filings.toolsItem 16. Form 10-K Summary
138K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| OMNICOM GROUP INC. | ||
| February 15, 2018 | BY: | /s/ PHILIP J. ANGELASTRO |
| Philip J. Angelastro Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ BRUCE CRAWFORD | Chairman and Director | February 15, 2018 |
| Bruce Crawford | ||
| /s/ JOHN D. WREN | Chief Executive Officer and President and Director (Principal Executive Officer) | February 15, 2018 |
| John D. Wren | ||
| /s/ PHILIP J. ANGELASTRO | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 15, 2018 |
| Philip J. Angelastro | ||
| /s/ ANDREW L. CASTELLANETA | Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) | February 15, 2018 |
| Andrew L. Castellaneta | ||
| /s/ ALAN R. BATKIN | Director | February 15, 2018 |
| Alan R. Batkin | ||
| /s/ MARY C. CHOKSI | Director | February 15, 2018 |
| Mary C. Choksi | ||
| /s/ ROBERT CHARLES CLARK | Director | February 15, 2018 |
| Robert Charles Clark | ||
| /s/ LEONARD S. COLEMAN, JR. | Director | February 15, 2018 |
| Leonard S. Coleman, Jr. | ||
| /s/ SUSAN S. DENISON | Director | February 15, 2018 |
| Susan S. Denison | ||
| /s/ DEBORAH J. KISSIRE | Director | February 15, 2018 |
| Deborah J. Kissire | ||
| /s/ GRACIA C. MARTORE | Director | February 15, 2018 |
| Gracia C. Martore | ||
| /s/ JOHN R. MURPHY | Director | February 15, 2018 |
| John R. Murphy | ||
| /s/ JOHN R. PURCELL | Director | February 15, 2018 |
| John R. Purcell | ||
| /s/ LINDA JOHNSON RICE | Director | February 15, 2018 |
| Linda Johnson Rice | ||
| /s/ VALERIE M. WILLIAMS | Director | February 15, 2018 |
| Valerie M. Williams |
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for the preparation of the consolidated financial statements and related information of Omnicom Group Inc. (“Omnicom”). Management uses its best judgment to ensure that the consolidated financial statements present fairly, in all material respects, Omnicom’s consolidated financial position and results of operations in conformity with generally accepted accounting principles in the United States.
The financial statements have been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board. Their report expresses the independent accountant’s judgment as to the fairness of management’s reported financial position, results of operations and cash flows. This judgment is based on the procedures described in the fourth and fifth paragraphs of their report.
Omnicom management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Management, with the participation of our Chief Executive Officer, or CEO, Chief Financial Officer, or CFO, and our agencies, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our CEO and CFO concluded that our internal control over financial reporting was effective as of December 31, 2017. There have not been any changes in our internal control over financial reporting during our fourth fiscal quarter that have materially affected or are reasonably likely to affect our internal control over financial reporting.
KPMG LLP, an independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on Omnicom’s internal control over financial reporting as of December 31, 2017, dated February 15, 2018.
The Board of Directors of Omnicom has an Audit Committee comprised of six independent directors. The Audit Committee meets periodically with financial management, Internal Audit and the independent auditors to review accounting, control, audit and financial reporting matters.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors of Omnicom Group Inc.:
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Omnicom Group Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Omnicom Group Inc. and subsidiaries as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
New York, New York
February 15, 2018
F-3
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| Current Assets: | |||||||
| Cash and cash equivalents | $ | 3,796.0 | $ | 3,002.2 | |||
| Short-term investments, at cost | 0.4 | 20.6 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $32.1 and $24.9 | 8,083.8 | 7,510.8 | |||||
| Work in process | 1,110.6 | 1,125.4 | |||||
| Other current assets | 1,125.2 | 1,063.0 | |||||
| Total Current Assets | 14,116.0 | 12,722.0 | |||||
| Property and Equipment at cost, less accumulated depreciation of $1,279.2 and $1,233.4 | 690.9 | 674.8 | |||||
| Equity Method Investments | 120.3 | 120.4 | |||||
| Goodwill | 9,337.5 | 8,976.1 | |||||
| Intangible Assets, net of accumulated amortization of $879.9 and $777.6 | 368.4 | 427.4 | |||||
| Other Assets | 298.1 | 244.7 | |||||
| TOTAL ASSETS | $ | 24,931.2 | $ | 23,165.4 | |||
| LIABILITIES AND EQUITY | |||||||
| Current Liabilities: | |||||||
| Accounts payable | $ | 11,574.6 | $ | 10,476.7 | |||
| Customer advances | 1,266.7 | 1,186.6 | |||||
| Current portion of debt | — | 0.1 | |||||
| Short-term debt | 11.8 | 28.7 | |||||
| Taxes payable | 330.0 | 349.6 | |||||
| Other current liabilities | 1,925.8 | 1,969.2 | |||||
| Total Current Liabilities | 15,108.9 | 14,010.9 | |||||
| Long-Term Debt | 4,912.9 | 4,920.5 | |||||
| Long-Term Liabilities | 1,091.2 | 892.3 | |||||
| Deferred Tax Liabilities | 483.6 | 480.5 | |||||
| Commitments and Contingent Liabilities (Note 16) | |||||||
| Temporary Equity - Redeemable Noncontrolling Interests | 182.4 | 201.6 | |||||
| Equity: | |||||||
| Shareholders’ Equity: | |||||||
| Preferred stock, $1.00 par value, 7.5 million shares authorized, none issued | — | — | |||||
| Common stock, $0.15 par value, 1.0 billion shares authorized, 297.2 million shares issued, 230.1 million and 234.7 million shares outstanding | 44.6 | 44.6 | |||||
| Additional paid-in capital | 828.3 | 798.3 | |||||
| Retained earnings | 6,210.6 | 5,677.2 | |||||
| Accumulated other comprehensive income (loss) | (963.0 | ) | (1,356.0 | ) | |||
| Treasury stock, at cost, 67.1 million and 62.5 million shares | (3,505.4 | ) | (3,002.1 | ) | |||
| Total Shareholders’ Equity | 2,615.1 | 2,162.0 | |||||
| Noncontrolling interests | 537.1 | 497.6 | |||||
| Total Equity | 3,152.2 | 2,659.6 | |||||
| TOTAL LIABILITIES AND EQUITY | $ | 24,931.2 | $ | 23,165.4 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-4
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
| Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Revenue | $ | 15,273.6 | $ | 15,416.9 | $ | 15,134.4 | |||||
| Operating Expenses: | |||||||||||
| Salary and service costs | 11,249.7 | 11,440.6 | 11,248.7 | ||||||||
| Occupancy and other costs | 1,232.1 | 1,230.6 | 1,242.7 | ||||||||
| Cost of services | 12,481.8 | 12,671.2 | 12,491.4 | ||||||||
| Selling, general and administrative expenses | 450.0 | 443.9 | 431.8 | ||||||||
| Depreciation and amortization | 282.1 | 292.9 | 291.1 | ||||||||
| 13,213.9 | 13,408.0 | 13,214.3 | |||||||||
| Operating Profit | 2,059.7 | 2,008.9 | 1,920.1 | ||||||||
| Interest Expense | 224.5 | 209.7 | 181.1 | ||||||||
| Interest Income | 49.7 | 42.6 | 39.6 | ||||||||
| Income Before Income Taxes and Income From Equity Method Investments | 1,884.9 | 1,841.8 | 1,778.6 | ||||||||
| Income Tax Expense | 696.2 | 600.5 | 583.6 | ||||||||
| Income From Equity Method Investments | 3.5 | 5.4 | 8.4 | ||||||||
| Net Income | 1,192.2 | 1,246.7 | 1,203.4 | ||||||||
| Net Income Attributed To Noncontrolling Interests | 103.8 | 98.1 | 109.5 | ||||||||
| Net Income - Omnicom Group Inc. | $ | 1,088.4 | $ | 1,148.6 | $ | 1,093.9 | |||||
| Net Income Per Share - Omnicom Group Inc.: | |||||||||||
| Basic | $ | 4.68 | $ | 4.80 | $ | 4.43 | |||||
| Diluted | $ | 4.65 | $ | 4.78 | $ | 4.41 | |||||
| Dividends Declared Per Common Share | $ | 2.25 | $ | 2.15 | $ | 2.00 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-5
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net Income | $ | 1,192.2 | $ | 1,246.7 | $ | 1,203.4 | |||||
| Other Comprehensive Income (Loss): | |||||||||||
| Cash flow hedge: | |||||||||||
| Loss for the period | — | (48.9 | ) | (5.6 | ) | ||||||
| Amortization of loss included in interest expense | 5.3 | 4.0 | — | ||||||||
| Income tax effect | (2.1 | ) | 18.7 | 2.3 | |||||||
| 3.2 | (26.2 | ) | (3.3 | ) | |||||||
| Defined benefit pension plans and postemployment arrangements: | |||||||||||
| Unrecognized actuarial losses and prior service cost for the period | (12.2 | ) | (18.3 | ) | (7.8 | ) | |||||
| Amortization of prior service cost and actuarial losses included in periodic benefit expense | 16.1 | 14.0 | 14.8 | ||||||||
| Income tax effect | (1.7 | ) | 1.6 | (2.8 | ) | ||||||
| 2.2 | (2.7 | ) | 4.2 | ||||||||
| Available-for-sale securities: | |||||||||||
| Unrealized gain for the period | 0.8 | 0.2 | 0.4 | ||||||||
| Income tax effect | (0.3 | ) | (0.1 | ) | (0.1 | ) | |||||
| 0.5 | 0.1 | 0.3 | |||||||||
| Foreign currency translation adjustment | 412.7 | (319.4 | ) | (427.2 | ) | ||||||
| Other Comprehensive Income (Loss) | 418.6 | (348.2 | ) | (426.0 | ) | ||||||
| Comprehensive Income | 1,610.8 | 898.5 | 777.4 | ||||||||
| Comprehensive Income Attributed To Noncontrolling Interests | 129.4 | 90.5 | 80.7 | ||||||||
| Comprehensive Income - Omnicom Group Inc. | $ | 1,481.4 | $ | 808.0 | $ | 696.7 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-6
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Three Years Ended December 31, 2017
(In millions, except per share amounts)
| Omnicom Group Inc. | ||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||
| Shares | Par Value | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2014 | 397.2 | $ | 59.6 | $ | 818.6 | $ | 9,576.9 | $ | (618.2 | ) | $ | (6,986.9 | ) | $ | 2,850.0 | $ | 471.3 | $ | 3,321.3 | |||||||||||||||
| Net income | 1,093.9 | 1,093.9 | 109.5 | 1,203.4 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (397.2 | ) | (397.2 | ) | (28.8 | ) | (426.0 | ) | ||||||||||||||||||||||||||
| Dividends to noncontrolling interests | (129.4 | ) | (129.4 | ) | ||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | (38.8 | ) | (38.8 | ) | (24.2 | ) | (63.0 | ) | ||||||||||||||||||||||||||
| Increase in noncontrolling interests from business combinations | 38.6 | 38.6 | ||||||||||||||||||||||||||||||||
| Change in temporary equity | 11.9 | 11.9 | 11.9 | |||||||||||||||||||||||||||||||
| Common stock dividends declared ($2.00 per share) | (492.6 | ) | (492.6 | ) | (492.6 | ) | ||||||||||||||||||||||||||||
| Share-based compensation | 99.4 | 99.4 | 99.4 | |||||||||||||||||||||||||||||||
| Stock issued, share-based compensation | (31.2 | ) | 84.5 | 53.3 | 53.3 | |||||||||||||||||||||||||||||
| Common stock repurchased | (727.5 | ) | (727.5 | ) | (727.5 | ) | ||||||||||||||||||||||||||||
| Balance as of December 31, 2015 | 397.2 | 59.6 | 859.9 | 10,178.2 | (1,015.4 | ) | (7,629.9 | ) | 2,452.4 | 437.0 | 2,889.4 | |||||||||||||||||||||||
| Net income | 1,148.6 | 1,148.6 | 98.1 | 1,246.7 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (340.6 | ) | (340.6 | ) | (7.6 | ) | (348.2 | ) | ||||||||||||||||||||||||||
| Dividends to noncontrolling interests | (87.2 | ) | (87.2 | ) | ||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | (87.7 | ) | (87.7 | ) | (16.0 | ) | (103.7 | ) | ||||||||||||||||||||||||||
| Increase in noncontrolling interests from business combinations | 73.3 | 73.3 | ||||||||||||||||||||||||||||||||
| Change in temporary equity | (33.0 | ) | (33.0 | ) | (33.0 | ) | ||||||||||||||||||||||||||||
| Common stock dividends declared ($2.15 per share) | (513.9 | ) | (513.9 | ) | (513.9 | ) | ||||||||||||||||||||||||||||
| Share-based compensation | 93.4 | 93.4 | 93.4 | |||||||||||||||||||||||||||||||
| Stock issued, share-based compensation | (34.3 | ) | 79.3 | 45.0 | 45.0 | |||||||||||||||||||||||||||||
| Common stock repurchased | (602.2 | ) | (602.2 | ) | (602.2 | ) | ||||||||||||||||||||||||||||
| Treasury stock retired | (100.0 | ) | (15.0 | ) | (5,135.7 | ) | 5,150.7 | — | — | |||||||||||||||||||||||||
| Balance as of December 31, 2016 | 297.2 | 44.6 | 798.3 | 5,677.2 | (1,356.0 | ) | (3,002.1 | ) | 2,162.0 | 497.6 | 2,659.6 | |||||||||||||||||||||||
