What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-08 compared with 2022-02-09 · 262 added, 269 removed, 494 unchanged (52% of the section changed)

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EXECUTIVE SUMMARY

Impact of the COVID-19 Pandemic on our Business

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

We are a strategic holding company providing advertising, marketing and corporate communications services to clients through our branded networks and agencies around the world.

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

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.

Risks and Uncertainties

Current global economic challenges, including the impact of the war in Ukraine, the lingering effects of the COVID-19 pandemic, high and sustained inflation, rising interest rates, and supply chain disruptions could cause economic uncertainty and volatility.

The impact of these issues on our business will vary by geographic market and discipline.

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

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

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

Impact of the War in Ukraine

Historically, we conducted operations in Russia and Ukraine through local agencies in which we held a majority stake.

During the first quarter of 2022, the war in Ukraine required us to suspend our business operations in Ukraine.

The war resulted in the imposition of sanctions by the United States, the United Kingdom, and the European Union, that affected the cross-border operations of businesses operating in Russia.

In addition, Russian regulators imposed currency restrictions and regulations.

All of these actions created uncertainty regarding our ability to recover our investment in our operations in Russia, as well as our ability to exercise control over the operations.

Therefore, the ability to continue operations in Russia was uncertain.

As a result, we disposed of all of our businesses in Russia.

Accordingly, in the first quarter of 2022, we recorded pretax charges of $113.4 million, which primarily consisted of the net investment in our Russian businesses, and included charges related to the suspension of operations in Ukraine.

Lingering Effects of the COVID-19 Pandemic

The COVID-19 pandemic adversely affected global economic activity.

Beginning in March 2020 and continuing through the first quarter of 2021, our business was impacted by reductions in client spending due 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 markets began to improve in April 2021.

We are a strategic holding company providing advertising, marketing and corporate communications services to many of the largest global companies.

Our portfolio of companies includes our global networks, BBDO, DDB, TBWA, Omnicom Media Group, the DAS Group of Companies, and the Communications Consultancy Network.

All of our global networks integrate their service offerings with the Omnicom branded practice areas, including the Omnicom Health Group, the Omnicom Precision Marketing Group, the Omnicom Commerce Group, the Omnicom Advertising Collective, the Omnicom Public Relations Group, and the Omnicom Brand Consulting Group, as well as our Experiential businesses and Execution & Support businesses, which includes the Omnicom Specialty Marketing Group.

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

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

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

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

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

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.

Execution & Support includes field marketing, sales support, digital and physical merchandising, point-of-sale and product placement, 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.

Healthcare includes corporate communications and advertising and media services to global healthcare and pharmaceutical companies.

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

While our networks and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients.

While our networks, practice areas and agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients.

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

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

networks utilizing our key client matrix organization structure.

This client-centric business model requires that multiple agencies within Omnicom

collaborate in formal and informal virtual client networks utilizing our key client matrix organization structure.

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

We use our client-centric approach to grow our business by expanding our service offerings to existing clients, moving into new markets and obtaining new clients.

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

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

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

For the year ended December 31, 2022, our largest client represented 2.7% of revenue, and our 100 largest clients, which represent many of the world's major marketers, represented approximately 53% of revenue.

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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.

Adverse global or regional economic conditions 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.

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

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.

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.

The key indicators that we focus on are revenue and operating expenses.

We analyze revenue growth by reviewing the components and mix of the growth, including growth by principal regional market and marketing discipline, the impact from foreign currency exchange rate changes, growth from acquisitions, net of dispositions, and growth from our largest clients.

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

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 key performance indicators that we focus on are revenue growth and variability of operating expenses.

We analyze revenue growth by reviewing the components and mix of the growth, including growth by principal regional market, practice area and marketing discipline, the impact from foreign currency exchange rate changes, growth from acquisitions, net of dispositions, and growth from our largest clients.

Operating expenses are analyzed in the following categories:

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

Results of Operations

Revenue in 2022 decreased slightly to $14,289.1 million compared to $14,289.4 million in 2021.

