# OMNICOM GROUP INC. (OMC) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from OMNICOM GROUP INC.'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/29989/000002998923000005/omc-20221231.htm Accession: 0000029989-23-000005 Filing date: 2023-02-08 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/OMC/ All MD&A years: /company/OMC/mda/ Previous year: /company/OMC/mda/fy2021/ (FY 2021) Next year: /company/OMC/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations EXECUTIVE SUMMARY 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. Our Business 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, 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 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, 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 8 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 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. Our clients operate in virtually every sector of the global economy, with no one industry representing more than 17% of our revenue in 2022. Although our revenue is generally balanced between the United States and international markets and we have a large and diverse client base, we are not immune to general economic downturns. Certain global events targeted by major marketers for advertising expenditures, such as the FIFA World Cup and the Olympics, and certain national events, such as the U.S. election process, may affect our revenue period-over-period in certain businesses. Typically, these events do not have a significant impact on our revenue in any period. Global economic conditions have a direct impact on our business and financial performance. Adverse global or regional economic conditions pose a risk that our clients may reduce, postpone or cancel spending on advertising, marketing and corporate communications services, which would reduce the demand for our services. Revenue is typically lower in the first and third quarters and higher in the second and fourth quarters, reflecting client spending patterns during the year and additional project work that usually occurs in the fourth quarter. Given our size and breadth, we manage our business by monitoring several financial indicators. 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 $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. Dollar. 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: salary and service costs and occupancy and other costs. As a service business, salary and service costs make up the significant portion of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services. Salary and service costs include employee compensation and benefits, freelance labor and third-party service costs, which include third-party supplier costs when we act as principal in providing services to our clients and client-related travel costs. Occupancy and other costs consist of the indirect costs related to the delivery of our services, including office rent and other occupancy costs, equipment rent, technology costs, general office expenses and other expenses. Adverse and beneficial fluctuations in foreign currencies from period to period impact our 9 results of operations and financial position when we translate our financial statements from local foreign currencies to the U.S. Dollar. 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 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. 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. by $0.57. 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. by $0.14. 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. 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 consolidated financial statements and the related notes, including Note 2, for a more complete understanding of the critical accounting policies discussed below. 10 Estimates We prepare our financial statements in conformity with U.S. GAAP and are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. 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. Acquisitions and Goodwill We have made and expect to continue to make selective acquisitions. The evaluation of potential acquisitions is based on various factors, including specialized know-how, reputation, geographic coverage, competitive position and service offerings of the target businesses, as well as our experience and judgment. Our acquisition strategy is focused on acquiring the expertise of an assembled workforce in order to continue to build upon the core capabilities of our various strategic business platforms and agency brands through the expansion of their geographic reach or their service capabilities to better serve our clients. Additional key factors we consider include the competitive position and specialized know-how of the acquisition targets. Accordingly, as is typical in most service businesses, a substantial portion of the assets we acquire are intangible assets primarily consisting of the know-how of the personnel, which is treated as part of goodwill and is not required to be valued separately under U.S. GAAP. For each acquisition, we undertake a detailed review to identify other intangible assets that are required to be valued separately. A significant portion of the identifiable intangible assets acquired is derived from customer relationships, including the related customer contracts, as well as trade names. In valuing these identified intangible assets, we typically use an income approach and consider comparable market participant measurements. We evaluate goodwill for impairment at least annually at the end of the second quarter of the year and whenever events or circumstances indicate the carrying value may not be recoverable. Under FASB ASC Topic 350, Intangibles - Goodwill and Other, we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of our reporting units exceeds their respective fair value (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. The regional reporting units of each agency network are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our key client matrix organization structure for delivering services to clients in their regions. We have concluded that for each of our operating segments, their regional reporting units have similar economic characteristics and should be aggregated for purposes of testing goodwill for impairment at the operating segment level. Our conclusion was based on a detailed analysis of the aggregation criteria set forth in FASB ASC Topic 280, Segment Reporting, and in FASB ASC Topic 350. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. In addition, the agencies within our regional reporting units have similar economic characteristics 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. Finally, the expected benefits of our acquisitions are typically shared by multiple agencies in various regions as they work together to integrate the acquired agency into our virtual client network strategy. Goodwill Impairment Review - Estimates and Assumptions We use the following valuation methodologies to determine the fair value of our reporting units: (1) the income approach, which utilizes discounted expected future cash flows, (2) comparative market participant multiples for EBITDA (earnings before interest, taxes, depreciation and amortization) and (3) when available, consideration of recent and similar acquisition transactions. In applying the income approach, we use estimates to derive the discounted expected cash flows (“DCF”) for each reporting unit that serves as the basis of our valuation. These estimates and assumptions include revenue growth and operating margin, EBITDA, tax rates, capital expenditures, weighted average cost of capital and related discount rates and expected long-term cash flow growth rates. All of these estimates and assumptions are affected by conditions specific to our businesses, economic conditions related to the industry we operate in, as well as conditions in the global economy. The assumptions that have the most significant effect on our valuations derived using a DCF methodology are: (1) the expected long-term growth rate of our reporting units' cash flows and (2) the weighted average cost of capital (“WACC”) for each reporting unit. The assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 2022 and 2021 were: [[GREPCENT_TABLE]] [["","2022","","2021"],["Long-Term Growth Rate","3.5%","","3.5%"],["WACC","11.1% - 12.0%","","9.8% - 10.4%"]] [[/GREPCENT_TABLE]] 11 Long-term growth rate represents our estimate of the long-term growth rate for our industry and the markets of the global economy we operate in. For the past ten years, the average historical revenue growth rate of our reporting units and the Average Nominal GDP, or NGDP, growth of the countries comprising the major markets that account for substantially all of our revenue was approximately 3.6% and 3.8%, respectively. We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 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 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, 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: (1) a risk-free rate of return, (2) a business risk index ascribed to us and to companies in our industry comparable to our reporting units based on a market derived variable that measures the volatility of the share price of equity securities relative to the volatility of the overall equity market, (3) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, and (4) a current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted by the relative market value percentages of our equity and debt. Our six reporting units vary in size with respect to revenue and the amount of debt allocated to them. These differences drive variations in fair value among our reporting units. In addition, these differences as well as differences in book value, including goodwill, cause variations in the amount by which fair value exceeds book value among the reporting units. The reporting unit goodwill balances and debt vary by reporting unit primarily because our three legacy agency networks were acquired at the formation of Omnicom and were accounted for as a pooling of interests that did not result in any additional debt or goodwill being recorded. The remaining three agency networks were built through a combination of internal growth and acquisitions that were accounted for using the acquisition method and as a result, they have a relatively higher amount of goodwill and debt. Finally, the allocation of goodwill when components are transferred between reporting units is based on relative fair value at the time of transfer. Goodwill Impairment Review - Conclusion Based on the results of our impairment test, we concluded that our goodwill at June 30, 2022 was not impaired, because the fair value of each of our reporting units was in excess of its respective net book value. For our reporting units with negative book value, we concluded that the fair value of their total assets was in excess of book value. The minimum decline in fair value that one of our reporting units would need to experience in order to fail the goodwill impairment test was approximately 46%. Notwithstanding our belief that the assumptions we used for WACC and long-term growth rate in our impairment testing were reasonable, we performed a sensitivity analysis for each of our reporting units. The results of this sensitivity analysis on our impairment test as of June 30, 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 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. The estimates used in our goodwill impairment test do not constitute forecasts or projections of future results of operations, but rather are estimates and assumptions based on historical results and assessments of macroeconomic factors affecting our reporting units as of the valuation date. We believe that our estimates and assumptions are reasonable, but they are subject to change from period to period. Actual results of operations and other factors will likely differ from the estimates used in our discounted cash flow valuation, and it is possible that differences could be significant. A change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail our goodwill impairment test if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. A large decline in estimated fair value of a reporting unit could result in a non-cash impairment charge and may have an adverse effect on our results of operations and financial position. Additional information about acquisitions and goodwill appears in Notes 2, 5 and 6 to the consolidated financial statements. 12 Revenue Recognition 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. Revenue is recognized as the performance obligations are satisfied. Our revenue is primarily derived from the planning and execution of advertising communications and marketing services in the following fundamental disciplines: 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. Revenue is recorded net of sales, use and value added taxes. Performance Obligations. In substantially all our disciplines, the performance obligation is to provide advisory and consulting services at an agreed-upon level of effort to accomplish the specified engagement. Our client contracts are comprised of diverse arrangements involving fees based on any one or a combination of the following: an agreed fee or rate per hour for the level of effort expended by our employees; commissions based on the client’s spending for media purchased from third parties; qualitative or quantitative incentive provisions specified in the contract; and reimbursement for third-party costs that we are required to include in revenue when we control the vendor services related to these costs and we act as principal. The transaction price of a contract is allocated to each distinct performance obligation based on its relative stand-alone selling price and is recognized as revenue when, or as, the customer receives the benefit of the performance obligation. Clients typically receive and consume the benefit of our services as they are performed. Substantially all our client contracts provide that we are compensated for services performed to date and allow for cancellation by either party on short notice, typically 90 days, without penalty. Generally, our short-term contracts, which normally take 30 to 90 days to complete, are performed by a single agency and consist of a single performance obligation. As a result, we do not consider the underlying services as separate or distinct performance obligations because our services are highly interrelated, occur in close proximity, and the integration of the various components of a marketing message is essential to overall service. In certain of our long-term client contracts, which have a term of up to one year, the performance obligation is a stand-ready obligation, because we provide a constant level of similar services over the term of the contract. In other long-term contracts, when our services are not a stand-ready obligation, we consider our services distinct performance obligations and allocate the transaction price to each separate performance obligation based on its stand-alone selling price, including contracts for strategic media planning and buying services, which are considered to be multiple performance obligations, and we allocate the transaction price to each distinct service based on the staffing plan and the stand-alone selling price. In substantially all of our creative services contracts, we have distinct performance obligations for our services, including certain creative services contracts where we act as an agent and arrange, at the client’s direction, for third parties to perform studio production efforts. Revenue Recognition Methods. 