What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-09 compared with 2021-02-18 · 289 added, 333 removed, 474 unchanged (57% of the section changed)

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Impact of the COVID-19 Pandemic on our Business

In 2020, the COVID-19 pandemic negatively impacted our business and results of operations.

Efforts to mitigate the impact of the pandemic, including government actions to restrict travel, limit public gatherings, shelter-in-place orders and mandatory closures of businesses, resulted in many of our clients reducing or suspending their spending for our advertising, marketing and corporate communication services.

As a result, for the year ended December 31, 2020, revenue decreased $1,782.6 million, or 11.9%, compared to 2019, primarily due to the impact of the COVID-19 pandemic.

We anticipate that the negative impact from the pandemic on our revenue will continue through the first quarter of 2021 as compared to the prior year period.

However, we expect organic revenue growth for the first half of 2021.

The impact of the COVID-19 pandemic on our revenue has been, and may continue to be, material, depending on several factors, including the potential for prolonged or additional governmental actions to mitigate the effects of the pandemic.

It is possible that the COVID-19 pandemic will accelerate certain trends that began pre-pandemic, particularly those relating to online commerce, brand building and how we deploy our personnel.

We expect that some of these trends will benefit our agencies and provide revenue growth opportunities, as well as increasing flexibility with respect to our use of physical locations and our cost structure, but some trends may negatively affect us including potential disruption by new participants and technologies.

In response to the impact of the COVID-19 pandemic, in the second quarter of 2020, we took actions to align our cost structure and reduce our workforce and facility requirements and continued the review of businesses for disposal and assets for impairment.

As a result, we recorded a pre-tax charge of $277.9 million, which is comprised of incremental severance of $150.0 million, real estate operating lease right-of-use, or ROU, asset and other asset impairment charges of $55.8 million, other exit costs of $47.0 million and dispositions and other charges of $25.1 million (see Note 1 to the consolidated financial statements).

These actions reduced headcount by over 6,000 and reduced the related facility requirements, which should result in significant reductions in future operating expenses.

In addition, during 2020, we reduced salary and service costs by $162.6 million related to reimbursements and tax credits under government programs in several countries, including the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, in the United States, the Kurzarbeit program in Germany, and other government reimbursement programs in the U.K., France, Canada and other jurisdictions (see Note 1 to the consolidated financial statements).

Further, in the fourth quarter of 2020, we recorded asset impairment charges of $55.8 million associated with underperforming assets, which is included in salary and service costs.

The COVID-19 pandemic negatively impacted most of our clients' businesses.

As a result, clients have cut costs, including postponing or reducing marketing communication expenditures.

While certain industries such as healthcare and pharmaceuticals, technology and telecommunications, financial services and consumer products have been less affected, as long as the COVID-19

pandemic remains a threat, global economic conditions continue to be volatile and such uncertainty cuts across all clients, industries and geographies.

Overall, while we have a diversified portfolio of service offerings, clients and geographies, demand for our services can be expected to continue to be adversely affected as marketers reduce expenditures in the short term due to the uncertain impact of the pandemic on the global economy.

We expect global economic performance and our performance to vary by geography until the impact of the COVID-19 pandemic on the global economy moderates.

Although we have experienced a decrease in our cash flow from operating activities, we took numerous proactive steps to strengthen our liquidity and financial position that are intended to mitigate the potential impact of the COVID-19 pandemic on our liquidity.

In February 2020, we issued $600 million 2.45% Senior Notes due April 30, 2030, or the 2.45% Notes.

In March 2020, the net proceeds from the issuance of the 2.45% Notes were used to redeem the remaining $600 million principal amount of our 4.45% Senior Notes due August 15, 2020, or the 2020 Notes.

As a result, we have no notes maturing until May 2022.

In April 2020, we issued $600 million of 4.20% Senior Notes due June 1, 2030, or the 4.20% Notes, and we entered into a new $400 million 364 day revolving credit facility, or the 364 Day Credit Facility.

The 364 Day Credit Facility is in addition to our existing $2.5 billion multi-currency revolving credit facility, or Credit Facility, which we extended to mature in February 2025.

In addition, in March 2020, we suspended our share repurchase activity.

As the impact of the COVID-19 pandemic on the global economy moderated, we experienced improvement in our business in 2021 as compared to 2020.

In 2021, revenue increased $1,118.3 million, or 8.5%, compared to 2020.

The increase in revenue primarily reflects increased client spending in all our disciplines and across all our geographic areas compared to the prior year and the strengthening of most foreign currencies, primarily the British Pound and the Euro, against the U.S.

The increase in revenue year-over-year was partially offset by a reduction in acquisition revenue, net of disposition revenue, reflecting the sale of ICON International, or ICON, a specialty media business, in the second quarter of 2021.

Global economic conditions may continue to be volatile as long as the COVID-19 pandemic remains a public health threat, which could negatively impact our clients' spending plans.

We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy subsides.

Results of Operations for the Year Ended December 31, 2021

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On a global, pan-regional and local basis, our networks and agencies provide a comprehensive range of services in the following fundamental disciplines:

advertising, CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare.

Advertising, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare.

Advertising includes creative services across digital and traditional media, and strategic media planning and buying and data analytics services.

Precision Marketing includes digital and direct marketing, digital transformation and data and analytics.