Organic growth increased revenue $1,346.3 million, or 9.4%.

Changes in foreign exchange rates reduced revenue $681.0 million, or 4.8%, and acquisition revenue, net of disposition revenue, reduced revenue $665.6 million, or 4.7%.

The reduction in acquisition revenue, net of disposition revenue, reflects dispositions in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022.

The change in revenue across our principal regional markets were:

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.

North America increased $146.3 million, Europe decreased $209.1 million, Asia-Pacific decreased $49.5 million and Latin America increased $32.9 million.

In North America, organic revenue increased across all our disciplines, especially in our Advertising & Media, Precision Marketing and Public Relations disciplines, and was substantially offset by a reduction in acquisition revenue, net of disposition revenue, primarily due to the disposition in the Advertising & Media discipline in the second quarter of 2021.

In Europe, organic revenue increased in substantially all countries and in all disciplines, especially our Advertising & Media discipline, which was led by our media business, our Precision Marketing and Public Relations disciplines, and our Experiential discipline, as it continues to recover from the impact of the pandemic.

The increase in organic revenue was offset by the weakening of substantially all foreign currencies against the U.S.

Dollar, especially the British Pound and the Euro, as well as the disposition of our businesses in Russia in the first quarter of 2022.

In Latin America, organic revenue increased in most countries in the region, especially Brazil and Colombia.

The increase in organic revenue was partially offset by negative performance in Mexico and the weakening of most currencies in the region against the U.S.

In Asia-Pacific, organic revenue increased in most disciplines, especially our Advertising & Media discipline, which was led by our media business, and in most of our major markets in the region, particularly Australia, India, Japan, Korea and Malaysia.

The increase in organic revenue was offset by the weakening of all currencies in the region against the U.S.

Dollar and negative performance in our Experiential discipline, primarily caused by prolonged COVID-19 lockdowns in China.

The changes in revenue in 2022, compared to 2021, in our fundamental disciplines were:

Advertising & Media decreased $534.6 million, Precision Marketing increased $223.1 million, Commerce and Brand Consulting increased $47.7 million, Experiential increased $99.6 million, Execution & Support decreased $46.6 million, Public Relations increased $154.1 million, and Healthcare increased $56.4 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 primarily include third-party supplier costs when we act as principal in providing services to our clients and client-related travel costs.

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

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

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 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 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.

Adverse and beneficial fluctuations in foreign currencies from period to period impact our

results of operations and financial position when we translate our financial statements from local foreign currencies to the U.S.

However, substantially all of our foreign operations transact business in their local currency mitigating the impact of changes in foreign currency exchange rates on our operating margin percentage.

Operating expenses in 2022 increased $114.3 million, or 0.9%, to $12,205.8 million year-over-year.

Operating expenses for 2022 reflect charges arising from the effects of the war in Ukraine of $113.4 million.

Operating expenses in 2021 were favorably impacted by the $50.5 million gain recorded in connection with the disposition in the Advertising & Media discipline.

The weakening of most foreign currencies, especially the British Pound and Euro, against the U.S.

Dollar reduced operating expenses for 2022 as compared to the prior year, which was in line with the percentage reduction from changes in foreign currencies on revenue.

Salary and service costs, which tend to fluctuate with changes in revenue, decreased $76.1 million, compared to 2021, reflecting a decrease in third-party service costs of $303.0 million, partially offset by an increase in salary and related service costs of $226.9 million.

Third-party service costs decreased during the year primarily due to the disposition in the Advertising & Media discipline in the second quarter of 2021 and the disposition of our businesses in Russia in the first quarter of 2022.

The increase in salary and related service costs primarily resulted from the increase in organic revenue and an increase in headcount, as well as an increase in travel and related costs, reflecting the post-pandemic return to the office of our workforce in most markets.

Occupancy and other costs, which are less directly linked to changes in revenue than salary and service costs, increased $20.4 million year-over-year, primarily due to an increase in general office expenses and other costs resulting from the return of our workforce to the office, partially offset by lower rent and other occupancy costs.

