million.
In addition, during 2020 we reduced salary and service costs by $162.6 million related to share-based compensation be recordedreimbursements and tax credits under government programs in resultsseveral countries, including the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, in the United States, the Kurzarbeit program in Germany, and other government reimbursement programs in the U.K., France, Canada and other jurisdictions.
The COVID-19 pandemic negatively impacted most of operations upon vesting of restricted stock awardsour clients' businesses. As a result, clients have cut costs, including postponing or exercise of stock options. Excess tax benefitsreducing marketing communication expenditures. While certain industries such as healthcare and deficiencies represent the difference between the actual compensation deduction for tax purposes, which is calculatedpharmaceuticals, technology and telecommunications, financial services and consumer products have been less affected, as long as the difference betweenCOVID-19 pandemic remains a threat, global economic conditions continue to be volatile and such uncertainty cuts across all clients, industries and geographies. Overall, while we have a diversified portfolio of service offerings, clients and geographies, demand for our services can be expected to continue to be adversely affected as marketers reduce expenditures in the grant date priceshort term due to the uncertain impact of the awardpandemic on the global economy. We expect global economic performance and our performance to vary by geography until the impact of the COVID-19 pandemic on the global economy moderates.
Although we have experienced a decrease in our cash flow from operating activities, we took numerous proactive steps to strengthen our liquidity and financial position that are intended to mitigate the potential impact of the COVID-19 pandemic on our liquidity. In February 2020, we issued $600 million 2.45% Senior Notes due April 30, 2030, or the 2.45% Notes. In March 2020, the net proceeds from the issuance of the 2.45% Notes were used to redeem the remaining $600 million principal amount of our 4.45% Senior Notes due August 15, 2020, or the 2020 Notes. As a result, we have no notes maturing until May 2022. In April 2020, we issued $600 million of 4.20% Senior Notes due June 1, 2030, or the 4.20% Notes, and we entered into a new $400 million 364 day revolving credit facility, or the 364 Day Credit Facility. The 364 Day Credit Facility is in addition to our existing $2.5 billion multi-currency revolving credit facility, or Credit Facility, which we extended to mature in February 2025. In addition, in March 2020, we suspended our share repurchase activity.
The impact on the global economy and resulting decline in the price of our common stock onwas determined to be a trigger event in the vesting or exercise date, and compensation expense recognizedfirst quarter of 2020 that required us to perform a review of our long-lived assets 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 flowsimpairment, primarily related to goodwill, amortizable intangible assets and equity method investments. We updated our review in June 2020, and the excess tax benefits or deficiencies be classifiedresult of the review of intangible assets and goodwill is discussed in operating activities. Accordingly,Note 5. In the second quarter of 2020, we retrospectively adjusteddisposed of one of our equity method investments and recognized a non-cash after-tax charge of $3.9 million. In the statementfourth quarter 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,2020 we recorded a cumulative catch-up adjustment to increase additional paid-in capitalasset impairment charges of $55.8 million associated with underperforming assets, which is included in salary 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
Revenue Recognition. We recognize revenue in accordance with FASB Accounting Standards Codification, or FASB ASC, Topic 605, Revenue Recognition, and applicable SEC Staff Accounting Bulletins. Our principal source of revenue is derived from fees for services on a rate per hour or per 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 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.
costs.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The impact of these actions on operating profit and income (loss) from equity method investments was (in millions):
| | | | | | | | | | | |
| Increase (Decrease) |
| Operating Profit | | Income (Loss) from Equity Method Investments |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
COVID-19 repositioning costs | $ | (277.9) | | | |
Impairment charges - underperforming assets | (55.8) | | | |
Impairment charge - equity method investment | | | $ | (3.9) | |
Reimbursements and tax credits under government programs | 162.6 | | | |
| $ | (171.1) | | | $ | (3.9) | |
Accounting Changes
Adoption of ASU 2016-13
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which changes the impairment model for most financial assets, including accounts receivable. The new model uses a forward-looking expected loss method. Historically, the credit loss experience on our client billings has not resulted in material bad debt expense. Accordingly, the adoption of ASU 2016-13 did not have a significant impact on our financial position, or on our results of operations.
As a result of the adoption of ASU 2016-13, we changed our accounting policy for allowance for doubtful accounts as follows: We maintain an allowance for doubtful accounts related to potential losses that could arise due to our customers' inability to make required payments. This allowance requires management to apply judgment in deriving the estimated reserve. In connection with the majorityestimate of our allowance, we perform ongoing credit evaluations of our customers’ financial condition, including information related to their credit ratings obtained from independent third-party firms. If, as a result, we become aware that additional reserves may be necessary, we perform additional analysis including, but not limited to, factors such as a customer’s creditworthiness, intent and ability to pay and overall financial position. If the data we use to calculate the allowance for doubtful accounts does not timely reflect the future ability to collect outstanding receivables, including the effects of the COVID-19 pandemic on our clients' credit, additional provisions for doubtful accounts may be needed and our results of operations could be affected. For 2020, we recorded bad debt expense of $23.5 million and increased our allowance for doubtful accounts to $30.4 million.
Adoption of ASU 2018-15
On January 1, 2020, we adopted ASU 2018-15, Intangibles - Goodwill and Other, Internal-Use Software, or ASU 2018-15, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU 2018-15 on a prospective basis for implementation costs for new or existing arrangements incurred on or after the adoption date. The adoption of ASU 2018-15 did not have a significant impact on our results of operations or financial position.
2. Significant Accounting Policies
Revenue Recognition.Revenue is recognized when a customer obtains control of promised goods or services (the performance obligation) in an amount that reflects the consideration we expect to receive in exchange for those goods or services (the transaction price). We measure revenue by estimating the transaction price based on the consideration specified in the client arrangement. Revenue is recognized as the performance obligations are satisfied. Our revenue is primarily derived from the planning and execution of advertising communications and marketing services in the following fundamental disciplines: advertising, which includes creative advertising services and strategic media planning and buying services, customer relationship management or CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare advertising. Our client contracts are primarily fees for service on a rate per hour or per project basis. Revenue is recorded net of sales, use and value added taxes.
Performance Obligations. In substantially all our disciplines, the performance obligation is to provide advisory and consulting services at an agreed-upon level of effort to accomplish the specified engagement. Our client contracts are comprised of diverse arrangements involving fees based on any one or a combination of the following: an agreed fee or rate per hour for the level of effort expended by our employees; commissions based on the client’s spending for media purchased from third parties; qualitative or quantitative incentive provisions specified in the contract; and reimbursement for third-party costs that we are required to include in revenue when we control the vendor services related to these costs and we act as principal. The transaction price of a contract is allocated to each distinct performance obligation based on its relative stand-alone selling price and is recognized as revenue when, or as, the customer receives the benefit of the performance obligation. Clients typically receive and consume the benefit of our services as they are performed. Substantially all our client contracts provide that we are compensated for services performed to date and allow for cancellation by either party on short notice, typically 90 days, without penalty.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, our short-term contracts, which normally take 30 to 90 days to complete, are performed by a single agency and consist of a single performance obligation. As a result, we do not consider the underlying services as separate or distinct performance obligations because our services are highly interrelated, occur in close proximity, and the integration of the various components of a marketing message is essential to overall service. In certain of our long-term client contracts, which have a term of up to one year, the performance obligation is a stand-ready obligation, because we provide a constant level of similar services over the term of the contract. In other long-term contracts, when our services are not a stand-ready obligation, we consider our services distinct performance obligations and allocate the transaction price to each separate performance obligation based on its stand-alone selling price, including contracts for strategic media planning and buying services, which are considered to be multiple performance obligations, and we allocate the transaction price to each distinct service based on the staffing plan and the stand-alone selling price. In substantially all of our creative services contracts, we have distinct performance obligations for our services, including certain creative services contracts where we act as an agent and arrange, at the client’s direction, for third parties to perform studio production efforts.