| Cumulative effect of accounting changes | 4.5 | (31.6 | ) | (27.1 | ) | — | (27.1 | ) | ||||||||||||||||||||||||||
| Net income | 1,088.4 | 1,088.4 | 103.8 | 1,192.2 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 393.0 | 393.0 | 25.6 | 418.6 | ||||||||||||||||||||||||||||||
| Dividends to noncontrolling interests | (101.7 | ) | (101.7 | ) | ||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | (25.7 | ) | (25.7 | ) | (8.2 | ) | (33.9 | ) | ||||||||||||||||||||||||||
| Increase in noncontrolling interests from business combinations | 20.0 | 20.0 | ||||||||||||||||||||||||||||||||
| Change in temporary equity | 27.1 | 27.1 | 27.1 | |||||||||||||||||||||||||||||||
| Common stock dividends declared ($2.25 per share) | (523.4 | ) | (523.4 | ) | (523.4 | ) | ||||||||||||||||||||||||||||
| Share-based compensation | 80.2 | 80.2 | 80.2 | |||||||||||||||||||||||||||||||
| Stock issued, share-based compensation | (56.1 | ) | 65.1 | 9.0 | 9.0 | |||||||||||||||||||||||||||||
| Common stock repurchased | (568.4 | ) | (568.4 | ) | (568.4 | ) | ||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 297.2 | $ | 44.6 | $ | 828.3 | $ | 6,210.6 | $ | (963.0 | ) | $ | (3,505.4 | ) | $ | 2,615.1 | $ | 537.1 | $ | 3,152.2 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-7
OMNICOM GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 1,192.2 | $ | 1,246.7 | $ | 1,203.4 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 168.3 | 177.7 | 181.8 | ||||||||
| Amortization of intangible assets | 113.8 | 115.2 | 109.3 | ||||||||
| Amortization of deferred gain on interest rate swaps | (12.9 | ) | (15.4 | ) | (9.2 | ) | |||||
| Share-based compensation | 80.2 | 93.4 | 99.4 | ||||||||
| Impact of Tax Act | 106.3 | — | — | ||||||||
| Other, net | 27.5 | 32.0 | 55.3 | ||||||||
| Increase in operating capital | 348.5 | 302.8 | 559.5 | ||||||||
| Net Cash Provided By Operating Activities | 2,023.9 | 1,952.4 | 2,199.5 | ||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Capital expenditures | (156.0 | ) | (165.5 | ) | (202.7 | ) | |||||
| Acquisition of businesses and interests in affiliates, net of cash acquired | (26.3 | ) | (308.8 | ) | (60.3 | ) | |||||
| Sale (purchase) of investments, net | 66.9 | (7.3 | ) | (0.5 | ) | ||||||
| Net Cash Used In Investing Activities | (115.4 | ) | (481.6 | ) | (263.5 | ) | |||||
| Cash Flows from Financing Activities: | |||||||||||
| Change in short-term debt | (18.1 | ) | (1.2 | ) | (1.1 | ) | |||||
| Proceeds from borrowings | — | 1,389.6 | — | ||||||||
| Repayment of debt | — | (1,000.0 | ) | — | |||||||
| Dividends paid to common shareholders | (515.2 | ) | (505.4 | ) | (496.7 | ) | |||||
| Repurchases of common stock | (568.4 | ) | (602.2 | ) | (727.5 | ) | |||||
| Proceeds from stock plans | 10.7 | 26.8 | 20.1 | ||||||||
| Acquisition of additional noncontrolling interests | (17.0 | ) | (72.7 | ) | (33.5 | ) | |||||
| Dividends paid to noncontrolling interest shareholders | (101.7 | ) | (87.2 | ) | (129.4 | ) | |||||
| Payment of contingent purchase price obligations | (108.4 | ) | (110.5 | ) | (55.3 | ) | |||||
| Other, net | (24.5 | ) | (35.5 | ) | (32.9 | ) | |||||
| Net Cash Used In Financing Activities | (1,342.6 | ) | (998.3 | ) | (1,456.3 | ) | |||||
| Effect of foreign exchange rate changes on cash and cash equivalents | 227.9 | (75.5 | ) | (262.6 | ) | ||||||
| Net Increase in Cash and Cash Equivalents | 793.8 | 397.0 | 217.1 | ||||||||
| Cash and Cash Equivalents at the Beginning of Year | 3,002.2 | 2,605.2 | 2,388.1 | ||||||||
| Cash and Cash Equivalents at the End of Year | $ | 3,796.0 | $ | 3,002.2 | $ | 2,605.2 |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
F-8
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Presentation of Financial Statements
The terms “Omnicom,” “the Company,” “we,” “our” and “us” each refer to Omnicom Group Inc. and its subsidiaries, unless the context indicates otherwise. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP or GAAP. All intercompany balances and transactions have been eliminated.
We prepare our financial statements in conformity with U.S. GAAP and are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Accounting Changes
On January 1, 2017, we adopted FASB ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09, which requires that beginning in 2017 excess tax benefits and deficiencies related to share-based compensation be recorded in results of operations upon vesting of restricted stock awards or exercise of stock options. Excess tax benefits and deficiencies represent the difference between the actual compensation deduction for tax purposes, which is calculated as the difference between the grant date price of the award and the price of our common stock on the vesting or exercise date, and compensation expense recognized for financial reporting purposes. In prior years, excess tax benefits and deficiencies were recorded in additional paid-in capital. In 2017 we recognized an excess tax benefit of $20.8 million.
ASU 2016-09 requires that cash flows related to the excess tax benefits or deficiencies be classified in operating activities. Accordingly, we retrospectively adjusted the statement of cash flows for 2016 and 2015 to conform to the current year presentation, resulting in an increase in net cash provided by operating activities and a corresponding decrease in net cash used in financing activities of $21.2 million and $27.2 million, respectively. Further, ASU 2016-09 permits a policy election to either continue to estimate the number of awards that will be forfeited or to account for forfeitures as they occur. We elected to account for forfeitures as they occur. Accordingly, we recorded a cumulative catch-up adjustment to increase additional paid-in capital and reduce opening retained earnings by $4.5 million reflecting the estimate of unvested awards at December 31, 2016 that were not expected to vest.
On January 1, 2017, we adopted FASB ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory, or ASU 2016-16, which requires that the income tax effects of intra-entity transfers of assets other than inventory are recognized when the transfer occurs. We adopted ASU 2016-16 using the modified retrospective method and recorded a cumulative catch-up adjustment to reduce opening retained earnings by $27.1 million reflecting the elimination of the deferred tax asset related to intercompany asset transfers.
On December 31, 2017, we adopted FASB ASU 2017-12, Derivatives and Hedging, or ASU 2017-12, which amended the hedge accounting and recognition and presentation requirements. The adoption of ASU 2017-12 did not have any impact on our existing hedges, financial position or results of operations.
- Significant Accounting Policies
Revenue Recognition. We recognize revenue in accordance with FASB Accounting Standards Codification, or FASB ASC, Topic 605, Revenue Recognition, and applicable SEC Staff Accounting Bulletins. Our principal source of revenue is derived from fees for services on a rate per hour or per project basis. Revenue is realized when the service is performed in accordance with the client arrangement and upon the completion of the earnings process. Our primary client arrangements include: fixed fee contracts where revenue is recognized based on the level of effort completed to date, retainer agreements where revenue is recognized on a straight-line basis over the contract period, and media commissions where revenue is recognized when the media is run. Prior to recognizing revenue, persuasive evidence of an arrangement must exist, the sales price must be fixed or determinable, delivery, performance and acceptance must be in accordance with the client arrangement and collection must be reasonably assured. These principles are the foundation of our revenue recognition policy and apply to all client arrangements in each of our service disciplines: advertising, customer relationship management, public relations and healthcare. Because the services that we provide across each of our disciplines are similar and delivered to clients in similar ways, all of the key elements of our revenue recognition policy apply to client arrangements in each of our four disciplines. Revenue is recorded net of sales, use and value added taxes.
F-9
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the majority of our businesses, we act as an agent and record revenue equal to the net amount retained when the fee or commission is earned. Although, in certain markets, we may bear credit risk with respect to these activities, the arrangements with our clients are such that we act as an agent on their behalf. In these cases, costs incurred with third-party suppliers are excluded from our revenue. In certain arrangements, we act as principal and we contract directly with third-party suppliers and media providers and production companies and we are the primary obligor. In these circumstances, revenue is recorded at the gross amount billed since revenue has been earned for the sale of goods or services.
Some of our client arrangements include performance incentive provisions designed to link a portion of our revenue to our performance relative to quantitative and qualitative goals. We recognize performance incentives in revenue when the specific quantitative goals are achieved, or when our performance against qualitative goals is determined by the client. We may receive rebates or credits from certain vendors based on transactions entered into on behalf of clients. These rebates or credits are remitted to the clients in accordance with contractual requirements or in certain international markets may be retained by us based on the terms of the client contract or local law. Amounts passed on to clients are recorded as a liability and amounts retained by us are recorded as revenue when earned.
See Note 20 for a discussion of the adoption of ASU 2014-09, Revenue from Contracts with Customers ASC Topic 606.
Operating Expenses. Operating expenses are comprised of cost of services, selling, general and administrative, or SG&A, expenses and depreciation and amortization. We measure cost of services in two distinct categories: salary and service costs and occupancy and other costs. As a service business, salary and service costs make up the vast majority of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs include employee compensation and benefits, freelance labor and direct service costs, which include third-party supplier costs and client-related travel costs. Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses. SG&A expenses primarily consist of third-party marketing costs, professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices, which includes group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid interest-bearing time deposits with original maturities of three months or less. Due to the short-term nature of these investments, carrying value approximates fair value. We have a policy governing counterparty credit risk for financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution.
Short-Term Investments. Short-term investments consist of interest-bearing time deposits with maturities of less than twelve months. Short-term investments are carried at cost, which approximates fair value.
Work in Process. Work in process includes costs incurred on behalf of clients in providing advertising and marketing services, including media and production costs, and fees that have not yet been billed. Media and production costs are billed during the production process and fees are normally billed within the next 30 days or when the services are performed.
Property and Equipment. Property and equipment are carried at cost and are depreciated over the estimated useful lives of the assets using the straight-line method. The estimated useful lives range from seven to ten years for furniture and three to five years for equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the related lease term or the estimated useful life of the asset. Property under capital lease is depreciated on a straight-line basis over the lease term.
