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TMCNet:  OMNICOM GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 19, 2013]

OMNICOM GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Executive Summary We are a strategic holding company. We provide professional services to clients through multiple agencies around the world. On a global, pan-regional and local basis, our agencies provide these services in the following disciplines: advertising, customer relationship management, or CRM, public relations and specialty communications. Our business model was built and continues to evolve around our clients. While our agencies operate under different names and frame their ideas in different disciplines, we organize our services around our clients. The fundamental premise of our business is that our clients' specific requirements should be the central focus in how we deliver our services and allocate our resources. This client-centric business model results in multiple agencies collaborating in formal and informal virtual networks that cut across internal organizational structures to deliver consistent brand messages for a specific client and execute against each of our clients' specific marketing requirements. We continually seek to grow our business with our existing clients by maintaining our client-centric approach, as well as expanding our existing business relationships into new markets and with new clients. In addition, we pursue selective acquisitions of complementary companies with strong entrepreneurial management teams that typically currently serve or have the ability to serve our existing client base.



As a leading global advertising, marketing and corporate communications company, we operate in all major markets around the world. We have a large and diverse client base. Our largest client accounted for 2.6% of our 2012 revenue and no other client accounted for more than 2.6% of our 2012 revenue. Our top 100 clients accounted for approximately 52% of our 2012 revenue. Our business is spread across a significant number of industry sectors with no one industry comprising more than 14% of our 2012 revenue. 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.

In 2012, our revenue increased 2.5% compared to 2011. The increase reflects strong operating performance by many of our agencies, partially offset by the negative impact from changes in foreign exchange rates. Increased revenue in the United States and continued growth in the emerging markets of Asia and Latin America was partially offset by the on-going economic weakness in the Euro Zone.

Global economic conditions have a direct impact on our business and financial performance. In particular, current global economic conditions pose a risk that our clients may reduce future spending on advertising and marketing services which could reduce the demand for our services. In 2012, the United States experienced modest economic growth and the major economies of Asia and Latin America continued to expand. However, the continuing fiscal issues faced by many countries in the Euro Zone has caused economic difficulty in certain of our Euro Zone markets. If economic conditions in these markets do not improve, the demand for our services could be further reduced. If domestic or global economic conditions worsen or do not improve, our results of operations and financial position could be adversely affected. We will continue to closely monitor economic conditions, client revenue levels and other factors and, in response to reductions in our client revenue, if necessary, we will take actions available to us to align our cost structure and manage working capital. There can be no assurance whether, or to what extent, our efforts to mitigate any impact of future economic conditions, reductions in our client revenue, changes in client creditworthiness and other developments will be effective.

Certain business trends have had a positive impact on our business and industry.

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

Additionally, in an effort to gain greater efficiency and effectiveness from their total marketing budgets, clients are increasingly requiring greater coordination of marketing activities and concentrating these activities with a smaller number of service providers. We believe these trends have benefited our business in the past and over the medium and long term will continue to provide a competitive advantage to us.

In the near term, barring unforeseen events and excluding the impact from changes in foreign exchange, as a result of continued strong operating performance by many of our agencies and new business activities we expect our 2013 revenue to increase modestly in excess of the weighted average nominal GDP growth in our major markets. We expect to continue to identify acquisition opportunities that will build on the core capabilities of our strategic business platforms, expand our operations in the emerging markets and enhance our capabilities to leverage new technologies that are being used by marketers today.

Effective February 1, 2011, we acquired a controlling interest in the Clemenger Group, our affiliate in Australia and New Zealand increasing our equity ownership to 73.7% from 46.7%. In connection with this transaction, we recorded a non-cash gain of $123.4 million in the first quarter of 2011 resulting from the remeasurement of the carrying value of our equity interest to the acquisition date fair value. This acquisition has and will continue to help us to further develop our combined businesses throughout the Asia Pacific region and further enhance our global capabilities.

We had an objective of improving EBITA margins to 2007 levels for the full year 2012. In connection with this objective, during 2011 we reviewed our businesses with a focus on enhancing our strategic position, improving our operations and 9 -------------------------------------------------------------------------------- rebalancing our workforce. As part of this process, we disposed of certain non-core and underperforming businesses and repositioned others. As a result of these actions, we incurred charges of $131.3 million in the first quarter of 2011 for severance, real estate lease terminations and asset and goodwill write-offs related to disposals and other costs. We continue to perform reviews of our businesses and we will take actions, where appropriate, to reposition underperforming businesses. We will also continue to pursue operational consolidations to further drive efficiencies in our back office functions.

Given our size and breadth, we manage our business by monitoring several financial indicators. The key indicators that we review focus on revenue and operating expenses. We analyze revenue growth by reviewing the components and mix of the growth, including growth by major geographic region, growth by major marketing discipline, impact from foreign currency fluctuations, growth from acquisitions and growth from our largest clients. In recent years, our revenue has been divided almost evenly between our domestic and international operations.

Revenue in 2012 increased 2.5% compared to 2011, of which 4.0% was organic growth and 0.7% was related to acquisitions, net of dispositions. Changes in foreign exchange rates reduced revenue by 2.2%. Across our geographic markets, revenue increased 4.5% in the United States, 2.3% in the United Kingdom and 9.0% in our other markets, primarily Asia and Latin America, while revenue decreased 10.4% in our Euro markets. The change in revenue in 2012 compared to 2011 in our four fundamental disciplines was: advertising increased 4.6%, CRM increased 0.2%, public relations increased 4.9% and specialty communications decreased 2.1%.

We measure operating expenses in two distinct cost categories: salary and service costs and office and general expenses. Salary and service costs consist of employee compensation and related costs and direct service costs. Office and general expenses consist of rent and occupancy costs, technology costs, depreciation and amortization and other overhead expenses. Each of our agencies requires professionals with a skill set that is common across our disciplines.

At the core of this skill set is the ability to understand a client's brand or product and its selling proposition and the ability to develop a unique message to communicate the value of the brand or product to the client's target audience. The facility requirements of our agencies are also similar across geographic regions and disciplines, and their technology requirements are generally limited to personal computers, servers and off-the-shelf software.

Because we are a service business, we monitor salary and service costs and office and general costs in relation to revenue.

Salary and service costs tend to fluctuate in conjunction with changes in revenue. Salary and service costs increased 1.3% in 2012 compared to 2011.

Salary and service costs for 2011 reflect $92.8 million of severance charges associated with our repositioning actions. The increase in 2012 costs resulted from growth in our business, as well as increased use of freelance labor, partially offset by lower compensation costs, including incentive compensation primarily as a result of the repositioning actions taken in 2011 and tight controls restricting the frequency of salary increases. Excluding the $92.8 million of severance charges taken in 2011, salary and service costs as a percentage of revenue in 2012 would have been flat as compared to 2011.

Office and general expenses are less directly linked to changes in revenue than salary and service costs. Office and general expenses increased 4.3% in 2012 compared to 2011. Office and general expenses for 2011 includes a reduction of $84.9 million, which reflects the $123.4 million non-cash remeasurement gain recorded in connection with the acquisition of the controlling interest in the Clemenger Group and charges of $38.5 million related to our repositioning actions. Excluding the $84.9 million net decrease, office and general expenses in 2012 would have been flat as compared to 2011.

Operating margins increased to 12.7% in 2012 from 12.0% in 2011 and EBITA margins increased to 13.4% in 2012 from 12.7% in 2011. The year-over-year margin improvement was driven by our revenue growth, as well as lower operating costs resulting from actions taken in 2011 to improve our operations, rebalance our workforce and drive efficiencies in our back office functions.

Our effective tax rate for 2012 decreased to 31.8%, compared to 32.7% for 2011.

In the fourth quarter of 2012, income tax expense was reduced by $53 million, primarily resulting from a reduction in the deferred tax liabilities for unremitted foreign earnings of certain of our operating companies located in the Asia Pacific region, as well as lower statutory tax rates in other foreign jurisdictions. In an effort to support our continued expansion and pursue operational efficiencies in the Asia Pacific region, we completed a legal reorganization in certain countries within the region. As a result of the reorganization, our unremitted foreign earnings in the affected countries are subject to lower effective tax rates as compared to the U.S. statutory tax rate. Therefore we recorded a reduction in our deferred tax liabilities to reflect the lower tax rate that these earnings are subject to. In future periods we expect an ongoing annual reduction in income tax expense of approximately $11 million. The reduction in income tax expense was partially offset by a charge of approximately $16 million resulting from U.S. state and local tax accruals recorded for uncertain tax positions, net of U.S. federal income tax benefit.

