Stagwell Inc. 10-Q Summary — Second Quarter 2022
Business Context and Reporting Period
Stagwell provides marketing, media, digital transformation, communications, data and creative services through its Integrated Agencies Network, Media Network and Communications Network. This report covers the three and six months ended June 30, 2022 and was filed August 5, 2022.
Comparability with 2021 is limited. The August 2, 2021 combination of MDC Partners and Stagwell Marketing was accounted for as a reverse acquisition. The 2021 periods primarily reflect Stagwell Marketing, while 2022 includes the combined business for the full period.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $672.9 million | $209.6 million | $1,315.8 million | $390.8 million |
| Operating income | $48.3 million | $24.4 million | $103.0 million | $30.4 million |
| Operating margin | 7.2% | 11.7% | 7.8% | 7.8% |
| Adjusted EBITDA | $111.3 million | $38.7 million | $212.7 million | $62.6 million |
| Adjusted EBITDA margin | 16.5% | 18.5% | 16.2% | 16.0% |
| Net income | $24.5 million | $18.7 million | $58.1 million | $23.3 million |
| Net income attributable to common shareholders | $10.5 million | $17.3 million | $23.1 million | $21.7 million |
| Diluted EPS | $0.08 | Not applicable | $0.18 | Not applicable |
Organic net revenue increased 37.1% in the second quarter and 46.1% in the first six months, excluding foreign exchange and acquisition or disposition effects. Reported growth was primarily driven by the MDC combination and the acquisitions of Brand New Galaxy and GoodStuff, as well as higher spending by existing and new clients.
- Second-quarter revenue by segment: Integrated Agencies Network $378.2 million, Media Network $194.3 million, Communications Network $97.8 million and All Other $2.7 million.
- Six-month operating expenses included $63.4 million of depreciation and amortization, $21.2 million of stock-based compensation, $15.4 million of deferred acquisition consideration expense and $2.8 million of impairment and other losses.
- Interest expense increased to $18.2 million in the second quarter and $36.9 million for the six months, primarily because of higher debt following the MDC transaction.
- Foreign currency translation produced other comprehensive losses of $23.8 million in the quarter and $29.2 million for the six months.
Cash Flow, Debt and Liquidity
- Operating cash flow was negative $107.3 million for the six months, compared with positive $39.2 million in the prior-year period. Management attributed the change primarily to unfavorable working-capital timing, including media supplier payments.
- Investing cash flow was negative $54.9 million, including $38.3 million for acquisitions and $14.5 million of capital expenditures.
- Financing cash flow was positive $65.2 million, primarily reflecting $187.5 million of net revolving-credit borrowings, offset by deferred acquisition payments, distributions to noncontrolling interests, stock repurchases and share withholding transactions.
- Cash and cash equivalents were $93.4 million at June 30, 2022, down from $184.0 million at December 31, 2021.
- Long-term debt, net of issuance costs, was $1.382 billion, consisting of $1.100 billion of 5.625% senior notes due 2029 and $298.0 million drawn under the revolving credit facility.
- The $500.0 million revolving facility had $177.6 million of availability after outstanding borrowings and $24.4 million of undrawn letters of credit.
- The reported total leverage ratio was 3.27 versus a covenant maximum of 4.50. The company stated that it was in compliance with all debt covenants.
- Deferred acquisition consideration totaled approximately $196.5 million at June 30, 2022, and redeemable noncontrolling interests were $49.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue and Adjusted EBITDA increased substantially, largely because 2022 includes the combined MDC business and the effects of additional acquisitions. Organic growth was also strong across the principal networks.
- Operating income increased, but second-quarter operating margin declined to approximately 7.2% from 11.7%, reflecting higher amortization, stock-based compensation, deferred acquisition consideration, corporate costs and other expenses.
- Net income attributable to common shareholders declined in the second quarter despite higher consolidated net income, primarily because noncontrolling and redeemable noncontrolling interests increased to $14.1 million from $1.3 million.
- Interest expense rose materially following the increase in debt associated with the MDC combination.
- Working capital consumed significant cash, with accounts receivable increasing to $782.9 million from $696.9 million at year-end 2021.
- The company repurchased approximately 2.0 million Class A shares for $14.8 million during the six months under a $125.0 million authorization; $110.1 million remained available at June 30.
- Second-quarter reportable segment results were recast after management reclassified several brands from the Integrated Agencies Network to the Media Network.
Guidance, Outlook, Commentary and Risks
The filing does not provide explicit quantitative revenue, earnings or margin guidance. Management expects to maintain sufficient cash and available borrowing capacity to fund operations for the next twelve months and believes operating cash flow, cash on hand and revolver availability will meet anticipated needs. Future liquidity requirements include deferred acquisition payments, purchases of noncontrolling interests, lease obligations, capital expenditures, debt service and potential Tax Receivables Agreement payments.
Management cited increased client spending, new-business wins, election-year advocacy activity, recovery in travel-related business and acquisitions as key growth drivers. The company expects the July 2022 acquisitions of PEP Group and Apollo to expand content production and artificial-intelligence-enabled data and insights capabilities.
- Material weaknesses in internal control over financial reporting remained unresolved. Disclosure controls and procedures were determined not to be effective as of June 30, 2022.
- Management’s remediation plan, including finance transformation, new systems, third-party consultants and additional staff, was expected to continue through the first quarter of 2023, followed by a period of testing.
- Key risks include economic weakness and reduced client marketing budgets, client concentration and financial health, employee retention, acquisition integration, debt covenant compliance, contingent acquisition obligations, foreign exchange, cybersecurity, geopolitical conflict, COVID-19 effects and potential impairment of goodwill or intangible assets.
- Management stated that COVID-19 and the Russia-Ukraine conflict were not expected to have a material adverse effect, but adverse impacts beyond current expectations could affect operations and liquidity.
- Litigation was described as occurring in the ordinary course, with no current expectation of a material adverse effect.
Important Facts for Investors to Verify
- Assess the comparability of 2022 results with 2021 because of the reverse acquisition and the inclusion of MDC results.
- Track conversion of strong organic revenue and Adjusted EBITDA growth into operating cash flow, particularly accounts receivable and media-related working capital.
- Review leverage, variable-rate borrowing costs, revolver availability and compliance with the 4.50 maximum total leverage ratio.
- Evaluate the scale and timing of deferred acquisition consideration, redeemable noncontrolling interests and Tax Receivables Agreement payments.
- Monitor whether operating margins recover as integration, corporate, amortization, stock-based compensation and acquisition-related costs evolve.
- Follow remediation of the material weaknesses and the effectiveness of internal controls after new finance systems and processes are implemented.
- Review the performance and integration of BNG, TMA Direct, PEP Group, Apollo and other acquired businesses, including contingent consideration exposure.