000002998912-312021Q2FALSE00000299892021-01-012021-06-300000029989omc:CommonStock0.15ParValueMember2021-01-012021-06-300000029989omc:A0800SeniorNotesDueJuly82027Member2021-01-012021-06-300000029989omc:A1.400SeniorNotesdueJuly82031Member2021-01-012021-06-30xbrli:shares00000299892021-07-15iso4217:USD00000299892021-06-3000000299892020-12-3100000299892021-04-012021-06-3000000299892020-04-012020-06-3000000299892020-01-012020-06-30iso4217:USDxbrli:shares0000029989us-gaap:CommonStockMember2021-06-300000029989us-gaap:CommonStockMember2020-06-300000029989us-gaap:AdditionalPaidInCapitalMember2021-03-310000029989us-gaap:AdditionalPaidInCapitalMember2020-03-310000029989us-gaap:AdditionalPaidInCapitalMember2020-12-310000029989us-gaap:AdditionalPaidInCapitalMember2019-12-310000029989us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300000029989us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300000029989us-gaap:AdditionalPaidInCapitalMember2021-01-012021-06-300000029989us-gaap:AdditionalPaidInCapitalMember2020-01-012020-06-300000029989us-gaap:AdditionalPaidInCapitalMember2021-06-300000029989us-gaap:AdditionalPaidInCapitalMember2020-06-300000029989us-gaap:RetainedEarningsMember2021-03-310000029989us-gaap:RetainedEarningsMember2020-03-310000029989us-gaap:RetainedEarningsMember2020-12-310000029989us-gaap:RetainedEarningsMember2019-12-310000029989us-gaap:RetainedEarningsMember2021-04-012021-06-300000029989us-gaap:RetainedEarningsMember2020-04-012020-06-300000029989us-gaap:RetainedEarningsMember2021-01-012021-06-300000029989us-gaap:RetainedEarningsMember2020-01-012020-06-300000029989us-gaap:RetainedEarningsMember2021-06-300000029989us-gaap:RetainedEarningsMember2020-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-012021-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-300000029989us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300000029989us-gaap:TreasuryStockMember2021-03-310000029989us-gaap:TreasuryStockMember2020-03-310000029989us-gaap:TreasuryStockMember2020-12-310000029989us-gaap:TreasuryStockMember2019-12-310000029989us-gaap:TreasuryStockMember2021-04-012021-06-300000029989us-gaap:TreasuryStockMember2020-04-012020-06-300000029989us-gaap:TreasuryStockMember2021-01-012021-06-300000029989us-gaap:TreasuryStockMember2020-01-012020-06-300000029989us-gaap:TreasuryStockMember2021-06-300000029989us-gaap:TreasuryStockMember2020-06-300000029989us-gaap:ParentMember2021-06-300000029989us-gaap:ParentMember2020-06-300000029989us-gaap:NoncontrollingInterestMember2021-03-310000029989us-gaap:NoncontrollingInterestMember2020-03-310000029989us-gaap:NoncontrollingInterestMember2020-12-310000029989us-gaap:NoncontrollingInterestMember2019-12-310000029989us-gaap:NoncontrollingInterestMember2021-04-012021-06-300000029989us-gaap:NoncontrollingInterestMember2020-04-012020-06-300000029989us-gaap:NoncontrollingInterestMember2021-01-012021-06-300000029989us-gaap:NoncontrollingInterestMember2020-01-012020-06-300000029989us-gaap:NoncontrollingInterestMember2021-06-300000029989us-gaap:NoncontrollingInterestMember2020-06-3000000299892020-06-3000000299892019-12-310000029989omc:DisciplineMember2021-01-012021-06-300000029989us-gaap:AdvertisingMember2021-04-012021-06-300000029989us-gaap:AdvertisingMember2020-04-012020-06-300000029989us-gaap:AdvertisingMember2021-01-012021-06-300000029989us-gaap:AdvertisingMember2020-01-012020-06-300000029989omc:CRMPrecisionMarketingMember2021-04-012021-06-300000029989omc:CRMPrecisionMarketingMember2020-04-012020-06-300000029989omc:CRMPrecisionMarketingMember2021-01-012021-06-300000029989omc:CRMPrecisionMarketingMember2020-01-012020-06-300000029989omc:CRMCommerceAndBrandConsultingMember2021-04-012021-06-300000029989omc:CRMCommerceAndBrandConsultingMember2020-04-012020-06-300000029989omc:CRMCommerceAndBrandConsultingMember2021-01-012021-06-300000029989omc:CRMCommerceAndBrandConsultingMember2020-01-012020-06-300000029989omc:CRMExperientialMember2021-04-012021-06-300000029989omc:CRMExperientialMember2020-04-012020-06-300000029989omc:CRMExperientialMember2021-01-012021-06-300000029989omc:CRMExperientialMember2020-01-012020-06-300000029989omc:CRMExecutionSupportMember2021-04-012021-06-300000029989omc:CRMExecutionSupportMember2020-04-012020-06-300000029989omc:CRMExecutionSupportMember2021-01-012021-06-300000029989omc:CRMExecutionSupportMember2020-01-012020-06-300000029989omc:PublicrelationsMember2021-04-012021-06-300000029989omc:PublicrelationsMember2020-04-012020-06-300000029989omc:PublicrelationsMember2021-01-012021-06-300000029989omc:PublicrelationsMember2020-01-012020-06-300000029989us-gaap:HealthCareMember2021-04-012021-06-300000029989us-gaap:HealthCareMember2020-04-012020-06-300000029989us-gaap:HealthCareMember2021-01-012021-06-300000029989us-gaap:HealthCareMember2020-01-012020-06-300000029989omc:GeographicMarketsMember2021-01-012021-06-300000029989srt:NorthAmericaMember2021-04-012021-06-300000029989srt:NorthAmericaMember2020-04-012020-06-300000029989srt:NorthAmericaMember2021-01-012021-06-300000029989srt:NorthAmericaMember2020-01-012020-06-300000029989srt:LatinAmericaMember2021-04-012021-06-300000029989srt:LatinAmericaMember2020-04-012020-06-300000029989srt:LatinAmericaMember2021-01-012021-06-300000029989srt:LatinAmericaMember2020-01-012020-06-300000029989srt:EuropeMember2021-04-012021-06-300000029989srt:EuropeMember2020-04-012020-06-300000029989srt:EuropeMember2021-01-012021-06-300000029989srt:EuropeMember2020-01-012020-06-300000029989omc:MiddleEastandAfricaMember2021-04-012021-06-300000029989omc:MiddleEastandAfricaMember2020-04-012020-06-300000029989omc:MiddleEastandAfricaMember2021-01-012021-06-300000029989omc:MiddleEastandAfricaMember2020-01-012020-06-300000029989srt:AsiaPacificMember2021-04-012021-06-300000029989srt:AsiaPacificMember2020-04-012020-06-300000029989srt:AsiaPacificMember2021-01-012021-06-300000029989srt:AsiaPacificMember2020-01-012020-06-300000029989country:US2021-04-012021-06-300000029989country:US2020-04-012020-06-300000029989country:US2021-01-012021-06-300000029989country:US2020-01-012020-06-300000029989us-gaap:ComputerSoftwareIntangibleAssetMember2021-06-300000029989us-gaap:ComputerSoftwareIntangibleAssetMember2020-12-310000029989us-gaap:CustomerRelationshipsMember2021-06-300000029989us-gaap:CustomerRelationshipsMember2020-12-310000029989us-gaap:RevolvingCreditFacilityMember2021-06-300000029989us-gaap:RevolvingCreditFacilityMember2021-01-012021-06-300000029989omc:UncommittedLinesOfCreditMember2021-06-300000029989us-gaap:CommercialPaperMember2021-06-30xbrli:pure0000029989omc:SeniorNotesDueMay12022Member2021-06-300000029989omc:SeniorNotesDueMay12022Member2020-12-310000029989omc:SeniorNotesdueNovember12024Member2021-06-300000029989omc:SeniorNotesdueNovember12024Member2020-12-310000029989omc:SeniorNotesdueApril152026Member2021-06-300000029989omc:SeniorNotesdueApril152026Member2020-12-310000029989omc:A0800SeniorNotesDueJuly82027Member2021-06-300000029989omc:A0800SeniorNotesDueJuly82027Member2020-12-310000029989omc:A245SeniorNotesDueApril302030Member2021-06-300000029989omc:A245SeniorNotesDueApril302030Member2020-12-310000029989omc:A420SeniorNotesDueJune12030Member2021-06-300000029989omc:A420SeniorNotesDueJune12030Member2020-12-310000029989omc:A1.400SeniorNotesdueJuly82031Member2021-06-300000029989omc:A1.400SeniorNotesdueJuly82031Member2020-12-310000029989omc:A260SeniorNotesDueAugust12031Member2021-06-300000029989omc:A260SeniorNotesDueAugust12031Member2020-12-310000029989omc:A260SeniorNotesDueAugust12031Member2021-04-2800000299892021-04-282021-04-2800000299892021-05-282021-05-280000029989srt:AmericasMember2021-04-012021-06-300000029989us-gaap:EMEAMember2021-04-012021-06-300000029989srt:AmericasMember2021-01-012021-06-300000029989us-gaap:EMEAMember2021-01-012021-06-300000029989srt:AmericasMember2021-06-300000029989us-gaap:EMEAMember2021-06-300000029989srt:AsiaPacificMember2021-06-300000029989srt:AmericasMember2020-04-012020-06-300000029989us-gaap:EMEAMember2020-04-012020-06-300000029989srt:AmericasMember2020-01-012020-06-300000029989us-gaap:EMEAMember2020-01-012020-06-300000029989srt:AmericasMember2020-06-300000029989us-gaap:EMEAMember2020-06-300000029989srt:AsiaPacificMember2020-06-300000029989us-gaap:PensionPlansDefinedBenefitMember2021-01-012021-06-300000029989us-gaap:PensionPlansDefinedBenefitMember2020-01-012020-06-300000029989us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember2021-01-012021-06-300000029989us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember2020-01-012020-06-300000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2020-12-310000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-12-310000029989us-gaap:AccumulatedTranslationAdjustmentMember2020-12-310000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2021-01-012021-06-300000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2021-01-012021-06-300000029989us-gaap:AccumulatedTranslationAdjustmentMember2021-01-012021-06-300000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2021-06-300000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2021-06-300000029989us-gaap:AccumulatedTranslationAdjustmentMember2021-06-300000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2019-12-310000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-12-310000029989us-gaap:AccumulatedTranslationAdjustmentMember2019-12-310000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2020-01-012020-06-300000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-01-012020-06-300000029989us-gaap:AccumulatedTranslationAdjustmentMember2020-01-012020-06-300000029989us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember2020-06-300000029989us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-06-300000029989us-gaap:AccumulatedTranslationAdjustmentMember2020-06-300000029989us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-06-300000029989us-gaap:FairValueMeasurementsRecurringMember2021-06-300000029989us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-06-300000029989us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2021-06-300000029989us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310000029989us-gaap:FairValueMeasurementsRecurringMember2020-12-310000029989us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310000029989us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-12-310000029989omc:ContingentPurchasePriceObligationsMember2020-12-310000029989omc:ContingentPurchasePriceObligationsMember2019-12-310000029989omc:ContingentPurchasePriceObligationsMember2021-01-012021-06-300000029989omc:ContingentPurchasePriceObligationsMember2020-01-012020-06-300000029989omc:ContingentPurchasePriceObligationsMember2021-06-300000029989omc:ContingentPurchasePriceObligationsMember2020-06-300000029989us-gaap:CarryingReportedAmountFairValueDisclosureMember2021-06-300000029989us-gaap:EstimateOfFairValueFairValueDisclosureMember2021-06-300000029989us-gaap:CarryingReportedAmountFairValueDisclosureMember2020-12-310000029989us-gaap:EstimateOfFairValueFairValueDisclosureMember2020-12-31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
Impact of the COVID-19 Pandemic on our Business
We experienced an improvement in our business in the second quarter of 2021 as compared to the second quarter of 2020, primarily because the recovery from the COVID-19 pandemic that began in the first quarter of 2021 continued into the second quarter. The second quarter of 2020 was the quarter in which our business was most negatively impacted since the onset of the pandemic, as the COVID-19 pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020. Accordingly, the recovery from the pandemic in 2021 compared to the prior year's quarter, was significantly greater in the second quarter than the first quarter. Revenue for the six months ended June 30, 2021 increased $791.0 million, or 12.7%, compared to the six months ended June 30, 2020. The increase in revenue primarily reflects an increase in client spending compared to the prior year period and the strengthening of most foreign currencies, primarily the British Pound and the Euro, against the U.S. Dollar.