In the fourth quarter of 2012, we determined, based on the financial condition and prospects of our equity investee in Egypt, that there was an other-than-temporary decline in its carrying value. As a result, we recorded a $29.2 million impairment charge to reduce the carrying value of the investment to fair value. The impairment charge is included in income (loss) from equity method investments in our income statement.

10 -------------------------------------------------------------------------------- Net income - Omnicom Group Inc. in 2012 increased $45.7 million, or 4.8%, to $998.3 million from $952.6 million in 2011. The year-over-year increase in net income - Omnicom Group Inc. is due to the factors described above. Diluted net income per common share - Omnicom Group Inc. increased 8.4% to $3.61 in 2012, compared to $3.33 in 2011 due to the factors described above, as well as the reduction in our weighted average common shares outstanding. This reduction was the result of repurchases of our common stock, net of stock option exercises and shares issued under our employee stock purchase plan.

Critical Accounting Policies and New Accounting Standards Critical Accounting Policies 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 and represent the critical accounting policies used in the preparation of our financial statements. Readers are encouraged to consider this summary together with our financial statements and the related notes, including Note 2, Significant Accounting Policies, for a more complete understanding of the critical accounting policies discussed below.

Estimates: Our financial statements are prepared in conformity with U.S. GAAP and require us to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses that are reported in the consolidated financial statements and accompanying notes. We use a fair value approach in testing goodwill for impairment and when evaluating our cost-method investments to determine if an other-than-temporary impairment has occurred. Actual results could differ from those estimates and assumptions.

Acquisitions and Goodwill: We have made and expect to continue to make selective acquisitions. In making acquisitions, the valuation of potential acquisitions is based on various factors, including specialized know-how, reputation, competitive position, geographic coverage and service offerings of the target businesses, as well as our experience and judgment.

Business combinations are accounted for using the acquisition method and, accordingly, the assets acquired, including identified intangible assets, the liabilities assumed and any noncontrolling interest in the acquired business are recorded at their acquisition date fair values. In circumstances where control is obtained and less than 100% of an entity is acquired, we record 100% of the goodwill acquired. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed as incurred. Certain of our acquisitions are structured with contingent purchase price obligations (earn-outs). Contingent purchase price obligations are recorded as liabilities at the acquisition date fair value. Subsequent changes in the fair value of the liability are recorded in our results of operations. The results of operations of acquired businesses are included in our results of operations from the acquisition date. In 2012, we completed 13 acquisitions of new subsidiaries and made additional investments in businesses in which we had an existing minority ownership interest. Goodwill from these transactions was $235.1 million. In addition, for acquisitions completed prior to January 1, 2009, we made contingent purchase price payments (earn-outs) of $40.4 million, which were included in goodwill. Contingent purchase price obligations for acquisitions completed prior to January 1, 2009 are accrued, in accordance with U.S. GAAP, when the contingency is resolved and payment is certain. At December 31, 2012, the amount we could be required to pay for earn-outs for acquisitions completed prior to January 1, 2009 is $15.7 million.

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 and/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 intangible asset value we acquire is the know-how of the people, which is treated as part of goodwill and is not valued separately. For each acquisition, we undertake a detailed review to identify other intangible assets and a valuation is performed for all such identified assets. 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. We identified our regional reporting units as components of our operating segments, which are our five agency networks. The regional reporting units of each agency network are responsible for the agencies in their region. They report to the segment managers and facilitate the administrative and logistical requirements of our client-centric strategy for delivering services to clients in their regions. We have concluded that for each of our operating segments, their regional reporting units 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 the guidance set forth in FASB ASC Topic 350, Intangibles - Goodwill and Other. Consistent with our fundamental business strategy, the agencies within our regional reporting units serve similar clients in similar industries, and in many cases the same clients. In addition, the agencies within our regional reporting units have similar economic characteristics. The main economic components of each agency are 11 -------------------------------------------------------------------------------- employee compensation and related costs and direct service costs and office and general 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 across multiple agencies and regions as they work together to integrate the acquired agency into our client service 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 purchase acquisition transactions.

In applying the income approach, we use estimates to derive the expected discounted 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").

The range of assumptions used for the long-term growth rate and WACC in our evaluations as of June 30, 2012 and 2011 were: June 30, 2012 2011 Long-Term Growth Rate 4.0% 4.0% WACC 10.3% - 10.9% 10.5% - 11.2% 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. The average historical revenue growth rate of our reporting units for the past ten years was approximately 7.5% and the Average Nominal GDP growth of the countries comprising our major markets that account for substantially all of our revenue was 4.3% over the same period. We considered this history when determining the long-term growth rates used in our annual impairment test at June 30, 2012. We believe marketing expenditures over the long term have a high correlation to GDP. We also believe, based on our historical performance, that our long-term growth rate will exceed Average Nominal GDP growth in the markets we operate in.

For our annual test as of June 30, 2012, we used an estimated long-term growth rate of 4% for our reporting units.

When performing our annual impairment test as of June 30, 2012 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 2012. In the first half of 2012, we experienced an increase in our revenue of 5.1%, which excludes growth from acquisitions and the impact from changes in foreign exchange rates. However, the continuing fiscal issues faced by many countries in the Euro Zone has caused economic difficulty in certain of our Euro Zone markets. We considered the effect of these conditions in our annual impairment test. As a result, we estimated growth rates for the next six years that reflect a reduction from current business results.

The risk-adjusted discount rate used in our DCF analysis represents the estimated after-tax WACC for each of our reporting units and ranged from 10.3% to 10.9%. 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. The decrease in the WACC at June 30, 2012 compared to June 30, 2011 was primarily the result of a decrease in the long-term U.S. Treasury bond, the risk-free rate of return used as a component that we use in determining the WACC.

Our five 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 two agency networks were built through a combination of internal growth and acquisitions that were accounted for as purchase transactions and as a result, they have a relatively higher amount of goodwill and debt.

12 -------------------------------------------------------------------------------- Goodwill Impairment Review - Conclusion: Under U.S. GAAP, we have the option of either assessing qualitative factors to determine whether it is more-likely-than-not that the carrying value of of our reporting units exceeds their respective fair value or proceeding directly to Step 1 of the goodwill impairment test. Although not required, we performed Step 1 of the annual impairment test and compared the fair value of each of our reporting units to its respective carrying value, including goodwill. Based on the results of our impairment test, we concluded that our goodwill was not impaired at June 30, 2012, because the fair value of each of our reporting units was substantially in excess of their respective net book value. The minimum decline in fair value that one of our reporting units would need to experience in order to fail Step 1 of the goodwill impairment test was approximately 70%. Notwithstanding our belief that the assumptions we used in our impairment testing for our WACC and long-term growth rate are 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, 2012 revealed that if WACC increased by 1% and/or long-term growth rate decreased by 1%, the fair value of each of our reporting units would continue to be substantially in excess of their respective net book values and would pass Step 1 of the impairment test.

We will continue to perform our impairment test at the end of the second quarter of each year unless events or circumstances trigger the need for an interim evaluation for impairment. The estimates we use in testing our goodwill for impairment 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. 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 material. 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 Step 1 of 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.

Subsequent to our annual evaluation of the carrying value of goodwill at June 30, 2012, there were no events or circumstances that triggered the need for an interim evaluation for impairment. At December 31, 2012, given the current economic climate we reviewed the assumptions used in our June 30, 2012 annual impairment test for revenue growth, cash flows, WACC and long-term growth rate.

Our actual 2012 results for revenue growth and cash flows approximated the forecast for revenue growth and cash flows that we used in our impairment test at June 30, 2012. Our assumptions for revenue growth and cash flows for 2013 approximate our current 2013 forecast. We also reviewed the assumptions used for WACC and long-term growth rate. Using data at December 31, 2012, the assumptions are within the 1% change used in our sensitivity analysis at June 30, 2012.

Based on these factors, we did not perform an interim evaluation for impairment on the carrying value of goodwill at December 31, 2012. Additional information about acquisitions and goodwill appears in Notes 2 and 5 to our consolidated financial statements.

