Business Context and Reporting Period
The provided filing is MDC Partners Inc.’s unaudited Form 10-Q for the three and six months ended June 30, 2017. The request identifies Stagwell Inc., but the filing itself identifies the registrant as MDC Partners Inc.; the filing does not refer to Stagwell Inc. MDC operates a network of marketing communications and advertising Partner Firms in the United States, Canada, and other international markets.
MDC revised its reportable segments following SEC feedback. Prior-period segment information was recast, but management stated that the change did not affect consolidated financial statements, cash flows, goodwill, or consolidated results.
Key Financial Metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $390.5 million | $337.0 million | $735.2 million | $646.1 million |
| Operating profit | $26.4 million | $24.1 million | $34.8 million | $32.6 million |
| Operating margin | 6.8% | 7.1% | 4.7% | 5.0% |
| Net income (loss) | $13.5 million | $2.1 million | $3.8 million | $(20.7) million |
| Net income (loss) attributable to MDC | $11.3 million | $0.8 million | $0.7 million | $(22.8) million |
| Net income (loss) per common share, diluted | $0.14 | $0.02 | $(0.03) | $(0.45) |
Six-month revenue increased 13.8%, including 8.7% organic revenue growth, 6.1% from non-GAAP acquisitions and dispositions, net, and a 1.1% negative foreign-exchange impact. Quarterly revenue increased 15.9%, including 11.7% organic growth.
- Six-month revenue growth was led by Global Integrated Agencies, up 22.5%, and Media Services, up 14.0%. Specialist Communications increased 2.5%, while Domestic Creative Agencies declined 1.8% and All Other increased 6.1%.
- Six-month Advertising and Communications Group operating profit declined to $53.0 million from $58.5 million, and its margin declined to 7.2% from 9.1%. Higher direct costs and deferred acquisition consideration adjustments offset revenue growth.
- Corporate operating expenses declined to $18.3 million from $25.9 million, primarily due to lower executive compensation and lower legal costs.
- Other income included foreign-exchange gains of $8.9 million for the six months and $6.4 million for the quarter. These gains materially benefited reported earnings.
- Interest expense and finance charges were $32.5 million for the six months, compared with $32.7 million in the prior-year period. The 2016 period also included a $33.3 million loss on redemption of notes.
- Cash provided by operating activities was $23.7 million, compared with cash used of $110.2 million in the prior-year period. Capital expenditures were $21.2 million, compared with $13.4 million.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $20.3 million at June 30, 2017, compared with $27.9 million at December 31, 2016. Approximately $5.5 million was held by subsidiaries and was not available for corporate debt reduction.
- Debt, net of issuance costs, was $909.4 million, down from $936.4 million at December 31, 2016. This consisted principally of $900.0 million of 6.50% senior unsecured notes due 2024 and $26.7 million drawn under the revolving credit agreement.
- The revolving credit facility had approximately $293.3 million of undrawn commitments, subject to borrowing conditions and covenants. Outstanding letters of credit totaled $5.0 million.
- Working capital remained negative at $(263.7) million, although this improved from $(313.2) million at year-end 2016. The company cited proceeds from convertible preferred shares, debt repayments, and deferred acquisition payments as key factors.
- Management stated that MDC was in compliance with its credit agreement and expected to remain compliant over the following twelve months. Reported trailing-twelve-month covenant metrics included a total leverage ratio of 4.7 versus a 5.5 maximum, a fixed charges ratio of 2.1 versus a 1.0 minimum, and EBITDA of $197.1 million versus a $105.0 million minimum.
Material Changes, Outlook, and Unusual Items
- MDC issued $95.0 million of Series 4 convertible preference shares in March 2017 and received approximately $90.2 million after fees and estimated expenses. The shares had a June 30, 2017 liquidation preference of $97.4 million and were convertible into approximately 9.7 million Class A common shares at that date.
- The company settled $28.7 million of deferred acquisition consideration through the issuance of 3.35 million Class A shares and paid $65.1 million of acquisition-related consideration in cash during the first six months.
- Deferred acquisition consideration totaled $169.7 million, including $159.5 million of contingent payments. The liability is sensitive to acquired-company performance, stock price, foreign exchange, and contractual valuation formulas.
- Potential payments relating to subsidiary noncontrolling-interest put rights were estimated at approximately $13.8 million based on trailing earnings assumptions, plus approximately $45.2 million payable only upon specified employment terminations or death. Actual amounts and timing may differ materially.
- The company recorded a $6.916 million increase to deferred tax liabilities as an out-of-period correction related to the application of ASC 740 and ASC 850-740. Management concluded the correction was not material to prior periods; 2016 income tax expense and accumulated deficit were revised.
- The company identified four new reportable segments: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, and Media Services, plus All Other and Corporate.
- Management cited client spending, client wins and losses, retention of key employees, acquisitions, economic conditions, seasonality, foreign exchange, and integration execution as important business factors. No formal revenue or earnings guidance is provided in the filing.
- A Canadian securities class action remained pending, with motions regarding the proposed class definition scheduled for the fourth quarter of 2017. A subsidiary also received a U.S. Department of Justice Antitrust Division subpoena concerning advertising-industry production practices and was cooperating with the investigation.
- The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. Management expected an acceleration in recognition of certain performance incentives but did not expect those incentives to be material to revenue.
Investor Verification Priorities
- Verify the issuer identity and corporate history because the supplied request names Stagwell Inc., while the filing names MDC Partners Inc.
- Assess the quality of revenue growth by separating organic growth, acquisitions, pass-through costs, and foreign-exchange effects.
- Monitor the deterioration in six-month operating margins, particularly at Global Integrated Agencies, and the impact of direct costs and deferred acquisition consideration adjustments.
- Reconcile reported earnings to cash generation, including the substantial working-capital movements and the reliance on advance billings, accrued media, and receivables collections.
- Review debt maturities, revolver availability, covenant headroom, variable-rate exposure, and the company’s ability to fund deferred acquisition and put-right obligations.
- Evaluate dilution from the convertible preference shares and shares issued to settle acquisition consideration.
- Follow the Canadian securities litigation, DOJ antitrust investigation, SEC comment process, and any resulting disclosure or control changes.
- Confirm the effect of the deferred-tax correction and future adoption of revenue, lease, cash-flow, and other accounting standards.