Operating profit decreased $114.6 million to $2,083.3 million, operating margin decreased to 14.6% from 15.4%, and EBITA margin decreased to 15.1% from 15.9%.

Operating profit, operating margin and EBITA margin for 2022 were negatively impacted by the $113.4 million charges arising from the effects of the war in Ukraine.

Operating profit, operating margin and EBITA margin for 2021 were favorably impacted by the $50.5 million gain recorded in connection with dispositions in the Advertising & Media discipline.

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, including group-wide finance and accounting, treasury, legal and governance, human resource oversight and similar costs.

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

Net interest expense in 2022 decreased $71.2 million year-over-year to $137.9 million.

Interest expense on debt decreased $21.9 million to $191.3 million in 2022 compared to 2021, primarily as a result of the benefit from 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 issuance of $800 million of our 2.60% Senior Notes due 2031, or 2031 Notes, in May 2021, and the issuance of the £325 million 2.25% Senior Notes due 2033, or Sterling Notes, in November 2021.

Interest expense for 2021 includes a loss of $26.6 million on the early redemption of the 2022 Notes.

Interest income in 2022 increased $43.4 million to $70.7 million year-over-year, primarily as a result of higher interest rates on our cash balances and our short-term investments.

Our effective tax rate for 2022 increased year-over-year to 28.1% from 24.6%.

The higher effective tax rate for 2022 was predominantly the result of the non-deductibility of the $113.4 million charge recorded in the first quarter of 2022, arising from the effects of the war in Ukraine, as well as an additional increase in income tax expense of $4.8 million related to the disposition of our businesses in Russia.

These charges were partially offset by the tax benefit arising from our share-based compensation awards.

The effective tax rate for 2021 reflects a nominal tax applied to the book gain on the disposition in the Advertising & Media discipline resulting from the excess of tax over book basis and a reduction in income tax expense of $32.8 million, primarily related to the favorable settlements of uncertain tax positions in certain jurisdictions.

Net income - Omnicom Group Inc.

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.

in 2022 decreased $91.3 million to $1,316.5 million from $1,407.8 million in 2021.

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

Diluted net income per share - Omnicom Group Inc.

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

decreased to $6.36 in 2022, compared to $6.53 in 2021, due to the factors described above, partially offset by the impact of the reduction in our weighted average common shares outstanding resulting from repurchases of our common stock, net of shares issued for restricted stock awards, stock option exercises and the employee stock purchase plan during the year.

The impact of the after-tax charges arising from the effect of the war in Ukraine reduced net income - Omnicom Group Inc.

for 2022 by $118.2 million and diluted net income per share - Omnicom Group Inc.

The combined effect of the after-tax gain on the disposition in the Advertising & Media discipline and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc.

in 2021 by $31.0 million and increased diluted net income per share - Omnicom Group Inc.

CRITICAL ACCOUNTING 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.

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GAAP and are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

We use a fair value approach in testing goodwill for impairment and when evaluating our equity method investments to determine if an other-than-temporary impairment has occurred.

We use a fair value approach in testing our intangible assets, which primarily consist of goodwill, for impairment.

Actual results could differ from those estimates and assumptions.

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In valuing these identified intangible assets, we typically use an income approach and consider comparable market participant measurements.

We evaluate goodwill for impairment at least annually at the end of the second quarter of each fiscal year and whenever events or circumstances indicate the carrying value may not be recoverable.

Under FASB ASC Topic 350, Intangibles - Goodwill and Other , we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to the goodwill impairment test.

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

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 evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable.

Under FASB ASC Topic 350, Intangibles - Goodwill and Other , we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value (Step 0) or proceeding directly to the quantitative goodwill impairment test.

While there were no trigger events that required us to perform a quantitative test, we performed the annual quantitative 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 six global agency networks.

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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.

Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients.

In addition, the agencies within our regional reporting units have similar economic characteristics.

