01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Omnicom Group Inc. (NYSE: OMC) reported 2003 revenue of $8.62 billiona, up 14.4% from $7.54 billion in 2002, and net income of $675.9 million, up 5.0% from $643.5 million.
Diluted EPS was $3.59b versus $3.44. The filing attributes 6.2 percentage points of revenue growth to foreign exchange, 3.6 points to acquisitions and 4.6 points to organic growth. Operating margin declined to 13.5% from 14.7%, as salary and service costs rose to 67.7% of revenue from 65.7%, which management attributed to greater use of freelance labor, severance costs and incentive compensation.
Management said margins should begin to stabilize with continued U.S. economic improvement and cost-reduction actions. Balance sheet and liquidity: cash and cash equivalents were $1.53 billionc at year-end 2003, and the company had $2.0 billion of unused committed credit facilities. Convertible notes totaled $2.34 billion, up from $1.75 billion, following the June 2003 issuance of $600 million of zero coupon convertible notes due 2033.
Ratings were A- (S&P), Baa1 (Moody's) and A- (Fitch). The company reported a debt-to-EBITDA ratio of 2.0 times against a 3.0 times covenant, and EBITDA-to-interest of 22.9 times against a 5.0 times minimum.
The filing also discloses that the company plans to adopt fair value expensing of stock options in the first quarter of 2004, which it expects to reduce future net income and EPS. A securities class action filed in June 2002 remains pending, and the company is unable to determine its outcome.
02—Key points
Key Highlights
- Revenue rose 14.4% to $8.62 billion in 2003; organic growth contributed 4.6 points, acquisitions 3.6 points and foreign exchange 6.2 points.
- Net income increased 5.0% to $675.9 million; diluted EPS rose 4.4% to $3.59 from $3.44.
- Operating margin fell to 13.5% from 14.7% as salary and service costs increased to 67.7% of revenue from 65.7%.
- Cash and cash equivalents reached $1.53 billion at December 31, 2003, with $2.0 billion of unused committed credit facilities.
- Convertible notes outstanding rose to $2.34 billion, including $600 million of zero coupon notes due 2033 issued in June 2003.
- Management plans to adopt fair value expensing for stock options in Q1 2004, expected to reduce future net income and EPS.
- A consolidated securities class action filed in June 2002 is pending; the company cannot currently determine its outcome.
03—Questions
Frequently Asked Questions
How did Omnicom perform in 2003?
Revenue grew 14.4% to $8.62 billion and net income grew 5.0% to $675.9 million, with diluted EPS of $3.59. Operating profit rose to $1.16 billion, but operating margin declined to 13.5% from 14.7%.
What drove the decline in operating margin?
The filing cites changes in business mix, increased severance costs, under-utilization of staff, higher professional fees and increased amortization of other intangible assets. Salary and service costs rose to 67.7% of revenue from 65.7%, driven partly by greater use of freelance labor.
How strong is the company's balance sheet and liquidity?
Cash and equivalents were $1.53 billion and unused committed credit facilities totaled $2.0 billion. Debt-to-EBITDA was 2.0 times against a 3.0 times covenant, and EBITDA-to-interest was 22.9 times against a 5.0 times minimum. Ratings were A- (S&P), Baa1 (Moody's) and A- (Fitch).
What are the main risks the filing highlights?
Risks include the pending securities class action over 2001–2002 disclosures, the possibility that convertible noteholders put their notes to the company (total convertible notes of $2.34 billion), and the expected earnings impact of expensing stock options beginning in 2004.
What does management expect for future margins?
Management said it expects operating expense control to remain difficult, but hopes that continued improvement in the U.S. economy and cost-reduction actions will allow margins to begin to stabilize.
04—Continue