Revenue Recognition: We recognize revenue in accordance with FASB ASC Topic 605, Revenue Recognition, and applicable SEC Staff Accounting Bulletins.

Substantially all of our revenue is derived from fees for services or a rate per hour or equivalent basis. Revenue is realized when the service is performed in accordance with terms of each client arrangement, upon completion of the earnings process and when collection is reasonably assured. Prior to recognizing revenue, persuasive evidence of an arrangement must exist, the sales price must be fixed or determinable and delivery, performance and acceptance must be in accordance with the client arrangement. These principles are the foundation of our revenue recognition policy and apply to all client arrangements in each of our service disciplines: advertising, CRM, public relations and specialty communications. Certain of our businesses earn a portion of their revenue as commissions based upon performance in accordance with client arrangements.

Because the services that we provide across each of our disciplines are similar and delivered to clients in similar ways, all of the key elements in revenue recognition apply to client arrangements in each of our four disciplines.

In the majority of our businesses, we act as an agent and record revenue equal to the net amount retained when the fee or commission is earned. Although we may bear credit risk with respect to these activities, the arrangements with our clients are such that we act as an agent on their behalf. In these cases, costs incurred with third-party suppliers are excluded from our revenue. In certain arrangements, we act as principal and we contract directly with third-party suppliers and media providers and production companies and we are responsible for payment. In these circumstances, revenue is recorded at the gross amount billed since revenue has been earned for the sale of goods or services.

Some of our client contractual arrangements include performance incentive provisions designed to link a portion of our revenue to our performance relative to both quantitative and qualitative goals. We recognize performance incentives in revenue when the specific quantitative goals are achieved, or when our performance against qualitative goals is determined by our clients.

Additional information about our revenue recognition policy appears in Note 2 to our consolidated financial statements.

13 -------------------------------------------------------------------------------- Share-Based Compensation: Share-based compensation is measured at the grant date fair value based on the fair value of the award. We use the Black-Scholes option valuation model to determine the fair value of stock option awards. This valuation model uses several assumptions and estimates such as expected life, rate of risk free interest, volatility and dividend yield. If different assumptions and estimates were used to determine the fair value, our actual results of operations and cash flows would likely differ from the estimates used and it is possible that differences could be material. The fair value of restricted stock awards is determined using the closing price of our common stock on the grant date. Additional information about these assumptions and estimates appears in Note 2 to our consolidated financial statements.

Share-based compensation expense was $80.8 million, $74.5 million and $69.3 million, in 2012, 2011 and 2010, respectively. Information about our specific awards and stock plans can be found in Note 10 to our consolidated financial statements.

New Accounting Standards Additional information regarding new accounting guidance can be found in Note 20 to our consolidated financial statements. Note 2 to our consolidated financial statements provides a summary of our significant accounting policies.

Results of Operations - 2012 Compared to 2011 (In millions): 2012 2011 Revenue $ 14,219.4 $ 13,872.5 Operating Expenses: Salary and service costs 10,380.7 10,250.6 Office and general expenses 2,034.5 1,950.8 Total Operating Expenses 12,415.2 12,201.4 Add back: Amortization of intangible assets 101.1 91.4 12,314.1 12,110.0 Earnings before interest, taxes and amortization of intangible assets ("EBITA") 1,905.3 1,762.5 EBITA Margin - % 13.4 % 12.7 % Deduct: Amortization of intangible assets 101.1 91.4 Operating Income 1,804.2 1,671.1 Operating Margin - % 12.7 % 12.0 % Interest Expense 179.7 158.1 Interest Income 35.1 36.0Income Before Income Taxes and Income (Loss) From Equity Method Investments 1,659.6 1,549.0 Income Tax Expense 527.1 505.8 Income (Loss) From Equity Method Investments (15.0 ) 17.2 Net Income 1,117.5 1,060.4 Less: Net Income Attributed To Noncontrolling Interests 119.2 107.8 Net Income - Omnicom Group Inc. $ 998.3 $ 952.6 EBITA, which we define as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin, which we define as EBITA divided by Revenue, are Non-GAAP measures. We use EBITA and EBITA Margin as additional operating performance measures, which exclude the non-cash amortization expense of acquired intangible assets. The table above reconciles EBITA and EBITA Margin to the U.S. GAAP financial measure of Operating Income for the periods presented. We believe that EBITA and EBITA Margin are useful measures to evaluate the performance of our businesses. 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.

Revenue: Revenue in 2012 increased 2.5%, to $14,219.4 million from $13,872.5 million in 2011. Organic growth increased revenue by $561.9 million and acquisitions, net of dispositions, increased revenue by $95.0 million. Changes in foreign exchange rates reduced revenue by $310.0 million.

14 --------------------------------------------------------------------------------The components of 2012 revenue change in the United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % December 31, 2011 $ 13,872.5 $ 7,048.7 $ 6,823.8 Components of revenue change: Foreign exchange impact (310.0 ) (2.2 )% - - % (310.0 ) (4.5 )% Acquisitions, net of dispositions 95.0 0.7 % (2.8 ) - % 97.8 1.4 % Organic growth 561.9 4.0 % 317.8 4.5 % 244.1 3.6 % December 31, 2012 $ 14,219.4 2.5 % $ 7,363.7 4.5 % $ 6,855.7 0.5 % The components and percentages are calculated as follows: • The foreign exchange impact is calculated by first converting the current period's local currency revenue using the average exchange rates from the equivalent prior period to arrive at a constant currency revenue (in this case $14,529.4 million for the Total column in the table). The foreign exchange impact equals the difference between the current period revenue in U.S. dollars and the current period revenue in constant currency ($14,219.4 million less $14,529.4 million for the Total column in the table).

• The acquisition component is calculated by aggregating the applicable prior period revenue of the acquired businesses, less revenue of any business included in the prior period revenue that was disposed of subsequent to the period.

• Organic growth is calculated by subtracting both the foreign exchange and acquisition 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 ($13,872.5 million for the Total column in the table).

Revenue for 2012 and the percentage change in revenue and organic growth from 2011 in our primary geographic markets were (in millions): $ % Change % Organic Growth United States $ 7,363.7 4.5 % 4.5 % Euro Markets 2,311.9 (10.4 )% (1.8 )% United Kingdom 1,255.1 2.3 % 1.5 % Rest of the world 3,288.7 9.0 % 9.0 % $ 14,219.4 2.5 % 4.0 % In 2012, changes in foreign exchange rates reduced revenue by 2.2%, or $310.0 million, compared to 2011. The most significant impacts resulted from the strengthening of the U.S. Dollar against the Euro, Brazilian Real and British Pound.

Assuming exchange rates at February 1, 2013 remain unchanged, we expect changes in foreign exchange rates to have a marginally positive impact on 2013 revenue.

Due to a variety of factors, in the normal course, our agencies both gain and lose business from clients each year. The net result in 2012 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with our largest clients. Revenue from our largest client represented 2.6% of our revenue in each of 2012 and 2011. No other client represented more than 2.6% of our revenue in 2012 or more than 2.1% of our revenue in 2011. Our ten largest and 100 largest clients represented 19.0% and 51.7% of 2012 revenue, respectively and 18.0% and 50.3% of 2011 revenue, respectively.

Driven by our clients' continuous demand for more effective and efficient marketing activities, we strive to provide an extensive range of advertising, marketing and corporate communications services through various client-centric networks that are organized to meet specific client objectives. These services include advertising, brand consultancy, corporate social responsibility consulting, crisis communications, custom publishing, data analytics, database management, direct marketing, entertainment marketing, environmental design, experiential marketing, field marketing, financial/corporate business-to-business advertising, interactive marketing, marketing research, media planning and buying, mobile marketing, multi-cultural marketing, non-profit marketing, public affairs, public relations, recruitment communications, reputation consulting, retail 15 -------------------------------------------------------------------------------- marketing, search engine marketing, social media marketing and sports and event marketing. In an effort to monitor the changing needs of our clients and to further expand the scope of our services to key clients, we monitor revenue across a broad range of disciplines and group them into the following four categories: advertising, CRM, public relations and specialty communications.