Revenue Recognition Methods. A substantial portion of our revenue is recognized over time, as the services are performed, because the client receives and consumes the benefit of our performance throughout the contract period, or we create an asset with no alternative use and are contractually entitled to payment for our performance to date in the event the client terminates the contract for convenience. For these client contracts, other than when we have a stand-ready obligation to perform services, revenue is recognized over time using input measures that correspond to the level of staff effort expended to satisfy the performance obligation on a rate per hour or equivalent basis. For client contracts when we have a stand-ready obligation to perform services on an ongoing basis over the life of the contract, typically for periods up to one year, where the scope of these arrangements is broad and there are no significant gaps in performing the services, we recognize revenue using a time-based measure resulting in a straight-line revenue recognition. From time to time, there may be changes in the client service requirements during the term of a contract and the changes could be significant. These changes are typically negotiated as new contracts covering the additional requirements and the associated costs, as well as additional fees for the incremental work to be performed.
To a lesser extent, for certain other contracts where our performance obligations are satisfied in phases, we recognize revenue over time using certain output measures based on the measurement of the value transferred to the customer, including milestones achieved. Where the transaction price or a portion of the transaction price is derived from commissions based on a percentage of purchased media from third parties, the performance obligation is not satisfied until the media is run and we have an enforceable contract providing a right to payment. Accordingly, revenue for commissions is recognized at a point in time, typically when the media is run, including when it is not subject to cancellation by the client or media vendor.
Principal vs. Agent. In substantially all our businesses, we incur third-party costs on behalf of clients, including direct costs and incidental, or out-of-pocket costs. Third-party direct costs incurred in connection with the creation and delivery of advertising or marketing communication services include, among others: purchased media, studio production services, specialized talent, including artists and other freelance labor, event marketing supplies, materials and services, promotional items, market research and third-party data and other related expenditures. Out-of-pocket costs include, among others: transportation, hotel, meals and telecommunication charges incurred by us in the course of providing our services. Billings related to out-of-pocket costs are included in revenue since we control the goods or services prior to delivery to the client.
However, the inclusion of billings related to third-party direct costs in revenue depends on whether we act as a principal or as an agent in the client arrangement. In most of our businesses, including advertising, which also includes studio production efforts and media planning and buying services, public relations, healthcare advertising and most of our CRM Consumer Experience businesses, we act as an agent and recordarrange, at the client's direction, for third parties to perform certain services. In these cases, we do not control the goods or services prior to the transfer to the client. As a result, revenue is recorded net of these costs, equal to the net amount retained when thefor our fee or commission is earned. Although, incommission.
In certain markets,businesses we may bear credit risk with respect to these activities, the arrangements with our clients are such that we act as an agentprincipal when contracting for third-party services on their behalf.behalf of our clients. In these cases, costs incurred with third-party suppliers are excluded from our revenue. Inevents business and most of our CRM Execution & Support businesses, including field marketing and certain arrangements,specialty marketing businesses, we act as principal because we control the specified goods or services before they are transferred to the client and we are responsible for providing the specified goods or services, or we are responsible for directing and integrating third-party vendors to fulfill our performance obligation at the agreed upon contractual price. In such arrangements, we also take pricing risk under the terms of the client contract. In certain specialty media buying businesses, we act as principal when we control the buying process for the purchase of the media and contract directly with third-party suppliers andthe media providers and production companies and we are the primary obligor.vendor. In these circumstances,arrangements, we assume the pricing risk under the terms of the client contract. When we act as principal, we include billable amounts related to third-party costs in the transaction price and record revenue is recordedover time at the gross amount billed, sinceincluding out-of-pocket costs, consistent with the manner that we recognize revenue has been earned for the sale of goodsunderlying services contract. However, in media buying contracts where we act as principal, we recognize revenue at a point in time, typically when the media is run, including when it is not subject to cancellation by the client or services.media vendor.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Variable Consideration. Someof our client arrangements include performance incentivevariable consideration provisions, designed to link a portion of our revenue to our performance relative to quantitative and qualitative goals. We recognizewhich include performance incentives, tiered commission structures and vendor rebates in certain markets outside of the United States. Variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. These estimates are based on historical award experience, anticipated performance and other factors known at the time. Performance incentives are typically recognized in revenue over time. Variable consideration for our media businesses in certain international markets includes rebate revenue and is recognized when it is probable that the specific quantitative goals are achieved, ormedia will be run, including when our performance against qualitative goalsit is determinednot subject to cancellation by the client. We mayIn addition, when we receive rebates or credits from certain vendors based onfor transactions entered into on behalf of clients. These rebates or creditsclients, they 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.earned, typically when the media is run.
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 are comprised ofinclude cost of services, selling, general and administrative expenses, or SG&A, expenses and depreciation and amortization. We measure cost of services in two distinct categories: salary and service costs and occupancy and other costs. As a service business, salary and service costs make up the 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 include employee compensation and benefits, freelance labor and direct service costs, which include third-party supplier costs and client-related travel costs. Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses. SG&A expenses 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.
Cash and Cash Equivalents. Cash and cash equivalents consist ofinclude cash in banks and highly liquid interest-bearing time deposits with original maturities of three months or less. Due to the short-term nature of these investments, carrying value approximates fair value. We have a 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 ofinclude 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 includesrepresents accrued costs incurred on behalf of clients in providing advertising and marketing services,customers, including media and production costs, and fees and other third-party costs that have not yet been billed. Media and production costs are billed during the production process in accordance with the terms of the client contract. Substantially all unbilled fees and fees are normallycosts will be billed within the next 30 days or when the services are performed.days.
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. PropertyAssets under capital lease is depreciatedfinance leases are amortized 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 our ownership interests are recorded in results of operations until control is achieved. WhereIn circumstances where 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 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 $14.4 million and $14.2 million at December 31, 2017 and 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-SaleMarketable Equity Securities. Investments in common stock of publicly traded companies Marketable equity securities are classified as available-for-sale securities. These investments are included in other assets and are carriedmeasured at fair value using quoted market prices. Unrealized gains and losseschanges in fair value are recordedrecognized in accumulated other comprehensive income. The carryingresults of operations.
Non-Marketable Equity Securities.Non-marketable equity securities do not have a readily determinable fair value and are measured at cost, less any impairment, and are adjusted for observable changes in fair value from transactions for identical or similar securities of the available-for-sale securities was $1.4 million and $4.3 million at December 31, 2017 and 2016, respectively.same issuer.
