MDC Partners Inc. 2019 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019. The filing is by MDC Partners Inc., not an entity identified as Stagwell Inc.; Stagwell Holdings became a strategic investor in March 2019.
Business Context
MDC operates a global network of advertising, marketing, media, public relations, digital, experiential and communications agencies across the United States, Canada and other international markets. Reportable segments are Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services and All Other.
Financial Performance
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Revenue | $362.1 million | $379.7 million | $690.9 million | $706.7 million |
| Operating income | $23.4 million | $30.8 million | $39.1 million | $16.1 million |
| Operating margin | 6.5% | 8.1% | 5.7% | 2.3% |
| Net income | $7.3 million | $6.0 million | $7.6 million | $(22.6) million |
| Net income attributable to MDC | $4.3 million | $3.4 million | $4.2 million | $(26.0) million |
| Net income attributable to common shareholders | $0.8 million | $1.1 million | $(1.4) million | $(30.1) million |
| Diluted earnings per share | $0.01 | $0.02 | $(0.02) | $(0.53) |
Q2 revenue declined 4.6%, while six-month revenue declined 2.2%. Q2 operating income decreased 24.0%, primarily because of lower revenue and $6.7 million of corporate severance expense. Six-month operating income improved substantially due to cost reductions, lower corporate expenses and the absence of a $2.3 million 2018 asset impairment charge.
Six-month segment operating income increased at Global Integrated Agencies to $24.5 million from $4.8 million, Domestic Creative Agencies to $14.2 million from $8.0 million, and Specialist Communications to $13.8 million from $9.9 million. Media Services remained loss-making at $(0.8) million, although this improved from $(1.7) million. All Other declined to $9.0 million from $22.4 million.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $27.3 million at June 30, 2019, compared with $30.9 million at December 31, 2018.
- Operating cash flow was negative $40.2 million for the first six months, improving from negative $61.7 million in the prior-year period. The principal pressure was unfavorable working capital, including media and supplier payments.
- Investing cash flow was positive $9.8 million, including $23.1 million of proceeds from the Kingsdale disposition, offset by $7.9 million of capital expenditures and $5.1 million of acquisition spending.
- Financing cash flow was positive $25.7 million, including $98.6 million of net proceeds from the issuance of common and convertible preference shares, partly offset by $40.6 million of net revolver repayments and $24.2 million of acquisition-related payments.
- Total debt, net of issuance costs, was $914.1 million, consisting principally of $900.0 million of 6.50% senior notes due 2024 and $27.5 million outstanding under the revolving facility.
- The $250.0 million revolving facility had $202.7 million of availability at June 30, 2019. The company reported compliance with its debt covenants, including a 4.91 total leverage ratio versus a 6.25 maximum.
- Working capital was negative $184.6 million, compared with negative $152.7 million at December 31, 2018. Management stated that cash, operating cash flow and available revolver capacity should be sufficient for anticipated needs, subject to business performance and market conditions.
Material Changes Versus Prior Comparable Period
- Revenue declined because of client losses, reduced client spending, foreign-exchange effects and the disposition of a business. Six-month organic revenue declined 1.7%; Q2 organic revenue declined 2.4%.
- Foreign exchange was a $2.9 million gain in Q2 and an $8.4 million gain for six months, compared with losses of $6.5 million and $13.2 million, respectively, in the prior-year periods.
- Staff reductions and administrative savings improved operating profitability, but Q2 margins were pressured by lower revenue and corporate severance costs.
- The company sold Kingsdale on March 8, 2019 for aggregate consideration of approximately $50 million and recognized an approximately $3 million loss.
- MDC acquired the remaining 35% interest in Hunter for $9.6 million, including deferred consideration.
- On March 14, 2019, Stagwell Holdings purchased 14.3 million Class A shares and 50,000 Series 6 convertible preference shares for aggregate contractual consideration of $100 million. Net proceeds were approximately $98.6 million and were used primarily to repay debt and for general corporate purposes.
- Mark Penn, manager of Stagwell, became CEO and a director in March 2019 and Chairman in April 2019.
- The company adopted ASC 842 lease accounting, recognizing a $254.2 million right-of-use asset and a $299.2 million lease liability at adoption. The adoption materially affected the balance sheet but not the other financial statements.
Outlook, Risks and Unusual Items
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects liquidity to be adequate for the foreseeable future but notes dependence on operating performance, revolver availability, refinancing or additional financing, and compliance with debt covenants.
- Key risks include economic weakness, reductions in client marketing budgets, client concentration and retention, competition for new business, retention of key personnel, foreign-currency fluctuations and acquisition integration.
- Agencies enter into media and production commitments on behalf of clients that can exceed reported service revenue, exposing MDC to client receivable and collection risk.
- Deferred acquisition consideration totaled $58.2 million at June 30, 2019. Redeemable noncontrolling interests totaled $42.6 million, with potential future payments dependent on business performance, employment conditions and exercise timing.
- Operating lease liabilities totaled $279.5 million, and the filing identifies approximately $6 million of additional future lease obligations not yet recognized on the balance sheet.
- The company had $743.6 million of goodwill and $60.8 million of other intangible assets. No impairment was recorded during the periods presented, but future impairment charges remain a risk.
- The company reported no material litigation changes and no material changes to the risk factors in its 2018 Form 10-K.
Most Important Facts for Investors to Verify
- Confirm the issuer and corporate relationship: the filing is for MDC Partners Inc.; Stagwell Holdings is an investor and related strategic party.
- Assess whether revenue declines and negative organic growth stabilize, particularly in the United States and Canada.
- Monitor cash conversion, the negative working-capital position and continued reliance on revolver availability.
- Review the maturity and refinancing risk of the $900 million senior notes due 2024 and ongoing covenant compliance.
- Evaluate the dilution and economic priority associated with the 145,000 convertible preference shares, including the Series 6 shares issued to Stagwell.
- Track deferred acquisition payments, redeemable noncontrolling interests and potential cash requirements through 2024 and beyond.
- Determine whether cost reductions and improved segment margins can offset client losses, reduced spending and corporate restructuring costs.