MDC Partners Inc. Form 10-Q Summary
Entity note: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the quarter and six months ended June 30, 2018. The financial statements are unaudited and presented under U.S. GAAP; amounts are in U.S. dollars unless otherwise stated.
Business Context and Reporting Period
MDC operated a global network of advertising, marketing, media, public relations and communications agencies through four reportable segments—Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications and Media Services—plus All Other and Corporate. The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior periods were not recast for revenue recognition.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $379.7 million | $390.5 million | $706.7 million | $735.2 million |
| Operating profit | $30.8 million | $26.4 million | $16.1 million | $34.8 million |
| Operating margin | 8.1% | 6.8% | 2.3% | 4.7% |
| Net income (loss) | $6.0 million | $13.5 million | $(22.6) million | $3.8 million |
| Net income (loss) attributable to common shareholders | $1.1 million | $8.0 million | $(30.1) million | $(1.7) million |
| Basic and diluted EPS | $0.02 | $0.14 | $(0.53) | $(0.03) |
Q2 operating profit benefited from the accounting presentation under ASC 606. Excluding ASC 606, Q2 2018 revenue would have been approximately $389.5 million and operating profit approximately $21.7 million, compared with $390.5 million and $26.4 million, respectively, in Q2 2017. For the six-month period, revenue excluding ASC 606 would have been approximately $737.7 million and operating profit approximately $13.2 million.
Cash Flow and Liquidity
- Cash used in operating activities was $61.7 million for the six months ended June 30, 2018, compared with $0.7 million used in the prior-year period. The outflow reflected working-capital requirements, supplier and media payments, and acquisition-related contingent consideration.
- Cash used in investing activities was $36.1 million, including $27.3 million for the Instrument acquisition and $9.7 million of capital expenditures.
- Cash provided by financing activities was $76.3 million, primarily from net borrowings under the revolving credit facility.
- Cash and cash equivalents were $25.0 million at June 30, 2018, including $47.9 million of cash held in trusts that was available against related trust liabilities but was not distributable to MDC for debt reduction.
- Working capital was negative $177.0 million, improved from negative $232.9 million at December 31, 2017.
Debt and Balance Sheet
- Total debt, net of issuance costs, was approximately $1.0 billion at June 30, 2018, up from $883.1 million at December 31, 2017.
- Debt consisted primarily of $900.0 million of 6.50% senior unsecured notes due 2024 and $115.2 million drawn under a $325 million revolving credit facility due 2021.
- Approximately $121.9 million remained available under the revolving facility; $5.2 million of letters of credit were outstanding.
- Shareholders’ deficit was $153.3 million, and redeemable noncontrolling interests were $55.7 million.
- The company reported compliance with its debt covenants. The total leverage ratio was 5.4 against a maximum of 5.5, indicating limited covenant headroom.
Material Changes Versus Prior Comparable Period
- Q2 revenue declined 2.8%; the reported decrease included a $9.7 million reduction from ASC 606, a $5.6 million disposition impact and a $10.1 million decline from existing agencies, partly offset by $11.1 million of acquired revenue and $3.1 million of favorable foreign exchange.
- Six-month revenue declined 3.9%; ASC 606 reduced reported revenue by $31.0 million. Existing agencies declined $6.8 million, while acquisitions contributed $11.1 million and foreign exchange contributed $8.6 million.
- Reported Q2 operating profit increased $4.4 million, but would have declined by approximately $4.7 million excluding ASC 606. Six-month operating profit declined $18.6 million, including a $2.3 million long-lived asset impairment charge and higher corporate expenses.
- Foreign exchange materially reduced earnings: other expense was $6.0 million in Q2 and $12.2 million for the six months, compared with other income of $6.6 million and $9.2 million, respectively, in the prior-year periods.
- Media Services deteriorated to an operating loss of $1.2 million in Q2 and $1.0 million for the six months, compared with operating profits of $4.0 million and $6.6 million, respectively.
- Global Integrated Agencies revenue declined 12.7% in Q2 and 14.3% for the six months. Six-month operating profit fell to $3.5 million from $13.2 million.
- All Other revenue increased 35.2% in Q2 and 29.1% for the six months, supported by experiential and healthcare activity and the Instrument acquisition.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance in the supplied filing. It stated that existing cash, operating cash flow and revolver availability were expected to fund anticipated needs for the foreseeable future.
- Management identified client spending reductions and delays, slower new-business conversion, client concentration and retention, employee retention, economic conditions, acquisitions, foreign exchange and seasonality as important operating factors.
- The DOJ Antitrust Division investigation into production bidding practices at a subsidiary remained ongoing. MDC was cooperating and discussing a potential settlement, but disclosed that timing, terms and potential monetary sanctions were uncertain.
- Noncontrolling shareholder put rights and deferred acquisition consideration create contingent obligations. Management estimated approximately $13.3 million of potential future payments for certain put rights and an additional $37.0 million payable only upon specified employment termination or death conditions.
- The company acquired 51% of Instrument LLC for an estimated $35.6 million, consisting of $28.6 million in cash and $7.0 million in MDC shares.
- The company recognized a $2.3 million impairment charge during the six months and noted that certain reporting units had only minimal excess fair value over carrying value in the second-quarter goodwill review.
- ASC 606 increased opening accumulated deficit by $1.2 million and materially affected reported revenue, costs and segment margins. Future lease accounting under ASC 842 was expected to significantly increase reported assets and liabilities, although the full impact had not yet been determined.
Investor Verification Items
- Confirm the issuer identity: the supplied document identifies MDC Partners Inc., while the request identifies Stagwell Inc.
- Reconcile reported results with ASC 606-adjusted results when comparing 2018 with 2017.
- Monitor liquidity, operating cash flow and the limited headroom under the total leverage covenant.
- Assess whether weakness in Global Integrated Agencies and Media Services is temporary or reflects sustained client spending and new-business pressure.
- Review the status and potential financial exposure of the DOJ investigation.
- Verify future cash requirements for deferred acquisition consideration, noncontrolling-interest put rights, debt maturities and interest expense.
- Evaluate goodwill and other asset impairment risk, particularly for reporting units with minimal valuation cushion.