MDC Partners Inc. 2020 Form 10-K Summary
Business context and reporting period
The filing is MDC Partners Inc.’s annual report for the fiscal year ended December 31, 2020, filed March 16, 2021. Although the request identifies Stagwell Inc., the source filing is for MDC Partners Inc., the predecessor company that later combined with Stagwell-related entities. MDC operates a global network of marketing, advertising, media, data, communications and strategic consulting agencies across North America, Europe, Asia, South America and Australia.
The Company reported three segments: Integrated Networks—Group A, Integrated Networks—Group B, and Media & Data Network, plus All Other and Corporate. The Company employed 4,866 people at year-end. The fourth quarter is historically its strongest revenue period due to media placements and retail-related marketing activity.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,199.0 million | $1,415.8 million | Down 15.3% |
| Organic revenue change | Down $197.5 million, or 13.9% | Down 3.1% | Material deterioration |
| Operating income (loss) | $(45.8) million | $79.5 million | Declined $125.2 million |
| Adjusted EBITDA | $177.3 million | $174.2 million | Up $3.2 million |
| Net loss attributable to common shareholders | $(243.2) million | $(17.6) million | Loss widened |
| Diluted loss per share | $(3.34) | $(0.25) | Worsened |
| Cash flow from operations | $32.6 million | $86.5 million | Down $54.0 million |
| Capital expenditures | $37.3 million | $18.6 million | Up $18.7 million |
| Cash and cash equivalents | $60.8 million | $106.9 million | Down $46.2 million |
| Working capital | $(204.1) million | $(197.7) million | Deficit increased |
Revenue declined primarily because clients reduced marketing spending during the COVID-19 pandemic. U.S. revenue was $959.6 million, or 80.1% of total revenue; Canada contributed $81.9 million and other regions $157.4 million.
Adjusted EBITDA increased despite lower revenue because management reduced staff costs, hiring, discretionary spending, capital expenditures and other operating expenses. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP operating income or cash flow.
2020 operating results included $96.4 million of impairment and other losses, consisting principally of $61.7 million of goodwill impairment, $12.1 million of intangible asset impairment and $22.7 million of lease-related impairment and accelerated costs. The Company also recorded a $16.8 million gain on the sale of Sloane and a $7.4 million gain on repurchased debt.
Income tax expense was $116.6 million despite a pretax loss of $88.4 million. The principal driver was a $128.9 million increase in the valuation allowance against deferred tax assets, primarily U.S. deferred tax assets.
Debt, liquidity and commitments
- Senior Notes had principal outstanding of $870.3 million and carried a fixed 7.50% interest rate, with maturity in May 2024.
- Net debt carrying value was $843.2 million at December 31, 2020, compared with $887.6 million at December 31, 2019.
- The Company had no borrowings under its $211.5 million secured revolving credit facility and reported $192.8 million of availability at year-end. The facility was scheduled to mature February 3, 2022.
- Management stated that cash, operating cash flow and available revolver capacity were expected to fund operations and anticipated needs for the next twelve months.
- Contractual obligations totaled approximately $1.61 billion, including $870.3 million of indebtedness, $425.2 million of operating lease obligations, $227.2 million of interest on debt and $83.1 million of deferred acquisition consideration.
- The Company reported compliance with its debt covenants. Its reported total leverage ratio was 4.42 against a maximum of 6.25, fixed charges ratio was 2.52 against a minimum of 1.00, and covenant EBITDA was $190.1 million against a minimum of $120.0 million.
- The Company had a working capital deficit and remained dependent on operating cash flow, revolver availability and future refinancing or other financing transactions to meet longer-term obligations.
Material changes versus the prior comparable period
- Revenue fell 15.3%, with organic revenue down 13.9%, compared with a 3.1% organic decline in 2019.
- All major revenue categories declined: Group A decreased 3.2%, Group B decreased 18.1%, Media & Data decreased 13.9%, and All Other decreased 26.0%.
- Operating income changed from $79.5 million of income to a $45.8 million loss, primarily due to lower revenue and substantially higher impairment charges.
- Adjusted EBITDA increased modestly to $177.3 million from $174.2 million because cost reductions more than offset the revenue decline.
- Operating cash flow declined to $32.6 million from $86.5 million, reflecting pandemic-related impacts and unfavorable working capital movements.
- Cash declined to $60.8 million from $106.9 million, while debt declined primarily through a $29.7 million repurchase of Senior Notes for $22.0 million.
- Goodwill declined to $668.2 million from $731.7 million after $61.7 million of impairment and the disposition of Sloane-related goodwill.
- The Company increased its deferred tax valuation allowance to $198.5 million from $65.6 million.
- Capital expenditures increased to $37.3 million, primarily due to leasehold improvements for the new One World Trade Center headquarters and New York real estate consolidation.
Guidance, outlook, risks and unusual items
Management did not provide quantitative revenue or earnings guidance. It expected COVID-19 to continue negatively affecting revenue through at least the first half of 2021 and stated that cost reductions and liquidity actions positioned the Company to manage the anticipated impact.
On December 21, 2020, MDC announced a definitive agreement to combine with Stagwell Entities through a Delaware redomiciliation and Up-C structure. The proposed transaction contemplated Stagwell receiving approximately 74% of voting rights and existing MDC shareholders retaining approximately 26% of the combined company, before giving effect to outstanding preference shares. The transaction remained subject to shareholder, regulatory and other conditions.
The transaction introduced significant risks, including failure to close, transaction costs, litigation, tax liabilities, debt amendments, business disruption, employee retention issues and reduced ownership and voting influence for existing MDC shareholders. The Company estimated approximately $21 million of Canadian corporate tax related to the redomiciliation, but stated that the actual amount could be materially higher.
Other significant risks include continued client budget reductions, client defaults, loss of major clients or key employees, competitive pressure from global holding companies, consultancies and technology platforms, cybersecurity and data privacy obligations, foreign exchange exposure, future goodwill and lease impairments, contingent acquisition payments, redeemable noncontrolling interests and refinancing risk.
The filing disclosed three securities lawsuits relating to alleged omissions in the Form S-4 transaction materials. The Company also disclosed a $5.855 million potential termination fee payable to Stagwell in specified circumstances.
Management reported that a material weakness relating to income tax accounting identified in the prior year had been remediated. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2020. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- Confirm the status, final terms and closing effects of the MDC-Stagwell business combination, including ownership, voting rights, preference share treatment and any transaction-related dilution.
- Assess whether COVID-19-related client spending reductions persisted beyond the first half of 2021 and whether revenue returned to organic growth.
- Review the Company’s ability to refinance or repay the $870.3 million of Senior Notes due in 2024 and renew or replace the revolving facility due in 2022.
- Reconcile Adjusted EBITDA with GAAP operating results, particularly the $96.4 million of impairment and other losses and $42.2 million of deferred acquisition consideration adjustments.
- Evaluate the realizability of deferred tax assets after the $128.9 million valuation allowance increase.
- Monitor goodwill, intangible assets and lease assets for additional impairment, including the reporting unit with only 2% headroom in the 2020 impairment analysis.
- Quantify future cash requirements for deferred acquisition consideration, redeemable noncontrolling interests, lease obligations, pension funding and transaction costs.
- Review outstanding litigation, proposed transaction conditions, tax assessments and the potential impact of the Senior Notes consent amendments.