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 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. From time to time, there may be changes in the client service requirements during the term of a contract and the changes could be significant. These changes are typically negotiated as new contracts covering the additional requirements and the associated costs, as well as additional fees for the incremental work to be performed. To a lesser extent, for certain other contracts where our performance obligations are satisfied in phases, we recognize revenue over time using certain output measures based on the measurement of the value transferred to the customer, including milestones achieved. Where the transaction price or a portion of the transaction price is derived from commissions based on a percentage of purchased media from third parties, the performance obligation is not satisfied until the media is run and we have an enforceable contract providing a right to payment. Accordingly, revenue for commissions is recognized at a point in time, typically when the media is run, including when it is not subject to cancellation by the client or media vendor. Principal vs. Agent. In substantially all our businesses, we incur third-party costs on behalf of clients, including direct costs and incidental, or out-of-pocket costs. Third-party direct costs incurred in connection with the creation and delivery of advertising or marketing communication services include, among others: purchased media, studio production services, specialized talent, including artists and other freelance labor, event marketing supplies, materials and services, promotional items, market research and third-party data and other related expenditures. Out-of-pocket costs include, among others: 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. 13 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, 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. As a result, revenue is recorded net of these costs, equal to the amount retained for our fee or commission. In certain businesses we may act as principal when contracting for third-party services on behalf of our clients. 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. In certain specialty media buying businesses, we act as principal when we control the buying process for the purchase of the media and contract directly with the media vendor. In these arrangements, we assume the pricing risk under the terms of the client contract. When we act as principal, we include billable amounts related to third-party costs in the transaction price and record revenue over time at the gross amount billed, including out-of-pocket costs, consistent with the manner that we recognize revenue for the underlying services contract. However, in media buying contracts where we act as principal, we recognize revenue at a point in time, typically when the media is run, including when it is not subject to cancellation by the client or media vendor. Variable Consideration. Some of our client arrangements include variable consideration provisions, which include performance incentives, tiered commission structures and vendor rebates in certain markets outside of the United States. Variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. These estimates are based on historical award experience, anticipated performance and other factors known at the time. Performance incentives are typically recognized in revenue over time. Variable consideration for our media businesses in certain international markets includes rebate revenue and is recognized when it is probable that the media will be run, including when it is not subject to cancellation by the client. In addition, when we receive rebates or credits from vendors for transactions entered into on behalf of clients, they are remitted to the clients in accordance with contractual requirements or retained by us based on the terms of the client contract or local law. Amounts passed on to clients are recorded as a liability and amounts retained by us are recorded as revenue when earned, typically when the media is run. NEW ACCOUNTING STANDARDS See Note 22 to the consolidated financial statements for information on the adoption of new accounting standards and accounting standards not yet adopted. 14 RESULTS OF OPERATIONS - 2022 Compared to 2021 (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["Revenue","$","14,289.1","","","$","14,289.4"],["Operating Expenses:"],["Salary and service costs","10,325.9","","","10,402.0"],["Occupancy and other costs","1,168.6","","","1,148.2"],["Charges arising from the effects of the war in Ukraine","113.4","","","\u2014"],["Gain on disposition of subsidiary","\u2014","","","(50.5)"],["Cost of services","11,607.9","","","11,499.7"],["Selling, general and administrative expenses","378.5","","","379.7"],["Depreciation and amortization","219.4","","","212.1"],["","12,205.8","","","12,091.5"],["Operating Profit","2,083.3","","","2,197.9"],["Operating Margin %","14.6","%","","15.4","%"],["Interest Expense","208.6","","","236.4"],["Interest Income","70.7","","","27.3"],["Income Before Income Taxes and Income From Equity Method Investments","1,945.4","","","1,988.8"],["Income Tax Expense","546.8","","","488.7"],["Income From Equity Method Investments","5.2","","","7.5"],["Net Income","1,403.8","","","1,507.6"],["Net Income Attributed To Noncontrolling Interests","87.3","","","99.8"],["Net Income - Omnicom Group Inc.","$","1,316.5","","","$","1,407.8"]] [[/GREPCENT_TABLE]] Non-GAAP Financial Measures We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies. The following table reconciles the U.S. GAAP financial measure of net income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["Net Income - Omnicom Group Inc.","$","1,316.5","","","$","1,407.8"],["Net Income Attributed To Noncontrolling Interests","87.3","","","99.8"],["Net Income","1,403.8","","","1,507.6"],["Income From Equity Method Investments","5.2","","","7.5"],["Income Tax Expense","546.8","","","488.7"],["Income Before Income Taxes and Income From Equity Method Investments","1,945.4","","","1,988.8"],["Interest Expense","208.6","","","236.4"],["Interest Income","70.7","","","27.3"],["Operating Profit","2,083.3","","","2,197.9"],["Add back: Amortization of intangible assets","80.3","","","80.0"],["Earnings before interest, taxes and amortization of intangible assets (\u201cEBITA\u201d)","$","2,163.6","","","$","2,277.9"],["Revenue","$","14,289.1","","","$","14,289.4"],["EBITA","$","2,163.6","","","$","2,277.9"],["EBITA Margin %","15.1","%","","15.9","%"]] [[/GREPCENT_TABLE]] 15 Revenue 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 $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. Dollar. 