Stagwell Inc quarterly report, Q2 FY2016

SEC Filing Summary

Filing: Form 10-Q for the quarter ended June 30, 2016. The supplied filing identifies the registrant as MDC Partners Inc., not Stagwell Inc.; investors should verify the issuer and corporate name history.

Business Context and Reporting Period

MDC operated a network of marketing communications, advertising, public relations, strategic consulting, digital, media and related Partner Firms. It reported one Advertising and Communications segment plus a Corporate Group. Results are presented under U.S. GAAP for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.

Management described the business as seasonal, with historically higher revenue in the fourth quarter. Revenue performance depends on client spending, client wins and losses, employee retention, acquisitions, economic conditions and foreign exchange.

Financial Performance and Position

Metric	Q2 2016	Q2 2015	Six Months 2016	Six Months 2015
Revenue	$337.0 million	$336.6 million	$646.1 million	$638.8 million
Operating profit	$24.1 million	$44.5 million	$32.6 million	$49.7 million
Income/(loss) from continuing operations	$2.4 million	$31.1 million	$(20.0) million	$7.7 million
Net income/(loss) attributable to MDC	$1.2 million	$29.6 million	$(22.1) million	$(2.5) million
Diluted EPS attributable to MDC	$0.02	$0.59	$(0.44)	$(0.05)

Q2 Advertising and Communications operating margin declined to 10.9% from 16.2%. The six-month segment margin declined to 9.1% from 12.6%. Consolidated operating margin was approximately 7.1% in Q2 and 5.0% for the six months; the filing does not identify these consolidated margins as reported measures.

Q2 revenue increased 0.1%, comprising $1.9 million of acquisition growth and $1.0 million of organic growth, offset by a $2.5 million foreign-exchange impact.
Six-month revenue increased 1.1%, comprising $7.7 million of organic growth and $5.7 million of acquisition growth, offset by a $6.2 million foreign-exchange impact.
Q2 cost of services sold increased to $228.8 million from $225.0 million; office and general expenses increased to $72.7 million from $53.1 million.
For six months, staff costs increased $14.6 million and deferred acquisition consideration shifted from $10.5 million of income in 2015 to $6.0 million of expense in 2016.
Cash and cash equivalents were $16.1 million at June 30, 2016, compared with $61.5 million at December 31, 2015.
Working capital deficit was $268.2 million at June 30, 2016, improved from $403.9 million at year-end 2015.
Goodwill was $876.6 million and other intangible assets were $61.4 million at June 30, 2016. Total shareholders’ deficit was $522.7 million.

Cash Flow, Debt and Liquidity

Six-month operating cash flow was an outflow of $138.5 million, compared with $69.5 million of cash provided by continuing operations in 2015. The 2016 outflow was principally driven by decreases in accounts payable, accruals and other liabilities, higher receivables and the timing of media-related payments.
Investing cash flow was an outflow of $16.8 million, including $13.4 million of capital expenditures and $2.2 million for acquisitions, net of cash acquired.
Financing cash flow was $109.7 million provided, primarily reflecting issuance of $900.0 million of 6.50% senior notes and borrowings under the revolving credit agreement, partially offset by redemption of the former notes, acquisition-related payments, dividends and financing costs.
Debt was approximately $987.7 million at June 30, 2016, compared with $728.9 million at December 31, 2015. This included $900.0 million of 6.50% senior notes due 2024 and $107.4 million drawn under the revolving credit agreement.
The 6.50% notes replaced the 6.75% notes due 2020. MDC recorded a $33.3 million loss on redemption, including write-offs of unamortized financing costs and original issue premium.
The revolving credit facility was amended to extend its maturity to May 3, 2021. Approximately $213.0 million of commitments were undrawn at June 30, 2016, and $4.6 million of letters of credit were outstanding.
Management stated that the company was in compliance with its credit agreement and expected to remain compliant over the next twelve months. Reported covenant measures included total leverage of 5.0x versus a 5.5x maximum, fixed-charge coverage of 2.4x versus a 1.0x minimum, and EBITDA of $201.9 million versus a $105.0 million minimum.

Material Changes Versus the Prior Comparable Period

Revenue was broadly flat in Q2 and increased modestly for the six months, but profitability deteriorated substantially because of higher staff and administrative costs, acquisition-related adjustments and higher interest expense.
Six-month net loss attributable to MDC increased to $22.1 million from $2.5 million, primarily due to lower operating profit and the $33.3 million note-redemption loss.
Foreign-exchange results improved by $29.2 million year over year for the six months, changing from a $13.7 million expense to $15.5 million of income; this improvement partly offset operating and financing pressures.
Outside North America generated 19.6% organic revenue growth for the six months, while total revenue from outside North America rose to 9.1% from 7.9%.
MDC acquired the remaining 40% of Luntz Global Partners in April 2016 and completed other non-material ownership transactions. No material new acquisition was completed during the first six months.
On July 1, 2016, after quarter-end, MDC acquired Forsman & Bodenfors AB for 1.9 million Class A shares plus contingent deferred consideration.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal revenue or earnings guidance. Management stated its intention to maintain sufficient cash and available revolver capacity to fund operations for the next twelve months and to finance contingent acquisition obligations through operating cash flow, borrowings and, if necessary, additional debt or equity.

Management cited new client wins and international expansion as growth drivers, offset by client losses, spending shifts, weaker North American performance in certain areas and reduced billable pass-through costs.
Deferred acquisition consideration totaled approximately $232.0 million at June 30, 2016, including $229.8 million of contingent payments. The ultimate amount may vary materially with subsidiary earnings, growth rates, exchange rates and contract amendments.
Put rights and similar obligations related to noncontrolling interests were estimated at approximately $15.4 million if all applicable rights were exercised, plus approximately $47.1 million payable only upon certain employment terminations or death. These estimates are highly dependent on future performance and timing.
An SEC investigation remained ongoing concerning executive expenses, goodwill and accounting practices, and trading-related information. The company continued to cooperate with the SEC.
Related U.S. and Canadian class-action litigation remained pending. The company had filed a motion to dismiss the U.S. action and stated that it intended to defend both matters vigorously.
The filing identifies risks from client concentration and retention, employee retention, economic conditions, acquisitions, debt covenant compliance, liquidity, contingent acquisition obligations and foreign-exchange volatility.
The company does not hedge foreign-exchange exposure with derivatives. Management estimated that a one-cent change in relevant exchange rates could produce a $3.6 million impact on the financial statements.
Disclosure controls and procedures were assessed as effective as of June 30, 2016, with no material changes in internal control over financial reporting reported during the six months.

Important Facts for Investors to Verify

Confirm whether this MDC Partners filing is the intended filing for Stagwell Inc. and reconcile any subsequent merger, renaming or successor-company reporting.
Assess the sustainability of liquidity given $16.1 million of cash, a $268.2 million working capital deficit and $138.5 million of six-month operating cash outflow.
Review debt maturity, interest-rate exposure, covenant headroom and the effect of the $900 million refinancing on future interest expense.
Evaluate whether staff-cost growth, corporate expenses and acquisition-related obligations can be brought into line with revenue growth.
Monitor the SEC investigation and related securities litigation for potential penalties, settlements, restatements or additional legal costs.
Validate the assumptions underlying deferred acquisition consideration, redeemable noncontrolling interests and goodwill valuations.
Review the financial impact and integration risks of the post-quarter-end Forsman & Bodenfors acquisition.