Business Context and Reporting Period
The filing is a Form 10-Q for MDC Partners Inc. and subsidiaries, not Stagwell Inc., for the quarter and nine months ended September 30, 2016. MDC operated a portfolio of marketing communications, advertising, media, public relations, strategic consulting, data, design and related firms. During the quarter, the company changed its operating and reportable segment structure; prior-period results were recast.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $349.3 million, up 6.3% | $995.3 million, up 2.9% |
| Operating profit (loss) | $(10.8) million, versus $23.6 million profit | $21.9 million, versus $73.3 million |
| Operating margin | (3.1%), versus 7.2% | 2.2%, versus 7.6% |
| Net loss attributable to MDC | $(33.5) million, or $(0.64) per share | $(55.7) million, or $(1.09) per share |
| Cash flow from operating activities | Not separately provided | $(58.9) million, versus $(10.5) million |
Quarterly revenue growth reflected $14.1 million of acquisition growth, $8.8 million of organic growth and a $2.0 million foreign-exchange headwind. Nine-month growth reflected $19.8 million of acquisition growth, $16.5 million of organic growth and an $8.2 million foreign-exchange headwind.
- Cash and cash equivalents were $21.7 million at September 30, 2016, compared with $61.5 million at December 31, 2015.
- Working capital deficit was $319.2 million, compared with $403.9 million at year-end 2015.
- Total debt, including capital lease obligations, was $951.4 million, compared with $728.9 million at December 31, 2015.
- Debt consisted primarily of $900.0 million of 6.50% senior notes due 2024 and $70.5 million drawn under a revolving credit facility.
- Management reported approximately $249.9 million of undrawn commitments and $170.6 million of availability under the credit agreement, after letters of credit.
- Capital expenditures were $19.7 million for the nine months, compared with $17.7 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Revenue increased, but profitability deteriorated substantially because of higher staff and administrative costs, deferred acquisition consideration adjustments, and a $29.6 million goodwill impairment charge.
- The nine-month operating margin fell to 2.2% from 7.6%. The Reportable segment margin declined to 8.3% from 13.3%, while the All Other segment moved to a 7.7% operating loss from a 10.2% profit margin.
- The company recorded a $33.3 million loss on redemption of its former 6.75% notes after issuing $900.0 million of 6.50% notes. Interest expense increased to $48.7 million from $42.7 million for the nine-month period.
- Operating cash flow worsened primarily because of a $94.9 million decrease in accounts payable, accruals and other liabilities, a $47.8 million increase in accounts receivable and a $16.9 million increase in prepaid and other current assets.
- MDC acquired Forsman & Bodenfors AB on July 1, 2016, for estimated consideration of $49.8 million, including 1.9 million Class A shares and deferred payments. The acquisition contributed $15.5 million of quarterly revenue but also contributed to reported net loss through deferred acquisition liability remeasurement and amortization.
- Goodwill declined to $868.5 million from $870.3 million at year-end after the impairment, an additional $0.8 million write-off related to the sale of Bryan Mills, acquisitions and foreign-currency changes.
- The company suspended its quarterly dividend on November 3, 2016, after the reporting date, to retain approximately $11 million per quarter and improve liquidity.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that it intended to maintain sufficient cash and borrowing capacity to fund operations for the next twelve months and believed, based on current projections, that it would remain in compliance with credit agreement covenants.
- Reported covenant metrics were within stated limits: total senior leverage ratio of 0.4 versus a maximum of 2.0; total leverage ratio of 4.8 versus a maximum of 5.5; fixed-charge ratio of 2.3 versus a minimum of 1.0; and covenant-defined EBITDA of $201.3 million versus a minimum of $105.0 million.
- Liquidity remains sensitive to negative operating cash flow, seasonal working-capital requirements, debt service, acquisition payments and potential exercises of subsidiary noncontrolling-interest put rights.
- Deferred acquisition consideration totaled $243.1 million at September 30, 2016. Redeemable noncontrolling interests totaled $60.2 million. Management estimated potential future payments of approximately $13.3 million under certain put rights, plus approximately $43.8 million payable only upon specified employment termination or death events; actual amounts may vary materially.
- The SEC investigation regarding historical executive expenses, compensation and related matters remained ongoing. Former CEO Miles Nadal had repaid $2.5 million of $10.6 million in prior cash bonus awards through September 30, 2016, with the remaining balance scheduled in installments through December 2017.
- A U.S. securities class action was dismissed with prejudice on September 30, 2016, but plaintiffs filed an appeal on November 2, 2016. A separate Ontario proposed class action remained pending.
- Key operating risks include client losses or spending reductions, retention of key personnel, economic conditions, foreign-currency volatility, acquisition integration, covenant compliance and access to liquidity.
- The company does not hedge foreign-currency exposure with derivatives. Management estimated that a one-cent change in relevant exchange rates could produce a $3.6 million impact to the financial statements.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for MDC Partners Inc., whereas the request identifies Stagwell Inc.
- Reconcile the company’s ability to fund operations and acquisition-related obligations given $21.7 million of cash, negative operating cash flow and a $319.2 million working-capital deficit.
- Review the credit agreement’s definitions of covenant EBITDA and leverage, including permitted adjustments and remaining revolver availability.
- Assess whether the $29.6 million goodwill impairment signals additional impairment risk, particularly in the experiential and other underperforming reporting units.
- Track the outcome of the SEC investigation and the Ontario litigation, as well as the appeal of the dismissed U.S. class action.
- Evaluate the effect of the dividend suspension, acquisition payments, deferred acquisition consideration and noncontrolling-interest put rights on shareholder returns and future liquidity.