Global economic conditions will continue to be volatile as long as the COVID-19 pandemic remains a public health threat, including, as a result of new information concerning the severity of the pandemic, government actions to mitigate the effects of the pandemic in the near-term, and the resulting impact on our clients' spending plans. We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy subsides.
Results of Operations for the Six Months Ended June 30, 2021
We are a strategic holding company providing advertising, marketing and corporate communications services to clients through our branded networks and agencies around the world. On a global, pan-regional and local basis, our branded networks and agencies operate in all major markets and provide services in the following fundamental disciplines: advertising, customer relationship management, or CRM, public relations, and healthcare. Advertising includes creative services, as well as strategic media planning and buying and data analytics services. Public relations services include corporate communications, crisis management, public affairs and media and media relations services. Healthcare includes advertising and media services to global healthcare clients. In an effort to better capture the expanding scope of our services, effective January 1, 2021, we realigned the classification of certain services primarily within our CRM Consumer Experience discipline. As a result, our CRM discipline has been reclassified into four categories: CRM Precision Marketing, which includes our precision marketing and digital/direct marketing agencies; CRM Commerce and Brand Consulting that is primarily comprised of Omnicom Commerce Group, including our shopper marketing businesses, and our Brand Consulting agencies; CRM Experiential, which includes our experiential marketing agencies and events businesses; and CRM Execution & Support, which includes field marketing, merchandising and point of sale, as well as other specialized marketing and custom communications services. Our business model was built and continues to evolve around our clients. While our networks and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. Our fundamental business principle is that our clients’ specific marketing requirements are the central focus of how we structure our service offerings and allocate our resources. This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client networks utilizing our key client matrix organization structure. This collaboration allows us to cut across our internal organizational structures to execute our clients’ marketing requirements in a consistent and comprehensive manner. We use our client-centric approach to grow our business by expanding our service offerings to existing clients, moving into new markets and obtaining new clients. In addition, we pursue selective acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or could serve our existing clients.
As a leading global advertising, marketing and corporate communications company, we operate in all major markets and have a large and diverse client base. For the twelve months ended June 30, 2021, our largest client accounted for 3.1% of our revenue and our 100 largest clients, which represent many of the world's major marketers, accounted for approximately 54.6% of our revenue. Our business is spread across a number of industry sectors with no one industry comprising more than 16% of our revenue for the six months ended June 30, 2021. Although our revenue is generally balanced between the United States and international markets, and we have a large and diverse client base, we are not immune to general economic downturns.
Certain global events targeted by major marketers for advertising expenditures, such as the FIFA World Cup and the Olympics, and certain national events, such as the U.S. election process, may affect our revenue period-over-period in certain businesses. Typically, these events do not have a significant impact on our revenue in any period.
Global economic conditions have a direct impact on our business and financial performance. Adverse global or regional economic conditions, such as those arising from the COVID-19 pandemic, pose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services. Revenue is typically lower in the first and third quarters and higher in the second and fourth quarters, reflecting client spending patterns during the year and additional project work that usually occurs in the fourth quarter.
Beginning in March 2020 and continuing through the first quarter of 2021, our business experienced the effects from reductions in client spending due to the economic impact related to the COVID-19 pandemic. While mixed by business and geography, the spending reductions impacted all our businesses and markets. Globally, the most impacted businesses were our CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in field marketing. In the second quarter of 2021, as certain markets continued the recovery from the pandemic that began in the first quarter of 2021, clients substantially increased their spending on our services compared to the prior year period. The economic and fiscal issues, including the impact related to the pandemic, facing the countries we operate in can be expected to continue to cause economic uncertainty and volatility; however, the impact on our business varies by country. We monitor economic conditions closely, as well as client revenue levels and other factors. In response to reductions in revenue, we can take actions to align our cost structure with changes in client demand and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments.
General business trends impact our business and industry. On balance, we believe that these effects are generally positive. These trends include integrating traditional and non-traditional marketing channels, as well as utilizing new communications technologies and emerging digital platforms, and clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets. As clients increase their demands for marketing effectiveness and efficiency, many of them have made it a practice to consolidate their business within one or a small number of service providers in the pursuit of a single engagement covering all consumer touch points. We have structured our business around these trends. While the current economic environment caused many clients to reduce spending for our services, certain trends such as increased spending on digital marketing platforms, and our key client matrix organization structure approach to collaboration and integration of our services and solutions provide a competitive advantage to our business. We expect this advantage to continue over the medium and long term.
Driven by our clients’ continuous demand for more effective and efficient marketing activities, we strive to provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. These services include, among others, advertising, brand consulting, content marketing, corporate social responsibility consulting, crisis communications, custom publishing, data analytics, database management, digital/direct marketing, digital transformation, entertainment marketing, experiential marketing, field marketing, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare marketing and communications, in-store design, interactive marketing, investor relations, marketing research, media planning and buying, merchandising and point of sale, mobile marketing, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, retail marketing, sales support, search engine marketing, shopper marketing, social media marketing and sports and event marketing.
We continually evaluate our portfolio of businesses to identify areas for investment and acquisition opportunities, as well as to identify non-strategic or underperforming businesses for disposition. As discussed below, in the second quarter of 2021, we disposed of our wholly owned subsidiary, ICON International, or ICON, a specialty media business.
Given our size and breadth, we manage our business by monitoring several financial indicators. The key indicators that we focus on are revenue and operating expenses. We analyze revenue growth by reviewing the components and mix of the growth, including growth by principal regional market and marketing discipline, the impact from foreign currency exchange rate changes, growth from acquisitions, net of dispositions and growth from our largest clients. Operating expenses are comprised of cost of services, selling, general and administrative expenses, or SG&A, and depreciation and amortization.
Revenue for the quarter ended June 30, 2021 increased $770.9 million, or 27.5%, compared to the prior year quarter, as all our markets performed substantially better than the second quarter of 2020, which experienced the most significant decline in revenue since the onset of the COVID-19 pandemic. Changes in foreign exchange rates in the second quarter of 2021 increased revenue 5.4%, acquisition revenue, net of disposition revenue, reduced revenue 2.2% and organic growth increased revenue 24.4%. The reduction in acquisition revenue, net of disposition revenue, for the quarter reflects the sale of ICON. The changes in revenue across our principal regional markets were: North America increased $293.4 million, or 17.6%, Europe increased $316.6 million, or 43.5%, Asia-Pacific increased $127.6 million, or 39.9%, and Latin America increased $15.5 million, or 28.2%. In North America, the increase in organic revenue in all our disciplines, especially in our advertising discipline, which was led by our media businesses, and our CRM Precision Marketing businesses, was partially offset by a decline in acquisition revenue, net of disposition revenue, from the sale of ICON. In Europe, organic revenue increased in all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Execution and Support businesses. The strengthening of the British Pound and the Euro against the U.S. Dollar contributed to increased revenue in the region. In Latin America, revenue increased due to organic growth in all countries in the region, especially Brazil and Mexico, primarily in our advertising discipline and the strengthening of most currencies against the U.S. Dollar. In Asia-Pacific, revenue increased due to strong organic revenue growth in all countries, particularly China, Australia and New Zealand, and in all disciplines. The
strengthening of substantially all currencies against the U.S. Dollar contributed to increased revenue in the region. The increase in revenue in the second quarter of 2021 compared to the second quarter of 2020 in our fundamental disciplines was: advertising $484.4 million, CRM Precision Marketing $79.6 million, CRM Commerce and Brand Consulting $33.8 million, CRM Experiential $45.5 million, CRM Execution & Support $58.1 million, public relations $47.8 million and healthcare $21.7 million.