Commerce & Brand Consulting services include brand consulting, strategy and research and retail ecommerce.

Experiential marketing services include live and digital events and experience design and execution.

Execution & Support includes field marketing, sales support, digital and physical merchandising and point-of-sale, as well as other specialized marketing and custom communications services.

Public relations services include corporate communications, crisis management, public affairs and media and media relations services.

Healthcare includes advertising and media services to global healthcare and pharmaceutical clients.

Our business model was built and continues to evolve around our clients.

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Our fundamental business principle is that our clients’ specific marketing requirements are the central focus of how we structure our service offerings and allocate our resources.

This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client networks utilizing our key client matrix organization structure.

This client-centric business model requires that multiple agencies within Omnicom collaborate in formal and informal virtual client

networks utilizing our key client matrix organization structure.

This collaboration allows us to cut across our internal organizational structures to execute our clients’ marketing requirements in a consistent and comprehensive manner.

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In addition, we pursue selective acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or could serve our existing clients.

Driven by our clients’ continuous demand for more effective and efficient marketing activities, we strive to provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives.

These services include, among others, advertising, brand consulting, content marketing, corporate social responsibility consulting, crisis communications, custom publishing, data analytics, database management, digital/direct marketing, digital transformation, entertainment marketing, experiential marketing, field marketing, financial/corporate business-to-business advertising, graphic arts/digital imaging, healthcare marketing and communications, in-store design, interactive marketing, investor relations, marketing research, media planning and buying, merchandising and point of sale, mobile marketing, multi-cultural marketing, non-profit marketing, organizational communications, package design, product placement, promotional marketing, public affairs, public relations, retail marketing, sales support, search engine marketing, shopper marketing, social media marketing and sports and event marketing.

We continually evaluate our portfolio of businesses to identify areas for investment and acquisition opportunities, as well as to identify non-strategic or underperforming businesses for disposition.

As a leading global advertising, marketing and corporate communications company, we operate in all major markets and have a large and diverse client base.

In 2020, our largest client represented 3.4% of revenue and our 100 largest clients, which represent many of the world's major marketers, represented approximately 54% of revenue.

For the year ended December 31, 2021, our largest client represented 3.2% of revenue and our 100 largest clients, which represent many of the world's major marketers, represented approximately 54% of revenue.

Our clients operate in virtually every sector of the global economy with no one industry representing more than 16% of our revenue in 2021.

Although our revenue is generally balanced between the United States and international markets and we have a large and diverse client base, we are not immune to general economic downturns.

Global economic conditions have a direct impact on our business and financial performance.

Adverse global or regional economic conditions, such as those currently arising from the COVID-19 pandemic, pose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services.

Revenue is typically lower in the first and third quarters a nd higher i n the second and fourth quarters, reflecting client spending patterns during the year and additional project work that usually occurs in the fourth quarter.

As a result of the impact related to the COVID-19 pandemic, we experienced a significant decline in our year-over-year organic revenue growth in the second, third and fourth quarters of 2020, which will likely continue at least through the first half of 2021.

We anticipate that the negative impact from the pandemic on our revenue will continue through the first quarter of 2021 as compared to the prior year period.

However, we expect organic revenue growth for the first half of 2021.

In 2020, revenue decreased $1,782.6 million, or 11.9%, compared to 2019.

Changes in foreign exchange rates reduced revenue $60.9 million, or 0.4%, acquisition revenue, net of disposition revenue, reduced revenue $56.7 million, or 0.4%, reflecting the disposition of certain non-strategic businesses, and organic growth reduced revenue $1,665.0 million, or 11.1%.

Certain global events targeted by major marketers for advertising expenditures, such as the FIFA World Cup and the Olympics, and certain national events, such as the U.S.

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Typically, these events do not have a significant impact on our revenue in any period.

Beginning in March 2020 and continuing through the fourth quarter of 2020, our business experienced the effects from reductions in client spending due to the impact related to the COVID-19 pandemic.

The spending reductions impacted all our businesses and markets.

The most significantly impacted businesses were our advertising discipline, CRM Consumer Experience discipline, especially in our event marketing businesses, and CRM Execution & Support discipline, primarily in our field marketing and merchandising businesses.

In North America, we experienced a decline in organic revenue attributable to the COVID-19 pandemic in all our disciplines, except healthcare.

In Europe and the Middle East and Africa, almost all businesses

and regions experienced a decline in organic revenue resulting from the COVID-19 pandemic, which was marginally offset by an increase primarily from the strengthening of the British Pound and Euro against the U.S.

In addition, the economic and political conditions in the U.K.

resulting from the implementation of the Brexit Agreement remain uncertain and could negatively impact our businesses in the U.K.

In Latin America, the impact of the COVID-19 pandemic compounded by the continuing unstable economic and political conditions in Brazil resulted in negative organic growth in Brazil and throughout the region.

In addition, the weakening of foreign currency exchange rates against the U.S.

Dollar in all countries further contributed to the reduction in revenue in the region.

In Asia-Pacific, almost all our businesses in the region experienced negative organic growth as a result of the COVID-19 pandemic, and the weakening of most currencies against the U.S.

Dollar had a marginal negative impact on revenue.

The economic and fiscal issues, including the impact related to the COVID-19 pandemic, facing the countries we operate in can be expected to continue to cause economic uncertainty and volatility;

however, the impact on our business varies by country.

