MDC Partners Inc. Form 10-K Summary
Filing identity and period: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the fiscal year ended December 31, 2016, including fourth-quarter results. Results are reported under U.S. GAAP in U.S. dollars.
Business Context
MDC operated a global network of marketing, advertising, media, public relations, digital, data analytics, communications and strategic consulting firms. Its principal reportable segment comprised integrated advertising, media and public relations businesses; “All Other” included specialized marketing services; and the Corporate Group provided shared services. The Company had 6,138 employees at year-end.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $1,385.8 million | $1,326.3 million | +4.5% |
| Operating income | $48.4 million | $72.1 million | -$23.7 million |
| Income from continuing operations | Loss of $42.7 million | Loss of $22.0 million | Loss increased $20.7 million |
| Net loss attributable to MDC | $47.9 million | $37.4 million | Loss increased $10.6 million |
| Diluted loss per share | $0.93 loss | $0.75 loss | Worsened |
| Cash from operating activities | $5.4 million | $162.8 million | Down $157.4 million |
| Cash and cash equivalents | $27.9 million | $61.5 million | Down $33.5 million |
| Total debt, net of issuance costs | $936.4 million | $728.9 million | Up $207.6 million |
The consolidated operating margin was approximately 3.5%, compared with approximately 5.4% in 2015. The Advertising and Communications Group operating margin declined to 6.7% from 10.4%; the Reportable segment margin declined to 10.0% from 12.3%; and the All Other segment moved from a 0.8% profit margin to a negative 9.1% margin.
Material Changes Versus 2015
- Revenue growth included $42.0 million of non-GAAP net acquisition and disposition effects, $30.1 million of organic revenue growth and a $12.5 million negative foreign-exchange impact.
- International revenue increased to 11.4% of total revenue from 8.5%, with reported growth particularly strong in Europe and Asia.
- Goodwill impairment of $48.5 million was recorded in 2016, including charges related to experiential, strategic communications and other reporting units.
- Staff costs and administrative expenses increased as a percentage of revenue, reflecting headcount added ahead of revenue and expansion initiatives.
- Deferred acquisition consideration expense decreased to $8.0 million from $36.3 million, primarily because certain Partner Firms underperformed prior expectations.
- The Company refinanced its debt by issuing $900.0 million of 6.50% senior notes due 2024 and redeeming its $735.0 million of 6.75% notes due 2020. The refinancing generated a $33.3 million loss on redemption.
- The quarterly dividend was suspended indefinitely in November 2016. Dividends declared during 2016 totaled $0.63 per share.
- Forsman & Bodenfors was acquired effective July 1, 2016, with estimated acquisition-date consideration of $49.8 million, including shares and deferred payments.
Fourth-Quarter Results
Fourth-quarter revenue was $390.4 million, up 8.8% from $359.0 million in the prior-year quarter. Income from continuing operations was $9.8 million, compared with a $24.5 million loss in the fourth quarter of 2015. The improvement was driven principally by a $51.1 million decrease in deferred acquisition consideration expense, partly offset by an $18.9 million goodwill impairment charge. Fourth-quarter 2016 included $29.6 million of goodwill impairment in the third quarter and $18.9 million in the fourth quarter.
Liquidity, Debt and Cash Flow
- Working capital remained negative at $313.2 million, although this improved from a $418.0 million deficit in 2015.
- Cash flow from operations fell sharply to $5.4 million, largely because accounts payable, accruals and other current liabilities declined by $103.4 million, primarily reflecting supplier-payment timing.
- Capital expenditures were $29.4 million, and cash used in investing activities was $25.2 million.
- The revolving credit facility had $54.4 million outstanding and approximately $266.2 million of undrawn commitments at year-end. Including cash and undrawn commitments, management reported approximately $294.1 million available to support future cash requirements.
- The Company reported compliance with its debt covenants. The total leverage ratio was 5.03 versus a maximum of 5.50; the fixed charges ratio was 1.95 versus a minimum of 1.00; and covenant EBITDA was $190.4 million versus a $105.0 million minimum.
- Contractual obligations totaled approximately $2.02 billion, including $954.4 million of indebtedness, $391.8 million of operating leases, $429.0 million of interest on debt and $229.6 million of deferred acquisition consideration.
Outlook, Commentary and Risks
- Management expected cash from operations, available revolver capacity and other initiatives to fund working capital, capital expenditures and other needs over the next twelve months, while noting that acquisitions could require additional debt or equity financing.
- Management expected approximately $28.0 million of capital expenditures in 2017.
- Deferred acquisition consideration was $229.6 million at year-end, including $108.3 million expected to be payable in 2017. Actual payments may differ materially based on acquired-business performance and contractual formulas.
- Redeemable noncontrolling interests were $60.2 million. Potential put-right payments were estimated at approximately $12.5 million based on current performance assumptions, plus approximately $43.1 million payable upon specified employment termination or death events.
- On February 14, 2017, MDC agreed, subject to closing conditions, to issue $95.0 million of Series 4 convertible preference shares to an affiliate of Goldman Sachs. Failure to complete the financing could require alternative liquidity sources and could dilute existing shareholders if completed.
- The SEC investigation was settled in January 2017 for a $1.5 million civil penalty, with no restatement of prior financial statements. A Canadian securities class-action claim remained pending, and a subsidiary was cooperating with a confidential U.S. Department of Justice antitrust investigation.
- Key operating risks included client budget reductions, client concentration and retention, competition for talent, foreign-exchange volatility, covenant compliance, substantial leverage, acquisition integration, contingent acquisition payments, client credit defaults and potential further goodwill impairment.
Most Important Facts to Verify
- Confirm that the intended issuer is MDC Partners Inc.; the supplied filing does not identify Stagwell Inc.
- Review the $48.5 million goodwill impairment and the sensitivity of remaining goodwill to operating performance, discount rates and growth assumptions.
- Assess liquidity after the substantial decline in operating cash flow, the negative working capital position and the upcoming $108.3 million of deferred acquisition payments.
- Review the 6.50% notes, revolver covenants and refinancing terms, including the 5.03 total leverage ratio against the 5.50 covenant limit.
- Track completion and terms of the proposed $95.0 million convertible preference financing and its potential dilution and senior-ranking features.
- Monitor the Canadian securities litigation, DOJ antitrust investigation and any related insurance recoveries or legal costs.
- Evaluate whether revenue growth excluding acquisitions and currency effects is sufficient to offset rising staff and administrative costs.