Revenue for the six months ended June 30, 2021 increased $791.0 million, or 12.7%, compared to the six months ended June 30, 2020. Changes in foreign exchange rates increased revenue 4.0%, acquisition revenue, net of disposition revenue, reduced revenue 1.2%, and organic growth increased revenue 10.0%. In the first six months of 2021, our business improved as compared to the same period in 2020. The COVID-19 pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020. As a result, the improvement in revenue in the first six months of 2021 versus the prior year period was driven by the recovery in the second quarter of 2021 as compared to the second quarter of 2020. The total increase in revenue for the first six months of 2021 versus 2020 was mixed by geography and discipline. Across our principal regional markets, the changes in revenue were: North America increased $268.6 million, or 7.3%, Europe increased $334.3 million, or 20.3%, Asia-Pacific increased $168.3 million, or 24.8%, and Latin America increased $7.4 million, or 5.9%. In North America, improved organic growth in the United States and Canada was partially offset by a decrease in revenue resulting from the disposition of ICON. Organic revenue growth in the United States was led by our advertising discipline on the strength of our media business, CRM Precision Marketing and public relations businesses, partially offset by a decrease in organic revenue growth in our CRM Experiential businesses. In Europe, organic revenue increased in substantially all countries and disciplines, especially our advertising discipline, which was led by our media business, CRM Precision Marketing and public relations businesses. The strengthening of the British Pound and the Euro against the U.S. Dollar contributed to increased revenue in the region. In Latin America, organic growth in all countries in the region, especially Mexico, primarily in our advertising discipline was partially offset by the weakening of the Brazilian Real against the U.S. Dollar. In Asia-Pacific, revenue increased due to strong organic revenue growth in all countries, particularly China, Australia and New Zealand, and in all disciplines. The strengthening of all currencies against the U.S. Dollar contributed to increased revenue in the region. The increase in revenue in the six months of 2021 compared to the six months of 2020 in our fundamental disciplines was: advertising $554.8 million, CRM Precision Marketing $117.0 million, CRM Commerce and Brand Consulting $27.5 million, CRM Experiential $2.6 million, CRM Execution & Support $31.0 million, Public Relations $31.6 million and Healthcare $26.5 million.
We measure cost of services in two distinct categories: salary and service costs and occupancy and other costs. As a service business, salary and service costs make up the significant portion of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs include employee compensation and benefits, freelance labor and third-party service costs, which include third-party supplier costs when we act as principal in providing services to our clients and client-related travel costs. Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses.
SG&A expenses increased period-over-period in most categories. SG&A expenses primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices, which includes group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs.
Operating expenses for the quarter ended June 30, 2021 increased $265.0 million, or 9.7%, period-over-period. Operating expenses for the quarter ended June 30, 2021 include a reduction of $50.5 million related to the gain from the sale of ICON. Salary and service costs, which tend to fluctuate with changes in revenue, increased $572.0 million, or 28.2%, compared to the quarter ended June 30, 2020, reflecting increases in salary and related service costs and third-party service costs of $297.0 million and $275.0 million, respectively. These increases resulted primarily from the increase in organic revenue, as well as the strengthening of most foreign currencies against the U.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of $49.2 million related to reimbursement and tax credits from governmental programs in several countries. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $3.9 million, or 1.3%, period-over-period, due to the strengthening of most foreign currencies against the U.S. Dollar. For the quarter ended June 30, 2021, operating profit increased $505.9 million to $568.4 million, operating margin increased to 15.9% from 2.2%, and EBITA margin increased to 16.5% from 3.0%, period-over-period. The increase in operating profit, operating margin and EBITA margin reflect the impact of the organic revenue growth, the positive impact of actions taken in the second quarter of 2020 in response to the COVID-19 pandemic, and higher costs recorded in 2020 of $277.9 million related to the COVID-19 repositioning charges. Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.
Operating expenses for the six months ended June 30, 2021, increased $239.9 million, or 4.2%, period-over-period. Operating expenses for the six months ended June 30, 2021 include a reduction of $50.5 million related to the gain from the sale of ICON. Salary and service costs, which tend to fluctuate with changes in revenue, increased $583.7 million, or 12.8%, compared to the six months of 2020, reflecting increases in salary and related service costs and third-party service costs of $303.8 million and $279.9 million, respectively. These increases resulted primarily from the increase in organic revenue, as well as the
strengthening of most foreign currencies against the U.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of $49.2 million related to reimbursement and tax credits from governmental programs in several countries. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $14.1 million, or 2.4%, period-over-period reflecting the positive effects of actions taken in the second quarter of 2020 in response to the COVID-19 pandemic to manage our costs, which were substantially offset by the strengthening of most foreign currencies against the U.S. Dollar. For the six months ended June 30, 2021, operating profit increased $551.1 million to $1,033.8 million, operating margin increased to 14.8% from 7.8% and EBITA margin increased to 15.4% from 8.5%. The increase in operating profit, operating margin and EBITA margin reflect the impact of the organic revenue growth, the positive impact of actions taken in the second quarter of 2020 in response to the COVID-19 pandemic, and higher costs recorded in 2020 of $277.9 million related to the COVID-19 repositioning charges. Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.
In the second quarter of 2021, in connection with the sale of ICON, we recorded a pre-tax gain of $50.5 million. The sale of ICON is part of our continuing realignment of our portfolio of businesses and is consistent with our strategic plan and investment priorities. The disposition is not expected to have a material impact on our ongoing results of operations or financial position. Going forward, the anticipated level of disposition activity is expected to be limited, and we expect to be principally focused on acquisition opportunities.
Net interest expense in the second quarter of 2021 increased $26.3 million period-over-period to $73.5 million. Net interest expense in the six months of 2021 increased $28.0 million period-over-period to $121.0 million. Interest expense on debt in the second quarter of 2021 increased $25.7 million to $74.7 million and increased $19.7 million to $122.6 million in the six months of 2021, primarily arising from a loss of $26.6 million on the early redemption in May 2021 of all the outstanding $1.250 billion principal amount of 3.625% Senior Notes due 2022, or 2022 Notes. In April 2021, we issued $800 million of 2.60% Senior Notes due 2031, or 2031 Notes. The proceeds from the issuance plus cash on hand were used to redeem the 2022 Notes. The impact of this refinancing activity reduced our leverage that increased in the second quarter of 2020 from the issuance of $600 million of 4.20% Senior Notes due 2030, or 2030 Notes, to increase our liquidity in response to the COVID-19 pandemic, and is expected to result in lower interest expense for the remainder of 2021 as compared to the prior year periods. Interest income in the second quarter of 2021 increased $0.3 million period-over-period to $6.8 million and in the six months of 2021 decreased $6.1 million period-over-period to $13.1 million.
Our effective tax rate for the six months ended June 30, 2021 decreased period-over-period to 25.8% from 30.6%. In connection with the sale of ICON in the second quarter of 2021, we recorded a pre-tax gain of $50.5 million. The lower effective tax rate for 2021 was predominantly the result of a nominal tax applied against the book gain on the sale of ICON resulting from excess tax over book basis. The effective tax rate for 2020 reflects an increase due to the non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning charges recorded in the second quarter of 2020. Our effective tax rate for the six months ended June 30, 2021 would have been in line with our expectations except for the nominal tax on the pre-tax ICON gain of $50.5 million.
Net income - Omnicom Group Inc. for the second quarter of 2021 was $348.2 million, as compared to the net loss of $24.2 million in the second quarter of 2020. Net income - Omnicom Group Inc. in the six months of 2021 increased $402.0 million to $636.0 million from $234.0 million in the six months of 2020. The period-over-period increase is due to the factors described above. Diluted net income per share - Omnicom Group Inc. for the second quarter of 2021 was $1.60, as compared to a diluted loss per share of $0.11 in the second quarter of 2020. Diluted net income per share - Omnicom Group Inc. increased to $2.93 in the six months of 2021, as compared to $1.08 in the six months of 2020. The period-over-period change was due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of repurchases of our common stock in the second quarter of 2021, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan.
The combined effect of the after-tax gain from the sale of ICON and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc. for both the second quarter and six months of 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc. for both the second quarter and six months of 2021 by $0.14. The effect of the COVID-19 repositioning charges in 2020 decreased net income - Omnicom Group Inc. for both the second quarter and six months of 2020 by $233.1 million and decreased net diluted income per share - Omnicom Group Inc. for both the second quarter and six months of 2020 by $1.03.
RESULTS OF OPERATIONS - Second Quarter 2021 Compared to Second Quarter 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Revenue
|
$
|
3,571.6
|
|
|
$
|
2,800.7
|
|
|
Operating Expenses:
|
|
|
|
|
Salary and service costs
|
2,603.1
|
|
|
2,031.1
|
|
|
Occupancy and other costs
|
293.9
|
|
|
290.0
|
|
|
Gain on disposition of subsidiary
|
(50.5)
|
|
|
—
|
|
|
COVID-19 repositioning costs
|
—
|
|
|
277.9
|
|
|
Cost of services
|
2,846.5
|
|
|
2,599.0
|
|
|
Selling, general and administrative expenses
|
103.2
|
|
|
82.1
|
|
|
Depreciation and amortization
|
53.5
|
|
|
57.1
|
|
|
|
3,003.2
|
|
|
2,738.2
|
|
|
Operating Profit
|
568.4
|
|
|
62.5
|
|
|
Operating Margin %
|
15.9
|
%
|
|
2.2
|
%
|
|
Interest Expense
|
80.3
|
|
|
53.7
|
|
|
Interest Income
|
6.8
|
|
|
6.5
|
|
|
Income Before Income Taxes and Income (Loss) From Equity Method Investments
|
494.9
|
|
|
15.3
|
|
|
Income Tax Expense
|
123.2
|
|
|
21.9
|
|
|
Income (Loss) From Equity Method Investments
|
(0.1)
|
|
|
(7.8)
|
|
|
Net Income (Loss)
|
371.6
|
|
|
(14.4)
|
|
|
Net Income Attributed To Noncontrolling Interests
|
23.4
|
|
|
9.8
|
|
|
Net Income (Loss) - Omnicom Group Inc.
|
$
|
348.2
|
|
|
$
|
(24.2)
|
|
Non-GAAP Financial Measures
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Net Income (Loss) - Omnicom Group Inc.