Global economic conditions have a direct impact on our business and financial performance.

Adverse global or regional economic conditions, including those arising from the COVID-19 pandemic, severe and sustained inflation in countries that comprise our major markets and client supply chain issues, pose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services.

Beginning in March 2020 and continuing through the first quarter of 2021, our business experienced the effects from reductions in client spending due to the economic impact related to the COVID-19 pandemic.

While mixed by business and geography, the spending reductions impacted all our businesses and markets.

Globally, the most impacted businesses were our Experiential discipline, especially in our event marketing businesses, and our Execution & Support discipline, primarily in field marketing.

Most of our markets began to improve versus the prior year in the first quarter of 2021, and the improvement continued through the end of 2021 as clients substantially increased their spending on our services.

The economic and fiscal issues, including impacts related to the pandemic, facing the countries we operate in could cause economic uncertainty and volatility;

however, the impact on our business will likely vary by country.

We monitor economic conditions closely, as well as client revenue levels and other factors.

In response to reductions in our revenue that are expected to continue at least through the first half of 2021, beginning in the second quarter of 2020, we took actions to align our cost structure with changes in client demand and manage our working capital.

However, there can be no assurance whether, or to what extent, our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments will be effective or that additional actions will not be necessary.

Prior to the COVID-19 pandemic, certain business trends generally had a positive impact on our business and industry.

These trends include clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets and integrating traditional and non-traditional marketing channels, as well as utilizing new communications technologies and emerging digital platforms.

As clients increase their demands for marketing effectiveness and efficiency, they have made it a practice to consolidate their business within one service provider in the pursuit of a single engagement covering all consumer touch points.

In response to reductions in revenue, we can take actions to align our cost structure with changes in client demand and manage our working capital.

However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments.

General marketing communications trends impact our business and industry and, on balance, we believe that these effects are generally positive.

These trends include integrating traditional and non-traditional marketing channels, as well as utilizing new communications technologies and emerging digital platforms, and clients increasingly expanding the focus of their brand strategies from national markets to pan-regional and global markets.

As clients increase their demands for marketing effectiveness and efficiency, many of them have made it a practice to consolidate their business within one or a small number of service providers in the pursuit of a single engagement covering all consumer touch points.

We have structured our business around these trends.

While the current economic environment caused many clients to reduce spending for our services, certain trends such as increased spending on digital marketing platforms, and our key client matrix organization structure approach to collaboration and integration of our services and solutions provide a competitive advantage to our business.

We expect this advantage to continue over the medium and long term.

We continually evaluate our portfolio of businesses to identify areas for investment and acquisition opportunities, as well as to identify non-strategic or underperforming businesses for disposition.

In the first and second quarters of 2019, we disposed of certain businesses, primarily in our CRM Execution & Support discipline.

Certain trends such as increased spending on digital marketing platforms, and our key client matrix organization structure approach to collaboration and integration of our services and solutions provide a competitive advantage to our business, and we expect this advantage to continue over the medium and long term.

Given our size and breadth, we manage our business by monitoring several financial indicators.

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Operating expenses are comprised of cost of services, selling, general and administrative expenses, or SG&A, and depreciation and amortization.

In 2020, our revenue decreased 11.9% compared to 2019.

Changes in foreign exchange rates reduced revenue 0.4%, acquisition revenue, net of disposition revenue, reduced revenue 0.4%, and organic growth decreased revenue 11.1% as all our markets were negatively impacted by the COVID-19 pandemic.

In 2021, our revenue increased $1,118.3 million, or 8.5%, compared to 2020.

Changes in foreign exchange rates increased revenue 2.2%, acquisition revenue, net of disposition revenue, reduced revenue 3.9%, and organic growth increased revenue 10.2%.

The reduction in acquisition revenue, net of disposition revenue, reflects the sale of ICON in the second quarter of 2021.

In 2021, our business experienced a recovery from the negative effects of the COVID-19 pandemic in all our disciplines and regional markets as compared to 2020.

The negative effects from the pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020.

As a result, the improvement in revenue in 2021 versus the prior year was driven by the recovery in the second through the fourth quarter of 2021 as compared to the prior year.

The change in revenue across our principal regional markets were:

North America decreased 10.6%, Europe decreased 12.2%, Asia-Pacific decreased 8.8% and Latin America decreased 31.7%.

The change in revenue in 2020, compared to 2019, in our fundamental disciplines was:

Advertising decreased 13.1%, CRM Consumer Experience decreased 15.6%, CRM Execution & Support decreased 16.7%, Public Relations decreased 5.6% and Healthcare increased 3.4%.

North America increased $132.6 million, Europe increased $611.9 million, Asia-Pacific increased $292.7 million and Latin America increased $20.7 million.

In North America, improved organic revenue growth in the United States and Canada was partially offset by a decrease in revenue resulting from the disposition of ICON in the second quarter of 2021.

The United States experienced organic revenue growth in all disciplines, led by our Advertising discipline, on the strength of our media business, and our Precision Marketing and Public Relations disciplines.

In Europe, organic revenue increased in substantially all countries and disciplines, especially our Advertising discipline, which was led by our media business, and our Experiential, Precision Marketing and Commerce and Brand Consulting disciplines.

The strengthening of the British Pound and the Euro against the U.S.