Revenue for 2012 and 2011 and the percentage change in revenue and organic growth from 2011 by discipline was (in millions): Year Ended December 31, 2012 2011 2012 vs 2011 % of % of $ % $ Revenue $ Revenue Change Change % Organic Growth Advertising $ 6,762.8 47.6 % $ 6,464.9 46.6 % $ 297.9 4.6 % 6.6 % CRM 5,122.5 36.0 % 5,111.9 36.8 % 10.6 0.2 % 2.3 % Public relations 1,290.8 9.1 % 1,230.3 8.9 % 60.5 4.9 % 3.3 % Specialty communications 1,043.3 7.3 % 1,065.4 7.7 % (22.1 ) (2.1 )% (2.3 )% $ 14,219.4 $ 13,872.5 $ 346.9 2.5 % 4.0 % We operate in a number of industry sectors. The percentage of our revenue by industry sector for 2012 and 2011 was: Industry 2012 2011 Food and Beverage 13.3 % 13.6 % Consumer Products 9.4 % 9.3 % Pharmaceuticals and Health Care 9.7 % 10.1 % Financial Services 8.7 % 9.5 % Technology 9.1 % 8.7 % Auto 8.4 % 7.5 % Travel and Entertainment 5.9 % 5.9 % Telecommunications 6.4 % 7.1 % Retail 7.5 % 6.6 % Other 21.6 % 21.7 % Operating Expenses: Operating expenses for 2012 compared to 2011 were (in millions): Year Ended December 31, 2012 2011 2012 vs 2011 % of % of % Total % Total of Operating of Operating $ % $ Revenue Expenses $ Revenue Expenses Change Change Revenue $ 14,219.4 $ 13,872.5 $ 346.9 2.5 % Operating Expenses: Salary and service costs 10,380.7 73.0 % 83.6 % 10,250.6 73.9 % 84.0 % 130.1 1.3 % Office and general expenses 2,034.5 14.3 % 16.4 % 1,950.8 14.1 % 16.0 % 83.7 4.3 % Operating Expenses 12,415.2 87.3 % 12,201.4 88.0 % 213.8 1.8 % Operating Income $ 1,804.2 12.7 % $ 1,671.1 12.0 % $ 133.1 8.0 % Repositioning Actions and Remeasurement Gain: In the first quarter of 2011, we recorded $131.3 million of charges related to our repositioning actions.

Additionally, in the first quarter of 2011 we recorded a $123.4 million remeasurement gain related to the acquisition of the controlling interest in the Clemenger Group, our affiliate in Australia and New Zealand.

16 --------------------------------------------------------------------------------The impact on operating expenses of these transactions for the year ended December 31, 2011 was (in millions): Increase (Decrease) Repositioning Remeasurement Actions Gain Salary and service costs $ 92.8 Office and general expenses 38.5 $ (123.4 ) $ 131.3 $ (123.4 ) Operating Expenses: Salary and service costs tend to fluctuate in conjunction with changes in revenue. Salary and service costs increased 1.3% in 2012 compared to 2011. Salary and service costs for 2011 reflects $92.8 million of charges related to our repositioning actions. The increase in 2012 costs resulted from growth in our business, as well as increased use of freelance labor, partially offset by lower compensation costs, including incentive compensation primarily as a result of the repositioning actions taken in 2011 and tight controls restricting the frequency of salary increases. Excluding the $92.8 million of severance charges taken in 2011, salary and service costs as a percentage of revenue in 2012 would have been flat as compared to 2011.

Office and general expenses are less directly linked to changes in our revenue than salary and service costs. Office and general expenses increased 4.3% in 2012 compared to 2011. Office and general expenses for 2011 included a reduction of $84.9 million, which reflects the $123.4 million non-cash remeasurement gain recorded in connection with the acquisition of the controlling interest in the Clemenger Group and charges of $38.5 million related to our repositioning actions. Excluding the $84.9 million net decrease, office and general expenses in 2012 would have been flat as compared to 2011.

Operating margins increased to 12.7% in 2012 from 12.0% in 2011 and EBITA margins increased to 13.4% in 2012 from 12.7% in 2011. Excluding the $131.3 million attributable to our repositioning actions and the $123.4 million remeasurement gain, operating margin and EBITA margin for 2011 would have been 12.1% and 12.8%, respectively. The year-over-year margin improvement was driven by our revenue growth, as well as lower operating costs resulting from the actions taken in 2011 to improve our operations, rebalance our workforce and drive efficiencies in our back office functions.

Net Interest Expense: Net interest expense increased to $144.6 million in 2012, compared to $122.1 million in 2011. Interest expense increased $21.6 million to $179.7 million. The increase in interest expense is primarily attributable to increased interest expense resulting from the issuance of $750 million of our 3.625% Senior Notes due May 1, 2022, or the 2022 Notes, in April 2012 and $500 million of the 2022 Notes in August 2012. The total outstanding principal amount of the 2022 Notes is $1.25 billion. The 2022 Notes issued in August were issued at an issue price of 105.287% reflecting a yield to maturity of 2.99%. The increase in interest expense was partially offset by lower commercial paper issuances in 2012. Interest income increased $0.9 million to $35.1 million in 2012. See "Liquidity and Capital Resources" and "Quantitative and Qualitative Disclosures About Market Risk" for a discussion of our indebtedness and related matters.

Income Taxes: Our effective tax rate for 2012 decreased to 31.8%, compared to 32.7% for 2011. In the fourth quarter of 2012, income tax expense was reduced by $53 million, primarily resulting from a reduction in the deferred tax liabilities for unremitted foreign earnings of certain of our operating companies located in the Asia Pacific region, as well as lower statutory tax rates in other foreign jurisdictions. In an effort to support our continued expansion and pursue operational efficiencies in the Asia Pacific region, we completed a legal reorganization in certain countries within the region. As a result of the reorganization, our unremitted foreign earnings in the affected countries are subject to lower effective tax rates as compared to the U.S. statutory tax rate. Therefore we recorded a reduction in our deferred tax liabilities to reflect the lower tax rate that these earnings are subject to. In future periods we expect an ongoing annual reduction in income tax expense of approximately $11 million. The reduction in income tax expense was partially offset by a charge of approximately $16 million resulting from U.S. state and local tax accruals recorded for uncertain tax positions, net of U.S. federal income tax benefit. We expect our effective tax rate for 2013 to approximate 33.6%.

Income tax expense for 2011 reflects a number of items that were recorded in the first quarter of 2011. These items include a $39.5 million tax benefit related to charges incurred in connection with our repositioning actions, a provision of $2.8 million related to the remeasurement gain and a provision of $9.0 million for agreed upon adjustments to income tax returns that were under examination in 2011. Excluding these items, our effective tax rate for 2011 would have been 34.3%.

Income (Loss) From Equity Method Investments: In the fourth quarter of 2012, we determined, based on the financial condition and prospects of our equity investee in Egypt, that there was an other-than-temporary decline in its carrying value. As a result, we recorded a $29.2 million impairment charge to reduce the carrying value of the investment to fair value. Excluding the impairment charge, income from equity method investments decreased $3.0 million to $14.2 million in 2012 from $17.2 million 2011.

17 -------------------------------------------------------------------------------- Net Income Per Common Share - Omnicom Group Inc.: For the foregoing reasons, net income - Omnicom Group Inc. in 2012 increased $45.7 million, or 4.8%, to $998.3 million, compared to $952.6 million in 2011. Diluted net income per common share - Omnicom Group Inc. increased 8.4% to $3.61 in 2012, compared to $3.33 in 2011 due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding. This reduction was the result of repurchases of our common stock, net of stock option exercises and shares issued under our employee stock purchase plan.

Results of Operations - 2011 Compared to 2010 (In millions): 2011 2010 Revenue $ 13,872.5 $ 12,542.5 Operating Expenses: Salary and service costs 10,250.6 9,214.2 Office and general expenses 1,950.8 1,868.1 Total Operating Expenses 12,201.4 11,082.3 Add back: Amortization of intangible assets 91.4 70.8 12,110.0 11,011.5 Earnings before interest, taxes and amortization of intangible assets ("EBITA") 1,762.5 1,531.0 EBITA Margin - % 12.7 % 12.2 % Deduct: Amortization of intangible assets 91.4 70.8 Operating Income 1,671.1 1,460.2 Operating Margin - % 12.0 % 11.6 % Interest Expense 158.1 134.7 Interest Income 36.0 24.9Income Before Income Taxes and Income From Equity Method Investments.

