Business Context and Reporting Period
MDC Partners Inc. (now associated with the Stagwell combination) filed this unaudited Form 10-Q for the three months ended March 31, 2021. The company provides global marketing, advertising, communications, activation, media, data and strategic consulting services through its Partner Firms. Results are presented under U.S. GAAP and remain affected by COVID-19.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $307.6 million | $327.7 million | Down 6.2%; organic revenue down 6.9% |
| Operating income | $27.7 million | $29.3 million | Down $1.7 million |
| Adjusted EBITDA | $51.9 million | $39.6 million | Up $12.4 million |
| Net income | $9.5 million | $1.8 million | Up $7.7 million |
| Net income attributable to common shareholders | $0.9 million | $(2.4) million | Returned to profitability |
| Diluted earnings per share | $0.01 | $(0.03) | Improved |
| Cash flow from operations | $47.1 million | $(20.0) million | Improved $67.0 million |
| Capital expenditures | $13.4 million | $1.5 million | Increase primarily related to headquarters |
| Cash and equivalents at March 31 | $113.3 million | $221.1 million | Lower year over year; up from $60.8 million at December 31, 2020 |
| Debt, net of issuance costs | $864.9 million | Not clearly provided for the comparable date | Up $21.7 million from December 31, 2020 |
Revenue margin, measured as operating income divided by revenue, was approximately 9.0% in Q1 2021 versus approximately 8.9% in Q1 2020. Adjusted EBITDA margin increased to approximately 16.9% from 12.1%.
- Senior Notes had $870.3 million of principal outstanding and bear interest at 7.50%, maturing May 1, 2024.
- The secured revolving credit facility has $211.5 million of capacity, with $20.0 million drawn and $172.3 million available at March 31, 2021.
- The company reported compliance with its debt covenants. The trailing-twelve-month total leverage ratio was 4.10 versus a 5.50 maximum, and fixed charges ratio was 2.81 versus a 1.00 minimum.
- Current liabilities were $715.9 million, including $52.2 million of current deferred acquisition consideration and $41.2 million of current operating lease liabilities.
- Shareholders' deficit was $405.6 million at March 31, 2021.
Material Changes Versus the Prior Comparable Period
- Organic revenue declined $22.6 million, or 6.9%, primarily because clients reduced spending in response to COVID-19. Foreign exchange provided a $4.6 million benefit, while dispositions reduced revenue by $2.1 million.
- Revenue increased in Integrated Networks–Group A by 13.0%, but declined in Group B by 5.6%, Media & Data Network by 10.4%, and All Other by 26.9%.
- Adjusted EBITDA increased despite lower revenue because of cost reductions, including lower staff, direct and administrative costs in several segments.
- Interest expense increased $3.5 million to $19.1 million, primarily due to a 1% increase in the Senior Notes interest rate and amortization of consent fees related to the proposed Stagwell transaction.
- Other income fell to $0.6 million from $16.3 million, principally because Q1 2020 included a $16.8 million gain on the sale of a Partner Firm.
- Foreign exchange changed from a $14.8 million loss in Q1 2020 to a $2.1 million gain in Q1 2021.
- The effective tax rate declined to 11.5% from 88.3%, primarily because minimal tax expense was recognized on U.S. earnings subject to a valuation allowance.
- Cash from operations improved substantially because of earnings and favorable working-capital changes. Capital expenditures increased to $13.4 million, primarily for the new One World Trade Center headquarters.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that existing cash, operating cash flow and available revolver capacity are expected to meet anticipated cash needs for the next twelve months, subject to business and economic conditions.
- The proposed combination with Stagwell Entities and the redomiciliation of MDC to Delaware remained pending. The shareholder meeting was scheduled for June 22, 2021. Risks include failure to satisfy closing conditions, transaction costs, tax consequences, debt impacts and integration challenges.
- On April 26, 2021, after the quarter-end, the company acquired the remaining 40% of Gale Partners for approximately $20.0 million, including approximately $12.0 million of deferred consideration due in 2022 and 2023, and issued 2.1 million Class A shares.
- Deferred acquisition consideration totaled $93.4 million at March 31, 2021. Fair-value adjustments generated an $11.7 million expense in Q1 2021, compared with a $4.6 million benefit in Q1 2020.
- The company recorded $0.9 million of impairment and other losses related to right-of-use lease assets. No goodwill or intangible-asset impairment was recorded.
- Five operating leases had not commenced and were therefore excluded from the balance sheet; aggregate future obligations were approximately $34.0 million.
- Key risks include COVID-19 and client spending, client concentration and creditworthiness, employee retention, foreign exchange, debt covenant compliance, refinancing needs, deferred acquisition obligations, redeemable noncontrolling interests and goodwill impairment.
- Management reported no material changes to the risk factors in the 2020 Form 10-K, no material adverse legal proceedings, and effective disclosure controls as of March 31, 2021.
Investor Verification Priorities
- Verify completion, terms, consideration, dilution and accounting treatment of the MDC-Stagwell business combination and Delaware redomiciliation.
- Assess whether organic revenue has recovered from the 6.9% Q1 decline and whether client spending remains affected by COVID-19.
- Reconcile Adjusted EBITDA growth with GAAP operating income, particularly the $11.7 million deferred acquisition adjustment and other non-GAAP items.
- Review the maturity and refinancing risk of the $870.3 million Senior Notes due in 2024 and the revolving facility due in February 2022.
- Monitor cash conversion, working-capital requirements, headquarters capital spending and available revolver capacity.
- Evaluate potential cash requirements for deferred acquisition consideration, redeemable noncontrolling interests, leases and the Gale Partners acquisition.
- Consider the effects of convertible preference shares, including $4.1 million of Q1 accretion and potential future dilution of common shareholders.