Dollar contributed to increased revenue in the region.

In Latin America, organic revenue growth in all countries in the region, especially Brazil, Colombia, and Chile, primarily in our Advertising discipline, was partially offset by the weakening of the Brazilian Real against the U.S.

In Asia-Pacific, revenue increased due to strong organic revenue growth in substantially all countries, particularly China, Australia, India, New Zealand, and Japan and in all disciplines.

The strengthening of substantially all currencies against the U.S.

Dollar contributed to increased revenue in the region.

The increases in revenue in 2021, compared to 2020, in our fundamental disciplines were:

Advertising $447.9 million, Precision Marketing $250.2 million, Commerce and Brand Consulting $88.9 million, Experiential $119.1 million, Execution & Support $65.3 million, Public Relations $80.8 million and Healthcare $66.1 million.

We measure cost of services in two distinct categories:

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As a service business, salary and service costs make up the significant portion of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services.

Salary and service costs include employee compensation and benefits, freelance labor and third-party service costs, which include third-party supplier costs and client-related travel costs.

Salary and service costs include employee compensation and benefits, freelance labor and third-party service costs, which primarily include third-party supplier costs when we act as principal in providing services to our clients and client-related travel costs.

Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses.

SG&A expenses, which decreased year-over-year, 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.

In 2020, salary and service costs, which tend to fluctuate with changes in revenue, decreased $1,399.4 million, or 12.8%, compared to 2019.

Salary and related service costs in 2020 decreased $644.3 million, or 9.3%, year-over-year, primarily as a result of the severance and furlough actions we took in the second quarter of 2020.

Also, during 2020, we reduced salary and service costs by $162.6 million related to reimbursements and tax credits under government programs in several countries (see Note 1 to the consolidated financial statements).

Third-party service costs, which include expenses incurred with third-party vendors primarily when we act as a principal when performing services for our clients, decreased $755.1 million, or 18.5%, year-over-year reflecting the decrease in revenue and the impact of actions we took to align our cost structure.

Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $83.3 million, or 6.8%, in 2020 as compared to 2019.

Operating profit decreased $523.5 million to $1,598.8 million.

Operating margin decreased to 12.1% from 14.2%, and EBITA margin decreased to 12.8% from 14.8% year-over-year.

In 2020, operating profit, operating margin and EBITA margin included a net decrease aggregating $171.1 million related to the COVID-19 repositioning costs recorded in the second quarter and asset impairment charges recorded in the fourth quarter, partially offset by an increase related to reimbursements and tax credits under government programs in several countries (see Note 1 to the consolidated financial statements).

In 2021, operating expenses increased $519.2 million, or 4.5%, year-over-year.

Operating expenses for 2021 reflect a reduction of $50.5 million related to the gain from the sale of ICON, and the prior year included an increase of $277.9 million related to charges we recorded in the second quarter of 2020 in connection with the actions we took in response to the COVID-19 pandemic.

Salary and service costs, which tend to fluctuate with changes in revenue, increased $829.2 million, or 8.7%, compared to 2020, reflecting increases in salary and related service costs, which include an increase in freelance labor costs, and third-party service costs of $720.1 million and $109.1 million, respectively.

These increases primarily resulted from the increase in organic revenue, as well as the strengthening of most foreign currencies against the U.S.

Dollar, especially the British Pound and Euro.

The prior year reflects a reduction in salary and service costs of $162.6 million related to reimbursements under pandemic relief government programs in several countries, as well as an increase of $55.8 million related to asset impairment charges.

Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $9.7 million, or 0.9%, in 2021 as compared to 2020.

Operating profit increased $599.1 million to $2,197.9 million, operating margin increased to 15.4% from 12.1%, and EBITA margin increased to 15.9% from 12.8%.

The increases in operating profit, operating margin and EBITA margin reflect the positive impact of organic revenue growth, the positive impact of cost reduction actions taken in the prior year in response to the COVID-19 pandemic, and the negative impact in the prior year from the net increase in operating expenses recorded in the second quarter of 2020 aggregating $171.1 million, related to the COVID-19 repositioning costs, and asset impairment charges recorded in the fourth quarter of 2020, partially offset by the benefit of $162.6 million related to reimbursements under pandemic relief government programs.

Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.

Looking ahead to 2022, we expect organic revenue growth to be between 5% and 6%.

Additionally, we expect certain operating costs, such as travel and general office expenses, to continue to increase to normal levels as more of our workforce returns to the office;

we believe we can offset the impact of these increases by managing other discretionary costs, as well as certain infrastructure costs.

Accordingly, for the full year 2022, we believe we will be able to maintain the operating margins we achieved in 2021.

SG&A expenses increased slightly year-over-year.

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.

In 2021, net interest expense increased $19.6 million year-over-year to $209.1 million.

Interest expense on debt decreased $27.6 million to $199.6 million, primarily reflecting a reduction in interest expense from our refinancing activity at lower interest rates in the second half of 2019 and the first quarter of 2020, partially offset by a loss of $7.7 million on the early redemption of the remaining $600 million principal amount of the 2020 Notes in the first quarter of 2020 and the interest expense from the issuance of the 4.20% Notes in April 2020 (see Note 7 to the consolidated financial statements).