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 comprise customer relationships, including the related customer contracts and trade names, and purchased and internally developed software and are
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amortized over their estimated useful lives ranging from five to twelve years.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 yearJune 30 and whenever events or circumstances indicate the carrying value may not be recoverable. The impairment evaluation 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, goodwill is not impaired. Goodwill is impaired when the carrying value of the reporting unit exceeds its fair value. Goodwill is written down to its fair value through a non-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 and practice areas of each agency network monitor the performance and are responsible for the agencies in their region. TheyThe regional reporting units 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 occupancy and other costs, which include rent and occupancy costs, technology costs that are generally limited to personal computers, servers and off-the-shelf software and other overhead 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, 20172020 and 2016 our2019 goodwill was not impaired because either the fair value of each reporting unit was substantially in excess of its respective net book value.value, or for reporting units with a negative book value, fair value of assets exceeds total assets. Subsequent to the annual impairment test of goodwill at June 30, 2017,2020, there werehave been no events or circumstances that triggered the need for an interim impairment test.
DebtIssuance Costs. Debt issuance costs are capitalized and amortized in interest expense over the life of the related debt and are presented as a reduction to 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.Repurchases ofour common stock 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. 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 acquisition date fair 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. Amounts earned under the contingent purchase price arrangements may be subject to a maximum and payment 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 certain subsidiaries held by third-parties.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 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)losses are recorded in results of operations were $(7.8)operations. In 2020 and 2019, we recorded losses of $4.8 million, $12.7 and $11.2 million, respectively, and $4.7 millionin 2017, 2016 and 2015, respectively.2018, we recorded gains of $2.1 million.
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 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 havewith 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 910 for additional information regarding our specific award 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.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 ofliability for 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. 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.
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 Share. Basic net income per share is based on the weighted average number of common shares outstanding during the period. Diluted net income per 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 awards.
Net income per shareLeases.At the inception of a contract we assess whether the contract is, computedor contains, a lease. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of the criteria. Substantially all our operating leases are leases for office space, and substantially all our finance leases are leases for office furniture and technology equipment.
For all leases a ROU asset and lease liability are recognized at the lease commencement date. The lease liability represents the present value of the lease payments under the lease. The ROU asset is initially measured at cost, which includes the initial lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All ROU assets are reviewed for impairment. The lease liability is initially measured as the present value of the lease payments, discounted using the two-class method, which is an earnings allocation methodinterest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for computing net income per share when a company's capital structure includes common stockthe same term as the underlying lease. For real estate and participating securities. Certaincertain equipment operating leases, we use our secured incremental borrowing rate. For finance leases, we use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined.
Lease payments included in the measurement of the unvested restricted stock awards receive non-forfeitable dividends atlease liability comprise: the same rate asfixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the common stockrenewal period will be exercised, and thereforepayments for early termination options unless it is reasonably certain the lease will not be terminated early. Lease components, including fixed payments for real estate taxes and insurance for office space leases, are considered participating securities. Underincluded in the two-class method, basic and diluted net income per share is reduced for a presumed hypothetical distribution of earnings to holdersmeasurement of the unvested restricted stock awards receiving non-forfeitable dividends.initial lease liability.
Office space leases may contain variable lease payments, which include payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.
Operating lease expense is recognized on a straight-line basis over the lease term. Lease expense may include variable lease payments incurred in the period that were not included in the initial lease liability. Finance lease expense consists of the amortization of the ROU asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. Finance lease payments are allocated between a reduction of the lease liability and interest expense.
Concentration of Credit Risk. We provide advertising, marketing and corporate communications services to several thousand clients that 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 3.0%3.4% of revenue in 2017.2020.
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: the hedging instrument is designated as a hedge, the hedged exposure is specifically identifiable and exposes us to risk, and 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. 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 derivatives 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.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Reclassifications. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
3. Net Income per Share Revenue
Nature of our services
We provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. Our branded networks and agencies operate in all major markets and provide services in the following fundamental disciplines: advertising, customer relationship management, or CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare. Advertising includes creative services, as well as strategic media planning and buying and data analytics services. CRM Consumer Experience includes Omnicom’s Precision Marketing Group and digital/direct agencies, as well as our brand consulting, shopper marketing and experiential marketing agencies. CRM Execution & Support includes field marketing, sales support, merchandising and point of sale, as well as other specialized marketing and custom communications services. Public relations services include corporate communications, crisis management, public affairs and media and media relations services. Healthcare includes advertising and media services to global healthcare clients. At the core of all our services is the ability to create or develop a client’s marketing or corporate communications message into content that can be delivered to a target audience across different communications mediums.
Primarily as a result of the COVID-19 pandemic (see Note 1), our revenue decreased in all our major markets and all disciplines except for healthcare, as compared to the prior year periods.
Revenue by discipline was (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Advertising | $ | 7,369.0 | | | $ | 8,483.8 | | | $ | 8,281.0 | |
CRM Consumer Experience | 2,175.7 | | | 2,577.9 | | | 2,629.6 | |
CRM Execution & Support | 1,133.5 | | | 1,361.2 | | | 1,891.6 | |
Public Relations | 1,301.8 | | | 1,378.9 | | | 1,435.1 | |
Healthcare | 1,191.1 | | | 1,151.9 | | | 1,052.9 | |
| $ | 13,171.1 | | | $ | 14,953.7 | | | $ | 15,290.2 | |
Economic factors affecting our revenue
Global economic conditions have a direct impact on our revenue. Adverse economic conditions pose a risk that our clients may reduce, postpone or cancel spending for our services, which would impact our revenue (see Note 1).
Revenue in our principal geographic markets was (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Americas: | | | | | |
North America | $ | 7,577.1 | | | $ | 8,478.8 | | | $ | 8,442.5 | |
Latin America | 275.4 | | | 403.4 | | | 457.5 | |
EMEA: | | | | | |
Europe | 3,607.7 | | | 4,107.4 | | | 4,375.4 | |
Middle East and Africa | 207.2 | | | 314.6 | | | 304.4 | |
Asia-Pacific | 1,503.7 | | | 1,649.5 | | | 1,710.4 | |
| $ | 13,171.1 | | | $ | 14,953.7 | | | $ | 15,290.2 | |
The computationsAmericas is comprised of basicNorth America, which includes the United States, Canada and diluted net income per share forPuerto Rico, and Latin America, which includes South America and Mexico. EMEA is comprised of Europe, the three years ended December 31, 2017 were (in millions, except per share amounts):Middle East and Africa. Asia-Pacific includes Australia, Greater China, India, Japan, Korea, New Zealand, Singapore and other Asian countries. Revenue in the United States in 2020 and 2019 was $7,186.1 million and $8,033.0 million, respectively.
|
| | | | | | | | | | | |
| 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
Contract assets and liabilities
Work in process includes contract assets, unbilled fees and costs, and media and production costs. Contract liabilities primarily consist of customer advances. Work in process and contract liabilities were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Work in process: | | | |
Contract assets and unbilled fees and costs | $ | 501.1 | | | $ | 689.2 | |
Media and production costs | 600.1 | | | 568.4 | |
| $ | 1,101.2 | | | $ | 1,257.6 | |
Contract liabilities: | | | |
Customer advances | $ | 1,361.3 | | | $ | 1,215.3 | |
Work in process represents accrued costs incurred on behalf of customers, including media and production costs, and fees and other third-party costs that have not yet been billed. Media and production costs are billed during the production process in accordance with the terms of the client contract. Contract assets primarily include incentive fees, which are not material and will be billed to clients in accordance with the terms of the client contract. Substantially all unbilled fees and costs will be billed within the next 30 days. The contract liability primarily represents advance billings to customers in accordance with the terms of the client contracts, primarily for the reimbursement of third-party costs that are generally incurred in the near term. No impairment losses to the contract assets were recorded in 2020 and 2019.
