Business Context and Reporting Period
This filing is a Form 10-Q for MDC Partners Inc. for the three months ended March 31, 2017. The request metadata identifies Stagwell Inc.; however, the filing itself identifies the registrant as MDC Partners Inc. MDC operated a network of marketing communications, advertising, media, public relations, and specialty marketing firms.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $344.7 million | $309.0 million |
| Operating profit | $8.4 million | $8.5 million |
| Operating margin | 2.4% | 2.8% |
| Net loss | $9.7 million | $22.4 million |
| Net loss attributable to common shareholders | $11.1 million | $23.3 million |
| Basic and diluted loss per share | $0.21 loss | $0.47 loss |
| Cash used in operating activities | $30.7 million | $122.4 million |
| Capital expenditures | $9.4 million | $5.5 million |
At March 31, 2017, cash and cash equivalents were $23.2 million, excluding $5.4 million held by subsidiaries and $5.4 million held in client-related trusts. Total debt, net of issuance costs, was $887.5 million, consisting primarily of $900.0 million of 6.50% senior unsecured notes due 2024. Revolver borrowings were $4.9 million, with approximately $315.3 million of undrawn commitments. Working capital was negative $280.0 million.
Total assets were $1.63 billion, including $846.1 million of goodwill and $81.0 million of other intangible assets. Shareholders’ deficit was $417.2 million. Deferred acquisition consideration totaled approximately $235.4 million, including $231.1 million of contingent payments.
Material Changes Versus the Prior Comparable Period
- Revenue increased $35.7 million, or 11.5%, including $20.4 million of non-GAAP acquisition and disposition effects, $17.2 million of organic growth, and a $1.9 million adverse foreign-exchange impact.
- Revenue growth was led by the United States, which increased 8.9%, and acquisitions outside North America. Canada declined 6.8% and other international operations increased 53.1%, substantially reflecting acquisitions.
- Operating profit was essentially flat, while operating margin declined to 2.4% from 2.8%. In the Advertising and Communications Group, operating margin declined to 4.9% from 7.0%.
- Higher direct costs, administrative costs, and deferred acquisition consideration reduced operating profitability. Deferred acquisition consideration expense increased to $11.4 million from $6.3 million.
- Net loss improved primarily because Q1 2016 included a $33.3 million loss on redemption of the former 6.75% notes. This benefit was partly offset by lower foreign-exchange gains, higher income tax expense, and higher interest expense.
- Corporate operating expenses decreased $4.6 million, primarily due to lower executive compensation, lower legal expenses, and insurance proceeds related to litigation and SEC investigations.
- The Company issued $95.0 million of Series 4 convertible preference shares in March 2017. Net proceeds were approximately $90.2 million and were used principally to reduce revolver borrowings and for general corporate purposes.
- Deferred acquisition consideration of approximately $5.0 million was settled through the issuance of 568,182 Class A shares.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects to maintain sufficient cash and available borrowing capacity to fund operations for the next twelve months and believes the Company will remain in compliance with its debt covenants based on current projections.
- The business is seasonal, with historically lower revenue and media placement volume in the first quarter and higher levels in the fourth quarter.
- Management identifies economic conditions, client spending, client wins and losses, retention of key employees, acquisitions, foreign exchange, and compliance with debt covenants as significant risks.
- The Company was in compliance with its revolving credit agreement. At March 31, 2017, the total leverage ratio was 4.7 versus a maximum of 5.5, the fixed charges ratio was 3.2 versus a minimum of 1.0, and covenant-defined EBITDA was $191.9 million versus a minimum of $105.0 million.
- Potential future payments for subsidiary noncontrolling-interest put rights were estimated at $12.4 million, plus approximately $44.1 million payable only upon certain employment terminations or death. Actual amounts depend on future earnings, timing, and foreign-exchange rates.
- The Company is defending a Canadian securities class-action claim related to alleged misstatements and omissions concerning an SEC investigation. It also received a U.S. Department of Justice Antitrust Division subpoena concerning production practices in the advertising industry and is cooperating with the investigation.
- Foreign exchange remains material: management estimates that a one-cent change in relevant exchange rates could affect the financial statements by approximately $4.4 million. The Company generally does not use foreign-currency derivatives to hedge this exposure.
- The Company recorded $4.0 million of income tax expense despite a pretax loss, and maintains a full valuation allowance on deferred tax assets related to U.S. net operating losses.
- The Company expects future accounting changes, including new revenue-recognition and lease standards, to affect presentation and potentially the timing of revenue recognition and balance-sheet amounts.
Investor Verification Checklist
- Confirm the registrant identity and corporate history, because the supplied metadata refers to Stagwell Inc. while the filing is for MDC Partners Inc.
- Assess whether revenue growth is sustainable after separating organic growth, acquisitions, dispositions, pass-through costs, and foreign exchange.
- Monitor the decline in operating margins and the effect of direct costs, staffing, administrative expenses, and deferred acquisition consideration.
- Reconcile liquidity using unrestricted cash, revolver availability, seasonal working-capital requirements, and the negative working-capital position.
- Review the maturity, covenants, and refinancing risk associated with the $900.0 million notes due 2024 and the revolving credit facility.
- Track contingent acquisition payments, noncontrolling-interest put rights, and potential share dilution from equity settlements or conversion of the preference shares.
- Follow developments in the Canadian securities litigation and the Department of Justice antitrust investigation.