Interest expense on debt in 2021 increased $13.6 million to $213.2 million compared to 2020, primarily arising from a loss of $26.6 million on the early redemption in May 2021 of all the outstanding $1.25 billion of our 3.625% Senior Notes due 2022, or 2022 Notes, which was partially offset by the benefit from the issuance of $800 million of our 2.60% Senior Notes due 2031, or 2031 Notes, at a lower rate.

Interest income in 2021 decreased $5.0 million year-over-year to $27.3 million primarily due to lower rates.

Our effective tax rate for 2020 increased year-over-year to 27.1% from 26.0%.

The non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning costs recorded in the second quarter of 2020 had the effect of increasing our effective tax rate for 2020.

This increase was substantially offset by a lower effective tax rate on our foreign earnings resulting from a change in legislation.

In 2019, income tax expense was reduced by $10.8 million primarily from the net favorable settlements of uncertain tax positions in certain jurisdictions.

After considering these items, our effective rate for 2020 would have approximated the rate for 2019.

Our effective tax rate for 2021 decreased year-over-year to 24.6% from 27.1%.

In connection with the sale of ICON in the second quarter of 2021, we recorded a pre-tax gain of $50.5 million.

The lower effective tax rate for 2021 was predominantly the result of $32.8 million favorable settlements of uncertain tax positions in certain domestic jurisdictions, as well as a nominal tax applied against the book gain on the sale of ICON resulting from excess tax over book basis.

The effective tax rate for 2020 reflects an increase due to the non-deductibility in certain jurisdictions of a portion of the COVID-19 repositioning charges recorded in the second quarter of 2020.

Net income - Omnicom Group Inc.

in 2020 decreased $393.7 million to $945.4 million from $1,339.1 million in 2019.

The year-over-year decrease is due to the factors described above.

in 2021 increased $462.4 million to $1,407.8 million from $945.4 million in 2020.

The year-over-year increase is due to the factors described above.

Diluted net income per share - Omnicom Group Inc.

decreased to $4.37 in 2020, compared to $6.06 in 2019, due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock through March 2020, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan during the year.

As discussed above and in Note 1 to the consolidated financial statements, our results of operations for 2020 included COVID-19 repositioning costs and asset impairment charges, which were partially offset by an increase attributable to reimbursements and tax credits under government programs in several countries.

The after-tax impact of these items on net income - Omnicom Group Inc.

was $146.8 million.

CRITICAL ACCOUNTING POLICIES

increased to $6.53 in 2021, compared to $4.37 in 2020, due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding resulting from the resumption of repurchases of our common stock during the year, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan during the year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following summary of our critical accounting policies provides a better understanding of our financial statements and the related discussion in this MD&A.

We believe that the following policies may involve a higher degree of judgment and complexity in their application than most of our accounting policies and represent the critical accounting policies used in the preparation of our financial statements.

Readers are encouraged to consider this summary together with our financial statements and the related notes, including Note 2, for a more complete understanding of the critical accounting policies discussed below.

Readers are encouraged to consider this summary together with our consolidated financial statements and the related notes, including Note 2, for a more complete understanding of the critical accounting policies discussed below.

We prepare our financial statements in conformity with U.S.

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Acquisitions and Goodwill

We have made and expect to continue to make selective acquisitions.

The evaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings of the target businesses, as well as our experience and judgment.

Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic

reach or their service capabilities to better serve our clients.

Additional key factors we consider include the competitive position and specialized know-how of the acquisition targets.

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We performed the annual impairment test and compared the fair value of each of our reporting units to its respective carrying value, including goodwill.

We identified our regional reporting units as components of our operating segments, which are our five global agency networks.

In June 2021, we combined certain practice areas into a new reporting unit and assigned a segment manager primarily responsible for the Omnicom Public Relations Group.

As a result, the number of operating segments increased from five to six.

We identified our regional reporting units as components of our operating segments, which are our six global agency networks.

The regional reporting units of each agency network are responsible for the agencies in their region.

They report to the segment managers and facilitate the administrative and logistical requirements of our key client matrix organization structure for delivering services to clients in their regions.

We have concluded that for each of our operating segments, their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level.

We have concluded that for each of our operating segments, their regional reporting

units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level.

Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment Reporting , and in FASB ASC Topic 350.

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(1) the expected long-term growth rate of our reporting units’ cash flows and (2) the weighted average cost of capital (“WACC”) for each reporting unit.

At June 30, 2020 we adjusted our assumptions to reflect the economic conditions in light of the impact on our business related to the COVID-19 pandemic, including downward adjustment to our revenue and earnings assumptions, reducing our long-term growth rate and increasing the weighted average cost of capital, or WACC, for each reporting unit and limiting our estimate of our equity value to reflect the decline in our share price that occurred during the first half of 2020.

In addition, the assumptions reflected the expected cost reductions from our severance and real estate facility repositioning actions (see Notes 1 and 11 to the consolidated financial statements).

At June 30, 2021 we adjusted our assumptions to reflect the economic conditions in light of the impact on our business related to the COVID-19 pandemic.

The assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 2021 and 2020 were:

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For the past ten years, the average historical revenue growth rate of our reporting units and the Average Nominal GDP, or NGDP, growth of the countries comprising the major markets that account for substantially all of our revenue was approximately 3.2% and 3.4% , respectively.