|
$
|
348.2
|
|
|
$
|
(24.2)
|
|
|
Net Income Attributed To Noncontrolling Interests
|
23.4
|
|
|
9.8
|
|
|
Net Income (Loss)
|
371.6
|
|
|
(14.4)
|
|
|
Income (Loss) From Equity Method Investments
|
(0.1)
|
|
|
(7.8)
|
|
|
Income Tax Expense
|
123.2
|
|
|
21.9
|
|
|
Income Before Income Taxes and Income (Loss) From Equity Method Investments
|
494.9
|
|
|
15.3
|
|
|
Interest Expense
|
80.3
|
|
|
53.7
|
|
|
Interest Income
|
6.8
|
|
|
6.5
|
|
|
Operating Profit
|
568.4
|
|
|
62.5
|
|
|
Add back: Amortization of intangible assets
|
21.2
|
|
|
21.4
|
|
|
Earnings before interest, taxes and amortization of intangible assets (“EBITA”)
|
$
|
589.6
|
|
|
$
|
83.9
|
|
|
|
|
|
|
|
Revenue
|
$
|
3,571.6
|
|
|
$
|
2,800.7
|
|
|
EBITA
|
$
|
589.6
|
|
|
$
|
83.9
|
|
|
EBITA Margin %
|
16.5
|
%
|
|
3.0
|
%
|
Revenue
Revenue for the quarter ended June 30, 2021 increased $770.9 million, or 27.5%, compared to the prior year quarter, as all our markets performed substantially better than the second quarter of 2020, which experienced the most significant decline in revenue since the onset of the COVID-19 pandemic. Changes in foreign exchange rates in the second quarter of 2021 increased revenue 5.4%, acquisition revenue, net of disposition revenue, reduced revenue 2.2% and organic growth increased revenue 24.4%. The reduction in acquisition revenue, net of disposition revenue, for the quarter reflects the sale of ICON. The changes in revenue across our principal regional markets were: North America increased $293.4 million, or 17.6%, Europe increased $316.6 million, or 43.5%, Asia-Pacific increased $127.6 million, or 39.9%, and Latin America increased $15.5 million, or 28.2%. In North America, the increase in organic revenue in all our disciplines, especially in our advertising discipline, which was led by our media businesses, and our CRM Precision Marketing businesses, was partially offset by a decline in acquisition revenue, net of disposition revenue, from the sale of ICON. In Europe, organic revenue increased in all countries and disciplines, especially our advertising discipline, which was led by our media business, and our CRM Execution and Support businesses. The strengthening of the British Pound and the Euro against the U.S. Dollar contributed to increased revenue in the region. In Latin America, revenue increased due to organic growth in all countries in the region, especially Brazil and Mexico, primarily in our advertising discipline and the strengthening of most currencies against the U.S. Dollar. In Asia-Pacific, revenue increased due to strong organic revenue growth in all countries, particularly China, Australia and New Zealand, and in all disciplines. The strengthening of substantially all currencies against the U.S. Dollar contributed to increased revenue in the region. The increase in revenue in the second quarter of 2021 compared to the second quarter of 2020 in our fundamental disciplines was: advertising $484.4 million, CRM Precision Marketing $79.6 million, CRM Commerce and Brand Consulting $33.8 million, CRM Experiential $45.5 million, CRM Execution & Support $58.1 million, public relations $47.8 million and healthcare $21.7 million.
The components of revenue change for the second quarter of 2021 in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Domestic
|
|
International
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
June 30, 2020
|
$
|
2,800.7
|
|
|
|
|
$
|
1,587.4
|
|
|
|
|
$
|
1,213.3
|
|
|
|
|
Components of revenue change:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange rate impact
|
150.8
|
|
|
5.4
|
%
|
|
—
|
|
|
—
|
%
|
|
150.8
|
|
|
12.4
|
%
|
|
Acquisition revenue, net of disposition revenue
|
(62.0)
|
|
|
(2.2)
|
%
|
|
(62.5)
|
|
|
(3.9)
|
%
|
|
0.5
|
|
|
—
|
%
|
|
Organic growth
|
682.1
|
|
|
24.4
|
%
|
|
315.8
|
|
|
19.9
|
%
|
|
366.3
|
|
|
30.2
|
%
|
|
June 30, 2021
|
$
|
3,571.6
|
|
|
27.5
|
%
|
|
$
|
1,840.7
|
|
|
16.0
|
%
|
|
$
|
1,730.9
|
|
|
42.7
|
%
|
The components and percentages are calculated as follows:
•Foreign exchange rate impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $3,420.8 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($3,571.6 million less $3,420.8 million for the Total column).
•Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table.
•Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
•The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($2,800.7 million for the Total column).
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 expense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. Assuming exchange rates at July 15, 2021 remain unchanged, we expect the impact of changes in foreign exchange rates to increase revenue approximately 1.5% in the third quarter of 2021, and by approximately 2.5% for the full year. Based on our acquisition and disposition activity to date, we expect that the net impact will reduce revenue by between 6% and 7% for the third and fourth quarters of 2021 and 4% for the full year.
Revenue and organic growth in our principal regional markets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Organic Growth
|
|
Americas:
|
|
|
|
|
|
|
|
|
North America
|
$
|
1,957.4
|
|
|
$
|
1,664.0
|
|
|
$
|
293.4
|
|
|
20.7
|
%
|
|
Latin America
|
70.4
|
|
|
54.9
|
|
|
15.5
|
|
|
20.8
|
%
|
|
EMEA:
|
|
|
|
|
|
|
|
|
Europe
|
1,044.1
|
|
|
727.5
|
|
|
316.6
|
|
|
30.6
|
%
|
|
Middle East and Africa
|
52.3
|
|
|
34.5
|
|
|
17.8
|
|
|
42.8
|
%
|
|
Asia-Pacific
|
447.4
|
|
|
319.8
|
|
|
127.6
|
|
|
27.9
|
%
|
|
|
$
|
3,571.6
|
|
|
$
|
2,800.7
|
|
|
$
|
770.9
|
|
|
24.4
|
%
|
Revenue in Europe, which includes our primary markets of the U.K. and the Euro Zone, increased $316.6 million for the second quarter of 2021. Revenue in the U.K., representing 10.6% of consolidated revenue, increased $114.2 million. Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 18.6% of consolidated revenue, increased $202.4 million. The increase in revenue is due to strong organic growth in all countries and disciplines, as well as the continued strengthening of the British Pound and Euro against the U.S. Dollar.
In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. Under our client-centric approach, we seek to broaden our relationships with all of our clients. For the twelve months ended June 30, 2021 and 2020, our largest client represented 3.1% and 3.2% of revenue, respectively. Our ten largest and 100 largest clients represented 21.8% and 54.6% of revenue for the twelve months ended June 30, 2021, respectively, and 19.9% and 51.3% of revenue for the for the twelve months ended June 30, 2020, respectively.
To monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories: advertising, CRM, public relations and healthcare. In an effort to better capture the expanding scope of our services, effective January 1, 2021, we realigned the classification of certain services primarily within our CRM Consumer Experience discipline. As a result, our CRM discipline has been reclassified into four categories: CRM Precision Marketing, which includes our precision marketing and digital/direct marketing agencies; CRM Commerce and Brand Consulting that is primarily comprised of Omnicom Commerce Group, including our shopper marketing businesses, and our Brand Consulting agencies; CRM Experiential, which includes our experiential marketing agencies and events businesses; and CRM Execution & Support, which includes field marketing, merchandising and point of sale, as well as other specialized marketing and custom communications services.
Although all our disciplines improved as compared to the second quarter of 2020, certain of our businesses and markets continue to experience the effects of client spending reductions related to the COVID-19 pandemic. Among the most impacted businesses were our CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing businesses. Revenue and organic growth by discipline were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021 vs. 2020
|
|
|
$
|
|
% of
Revenue
|
|
$
|
|
% of
Revenue
|
|
$ Change
|
|
% Organic Growth
|
|
Advertising
|
$
|
2,014.5
|
|
|
56.4
|
%
|
|
$
|
1,530.1
|
|
|
54.6
|
%
|
|
$
|
484.4
|
|
|
29.8
|
%
|
|
CRM Precision Marketing
|
293.6
|
|
|
8.2
|
%
|
|
214.0
|
|
|
7.6
|
%
|
|
79.6
|
|
|
25.0
|
%
|
|
CRM Commerce and Brand Consulting
|
221.5
|
|
|
6.2
|
%
|
|
187.7
|
|
|
6.7
|
%
|
|
33.8
|
|
|
15.2
|
%
|
|
CRM Experiential
|
124.0
|
|
|
3.5
|
%
|
|
78.5
|
|
|
2.8
|
%
|
|
45.5
|
|
|
53.0
|
%
|
|
CRM Execution & Support
|
250.9
|
|
|
7.0
|
%
|
|
192.8
|
|
|
6.9
|
%
|
|
58.1
|
|
|
22.7
|
%
|
|
Public Relations
|
345.9
|
|
|
9.7
|
%
|
|
298.1
|
|
|
10.7
|
%
|
|
47.8
|
|
|
15.1
|
%
|
|
Healthcare
|
321.2
|
|
|
9.0
|
%
|
|
299.5
|
|
|
10.7
|
%
|
|
21.7
|
|
|
4.5
|
%
|
|
|
$
|
3,571.6
|
|
|
|
|
$
|
2,800.7
|
|
|
|
|
$
|
770.9
|
|
|
24.4
|
%
|
We provide services to clients that operate in various industry sectors. Revenue by sector was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
Food and Beverage
|
14
|
%
|
|
14
|
%
|
|
Consumer Products
|
9
|
%
|
|
9
|
%
|
|
Pharmaceuticals and Healthcare
|
16
|
%
|
|
18
|
%
|
|
Financial Services
|
7
|
%
|
|
8
|
%
|
|
Technology
|
10
|
%
|
|
9
|
%
|
|
Auto
|
10
|
%
|
|
9
|
%
|
|
Travel and Entertainment
|
7
|
%
|
|
6
|
%
|
|
Telecommunications
|
5
|
%
|
|
6
|
%
|
|
Retail
|
7
|
%
|
|
6
|
%
|
|
Services
|
2
|
%
|
|
2
|
%
|
|
Oil, Gas and Utilities
|
2
|
%
|
|
2
|
%
|
|
Not-for-Profit
|
1
|
%
|
|
1
|
%
|
|
Government
|
3
|
%
|
|
3
|
%
|
|
Education
|
1
|
%
|
|
1
|
%
|
|
Other
|
6
|
%
|
|
6
|
%
|
|
|
100
|
%
|
|
100
|
%
|
In 2020, certain industry sectors were more negatively affected by the impact of the COVID-19 pandemic than others.