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 $56.4 million. The components of revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions): [[GREPCENT_TABLE]] [["","Total","","Domestic","","International"],["","$","","%","","$","","%","","$","","%"],["December 31, 2021","$","14,289.4","","","","","$","7,245.9","","","","","$","7,043.5"],["Components of revenue change:"],["Foreign exchange rate impact","(681.0)","","","(4.8)","%","","\u2014","","","\u2014","","","(681.0)","","","(9.7)","%"],["Acquisition revenue, net of disposition revenue","(665.6)","","","(4.7)","%","","(505.5)","","","(7.0)","%","","(160.1)","","","(2.3)","%"],["Organic growth","1,346.3","","","9.4","%","","626.9","","","8.7","%","","719.4","","","10.2","%"],["December 31, 2022","$","14,289.1","","","\u2014","%","","$","7,367.3","","","1.7","%","","$","6,921.8","","","(1.7)","%"]] [[/GREPCENT_TABLE]] The components and percentages are calculated as follows: •The foreign exchange impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $14,970.1 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($14,289.1 million less $14,970.1 million for the Total column). •Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table. •Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth. •The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($14,289.4 million for the Total column). Changes in the value of foreign currencies against the U.S. Dollar affect our results of operations and financial position. For the most part, because the revenue and expense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. Assuming exchange rates at February 3, 2023 remain unchanged, we expect the impact of changes in foreign exchange rates to reduce revenue in the first quarter by approximately 3.0% and to be flat for the year. 16 Revenue and organic growth in our geographic markets were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","$ Change","","","","% Organic Growth"],["Americas:"],["North America","$","7,856.0","","","$","7,709.7","","","$","146.3","","","","","8.7","%"],["Latin America","329.0","","","296.1","","","32.9","","","","","14.1","%"],["EMEA:"],["Europe","4,010.5","","","4,219.6","","","(209.1)","","","","","10.1","%"],["Middle East and Africa","346.7","","","267.6","","","79.1","","","","","33.2","%"],["Asia-Pacific","1,746.9","","","1,796.4","","","(49.5)","","","","","6.6","%"],["","$","14,289.1","","","$","14,289.4","","","$","(0.3)","","","","","9.4","%"]] [[/GREPCENT_TABLE]] Revenue in Europe, which includes our primary markets of the U.K. and the Euro Zone, decreased $209.1 million in 2022 compared to 2021. Revenue in the U.K., representing 10.7% of revenue, increased $7.6 million. Revenue in Continental Europe, which includes the Euro Zone and the other European countries, representing 17.4% of revenue, decreased $216.7 million. The organic revenue growth in Europe of 10.1% reflects organic growth in all disciplines and substantially all countries. The organic revenue growth was offset by the weakening of most currencies in the region against the U.S. Dollar, especially the British Pound and the Euro, and the disposition of our businesses in Russia in the first quarter of 2022. In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. Under our client-centric approach, we seek to broaden our relationships with all of our clients. In 2022 and 2021, our largest client represented 2.7% and 3.2% of revenue, respectively. Our ten largest and 100 largest clients represented 19.1% and 53.1% of revenue for 2022, respectively, and 21.7% and 53.6% of revenue for 2021, respectively. To monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following categories: Advertising & Media, Precision Marketing, Commerce & Brand Consulting, Experiential, Execution & Support, Public Relations and Healthcare. The change in revenue year-over-year and organic growth in the current year by discipline were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2022 vs. 2021","","","","2022"],["","$","","% ofRevenue","","$","","% ofRevenue","","$ Change","","","","% Organic Growth"],["Advertising & Media","$","7,424.7","","","52.0","%","","$","7,959.3","","","55.7","%","","$","(534.6)","","","","","7.3","%"],["Precision Marketing","1,417.9","","","9.9","%","","1,194.8","","","8.4","%","","223.1","","","","","17.1","%"],["Commerce & Brand Consulting","958.4","","","6.7","%","","910.7","","","6.4","%","","47.7","","","","","10.7","%"],["Experiential","645.5","","","4.5","%","","545.9","","","3.8","%","","99.6","","","","","26.1","%"],["Execution & Support","980.0","","","6.9","%","","1,026.6","","","7.2","%","","(46.6)","","","","","4.0","%"],["Public Relations","1,545.8","","","10.8","%","","1,391.7","","","9.7","%","","154.1","","","","","13.7","%"],["Healthcare","1,316.8","","","9.2","%","","1,260.4","","","8.8","%","","56.4","","","","","7.1","%"],["","$","14,289.1","","","","","$","14,289.4","","","","","$","(0.3)","","","","","9.4","%"]] [[/GREPCENT_TABLE]] 17 We provide services to clients that operate in various industry sectors. Revenue by sector was: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021"],["Pharmaceuticals and Healthcare","16","%","","15","%"],["Food and Beverage","14","%","","14","%"],["Technology","10","%","","11","%"],["Auto","10","%","","10","%"],["Consumer Products","8","%","","8","%"],["Financial Services","8","%","","7","%"],["Travel and Entertainment","7","%","","7","%"],["Retail","6","%","","7","%"],["Telecommunications","4","%","","5","%"],["Government","4","%","","3","%"],["Services","2","%","","2","%"],["Oil, Gas and Utilities","2","%","","2","%"],["Not-for-Profit","1","%","","1","%"],["Education","1","%","","1","%"],["Other","7","%","","7","%"],["","100","%","","100","%"]] [[/GREPCENT_TABLE]] Operating Expenses Operating expenses were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2022","","2021","","2022 vs. 2021"],["","$","","% of Revenue","","$","","% of Revenue","","$ Change","","% Change"],["Revenue","$","14,289.1","","","","","$","14,289.4","","","","","$","(0.3)","","","\u2014","%"],["Operating Expenses:"],["Salary and service costs:"],["Salary and related service costs","7,197.9","","","50.4","%","","6,971.0","","","48.8","%","","226.9","","","3.3","%"],["Third-party service costs","3,128.0","","","21.9","%","","3,431.0","","","24.0","%","","(303.0)","","","(8.8)","%"],["","10,325.9","","","72.3","%","","10,402.0","","","72.8","%","","(76.1)","","","(0.7)","%"],["Occupancy and other costs","1,168.6","","","8.2","%","","1,148.2","","","8.0","%","","20.4","","","1.8","%"],["Charges arising from the effects of the war in Ukraine","113.4","","","0.8","%","","\u2014","","","","","113.4"],["Gain on sale of subsidiary","\u2014","","","","","(50.5)","","","(0.4)","%","","50.5"],["Cost of services","11,607.9","","","","","11,499.7","","","","","108.2"],["Selling, general and administrative expenses","378.5","","","2.6","%","","379.7","","","2.7","%","","(1.2)","","","(0.3)","%"],["Depreciation and amortization","219.4","","","1.5","%","","212.1","","","1.5","%","","7.3","","","3.4","%"],["","12,205.8","","","85.4","%","","12,091.5","","","84.6","%","","114.3","","","0.9","%"],["Operating Profit","$","2,083.3","","","14.6","%","","$","2,197.9","","","15.4","%","","$","(114.6)","","","(5.2)","%"]] [[/GREPCENT_TABLE]] 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 18 $20.4 million year-over-year, primarily due to an increase in general office expenses and other costs resulting from the post-pandemic 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 the dispositions in the Advertising & Media discipline. Net Interest Expense 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 2022 Notes, which was partially offset by the issuance of the 2031 Notes in May 2021, and the issuance of the 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. Income Taxes 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. For 2023, we expect our effective tax rate to increase to approximately 27%, primarily due to the increase in the UK tax rate from 19% to 25% in April 2023. Net Income and Net Income Per Share - Omnicom Group Inc. Net income - Omnicom Group Inc. 