1,549.0 1,350.4 Income Tax Expense 505.8 460.2 Income From Equity Method Investments 17.2 33.5 Net Income 1,060.4 923.7 Less: Net Income Attributed To Noncontrolling Interests 107.8 96.0 Net Income - Omnicom Group Inc. $ 952.6 $ 827.7 EBITA, which we define as earnings before interest, taxes and amortization of intangible assets, and EBITA Margin, which we define as EBITA divided by Revenue, are Non-GAAP measures. We use EBITA and EBITA Margin as additional operating performance measures, which exclude the non-cash amortization expense of acquired intangible assets. The table above reconciles EBITA and EBITA Margin to the U.S. GAAP financial measure of Operating Income for the periods presented. We believe that EBITA and EBITA Margin are useful measures to evaluate the performance of our businesses. 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.

Revenue: Revenue in 2011 increased 10.6% to $13,872.5 million from $12,542.5 million in 2010. Organic growth increased revenue by $770.6 million, acquisitions, net of dispositions, increased revenue by $236.0 million and changes in foreign exchange rates increased revenue by $323.4 million.

The components of 2011 revenue change in the United States ("Domestic") and the remainder of the world ("International") were (in millions): Total Domestic International $ % $ % $ % December 31, 2010 $ 12,542.5 $ 6,683.1 $ 5,859.4 Components of revenue change: Foreign exchange impact 323.4 2.6 % - - % 323.4 5.5 % Acquisitions, net of dispositions 236.0 1.9 % (21.9 ) (0.3 )% 257.9 4.4 % Organic growth 770.6 6.1 % 387.5 5.8 % 383.1 6.5 % December 31, 2011 $ 13,872.5 10.6 % $ 7,048.7 5.5 % $ 6,823.8 16.5 % 18--------------------------------------------------------------------------------The components and percentages are calculated as follows: • The foreign exchange impact is calculated by first converting the current period's local currency revenue using the average exchange rates from the equivalent prior period to arrive at a constant currency revenue (in this case $13,549.1 million for the Total column in the table). The foreign exchange impact equals the difference between the current period revenue in U.S. Dollars and the current period revenue in constant currency ($13,872.5 million less $13,549.1 million for the Total column in the table).

• The acquisition component is calculated by aggregating the applicable prior period revenue of the acquired businesses, less revenue of any business included in the prior period revenue that was disposed of subsequent to the prior period.

• Organic growth is calculated by subtracting both the foreign exchange and acquisition 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 ($12,542.5 million for the Total column in the table).

Revenue in 2011 and the percentage change in revenue and organic growth from 2010 in our primary geographic markets were (in millions): $ % Change % Organic Growth United States $ 7,048.7 5.5 % 5.8 % Euro Markets 2,579.5 4.9 % 0.5 % United Kingdom 1,227.0 12.5 % 7.9 % Rest of the world 3,017.3 30.7 % 12.3 % $ 13,872.5 10.6 % 6.1 % In 2011, changes in foreign exchange rates increased our revenue by 2.6%, or $323.4 million, compared to 2010. The most significant impacts resulted from the weakening of the U.S. Dollar against the Euro, Australian Dollar and British Pound.

Due to a variety of factors, in the normal course, our agencies both gain and lose business from clients each year. The net result in 2011 was an overall gain in new business. Under our client-centric approach, we seek to broaden our relationships with our largest clients. Revenue from our largest client represented 2.6% and 3.0% of our revenue in 2011 and 2010, respectively. No other client represented more than 2.1% of our revenue in 2011 or more than 2.4% of our revenue in 2010. Our ten largest and 100 largest clients represented 18.0% and 50.3% of 2011 revenue, respectively, and 18.0% and 50.6% of 2010 revenue, respectively.

Revenue for 2011 and 2010 and the percentage change in revenue and organic growth from 2010 by discipline was (in millions): Year Ended December 31, 2011 2010 2011 vs 2010 % of % of $ % $ Revenue $ Revenue Change Change % Organic Growth Advertising $ 6,464.9 46.6 % $ 5,738.9 45.8 % $ 726.0 12.7 % 7.6 % CRM 5,111.9 36.8 % 4,582.6 36.5 % 529.3 11.6 % 7.3 %Public relations 1,230.3 8.9 % 1,154.8 9.2 % 75.5 6.5 % 2.4 % Specialty communications 1,065.4 7.7 % 1,066.2 8.5 % (0.8 ) (0.1 )% (2.4 )% $ 13,872.5 $ 12,542.5 $ 1,330.0 10.6 % 6.1 % 19--------------------------------------------------------------------------------We operate in a number of industry sectors. The percentage of our revenue by industry sector for 2011 and 2010 was: Industry 2011 2010 Food and Beverage 13.6 % 13.6 % Consumer Products 9.3 % 9.8 % Pharmaceuticals and Health Care 10.1 % 10.9 % Financial Services 9.5 % 8.3 % Technology 8.7 % 8.7 % Auto 7.5 % 7.2 % Travel and Entertainment 5.9 % 6.0 % Telecommunications 7.1 % 7.1 % Retail 6.6 % 6.5 % Other 21.7 % 21.9 % Operating Expenses: Operating expenses for 2011 compared to 2010 were (in millions): Year Ended December 31, 2011 2010 2011 vs 2010 % of % of % Total % Total of Operating of Operating $ % $ Revenue Expenses $ Revenue Expenses Change Change Revenue $ 13,872.5 $ 12,542.5 $ 1,330.0 10.6 % Operating Expenses: Salary and service costs 10,250.6 73.9 % 84.0 % 9,214.2 73.5 % 83.1 % 1,036.4 11.2 % Office and general expenses 1,950.8 14.1 % 16.0 % 1,868.1 14.9 % 16.9 % 82.7 4.4 % Operating Expenses 12,201.4 88.0 % 11,082.3 88.4 % 1,119.1 10.1 % Operating Income $ 1,671.1 12.0 % $ 1,460.2 11.6 % $ 210.9 14.4 % Repositioning Actions and Remeasurement Gain: In the first quarter of 2011, we recorded $131.3 million of charges related to our repositioning actions.

Additionally, in the first quarter of 2011 we recorded a $123.4 million remeasurement gain related to the acquisition of the controlling interest in the Clemenger Group, our affiliate in Australia and New Zealand.

The impact on operating expenses of these transactions for the year ended December 31, 2011 was (in millions): Increase (Decrease) Repositioning Remeasurement Actions Gain Salary and service costs $ 92.8 Office and general expenses 38.5 $ (123.4 ) $ 131.3 $ (123.4 ) Operating Expenses: Salary and services costs tend to fluctuate in conjunction with changes in revenue. Salary and service costs increased 11.2% in 2011 compared to 2010. This increase reflects growth in our business, as well as increased compensation costs, including freelance labor and incentive compensation and an increase in severance of approximately $100 million to $201 million, including our repositioning actions in the first quarter of 2011. The increase in salary and service costs was partially offset by the associated cost savings from these head count reductions.

Office and general expenses are less directly linked to changes in our revenue than salary and service costs. Office and general expenses increased 4.4% in 2011 compared to 2010, reflecting a decrease of $123.4 million related to the non-cash remeasurement gain recorded in connection with the acquisition of the controlling interest in the Clemenger Group in the first quarter of 2011, partially offset by $38.5 million of charges related to our repositioning actions in the first quarter of 2011. Excluding the net decrease of $84.9 million related to the remeasurement gain and the charges for our repositioning actions, office and general expenses were $2,035.7 million in 2011, an increase of 9.0%.

20 -------------------------------------------------------------------------------- As a result of the above changes, operating margins increased to 12.0% in 2011 from 11.6% in 2010 and EBITA margins increased to 12.7% in 2011 from 12.2% in 2010.

Net Interest Expense: Net interest expense increased to $122.1 million in 2011, as compared to $109.8 million in 2010. Interest expense increased $23.4 million to $158.1 million. The increase in interest expense was primarily due to increased interest expense resulting from the issuance of our 4.45% Senior Notes due 2020 in August 2010, partially offset by a net reduction in interest expense resulting from the interest rate swaps on our 2016 Notes entered into in August 2010. The interest rate swaps were settled with the counterparties in August 2011 resulting in a deferred gain of $33.2 million that is being amortized over the remaining life of the 2016 Notes as a reduction of interest expense.