Operating Expenses
Operating expenses were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021 vs. 2020
|
|
|
$
|
|
% of
Revenue
|
|
$
|
|
% of
Revenue
|
|
$
Change
|
|
%
Change
|
|
Revenue
|
$
|
3,571.6
|
|
|
|
|
$
|
2,800.7
|
|
|
|
|
$
|
770.9
|
|
|
27.5
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and service costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and related service costs
|
1,721.7
|
|
|
48.2
|
%
|
|
1,424.7
|
|
|
50.9
|
%
|
|
297.0
|
|
|
20.8
|
%
|
|
Third-party service costs
|
881.4
|
|
|
24.7
|
%
|
|
606.4
|
|
|
21.7
|
%
|
|
275.0
|
|
|
45.3
|
%
|
|
|
2,603.1
|
|
|
72.9
|
%
|
|
2,031.1
|
|
|
72.5
|
%
|
|
572.0
|
|
|
28.2
|
%
|
|
Occupancy and other costs
|
293.9
|
|
|
8.2
|
%
|
|
290.0
|
|
|
10.4
|
%
|
|
3.9
|
|
|
1.3
|
%
|
|
Gain on disposition of subsidiary
|
(50.5)
|
|
|
(1.4)
|
%
|
|
—
|
|
|
|
|
(50.5)
|
|
|
|
|
COVID-19 repositioning costs
|
—
|
|
|
|
|
277.9
|
|
|
9.9
|
%
|
|
(277.9)
|
|
|
|
|
Cost of services
|
2,846.5
|
|
|
|
|
2,599.0
|
|
|
|
|
247.5
|
|
|
9.5
|
%
|
|
Selling, general and administrative expenses
|
103.2
|
|
|
2.9
|
%
|
|
82.1
|
|
|
2.9
|
%
|
|
21.1
|
|
|
25.7
|
%
|
|
Depreciation and amortization
|
53.5
|
|
|
1.5
|
%
|
|
57.1
|
|
|
2.0
|
%
|
|
(3.6)
|
|
|
(6.3)
|
%
|
|
|
3,003.2
|
|
|
84.1
|
%
|
|
2,738.2
|
|
|
97.8
|
%
|
|
265.0
|
|
|
9.7
|
%
|
|
Operating Profit
|
$
|
568.4
|
|
|
15.9
|
%
|
|
$
|
62.5
|
|
|
2.2
|
%
|
|
$
|
505.9
|
|
|
809.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for the quarter ended June 30, 2021 increased $265.0 million, or 9.7%, period-over-period. Operating expenses for the quarter ended June 30, 2021 include a reduction of $50.5 million related to the gain from the sale of ICON. Salary and service costs, which tend to fluctuate with changes in revenue, increased $572.0 million, or 28.2%, compared to the quarter ended June 30, 2020, reflecting increases in salary and related service costs and third-party service costs of $297.0 million and $275.0 million, respectively. These increases resulted primarily from the increase in organic revenue, as well as the strengthening of most foreign currencies against the U.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of $49.2 million related to reimbursement and tax credits from governmental programs in several countries. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $3.9 million, or 1.3%, period-over-period, due to the strengthening of most foreign currencies against the U.S. Dollar. For the quarter ended June 30, 2021, operating profit increased $505.9 million to $568.4 million, operating margin increased to 15.9% from 2.2%, and EBITA margin increased to 16.5% from 3.0%, period-over-period. The increase in operating
profit, operating margin and EBITA margin reflect the impact of the organic revenue growth, the positive impact of actions taken in the second quarter of 2020 in response to the COVID-19 pandemic, and higher costs recorded in 2020 of $277.9 million related to the COVID-19 repositioning charges. Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.
Net Interest Expense
Net interest expense in the second quarter of 2021 increased $26.3 million period-over-period to $73.5 million. Interest expense on debt in the second quarter of 2021 increased $25.7 million to $74.7 million, primarily arising from a loss of $26.6 million on the early redemption in May 2021 of all the outstanding $1.250 billion of 2022 Notes. In April 2021, we issued $800 million of 2031 Notes. The proceeds from the issuance plus cash on hand were used to redeem the 2022 Notes. The impact of this refinancing activity reduced our leverage that increased in the second quarter of 2020 from the issuance of the $600 million of 2030 Notes, to increase our liquidity in response to the COVID-19 pandemic, and is expected to result in lower interest expense for the remainder of 2021 as compared to the prior year periods. Interest income in the second quarter of 2021 increased $0.3 million period-over-period to $6.8 million.
Income Taxes
Income tax expense for the second quarter of 2021 was $123.2 million, as compared to $21.9 million for the prior year period. In connection with the sale of ICON in the second quarter of 2021, we recorded a pre-tax gain of $50.5 million. In the second quarter of 2021, we applied a nominal tax against the book gain on sale of ICON resulting from excess tax over book basis. The effective tax rate for 2020 reflects an increase due to the non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning charges recorded in the second quarter of 2020.
Net Income (Loss) and Net Income (Loss) Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. for the second quarter of 2021 was $348.2 million, as compared to a net loss of $24.2 million in the second quarter of 2020. The period-over-period increase is due to the factors described above. Diluted income per share - Omnicom Group Inc. for the second quarter of 2021 was $1.60, as compared to a diluted loss per share of $0.11 in the second quarter of 2020. The period-over-period change was due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of repurchases of our common stock in the second quarter of 2021, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan.
The combined effect of the after-tax gain from the sale of ICON and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc. for the second quarter of 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc. for the second quarter 2021 by $0.14. The effect of the COVID-19 repositioning charges in 2020 decreased net income - Omnicom Group Inc. for the second quarter of 2020 by $233.1 million and decreased diluted net income per share - Omnicom Group Inc. for the second quarter of 2020 by $1.03.
RESULTS OF OPERATIONS - Six Months of 2021 Compared to Six Months of 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Revenue
|
$
|
6,998.6
|
|
|
$
|
6,207.6
|
|
|
Operating Expenses:
|
|
|
|
|
Salary and service costs
|
5,148.1
|
|
|
4,564.4
|
|
|
Occupancy and other costs
|
585.5
|
|
|
599.6
|
|
|
Gain on disposition of subsidiary
|
(50.5)
|
|
|
—
|
|
|
COVID-19 repositioning costs
|
—
|
|
|
277.9
|
|
|
Cost of services
|
5,683.1
|
|
|
5,441.9
|
|
|
Selling, general and administrative expenses
|
174.9
|
|
|
168.9
|
|
|
Depreciation and amortization
|
106.8
|
|
|
114.1
|
|
|
|
5,964.8
|
|
|
5,724.9
|
|
|
Operating Profit
|
1,033.8
|
|
|
482.7
|
|
|
Operating Margin %
|
14.8
|
%
|
|
7.8
|
%
|
|
Interest Expense
|
134.1
|
|
|
112.2
|
|
|
Interest Income
|
13.1
|
|
|
19.2
|
|
|
Income Before Income Taxes and Income (Loss) From Equity Method Investments
|
912.8
|
|
|
389.7
|
|
|
Income Tax Expense
|
235.2
|
|
|
119.3
|
|
|
Income (Loss) From Equity Method Investments
|
(0.1)
|
|
|
(13.0)
|
|
|
Net Income
|
677.5
|
|
|
257.4
|
|
|
Net Income Attributed To Noncontrolling Interests
|
41.5
|
|
|
23.4
|
|
|
Net Income - Omnicom Group Inc.
|
$
|
636.0
|
|
|
$
|
234.0
|
|
Non-GAAP Financial Measures
We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies.
The following table reconciles the U.S. GAAP financial measure of Net Income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Net Income - Omnicom Group Inc.
|
$
|
636.0
|
|
|
$
|
234.0
|
|
|
Net Income Attributed To Noncontrolling Interests
|
41.5
|
|
|
23.4
|
|
|
Net Income
|
677.5
|
|
|
257.4
|
|
|
Income (Loss) From Equity Method Investments
|
(0.1)
|
|
|
(13.0)
|
|
|
Income Tax Expense
|
235.2
|
|
|
119.3
|
|
|
Income Before Income Taxes and Income (Loss) From Equity Method Investments
|
912.8
|
|
|
389.7
|
|
|
Interest Expense
|
134.1
|
|
|
112.2
|
|
|
Interest Income
|
13.1
|
|
|
19.2
|
|
|
Operating Profit
|
1,033.8
|
|
|
482.7
|
|
|
Add back: Amortization of intangible assets
|
41.1
|
|
|
42.2
|
|
|
Earnings before interest, taxes and amortization of intangible assets (“EBITA”)
|
$
|
1,074.9
|
|
|
$
|
524.9
|
|
|
|
|
|
|
|
Revenue
|
$
|
6,998.6
|
|
|
$
|
6,207.6
|
|
|
EBITA
|
$
|
1,074.9
|
|
|
$
|
524.9
|
|
|
EBITA Margin %
|
15.4
|
%
|
|
8.5
|
%
|
Revenue
Revenue for the six months ended June 30, 2021 increased $791.0 million, or 12.7%, compared to the six months ended June 30, 2020. Changes in foreign exchange rates increased revenue 4.0%, acquisition revenue, net of disposition revenue, reduced revenue 1.2%, and organic growth increased revenue 10.0%. In the first six months of 2021, our business improved as compared to the same period in 2020. The COVID-19 pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020. As a result, the improvement in revenue in the first six months of 2021 versus the prior year period was driven by the recovery in the second quarter of 2021 as compared to the second quarter of 2020. The total increase in revenue for the first six months of 2021 versus 2020 was mixed by geography and discipline. Across our principal regional markets, the changes in revenue were: North America increased $268.6 million, or 7.3%, Europe increased $334.3 million, or 20.3%, Asia-Pacific increased $168.3 million, or 24.8%, and Latin America increased $7.4 million, or 5.9%. In North America, improved organic growth in the United States and Canada was partially offset by a decrease in revenue resulting from the disposition of ICON. Organic revenue growth in the United States was led by our advertising discipline on the strength of our media business, CRM Precision Marketing and public relations businesses, partially offset by a decrease in organic revenue growth in our CRM Experiential businesses. In Europe, organic revenue increased in substantially all countries and disciplines, especially our advertising discipline, which was led by our media business, CRM Precision Marketing and public relations businesses. The strengthening of the British Pound and the Euro against the U.S. Dollar contributed to increased revenue in the region. In Latin America, organic growth in all countries in the region, especially Mexico, primarily in our advertising discipline was partially offset by the weakening of the Brazilian Real against the U.S. Dollar. In Asia-Pacific, revenue increased due to strong organic revenue growth in all countries, particularly China, Australia and New Zealand, and in all disciplines. The strengthening of all currencies against the U.S. Dollar contributed to increased revenue in the region. The increase in revenue in the six months of 2021 compared to the six months of 2020 in our fundamental disciplines was: advertising $554.8 million, CRM Precision Marketing $117.0 million, CRM Commerce and Brand Consulting $27.5 million, CRM Experiential $2.6 million, CRM Execution & Support $31.0 million, Public Relations $31.6 million and Healthcare $26.5 million.
