MDC Partners Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The filing is for MDC Partners Inc., not Stagwell Inc.; it identifies Stagwell Media LP as a party to a proposed business combination. Figures are in thousands of U.S. dollars unless otherwise stated.
Business Context
MDC Partners provides global advertising, marketing, communications, activation, media, data and strategic consulting services through partner agencies in the United States, Canada and other international markets. In 2020, the Company reorganized its management structure and revised its reportable segments to Integrated Networks—Groups A and B, Media & Data Network, and All Other.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $283.4 million | $342.9 million | $870.8 million | $1,033.8 million |
| Operating income | $28.9 million | $29.4 million | $58.3 million | $68.5 million |
| Adjusted EBITDA | $54.1 million | $49.2 million | $129.8 million | $117.1 million |
| Net income | $14.8 million | $5.5 million | $19.1 million | $13.2 million |
| Net income attributable to common shareholders | $0.4 million | $(5.1) million | $(6.0) million | $(6.5) million |
| Diluted EPS | $0.00 | $(0.07) | $(0.08) | $(0.10) |
- Q3 revenue declined 17.3%; organic revenue declined 16.4%, primarily because of COVID-19-related reductions in client spending.
- Nine-month revenue declined 15.8%; organic revenue declined 14.1%. Foreign exchange reduced nine-month revenue by approximately $3.8 million.
- Q3 operating margin was approximately 10.2%, compared with 8.6% in the prior-year quarter. Nine-month operating margin was approximately 6.7%, compared with 6.6%.
- Adjusted EBITDA increased despite lower revenue because of staff reductions, expense controls and lower discretionary spending. Adjusted EBITDA margin increased to approximately 19.1% in Q3 from 14.3% and to 14.9% for nine months from 11.3%.
- Cash flow from operations was negative $2.5 million for the first nine months, compared with negative $5.8 million in 2019. Investing cash flow was positive $4.5 million, including $19.6 million from the Sloane disposition. Capital expenditures were $11.5 million on the cash flow statement and $27.9 million on the segment disclosure basis, primarily reflecting headquarters leasehold improvements.
- Cash and cash equivalents were $37.1 million at September 30, 2020, down from $106.9 million at December 31, 2019.
- Debt, net of issuance costs, was $860.4 million, consisting primarily of 6.50% senior notes due 2024. The Company repurchased $29.7 million principal amount of notes for $22.0 million and recognized a $7.4 million extinguishment gain.
- No revolving credit facility borrowings were outstanding; approximately $192.9 million was available under the $211.5 million facility. The Company reported compliance with its debt covenants.
- Total shareholders’ deficit was $170.3 million at September 30, 2020. Goodwill was $710.0 million, including approximately $130.8 million associated with a reporting unit whose fair value exceeded carrying value by only a minimal percentage.
Material Changes Versus the Prior Comparable Period
- Revenue was materially lower across all major segments. Q3 declines were 12.3% in Integrated Networks—Group A, 13.1% in Group B, 7.3% in Media & Data, and 35.4% in All Other.
- Q3 operating income was broadly stable because cost reductions offset much of the revenue decline. Nine-month operating income decreased 14.9%.
- Q3 and nine-month Adjusted EBITDA improved, primarily due to cost containment; however, nine-month operating income included $19.2 million of impairment and other losses, versus $1.9 million in the prior period.
- The nine-month impairment charge included $13.4 million of goodwill impairment and $5.8 million of right-of-use asset and related losses.
- Other income improved by $27.3 million year over year for the nine months, primarily from a $16.8 million gain on the sale of Sloane and the gain on repurchase of senior notes. These items are unusual and nonrecurring in nature.
- The Company sold substantially all assets and certain liabilities of Sloane to a Stagwell affiliate for consideration of approximately $26.7 million, including contingent deferred payments.
- Corporate costs increased because of restructuring-related professional fees, occupancy costs for the new One World Trade Center headquarters and higher stock-based compensation.
Outlook, Risks and Unusual Items
- Management stated that COVID-19 negatively affected operations, financial position and cash flows. Actions included hiring freezes, staff reductions, furloughs, salary and benefit reductions, lower discretionary spending and tighter capital expenditure controls.
- Management expected cash from operations, existing cash and revolver availability to fund anticipated needs for the next twelve months, but noted that future performance and economic conditions affect its ability to fund debt service, deferred acquisition payments, contingent obligations and capital expenditures.
- A non-binding agreement in principle was reached in October 2020 regarding a potential business combination with Stagwell Media LP. The transaction remained subject to due diligence, definitive documentation and third-party consents, and no assurance was provided that it would close or on what terms.
- The Company withdrew its proposed U.S. domestication registration statement and expected the matter to be considered with the potential Stagwell transaction.
- Convertible preference shares had an aggregate balance of $152.7 million and reduced earnings available to common shareholders through accretion and allocation. Their aggregate liquidation preference was approximately $182.5 million at September 30, 2020, based on the Series 4 and Series 6 disclosures.
- Deferred acquisition consideration was $46.1 million at September 30, 2020. Redeemable noncontrolling interests were $25.2 million, with potential funding obligations dependent on future performance and exercise timing.
- The Company deferred an estimated $16.0 million of employer Social Security payroll taxes under the CARES Act, payable in equal installments in 2021 and 2022.
- Three operating leases with aggregate future obligations of approximately $12.7 million had not commenced and were not recorded on the balance sheet.
- Disclosure controls and procedures were deemed ineffective because of an unremediated material weakness in internal control over financial reporting related to income-tax accounting.
Investor Verification Items
- Verify that the filing entity is MDC Partners Inc. and reconcile the request’s Stagwell Inc. company designation.
- Monitor the status, final terms, required consents and potential closing of the Stagwell business combination.
- Assess whether COVID-19-related revenue pressure and client budget reductions persist and whether cost reductions are sustainable.
- Review liquidity against the $860.4 million debt balance, 2024 note maturity, revolver covenant thresholds and contingent acquisition obligations.
- Evaluate the sensitivity of the $710.0 million goodwill balance, particularly the reporting unit with minimal fair-value headroom.
- Track remediation of the income-tax internal-control material weakness and any resulting financial-reporting adjustments.
- Separate recurring operating performance from the Sloane sale gain, debt-repurchase gain and impairment-related adjustments when assessing earnings quality.