4. Net Income per Share
The computations of basic and diluted net income per share were (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Net income available for common shares: | | | | | |
Net income - Omnicom Group Inc. | $ | 945.4 | | | $ | 1,339.1 | | | $ | 1,326.4 | |
| | | | | |
| | | | | |
Weighted average shares: | | | | | |
Basic | 215.6 | | | 219.8 | | | 226.6 | |
Dilutive stock options and restricted shares | 0.6 | | | 1.1 | | | 1.0 | |
Diluted | 216.2 | | | 220.9 | | | 227.6 | |
| | | | | |
Anti-dilutive stock options and restricted shares | 0.8 | | | 0 | | | 1.0 | |
Net income per share - Omnicom Group Inc.: | | | | | |
Basic | $ | 4.38 | | | $ | 6.09 | | | $ | 5.85 | |
Diluted | $ | 4.37 | | | $ | 6.06 | | | $ | 5.83 | |
5. Business Combinations
In 2017, weAcquisitions completed four acquisitions, whichin 2020 increased goodwill $65.3$82.4 million. Also,In addition, during 2020, 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 thesethe acquisitions in 2020, either individually or in the aggregate, was material to our results of operations or financial position.
The evaluation of potential 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 entitycompany and are based on predetermined formulas. ContingentAt December 31, 2020 and 2019, contingent purchase price obligations at December 31, 2017 and 2016 were $215.6$71.9 million and $386.1$107.7 million, respectively, of which $92.6$32.1 million and $190.8$29.5 million, respectively, are included in other current liabilities.
For each acquisition, we undertake a detailed review to identify other intangible 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
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
5.6. Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2017 and 2016 were (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| | | | | | | | | | | |
Goodwill | $ | 10,141.6 | | | $ | (531.9) | | | $ | 9,609.7 | | | $ | 9,957.5 | | | $ | (517.0) | | | $ | 9,440.5 | |
| | | | | | | | | | | |
Intangible assets: | | | | | | | | | | | |
Purchased and internally developed software | $ | 377.6 | | | $ | (307.0) | | | $ | 70.6 | | | $ | 350.7 | | | $ | (288.5) | | | $ | 62.2 | |
Customer related and other | 738.1 | | | (510.2) | | | 227.9 | | | 746.7 | | | (470.7) | | | 276.0 | |
| $ | 1,115.7 | | | $ | (817.2) | | | $ | 298.5 | | | $ | 1,097.4 | | | $ | (759.2) | | | $ | 338.2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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):
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
January 1 | | $ | 9,440.5 | | | $ | 9,384.3 | |
Acquisitions | | 50.8 | | | 5.5 | |
Noncontrolling interests in acquired businesses | | 31.6 | | | 17.2 | |
Contingent purchase price obligations of acquired businesses | | 0 | | | 24.7 | |
Dispositions | | (18.8) | | | (19.1) | |
Foreign currency translation | | 105.6 | | | 27.9 | |
December 31 | | $ | 9,609.7 | | | $ | 9,440.5 | |
|
| | | | | | | |
| 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 |
|
The decline in our stock price at the onset of the COVID-19 pandemic in March 2020 was determined to be a trigger event requiring us to perform an impairment review of our goodwill. We concluded our goodwill was not impaired. At June 30, 2020, we updated our first quarter 2020 assessment and performed our annual goodwill impairment test. Our assumptions reflect the economic conditions in light of the impact of the COVID-19 pandemic on our business, including downward adjustment to our revenue and earnings assumptions, reducing our long-term growth rate to 3.0%, compared to 3.5% in the prior year, increasing the weighted average cost of capital, or WACC, for each reporting unit to between 10.6% and 10.8%, compared to between 10.1% and 10.6% in the prior year, and limiting our estimate of our equity value to reflect the decline in our share price that occurred during the first half of 2020. In addition, the assumptions reflect the expected cost reductions from our severance and real estate repositioning actions (see Notes 1 and 13). Based on the results of the impairment test, we concluded that at June 30, 2020 our goodwill was not impaired because the fair value of each of our reporting units was significantly in excess of its respective carrying value, and for our reporting units with negative book value, we concluded that the fair value of their total assets was in excess of book value. We performed a sensitivity analysis of our assumptions, including a 1 percent change to our WACC or long-term growth assumptions. The results of the sensitivity analysis confirmed our conclusion that goodwill at June 30, 2020 was not impaired. If economic conditions further deteriorate from June 30, 2020, including further declines in GDP estimates, our share price, increased interest rates or other factors, our goodwill could become impaired, and we could incur a non-cash charge against our earnings. The minimum decline in fair value that one of our reporting units would need to experience in order to fail the goodwill impairment test was approximately 20%.
In addition, we evaluated our customer related and other intangible assets for impairment. We compared the carrying value of these assets against the undiscounted cash flows expected to be generated from the assets, and we concluded that at June 30, 2020, our customer related and other intangible assets were not impaired.
There were no events through December 31, 2020 that would change our assumptions and resulting impairment assessments. NaN goodwill impairment losses were recorded in 20172020 or 20162019, and there are no0 accumulated goodwill impairment losses.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.7. Debt
Credit Facilities
At December 31, 2017,On February 14, 2020, we amended our short-term liquidity sources include a $2.5 billion revolving credit facility, or Credit Facility expiringto extend its term to February 14, 2025. To strengthen our liquidity position to mitigate the impact of the COVID-19 pandemic (see Note 1), on July 31, 2021,April 3, 2020, we entered into the $400 million 364 Day Credit Facility, maturing on April 2, 2021. We have uncommitted credit lines aggregating $1.2$1.1 billion and the ability to issue up to $2 billion of commercial paper.
There These facilities provide additional liquidity sources for operating capital and general corporate purposes. At December 31, 2020, there were no0 outstanding commercial paper issuances or borrowings under the Credit Facility, the 364 Day Credit Facility or the uncommitted credit lines at December 31, 2017 and 2016. Available and unused credit lines at December 31, 2017 and 2016 were (in millions):
|
| | | | | | | |
| 2017 | | 2016 |
Credit Facility | $ | 2,500.0 |
| | $ | 2,500.0 |
|
Uncommitted credit lines | 1,181.0 |
| | 1,132.0 |
|
Available and unused credit lines | $ | 3,681.0 |
| | $ | 3,632.0 |
|
lines.
The Credit Facility containsand the 364 Day Credit Facility each contain a financial covenantscovenant that requirerequires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3 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 53.5 times for the most recently ended 12-month period. On October 26, 2020, we amended the Credit Facility and the 364 Day Credit Facility to provide additional flexibility with respect to the Leverage Ratio covenant. The amendments increase the maximum Leverage Ratio to 4.0 times through December 31, 2021 for the Credit Agreement and to 4.0 times through the maturity for the 364 Day Credit Facility. At December 31, 20172020, we were in compliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 10.43.0 times. The Credit Facility doesand the 364 Day Credit Facility do not limit our ability to declare or pay dividends or repurchase our common stock.