The components of revenue change for the six months of 2021 in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Domestic
|
|
International
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
June 30, 2020
|
$
|
6,207.6
|
|
|
|
|
$
|
3,481.7
|
|
|
|
|
$
|
2,725.9
|
|
|
|
|
Components of revenue change:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange rate impact
|
246.5
|
|
|
4.0
|
%
|
|
—
|
|
|
—
|
%
|
|
246.5
|
|
|
9.0
|
%
|
|
Acquisition revenue, net of disposition revenue
|
(77.0)
|
|
|
(1.2)
|
%
|
|
(70.3)
|
|
|
(2.0)
|
%
|
|
(6.7)
|
|
|
(0.2)
|
%
|
|
Organic growth
|
621.5
|
|
|
10.0
|
%
|
|
297.5
|
|
|
8.5
|
%
|
|
324.0
|
|
|
11.9
|
%
|
|
June 30, 2021
|
$
|
6,998.6
|
|
|
12.7
|
%
|
|
$
|
3,708.9
|
|
|
6.5
|
%
|
|
$
|
3,289.7
|
|
|
20.7
|
%
|
The components and percentages are calculated as follows:
•Foreign exchange rate impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $6,752.1 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($6,998.6 million less $6,752.1 million for the Total column).
•Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table.
•Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth.
•The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($6,207.6 million for the Total column).
Revenue and organic growth in our principal regional markets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Organic Growth
|
|
Americas:
|
|
|
|
|
|
|
|
|
North America
|
$
|
3,929.9
|
|
|
$
|
3,661.3
|
|
|
$
|
268.6
|
|
|
8.8
|
%
|
|
Latin America
|
133.7
|
|
|
126.3
|
|
|
7.4
|
|
|
7.7
|
%
|
|
EMEA:
|
|
|
|
|
|
|
|
|
Europe
|
1,985.1
|
|
|
1,650.8
|
|
|
334.3
|
|
|
11.0
|
%
|
|
Middle East and Africa
|
102.5
|
|
|
90.1
|
|
|
12.4
|
|
|
10.1
|
%
|
|
Asia-Pacific
|
847.4
|
|
|
679.1
|
|
|
168.3
|
|
|
14.4
|
%
|
|
|
$
|
6,998.6
|
|
|
$
|
6,207.6
|
|
|
$
|
791.0
|
|
|
10.0
|
%
|
Revenue in Europe, which includes our primary markets of the U.K. and the Euro Zone, increased $334.3 million for the six months of 2021 as compared to the prior year period. Revenue in the U.K., representing 10.5% of total revenue, increased $125.7 million. Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 17.8% of total revenue, increased $208.6 million. The increase in revenue is due to strong organic growth in all countries and disciplines, as well as the continued strengthening of the British Pound and Euro against the U.S. Dollar.
In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. The net change through the six months of 2021 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with all of our clients.
To monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories: advertising, CRM, public relations and healthcare. In an effort to better capture the expanding scope of our services, effective January 1, 2021, we realigned the classification of certain services primarily within our CRM Consumer Experience discipline. As a result, our CRM discipline has been reclassified into four categories: CRM Precision Marketing, which includes our precision marketing and digital/direct marketing agencies; CRM Commerce and Brand Consulting that is primarily comprised of Omnicom Commerce Group, including our shopper marketing businesses, and our Brand Consulting agencies; CRM Experiential, which includes our experiential marketing agencies and events businesses; and CRM Execution & Support, which includes field marketing, merchandising and point of sale, as well as other specialized marketing and custom communications services.
Certain of our businesses and markets continue to experience the effects of client spending reductions related to the COVID-19 pandemic. Among the most impacted businesses were our CRM Experiential discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing businesses. Revenue and organic growth by discipline were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021 vs. 2020
|
|
|
$
|
|
% of
Revenue
|
|
$
|
|
% of
Revenue
|
|
$ Change
|
|
% Organic Growth
|
|
Advertising
|
$
|
4,018.2
|
|
|
57.4
|
%
|
|
$
|
3,463.4
|
|
|
55.8
|
%
|
|
$
|
554.8
|
|
|
13.9
|
%
|
|
CRM Precision Marketing
|
563.0
|
|
|
8.1
|
%
|
|
446.0
|
|
|
7.2
|
%
|
|
117.0
|
|
|
15.8
|
%
|
|
CRM Commerce and Brand Consulting
|
436.1
|
|
|
6.2
|
%
|
|
408.6
|
|
|
6.6
|
%
|
|
27.5
|
|
|
4.7
|
%
|
|
CRM Experiential
|
212.4
|
|
|
3.0
|
%
|
|
209.8
|
|
|
3.4
|
%
|
|
2.6
|
|
|
(1.0)
|
%
|
|
CRM Execution & Support
|
497.5
|
|
|
7.1
|
%
|
|
466.5
|
|
|
7.5
|
%
|
|
31.0
|
|
|
1.6
|
%
|
|
Public Relations
|
663.4
|
|
|
9.5
|
%
|
|
631.8
|
|
|
10.2
|
%
|
|
31.6
|
|
|
5.3
|
%
|
|
Healthcare
|
608.0
|
|
|
8.7
|
%
|
|
581.5
|
|
|
9.3
|
%
|
|
26.5
|
|
|
2.3
|
%
|
|
|
$
|
6,998.6
|
|
|
|
|
$
|
6,207.6
|
|
|
|
|
$
|
791.0
|
|
|
10.0
|
%
|
We provide services to clients that operate in various industry sectors. Revenue by sector was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
Food and Beverage
|
14
|
%
|
|
14
|
%
|
|
Consumer Products
|
8
|
%
|
|
8
|
%
|
|
Pharmaceuticals and Healthcare
|
16
|
%
|
|
16
|
%
|
|
Financial Services
|
7
|
%
|
|
8
|
%
|
|
Technology
|
9
|
%
|
|
8
|
%
|
|
Auto
|
10
|
%
|
|
10
|
%
|
|
Travel and Entertainment
|
9
|
%
|
|
8
|
%
|
|
Telecommunications
|
5
|
%
|
|
6
|
%
|
|
Retail
|
7
|
%
|
|
6
|
%
|
|
Services
|
2
|
%
|
|
2
|
%
|
|
Oil, Gas and Utilities
|
1
|
%
|
|
2
|
%
|
|
Not-for-Profit
|
1
|
%
|
|
1
|
%
|
|
Government
|
3
|
%
|
|
3
|
%
|
|
Education
|
1
|
%
|
|
1
|
%
|
|
Other
|
7
|
%
|
|
7
|
%
|
|
|
100
|
%
|
|
100
|
%
|
In 2020, certain industry sectors were more negatively affected by the impact of the COVID-19 pandemic than others.
Operating Expenses
Operating expenses were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021 vs. 2020
|
|
|
$
|
|
% of
Revenue
|
|
$
|
|
% of
Revenue
|
|
$
Change
|
|
%
Change
|
|
Revenue
|
$
|
6,998.6
|
|
|
|
|
$
|
6,207.6
|
|
|
|
|
$
|
791.0
|
|
|
12.7
|
%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and service costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and related service costs
|
3,370.9
|
|
|
48.2
|
%
|
|
3,067.1
|
|
|
49.4
|
%
|
|
303.8
|
|
|
9.9
|
%
|
|
Third-party service costs
|
1,777.2
|
|
|
25.4
|
%
|
|
1,497.3
|
|
|
24.1
|
%
|
|
279.9
|
|
|
18.7
|
%
|
|
|
5,148.1
|
|
|
73.6
|
%
|
|
4,564.4
|
|
|
73.5
|
%
|
|
583.7
|
|
|
12.8
|
%
|
|
Occupancy and other costs
|
585.5
|
|
|
8.4
|
%
|
|
599.6
|
|
|
9.7
|
%
|
|
(14.1)
|
|
|
(2.4)
|
%
|
|
Gain on sale of subsidiary
|
(50.5)
|
|
|
(0.7)
|
%
|
|
—
|
|
|
|
|
(50.5)
|
|
|
|
|
COVID-19 repositioning costs
|
—
|
|
|
|
|
277.9
|
|
|
4.5
|
%
|
|
(277.9)
|
|
|
|
|
Cost of services
|
5,683.1
|
|
|
|
|
5,441.9
|
|
|
|
|
241.2
|
|
|
4.4
|
%
|
|
Selling, general and administrative expenses
|
174.9
|
|
|
2.5
|
%
|
|
168.9
|
|
|
2.7
|
%
|
|
6.0
|
|
|
3.6
|
%
|
|
Depreciation and amortization
|
106.8
|
|
|
1.5
|
%
|
|
114.1
|
|
|
1.8
|
%
|
|
(7.3)
|
|
|
(6.4)
|
%
|
|
|
5,964.8
|
|
|
85.2
|
%
|
|
5,724.9
|
|
|
92.2
|
%
|
|
239.9
|
|
|
4.2
|
%
|
|
Operating Profit
|
$
|
1,033.8
|
|
|
14.8
|
%
|
|
$
|
482.7
|
|
|
7.8
|
%
|
|
$
|
551.1
|
|
|
114.2
|
%
|
Operating expenses for the six months ended June 30, 2021, increased $239.9 million, or 4.2%, period-over-period. Operating expenses for the six months ended June 30, 2021 include a reduction of $50.5 million related to the gain from the sale of ICON. Salary and service costs, which tend to fluctuate with changes in revenue, increased $583.7 million, or 12.8%, compared to the six months of 2020, reflecting increases in salary and related service costs and third-party service costs of $303.8 million and $279.9 million, respectively. These increases resulted primarily from the increase in organic revenue, as well as the strengthening of most foreign currencies against the U.S. Dollar, especially the British Pound and Euro. The prior year period reflects a reduction in salary and service costs of $49.2 million related to reimbursement and tax credits from governmental programs in several countries. Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $14.1 million, or 2.4%, period-over-period reflecting the positive effects of actions taken in the second
quarter of 2020 in response to the COVID-19 pandemic to manage our costs, which were substantially offset by the strengthening of most foreign currencies against the U.S. Dollar. For the six months ended June 30, 2021, operating profit increased $551.1 million to $1,033.8 million, operating margin increased to 14.8% from 7.8% and EBITA margin increased to 15.4% from 8.5%. The increase in operating profit, operating margin and EBITA margin reflect the impact of the organic revenue growth, the positive impact of actions taken in the second quarter of 2020 in response to the COVID-19 pandemic, and higher costs recorded in 2020 of $277.9 million related to the COVID-19 repositioning charges. Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.