We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2020 and lowered it to reflect the potential future effects of the unprecedented COVID-19 pandemic on the global economy, which are not reflected in the 10-year historical analysis.

We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2021, and included in the 10-year history is the full year 2020 that reflects the impact of the COVID-19 pandemic on the global economy.

We believe marketing expenditures over the long term have a high correlation to NGDP.

Based on our historical performance, we also believe that our long-term growth rate will exceed NGDP growth in the markets we operate in, which are similar across our reporting units.

For our annual test as of June 30, 2020, we used an estimated long-term growth rate of 3.0%.

Accordingly, for our annual test as of June 30, 2021, we used an estimated long-term growth rate of 3.5%.

When performing the annual impairment test as of June 30, 2021 and estimating the future cash flows of our reporting units, we considered the current macroeconomic environment, as well as industry and market specific conditions at mid-year 2021.

In the first half of 2020, our revenue declined 11.7%, which excluded our net disposition activity and the impact from changes in foreign exchange rates.

The COVID-19 pandemic significantly impacted the global economy.

Government actions taken to mitigate the impact of the pandemic negatively impacted many of our clients' businesses, and in turn, clients have reduced their demand for our services.

In addition, the assumptions reflected the expected cost reductions from our severance and real estate facility repositioning actions (see Notes 1 and 13 to the consolidated financial statements).

In the first half of 2021, our revenue increased 10.0%, which excluded our net disposition activity and the impact from changes in foreign exchange rates.

The WACC is comprised of:

(1) a risk-free rate of return, (2) a business risk index ascribed to us and to companies in our industry comparable to our reporting units based on a market derived variable that measures the volatility of the share price of equity securities relative to the volatility of the overall equity market, (3) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, and (4) a current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted by the relative market value percentages of our equity and debt.

Our five reporting units vary in size with respect to revenue and the amount of debt allocated to them.

Our six reporting units vary in size with respect to revenue and the amount of debt allocated to them.

These differences drive variations in fair value among our reporting units.

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The reporting unit goodwill balances and debt vary by reporting unit primarily because our three legacy agency networks were acquired at the formation of Omnicom and were accounted for as a pooling of interests that did not result in any additional debt or goodwill being recorded.

The remaining two agency networks were built through a combination of internal growth and acquisitions that were accounted for using the acquisition method and as a result, they have a relatively higher amount of goodwill and debt.

The remaining three agency networks were built through a combination of internal growth and acquisitions that were accounted for using the acquisition method and as a result, they have a relatively higher amount of goodwill and debt.

Finally, the allocation of goodwill when components are transferred between reporting units is based on relative fair value at the time of transfer.

Goodwill Impairment Review - Conclusion

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A change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail our goodwill impairment test if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill.

A large decline in estimated fair value of a reporting unit could result in a non-cash impairment charge and may have an adverse effect on our results of operations and financial condition.

A large decline in estimated fair value of a reporting unit could result in a non-cash impairment charge and may have an adverse effect on our results of operations and financial position.

Additional information about acquisitions and goodwill appears in Notes 2, 5 and 6 to the consolidated financial statements.

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Our revenue is primarily derived from the planning and execution of advertising communications and marketing services in the following fundamental disciplines:

advertising, which includes creative advertising services and strategic media planning and buying services, customer relationship management or CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare advertising.

Advertising, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare.

Our client contracts are primarily fees for service on a rate per hour or per project basis.

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A substantial portion of our revenue is recognized over time, as the services are performed, because the client receives and consumes the benefit of our performance throughout the contract period, or we create an asset with no alternative use and are contractually entitled to payment for our performance to date in the event the client terminates the contract for convenience.

For these client contracts, other than when we have a stand-ready obligation to perform services, revenue is recognized over time using input measures that correspond to the level of staff effort expended to satisfy the performance obligation on a rate per hour or equivalent basis.

For these client contracts, other than when we have a stand-ready obligation to perform services,

revenue is recognized over time using input measures that correspond to the level of staff effort expended to satisfy the performance obligation on a rate per hour or equivalent basis.

For client contracts when we have a stand-ready obligation to perform services on an ongoing basis over the life of the contract, typically for periods up to one year, where the scope of these arrangements is broad and there are no significant gaps in performing the services, we recognize revenue using a time-based measure resulting in a straight-line revenue recognition.

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However, the inclusion of billings related to third-party direct costs in revenue depends on whether we act as a principal or as an agent in the client arrangement.

In most of our businesses, including advertising, which also includes studio production efforts and media planning and buying services, public relations, healthcare advertising and most of our CRM Consumer Experience businesses, we act as an agent and arrange, at the client's direction, for third parties to perform certain services.

In most of our businesses, including advertising, which also includes studio production efforts and media planning and buying services, public relations, healthcare advertising and most of our Experiential businesses, we act as an agent and arrange, at the client’s direction, for third parties to perform certain services.

In these cases, we do not control the goods or services prior to the transfer to the client.

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In certain businesses we may act as principal when contracting for third-party services on behalf of our clients.

In our events business and most of our CRM Execution & Support businesses, including field marketing and certain specialty marketing businesses, we act as principal because we control the specified goods or services before they are transferred to the client and we are responsible for providing the specified goods or services, or we are responsible for directing and integrating third-party vendors to fulfill our performance obligation at the agreed upon contractual price.