Equity Method Investments. Investments in companies where we exercise significant influence over the operating and financial policies of the investee and own less than 50% of the equity are accounted for using the equity method. Our proportionate share of the net income or loss of equity method investments is included in results of operations and any dividends received reduce the carrying value of the investment. The excess of the cost of our investment over our proportionate share of the fair value of the net assets of the investee at the acquisition date is recognized as goodwill and included in the carrying amount of the investment. Goodwill in the equity method investments is not amortized. Gains and losses from changes in our ownership interests are recorded in results of operations until control is achieved. Where a change in our ownership interest results in obtaining control, the existing carrying value of the investment is remeasured to the acquisition date fair value and any gain or loss is recognized in results of operations.
F-10
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost Method Investments. Investments in companies where we do not exercise significant influence over the operating and financial policies of the investee and own less than 20% of the equity are accounted for using the cost method. Cost method investments are included in other assets and are carried at cost, which approximates or is less than fair value. The carrying value of our cost method investments was $14.4 million and $14.2 million at December 31, 2017 and 2016, respectively.
We periodically review the carrying value of the equity method and cost method investments to determine if there has been an other-than-temporary decline in carrying value. A variety of factors are considered when determining if a decline in carrying value is other-than-temporary, including the financial condition and business prospects of the investee, as well as our investment intent.
Available-for-Sale Securities. Investments in common stock of publicly traded companies are classified as available-for-sale securities. These investments are included in other assets and are carried at fair value using quoted market prices. Unrealized gains and losses are recorded in accumulated other comprehensive income. The carrying value of the available-for-sale securities was $1.4 million and $4.3 million at December 31, 2017 and 2016, respectively.
Goodwill and Intangible Assets. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired. Goodwill is not amortized, but is periodically reviewed for impairment. Intangible assets comprise customer relationships, including the related customer contracts and trade names, and purchased and internally developed software and are amortized over their estimated useful lives ranging from five to twelve years. We consider a number of factors in determining the useful lives and amortization method, including the pattern in which the economic benefits are consumed, as well as trade name recognition and customer attrition. There is no estimated residual value for the intangible assets.
We review the carrying value of goodwill for impairment annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. The impairment evaluation compares the fair value of each reporting unit, which we identified as our five agency networks, to its carrying value, including goodwill. If the fair value of the reporting unit is equal to or greater than its carrying value, goodwill is not impaired. Goodwill is impaired when the carrying value of the reporting unit exceeds its fair value. Goodwill is written down to its fair value through a non-cash expense recorded in results of operations in the period the impairment is identified.
We identified our regional reporting units as components of our operating segments, which are our five agency networks. The regional reporting units of each agency network monitor the performance and are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our client-centric strategy for delivering services to clients in their regions. We have concluded that, for each of our operating segments, their regional reporting units had similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level. Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment Reporting, and the guidance set forth in FASB ASC Topic 350, Intangibles - Goodwill and Other. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs, which include rent and occupancy costs, technology costs that are generally limited to personal computers, servers and off-the-shelf software and other overhead costs. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our client service strategy. We use the following valuation methodologies to determine the fair value of our reporting units: (1) the income approach, which utilizes discounted expected future cash flows, (2) comparative market participant multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions.
Based on the results of the annual impairment test, we concluded that at June 30, 2017 and 2016 our goodwill was not impaired because the fair value of each reporting unit was substantially in excess of its respective net book value. Subsequent to the annual impairment test of goodwill at June 30, 2017, there were no events or circumstances that triggered the need for an interim impairment test.
Debt Issuance Costs. Debt issuance costs are capitalized and amortized in interest expense over the life of the related debt and are presented as a reduction to the carrying amount of debt.
Temporary Equity - Redeemable Noncontrolling Interests. Owners of noncontrolling equity interests in some of our subsidiaries have the right in certain circumstances to require us to purchase all or a portion of their equity interests at fair value as defined in the applicable agreements. The intent of the parties is to approximate fair value at the time of redemption by using a multiple of earnings that is consistent with generally accepted valuation practices used by market participants in our industry. These contingent redemption rights are embedded in the equity security at issuance, are not free-standing instruments, do not represent a de facto financing and are not under our control.
F-11
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Treasury Stock. Repurchases of our common stock are accounted for at cost and are recorded as treasury stock. Reissued treasury stock, primarily in connection with share-based compensation plans, is accounted for at average cost. Gains or losses on reissued treasury stock arising from the difference between the average cost and the fair value of the award are recorded in additional paid-in capital and do not affect results of operations.
Business Combinations. Business combinations are accounted for using the acquisition method and accordingly, the assets acquired, including identified intangible assets, liabilities assumed and any noncontrolling interest in the acquired business are recorded at acquisition date fair value. In circumstances where control is obtained and less than 100% of a business is acquired, goodwill is recorded as if 100% were acquired. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs are expensed as incurred. Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which are recorded as a liability at the acquisition date fair value using the discount rate in effect on the acquisition date. Subsequent changes in the fair value of the liability are recorded in results of operations. Amounts earned under the contingent purchase price arrangements may be subject to a maximum and payment is not contingent upon future employment. The results of operations of acquired businesses are included in results of operations from the acquisition date.
Noncontrolling Interests. Noncontrolling interests represent equity interests in certain subsidiaries held by third-parties. Noncontrolling interests are presented as a component of equity and the proportionate share of net income attributed to the noncontrolling interests is recorded in results of operations. Changes in noncontrolling interests that do not result in a loss of control are accounted for in equity. Gains and losses resulting from a loss of control are recorded in results of operations.
Foreign Currency Translation and Transactions. Substantially all of our foreign subsidiaries use their local currency as their functional currency. Assets and liabilities are translated into U.S. Dollars at the exchange rate on the balance sheet date and revenue and expenses are translated at the average exchange rate for the period. Translation adjustments are recorded in accumulated other comprehensive income. Net foreign currency transaction gains and (losses) recorded in results of operations were $(7.8) million, $12.7 million and $4.7 million in 2017, 2016 and 2015, respectively.
Share-Based Compensation. Share-based compensation for restricted stock and stock option awards is measured at the grant date fair value. The fair value of restricted stock awards is determined and fixed using the closing price of our common stock on the grant date and is recorded in additional paid-in capital. The fair value of stock option awards is determined using the Black-Scholes option valuation model. For awards that have a service only vesting condition, compensation expense is recognized on a straight-line basis over the requisite service period. For awards with a performance vesting condition, compensation expense is recognized on a graded-vesting basis. Typically, all share-based awards are settled with treasury stock. See Note 9 for additional information regarding our specific award plans.
Salary Continuation Agreements. Arrangements with certain present and former employees provide for continuing payments for periods up to ten years after cessation of full-time employment in consideration for agreement by the employees not to compete with us and to render consulting services during the postemployment period. Such payments, which are subject to certain limitations, including our operating performance during the postemployment period, represent the fair value of the services rendered and are expensed in such periods.
Severance. The liability for one-time termination benefits, such as severance pay or benefit payouts, is measured and recognized at fair value in the period the liability is incurred. Subsequent changes to the liability are recognized in results of operations in the period of change.
Defined Benefit Pension Plans and Postemployment Arrangements. The funded status of our defined benefit plans is recorded as an asset or liability. Funded status is the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date, determined on a plan-by-plan basis. The benefit obligation for the defined benefit plans is the projected benefit obligation (“PBO”), which represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels. The fair value of plan assets represents the current market value. Overfunded plans where the fair value of plan assets exceeds the benefit obligation are aggregated and recorded as a prepaid pension asset equal to the excess. Underfunded plans where the benefit obligation exceeds the fair value of plan assets are aggregated and recorded as a liability equal to the excess. We record the liability for our postemployment arrangements. The benefit obligation of our postemployment arrangements is the PBO and these arrangements are not funded. The current portion of the benefit obligation for the defined benefit plans and postemployment arrangements, which represents the actuarial present value of benefits payable in the next twelve months that exceed the fair value of plan assets, is recorded in other current liabilities and the long-term portion is recorded in long-term liabilities.
F-12
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation. Some of our subsidiaries have individual deferred compensation arrangements with certain executives that provide for payments over varying terms upon retirement, cessation of employment or death. The cost of these arrangements is accrued during the employee’s service period.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable for the current period and the deferred taxes recognized during the period. Deferred income taxes reflect the temporary difference between assets and liabilities that are recognized for financial reporting purposes and income tax purposes and are recorded as noncurrent. Deferred income taxes are measured using the enacted tax rates that are assumed to be in effect when the differences reverse. Valuation allowances are recorded where it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we evaluate factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.
Interest and penalties related to tax positions taken in our tax returns are recorded in income tax expense. We record a liability for uncertain tax positions that reflects the treatment of certain tax positions taken in our tax returns, or planned to be taken in a future tax returns, which have not been reflected in income tax expense. Until these positions are sustained by the taxing authorities or the statute of limitations concerning such issues lapses, we do not generally recognize the tax benefits resulting from such positions.
In December 2017, the Tax Cuts and Jobs Act, or Tax Act, was enacted into law. As a result, tax positions related to the accumulated earnings of our foreign subsidiaries are reflected under the provisions of the Tax Act. See Note 10 for additional information.
Net Income Per Share. Basic net income per share is based on the weighted average number of common shares outstanding during the period. Diluted net income per share is based on the weighted average number of common shares outstanding, plus, the dilutive effect of common share equivalents, which include outstanding stock options and restricted stock awards.
Net income per share is computed using the two-class method, which is an earnings allocation method for computing net income per share when a company's capital structure includes common stock and participating securities. Certain of the unvested restricted stock awards receive non-forfeitable dividends at the same rate as the common stock and therefore are considered participating securities. Under the two-class method, basic and diluted net income per share is reduced for a presumed hypothetical distribution of earnings to holders of the unvested restricted stock awards receiving non-forfeitable dividends.
Concentration of Credit Risk. We provide advertising, marketing and corporate communications services to several thousand clients that operate in nearly every industry sector of the global economy and we grant credit to qualified clients in the normal course of business. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client accounted for 3.0% of revenue in 2017.
Derivative Financial Instruments. All derivative instruments, including certain derivative instruments embedded in other contracts, are recorded at fair value. Derivatives qualify for hedge accounting if: the hedging instrument is designated as a hedge, the hedged exposure is specifically identifiable, and exposes us to risk and a change in fair value of the derivative financial instrument and an opposite change in the fair value of the hedged exposure have a high degree of correlation. The method of assessing hedge effectiveness and measuring hedge ineffectiveness is formally documented. Hedge effectiveness is assessed and hedge ineffectiveness is measured at least quarterly throughout the designated hedge period. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through results of operations or recognized in other comprehensive income until the hedged item is recognized in results of operations. The ineffective portion of the change in fair value of a derivative used as hedge is recognized in results of operations. We do not use derivatives for trading or speculative purposes. Using derivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. We manage that risk through careful selection and ongoing evaluation of the counterparty financial institutions based on specific minimum credit standards and other factors.
F-13
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value. We apply the fair value measurement guidance in FASB ASC Topic 820, Fair Value Measurements and Disclosures, for our financial assets and liabilities that are required to be measured at fair value and for our nonfinancial assets and liabilities that are not required to be measured at fair value on a recurring basis, which includes goodwill and other identifiable intangible assets. The measurement of fair value requires the use of techniques based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The inputs create the following fair value hierarchy:
| • | Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical assets or liabilities in markets that are not active; and model-derived valuations with observable inputs. |
| • | Level 3 - Unobservable inputs for the asset or liability. |
We use unadjusted quoted market prices to determine the fair value of our financial assets and liabilities and classify such items in Level 1. We use unadjusted quoted market prices for similar assets and liabilities in active markets and model-derived valuations and classify such items in Level 2.