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. 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. by $0.57. 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. by $0.14. 19 RESULTS OF OPERATIONS - 2021 Compared to 2020 (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020"],["Revenue","$","14,289.4","","","$","13,171.1"],["Operating Expenses:"],["Salary and service costs","10,402.0","","","9,572.8"],["Occupancy and other costs","1,148.2","","","1,138.5"],["Gain on disposition of subsidiary","(50.5)","","","\u2014"],["COVID-19 Repositioning Costs","\u2014","","","277.9"],["Cost of services","11,499.7","","","10,989.2"],["Selling, general and administrative expenses","379.7","","","360.5"],["Depreciation and amortization","212.1","","","222.6"],["","12,091.5","","","11,572.3"],["Operating Profit","2,197.9","","","1,598.8"],["Operating Margin %","15.4","%","","12.1","%"],["Interest Expense","236.4","","","221.8"],["Interest Income","27.3","","","32.3"],["Income Before Income Taxes and Income (Loss) From Equity Method Investments","1,988.8","","","1,409.3"],["Income Tax Expense","488.7","","","381.7"],["Income (Loss) From Equity Method Investments","7.5","","","(6.8)"],["Net Income","1,507.6","","","1,020.8"],["Net Income Attributed To Noncontrolling Interests","99.8","","","75.4"],["Net Income - Omnicom Group Inc.","$","1,407.8","","","$","945.4"]] [[/GREPCENT_TABLE]] Non-GAAP Financial Measures We use EBITA and EBITA Margin as additional operating performance measures that exclude the non-cash amortization expense of intangible assets, which primarily consists of amortization of intangible assets arising from acquisitions. We define EBITA as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin as EBITA divided by revenue. EBITA and EBITA Margin are non-GAAP financial measures. We believe that EBITA and EBITA Margin are useful measures for investors to evaluate the performance of our business. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP financial measures reported by us may not be comparable to similarly titled amounts reported by other companies. The following table reconciles the U.S. GAAP financial measure of net income - Omnicom Group Inc. to EBITA and EBITA Margin for the periods presented (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020"],["Net Income - Omnicom Group Inc.","$","1,407.8","","","$","945.4"],["Net Income Attributed To Noncontrolling Interests","99.8","","","75.4"],["Net Income","1,507.6","","","1,020.8"],["Income (Loss) From Equity Method Investments","7.5","","","(6.8)"],["Income Tax Expense","488.7","","","381.7"],["Income Before Income Taxes and Income (Loss) From Equity Method Investments","1,988.8","","","1,409.3"],["Interest Expense","236.4","","","221.8"],["Interest Income","27.3","","","32.3"],["Operating Profit","2,197.9","","","1,598.8"],["Add back: Amortization of intangible assets","80.0","","","83.1"],["Earnings before interest, taxes and amortization of intangible assets (\u201cEBITA\u201d)","$","2,277.9","","","$","1,681.9"],["Revenue","$","14,289.4","","","$","13,171.1"],["EBITA","$","2,277.9","","","$","1,681.9"],["EBITA Margin %","15.9","%","","12.8","%"]] [[/GREPCENT_TABLE]] 20 Revenue Revenue in 2021 increased $1,118.3 million, or 8.5%, compared to 2020. Organic growth increased revenue 10.2%, and changes in foreign exchange rates increased revenue 2.2%. Acquisition revenue, net of disposition revenue, reduced revenue 3.9%, reflecting the disposition in the Advertising & Media discipline 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 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 in the Advertising & Media discipline 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. Dollar. 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 & Marketing $447.9 million, Precision Marketing $250.2 million, Commerce & Brand Consulting $88.9 million, Experiential $119.1 million, Execution & Support $65.3 million, Public Relations $80.8 million and Healthcare $66.1 million. The components of revenue change in the United States (“Domestic”) and the remainder of the world (“International”) were (in millions): [[GREPCENT_TABLE]] [["","Total","","Domestic","","International"],["","$","","%","","$","","%","","$","","%"],["December 31, 2020","$","13,171.1","","","","","$","7,186.1","","","","","$","5,985.0"],["Components of revenue change:"],["Foreign exchange rate impact","288.2","","","2.2","%","","\u2014","","","\u2014","","","288.2","","","4.8","%"],["Acquisition revenue, net of disposition revenue","(516.5)","","","(3.9)","%","","(524.8)","","","(7.3)","%","","8.3","","","0.1","%"],["Organic growth","1,346.6","","","10.2","%","","584.6","","","8.1","%","","762.0","","","12.7","%"],["December 31, 2021","$","14,289.4","","","8.5","%","","$","7,245.9","","","0.8","%","","$","7,043.5","","","17.7","%"]] [[/GREPCENT_TABLE]] The components and percentages are calculated as follows: •The foreign exchange impact is calculated by translating the current period’s local currency revenue using the prior period average exchange rates to derive current period constant currency revenue (in this case $14,001.2 million for the Total column). The foreign exchange impact is the difference between the current period revenue in U.S. Dollars and the current period constant currency revenue ($14,289.4 million less $14,001.2 million for the Total column). •Acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date. As a result, acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth. Disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date. The acquisition revenue and disposition revenue amounts are netted in the table. •Organic growth is calculated by subtracting the foreign exchange rate impact, and the acquisition revenue, net of disposition revenue components from total revenue growth. •The percentage change is calculated by dividing the individual component amount by the prior period revenue base of that component ($13,171.1 million for the Total column). Changes in the value of foreign currencies against the U.S. Dollar affect our results of operations and financial position. For the most part, because the revenue and expense of our foreign operations are both denominated in the same local currency, the economic impact on operating margin is minimized. 