In our events business and most of our Execution & Support businesses, including field marketing and certain specialty marketing businesses, we act as principal because we control the specified goods or services before they are transferred to the client and we are responsible for providing the specified goods or services, or we are responsible for directing and integrating third-party vendors to fulfill our performance obligation at the agreed upon contractual price.

In such arrangements, we also take pricing risk under the terms of the client contract.

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Occupancy and other costs 1,148.2 1,138.5

Gain on disposition of subsidiary (50.5) —

COVID-19 repositioning costs — 277.9

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EBITA Margin - % 15.9 % 12.8 %

Revenue for 2020 decreased $1,782.6 million, or 11.9%, compared to 2019.

Changes in foreign exchange rates reduced revenue 0.4%, acquisition revenue, net of disposition revenue, reduced revenue 0.4% and negative organic growth decreased revenue 11.1% as all our geographic markets were negatively impacted by the COVID-19 pandemic (see Note 1 to the consolidated financial statements).

In 2021, our revenue increased $1,118.3 million, or 8.5%, compared to 2020.

Changes in foreign exchange rates increased revenue 2.2%, acquisition revenue, net of disposition revenue, reduced revenue 3.9%, and organic growth increased revenue 10.2%.

The reduction in acquisition revenue, net of disposition revenue, reflects the sale of ICON in the second quarter of 2021.

In 2021, our business experienced a recovery from the negative effects of the COVID-19 pandemic in all our disciplines and regional markets as compared to 2020.

The negative effects from the pandemic did not significantly impact our major markets and businesses until late in the first quarter of 2020.

As a result, the improvement in revenue in 2021 versus the prior year was driven by the recovery in the second, third and fourth quarters of 2021 as compared to the prior year.

The change in revenue across our principal regional markets were:

North America decreased $901.7 million, Europe decreased $499.7 million, Asia-Pacific decreased $145.8 million and Latin America decreased $128.0 million.

In North America, we experienced a decline in organic revenue attributable to the COVID-19 pandemic in all our disciplines, except healthcare.

In Europe and the Middle East and Africa, almost all businesses and regions experienced a decline in organic revenue resulting from the COVID-19 pandemic, which was marginally offset by an increase primarily from the strengthening of the British Pound and Euro against the U.S.

In addition, the weakening of foreign currency exchange rates against the U.S.

Dollar in all countries further contributed to the reduction in revenue in the region.

In Asia-Pacific, almost all our businesses in the region experienced negative organic growth as a result of the COVID-19 pandemic, and the weakening of most currencies against the U.S.

Dollar had a marginal negative impact on revenue.

North America increased $132.6 million, Europe increased $611.9 million, Asia-Pacific increased $292.7 million and Latin America increased $20.7 million.

In North America, improved organic revenue growth in the United States and Canada was partially offset by a decrease in revenue resulting from the disposition of ICON in the second quarter of 2021.

The strengthening of the British Pound and the Euro against the U.S.

Dollar contributed to increased revenue in the region.

In Asia-Pacific, revenue increased due to strong organic revenue growth in substantially all countries, particularly China, Australia, India, New Zealand, and Japan and in all disciplines.

The strengthening of substantially all currencies against the U.S.

Dollar contributed to increased revenue in the region.

The increases in revenue in 2021, compared to 2020, in our fundamental disciplines were:

The components of revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions):

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For the most part, because the revenue and expense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized.

Assuming exchange rates at February 12, 2021 remain unchanged, we expect the impact of changes in foreign exchange rates to increase revenue between 2.5% and 3.0% in the first half of 2021, and by approximately 2.5% for the full year.

Revenue and organic growth in our principal regional markets were (in millions):

Assuming exchange rates at February 4, 2022 remain unchanged, we expect the impact of changes in foreign exchange rates to reduce revenue in 2022 by approximately 2.0% for the first quarter and 1.5% for the year.

In addition, for the full year 2022, based on acquisition and disposition activity to date, we expect the effect of net acquisition and disposition activity to reduce revenue by approximately 3.0% to 3.5% and organic revenue growth to be between 5% and 6%.

Revenue and organic growth in our geographic markets were (in millions):

Year Ended December 31,

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Revenue in Europe, which includes our primary markets of the U.K.

and the Euro Zone, decreased $499.7 million in 2020 compared to 2019.

Revenue in the U.K., representing 9.7% of revenue, decreased $151.5 million.

Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 17.7% of revenue, decreased $348.2 million.

The decrease in revenue is due to negative organic growth resulting from the impact of the COVID-19 pandemic.

and the Euro Zone, increased $611.9 million in 2021 compared to 2020.

Revenue in the U.K., representing 10.6% of revenue, increased $237.7 million.

Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 18.9% of revenue, increased $374.2 million.

The increase in revenue is due to strong organic growth in all countries and disciplines, as well as the strengthening of the British Pound and Euro against the U.S.

In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors.

In 2020, the reduction in spending by existing clients resulting from the COVID-19 pandemic offset the benefit from gains of new business.

In 2021, we had an overall gain in new business.

Under our client-centric approach, we seek to broaden our relationships with all of our clients.

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Our ten largest and 100 largest clients represented 21.7% and 53.6% of revenue for 2021, respectively, and 20.8% and 54.0% of revenue for 2020, respectively.

In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories:

advertising, CRM, which includes CRM Consumer Experience and CRM Execution & Support, public relations and healthcare.