In determining the fair value of financial assets and liabilities, we consider certain market valuation adjustments that market participants would consider in determining fair value, including: counterparty credit risk adjustments applied to financial assets and liabilities, taking into account the actual credit risk of the counterparty when valuing assets measured at fair value and credit risk adjustments applied to reflect our credit risk when valuing liabilities measured at fair value.
Reclassifications. Certain reclassifications have been made to the prior year financial information to conform to the current year presentation.
- Net Income per Share
The computations of basic and diluted net income per share for the three years ended December 31, 2017 were (in millions, except per share amounts):
| 2017 | 2016 | 2015 | |||||||||
| Net Income Available for Common Shares: | |||||||||||
| Net income - Omnicom Group Inc. | $ | 1,088.4 | $ | 1,148.6 | $ | 1,093.9 | |||||
| Net income allocated to participating securities | (1.6 | ) | (6.5 | ) | (12.4 | ) | |||||
| $ | 1,086.8 | $ | 1,142.1 | $ | 1,081.5 | ||||||
| Weighted Average Shares: | |||||||||||
| Basic | 232.3 | 237.9 | 244.2 | ||||||||
| Dilutive stock options and restricted shares | 1.6 | 1.3 | 1.0 | ||||||||
| Diluted | 233.9 | 239.2 | 245.2 | ||||||||
| Anti-dilutive stock options and restricted shares | 1.0 | — | 0.1 | ||||||||
| Net Income per Share - Omnicom Group Inc.: | |||||||||||
| Basic | $ | 4.68 | $ | 4.80 | $ | 4.43 | |||||
| Diluted | $ | 4.65 | $ | 4.78 | $ | 4.41 |
F-14
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Business Combinations
In 2017, we completed four acquisitions, which increased goodwill $65.3 million. Also, we acquired additional equity interests in certain majority owned subsidiaries in 2017, which are accounted for as equity transactions and no additional goodwill was recorded. None of these acquisitions, either individually or in the aggregate, was material to our results of operations or financial position.
The evaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings, as well as our experience and judgment. Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our strategic business platforms and agency brands, through the expansion of their geographic area or their service capabilities to better serve our clients. Certain acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs), which are derived using the performance of the acquired entity and are based on predetermined formulas. Contingent purchase price obligations at December 31, 2017 and 2016 were $215.6 million and $386.1 million, respectively, of which $92.6 million and $190.8 million, respectively, are included in other current liabilities.
For each acquisition, we undertake a detailed review to identify other intangible assets that are required to be valued separately. We use several market participant measurements to determine fair value. This approach includes consideration of similar and recent transactions, as well as utilizing discounted expected cash flow methodologies and when available and as appropriate, we use comparative market multiples to supplement our analysis. As is typical for most service businesses, a substantial portion of the intangible asset value we acquire is the specialized know-how of the workforce, which is treated as part of goodwill and is not valued separately. A significant portion of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. One of the primary drivers in executing our acquisition strategy is the existence of, or the ability to, expand our existing client relationships. The expected benefits of our acquisitions are typically shared across multiple agencies and regions.
- Goodwill and Intangible Assets
Goodwill and intangible assets at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
| Goodwill | $ | 9,871.8 | $ | (534.3 | ) | $ | 9,337.5 | $ | 9,481.4 | $ | (505.3 | ) | $ | 8,976.1 | |||||||||
| Intangible assets: | |||||||||||||||||||||||
| Purchased and internally developed software | $ | 368.2 | $ | (303.0 | ) | $ | 65.2 | $ | 342.6 | $ | (270.2 | ) | $ | 72.4 | |||||||||
| Customer related and other | 880.1 | (576.9 | ) | 303.2 | 862.4 | (507.4 | ) | 355.0 | |||||||||||||||
| $ | 1,248.3 | $ | (879.9 | ) | $ | 368.4 | $ | 1,205.0 | $ | (777.6 | ) | $ | 427.4 |
Changes in goodwill for the years ended December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| January 1 | $ | 8,976.1 | $ | 8,676.4 | |||
| Acquisitions | 19.3 | 311.7 | |||||
| Noncontrolling interests in acquired businesses | 18.9 | 74.0 | |||||
| Contingent purchase price obligations of acquired businesses | 27.1 | 152.8 | |||||
| Foreign currency translation and other | 296.1 | (238.8 | ) | ||||
| December 31 | $ | 9,337.5 | $ | 8,976.1 |
There were no goodwill impairment losses recorded in 2017 or 2016 and there are no accumulated goodwill impairment losses.
F-15
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Debt
Credit Facilities
At December 31, 2017, our short-term liquidity sources include a $2.5 billion revolving credit facility, or Credit Facility, expiring on July 31, 2021, uncommitted credit lines aggregating $1.2 billion and the ability to issue up to $2 billion of commercial paper.
There were no outstanding commercial paper issuances or borrowings under the Credit Facility or the uncommitted credit lines at December 31, 2017 and 2016. Available and unused credit lines at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| Credit Facility | $ | 2,500.0 | $ | 2,500.0 | |||
| Uncommitted credit lines | 1,181.0 | 1,132.0 | |||||
| Available and unused credit lines | $ | 3,681.0 | $ | 3,632.0 |
The Credit Facility contains financial covenants that require us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA of no more than 3 times for the most recently ended 12-month period (EBITDA is defined as earnings before interest, taxes, depreciation and amortization) and an Interest Coverage Ratio of consolidated EBITDA to interest expense of at least 5 times for the most recently ended 12-month period. At December 31, 2017 we were in compliance with these covenants as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 10.4 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock.
Short-Term Debt
Short-term debt at December 31, 2017 and 2016 of $11.8 million and $28.7 million, respectively consists of bank overdrafts and short-term borrowings of our international subsidiaries. The weighted average interest rate was 2.6% and 9.8%, respectively. Due to the short-term nature of this debt, carrying value approximates fair value.
Long-Term Debt
Long-term debt at December 31, 2017 and 2016 was (in millions):
| 2017 | 2016 | ||||||
| 6.25% Senior Notes due 2019 | $ | 500.0 | $ | 500.0 | |||
| 4.45% Senior Notes due 2020 | 1,000.0 | 1,000.0 | |||||
| 3.625% Senior Notes due 2022 | 1,250.0 | 1,250.0 | |||||
| 3.65% Senior Notes due 2024 | 750.0 | 750.0 | |||||
| 3.60% Senior Notes due 2026 | 1,400.0 | 1,400.0 | |||||
| Other debt | — | 0.1 | |||||
| 4,900.0 | 4,900.1 | ||||||
| Unamortized premium (discount), net | 6.2 | 7.6 | |||||
| Unamortized debt issuance costs | (20.3 | ) | (24.2 | ) | |||
| Unamortized deferred gain from settlement of interest rate swaps | 66.4 | 84.7 | |||||
| Fair value adjustment attributed to outstanding interest rate swaps | (39.4 | ) | (47.6 | ) | |||
| 4,912.9 | 4,920.6 | ||||||
| Current portion | — | (0.1 | ) | ||||
| Long-term debt | $ | 4,912.9 | $ | 4,920.5 |
F-16
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under all the senior notes. The senior notes are a joint and several liability of us and OCI and we unconditionally guarantee OCI’s obligations with respect to the senior notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI’s assets consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries and the related interest receivable. There are no restrictions on the ability of OCI or us to obtain funds from our subsidiaries through dividends, loans or advances. Our senior notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness.
The contractual maturities of our long-term debt at December 31, 2017 are (in millions):
| 2018 | $ | — | |
| 2019 | 500.0 | ||
| 2020 | 1,000.0 | ||
| 2021 | — | ||
| 2022 | 1,250.0 | ||
| Thereafter | 2,150.0 | ||
| $ | 4,900.0 |
We use fixed-to-floating interest rate swaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. Interest rate swaps hedge the risk of changes in fair value of the underlying senior notes attributable to changes in the benchmark LIBOR interest rate. The interest rate swaps qualify and are designated as fair value hedges on the underlying senior notes and have the economic effect of converting the underlying fixed rate senior notes to floating rate obligations. Gains and losses attributed to changes in the fair value of the swaps substantially offset changes in the fair value of the underlying senior notes attributed to changes in the benchmark interest rate. Accordingly, any hedge ineffectiveness is not material to our results of operations.
In October 2015, we entered into a $750 million interest rate swap on our 3.65% Senior Notes due 2024, or 2024 Notes. We receive fixed interest payments of 3.65% and pay a variable interest equal to three-month LIBOR, plus a spread of 1.72%.
In April 2016, concurrent with the issuance of our 3.60% Senior Notes due 2026, or 2026 Notes, we entered into a $500 million interest rate swap. We receive fixed interest payments of 3.60% and pay a variable interest equal to three-month LIBOR, plus a spread of 1.982%.
At December 31, 2017, we recorded long-term liabilities of $14.7 million and $24.7 million representing the fair value of the swaps on the 2024 Notes and 2026 Notes, respectively and at December 31, 2016, we recorded long-term liabilities of $17.1 million and $30.5 million, respectively. The interest rate swaps have the economic effect of converting our long-term debt portfolio to approximately 75% fixed rate obligations and 25% floating rate obligations.
Interest Expense
Interest expense for the three years ended December 31, 2017 is composed of (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Long-term debt | $ | 201.6 | $ | 205.5 | $ | 210.2 | |||||
| Interest rate swaps | (7.2 | ) | (13.1 | ) | (44.1 | ) | |||||
| Amortization of deferred gain on interest rate swaps | (12.9 | ) | (15.4 | ) | (9.2 | ) | |||||
| Commercial paper | 12.5 | 6.8 | 4.8 | ||||||||
| Fees | 5.6 | 5.6 | 5.7 | ||||||||
| Other | 24.9 | 20.3 | 13.7 | ||||||||
| $ | 224.5 | $ | 209.7 | $ | 181.1 |
F-17
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Segment Reporting
Our five branded agency networks operate in the advertising, marketing and corporate communications services industry, and are organized into agency networks, virtual client networks, regional reporting units and operating groups. Our networks, virtual client networks and agencies increasingly share clients and provide clients with integrated services. The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs which include rent and occupancy costs, technology costs and other overhead expenses. Therefore, given these similarities, we aggregate our operating segments, which are our five agency networks, into one reporting segment.
The agency networks' regional reporting units comprise three principal regions; the Americas, EMEA and Asia Pacific. The regional reporting units monitor the performance and are responsible for the agencies in their region. Agencies within the regional reporting units serve similar clients in similar industries and in many cases the same clients and have similar economic characteristics.
Revenue and long-lived assets and goodwill by geographic region at and for the three years ended December 31, 2017 were (in millions):
| Americas | EMEA | Asia Pacific | ||||||||||
| 2017 | ||||||||||||
| Revenue | $ | 9,180.8 | $ | 4,442.5 | $ | 1,650.3 | ||||||
| Long-lived assets and goodwill | 6,633.8 | 2,840.8 | 553.8 | |||||||||
| 2016 | ||||||||||||
| Revenue | $ | 9,597.6 | $ | 4,183.1 | $ | 1,636.2 | ||||||
| Long-lived assets and goodwill | 6,662.7 | 2,469.1 | 519.1 | |||||||||
| 2015 | ||||||||||||
| Revenue | $ | 9,359.0 | $ | 4,203.5 | $ | 1,571.9 | ||||||
| Long-lived assets and goodwill | 6,103.4 | 2,737.8 | 527.9 |
The Americas comprises North America, which includes the United States, Canada and Puerto Rico, and Latin America, which includes Mexico. EMEA comprises Europe, the Middle East and Africa. Asia Pacific comprises Australia, China, India, Japan, Korea, New Zealand, Singapore and other Asian countries. Revenue in the United States was $8,196.9 million, $8,627.8 million and $8,526.7 million in 2017, 2016 and 2015, respectively. The reduction in revenue in 2017 for North America and the United States primarily reflects the sale of our specialty print media business in the second quarter.