In addition, the agencies within our regional reporting units have similar economic characteristics and the employees share similar skill sets.

The main economic components of each agency are employee compensation and related costs and direct service costs and occupancy and other costs, which include rent and occupancy costs, technology costs that are generally limited to personal computers, servers and off-the-shelf software and other overhead expenses.

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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, 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, 2022 and 2021 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 3.6% and 3.8% , respectively.

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

We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2022, and included in the 10-year history is the full year 2020 that reflected the negative impact of the COVID-19 pandemic on the global economy and our revenue.

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.

Based on our past performance, we also believe that our growth rate can exceed NGDP growth in the short-term, notwithstanding the current inflationary environment, in the markets we operate in, which are similar across our reporting units.

Accordingly, for our annual test as of June 30, 2022, we used an estimated long-term growth rate of 3.5%.

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

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

When performing the annual impairment test as of June 30, 2022 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 2022 and projections through the end of the year.

The assumptions of economic conditions and our actual performance as of December 31, 2022 were in line with these estimates.

The WACC is comprised of:

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The results of this sensitivity analysis on our impairment test as of June 30, 2022 revealed that if the WACC increased by 1% and/or the long-term growth rate decreased by 1%, the fair value of each of our reporting units would continue to be in excess of its respective net book value and would pass the impairment test.

We will continue to perform our impairment test each year at June 30th unless events or circumstances trigger the need for an interim impairment test.

We will continue to perform our impairment test each year at the end of the second quarter unless events or circumstances trigger the need for an interim impairment test.

There were no events through December 31, 2022 that would change our impairment assessment.

6 unchanged sentences

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services (the performance obligation) in an amount that reflects the consideration we expect to receive in exchange for those goods or services (the transaction price).

Revenue is recognized when a customer obtains control and receives the benefit of the promised goods or services (the performance obligation) in an amount that reflects the consideration we expect to receive in exchange for those goods or services (the transaction price).

We measure revenue by estimating the transaction price based on the consideration specified in the client arrangement.

1 unchanged sentence

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

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

Advertising & Media, 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.

17 unchanged sentences

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.

9 unchanged sentences

Out-of-pocket costs include, among others:

transportation, hotel, meals and telecommunication charges incurred by us in the course of providing our services.

transportation, hotel, meals, shipping and telecommunication charges incurred by us in the course of providing our services.

Billings related to out-of-pocket costs are included in revenue since we control the goods or services prior to delivery to the client.

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

In most of our businesses, including advertising, which also includes studio production efforts and media planning and buying services, public relations, healthcare advertising and most of our Experiential 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, precision marketing, commerce and brand consulting 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.

1 unchanged sentence

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 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 experiential business and most of our execution and 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.

19 unchanged sentences

Occupancy and other costs 1,168.6 1,148.2

Charges arising from the effects of the war in Ukraine 113.4 —

Gain on disposition of subsidiary — (50.5)

COVID-19 repositioning costs — 277.9

Cost of services 11,607.9 11,499.7

6 unchanged sentences

Interest Income 70.7 27.3

Income Before Income Taxes and Income (Loss) From Equity Method Investments 1,988.8 1,409.3

Income Before Income Taxes and Income From Equity Method Investments 1,945.4 1,988.8

Income Tax Expense 546.8 488.7

Income (Loss) From Equity Method Investments 7.5 (6.8)

Income From Equity Method Investments 5.2 7.5

Net Income 1,403.8 1,507.6

17 unchanged sentences

Net Income 1,403.8 1,507.6

Income (Loss) From Equity Method Investments 7.5 (6.8)

Income From Equity Method Investments 5.2 7.5

Income Tax Expense 546.8 488.7

Income Before Income Taxes and Income (Loss) From Equity Method Investments 1,988.8 1,409.3

Income Before Income Taxes and Income From Equity Method Investments 1,945.4 1,988.8

Interest Expense 208.6 236.4

6 unchanged sentences

EBITA Margin % 15.1 % 15.9 %

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.