Net Interest Expense
Net interest expense in the six months of 2021 increased $28.0 million period-over-period to $121.0 million. Interest expense on debt in the six months of 2021 increased $19.7 million to $122.6 million, primarily arising from a loss of $26.6 million on the early redemption in May 2021 of all the outstanding $1.250 billion of 2022 Notes. In April 2021, we issued $800 million of 2031 Notes. The proceeds from the issuance plus cash on hand were used to redeem the 2022 Notes. The impact of this refinancing activity reduced our leverage that increased in the second quarter of 2020 from the issuance of the $600 million of 2030 Notes, to increase our liquidity in response to the COVID-19 pandemic, and is expected to result in lower interest expense for the remainder of 2021 as compared to the prior year periods. Interest income in the six months of 2021 decreased $6.1 million period-over-period to $13.1 million.
Income Taxes
Our effective tax rate for the six months ended June 30, 2021 decreased period-over-period to 25.8% from 30.6%. In connection with the sale of ICON in the second quarter of 2021, we recorded a pre-tax gain of $50.5 million. The lower effective tax rate for 2021 was predominantly the result of a nominal tax applied against the book gain on sale of ICON resulting from excess tax over book basis. The effective tax rate for 2020 reflects an increase due to the non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning charges recorded in the second quarter of 2020. Our effective tax rate for the six months ended June 30, 2021 would have been in line with our expectations except for the nominal tax on the pre-tax ICON gain of $50.5 million.
Net Income and Net Income Per Share - Omnicom Group Inc.
Net income - Omnicom Group Inc. in the six months of 2021 increased $402.0 million to $636.0 million from $234.0 million in the six months of 2020. The period-over-period increase is due to the factors described above. Diluted net income per share - Omnicom Group Inc. increased to $2.93 in the six months of 2021, compared to $1.08 in the six months of 2020, due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of repurchases of our common stock in the second quarter of 2021, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan.
The combined effect of the after-tax gain from the sale of ICON and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc. for the six months of 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc. for the six months of 2021 by $0.14. The effect of the COVID-19 repositioning charges in 2020 decreased net income - Omnicom Group Inc. for the six months of 2020 by $233.1 million and decreased diluted net income per share - Omnicom Group Inc. for the six months of 2020 by $1.03.
CRITICAL ACCOUNTING POLICIES
For a more complete understanding of our accounting policies, the unaudited consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, readers are encouraged to consider this information together with our discussion of our critical accounting policies under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 10-K.
Acquisitions and Goodwill
We have made and expect to continue to make selective acquisitions. The evaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings of the target businesses, as well as our experience and judgment.
Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic reach or their service capabilities to better serve our clients. Additional key factors we consider include the competitive position and specialized know-how of the acquisition targets. Accordingly, as is typical in most service businesses, a substantial portion of the assets we acquire are intangible assets primarily consisting of the know-how of the personnel, which is treated as part of goodwill and is not required to be valued separately under U.S. GAAP. For each acquisition, we undertake a detailed review to identify other intangible assets that are required to be valued separately. A significant portion of the identifiable intangible assets
acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In valuing these identified intangible assets, we typically use an income approach and consider comparable market participant measurements.
We evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. Under FASB ASC Topic 350, Intangibles - Goodwill and Other, we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to the goodwill impairment test. We performed the annual impairment test and compared the fair value of each of our reporting units to its respective carrying value, including goodwill. During the second quarter of 2021, we reorganized the management of one of our agency networks, effectively combining certain practice areas into a new reporting unit that primarily comprises our Omnicom Public Relations Group practice area. As a result of the reorganization, the number of operating segments increased from five to six in 2021. We identified our regional reporting units as components of our operating segments, which are our six global agency networks. The regional reporting units of each agency network are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our key client matrix organization structure for delivering services to clients in their regions. We have concluded that for each of our operating segments, their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level. Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment Reporting, and in FASB ASC Topic 350. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. In addition, the agencies within our regional reporting units have similar economic characteristics. The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs, which include rent and occupancy costs, technology costs that are generally limited to personal computers, servers and off-the-shelf software and other overhead expenses. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our virtual client network strategy.
Goodwill Impairment Review - Estimates and Assumptions
We use the following valuation methodologies to determine the fair value of our reporting units: (1) the income approach, which utilizes discounted expected future cash flows, (2) comparative market participant multiples for EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions.
In applying the income approach, we use estimates to derive the discounted expected cash flows (“DCF”) for each reporting unit that serves as the basis of our valuation. These estimates and assumptions include revenue growth and operating margin, EBITDA, tax rates, capital expenditures, weighted average cost of capital and related discount rates and expected long-term cash flow growth rates. All of these estimates and assumptions are affected by conditions specific to our businesses, economic conditions related to the industry we operate in, as well as conditions in the global economy. The assumptions that have the most significant effect on our valuations derived using a DCF methodology are: (1) the expected long-term growth rate of our reporting units' cash flows and (2) the weighted average cost of capital (“WACC”) for each reporting unit.
At June 30, 2021 we adjusted our assumptions to reflect the economic conditions in light of the impact on our business related to the COVID-19 pandemic.
The assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 2021 and 2020 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Long-Term Growth Rate
|
3.5%
|
|
3.0%
|
|
WACC
|
9.8% - 10.4%
|
|
10.6% - 10.8%
|
Long-term growth rate represents our estimate of the long-term growth rate for our industry and the markets of the global economy we operate in. For the past ten years, the average historical revenue growth rate of our reporting units and the Average Nominal GDP, or NGDP, growth of the countries comprising the major markets that account for substantially all of our revenue was approximately 3.2% and 3.4%, respectively. We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2021, and included in the 10-year history is the full year 2020 that reflected the impact of the COVID-19 pandemic on the global economy. We believe marketing expenditures over the long term have a high correlation to NGDP. Based on our historical performance, we also believe that our long-term growth rate will exceed NGDP growth in the short-term in the markets we operate in, which are similar across our reporting units. Accordingly, for our annual test as of June 30, 2021, we used an estimated long-term growth rate of 3.5%.
When performing the annual impairment test as of June 30, 2021 and estimating the future cash flows of our reporting units, we considered the current macroeconomic environment, as well as industry and market specific conditions at mid-year 2021. In the first half of 2021, our revenue increased 10.0%, which excluded our net disposition activity and the impact from changes in foreign exchange rates.
The WACC is comprised of: (1) a risk-free rate of return, (2) a business risk index ascribed to us and to companies in our industry comparable to our reporting units based on a market derived variable that measures the volatility of the share price of equity securities relative to the volatility of the overall equity market, (3) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, and (4) a current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted by the relative market value percentages of our equity and debt.
Our six reporting units vary in size with respect to revenue and the amount of debt allocated to them. These differences drive variations in fair value among our reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds book value among the reporting units. The reporting unit goodwill balances and debt vary by reporting unit primarily because our three legacy agency networks were acquired at the formation of Omnicom and were accounted for as a pooling of interests that did not result in any additional debt or goodwill being recorded. The remaining three agency networks were built through a combination of internal growth and acquisitions that were accounted for using the acquisition method and as a result, they have a relatively higher amount of goodwill and debt. Finally, the allocation of goodwill when components are transferred between reporting units is based on relative fair value at the time of transfer.
Goodwill Impairment Review - Conclusion
Based on the results of our impairment test, we concluded that our goodwill at June 30, 2021 was not impaired, because the fair value of each of our reporting units was in excess of its respective net book value. For our reporting units with negative book value, we concluded that the fair value of their total assets was in excess of book value. The minimum decline in fair value that one of our reporting units would need to experience in order to fail the goodwill impairment test was approximately 34%. Notwithstanding our belief that the assumptions we used for WACC and long-term growth rate in our impairment testing were reasonable, we performed a sensitivity analysis for each of our reporting units. The results of this sensitivity analysis on our impairment test as of June 30, 2021 revealed that if the WACC increased by 1% and/or the long-term growth rate decreased by 1%, the fair value of each of our reporting units would continue to be in excess of its respective net book value and would pass the impairment test.
We will continue to perform our impairment test at the end of the second quarter of each year unless events or circumstances trigger the need for an interim impairment test. The estimates used in our goodwill impairment test do not constitute forecasts or projections of future results of operations, but rather are estimates and assumptions based on historical results and assessments of macroeconomic factors affecting our reporting units as of the valuation date. We believe that our estimates and assumptions are reasonable, but they are subject to change from period to period. Actual results of operations and other factors will likely differ from the estimates used in our discounted cash flow valuation, and it is possible that differences could be significant. A change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail our goodwill impairment test if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. A large decline in estimated fair value of a reporting unit could result in a non-cash impairment charge and may have an adverse effect on our results of operations and financial condition.