Short-Term Debt
Short-term debt atAt December 31, 20172020 and 20162019, short-term debt of $11.8$3.9 million and $28.7$10.1 million, respectively, consists ofrepresented bank overdrafts and short-term borrowings primarily of our international subsidiaries. The weighted average interest rate was 2.6%3.5% and 9.8%2.5%, 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):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
4.45% Senior Notes due 2020 | $ | 0 | | | $ | 600.0 | |
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 | |
€500 Million 0.80% Senior Notes due 2027 | 611.5 | | | 561.4 | |
2.45% Senior Notes due 2030 | 600.0 | | | 0 | |
4.20% Senior Notes due 2030 | 600.0 | | | 0 | |
€500 Million 1.40% Senior Notes due 2031 | 611.5 | | | 561.4 | |
| | | |
| 5,823.0 | | | 5,122.8 | |
Unamortized premium (discount), net | (5.1) | | | 0.8 | |
Unamortized debt issuance costs | (27.0) | | | (20.0) | |
Unamortized deferred gain from settlement of interest rate swaps | 16.4 | | | 30.7 | |
| | | |
| 5,807.3 | | | 5,134.3 | |
Current portion | 0 | | | (602.4) | |
Long-term debt | $ | 5,807.3 | | | $ | 4,531.9 | |
|
| | | | | | | |
| 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 |
|
On February 19, 2020, we issued $600 million of the 2.45% Notes. The net proceeds from the issuance, after deducting the underwriting discount and offering expenses, were $592.6 million and were used to redeem the remaining $600 million principal amount of the 2020 Notes on March 23, 2020. In connection with the redemption of the 2020 Notes, we recorded a loss on extinguishment of $7.7 million in interest expense. Following the redemption, there were 0 2020 Notes outstanding.
Additionally, to strengthen our liquidity and financial position and to mitigate the potential impact of the COVID-19 pandemic, on April 1, 2020, we issued $600 million of the 4.20% Notes. The net proceeds from the issuance, after deducting the underwriting discount and offering expenses, were $592.5 million and were used for general corporate purposes, which included working capital expenditures, fixed asset expenditures, acquisitions, repayment of commercial paper and short-term debt, refinancing of other debt, or other capital transactions.
The 2.45% Notes and the 4.20% Notes are senior unsecured obligations of Omnicom that rank equal in right of payment with all existing and future unsecured senior indebtedness.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under all the senior notes. The seniornotes due 2022, 2024 and 2026. These notes are a joint and several liability of usOmnicom and OCI, and weOmnicom unconditionally guaranteeguarantees 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 primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or usOmnicom to obtain funds from our subsidiaries through dividends, loans or advances. Our seniorSuch notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally guaranteed the obligations of Omnicom Finance Holdings plc, or OFHP, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the Euro denominated notes due 2027 and 2031. OFHP’s assets consist of its investments in several wholly owned finance companies that function as treasury centers, which provide funding for various operating companies in Europe, Brazil, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFHP to obtain funds from their subsidiaries through dividends, loans or advances. The Euro denominated notes and the related guarantees are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFHP and each of Omnicom and OCI, respectively.
The contractualAt December 31, 2020, the maturities of our long-term debt at December 31, 2017 arewere (in millions):
|
| | | |
2018 | $ | — |
|
2019 | 500.0 |
|
2020 | 1,000.0 |
|
2021 | — |
|
2022 | 1,250.0 |
|
Thereafter | 2,150.0 |
|
| $ | 4,900.0 |
|
We use fixed-to-floating 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. 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. The interest rate swaps qualify and are designated as fair value hedges on the underlying senior notes and have the economic effect of converting the underlying fixed rate senior 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. Accordingly, any hedge ineffectiveness is not material to our results of operations.
In October 2015, we entered into a $750 million interest rate swap on our 3.65% Senior Notes due 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, 2017, we recorded long-term liabilities of $14.7 million and $24.7 million representing the fair value of the swaps on the 2024 Notes and 2026 Notes, respectively and at December 31, 2016, we recorded long-term liabilities of $17.1 million and $30.5 million, respectively. The interest rate swaps have the economic effect of converting our long-term debt portfolio to approximately 75% fixed rate obligations and 25% floating rate obligations.
| | | | | | |
2021 | | $ | 0 | |
2022 | | 1,250.0 | |
2023 | | 0 | |
2024 | | 750.0 | |
2025 | | 0 | |
Thereafter | | 3,823.0 | |
Total principal payments | | $ | 5,823.0 | |
Interest Expense
Interest expense for the three years ended December 31, 2017 is composed of (in millions):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
Long-term debt | | $ | 186.4 | | | $ | 194.6 | | | $ | 201.6 | |
Commercial paper | | 0.9 | | | 6.5 | | | 9.6 | |
Interest rate swaps | | 0 | | | 6.1 | | | 5.2 | |
Amortization of deferred gain on interest rate swaps | | (8.1) | | | (14.8) | | | (12.9) | |
Fees | | 6.5 | | | 4.7 | | | 5.6 | |
| | | | | | |
| | | | | | |
Pension and other interest | | 36.1 | | | 47.2 | | | 57.3 | |
| | $ | 221.8 | | | $ | 244.3 | | | $ | 266.4 | |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Long-term debt | $ | 201.6 |
| | $ | 205.5 |
| | $ | 210.2 |
|
Interest rate swaps | (7.2 | ) | | (13.1 | ) | | (44.1 | ) |
Amortization of deferred gain on interest rate swaps | (12.9 | ) | | (15.4 | ) | | (9.2 | ) |
Commercial paper | 12.5 |
| | 6.8 |
| | 4.8 |
|
Fees | 5.6 |
| | 5.6 |
| | 5.7 |
|
Other | 24.9 |
| | 20.3 |
| | 13.7 |
|
| $ | 224.5 |
| | $ | 209.7 |
| | $ | 181.1 |
|
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.8. 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.groups or practice areas. 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 occupancy and other 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;regions: the Americas, EMEA and Asia Pacific.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.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue and long-lived assets and goodwill by geographic region at and for the three years ended December 31, 2017 were (in millions):
| | | | | | | | | | | | | | | | | |
| Americas | | EMEA | | Asia-Pacific |
December 31, 2020 | | | | | |
Revenue | $ | 7,852.5 | | | $ | 3,814.9 | | | $ | 1,503.7 | |
Long-lived assets and goodwill | 7,610.9 | | | 3,142.3 | | | 665.1 | |
December 31, 2019 | | | | | |
Revenue | $ | 8,882.2 | | | $ | 4,422.0 | | | $ | 1,649.5 | |
Long-lived assets and goodwill | 7,782.0 | | | 3,061.3 | | | 658.9 | |
December 31, 2018 | | | | | |
Revenue | $ | 8,900.0 | | | $ | 4,679.8 | | | $ | 1,710.4 | |
Long-lived assets and goodwill | 6,946.1 | | | 2,578.9 | | | 553.7 | |
|
| | | | | | | | | | | | |
| Americas | | EMEA | | Asia Pacific |
2017 | | | | | |
Revenue | $ | 9,180.8 |
| | $ | 4,442.5 |
| | $ | 1,650.3 |
|
Long-lived assets and goodwill | 6,633.8 |
| | 2,840.8 |
| | 553.8 |
|
2016 | | | | | |
Revenue | $ | 9,597.6 |
| | $ | 4,183.1 |
| | $ | 1,636.2 |
|
Long-lived assets and goodwill | 6,662.7 |
| | 2,469.1 |
| | 519.1 |
|
2015 | | | | | |
Revenue | $ | 9,359.0 |
| | $ | 4,203.5 |
| | $ | 1,571.9 |
|
Long-lived assets and goodwill | 6,103.4 |
| | 2,737.8 |
| | 527.9 |
|
The Americas comprises North America, which includes the United States, Canada and Puerto Rico, and Latin America, which includes Mexico. EMEA comprises 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 was $8,196.9 million, $8,627.8 million and $8,526.7 million in 2017, 2016 and 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.