- Equity Method Investments
Income from our equity method investments was $3.5 million, $5.4 million and $8.4 million in 2017, 2016 and 2015, respectively. Our proportionate share in their net assets at December 31, 2017 and 2016 was $40.7 million and $38.6 million, respectively. Our equity method investments are not material to our results of operations or financial position; therefore, summarized financial information is not required to be presented.
- Share-Based Compensation Plans
Share-based incentive awards are granted to employees under the 2013 Incentive Award Plan, or 2013 Plan, which is administered by the Compensation Committee of the Board of Directors, or Compensation Committee. Awards include stock options, restricted stock and other stock awards. The maximum number of shares of common stock that can be granted under the 2013 Plan is 33 million shares plus any shares awarded under the 2013 Plan and any prior plan that have been forfeited or have expired. Stock option awards reduce the number of shares available for grant on a one-for-one basis and all other awards reduce the number of shares available for grant by 3.5 shares for each share awarded. The terms of each award and the exercise date are determined by the Compensation Committee. The 2013 Plan does not permit the holder of an award to elect cash settlement under any circumstances. At December 31, 2017, there were 28,684,234 shares available for grant under the 2013 Plan. If all shares available for grant were for awards other than stock options, shares available for grant would be 8,195,495.
Share-based compensation expense was $80.2 million, $93.4 million and $99.4 million in 2017, 2016 and 2015, respectively. At December 31, 2017, unamortized share-based compensation that will be expensed over the next five years is $177.6 million.
F-18
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We record a deferred tax asset for the share-based compensation expense recognized for financial reporting purposes that has not been deducted on our income tax return. On January 1, 2017, we adopted ASU 2016-09, (see Note 1), which requires that beginning in 2017 excess tax benefits and deficiencies related to share-based compensation be recorded in results of operations upon vesting of restricted stock awards or exercise of stock options. Excess tax benefits and deficiencies represent the difference between the actual compensation deduction for tax purposes, which is calculated as the difference between the grant date price of the award and the price of our common stock on the vesting or exercise date, and compensation expense recognized for financial reporting purposes. In 2017 we recognized an excess tax benefit of $20.8 million.
Stock Options
The exercise price of stock option awards cannot be less than 100% of the market price of our common stock on the grant date. The 2017 option awards vest 100% three years from grant date and have a maximum contractual life of six years. All prior option awards have a maximum contractual life of 10 years.
Stock option activity for the three years ended December 31, 2017 was:
| 2017 | 2016 | 2015 | ||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||
| January 1 | 719,757 | $27.88 | 1,140,547 | $28.86 | 1,652,140 | $27.97 | ||||||||
| Granted | 1,000,000 | $84.94 | — | — | ||||||||||
| Exercised | (102,335 | ) | $23.40 | (420,790 | ) | $30.56 | (511,593 | ) | $25.98 | |||||
| Forfeited | (24,000 | ) | $84.94 | — | — | |||||||||
| December 31 | 1,593,422 | $63.11 | 719,757 | $27.88 | 1,140,547 | $28.86 | ||||||||
| Exercisable December 31 | 617,422 | $28.61 | 695,757 | $26.54 | 1,074,547 | $26.47 |
Options outstanding and exercisable at December 31, 2017 were:
| Options Outstanding | Options Exercisable | |||||||||||||
| Exercise Price Range | Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||
| $23.00 | to | $24.00 | 545,422 | 1.2 years | $23.40 | 545,422 | $23.40 | |||||||
| $66.00 | to | $71.00 | 72,000 | 6.4 years | $68.04 | 72,000 | $68.04 | |||||||
| $84.00 | to | $85.00 | 976,000 | 5.2 years | $84.94 | — | ||||||||
| 1,593,422 | 617,422 |
The 2017 option award grant date fair value of $9.87 was determined using the Black-Scholes option valuation model. The assumptions for the model, without adjusting for the risk of forfeiture and lack of liquidity, were: expected life - 4.5 years, risk free interest rate - 2.0%, expected volatility - 16.3% and dividend yield - 2.6%.
Restricted Stock
Restricted stock activity for the three years ended December 31, 2017 was:
| 2017 | 2016 | 2015 | ||||||
| January 1 | 3,802,105 | 4,349,105 | 5,040,641 | |||||
| Granted | 966,919 | 1,100,396 | 1,208,964 | |||||
| Vested | (1,757,269 | ) | (1,438,386 | ) | (1,631,343 | ) | ||
| Forfeited | (152,382 | ) | (209,010 | ) | (269,157 | ) | ||
| December 31 | 2,859,373 | 3,802,105 | 4,349,105 | |||||
| Weighted average grant date fair value of shares granted in the period | $74.10 | $73.16 | $64.49 | |||||
| Weighted average grant date fair value at December 31 | $68.85 | $61.72 | $55.08 |
F-19
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, restricted shares vest ratably over five years from the grant date provided the employee remains employed by us. Restricted shares may not be sold, transferred, pledged or otherwise encumbered until the forfeiture restrictions lapse. Under most circumstances, the employee forfeits the shares if employment ceases prior to the end of the restriction period.
Performance Restricted Stock Units
The Compensation Committee grants certain employees performance restricted stock units, or PRSU. Each PRSU represents the right to receive one share of common stock on vesting. The ultimate number of PRSUs received by the employee depends on the Company's average return on equity over a three year period compared to the average return on equity of a peer group of principal competitors over the same period. The PRSUs vest three years from the grant date. The PRSUs have a service and performance vesting condition and compensation expense is recognized on a graded-vesting basis. Over the performance period, compensation expense is adjusted upward or downward based on our estimate of the probability of
achieving the performance target for the portion of the awards subject to the performance vesting condition. We have assumed that substantially all the PRSUs will vest.
PRSU activity for the three years ended December 31, 2017 was:
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||
| January 1 | 462,381 | $ | 77.05 | 534,456 | $ | 66.05 | 622,859 | $ | 56.16 | |||||||||||
| Granted | 173,770 | 84.94 | 153,492 | 83.23 | 161,625 | 77.68 | ||||||||||||||
| Distributed | (147,264 | ) | 69.89 | (225,567 | ) | 55.20 | (239,387 | ) | 48.94 | |||||||||||
| Forfeited | — | — | — | — | (10,641 | ) | 48.87 | |||||||||||||
| December 31 | 488,887 | $ | 82.01 | 462,381 | $ | 77.05 | 534,456 | $ | 66.05 |
Employee Stock Purchase Plan
The employee stock purchase plan, or ESPP, enables employees to purchase our common stock through payroll deductions over each plan quarter at 95% of the market price on the last trading day of the plan quarter. Purchases are limited to 10% of eligible compensation as defined by the Employee Retirement Income Security Act of 1974, or ERISA. Our employees purchased 101,862 shares, 97,935 shares and 111,849 shares in 2017, 2016 and 2015, respectively. All shares purchased were treasury stock, for which we received $7.6 million, $7.8 million and $7.8 million, respectively. At December 31, 2017, there were 8,766,437 shares available under the ESPP.
- Income Taxes
We file a consolidated U.S. federal income tax return and income tax returns in various state and local jurisdictions. Our subsidiaries file tax returns in various foreign jurisdictions. Our principal foreign jurisdictions include the United Kingdom, France and Germany. The Internal Revenue Service has completed its examination of our federal tax returns through 2012. Tax returns in the United Kingdom, France and Germany have been examined through 2013, 2013 and 2009, respectively.
On December 22, 2017, the Tax Act was enacted into law. The Tax Act reduced the U.S. federal statutory income tax rate to 21% from 35% for tax years beginning after December 31, 2017 and made several changes to existing tax law that affect our tax assets and liabilities related to previously reported taxable income. The significant changes require that we record tax expense on the accumulated earnings of our foreign subsidiaries and adjust our previously reported deferred tax positions to reflect the impact of the revised statutory federal rate as of the enactment date. In December 2017, the SEC issued Staff Accounting Bulletin 118, or SAB 118, which provides guidance on accounting for the impact of the Tax Act. SAB 118 provides that provisional amounts should be recognized in our financial statements where accounting for certain effects of the Tax Act are not complete and a reasonable estimate of the effects of the Tax Act can be made. Accordingly, at December 31, 2017, we have estimated the effect of the Tax Act and recorded a net increase to income tax expense of $106.3 million. Our estimate is based on our understanding of the Tax Act and currently available guidance. However, we are still analyzing the impact of the Tax Act and we expect the estimate to change. Any adjustment to the provisional amounts through December 22, 2018 will be recorded in results of operations in the period when the analysis is complete.
F-20
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are required to account for effect of U.S. federal tax rate changes on our deferred tax balances by measuring deferred tax assets and liabilities at the rate at which they are expected to reverse in the future, which as a result of the Tax Act is 21%. The provisional amount for the remeasurement of our deferred tax assets and liabilities reduced income tax expense by $173.3 million.
The territorial tax system will allow us to repatriate future earnings of our foreign subsidiaries without incurring additional U.S. tax by providing a 100% dividend exemption. However, while the change to a territorial system limits U.S. federal income tax to domestic earnings, foreign source income is subject to tax by the appropriate foreign jurisdiction at the local rate, which, in certain jurisdictions, may be higher than the U.S. federal statutory income tax rate of 21%. As a result, the foreign tax rate differential will cause our effective tax rate to be higher than the U.S. federal statutory income tax rate.
The Tax Act imposes a one-time transition tax on our accumulated foreign earnings at December 31, 2017. We recorded a provisional amount of $192.1 million in income tax expense for the transition tax. The portion of the foreign earnings comprising cash and other specified assets is taxed at a 15.5% rate and any remaining amount is taxed at an 8% rate. The provisional amount can change as we obtain additional information related to our foreign subsidiaries. After taking into consideration available foreign tax credits and other items, we recorded a net cash liability of $102.9 million, which we will elect to pay over an eight year period. Although the adoption of a territorial tax system allows for the repatriation of foreign earnings after December 31, 2017 without incurring U.S. income tax, withholding taxes by the foreign jurisdictions will be applied to any dividends remitted to the U.S. As a result, we recorded a charge of $87.5 million related to these withholding taxes.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income, or GILTI, provisions of the Tax Act. We have elected to account for any GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2017.
Income before income taxes for the three years ended December 31, 2017 was (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Domestic | $ | 832.4 | $ | 805.2 | $ | 803.3 | |||||
| International | 1,052.5 | 1,036.6 | 975.3 | ||||||||
| $ | 1,884.9 | $ | 1,841.8 | $ | 1,778.6 |
Income tax expense (benefit) for the three years ended December 31, 2017 was (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Current: | |||||||||||
| Federal | $ | 458.8 | $ | 381.8 | $ | 342.3 | |||||
| State and local | 36.5 | 12.6 | 29.9 | ||||||||
| International | 280.2 | 332.1 | 324.5 | ||||||||
| 775.5 | 726.5 | 696.7 | |||||||||
| Deferred: | |||||||||||
| Federal | (205.5 | ) | (88.2 | ) | (86.7 | ) | |||||
| State and local | 11.1 | 12.0 | 12.1 | ||||||||
| International | 115.1 | (49.8 | ) | (38.5 | ) | ||||||
| (79.3 | ) | (126.0 | ) | (113.1 | ) | ||||||
| $ | 696.2 | $ | 600.5 | $ | 583.6 |
The reconciliation from the statutory U.S. federal income tax rate to our effective tax rate is:
| 2017 | 2016 | 2015 | ||||||
| Statutory U.S. federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||
| State and local income taxes, net of federal income tax benefit | 1.3 | 0.9 | 1.5 | |||||
| Effect of Tax Act | 5.6 | — | — | |||||
| International tax rate differentials | (3.8 | ) | (4.0 | ) | (3.7 | ) | ||
| Other | (1.2 | ) | 0.7 | — | ||||
| Effective tax rate | 36.9 | % | 32.6 | % | 32.8 | % |
F-21
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The international tax rate differentials are primarily attributed to our earnings in the U.K., Canada, the United Arab Emirates, Brazil and Singapore being taxed at different rates than the U.S. statutory tax rate.
