Stagwell Inc. (formerly MDC Partners Inc.) — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2021, and primarily reflects MDC Partners Inc. before the Stagwell combination. Stagwell Inc. became the successor SEC registrant on August 2, 2021, following the closing of the Up-C combination with Stagwell Media LP and its marketing services businesses. The shares began trading on Nasdaq under the ticker STGW on August 3, 2021.
The company provides global marketing, advertising, communications, activation, media, data and strategic consulting services through its Partner Firms. Management attributed the year-over-year improvement principally to recovery from the COVID-19-related decline in the second quarter of 2020.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $345.6 million | $259.7 million | $653.2 million | $587.4 million |
| Revenue growth | 33.1% | — | 11.2% | — |
| Organic revenue growth | 31.3% | — | 10.0% | — |
| Operating income | $32.6 million | $0.1 million | $60.3 million | $29.4 million |
| Operating margin | 9.4% | 0.04% | 9.2% | 5.0% |
| Adjusted EBITDA | $60.3 million | $36.2 million | $112.2 million | $75.7 million |
| Adjusted EBITDA margin | 17.4% | 13.9% | 17.2% | 12.9% |
| Net income | $14.3 million | $2.5 million | $23.8 million | $4.3 million |
| Net income attributable to common shareholders | $1.7 million | $(4.1) million | $2.6 million | $(6.5) million |
| Diluted earnings per share | $0.02 | $(0.06) | $0.03 | $(0.09) |
Q2 revenue increased $85.9 million, including $81.3 million of organic growth and $4.6 million of favorable foreign exchange. Six-month revenue increased $65.8 million, including $58.7 million of organic growth, $9.2 million of favorable foreign exchange and a $2.1 million unfavorable disposition effect.
Operating income and Adjusted EBITDA benefited from higher client spending and the absence of the $18.8 million of impairment and other losses recorded in Q2 2020. Six-month 2021 impairment and other losses were $0.9 million, compared with $19.0 million in the prior-year period. Adjusted EBITDA is a non-GAAP measure and is not directly comparable across companies.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $108.3 million at June 30, 2021, compared with $60.8 million at December 31, 2020.
- Operating cash flow was $10.4 million for the six months ended June 30, 2021, compared with $(33.7) million in the prior-year period.
- Investing cash flow was $(9.6) million, including $15.4 million of capital expenditures, principally related to the new headquarters, partly offset by $7.1 million of proceeds from a prior asset sale.
- Financing cash flow was $46.9 million, primarily reflecting net borrowings under the revolving credit facility, offset by acquisition-related payments and distributions to noncontrolling interests.
- Debt, net of issuance costs, was $935.1 million at June 30, 2021, compared with $843.2 million at December 31, 2020. It consisted of $870.3 million of 7.50% senior notes and $88.6 million outstanding under the revolving facility, net of debt issuance costs.
- The $211.5 million revolving facility had $103.4 million of availability at June 30, 2021, and $19.5 million of undrawn letters of credit.
- The company reported compliance with its debt covenants. Trailing-twelve-month covenant measures included a total leverage ratio of 4.14 versus a maximum of 5.50 and fixed charges ratio of 2.44 versus a minimum of 1.00.
- Total assets were $1.59 billion and total shareholders’ deficit was $407.7 million at June 30, 2021. Goodwill was $671.5 million.
Material changes versus the prior comparable period
- Revenue increased 33.1% in Q2 and 11.2% for the six-month period, primarily reflecting recovery in client spending following the pandemic-related contraction.
- Integrated Networks–Group A, Integrated Networks–Group B and Media & Data Network all reported higher Q2 revenue and Adjusted EBITDA. All Other revenue declined 7.1% for the six-month period, mainly because experiential marketing remained affected by COVID-19.
- Q2 operating income improved by $32.5 million, while six-month operating income increased by $30.9 million.
- Interest expense increased to $19.5 million in Q2 and $38.6 million for the six-month period, primarily due to a 1% increase in the senior note interest rate and amortization of consent fees related to the combination.
- Corporate Adjusted EBITDA declined to $(8.6) million in Q2 and $(16.2) million for the six-month period, reflecting higher staff, employee health benefit and headquarters-related depreciation costs.
- The company acquired the remaining 40% interest in Gale for approximately $20.0 million, consisting of $7.7 million settled with company stock and $11.4 million of deferred payments.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management stated that it expected cash from operations, existing cash and available revolver capacity to meet anticipated needs for the next twelve months, while noting that future performance and refinancing capacity remain subject to economic and competitive conditions.
- On July 26, 2021, the company announced redemption of the $870 million senior notes for approximately $904 million, including a $14 million premium and approximately $20 million of accrued interest. The redemption was scheduled for August 20, 2021.
- On August 2, 2021, the company repaid and terminated its revolving credit facility in connection with the transaction closing and planned refinancing of the combined company’s liquidity position.
- Amendments to preference share terms reduced the accretion rate on the base liquidation preference to zero percent per annum for a specified period after closing, subject to the amended agreements.
- COVID-19 remains a material uncertainty affecting client spending, economic conditions, operations and estimates. Other principal risks include client concentration and spending reductions, employee retention, acquisition integration, debt covenant compliance, contingent acquisition payments, tax consequences of the combination, foreign exchange and goodwill impairment.
- Deferred acquisition consideration totaled $67.7 million at June 30, 2021. Redeemable noncontrolling interests were $24.6 million, with potential payment timing dependent on contractual conditions and business performance.
- The company had six operating leases not yet commenced, representing approximately $38.2 million of aggregate future liability not recorded on the balance sheet at June 30, 2021.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect.
Most important facts for investors to verify
- Confirm the post-closing capital structure, refinancing terms and debt outstanding after the August 2021 transaction and senior note redemption.
- Assess whether the strong Q2 organic growth was sustained after the favorable pandemic-recovery comparison period.
- Reconcile Adjusted EBITDA to GAAP operating income and evaluate the recurring nature of acquisition-related, stock-based compensation, restructuring and other adjustments.
- Review cash conversion, working-capital requirements and the funding of deferred acquisition consideration and redeemable noncontrolling interests.
- Evaluate the effect of the transaction on preference share accretion, common-share dilution and Stagwell’s approximately 70% voting interest.
- Monitor COVID-19 effects, client marketing budgets, experiential marketing recovery, foreign exchange exposure and goodwill impairment risk.