Interest income increased $11.1 million to $36.0 million in 2011. This increase in interest income was attributable to higher foreign cash balances available for investment.

Income Taxes: Our effective tax rate for 2011 decreased to 32.7%, compared to 34.1% in 2010. The decrease in the effective tax rate was caused by the following items recorded in the first quarter of 2011 (in millions): Increase (Decrease) Income Before Income Income Tax Taxes Expense Repositioning actions $ (131.3 ) $ (39.5 ) Remeasurement gain 123.4 2.8 Charge for uncertain tax positions - 9.0 $ (7.9 ) $ (27.7 ) The tax benefit on the repositioning actions was calculated based on the jurisdictions where the charges were incurred and reflects the likelihood that we will be unable to obtain a tax benefit for all charges incurred. The remeasurement gain resulting from the acquisition of the controlling interest in Clemenger created a difference between the book basis and tax basis of our investment. Because this basis difference is not expected to reverse, no deferred taxes were provided and the tax provision recorded represents the incremental U.S. tax on acquired historical unremitted earnings. The $9.0 million charge resulted from adjustments to U.S. income tax returns for calendar years 2005, 2006 and 2007, that were agreed upon and recorded in the first quarter of 2011. The examination of those returns is closed.

Net Income Per Common Share - Omnicom Group Inc.: For the foregoing reasons, net income - Omnicom Group Inc. in 2011 increased $124.9 million, or 15.1%, to $952.6 million compared to $827.7 million in 2010. Diluted net income per common share - Omnicom Group Inc. increased 23.3% to $3.33 in 2011, as compared to $2.70 in 2010 due to the factors described above, as well as the impact of the reduction in our weighted average common shares outstanding. This reduction was the result of repurchases of our common stock during the fourth quarter of 2010 through 2011, net of stock option exercises and shares issued under our employee stock purchase plan.

Liquidity and Capital Resources Cash Sources and Requirements, Including Contractual Obligations Historically, the majority of our non-discretionary cash requirements have been funded from operating cash flow and cash on hand. Working capital is our principal non-discretionary funding requirement. In addition, we have contractual obligations related to our senior notes and convertible notes, our recurring business operations, primarily related to lease obligations, as well as contingent purchase price obligations (earn-outs) related to acquisitions made in prior years.

Our principal discretionary cash uses include dividend payments, capital expenditures, payments for strategic acquisitions and repurchases of our common stock. In December 2012, we paid the fourth quarter dividend on our common stock that historically has been paid in January of the following year. Our discretionary spending is funded from operating cash flow and cash on hand. In addition, depending on the level of our discretionary activity and conditions in the capital markets, we may use other available sources of funding such as issuing commercial paper, borrowing under our Credit Agreement or other long-term borrowings to finance these activities. We expect that we should be able to fund both our non-discretionary cash requirements and our discretionary spending for 2013 without incurring additional long-term debt. However, we may access the capital markets at any time if favorable conditions exist. To take advantage of historically low borrowing rates, in April 2012, we issued $750 million aggregate principal amount of our 2022 Notes at an issue price of 99.567%. In August 2012, we issued an additional $500 million of our 2022 Notes at an issue price of 105.287% reflecting a yield to maturity of 2.99%. As a result of these issuances, we were able to reduce our total commercial paper issuances in 2012 by 39% compared to 2011, as well as increase our cash balances from December 31, 2011.

21 -------------------------------------------------------------------------------- We have a seasonal cash requirement normally peaking during the second quarter primarily due to the timing of payments for incentive compensation, income taxes and contingent purchase price obligations. This typically results in a net borrowing requirement that decreases over the course of the year.

At December 31, 2012, our cash and cash equivalents increased by $897.1 million from December 31, 2011. The components of the increase for 2012 are (in millions): Sources Cash flow from operations $ 1,451.3 Less change in working capital 25.2 Principal cash sources 1,426.1 Uses Capital expenditures $ (226.3 ) Dividends paid (397.8 )Dividends paid to shareholders of noncontrolling interests (98.4 ) Acquisition payments, including contingent purchase price obligations of $32.2 and acquisition of additional shares of noncontrolling interests of $32.0, net of cash acquired, less net proceeds from sale of investments of $8.6 (188.3 ) Repurchase of common stock of $1,136.5, net of proceeds from stock option exercises and stock sold to our employee stock purchase plan of $219.2 and tax benefits of $85.3 (832.0 ) Principal cash uses (1,742.8 ) Principal cash uses in excess of principal cash sources (316.7 ) Foreign exchange rate changes 16.3 Financing activities and other 1,172.3 Add back change in working capital 25.2 Increase in cash and cash equivalents $ 897.1 Principal Cash Sources and Principal Cash Uses amounts are Non-GAAP financial measures. These amounts exclude changes in working capital and other investing and financing activities, including commercial paper issuances and redemptions used to fund working capital changes. This presentation reflects the metrics used by us to assess our sources and uses of cash and was derived from our statement of cash flows. We believe that this presentation is meaningful for understanding the primary sources and primary uses of our cash flow. 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 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 financial statements.

Cash Management We manage our cash and liquidity centrally through our regional treasury centers in North America, Europe and Asia. The treasury centers are managed by our wholly-owned finance subsidiaries. Each day, operations with excess funds invest these funds with their regional treasury center. Likewise, operations that require funds borrow from their regional treasury center. The treasury centers aggregate the net position which is either invested with or borrowed from third parties. To the extent that our treasury centers require liquidity, they have the ability to access local currency uncommitted lines of credit, the Credit Agreement or issue up to a total of $1.5 billion of U.S. Dollar-denominated commercial paper. This process enables us to manage our debt balances more efficiently and utilize our cash more effectively, as well as better manage our risk to foreign exchange rate changes. 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 lines of credit.

Our cash and cash equivalents increased $897.1 million and our short-term investments decreased $3.2 million from December 31, 2011. Short-term investments principally consist of time deposits with financial institutions that we expect to convert into cash within our current operating cycle, generally one year.

22 -------------------------------------------------------------------------------- At December 31, 2012, our foreign subsidiaries held $2,021.1 million of our total cash and cash equivalents of $2,678.3 million. The majority of this cash is available to us, net of any taxes payable upon repatriation to the United States. Changes in international tax rules or changes in U.S. tax rules and regulations covering international operations and foreign tax credits may affect our future reported financial results or the way we conduct our business.

We have policies governing counterparty credit risk with financial institutions that hold our cash and cash equivalents. In countries where we conduct treasury operations, generally the counterparties are either branches or subsidiaries of institutions that are party to our Credit Agreement. These financial institutions generally have credit ratings equal to or better than our credit ratings. We have deposit limits for each of these institutions. In countries where we do not conduct treasury operations, we ensure that all cash is held by counterparties that meet specific minimum credit standards.

Our cash and cash equivalents and short-term investments increased $893.9 million from the prior year end, partially reflecting the issuance of $1.25 billion of our 2022 Notes. As a result, our net debt position, which we define as total debt outstanding less cash and cash equivalents and short-term investments, increased $368.3 million as compared to the prior year-end, as follows (in millions): 2012 2011 Debt: Short-term borrowings, due in less than one year $ 6.4 $ 9.5 5.90% Senior Notes due April 15, 2016 1,000.0 1,000.0 6.25% Senior Notes due July 15, 2019 500.0 500.0 4.45% Senior Notes due August 15, 2020 1,000.0 1,000.0 3.625% Senior Notes due May 1, 2022 1,250.0 - Convertible Notes due July 31, 2032 252.7 252.7 Convertible Notes due June 15, 2033 0.1 0.1 Convertible Notes due July 1, 2038 406.6 406.6 Other debt 0.4 1.3 Unamortized premium (discount) on Senior Notes, net 16.0 (7.6 ) Deferred gain from termination of interest rate swaps on Senior Notes due 2016 23.1 30.5 Total debt 4,455.3 3,193.1Cash and cash equivalents and short-term investments 2,698.9 1,805.0 Net debt $ 1,756.4 $ 1,388.1 Net Debt is a Non-GAAP financial measure. This presentation, together with the comparable U.S. GAAP measures, reflects one of the key metrics used by us to assess our cash management performance. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with US GAAP. Non-GAAP financial measures as reported by us may not be comparable to similarly titled amounts reported by other companies.

