MDC Partners Inc. (now associated with Stagwell) — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing is MDC Partners Inc.’s unaudited quarterly report for the three months ended March 31, 2019. The company operated a global network of advertising, marketing, media, public relations and communications agencies across the United States, Canada and other international markets. The filing reports MDC Partners rather than an entity named “Stagwell Inc.”
Reportable segments were Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services and All Other. Prior-year segment results were recast for changes in the company’s internal reporting structure.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $328.8 million | $327.0 million |
| Operating income (loss) | $15.7 million | $(14.6) million |
| Operating margin | 4.8% | (4.5)% |
| Net income (loss) | $0.3 million | $(28.5) million |
| Net loss attributable to MDC Partners | $(0.1) million | $(29.4) million |
| Net loss attributable to common shareholders | $(2.5) million | $(31.4) million |
| Diluted loss per common share | $(0.04) | $(0.56) |
| Cash used in operating activities | $(81.2) million | $(61.0) million |
| Capital expenditures | $3.6 million | $3.8 million |
Revenue increased 0.6% year over year. Organic revenue declined 0.9%, including a 2.1% decline from agencies owned throughout both periods; acquisitions contributed 3.0% and foreign exchange reduced revenue by 1.6%.
Gross operating expense reductions, lower staffing costs, lower depreciation and amortization, favorable adjustments to deferred acquisition consideration and lower corporate expenses drove the operating turnaround. Interest expense increased to $16.8 million from $16.1 million. A $5.4 million foreign-exchange gain compared with a $6.7 million loss in the prior-year quarter also benefited pretax results.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $26.4 million at March 31, 2019, compared with $30.9 million at December 31, 2018.
- Working capital deficit was $160.8 million, compared with $152.7 million at year-end 2018.
- Total debt, net of issuance costs, was $919.1 million, consisting primarily of $900.0 million of 6.50% senior notes due 2024 and $32.8 million outstanding under the revolving facility.
- The amended revolving credit facility had $250.0 million of commitments and approximately $201.3 million of availability at quarter-end. The facility matures May 3, 2021.
- The March 2019 credit amendment increased the permitted total leverage ratio through December 31, 2020 from 5.5:1.0 to 6.25:1.0 and reduced revolving commitments from $325.0 million to $250.0 million.
- The company reported compliance with its debt covenants. The March 31, 2019 total leverage ratio was 5.05 versus a 6.25 maximum; fixed charges ratio was 2.38 versus a 1.00 minimum.
- Operating lease adoption under ASC 842 added substantial balance-sheet obligations, including $246.6 million of right-of-use assets and $292.7 million of operating lease liabilities at March 31, 2019.
Material changes versus the prior comparable period
- Operating income improved by $30.3 million, changing from a $14.6 million loss to $15.7 million of income.
- Advertising and Communications Group operating profit improved to $20.5 million from a $0.6 million loss, primarily due to lower staffing and other operating costs.
- Global Integrated Agencies returned to profitability, with operating income of $3.8 million versus a $13.6 million loss.
- Domestic Creative Agencies operating income rose to $5.5 million from $2.9 million, and Specialist Communications operating income rose to $7.1 million from $3.7 million.
- Media Services revenue declined 18.3% to $20.2 million and its operating loss widened to $1.8 million from $0.02 million.
- Corporate expenses declined to $4.8 million from $14.1 million, including the absence of a $2.3 million prior-year impairment charge and a 2019 reversal of certain stock-based compensation expense.
- Operating cash flow deteriorated by $20.2 million, primarily because of unfavorable working-capital movements and media and supplier payments.
- On March 8, 2019, MDC sold Kingsdale for cash and assumed liabilities totaling approximately $50 million, recognizing an approximately $3 million loss.
- On March 14, 2019, Stagwell Holdings purchased $50 million of Class A shares and $50 million of Series 6 convertible preference shares. Net proceeds were approximately $97.6 million and were used primarily to reduce revolving debt and for general corporate purposes.
Guidance, outlook, commentary and risks
The filing does not provide quantified revenue, earnings or cash-flow guidance. Management stated that existing cash, expected operating cash flow and available revolver capacity should be sufficient for anticipated needs for the foreseeable future, but emphasized dependence on future operating performance, economic conditions and continued access to financing.
Management cited client losses, reduced client spending, staffing actions, foreign-exchange movements and seasonality in media buying as important operating factors. The company expects working capital needs to fluctuate based on the timing of client collections and payments to media and other suppliers.
- Key risks include economic downturns, reductions in client marketing budgets, client retention and new-business performance, employee retention, foreign-currency volatility and acquisition integration.
- The company has significant leverage, a working-capital deficit and substantial fixed interest and lease obligations.
- Deferred acquisition consideration totaled $76.4 million at March 31, 2019. Redeemable noncontrolling interests totaled $48.0 million, with future payment timing and amounts dependent on contractual conditions and subsidiary performance.
- Goodwill was $742.8 million and other intangible assets were $64.9 million; impairment could materially affect future results if operating performance weakens.
- Subsequent to quarter-end, CEO Mark Penn was appointed chairman. The company also disclosed planned departures of its CFO and general counsel, with aggregate disclosed cash severance payments of $3.2 million, excluding other benefits.
- The company stated that it was not aware of legal proceedings expected to have a material adverse effect, but it remains exposed to client receivable collection risk and contractual commitments made on behalf of clients.
Investor verification priorities
- Confirm the registrant and corporate relationship between MDC Partners Inc., Stagwell Holdings and the requested “Stagwell Inc.” designation.
- Evaluate whether the Q1 operating improvement is sustainable or primarily reflects cost reductions, favorable deferred acquisition adjustments, lower corporate costs and foreign-exchange gains.
- Monitor organic revenue trends, especially client losses and spending declines in the United States and Canada and continued weakness in Media Services.
- Reconcile operating cash-flow usage with reported profitability and track working-capital requirements during subsequent quarters.
- Review debt covenant headroom, revolver availability, the 2024 senior notes and the company’s ability to fund deferred acquisition and redeemable noncontrolling-interest obligations.
- Assess the effect of the Stagwell equity and preference-share issuance, including conversion rights, 8% preference accretion and potential common-share dilution.
- Follow leadership transitions, severance costs and any strategic changes under Mark Penn and Stagwell’s influence.