MDC Partners Inc. 2018 Form 10-K Summary
Filing identity: The provided filing is for MDC Partners Inc., not Stagwell Inc. Stagwell appears as a subsequent-event investor and strategic partner. The report covers the fiscal year ended December 31, 2018; fourth-quarter information is included in the annual filing but is not the primary reporting period.
Business Context and Reporting Period
MDC was a Canada-domiciled global marketing, advertising, media, communications and strategic consulting company operating through independently managed Partner Firms. Reportable segments were Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services and All Other, plus Corporate.
The company had approximately 6,024 employees and no individual client represented 5% or more of revenue. Its ten largest clients represented 23% of 2018 revenue. The business is seasonal, with the fourth quarter historically producing the highest revenue.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1.476 billion | $1.514 billion | Down 2.5% |
| Operating income | $9.7 million | $132.0 million | Down 92.7% |
| Operating margin | Approximately 0.7% | Approximately 8.7% | Down approximately 8.0 percentage points |
| Net income (loss) | $(111.9) million | $257.2 million | Material deterioration |
| Net income (loss) attributable to MDC | $(123.7) million | $241.8 million | Material deterioration |
| Net income (loss) attributable to common shareholders | $(132.1) million | $205.6 million | Material deterioration |
| Diluted loss per share | $(2.31) | $3.71 | Changed from profit to loss |
| Cash provided by operating activities | $17.3 million | $71.8 million | Down $54.5 million |
| Capital expenditures | $20.3 million | $33.0 million | Down $12.7 million |
| Cash and cash equivalents | $30.9 million | $46.2 million | Down $15.3 million |
| Total debt, net of issuance costs | $954.6 million | $883.1 million | Up $71.5 million |
2018 interest expense was $67.1 million, compared with $64.4 million in 2017. The company recorded a $23.3 million foreign-exchange loss, versus an $18.1 million gain in 2017. The balance sheet reported a working-capital deficit of $152.7 million and shareholders’ deficit of $247.0 million.
Operating cash flow was reduced by working-capital requirements, media and supplier payments, and acquisition-related contingent consideration payments. Investing cash outflows were $50.4 million, including $32.7 million for acquisitions and $20.3 million of capital expenditures. Financing cash inflows were $21.4 million, primarily from $68.1 million of net revolving-credit borrowings.
Material Changes Versus the Prior Comparable Period
- Revenue declined $37.6 million, or 2.5%. Excluding the adoption of ASC 606, management reported adjusted revenue of approximately $1.528 billion and a $1.0 million operating loss.
- ASC 606, adopted January 1, 2018, reduced reported revenue by $51.6 million and increased operating income by $10.7 million, primarily because certain third-party costs were presented net as an agent rather than gross as a principal. Prior periods were not recast.
- Goodwill and other asset impairment increased to $80.1 million from $4.4 million. The charges primarily affected Global Integrated Agencies, Media Services and All Other.
- Global Integrated Agencies revenue fell 12.4% and operating profit fell 37.6%. Media Services revenue fell 15.3% and produced a $51.2 million operating loss, primarily because of a $52.0 million goodwill impairment.
- All Other revenue grew 30.1%, but operating profit declined 28.8% because expense growth exceeded revenue growth. Specialist Communications revenue increased 3.8%, while operating profit declined 10.1%.
- Corporate operating expenses increased 35.0%, partly because of severance and higher professional fees.
- The company suspended its quarterly dividend indefinitely and made no open-market share repurchases during 2018.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a clear formal revenue or earnings forecast. Management stated that cash, operating cash flow and available credit were expected to fund anticipated needs for the next twelve months, subject to business performance, economic conditions and covenant compliance.
- At December 31, 2018, the company had $68.1 million drawn under its revolving credit facility, $4.7 million of undrawn letters of credit and $152.3 million of available borrowing capacity under the then-existing facility.
- The company had $900 million of 6.50% senior notes due 2024 and significant contractual obligations, including approximately $83.7 million of deferred acquisition consideration and $51.5 million of redeemable noncontrolling interests.
- At year-end, the company reported a total leverage ratio of 5.2x versus a 5.5x covenant maximum, fixed-charge coverage of 2.4x versus a 1.1x minimum, and covenant EBITDA of $183.1 million versus a $105.0 million minimum.
- Subsequent to year-end, on March 12, 2019, the credit agreement was amended to increase the total-leverage covenant to 6.25x through December 31, 2020, while reducing maximum revolving commitments from $325 million to $250 million.
- On March 8, 2019, MDC sold its Kingsdale business for cash plus assumed liabilities totaling approximately $50 million.
- On March 14, 2019, Stagwell agreed to invest $100 million: $50 million for newly issued Class A shares and $50 million for Series 6 convertible preference shares. Mark Penn, manager of Stagwell, became CEO and a director effective March 18, 2019. This transaction creates potential dilution and changes the company’s strategic direction.
- Goodwill remained significant at $741.0 million, and one additional reporting unit with approximately $131.2 million of goodwill was highly sensitive to a 1% increase in the discount rate in the impairment sensitivity analysis.
- Key risks include client budget reductions, client and employee retention, competition, foreign-exchange volatility, cybersecurity and privacy regulation, acquisition integration, debt and covenant compliance, contingent acquisition payments, goodwill impairment and limited liquidity.
- The Ontario class-action litigation was dismissed in 2018, and the DOJ antitrust investigation was closed without charges.
Important Facts for Investors to Verify
- Confirm that the intended issuer is MDC Partners Inc.; the filing does not report Stagwell Inc. as the registrant.
- Reconcile reported 2018 results with and without ASC 606, particularly revenue, operating income and loss per share.
- Review the $80.1 million impairment charge and the sensitivity of remaining goodwill to operating performance and discount rates.
- Assess liquidity after the March 2019 credit-agreement amendment, including the reduced $250 million commitment and revised leverage covenant.
- Evaluate the maturity and refinancing risk of the $900 million senior notes due 2024.
- Review the timing and potential variability of deferred acquisition consideration and redeemable noncontrolling-interest obligations.
- Assess dilution, control and economic terms associated with the Stagwell investment and Series 6 convertible preference shares.
- Review post-year-end proceeds from the Kingsdale sale and their permitted use under the debt agreements.