Debt Instruments and Related Covenants We have committed and uncommitted lines of credit. We have a $2.5 billion committed line of credit, or Credit Agreement, with a consortium of banks expiring on October 12, 2016. We have the ability to classify borrowings under the Credit Agreement as long-term. The Credit Agreement provides support for up to $1.5 billion of commercial paper issuances, as well as back-up liquidity in the event that any of our convertible notes are put back to us.

Depending on market conditions at the time, we typically fund our day-to-day liquidity by issuing commercial paper, borrowing under our uncommitted lines of credit or borrowing under our Credit Agreement. At December 31, 2012, there were no outstanding commercial paper issuances or borrowings under the Credit Agreement.

Commercial paper activity for the three years ended December 31, 2012 was (dollars in millions): 2012 2011 2010 Average amount outstanding during the year $ 288.5 $ 626.5 $ 406.5 Maximum amount outstanding during the year $ 837.2 $ 1,132.9 $ 1,050.6 Total issuances during the year $ 13,935.1 $ 22,843.9 $ 13,319.2 Average days outstanding 7.6 10.0 11.1 Weighted average interest rate 0.41 % 0.36 % 0.40 % 23-------------------------------------------------------------------------------- The reduction in commercial paper borrowings in 2012 as compared to 2011 is a result of the issuance of our 2022 Notes.

At December 31, 2012, short-term borrowings of $6.4 million represent bank overdrafts and lines of credit of our international subsidiaries. These bank overdrafts and lines of credit are treated as unsecured loans pursuant to the agreements supporting the facilities.

The Credit Agreement contains financial covenants that restrict our ability to incur indebtedness as defined in the agreement. These financial covenants limit the Leverage Ratio of total consolidated indebtedness to total consolidated EBITDA to no more than 3 times for the most recently ended 12-month period (under the Credit Agreement, EBITDA is defined as earnings before interest, taxes, depreciation and amortization). We are also required to maintain a minimum Interest Coverage Ratio of consolidated EBITDA to interest expense of at least 5 times for the most recently ended 12-month period. At December 31, 2012 we were in compliance with these covenants, as our Leverage Ratio was 2.1 times and our Interest Coverage Ratio was 11.6 times. The Credit Agreement does not limit our ability to declare or pay dividends.

S&P rates our long-term debt BBB+ and Moody's rates our long-term debt Baa1. Our short-term debt credit ratings are A2 and P2 by the respective rating agencies.

Our outstanding 5.90% Senior Notes due April 15, 2016, 6.25% Senior Notes due July 15, 2019, 4.45% Senior Notes due August 15, 2020 and 3.625% Senior Notes due May 1, 2022, collectively the Senior Notes, convertible notes and Credit Agreement do not contain provisions that require acceleration of cash payments should our debt credit ratings be downgraded. However, the interest rates and fees on the Credit Agreement will increase if our long-term debt credit ratings are lowered.

Omnicom Capital Inc., or OCI, our wholly-owned finance subsidiary, together with us, is a co-obligor under our Senior Notes and convertible notes. Our Senior Notes and convertible notes are a joint and several liability of us and OCI and we unconditionally guarantee OCI's obligations with respect to the Senior Notes and the convertible notes. OCI provides funding for our operations by incurring debt and lending the proceeds to our operating subsidiaries. OCI's assets consist of cash and cash equivalents and intercompany loans made to our operating subsidiaries and the related interest receivable. There are no restrictions on the ability of OCI or us to obtain funds from our subsidiaries through dividends, loans or advances. Our Senior Notes and convertible notes are senior unsecured obligations that rank in equal right of payment with all existing and future unsecured senior indebtedness.

At December 31, 2012, the carrying value of our debt and amounts available under the Credit Agreement were (in millions): Debt Available Credit Short-term borrowings, due in less than one year $ 6.4 $ - Outstanding Commercial Paper issuances - - Borrowings under the Credit Agreement - 2,500.0 5.90% Senior Notes due April 15, 2016 1,000.0 - 6.25% Senior Notes due July 15, 2019 500.0 - 4.45% Senior Notes due August 15, 2020 1,000.0 - 3.625% Senior Notes due May 1, 2022 1,250.0 - Convertible Notes due July 31, 2032 252.7 - Convertible Notes due June 15, 2033 0.1 - Convertible Notes due July 1, 2038 406.6 - Other debt 0.4 - 4,416.2 Unamortized premium (discount) on Senior Notes, net 16.0 - Deferred gain from termination of interest rate swaps on Senior Notes due 2016 23.1 - $ 4,455.3 $ 2,500.0 Credit Markets and Availability of Credit We will continue to take actions available to us to respond to changing economic conditions and actively manage our discretionary expenditures and we will continue to monitor and manage the level of credit made available to our clients. We believe that these actions, in addition to operating cash from and the availability of our Credit Agreement, are sufficient to fund our working capital needs and our discretionary spending.

In funding our day-to-day liquidity, we have historically been a participant in the commercial paper market. We expect to continue funding our day-to-day liquidity through the commercial paper market. However, prior disruptions in the credit markets led to periods of illiquidity in the commercial paper market and higher credit spreads. During these periods of 24 -------------------------------------------------------------------------------- disruption, we used our uncommitted lines of credit and borrowed under our Credit Agreement to mitigate these conditions and to fund our day-to-day liquidity. We will continue to closely monitor our liquidity and the credit markets. We cannot predict with any certainty the impact on us of any future disruptions in the credit markets.

On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put back to us for repurchase. If our convertible notes are put back to us, based on our current financial condition and expectations, we expect to have sufficient available cash and unused credit commitments to fund any repurchase. Although such borrowings would reduce the amount available under our Credit Agreement to fund our cash requirements, we believe that we have sufficient capacity under these commitments to meet our cash requirements for the normal course of our business operations after any repurchase.

Contractual Obligations and Other Commercial Commitments We enter into numerous contractual and commercial undertakings in the normal course of business. The following tables should be read in conjunction with our consolidated financial statements.

Contractual obligations at December 31, 2012 were (in millions): Obligation Due Total Obligation 2013 2014 - 2015 2016 - 2017 After 2017 Long-term notes payable: Principal $ 3,750.4 $ 0.4 $ - $ 1,000.0 $ 2,750.0 Interest 1,160.9 180.1 360.1 259.3 361.4 Convertible Notes 659.4 - - 659.4 - Lease obligations 1,642.5 416.2 542.1 321.9 362.3 Contingent purchase price obligations 266.2 83.2 135.1 43.6 4.3 Defined benefit pension plans 188.4 4.8 12.1 13.9 157.6 Postemployment arrangements 118.7 9.9 17.7 15.8 75.3 Uncertain tax positions 188.6 23.1 51.3 114.2 - $ 7,975.1 $ 717.7 $ 1,118.4 $ 2,428.1 $ 3,710.9 Contractual commitments at December 31, 2012 were (in millions): Commitment Expires Total Commitment 2013 2014 - 2015 2016 - 2017 After 2017 Standby letters of credit $ 6.5 $ 0.1 $ 3.5 $ 2.9 $ - Guarantees 98.7 63.5 20.7 9.3 5.2 $ 105.2 $ 63.6 $ 24.2 $ 12.2 $ 5.2 On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put back to us for repurchase. If these rights were exercised at the earliest possible future date $659.4 million of convertible notes could be due in 2013.

At December 31, 2012, we classified our convertible notes as long-term in our balance sheet because our Credit Agreement does not expire until October 2016 and it is our intention to fund any repurchase with the Credit Agreement.

Consistent with our acquisition strategy and past practice, certain of our acquisitions include an initial payment at closing and provide for future additional contingent purchase price payments (earn-outs). We use contingent purchase price structures in an effort to minimize the risk to us associated with potential future negative changes in the performance of the acquired business during the post-acquisition transition period. Contingent purchase price obligations are recorded as liabilities at the acquisition date fair value. Subsequent changes in the fair value of the liability are recorded in our results of operations.

The unfunded benefit obligation for our defined benefit pension plans and liability for our postemployment arrangements was $244.4 million at December 31, 2012. In 2012, we contributed $9.1 million to our defined benefit pension plans and paid $10.3 million in benefits for our postemployment arrangements. We do not expect these payments to increase significantly in 2013.