21 Revenue and organic growth in our geographic markets were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","$ Change","","","","% Organic Growth"],["Americas:"],["North America","$","7,709.7","","","$","7,577.1","","","$","132.6","","","","","8.3","%"],["Latin America","296.1","","","275.4","","","20.7","","","","","9.4","%"],["EMEA:"],["Europe","4,219.6","","","3,607.7","","","611.9","","","","","11.9","%"],["Middle East and Africa","267.6","","","207.2","","","60.4","","","","","26.4","%"],["Asia-Pacific","1,796.4","","","1,503.7","","","292.7","","","","","13.7","%"],["","$","14,289.4","","","$","13,171.1","","","$","1,118.3","","","","","10.2","%"]] [[/GREPCENT_TABLE]] Revenue in Europe, which includes our primary markets of the U.K. and the Euro Zone, increased $611.9 million in 2021 as compared to the prior year. Revenue in the U.K., representing 10.6% of total revenue, increased $237.7 million. Revenue in Continental Europe, which comprises the Euro Zone and the other European countries, representing 18.9% of total revenue, increased $374.2 million. The increase in revenue is due to strong organic growth in all countries and disciplines, as well as the strengthening of the British Pound and Euro against the U.S. Dollar. In the normal course of business, our agencies both gain and lose business from clients each year due to a variety of factors. Under our client-centric approach, we seek to broaden our relationships with all of our clients. In 2021 and 2020, our largest client represented 3.2% and 3.4% of revenue, respectively. Our ten largest and 100 largest clients represented 21.7% and 53.6% of revenue in 2021, respectively, and 20.8% and 54.0% of revenue in 2020, respectively. All our business experienced the effects from client spending reductions related to the COVID-19 pandemic. The spending reductions impacted all our disciplines and markets. The most significantly impacted were our advertising discipline, our Experiential discipline, especially in our event marketing businesses, and our Execution & Support discipline, primarily in our field marketing and merchandising businesses. Our Public Relations discipline was less significantly impacted, and our Healthcare and Precision Marketing disciplines performed well. Revenue and organic growth by discipline were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","2021 vs. 2020","","","","2021"],["","$","","% of Revenue","","$","","% of Revenue","","$ Change","","","","% Organic Growth"],["Advertising & Media","$","7,959.3","","","55.7","%","","$","7,511.4","","","57.0","%","","$","447.9","","","","","10.7","%"],["Precision Marketing","1,194.8","","","8.4","%","","944.6","","","7.2","%","","250.2","","","","","19.0","%"],["Commerce & Brand Consulting","910.7","","","6.4","%","","821.8","","","6.2","%","","88.9","","","","","9.9","%"],["Experiential","545.9","","","3.8","%","","426.8","","","3.2","%","","119.1","","","","","27.0","%"],["Execution & Support","1,026.6","","","7.2","%","","961.3","","","7.3","%","","65.3","","","","","4.2","%"],["Public Relations","1,391.7","","","9.7","%","","1,310.9","","","10.0","%","","80.8","","","","","6.3","%"],["Healthcare","1,260.4","","","8.8","%","","1,194.3","","","9.1","%","","66.1","","","","","4.0","%"],["","$","14,289.4","","","","","$","13,171.1","","","","","$","1,118.3","","","","","10.2","%"]] [[/GREPCENT_TABLE]] 22 We provide services to clients that operate in various industry sectors. Revenue by sector was: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020"],["Pharmaceuticals and Healthcare","15","%","","16","%"],["Food and Beverage","14","%","","14","%"],["Auto","10","%","","10","%"],["Technology","11","%","","9","%"],["Consumer Products","8","%","","8","%"],["Financial Services","7","%","","8","%"],["Travel and Entertainment","7","%","","7","%"],["Retail","7","%","","7","%"],["Telecommunications","5","%","","6","%"],["Government","3","%","","3","%"],["Services","2","%","","2","%"],["Oil, Gas and Utilities","2","%","","1","%"],["Not-for-Profit","1","%","","1","%"],["Education","1","%","","1","%"],["Other","7","%","","7","%"],["","100","%","","100","%"]] [[/GREPCENT_TABLE]] In 2020, certain industry sectors were more negatively affected by the impact of the COVID-19 pandemic than others. Operating Expenses Operating expenses for 2021 compared to 2020 were (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2021","","2020","","2021 vs. 2020"],["","$","","% of Revenue","","$","","% of Revenue","","$ Change","","% Change"],["Revenue","$","14,289.4","","","","","$","13,171.1","","","","","$","1,118.3","","","8.5","%"],["Operating Expenses:"],["Salary and service costs:"],["Salary and related service costs","6,971.0","","","48.8","%","","6,250.9","","","47.5","%","","720.1","","","11.5","%"],["Third-party service costs","3,431.0","","","24.0","%","","3,321.9","","","25.2","%","","109.1","","","3.3","%"],["","10,402.0","","","72.8","%","","9,572.8","","","72.7","%","","829.2","","","8.7","%"],["Occupancy and other costs","1,148.2","","","8.0","%","","1,138.5","","","8.6","%","","9.7","","","0.9","%"],["Gain on sale of subsidiary","(50.5)","","","(0.4)","%","","\u2014","","","\u2014","","","(50.5)"],["COVID-19 repositioning costs","\u2014","","","\u2014","%","","277.9","","","2.1","%","","(277.9)"],["Cost of services","11,499.7","","","","","10,989.2","","","","","510.5"],["Selling, general and administrative expenses","379.7","","","2.7","%","","360.5","","","2.7","%","","19.2","","","5.3","%"],["Depreciation and amortization","212.1","","","1.5","%","","222.6","","","1.7","%","","(10.5)","","","(4.7)","%"],["","12,091.5","","","84.6","%","","11,572.3","","","87.9","%","","519.2","","","4.5","%"],["Operating Profit","$","2,197.9","","","15.4","%","","$","1,598.8","","","12.1","%","","$","599.1","","","37.5","%"]] [[/GREPCENT_TABLE]] Operating expenses in 2021 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 disposition in the Advertising & Media discipline, 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, 23 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 disposition in the Advertising & Media discipline. 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. Interest income in 2021 decreased $5.0 million year-over-year to $27.3 million primarily due to lower rates. Income Taxes Our effective tax rate for 2021 decreased year-over-year to 24.6% from 27.1%. In connection with the disposition in the Advertising & Media discipline in the second quarter of 2021, we recorded a pretax 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 disposition in the Advertising & Media discipline 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 and Net Income Per Share - Omnicom Group Inc. 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. 