Income tax expense in 2017, 2016 and 2015 includes $2.5 million, $2.3 million and $1.1 million, respectively, of interest, net of tax benefit, and penalties related to tax positions taken on our tax returns. At December 31, 2017 and 2016, accrued interest and penalties were $16.1 million and $11.9 million, respectively.
The components of deferred tax assets and liabilities at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| Deferred tax assets: | |||||||
| Compensation | $ | 173.7 | $ | 307.5 | |||
| Tax loss and credit carryforwards | 40.3 | 88.5 | |||||
| Basis differences from acquisitions | 18.0 | 24.3 | |||||
| Basis differences from short-term assets and liabilities | 39.5 | 36.2 | |||||
| Other | 17.8 | 18.7 | |||||
| Deferred tax assets | 289.3 | 475.2 | |||||
| Valuation allowance | (3.3 | ) | (3.0 | ) | |||
| Net deferred tax assets | $ | 286.0 | $ | 472.2 | |||
| Deferred tax liabilities: | |||||||
| Goodwill and intangible assets | $ | 562.2 | $ | 802.7 | |||
| Unremitted foreign earnings | 94.9 | 15.9 | |||||
| Financial instruments | 41.4 | 132.3 | |||||
| Basis differences from investments | 9.8 | 1.8 | |||||
| Deferred tax liabilities | $ | 708.3 | $ | 952.7 | |||
| Long-term deferred tax assets | $ | 61.3 | $ | — | |||
| Long-term deferred tax liabilities | $ | 483.6 | $ | 480.5 |
The American Recovery and Reinvestment Act of 2009 provided an election where qualifying cancellation of indebtedness income for debt reacquired in 2009 and 2010 was deferred and included in taxable income from 2014 to 2018. In 2009 and 2010, we redeemed $1.4 billion of our debt resulting in a tax liability of approximately $329 million. Through December 31, 2017, we paid $263 million of the liability. As a result of the Tax Act, the remaining liability was revalued to $41.4 million and will be paid in 2018.
We have concluded that it is more likely than not that we will be able to realize our net deferred tax assets in future periods because results of future operations are expected to generate sufficient taxable income. The valuation allowance of $3.3 million and $3.0 million at December 31, 2017 and 2016, respectively, relates to tax losses in international jurisdictions. Tax loss and credit carryforwards for which there is no valuation allowance are available for periods ranging from 2018 to 2037, which is longer than the forecasted utilization of such carryforwards.
A reconciliation of our unrecognized tax benefits at December 31, 2017 and 2016 is (in millions):
| 2017 | 2016 | ||||||
| January 1 | $ | 116.9 | $ | 113.0 | |||
| Additions: | |||||||
| Current year tax positions | 67.1 | 20.0 | |||||
| Prior year tax positions | 5.5 | 6.5 | |||||
| Reduction of prior year tax positions | (16.5 | ) | (21.9 | ) | |||
| Settlements | — | (0.7 | ) | ||||
| Foreign currency translation | 0.7 | — | |||||
| December 31 | $ | 173.7 | $ | 116.9 |
The majority of the liability for uncertain tax positions is recorded in long-term liabilities. At December 31, 2017 and 2016, approximately $142.8 million and $71.0 million, respectively, of the liability for uncertain tax positions would affect our effective tax rate upon resolution of the uncertain tax positions.
F-22
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Pension and Other Postemployment Benefits
Defined Contribution Plans
Our domestic and international subsidiaries provide retirement benefits for their employees primarily through defined contribution profit sharing and savings plans. Contributions to the plans vary by subsidiary and have generally been in amounts up to the maximum percentage of total eligible compensation of participating employees that is deductible for income tax purposes. Contribution expense was $112.9 million, $108.5 million and $105.7 million in 2017, 2016 and 2015, respectively.
Defined Benefit Pension Plans
Two of our U.S. businesses and several of our non-U.S. businesses sponsor noncontributory defined benefit pension plans. These plans provide benefits to employees based on formulas recognizing length of service and earnings. The U.S. plans cover approximately 900 participants, are closed to new participants and do not accrue future benefit credits. The non-U.S. plans, which include plans required by local law, cover approximately 6,200 participants and are not subject to ERISA.
We have a Senior Executive Restrictive Covenant and Retention Plan, or Retention Plan, for certain executive officers selected by the Compensation Committee. The Retention Plan is a non-qualified deferred compensation severance plan that was adopted to secure non-competition, non-solicitation, non-disparagement and ongoing consulting services from such executive officers and to strengthen the retention aspect of executive officer compensation. The Retention Plan provides annual payments upon termination following at least seven years of service with Omnicom or its subsidiaries to the participants or to their beneficiaries. A participant’s annual benefit is payable for 15 consecutive calendar years following termination, but in no event prior to age 55. The annual benefit is equal to the lesser of (i) the participant’s final average pay times an applicable percentage, which is based upon the executive’s years of service as an executive officer, not to exceed 35% or (ii) $1.5 million adjusted for cost-of-living, beginning with the second annual payment, not to exceed 2.5% per year. The Retention Plan is not funded and benefits are paid when due.
The components of net periodic benefit expense for the three years ended December 31, 2017 were (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Service cost | $ | 10.1 | $ | 7.8 | $ | 5.3 | |||||
| Interest cost | 7.9 | 7.8 | 7.6 | ||||||||
| Expected return on plan assets | (3.6 | ) | (3.7 | ) | (4.0 | ) | |||||
| Amortization of prior service cost | 4.6 | 4.5 | 4.3 | ||||||||
| Amortization of actuarial losses | 7.0 | 5.3 | 5.7 | ||||||||
| $ | 26.0 | $ | 21.7 | $ | 18.9 |
Included in accumulated other comprehensive income at December 31, 2017 and 2016 were unrecognized actuarial losses and unrecognized prior service cost of $90.0 million ($56.0 million net of income taxes) and $98.0 million ($60.0 million net of income taxes), respectively, that have not yet been recognized in net periodic benefit cost. The unrecognized actuarial gains and losses and unrecognized prior service cost included in accumulated other comprehensive income and expected to be recognized in net periodic benefit cost in 2018 is $11.4 million.
The weighted average assumptions used to determine net periodic benefit expense for the three years ended December 31, 2017 were:
| 2017 | 2016 | 2015 | ||||||
| Discount rate | 3.5 | % | 3.7 | % | 3.5 | % | ||
| Compensation increases | 2.0 | % | 2.0 | % | 1.9 | % | ||
| Expected return on plan assets | 5.3 | % | 4.8 | % | 5.7 | % |
F-23
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected long-term rate of return for plan assets for the U.S. plans is based on several factors, including current and expected asset allocations, historical and expected returns on various asset classes and current and future market conditions. A total return investment approach using a mix of equities and fixed income investments maximizes the long-term return. This strategy is intended to minimize plan expense by achieving long-term returns in excess of the growth in plan liabilities over time. The discount rate used to compute net periodic benefit cost is based on yields of available high-quality bonds and reflects the expected cash flow as of the measurement date. The expected returns on plan assets and discount rates for the non-U.S. plans are based on local factors, including each plan’s investment approach, local interest rates and plan participant profiles.
Experience gains and losses and the effects of changes in actuarial assumptions are generally amortized over a period no longer than the expected average future service of active employees.
Our funding policy is to contribute amounts sufficient to meet minimum funding requirements in accordance with the applicable employee benefit and tax laws that the plans are subject to, plus such additional amounts as we may determine to be appropriate. We contributed $8.3 million, $6.6 million and $4.2 million in 2017, 2016 and 2015, respectively, to our defined benefit pension plans. We do not expect our contributions for 2018 to differ materially from our 2017 contributions.
At December 31, 2017 and 2016, the benefit obligation, fair value of plan assets and funded status of our defined benefit pension plans were (in millions):
| 2017 | 2016 | ||||||
| Benefit Obligation: | |||||||
| January 1 | $ | 251.1 | $ | 234.8 | |||
| Service cost | 10.1 | 7.8 | |||||
| Interest cost | 7.9 | 7.8 | |||||
| Amendments, curtailments and settlements | 0.3 | — | |||||
| Actuarial losses | 6.8 | 13.3 | |||||
| Benefits paid | (9.1 | ) | (9.4 | ) | |||
| Foreign currency translation | 9.9 | (3.2 | ) | ||||
| December 31 | $ | 277.0 | $ | 251.1 | |||
| Fair Value of Plan Assets: | |||||||
| January 1 | $ | 68.6 | $ | 68.9 | |||
| Actual return on plan assets | 6.3 | 4.9 | |||||
| Employer contributions | 8.3 | 6.6 | |||||
| Benefits paid | (9.1 | ) | (9.4 | ) | |||
| Foreign currency translation and other | 6.2 | (2.4 | ) | ||||
| December 31 | $ | 80.3 | $ | 68.6 | |||
| Funded Status December 31 | $ | (196.7 | ) | $ | (182.5 | ) |
At December 31, 2017 and 2016, the funded status was classified as follows (in millions):
| 2017 | 2016 | ||||||
| Other assets | $ | 6.0 | $ | 4.2 | |||
| Other current liabilities | (5.1 | ) | (5.1 | ) | |||
| Long-term liabilities | (197.6 | ) | (181.6 | ) | |||
| $ | (196.7 | ) | $ | (182.5 | ) |
The accumulated benefit obligation for our defined benefit pension plans at December 31, 2017 and 2016, was $264.5 million and $240.8 million, respectively.
At December 31, 2017 and 2016, plans with benefit obligations in excess of plan assets were (in millions):
| 2017 | 2016 | ||||||
| Benefit obligation | $ | 253.8 | $ | 241.3 | |||
| Plan assets | 51.1 | 54.6 | |||||
| $ | 202.7 | $ | 186.7 |
F-24
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average assumptions used to determine the benefit obligation at December 31, 2017 and 2016, were:
| 2017 | 2016 | ||||
| Discount rate | 3.1 | % | 3.5 | % | |
| Compensation increases | 2.0 | % | 2.0 | % |
At December 31, 2017, the estimated benefits expected to be paid over the next 10 years are (in millions):
| 2018 | $ | 9.7 | |
| 2019 | 10.8 | ||
| 2020 | 12.3 | ||
| 2021 | 16.1 | ||
| 2022 | 16.8 | ||
| 2023 - 2027 | 99.6 |
The fair value of plan assets at December 31, 2017 and 2016 was (in millions):
| 2017 | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Cash | $ | 1.0 | $ | 1.0 | |||||||||||
| Mutual funds | 41.5 | 41.5 | |||||||||||||
| Unit trusts | 28.2 | 28.2 | |||||||||||||
| Insurance contracts | $ | 8.6 | 8.6 | ||||||||||||
| Other | $ | 1.0 | 1.0 | ||||||||||||
| $ | 70.7 | $ | 1.0 | $ | 8.6 | $ | 80.3 |
| 2016 | |||||||||||||||
| Cash | $ | 1.6 | $ | 1.6 | |||||||||||
| Mutual funds | 39.0 | 39.0 | |||||||||||||
| Unit trusts | 23.5 | 23.5 | |||||||||||||
| Insurance contracts | $ | 4.3 | 4.3 | ||||||||||||
| Other | $ | 0.2 | 0.2 | ||||||||||||
| $ | 64.1 | $ | 0.2 | $ | 4.3 | $ | 68.6 |
Mutual funds and unit trusts are publicly traded and are valued using quoted market prices. The mutual funds and unit trusts include investments in equity and fixed income securities. Insurance contracts primarily consist of guaranteed investment contracts. Other investments primarily consist of commingled short-term investment funds.