8.9. Equity Method Investments
Income (loss) from our equity method investments in 2020, 2019 and 2018 was $3.5$(6.8) million, $5.4$2.0 million and $8.4$8.9 million, in 2017, 2016 respectively. At December 31, 2020 and 2015, respectively. Our2019, our proportionate share in theirthe net assets at December 31, 2017 and 2016of the equity method investments was $40.7$30.1 million and $38.6$37.0 million, respectively. Our equityEquity method investments are not material to our results of operations or financial position; therefore, summarized financial information is not required to be presented. In the second quarter 2020, we sold an equity method investment and recorded a loss of $3.9 million (see Note 1).
9.10. Share-Based Compensation Plans
Share-based incentive awards are granted to employees under the 2013 Incentive Award Plan, or the 2013 Plan, which is administered by the Compensation Committee of the Board of Directors, or the Compensation 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, 2017,2020, there were 28,684,23421,419,944 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 8,195,495.6,119,984.
Share-based compensation expense in 2020, 2019 and 2018 was $80.2$70.8 million, $93.4$72.5 million and $99.4$70.5 million, in 2017, 2016 and 2015, respectively. At December 31, 2017,2020, unamortized share-based compensation that will be expensed over the next five years is $177.6 million.$168.0 million.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. On January 1, 2017, we adopted ASU 2016-09,(see Note 1), which requires that beginning in 2017Any excess tax benefits and deficienciesbenefit or deficiency related to share-based compensation beis recorded as compensation expense 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.date. In 20172020, we recognized an excessa tax deficiency of $3.6 million, and in 2019, we recognized a tax benefit of $20.8$2.8 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. The 2017 option awards vest 100% three years from grant 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, 2017 was:
|
| | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
January 1 | 719,757 |
| | $27.88 | | 1,140,547 |
| | $28.86 | | 1,652,140 |
| | $27.97 |
Granted | 1,000,000 |
| | $84.94 | | — |
| |
| | — |
| |
|
Exercised | (102,335 | ) | | $23.40 | | (420,790 | ) | | $30.56 | | (511,593 | ) | | $25.98 |
Forfeited | (24,000 | ) | | $84.94 | | — |
| |
| | — |
| |
|
December 31 | 1,593,422 |
| | $63.11 | | 719,757 |
| | $27.88 | | 1,140,547 |
| | $28.86 |
| | | | | | | | | | | |
Exercisable December 31 | 617,422 |
| | $28.61 | | 695,757 |
| | $26.54 | | 1,074,547 |
| | $26.47 |
Options outstanding and exercisable at December 31, 2017 were: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Shares | | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
January 1 | 866,000 | | | | $83.80 | | 988,050 | | | $80.37 | | 1,593,422 | | | $63.11 |
| | | | | | | | | | | | |
Exercised | 0 | | | | 0 | | (57,300) | | | $23.40 | | (500,122) | | | $24.43 |
Forfeited | (97,250) | | | | $84.94 | | (64,750) | | | $84.94 | | (105,250) | | | $84.94 |
December 31 | 768,750 | | | | $83.65 | | 866,000 | | | $83.80 | | 988,050 | | | $80.37 |
| | | | | | | | | | | | |
Exercisable December 31 | 768,750 | | | | $83.65 | | 60,000 | | | $68.42 | | 117,300 | | | $46.43 |
|
| | | | | | | | | | | | | | |
| | | | 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 $9.87 was determined using the Black-Scholes option valuation model. The assumptions for the model, without adjusting for the risk of forfeiture and lack of 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 three years ended December 31, 2017 was:
|
| | | | | | | | |
| 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
At December 31, 2020, options outstanding and exercisable were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Exercise Price Range | | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | | | | | | | | | | | | |
| $66.00 | to | $71.00 | | 60,000 | | | 3.4 years | | $68.42 | | 60,000 | | | $68.42 |
| $84.00 | to | $85.00 | | 708,750 | | | 2.3 years | | $84.94 | | 708,750 | | | $84.94 |
| | | | | 768,750 | | | | | | | 768,750 | | | |
Restricted Stock
Restricted stock activity was:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
January 1 | 2,547,001 | | | 2,553,902 | | | 2,859,373 | |
Granted | 1,511,719 | | | 956,135 | | | 815,810 | |
Vested | (874,431) | | | (798,468) | | | (944,048) | |
Forfeited | (171,301) | | | (164,568) | | | (177,233) | |
December 31 | 3,012,988 | | | 2,547,001 | | | 2,553,902 | |
| | | | | |
Weighted average grant date fair value of shares granted in the period | $51.26 | | $72.13 | | $67.62 |
| | | | | |
Weighted average grant date fair value at December 31 | $61.44 | | $70.89 | | $69.77 |
Generally, restricted shares vest ratably 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, 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 principal competitors over the same period. The 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 have assumed that substantially all the PRSUs will vest.
PRSU activity for the three years ended December 31, 2017 was:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Shares | | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
January 1 | 538,134 | | | | $ | 77.99 | | | 509,844 | | | $ | 80.41 | | | 488,887 | | | $ | 82.01 | |
Granted | 186,197 | | | | 61.36 | | | 181,782 | | | 75.64 | | | 182,582 | | | 73.72 | |
Distributed | (173,770) | | | | 84.94 | | | (153,492) | | | 83.23 | | | (161,625) | | | 77.68 | |
| | | | | | | | | | | | |
December 31 | 550,561 | | | | $ | 70.17 | | | 538,134 | | | $ | 77.99 | | | 509,844 | | | $ | 80.41 | |
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
January 1 | 462,381 |
| | $ | 77.05 |
| | 534,456 |
| | $ | 66.05 |
| | 622,859 |
| | $ | 56.16 |
|
Granted | 173,770 |
| | 84.94 |
| | 153,492 |
| | 83.23 |
| | 161,625 |
| | 77.68 |
|
Distributed | (147,264 | ) | | 69.89 |
| | (225,567 | ) | | 55.20 |
| | (239,387 | ) | | 48.94 |
|
Forfeited | — |
| | — |
| | — |
| | — |
| | (10,641 | ) | | 48.87 |
|
December 31 | 488,887 |
| | $ | 82.01 |
| | 462,381 |
| | $ | 77.05 |
| | 534,456 |
| | $ | 66.05 |
|
Employee Stock Purchase Plan
The employee stock purchase plan, or 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, or ERISA. OurIn 2020, 2019 and 2018, employees purchased 101,86291,605 shares, 97,93576,040 shares and 111,84991,086 shares, in 2017, 2016 and 2015, respectively. All shares purchased were treasury stock, for which we received $7.6$5.2 million,, $7.8 $5.6 million and $7.8$6.5 million,, respectively. At December 31, 2017,2020, there were 8,766,4378,507,706 shares available under the ESPP.
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 2012. Tax returns in the United Kingdom, France and Germany have been examined through 2013, 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.