All our business experienced the effects from client spending reductions related to the COVID-19 pandemic.

The spending reductions impacted all our disciplines and markets.

The most significantly impacted were our advertising discipline, our CRM Consumer Experience discipline, especially in our event marketing businesses, and our CRM Execution & Support discipline, primarily in our field marketing and merchandising businesses.

Our Public Relations discipline was less significantly impacted, and our Healthcare discipline performed well.

To monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories:

Advertising, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare.

Certain of our business and markets experienced a slower improvement in 2021 from the effects of client spending reductions in 2020 related to the COVID-19 pandemic.

Among the most negatively impacted businesses in 2020 were our Experiential discipline, primarily in our event marketing businesses, and our Execution & Support discipline, primarily in our field marketing businesses.

Revenue and organic growth by discipline were (in millions):

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Advertising $ 7,959.3 55.7 % $ 7,511.4 57.0 % $ 447.9 10.7 %

CRM Consumer Experience 2,175.7 16.5 % 2,577.9 17.2 % (402.2) (15.8) %

CRM Execution & Support 1,133.5 8.6 % 1,361.2 9.1 % (227.7) (15.1) %

Precision Marketing 1,194.8 8.4 % 944.6 7.2 % 250.2 19.0 %

Commerce & Brand Consulting 910.7 6.4 % 821.8 6.2 % 88.9 9.9 %

Experiential 545.9 3.8 % 426.8 3.2 % 119.1 27.0 %

Execution & Support 1,026.6 7.2 % 961.3 7.3 % 65.3 4.2 %

Public Relations 1,391.7 9.7 % 1,310.9 10.0 % 80.8 6.3 %

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Year Ended December 31,

Food and Beverage 14 % 14 %

Consumer Products 8 % 9 %

Pharmaceuticals and Healthcare 15 % 16 %

Financial Services 8 % 8 %

Food and Beverage 14 % 14 %

Technology 11 % 9 %

Auto 10 % 10 %

Consumer Products 8 % 8 %

Financial Services 7 % 8 %

Travel and Entertainment 7 % 7 %

Telecommunications 6 % 6 %

Retail 7 % 7 %

Telecommunications 5 % 6 %

Government 3 % 3 %

Services 2 % 2 %

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Not-for-Profit 1 % 1 %

Government 3 % 2 %

Education 1 % 1 %

Other 7 % 7 %

Certain industry sectors have been negatively affected by the impact of the COVID-19 pandemic more significantly than others.

In 2020, certain industry sectors were more negatively affected by the impact of the COVID-19 pandemic than others.

Operating Expenses

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Occupancy and other costs 1,148.2 8.0 % 1,138.5 8.6 % 9.7 0.9 %

Gain on sale of subsidiary (50.5) (0.4) % — — % (50.5)

COVID-19 repositioning costs — — % 277.9 2.1 % (277.9)

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Operating Profit $ 2,197.9 15.4 % $ 1,598.8 12.1 % $ 599.1 37.5 %

In 2020, salary and service costs, which tend to fluctuate with changes in revenue, decreased $1,399.4 million, or 12.8%, compared to 2019.

Salary and related service costs in 2020 decreased $644.3 million, or 9.3%, year-over-year, primarily as a result of the severance and furlough actions we took in the second quarter of 2020.

Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, decreased $83.3 million, or 6.8%, in 2020 as compared to 2019.

Operating profit decreased $523.5 million to $1,598.8 million.

Operating margin decreased to 12.1% from 14.2%, and EBITA margin decreased to 12.8% from 14.8% year-over-year.

In 2020, operating profit, operating margin and EBITA margin included a net decrease aggregating $171.1 million related to the COVID-19 repositioning costs recorded in the

second quarter and asset impairment charges, which are included in salary and service costs, recorded in the fourth quarter, partially offset by an increase related to reimbursements and tax credits under government programs in several countries during the year (see Note 1 to the consolidated financial statements).

In 2021, operating expenses increased $519.2 million, or 4.5%, year-over-year.

These increases primarily resulted from the increase in organic revenue, as well as the strengthening of most foreign currencies against the U.S.

Dollar, especially the British Pound and Euro.

Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $9.7 million, or 0.9%, in 2021 as compared to 2020.

Operating profit increased $599.1 million to $2,197.9 million, operating margin increased to 15.4%

from 12.1%, and EBITA margin increased to 15.9% from 12.8%.

Additionally, operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with the sale of ICON.

Looking ahead to 2022, we expect certain operating costs, such as travel and general office expenses, to continue to increase to normal levels as more of our workforce returns to the office;

we believe we can offset the impact of these increases by managing other discretionary costs, as well as certain infrastructure costs.

Accordingly, for the full year 2022, we believe we will be able to maintain the operating margins we achieved in 2021.

Net Interest Expense

In 2021, net interest expense increased $19.6 million year-over-year to $209.1 million.

Interest expense on debt in 2021 increased $13.6 million to $213.2 million compared to 2020, primarily arising from a loss of $26.6 million on the early redemption in May 2021 of all the outstanding $1.25 billion of the 3.625% Senior Notes due 2022, or 2022 Notes, which was partially offset by the benefit from the issuance of $800 million of the 2.60% Senior Notes due 2031, or 2031 Notes, at a lower rate.