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. The combined effect of the after-tax gain from the disposition in the Advertising & Media discipline and the loss on the early redemption of the 2022 Notes increased net income - Omnicom Group Inc. for 2021 by $31.0 million. In 2020, the net after-tax effect on net income - Omnicom Group Inc. from the COVID-19 repositioning costs and asset impairment charges was a decrease of $270.2 million, which was partially offset by a net after-tax increase in net income - Omnicom Group Inc. from reimbursements under government programs of $123.4 million. LIQUIDITY AND CAPITAL RESOURCES Cash Sources and Requirements Primary sources of our short-term liquidity are operating cash flow, cash and cash equivalents and short-term investments. Additional liquidity sources include our $2.5 billion multi-currency revolving credit facility, or Credit Facility, with a termination date of February 14, 2025, the ability to issue up to $2 billion of U.S. Dollar denominated commercial paper and issue up to the equivalent of $500 million in British Pounds or Euro under a Euro commercial paper program, and access to the capital markets. Certain of our international subsidiaries have uncommitted credit lines aggregating $582.9 million, which are guaranteed by Omnicom. Our liquidity sources fund our non-discretionary cash requirements and our discretionary spending. Working capital, which we define as current assets minus current liabilities, is our principal non-discretionary funding requirement. Our working capital cycle typically peaks during the second quarter of the year due to the timing of payments for incentive compensation, income taxes and contingent purchase price obligations. In addition, we have contractual obligations related to our long-term debt (principal and interest payments), recurring business operations, primarily related to lease obligations, and acquisition related obligations. Our principal discretionary cash spending includes dividend payments to common shareholders, capital expenditures, strategic acquisitions and repurchases of our common stock. 24 Cash and cash equivalents decreased $1,035.0 million from December 31, 2021. The components of the decrease were (in millions): [[GREPCENT_TABLE]] [["Sources"],["Cash flow from operations - as reported","","","$","926.5"],["Plus: Decrease in operating capital","","","844.0"],["Principal cash sources","","","1,770.5"],["Uses"],["Capital expenditures","$","(78.2)"],["Dividends paid to common shareholders","(581.1)"],["Dividends paid to noncontrolling interest shareholders","(79.5)"],["Acquisition payments, including payment of contingent purchase price obligations and acquisition of additional noncontrolling interests, net of proceeds from sale of investments","(356.1)"],["Repurchases of common stock, net of proceeds from stock plans","(594.0)"],["Principal cash uses","","","(1,688.9)"],["Principal cash sources in excess of principal cash uses","","","81.6"],["Effect of foreign exchange rate changes on cash and cash equivalents","","","(218.6)"],["Other net financing and investing activities","","","(54.0)"],["Decrease in operating capital","","","(844.0)"],["Decrease in cash and cash equivalents - as reported","","","$","(1,035.0)"]] [[/GREPCENT_TABLE]] Cash flow from operations in 2022 decreased $1.0 billion year-over-year. The decrease was principally due to the decrease in cash from operating capital of $844.0 million, primarily as a result of disposition activity in 2021 and 2022 in the Advertising & Media discipline, and the timing and volume of client billings year-over-year, which negatively impacted our operating capital funding. The year-over-year reduction in cash flow from operations had no material impact on our liquidity, and there were no issuances of commercial paper or borrowing under the Credit Facility during the year. Principal cash sources and principal cash uses are Non-GAAP liquidity measures. These amounts exclude changes in operating capital and other investing and financing activities. This presentation reflects the metrics used by us to assess our sources and uses of cash and was derived from our consolidated statement of cash flows. We believe that this presentation is meaningful to understand the primary sources and uses of our cash flow and the effect on our cash and cash equivalents. Non-GAAP liquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies. Additional information regarding our cash flows can be found in our consolidated statement of cash flows and Note 14 to the consolidated financial statements. At December 31, 2022, we have the following contractual obligations: •We have outstanding fixed-rate debt maturing at various times with an aggregate principal amount of $5.6 billion, of which $750 million is due in 2024. Depending on the conditions in the credit markets, we may refinance this debt, or we may use cash from operations, including temporally accessing our Credit Facility, to repay this debt. Future interest payments on our debt total $868.5 million, of which $159.1 million is payable in 2023. •The liability for our operating and finance lease payments is $1,527.8 million, of which $297.0 million is due in 2023. •The obligation for our defined benefit pension plans is $228.6 million, and the liability for our postemployment arrangements is $130.8 million. In 2022, we contributed $8.2 million to our defined benefit plans and paid $10.4 million for our postemployment arrangements. We do not expect these payments to increase significantly in 2023. •The liability for contingent purchase price payments (earn-outs) is $115.0 million, of which $39.2 million is payable in 2023. •The remaining balance for the transition tax on accumulated foreign earnings imposed by the Tax Cut and Jobs Act of 2017 is $88.8 million, of which $19.9 million is expected to be paid in 2023. Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term investments and operating cash flow will be sufficient to meet our non-discretionary cash requirements for the next twelve months. Over the longer term, our Credit Facility is available to fund our working capital and contractual obligations. Cash Management Our regional treasury centers in North America, Europe and Asia manage our cash and liquidity. Each day, operations with excess funds invest those funds with their regional treasury center. Likewise, operations that require funds borrow from their regional treasury center. Treasury centers with excess cash invest on a short-term basis with third parties, generally with maturities ranging from overnight to less than 90 days. Beginning in 2022, we purchased short-term investments with maturities ranging from 91 to 364 days. The balance of our short-term investments at December 31, 2022 was $60.7 million. Certain treasury centers have notional pooling arrangements that are used to manage their cash and set-off foreign exchange imbalances. 25 The arrangements require each treasury center to have its own notional pool account and to maintain a notional positive account balance. Additionally, under the terms of the arrangement, set-off of foreign exchange positions are limited to the long and short positions within their own account. To the extent that our treasury centers require liquidity, they have the ability to issue up to a total of $2.0 billion of U.S. Dollar-denominated commercial paper and issue up to the equivalent of $500 million in British Pounds or Euro under a Euro commercial paper program, or borrow under the Credit Facility or the uncommitted credit lines. This process enables us to manage our debt more efficiently and utilize our cash more effectively, as well as manage our risk to foreign exchange rate imbalances. In countries where we either do not conduct treasury operations or it is not feasible for one of our treasury centers to fund net borrowing requirements on an intercompany basis, we arrange for local currency uncommitted credit lines. We have a policy governing counterparty credit risk with financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to the Credit Facility. These institutions generally have credit