25 -------------------------------------------------------------------------------- The liability for uncertain tax positions is subject to uncertainty as to when or if the liability will be paid. We have assigned the liability to the periods presented based on our judgment as to when these liabilities will be resolved by the appropriate taxing authorities.

In the normal course of business, we often enter into contractual commitments with media providers and agreements with production companies on behalf of our clients at levels that can substantially exceed the revenue from our services.

Many of our agencies purchase media for our clients and act as an agent for a disclosed principal. These commitments are included in accounts payable when the media services are delivered by the media providers. While operating practices vary by country, media type and media vendor, in the United States and certain foreign markets, many of our contracts with media providers specify that if our client defaults on its payment obligation, then we are not liable to the media providers under the theory of sequential liability until we have been paid for the media by our client. In other countries, we manage our risk in other ways, including evaluating and monitoring our clients' creditworthiness and, in many cases, obtaining credit insurance or requiring payment in advance. Further, in cases where we are committed to a media purchase and it becomes apparent that a client may be unable to pay for the media, options are potentially available to us in the marketplace, in addition to those cited above to mitigate the potential loss, including negotiating with media providers. In addition, our agencies incur production costs on behalf of clients. We usually act as an agent for a disclosed principal in the procurement of these services. We manage the risk of payment default by the client by having the production companies be subject to sequential liability or requiring at least partial payment in advance from our client. However, the agreements entered into, as well as the production costs incurred, are unique to each client. We have not experienced a material loss related to media purchases or production costs incurred on behalf of our clients. However, the risk of a material loss could significantly increase in a severe economic downturn.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a global service business, we operate in multiple foreign currencies and issue debt in the capital markets. In the normal course of business, we are exposed to foreign currency fluctuations and the impact of interest rate changes. We limit these risks through risk management policies and procedures, including the use of derivatives. For foreign currency exposure, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations. For interest rate exposure, derivatives have been used to manage the related cost of debt.

As a result of using derivative instruments, we are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we have a policy of only entering into contracts with carefully selected major financial institutions based on specific minimum credit standards and other factors.

We evaluate the effects of changes in foreign currency exchange rates, interest rates and other relevant market risks on our derivative instruments. We periodically determine the potential loss from market risk on our derivative instruments by performing a value-at-risk analysis, or VaR. VaR is a statistical model that utilizes historical currency exchange and interest rate data to measure the potential impact on future earnings of our derivative financial instruments assuming normal market conditions. The VaR model is not intended to represent actual losses but is used as a risk estimation and management tool.

Based on the results of the model, we estimate with 95% confidence a maximum one-day loss in fair value on our derivative financial instruments at December 31, 2012 was not material.

Because we use foreign currency instruments for hedging purposes, the loss in fair value incurred on those instruments is generally offset by increases in the fair value of the underlying exposures.

Foreign Exchange Risk Our results of operations are subject to risk from the translation to U.S.

Dollars of the revenue and expenses of our foreign operations, which are generally denominated in their local currency. The effects of currency exchange rate fluctuation on the translation of our results of operations are discussed in Note 19 of our consolidated financial statements. For the most part, revenue and the expenses associated with that revenue are denominated in the same currency. This minimizes the impact of fluctuations in exchange rates on our results of operations.

While our major non-U.S. currency markets are the European Monetary Union, or the EMU, the United Kingdom, Australia, Brazil, Canada, China, and Japan, our agencies conduct business in more than 50 different currencies. As an integral part of our treasury operations, we centralize our cash and use multicurrency pool arrangements to manage the foreign exchange risk between subsidiaries and their respective treasury centers from which they borrow or invest funds.

In certain circumstances, instead of using a multicurrency pool, operations can borrow or invest on an intercompany basis with a treasury center operating in a different currency. To manage the foreign exchange risk associated with these transactions, we use forward foreign exchange contracts. At December 31, 2012, we had forward foreign exchange contracts outstanding with an aggregate notional amount of $181.5 million mitigating the foreign exchange risk of the intercompany borrowing and investment activities.

26 -------------------------------------------------------------------------------- Also, we use forward foreign exchange contracts to mitigate the foreign currency risk associated with activities when revenue and expenses are not denominated in the same currency. In these instances, amounts are promptly settled or hedged with forward contracts. At December 31, 2012, we had forward foreign exchange contracts outstanding with an aggregate notional amount of $63.6 million mitigating the foreign exchange risk of these activities.

By using these financial instruments, we reduced financial risk of adverse foreign exchange changes by foregoing any gain (reward) which might have occurred if the markets moved favorably.

Interest Rate Risk From time to time, we issue debt in the capital markets. In prior years we have used interest rate swaps to manage our overall interest cost. At December 31, 2012, there were no interest rate swaps outstanding.

On June 15, 2013, $406.6 million of our 2038 Notes may be put back to us for repurchase and on July 31, 2013, $252.7 million of our 2032 Notes may be put back to us for repurchase. As we have done on prior occasions, we may offer a supplemental interest payment or other incentives to the noteholders to induce them not to put their notes to us. If we decide to pay a supplemental interest payment, the amount offered would be based on a combination of market factors at the time of the put date, including the price of our common stock, short-term interest rates and a factor for credit risk.

If our convertible notes are put back to us, based on our current financial condition and expectations, we expect to have sufficient available cash and unused credit commitments to fund any repurchase. Although such borrowings would reduce the amount available under our Credit Agreement to fund our cash requirements, we believe that we have sufficient capacity under these commitments to meet our cash requirements for the normal course of operations after the repurchase. Additionally, if the convertible notes are put back to us, our interest expense will change. The extent, if any, of the increase or decrease in interest expense will depend on the portion of the amount repurchased that is refinanced, when we refinance, the type of instrument we use to refinance and the term of the refinancing.

Even if we were to replace the convertible notes with another form of debt on a dollar-for-dollar basis, it would have no impact on either our Leverage Ratio or our debt to capital ratio. If we were to replace our convertible notes with interest-bearing debt at prevailing rates, this may result in an increase in interest expense that would negatively impact our Interest Coverage Ratio.

However, the Leverage Ratio and Interest Coverage Ratio are currently well within the covenant thresholds. If either our Leverage Ratio was to increase 40% or our Interest Coverage Ratio was to halve, we would still be in compliance with these covenants. Therefore, based on our current ratios, our present expectations of our future operating cash flows and expected access to debt and equity capital markets, we believe any increase in the Interest Coverage Ratio and reduction in the Leverage Ratio would still place us comfortably above the covenant requirements.

Credit Risk We provide advertising, marketing and corporate communications services to several thousand clients who operate in nearly every industry sector of the global economy and in the normal course of business, we grant credit to qualified clients. Due to the diversified nature of our client base, we do not believe that we are exposed to a concentration of credit risk as our largest client accounted for 2.6% of our 2012 revenue and no other client accounted for more than 2.6% of our 2012 revenue. However, during periods of economic downturn, the credit profiles of our clients could change.

In the normal course of business, we often enter into contractual commitments with media providers and agreements with production companies on behalf of our clients at levels that can substantially exceed the revenue from our services.

Many of our agencies purchase media for our clients and act as an agent for a disclosed principal. These commitments are included in accounts payable when the media services are delivered by the media providers. While operating practices vary by country, media type and media vendor, in the United States and certain foreign markets, many of our contracts with media providers specify that if our client defaults on its payment obligation, then we are not liable to the media providers under the theory of sequential liability until we have been paid for the media by our client. In other countries, we manage our risk in other ways, including evaluating and monitoring our clients' creditworthiness and, in many cases, obtaining credit insurance or requiring payment in advance. Further, in cases where we are committed to a media purchase and it becomes apparent that a client may be unable to pay for the media, options are potentially available to us in the marketplace, in addition to those cited above to mitigate the potential loss, including negotiating with media providers. In addition, our agencies incur production costs on behalf of clients. We usually act as an agent for a disclosed principal in the procurement of these services. We manage the risk of payment default by the client by having the production companies be subject to sequential liability or requiring at least partial payment in advance from our client. However, the agreements entered into, as well as the production costs incurred, are unique to each client. We have not experienced a material loss related to media purchases or production costs incurred on behalf of our clients. However, the risk of a material loss could significantly increase in a severe economic downturn.

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