F-20
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
We are requiredThe components of income before income taxes were (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Domestic | $ | 711.1 | | | $ | 913.1 | | | $ | 643.7 | |
International | 698.2 | | | 1,025.2 | | | 1,280.6 | |
| $ | 1,409.3 | | | $ | 1,938.3 | | | $ | 1,924.3 | |
Income tax expense (benefit) was (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Current: | | | | | |
U.S. federal | $ | 172.2 | | | $ | 180.2 | | | $ | 273.8 | |
U.S. state and local | 39.5 | | | 33.9 | | | 35.5 | |
International | 189.1 | | | 306.9 | | | 305.2 | |
| 400.8 | | | 521.0 | | | 614.5 | |
Deferred: | | | | | |
U.S. federal | (17.4) | | | 19.1 | | | (104.2) | |
U.S. state and local | (6.1) | | | (22.5) | | | 2.8 | |
International | 4.4 | | | (13.2) | | | (20.4) | |
| (19.1) | | | (16.6) | | | (121.8) | |
| $ | 381.7 | | | $ | 504.4 | | | $ | 492.7 | |
The reconciliation from the statutory U.S. federal income tax rate to accountour effective tax rate is:
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Statutory U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
U.S. state and local income taxes, net of U.S. federal income tax benefit | 2.2 | | | 0.5 | | | 1.6 | |
Effect of Tax Act | 0 | | | 0 | | | 1.5 | |
Impact of foreign operations | 3.4 | | | 4.5 | | | 3.8 | |
Other | 0.5 | | | 0 | | | (2.3) | |
Effective tax rate | 27.1 | % | | 26.0 | % | | 25.6 | % |
Our effective tax rate for 2020 increased year-over-year to 27.1% from 26.0%. The non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning costs recorded in the second quarter of 2020 had the effect of U.S. federalincreasing our effective tax rate changesfor 2020. This increase was substantially offset by a lower effective tax rate on our deferredforeign earnings resulting from a change in legislation. The effective tax balances by measuring deferredrate for 2019 includes a reduction of $10.8 million primarily from the net favorable settlement of uncertain tax assets and liabilities at the rate at which they are expected to reversepositions in various jurisdictions in the future, which as a resultsecond quarter of 2019. The international tax rate differentials in 2020 and 2019 are primarily attributed to our earnings in Germany, Australia, France, Japan and Brazil being taxed at higher rates than the U.S. statutory tax rate.
The Tax Cuts and Jobs Act of 2017, or Tax Act, is 21%. The provisional amount foramong other things, implemented a territorial tax system and imposed a one-time transition tax on the remeasurementdeemed repatriation of our deferredaccumulated earnings of foreign subsidiaries. At December 31, 2020 and 2019, the transition tax assetsliability was $112.0 million and liabilities reduced income tax expense by $173.3 million.
$123.6 million, respectively. The territorial tax system will allowallows 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 toWhile a territorial tax system limits U.S. federal income tax to domestic earnings,source income, foreign source income is subject to tax byin 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 expensehave elected to account 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,incurred. In 2020 and therefore have not2019, we provided any deferred$3.0 million and $14.7 million, respectively, for tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2017.GILTI.
Income before income taxes for the three years ended December 31, 2017 was (in millions): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Domestic | $ | 832.4 |
| | $ | 805.2 |
| | $ | 803.3 |
|
International | 1,052.5 |
| | 1,036.6 |
| | 975.3 |
|
| $ | 1,884.9 |
| | $ | 1,841.8 |
| | $ | 1,778.6 |
|
Income tax expense (benefit) for the three years ended December 31, 2017 was (in millions): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 458.8 |
| | $ | 381.8 |
| | $ | 342.3 |
|
State and local | 36.5 |
| | 12.6 |
| | 29.9 |
|
International | 280.2 |
| | 332.1 |
| | 324.5 |
|
| 775.5 |
| | 726.5 |
| | 696.7 |
|
Deferred: | | | | | |
Federal | (205.5 | ) | | (88.2 | ) | | (86.7 | ) |
State and local | 11.1 |
| | 12.0 |
| | 12.1 |
|
International | 115.1 |
| | (49.8 | ) | | (38.5 | ) |
| (79.3 | ) | | (126.0 | ) | | (113.1 | ) |
| $ | 696.2 |
| | $ | 600.5 |
| | $ | 583.6 |
|
The reconciliation from the statutory U.S. federal income tax rate to our effective tax rate is: |
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State and local income taxes, net of federal income tax benefit | 1.3 |
| | 0.9 |
| | 1.5 |
|
Effect of Tax Act | 5.6 |
| | — |
| | — |
|
International tax rate differentials | (3.8 | ) | | (4.0 | ) | | (3.7 | ) |
Other | (1.2 | ) | | 0.7 |
| | — |
|
Effective tax rate | 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., Canada, the United Arab Emirates, Brazil and Singapore being taxed at different rates than the U.S. statutory tax rate.
Income tax expense in 2017, 20162020, 2019 and 20152018 includes $2.5$3.8 million, $2.3$2.2 million and $1.1$3.6 million,, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 20172020 and 2016,2019, accrued interest and penalties were $16.1$23.5 million and $11.9$20.0 million,, respectively.
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred tax assets and liabilities at December 31, 2017 and 2016balance sheet classification were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Deferred tax assets: | | | |
Compensation | $ | 236.5 | | | $ | 210.9 | |
Tax loss and credit carryforwards | 67.0 | | | 60.6 | |
Basis differences from acquisitions | 20.8 | | | 22.9 | |
Basis differences from short-term assets and liabilities | 34.4 | | | 42.2 | |
Other | (5.8) | | | 4.6 | |
Deferred tax assets | 352.9 | | | 341.2 | |
Valuation allowance | (15.9) | | | (7.6) | |
Net deferred tax assets | $ | 337.0 | | | $ | 333.6 | |
Deferred tax liabilities: | | | |
Goodwill and intangible assets | $ | 611.1 | | | $ | 598.0 | |
Unremitted foreign earnings | 91.9 | | | 69.0 | |
Basis differences from investments | (1.1) | | | 9.0 | |
Financial instruments | 0.8 | | | 0.9 | |
Deferred tax liabilities | $ | 702.7 | | | $ | 676.9 | |
| | | |
Long-term deferred tax assets | $ | 77.8 | | | $ | 64.8 | |
Long-term deferred tax liabilities | $ | 443.5 | | | $ | 408.1 | |
|
| | | | | | | |
| 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, 2017, we paid $263 million of the liability. As a result of the Tax Act, the remaining liability was revalued to $41.4 million and will be paid in 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 $3.3$15.9 million and $3.0$7.6 million at December 31, 20172020 and 2016,2019, respectively, relates to tax losses and tax credit carryforwards in the U.S. and in international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 20182021 to 2037,2040, which is longer than the forecasted utilization of such carryforwards.