Changes in the fair value of plan assets measured using Level 3 inputs at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| January 1 | $ | 4.3 | $ | 4.2 | |||
| Actual return on assets | 0.2 | 0.2 | |||||
| Purchases, sales and settlements, net | 4.1 | (0.1 | ) | ||||
| December 31 | $ | 8.6 | $ | 4.3 |
The weighted average asset allocations at December 31, 2017 and 2016 were:
| 2017 | 2016 | |||||||
| Target Allocation | Actual Allocation | Actual Allocation | ||||||
| Cash | 4 | % | 1 | % | 3 | % | ||
| Mutual funds | 48 | % | 52 | % | 57 | % | ||
| Unit trusts | 34 | % | 35 | % | 34 | % | ||
| Insurance contracts | 11 | % | 11 | % | 6 | % | ||
| Other | 3 | % | 1 | % | — | % | ||
| 100 | % | 100 | % | 100 | % |
F-25
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk tolerance for these plans is established through consideration of plan liabilities, funded status and evaluation of the overall investment environment. The investment portfolios comprise a mix of equity and fixed-income investments. Equity investments are diversified across geography and market capitalization through investment in large and medium capitalization U.S. and international equities. Fixed income investments include a mix of U.S. and international debt securities. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, and periodic asset/liability studies and investment portfolio reviews.
Postemployment Arrangements
We have executive retirement agreements under which benefits will be paid to participants or to their beneficiaries over periods up to ten years beginning after cessation of full-time employment. Our postemployment arrangements are unfunded and benefits are paid when due.
The components of net periodic benefit expense for the three years ended December 31, 2017 were (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Service cost | $ | 4.4 | $ | 3.9 | $ | 4.8 | |||||
| Interest cost | 3.7 | 3.5 | 4.3 | ||||||||
| Amortization of prior service cost | 3.5 | 3.1 | 3.2 | ||||||||
| Amortization of actuarial losses | 1.0 | 1.1 | 1.6 | ||||||||
| $ | 12.6 | $ | 11.6 | $ | 13.9 |
Included in accumulated other comprehensive income at December 31, 2017 and 2016 were unrecognized actuarial losses and unrecognized prior service cost of $54.0 million ($33.0 million net of income taxes) and $51.0 million ($30.0 million net of income taxes), respectively, that have not yet been recognized in the net periodic benefit cost. The unrecognized actuarial gains and losses and unrecognized prior service cost included in accumulated other comprehensive income and expected to be recognized in net periodic benefit cost in 2018 is $5.2 million.
The weighted average assumptions used to determine net periodic benefit expense for the three years ended December 31, 2017 were:
| 2017 | 2016 | 2015 | ||||||
| Discount rate | 3.9 | % | 4.1 | % | 3.8 | % | ||
| Compensation increases | 3.5 | % | 3.5 | % | 3.5 | % |
Experience gains and losses and effects of changes in actuarial assumptions are amortized over a period no longer than the expected average future service of active employees.
At December 31, 2017 and 2016, the benefit obligation was (in millions):
| 2017 | 2016 | ||||||
| January 1 | $ | 120.3 | $ | 115.9 | |||
| Service cost | 4.4 | 3.9 | |||||
| Interest cost | 3.7 | 3.5 | |||||
| Amendments | — | 5.6 | |||||
| Actuarial (gain) loss | 8.1 | 0.6 | |||||
| Benefits paid | (8.8 | ) | (9.2 | ) | |||
| December 31 | $ | 127.7 | $ | 120.3 |
At December 31, 2017 and 2016, the liability was classified as follows (in millions):
| 2017 | 2016 | ||||||
| Other current liabilities | $ | 9.3 | $ | 8.1 | |||
| Long-term liabilities | 118.4 | 112.2 | |||||
| $ | 127.7 | $ | 120.3 |
F-26
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average assumptions used to determine the benefit obligation at December 31, 2017 and 2016 were:
| 2017 | 2016 | ||||
| Discount rate | 3.4 | % | 3.9 | % | |
| Compensation increases | 3.5 | % | 3.5 | % |
At December 31, 2017, the estimated benefits expected to be paid over the next 10 years are (in millions):
| 2018 | $ | 9.3 | |
| 2019 | 7.4 | ||
| 2020 | 6.6 | ||
| 2021 | 6.1 | ||
| 2022 | 6.5 | ||
| 2023 - 2027 | 33.2 |
- Supplemental Cash Flow Data
The increase in operating capital for the three years ended December 31, 2017 was (in millions):
| 2017 | 2016 | 2015 | |||||||||
| (Increase) decrease in accounts receivable | $ | (341.6 | ) | $ | (376.5 | ) | $ | (1,063.6 | ) | ||
| (Increase) decrease in work in process and other current assets | 5.4 | (89.7 | ) | (79.6 | ) | ||||||
| Increase (decrease) in accounts payable | 763.2 | 741.9 | 1,443.7 | ||||||||
| Increase (decrease) in customer advances, taxes payable and other current liabilities | 4.8 | 31.6 | 243.9 | ||||||||
| Change in other assets and liabilities, net | (83.3 | ) | (4.5 | ) | 15.1 | ||||||
| $ | 348.5 | $ | 302.8 | $ | 559.5 | ||||||
| Income taxes paid | $ | 566.0 | $ | 570.4 | $ | 540.1 | |||||
| Interest paid | $ | 226.2 | $ | 216.7 | $ | 173.9 |
- Noncontrolling Interests
Changes in the ownership interests in our less than 100% owned subsidiaries for the three years ended December 31, 2017 were (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Net income attributed to Omnicom Group Inc. | $ | 1,088.4 | $ | 1,148.6 | $ | 1,093.9 | |||||
| Transfers (to) from noncontrolling interests: | |||||||||||
| Increase in additional paid-in capital from sale of shares in noncontrolling interests | 1.8 | 2.0 | 1.7 | ||||||||
| Decrease in additional paid-in capital from purchase of shares in noncontrolling interests | (27.5 | ) | (89.7 | ) | (40.5 | ) | |||||
| Net transfers (to) from noncontrolling interests | (25.7 | ) | (87.7 | ) | (38.8 | ) | |||||
| Change from net income attributed to Omnicom Group Inc. and transfers (to) from noncontrolling interests | $ | 1,062.7 | $ | 1,060.9 | $ | 1,055.1 |
F-27
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Leases
We lease our office space under operating leases and our equipment under operating and capital leases. Office leases may include renewal options. In circumstances where the exercise of a renewal option is reasonably assured at the inception of the lease, the renewal period is included in the determination of the lease term. Office leases may also include scheduled rent increases and concessions, such as rent abatements and landlord incentives and tenant improvement allowances. Scheduled rent increases are recognized on a straight-line basis over the lease term and concessions are recorded as deferred rent and are amortized in rent expense on a straight-line basis over the lease term. Certain office leases require payment of real estate taxes and other occupancy costs and these costs are not included in rent expense. Leasehold improvements made at inception or during the lease term are amortized over the shorter of the asset life or the lease term, which may include renewal periods where the renewal is reasonably assured.
Rent expense for the three years ended December 31, 2017 was (in millions):
| 2017 | 2016 | 2015 | |||||||||
| Office base rent | $ | 336.7 | $ | 339.7 | $ | 342.5 | |||||
| Third party sublease rent | (6.3 | ) | (5.6 | ) | (11.0 | ) | |||||
| Net office rent | 330.4 | 334.1 | 331.5 | ||||||||
| Equipment rent | 20.1 | 21.0 | 22.6 | ||||||||
| $ | 350.5 | $ | 355.1 | $ | 354.1 |
The aggregate minimum lease payments under non-cancelable operating leases, reduced by third party sublease rent receivable from existing non-cancelable subleases, and capital leases are (in millions):
| Operating Leases | Capital Leases | ||||||
| 2018 | $ | 317.8 | $ | 34.5 | |||
| 2019 | 249.7 | 30.0 | |||||
| 2020 | 198.3 | 26.4 | |||||
| 2021 | 169.4 | 17.1 | |||||
| 2022 | 144.2 | 6.4 | |||||
| Thereafter | 627.2 | 3.1 | |||||
| Total | 1,706.6 | 117.5 | |||||
| Sublease rent | (19.0 | ) | |||||
| Net operating lease payments | $ | 1,687.6 | |||||
| Interest component | (7.0 | ) | |||||
| Present value of minimum capital lease payments | $ | 110.5 |
Property under capital lease and capital lease obligations at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| Property under capital lease: | |||||||
| Cost | $ | 229.3 | $ | 184.8 | |||
| Accumulated depreciation | (121.0 | ) | (110.2 | ) | |||
| $ | 108.3 | $ | 74.6 | ||||
| Capital lease obligations: | |||||||
| Current | $ | 31.6 | $ | 24.2 | |||
| Long-term | 78.9 | 49.8 | |||||
| $ | 110.5 | $ | 74.0 |
Depreciation expense for property under capital lease was $31.1 million, $27.2 million and $26.5 million in 2017, 2016 and 2015, respectively.
F-28
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Temporary Equity - Redeemable Noncontrolling Interests
Owners of noncontrolling equity interests in some of our subsidiaries have the right in certain circumstances to require us to purchase all or a portion of their equity interest at fair value as defined in the applicable agreements. Assuming that the subsidiaries perform over the relevant periods at their current profit levels, at December 31, 2017 the aggregate estimated maximum amount we could be required to pay in future periods is $182.4 million, of which $130.5 million is currently exercisable by the holders. If these rights are exercised, there would be an increase in the net income attributable to Omnicom as a result of our increased ownership interest and the reduction of net income attributable to noncontrolling interests. The ultimate amount paid could be significantly different because the redemption amount depends on the future results of operations of the subject businesses, the timing of the exercise of these rights and changes in foreign currency exchange rates.
- Commitments and Contingent Liabilities
In the ordinary course of business, we are involved in various legal proceedings. We do not presently expect that these proceedings will have a material adverse effect on our results of operations or financial position.
On December 14, 2016, two of our subsidiaries received subpoenas from the U.S. Department of Justice Antitrust Division concerning its ongoing investigation of video production and post-production practices in the advertising industry. The Company is fully cooperating with the investigation. While the ultimate effect of the investigation is inherently uncertain, we do not at this time believe that the investigation will have a material adverse effect on our results of operations or financial position. However, the ultimate resolution of these matters could be different from our current assessment and the differences could be material.
- Equity
Changes in accumulated other comprehensive income (loss), net of income taxes, for the years ended December 31, 2017 and 2016 were (in millions):
| Cash Flow Hedge | Available-for-Sale Securities | Defined Benefit Pension Plans and Postemployment Arrangements | Foreign Currency Translation | Total | |||||||||||||||
| January 1, 2016 | $ | (3.3 | ) | $ | (0.9 | ) | $ | (87.9 | ) | $ | (923.3 | ) | $ | (1,015.4 | ) | ||||
| Other comprehensive income (loss) before reclassifications | (28.5 | ) | 0.1 | (11.0 | ) | (311.8 | ) | (351.2 | ) | ||||||||||
| Reclassification from accumulated other comprehensive income (loss) | 2.3 | — | 8.3 | — | 10.6 | ||||||||||||||
| December 31, 2016 | (29.5 | ) | (0.8 | ) | (90.6 | ) | (1,235.1 | ) | (1,356.0 | ) | |||||||||
| Other comprehensive income (loss) before reclassifications | — | 0.5 | (7.2 | ) | 387.1 | 380.4 | |||||||||||||
| Reclassification from accumulated other comprehensive income (loss) | 3.2 | — | 9.4 | — | 12.6 | ||||||||||||||
| December 31, 2017 | $ | (26.3 | ) | $ | (0.3 | ) | $ | (88.4 | ) | $ | (848.0 | ) | $ | (963.0 | ) |
In December 2016, we retired 100 million shares of our treasury stock, which reduced the number of common shares issued and treasury shares held. Upon retirement, the excess of the average cost of the treasury stock over the par value of the common stock was charged to retained earnings. Accordingly, the balance sheet at December 31, 2016 reflects a reduction in common stock, retained earnings and treasury stock. The retirement of the treasury stock had no impact on shareholders’ equity or common stock outstanding. The retired treasury shares are included in the authorized but unissued common shares.