ratings equal to or better than our credit ratings. In countries where we do not conduct treasury operations, all cash and cash equivalents are held by counterparties that meet specific minimum credit standards. At December 31, 2022, our foreign subsidiaries held approximately $2.1 billion of our total cash and cash equivalents of $4.3 billion. Substantially all of the cash is available to us, net of any foreign withholding taxes payable upon repatriation to the United States. At December 31, 2022, our net debt position, which we define as total debt, including short-term debt, less cash and cash equivalents and short-term investments increased $873.1 million to $1.3 billion from December 31, 2021. The increase in net debt primarily resulted from discretionary spending of $1.7 billion and the net effect of foreign exchange rate changes on cash and cash equivalents and our foreign currency denominated debt of $103.4 million, partially offset by cash flow from operating activities of $926.5 million. The components of net debt were (in millions): [[GREPCENT_TABLE]] [["","December 31,"],["","2022","","2021"],["Short-term debt","$","16.9","","","$","9.6"],["Long-term debt","5,577.2","","","5,685.7"],["Total debt","5,594.1","","","5,695.3"],["Less: Cash and cash equivalents and short-term investments","4,342.5","","","5,316.8"],["Net debt","$","1,251.6","","","$","378.5"]] [[/GREPCENT_TABLE]] Net debt is a Non-GAAP liquidity measure. This presentation, together with the comparable U.S. GAAP liquidity measures, reflects one of the key metrics used by us to assess our cash management. Non-GAAP liquidity measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP. Non-GAAP liquidity measures as reported by us may not be comparable to similarly titled amounts reported by other companies. Debt Instruments and Related Covenants The 2.45% Senior Notes due 2030, 4.20% Senior Notes due 2030 and 2.60% Senior Notes due 2031 are senior unsecured obligations of Omnicom that rank equal in right of payment with all existing and future unsecured senior indebtedness. Omnicom and its wholly owned finance subsidiary, Omnicom Capital Inc., or OCI, are co-obligors under the 3.65% Senior Notes due 2024 and the 3.60% Senior Notes due 2026. These notes are a joint and several liability of Omnicom and OCI, and Omnicom unconditionally guarantees OCI’s obligations with respect to the notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI’s assets primarily consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries, and the related interest receivable. There are no restrictions on the ability of OCI or Omnicom to obtain funds from our subsidiaries through dividends, loans or advances. Such notes are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness. Omnicom and OCI have, jointly and severally, fully and unconditionally guaranteed the obligations of Omnicom Finance Holdings plc, or OFH, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the €500 million 0.80% Senior Notes due 2027 and the €500 million 1.40% Senior Notes due 2031, collectively the Euro Notes. OFH’s assets consist of its investments in several wholly owned finance companies that function as treasury centers, providing funding for various operating companies in Europe, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom, OCI or OFH to obtain funds from their subsidiaries through dividends, loans or advances. The Euro Notes and the related guarantees are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OFH and each of Omnicom and OCI, respectively. 26 Omnicom has fully and unconditionally guaranteed the obligations of Omnicom Capital Holdings plc, or OCH, a U.K.-based wholly owned subsidiary of Omnicom, with respect to the £325 million 2.25% Senior Notes due 2033, or the Sterling Notes. OCH’s assets consist of its investments in several wholly owned finance companies that function as treasury centers, providing funding for various operating companies in EMEA, Australia and other countries in the Asia-Pacific region. The finance companies’ assets consist of cash and cash equivalents and intercompany loans that they make or have made to the operating companies in their respective regions and the related interest receivable. There are no restrictions on the ability of Omnicom or OCH to obtain funds from their subsidiaries through dividends, loans or advances. The Sterling Notes and the related guarantee are senior unsecured obligations that rank equal in right of payment with all existing and future unsecured senior indebtedness of OCH and Omnicom, respectively. The Credit Facility contains a financial covenant that requires us to maintain a Leverage Ratio of consolidated indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) of no more than 3.5 times for the most recently ended 12-month period. At December 31, 2022, we were in compliance with this covenant as our Leverage Ratio was 2.4 times. The Credit Facility does not limit our ability to declare or pay dividends or repurchase our common stock. Borrowings under the Credit Facility may use LIBOR as the benchmark interest rate. The LIBOR benchmark rate is expected to be phased out by the end of June 2023. We do not expect that the discontinuation of the LIBOR rate will have a material impact on our liquidity or results of operations. At December 31, 2022, our long-term and short-term debt was rated BBB+ and A2 by S&P and Baa1 and P2 by Moody's. Our access to the commercial paper market and the cost of these borrowings are affected by market conditions and our credit ratings. The long-term debt indentures and the Credit Facility do not contain provisions that require acceleration of cash payments in the event of a downgrade in our credit ratings. Credit Markets and Availability of Credit In light of the uncertainty of future economic conditions, we will continue to take actions available to us to respond to changing economic conditions, and we will continue to manage our discretionary expenditures. We will continue to monitor and manage the level of credit made available to our clients. We believe that these actions, in addition to the availability of our Credit Facility, are sufficient to fund our near-term working capital needs and our discretionary spending. Information regarding our Credit Facility is provided in Note 7 to the consolidated financial statements. We have the ability to fund our day-to-day liquidity, including working capital, by issuing commercial paper or borrowing under the Credit Facility. During 2022 and 2021, there were no issuances of commercial paper or borrowings under the Credit Facility. We can resume issuing commercial paper to fund our day-to-day liquidity when needed. However, disruptions in the credit markets may lead to periods of illiquidity in the commercial paper market and higher credit spreads. To mitigate any disruption in the credit markets and to fund our liquidity, we may borrow under the Credit Facility or the uncommitted credit lines or access the capital markets if favorable conditions exist. We will continue to monitor closely our liquidity and conditions in the credit markets. We cannot predict with any certainty the impact on us of any disruptions in the credit markets. In such circumstances, we may need to obtain additional financing to fund our day-to-day working capital requirements. Such additional financing may not be available on favorable terms, or at all.