NEW ACCOUNTING STANDARDS
Note 1 to the unaudited consolidated financial statements provides information regarding new accounting standards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources and Requirements
Our primary liquidity sources are our operating cash flow and cash and cash equivalents. Additional liquidity sources include our $2.5 billion multi-currency revolving credit facility, or Credit Facility, maturing on February 14, 2025, uncommitted credit lines aggregating $966.2 million, and the ability to issue up to $2 billion of commercial paper and access the capital markets. Our liquidity funds our non-discretionary cash requirements and our discretionary spending.
Borrowings under the Credit Facility may use LIBOR as the benchmark interest rate. The LIBOR benchmark rate is expected to be phased out by the end of June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations.
Working capital is our principal non-discretionary funding requirement. Our typical working capital cycle results in a short-term borrowing requirement that normally peaks during the second quarter of the year due to the timing of payments for incentive compensation, income taxes and contingent purchase price obligations. In addition, we have contractual obligations related to our long-term debt (principal and interest payments), recurring business operations, primarily related to lease obligations, and contingent purchase price obligations (earn-outs) from acquisitions. Our principal discretionary cash spending includes dividend payments to common shareholders, capital expenditures, strategic acquisitions and repurchases of our common stock.
Cash and cash equivalents decreased $1,212.4 million from December 31, 2020. During the first six months of 2021, we used $295.7 million of cash in operating activities, which included the use for operating capital of $1,091.2 million, primarily related to our typical working capital requirement during the period and the impact of foreign exchange rate changes, as compared to the prior year period. Our discretionary spending for the first six months of 2021 was $487.3 million as compared to $580.6 million for the first six months of 2020. Discretionary spending for the first six months of 2021 is comprised of: capital expenditures of $22.9 million; dividends paid to common shareholders of $292.4 million; dividends paid to shareholders of noncontrolling interests of $38.6 million; repurchases of our common stock, net of proceeds from stock option exercises and related tax benefits and common stock sold to our employee stock purchase plan, of $94.7 million; and acquisition payments, including payment of contingent purchase price obligations and acquisition of additional shares of noncontrolling interests, net of cash acquired, of $38.7 million. In addition, the impact of foreign exchange rate changes reduced cash and cash equivalents by $23.6 million.
Cash Management
Our regional treasury centers in North America, Europe and Asia manage our cash and liquidity. Each day, operations with excess funds invest those funds with their regional treasury center. Likewise, operations that require funds borrow from their regional treasury center. Treasury centers with excess cash invest on a short-term basis with third parties, generally with maturities ranging from overnight to less than 90 days. Certain treasury centers have notional pooling arrangements that are used to manage their cash and set-off foreign exchange imbalances. The arrangements require each treasury center to have its own notional pool account and to maintain a notional positive account balance. Additionally, under the terms of the arrangement, set-off of foreign exchange positions are limited to the long and short positions within their own account. To the extent that our treasury centers require liquidity, they have the ability to issue up to a total of $2 billion of U.S. Dollar-denominated commercial paper or borrow under the Credit Facility, or the uncommitted credit lines. This process enables us to manage our debt more efficiently and utilize our cash more effectively, as well as manage our risk to foreign exchange rate imbalances. In countries where we either do not conduct treasury operations or it is not feasible for one of our treasury centers to fund net borrowing requirements on an intercompany basis, we arrange for local currency uncommitted credit lines. We have a policy governing counterparty credit risk with financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to the Credit Facility. These institutions generally have credit ratings equal to or better than our credit ratings. In countries where we do not conduct treasury operations, all cash and cash equivalents are held by counterparties that meet specific minimum credit standards
At June 30, 2021, our foreign subsidiaries held approximately $1.9 billion of our total cash and cash equivalents of $4.4 billion. Most of the cash is available to us, net of any foreign withholding taxes payable upon repatriation to the United States.
At June 30, 2021, our net debt position, which we define as total debt, including short-term debt, less cash and cash equivalents increased to $921.9 million as compared to $210.7 million at December 31, 2020. The increase in net debt primarily resulted from the use of cash of $1,091.2 million for operating capital principally related to our typical working capital requirements during the period. In addition, the impact of foreign exchange rate changes decreased cash and cash equivalents by $23.6 million, as compared to December 31, 2020. Net debt decreased $1.5 billion from $2.4 billion at June 30, 2020 due to conservative management of our cash during the COVID-19 pandemic, including the suspension of share buybacks through the first quarter of 2021, and the impact of our refinancing activity in the second quarter of 2021 discussed below.
The components of net debt were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2020
|
|
Short-term debt
|
$
|
9.3
|
|
|
$
|
3.9
|
|
|
$
|
6.4
|
|
|
Long-term debt
|
5,300.7
|
|
|
5,807.3
|
|
|
5,714.1
|
|
|
Total debt
|
5,310.0
|
|
|
5,811.2
|
|
|
5,720.5
|
|
|
Less: Cash and cash equivalents and short-term investments
|
4,388.1
|
|
|
5,600.5
|
|
|
3,281.0
|
|
|
Net debt
|
$
|
921.9
|
|
|
$
|
210.7
|
|
|
$
|
2,439.5
|
|
In April 2021, we issued $800 million of the 2031 Notes. The net proceeds from the issuance, after deducting the underwriting discount and offering expenses, were $791.7 million. The net proceeds plus cash on hand were used to redeem all the outstanding $1.250 billion of 2022 Notes in May 2021. In connection with the redemption of the 2022 Notes, we recorded a loss on extinguishment of $26.6 million in interest expense. The impact of this refinancing activity reduced our leverage that had increased from the issuance of $600 million of 2030 Notes in the second quarter of 2020 to increase our liquidity in response to the COVID-19 pandemic, and is expected to result in lower interest expense for the remainder of 2021 as compared to the prior year periods.
Net debt is a Non-GAAP liquidity measure. This presentation, together with the comparable U.S. GAAP liquidity measures, reflects one of the key metrics used by us to assess our cash management. Non-GAAP liquidity measures should not be
considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies.
Debt Instruments and Related Covenants
The 2.45% Senior Notes, the 4.20% Senior Notes and the 2.60% Senior Notes are senior unsecured obligations of Omnicom that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under the 3.65% Senior Notes and the 3.60% Senior Notes. These notes are a joint and several liability of Omnicom and OCI, and Omnicom unconditionally guarantees OCI’s obligations with respect to the notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI’s assets primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or Omnicom to obtain funds from our subsidiaries through dividends, loans or advances. Such notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
Omnicom and OCI have, jointly and severally, fully and unconditionally guaranteed OFHP’s obligations with respect to the Euro denominated notes due 2027 and 2031. OFHP’s assets consist of its investments in several wholly owned finance companies that function as treasury centers that provide funding for various operating companies in Europe, Brazil, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFHP to obtain funds from their subsidiaries through dividends, loans or advances. The Euro denominated notes and the related guarantees are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFHP and each of Omnicom and OCI, respectively.
The Credit Facility contains a financial covenant that requires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3.5 times for the most recently ended 12-month period. In October 2020, we amended the Credit Facility to increase the maximum Leverage Ratio to 4.0 times through December 31, 2021. At June 30, 2021, we were in compliance with this covenant as our Leverage Ratio was 2.2 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
At June 30, 2021, our long-term and short-term debt was rated BBB+ and A2 by S&P and Baa1 and P2 by Moody's. Our access to the commercial paper market and the cost of these borrowings are affected by market conditions and our credit ratings. Our long-term debt and Credit Facility do not contain provisions that require acceleration of cash payments in the event of a downgrade in our credit ratings.
Credit Markets and Availability of Credit
In light of the uncertainty of future economic conditions, we will continue to take actions available to us to respond to changing economic conditions, and we will continue to actively manage our discretionary expenditures. We will continue to monitor and manage the level of credit made available to our clients. We believe that these actions, in addition to the availability of our Credit Facility, are sufficient to fund our near-term working capital needs and our discretionary spending. For additional information about our credit facilities, see Note 5 to the unaudited consolidated financial statements.
We have typically funded our day-to-day liquidity by issuing commercial paper. Beginning in the third quarter of 2020 and continuing through the second quarter of 2021, we substantially reduced our commercial paper issuances as compared to the prior year periods primarily as a result of the issuance of $600 million of 2030 Notes. Additional liquidity sources include our Credit Facility and the uncommitted credit lines. At June 30, 2021, there were no commercial paper issuances during the quarter or borrowings under the Credit Facility or the uncommitted credit lines.
Commercial paper activity was (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
Average amount outstanding during the quarter
|
$
|
5.9
|
|
|
$
|
107.7
|
|
|
Maximum amount outstanding during the quarter
|
$
|
200.0
|
|
|
$
|
401.2
|
|
|
Average days outstanding
|
1.1
|
|
|
24.4
|
|
|
Weighted average interest rate
|
0.15
|
%
|
|
2.08
|
%
|
We expect to continue issuing commercial paper to fund our day-to-day liquidity when needed. However, disruptions in the credit markets may lead to periods of illiquidity in the commercial paper market and higher credit spreads. To mitigate any disruption in the credit markets and to fund our liquidity, we may borrow under the Credit Facility or the uncommitted credit lines or access the capital markets if favorable conditions exist. We will continue to monitor closely our liquidity and conditions in the credit markets. We cannot predict with any certainty the impact on us of any disruptions in the credit markets. In such
circumstances, we may need to obtain additional financing to fund our day-to-day working capital requirements. Such additional financing may not be available on favorable terms, or at all.
CREDIT RISK
We provide advertising, marketing and corporate communications services to several thousand clients that operate in nearly every sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client represented 3.1% of revenue for the twelve months ended June 30, 2021. However, during periods of economic downturn, the credit profiles of our clients could change.
In the normal course of business, our agencies enter into contractual commitments with media providers and production companies on behalf of our clients at levels that can substantially exceed the revenue from our services. These commitments are included in accounts payable when the services are delivered by the media providers or production companies. If permitted by local law and the client agreement, many of our agencies purchase media and production services for our clients as an agent for a disclosed principal. In addition, while operating practices vary by country, media type and media vendor, 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.