F-29
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Fair Value
Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 were (in millions):
| 2017 | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Assets: | |||||||||||||||
| Cash and cash equivalents | $ | 3,796.0 | $ | 3,796.0 | |||||||||||
| Short-term investments | 0.4 | 0.4 | |||||||||||||
| Available-for-sale securities | 1.4 | 1.4 | |||||||||||||
| Foreign currency derivatives | $ | 1.0 | 1.0 | ||||||||||||
| Liabilities: | |||||||||||||||
| Interest rate and foreign currency derivatives | $ | 39.5 | $ | 39.5 | |||||||||||
| Contingent purchase price obligations | $ | 215.6 | 215.6 |
| 2016 | |||||||||||||||
| Assets: | |||||||||||||||
| Cash and cash equivalents | $ | 3,002.2 | $ | 3,002.2 | |||||||||||
| Short-term investments | 20.6 | 20.6 | |||||||||||||
| Available-for-sale securities | 4.3 | 4.3 | |||||||||||||
| Foreign currency derivatives | $ | 0.2 | 0.2 | ||||||||||||
| Liabilities: | |||||||||||||||
| Interest rate and foreign currency derivatives | $ | 48.9 | $ | 48.9 | |||||||||||
| Contingent purchase price obligations | $ | 386.1 | 386.1 |
Changes in contingent purchase price obligations for the years ended December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||
| January 1 | $ | 386.1 | $ | 322.0 | |||
| Acquisitions | 31.9 | 165.3 | |||||
| Revaluation and interest | (27.4 | ) | 18.0 | ||||
| Payments | (187.0 | ) | (103.7 | ) | |||
| Foreign currency translation | 12.0 | (15.5 | ) | ||||
| December 31 | $ | 215.6 | $ | 386.1 |
The carrying amount and fair value of our financial assets and liabilities at December 31, 2017 and 2016 were (in millions):
| 2017 | 2016 | ||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
| Assets: | |||||||||||||||
| Cash and cash equivalents | $ | 3,796.0 | $ | 3,796.0 | $ | 3,002.2 | $ | 3,002.2 | |||||||
| Short-term investments | 0.4 | 0.4 | 20.6 | 20.6 | |||||||||||
| Available-for-sale securities | 1.4 | 1.4 | 4.3 | 4.3 | |||||||||||
| Foreign currency derivatives | 1.0 | 1.0 | 0.2 | 0.2 | |||||||||||
| Cost method investments | 14.4 | 14.4 | 14.2 | 14.2 | |||||||||||
| Liabilities: | |||||||||||||||
| Short-term debt | $ | 11.8 | $ | 11.8 | $ | 28.7 | $ | 28.7 | |||||||
| Interest rate and foreign currency derivatives | 39.5 | 39.5 | 48.9 | 48.9 | |||||||||||
| Contingent purchase price obligations | 215.6 | 215.6 | 386.1 | 386.1 | |||||||||||
| Long-term debt, including current portion | 4,912.9 | 5,056.9 | 4,920.6 | 5,035.1 |
F-30
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the foreign currency and interest rate derivative instruments is determined using model-derived valuations, taking into consideration foreign currency rates for the foreign currency derivatives and readily observable inputs for LIBOR interest rates and yield curves to derive the present value of the future cash flows for the interest rate derivatives and counterparty credit risk for each. The estimated fair value of the contingent purchase price obligations is calculated in accordance with the terms of each acquisition agreement and is discounted. The fair value of long-term debt is based on quoted market prices.
- Derivative Instruments and Hedging Activities
We manage our exposure to foreign exchange and interest rate risk through various strategies, including the use of derivative financial instruments. We use forward foreign exchange contracts as economic hedges to manage the cash flow volatility arising from foreign exchange rate fluctuations. We use interest rate swaps to manage our interest expense and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. We do not use derivatives for trading or speculative purposes. Using derivatives exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. We manage that risk through careful selection and ongoing evaluation of the counterparty financial institutions based on specific minimum credit standards and other factors.
We evaluate the effects of changes in foreign currency exchange rates, interest rates and other relevant market risks on our derivatives. We periodically determine the potential loss from market risk on our derivatives by performing a value-at-risk, or VaR, analysis. VaR is a statistical model that uses historical currency exchange and interest rate data to measure the potential impact on future earnings of our derivative financial instruments assuming normal market conditions. The VaR model is not intended to represent actual losses but is used as a risk estimation and management tool. Based on the results of the model, we estimate with 95% confidence a maximum one-day change in the net fair value of our derivative financial instruments at December 31, 2017 was not significant.
Foreign Exchange Risk
As an integral part of our global treasury operations, we centralize our cash and use multicurrency pools to manage the foreign exchange risk that arises from imbalances between subsidiaries and their respective treasury centers from which they borrow or invest funds. However, in certain circumstances, subsidiaries borrowing or investing with a treasury center operating in a different currency creates foreign exchange exposure. To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $92.8 million and $99.0 million at December 31, 2017 and 2016, respectively. Additionally, there are circumstances where revenue and expense transactions are not denominated in the same currency. In these instances, amounts are either promptly settled or hedged with forward foreign exchange contracts. To manage that risk, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $136.3 million and $94.0 million at December 31, 2017 and 2016, respectively. The net fair value of the forward foreign contracts at December 31, 2017 and 2016 was a current asset of $0.9 million and a current liability of $1.1 million, respectively.
Foreign currency derivatives are designated as fair value hedges; therefore, any gain or loss in fair value incurred on those instruments is recorded in results of operations and is generally offset by decreases or increases in the fair value of the underlying exposures. By using these financial instruments, we reduced financial risk of adverse foreign exchange changes by foregoing any gain which might have occurred if the markets moved favorably. The terms of our forward foreign exchange contracts are generally less than 90 days.
Interest Rate Risk
We use interest rate swaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. Based on market conditions, we may terminate the swaps to reduce our exposure to rising interest rates or to monetize any gain and lock in a reduction in interest expense over the term of the underlying debt. The total notional amount of the outstanding fixed-to-floating interest rate swaps at December 31, 2017 and 2016, was $1.25 billion. See Note 6 for a discussion of our interest rate swaps.
- New Accounting Standards
Effective January 1, 2018, we will adopt FASB ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. As a result, we will change our revenue recognition accounting policy as described below. ASC 606 will be applied using the modified retrospective method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018 and is not expected to have a material impact on our financial position. ASC 606 provides a five-step model where revenue is recognized when the customer obtains control of the promised goods or services in an
F-31
OMNICOM GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount that reflects the consideration that we expect to receive in exchange for those goods or services. The adoption of ASC 606 will not have a material impact on how we recognize revenue for fixed fee or retainer based arrangements. Clients typically receive the benefit of our services as we perform. We will continue to recognize revenue over time using inputs or outputs to measure our progress. Revenue for commission based arrangements will continue to be recognized at a point-in-time. ASC 606 also includes additional disclosure requirements.
For certain of our businesses, the adoption of ASC 606 will result in a change in our accounting policy for certain third-party out-of-pocket costs, which are incurred in connection with our services and are billed to clients. The inclusion of third-party out-of-pocket costs in revenue depends on whether we act as a principal or agent in the client arrangement. Under ASC 606, the principal versus agent assessment is based on whether we control the specified goods or services before they are transferred to the customer. As a result of the adoption of ASC 606, certain third-party costs are no longer included in revenue and cost of services. This change will reduce reported revenue and will have no impact on operating profit.
In addition, performance incentives that can increase revenue if we meet certain quantitative or qualitative objectives in delivering our services will be treated as variable consideration. Performance incentives were recognized in revenue when specific quantitative goals were achieved, or when our performance against qualitative goals was acknowledged by the client. Under ASC 606, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely method. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. This change will have offsetting effects in each period and the net effect will not be material to our results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02, which will supersede the current guidance for lease accounting and will require lessees to recognize the right-to-use assets and related lease liabilities on the balance sheet. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. ASU 2016-02 provides for a modified retrospective application for leases existing at, or entered into after, the earliest comparative period presented in the financial statements. We will adopt ASU 2016-02 on January 1, 2019. While we are not yet in a position to assess the full impact of the application of the new standard, we expect that the impact of recording the lease liabilities and the corresponding right-to-use assets will have a significant impact on our total assets and liabilities with a minimal impact on our equity and no effect on results of operations.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value will be recognized in net income. ASU 2016-01 is effective on January 1, 2018 using a cumulative-effect adjustment to opening retained earnings. We do not expect that the adoption of ASU 2016-01 will not have a significant impact on our financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We will adopt ASU 2016-13 on January 1, 2020. However, we are not yet in a position to assess the impact of the new standard on our results of operations or financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits, or ASU 2017-07, which requires that only the service cost component of periodic benefit cost is recorded in salary and service cost. All other components of net periodic benefit cost are presented separately and are excluded from operating profit. ASU 2017-07 is effective on January 1, 2018 using the full retrospective method. The adoption of ASU 2017-07 will have the affect of increasing operating profit but will have no effect on income before income taxes and equity method investments, net income or earnings per share.
- Subsequent Events
We have evaluated events subsequent to the balance sheet date and determined there have not been any events that have occurred that would require adjustment to or disclosure in the consolidated financial statements.
F-32
OMNICOM GROUP INC. AND SUBSIDIARIES
Selected Quarterly Financial Data (Unaudited)
(In millions, except per share amounts)
The unaudited selected quarterly financial data for the years ended December 31, 2017 and 2016 were:
| Quarter | |||||||||||||||
| First | Second | Third | Fourth | ||||||||||||
| Revenue | |||||||||||||||
| 2017 | $ | 3,587.4 | $ | 3,790.1 | $ | 3,719.5 | $ | 4,176.6 | |||||||
| 2016 | 3,499.1 | 3,884.9 | 3,791.1 | 4,241.8 | |||||||||||
| Operating Expenses | |||||||||||||||
| 2017 | 3,177.5 | 3,224.6 | 3,255.3 | 3,556.5 | |||||||||||
| 2016 | 3,107.0 | 3,323.1 | 3,338.0 | 3,639.9 | |||||||||||
| Operating Profit | |||||||||||||||
| 2017 | 409.9 | 565.5 | 464.2 | 620.1 | |||||||||||
| 2016 | 392.1 | 561.8 | 453.1 | 601.9 | |||||||||||
| Net Income - Omnicom Group Inc. | |||||||||||||||
| 2017 | 241.8 | 328.6 | 263.6 | 254.4 | |||||||||||
| 2016 | 218.4 | 326.1 | 253.8 | 350.3 | |||||||||||
| Net Income Per Share Omnicom Group Inc. - Basic | |||||||||||||||
| 2017 | 1.03 | 1.41 | 1.14 | 1.10 | |||||||||||
| 2016 | 0.90 | 1.36 | 1.06 | 1.47 | |||||||||||
| Net Income Per Share Omnicom Group Inc. - Diluted | |||||||||||||||
| 2017 | 1.02 | 1.40 | 1.13 | 1.09 | |||||||||||
| 2016 | 0.90 | 1.36 | 1.06 | 1.47 |
F-33
OMNICOM GROUP INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 2017
(In millions)
| Description | Balance Beginning of Period | Charged to Costs and Expenses | Removal of Uncollectible Receivables | Translation Adjustment Increase (Decrease) | Balance End of Period | ||||||||||||||
| Valuation accounts deducted from assets: | |||||||||||||||||||
| Allowance for Doubtful Accounts: | |||||||||||||||||||
| December 31, 2017 | $ | 24.9 | $ | 15.1 | $ | (8.2 | ) | $ | 0.3 | $ | 32.1 | ||||||||
| December 31, 2016 | 22.5 | 10.2 | (7.4 | ) | (0.4 | ) | 24.9 | ||||||||||||
| December 31, 2015 | 24.9 | 4.4 | (5.4 | ) | (1.4 | ) | 22.5 |
S-1
Previous: Item 15. Exhibits, Financial Statement Schedules