A reconciliation of our unrecognized tax benefits at December 31, 2017 and 2016 is (in millions):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
January 1 | $ | 206.8 | | | $ | 182.8 | |
Additions: | | | |
Current year tax positions | 3.9 | | | 12.3 | |
Prior year tax positions | 2.8 | | | 29.4 | |
Reduction of prior year tax positions | (26.1) | | | (13.1) | |
Settlements | (2.5) | | | (5.0) | |
| | | |
Foreign currency translation | (2.0) | | | 0.4 | |
December 31 | $ | 182.9 | | | $ | 206.8 | |
|
| | | | | | | |
| 2017 | | 2016 |
January 1 | $ | 116.9 |
| | $ | 113.0 |
|
Additions: | | | |
Current year tax positions | 67.1 |
| | 20.0 |
|
Prior year tax positions | 5.5 |
| | 6.5 |
|
Reduction of prior year tax positions | (16.5 | ) | | (21.9 | ) |
Settlements | — |
| | (0.7 | ) |
Foreign currency translation | 0.7 |
| | — |
|
December 31 | $ | 173.7 |
| | $ | 116.9 |
|
The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 20172020 and 2016,2019, approximately $142.8$174.0 million and $71.0$179.0 million,, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.
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 U.S. federal tax returns through 2015. Tax returns in the United Kingdom, France and Germany have been examined through 2017, 2016 and 2009, respectively.
In response to the economic impact of the COVID-19 pandemic, the CARES Act, was signed into law on March 27, 2020. We have determined that the CARES Act did not have a material impact on our income tax expense or effective tax rate for 2020.
F-22
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.12. 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
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to the maximum percentage of total eligible compensation of participating employees that is deductible for income tax purposes. Contribution expense in 2020, 2019 and 2018 was $112.9$108.1 million, $108.5$115.2 million and $105.7$118.8 million, in 2017, 2016 and 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 900800 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 6,2005,100 participants and are not subject to ERISA.
We have a Senior Executive Restrictive Covenant and Retention Plan, or Retention Plan, for certain executive officers 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 expense for the three years ended December 31, 2017 were (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Service cost | $ | 7.5 | | | $ | 7.9 | | | $ | 7.7 | |
Interest cost | 7.7 | | | 8.2 | | | 7.9 | |
Expected return on plan assets | (2.6) | | | (3.5) | | | (2.8) | |
Amortization of prior service cost | 0.8 | | | 0.8 | | | 4.4 | |
Amortization of actuarial loss | 6.7 | | | 2.5 | | | 6.9 | |
| $ | 20.1 | | | $ | 15.9 | | | $ | 24.1 | |
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Service cost | $ | 10.1 |
| | $ | 7.8 |
| | $ | 5.3 |
|
Interest cost | 7.9 |
| | 7.8 |
| | 7.6 |
|
Expected return on plan assets | (3.6 | ) | | (3.7 | ) | | (4.0 | ) |
Amortization of prior service cost | 4.6 |
| | 4.5 |
| | 4.3 |
|
Amortization of actuarial losses | 7.0 |
| | 5.3 |
| | 5.7 |
|
| $ | 26.0 |
| | $ | 21.7 |
| | $ | 18.9 |
|
Included in accumulated other comprehensive income at December 31, 20172020 and 20162019 were unrecognized actuarial losses and unrecognized prior service cost of $90.0$96.5 million ($56.0 ($60.2 million net of income taxes) and $98.0$93.9 million ($60.0 ($58.3 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 20182021 is $11.4 million.$7.5 million.
The weighted average assumptions used to determine net periodic benefit expense for the three years ended December 31, 2017 were:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Discount rate | 3.5 | % | | 3.7 | % | | 3.5 | % |
Compensation increases | 2.0 | % | | 2.0 | % | | 1.9 | % |
Expected return on plan assets | 5.3 | % | | 4.8 | % | | 5.7 | % |
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
Discount rate | 2.4 | % | | 2.9 | % | | 3.6 | % |
Compensation increases | 2.5 | % | | 2.5 | % | | 2.5 | % |
Expected return on plan assets | 5.1 | % | | 5.5 | % | | 5.8 | % |
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. WeIn 2020 and 2019, we contributed $8.3$9.1 million $6.6and $7.1 million, and $4.2 million in 2017, 2016 and 2015, respectively, to ourthe defined benefit pension plans. We do not expect ourthe contributions for 20182021 to differ materially from our 2017the 2020 contributions.
At December 31, 2017 and 2016, the
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in benefit obligation and fair value of plan assets and funded status of ourthe defined benefit pension plans were (in millions):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Benefit Obligation: | | | |
January 1 | $ | 293.5 | | | $ | 258.4 | |
Service cost | 7.5 | | | 7.9 | |
Interest cost | 7.7 | | | 8.2 | |
Amendments, curtailments and settlements | (0.2) | | | 1.4 | |
Actuarial loss | 17.2 | | | 28.8 | |
Benefits paid | (13.5) | | | (9.2) | |
Foreign currency translation | (2.9) | | | (2.0) | |
December 31 | $ | 309.3 | | | $ | 293.5 | |
Fair Value of Plan Assets: | | | |
January 1 | $ | 64.3 | | | $ | 57.4 | |
Actual return on plan assets | 5.0 | | | 8.7 | |
Employer contributions | 9.1 | | | 7.1 | |
Benefits paid | (13.5) | | | (9.2) | |
| | | |
Foreign currency translation and other | (1.6) | | | 0.3 | |
December 31 | $ | 63.3 | | | $ | 64.3 | |
|
| | | | | | | |
| 2017 | | 2016 |
Benefit Obligation: | | | |
January 1 | $ | 251.1 |
| | $ | 234.8 |
|
Service cost | 10.1 |
| | 7.8 |
|
Interest cost | 7.9 |
| | 7.8 |
|
Amendments, curtailments and settlements | 0.3 |
| | — |
|
Actuarial losses | 6.8 |
| | 13.3 |
|
Benefits paid | (9.1 | ) | | (9.4 | ) |
Foreign currency translation | 9.9 |
| | (3.2 | ) |
December 31 | $ | 277.0 |
| | $ | 251.1 |
|
Fair Value of Plan Assets: | | | |
January 1 | $ | 68.6 |
| | $ | 68.9 |
|
Actual return on plan assets | 6.3 |
| | 4.9 |
|
Employer contributions | 8.3 |
| | 6.6 |
|
Benefits paid | (9.1 | ) | | (9.4 | ) |
Foreign currency translation and other | 6.2 |
| | (2.4 | ) |
December 31 | $ | 80.3 |
| | $ | 68.6 |
|
| | | |
Funded Status December 31 | $ | (196.7 | ) | | $ | (182.5 | ) |
The funded status and balance sheet classification of the defined benefit pension plans were (in millions): | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Funded Status | $ | (246.0) | | | $ | (229.2) | |
| | | |
Other assets | $ | 2.7 | | | $ | 2.8 | |
Other current liabilities | (5.2) | | | (5.1) | |
Long-term liabilities | (243.5) | | | (226.9) | |
| $ | (246.0) | | | $ | (229.2) | |
At December 31, 20172020 and 2016,2019, 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$243.9 million and $240.8$268.9 million, respectively.
At December 31, 2017 and 2016, plansPlans 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
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Benefit obligation | $ | (294.0) | | | $ | (280.7) | |
Plan assets | 45.4 | | | 48.3 | |
| $ | (248.6) | | | $ | (232.4) | |
The weighted average assumptions used to determine the benefit obligation at December 31, 2017 and 2016, were:
| | | | | | | December 31, |
| 2017 | | 2016 | | 2020 | | 2019 |
Discount rate | 3.1 | % | | 3.5 | % | Discount rate | 1.7 | % | | 2.8 | % |
Compensation increases | 2.0 | % | | 2.0 | % | Compensation increases | 2.7 | % | | 2.7 | % |
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.