SEC Filing Summary
Issuer and period: The supplied Form 10-Q is filed by MDC Partners Inc., not Stagwell Inc., for the quarter and six months ended June 30, 2020. MDC provides global marketing, advertising, communications, activation and strategic consulting services through its Partner Firms. Results were materially affected by COVID-19.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $259.7 million | $362.1 million | $587.4 million | $690.9 million |
| Operating income | $0.1 million | $23.4 million | $29.4 million | $39.1 million |
| Adjusted EBITDA | $36.2 million | $46.4 million | $75.7 million | $67.9 million |
| Net income attributable to MDC | $(0.6) million | $4.3 million | $0.4 million | $4.2 million |
| Net income (loss) attributable to common shareholders | $(4.1) million | $0.8 million | $(6.5) million | $(1.4) million |
| Diluted EPS | $(0.06) | $0.01 | $(0.09) | $(0.02) |
- Q2 revenue declined 28.3%, including a 26.4% organic decline, primarily because clients reduced marketing spending during the pandemic. Six-month revenue declined 15.0%, including a 12.9% organic decline.
- Q2 operating margin was approximately 0.0%, versus 6.5% in the prior-year quarter. Six-month operating margin was approximately 5.0%, versus 5.7%.
- Adjusted EBITDA margin improved to approximately 13.9% in Q2 from 12.8% and to 12.9% for the six months from 9.8%, principally because impairment charges were excluded and expenses were reduced.
- Cash used in operating activities was $33.7 million for the first six months, compared with $40.2 million used in the prior-year period. Investing activities provided $14.6 million, primarily from the Sloane disposition; financing activities used $1.4 million.
- Cash and cash equivalents were $85.5 million at June 30, 2020, down from $106.9 million at December 31, 2019.
- Debt, net of issuance costs, was $922.5 million, consisting primarily of $870.3 million of 6.50% notes due 2024 and $62.5 million drawn on the revolving facility. The company had $111.8 million of revolver availability and $18.6 million of undrawn letters of credit.
- Total assets were $1.71 billion and total shareholders’ deficit was $184.6 million at June 30, 2020.
Material Changes Versus the Prior Comparable Period
- COVID-19 drove broad revenue reductions, with Q2 declines across all reported networks. Integrated Networks–Group B revenue fell 30.0%, All Other fell 36.1%, Media & Data Network fell 27.6%, and Integrated Networks–Group A fell 19.9%.
- Operating income declined sharply in Q2 because of lower revenue and $18.8 million of impairment and other losses, including $13.4 million of goodwill impairment and approximately $5.5 million of lease-asset and related losses. Six-month impairment and other losses totaled $19.0 million.
- Adjusted EBITDA decreased 22.1% in Q2 but increased 11.5% for the six months, reflecting expense reductions, staff actions and lower discretionary spending.
- The company repurchased $29.7 million principal amount of its senior notes for $22.0 million, recognizing a $7.4 million extinguishment gain.
- MDC sold substantially all assets and certain liabilities of Sloane for aggregate consideration of $26.7 million and recognized a $16.8 million gain.
- Management reorganized the reportable segments in 2020. Prior periods were recast, and the former Integrated Agencies Network was separated into Integrated Networks–Group A and Group B beginning in Q2.
- The company revised previously issued financial statements for immaterial prior-period errors involving deferred taxes, goodwill impairment, ASC 606 revenue recognition and deemed dividends.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided. Management stated that it expects existing cash, operating cash flows and available revolver capacity to fund anticipated needs for the next twelve months, but this assessment depends on future performance and economic conditions.
- Management implemented hiring freezes, staff reductions, furloughs, salary and benefit reductions, reduced discretionary spending and lower capital expenditures to preserve liquidity.
- The revolving credit amendment reduced commitments to $211.5 million, extended maturity to February 2022 and increased the minimum trailing-twelve-month EBITDA covenant to $120 million. At June 30, the company reported covenant EBITDA of $193.3 million, total leverage of 4.60 versus a 6.25 maximum, and fixed-charge coverage of 2.94 versus a 1.00 minimum.
- COVID-19 may continue to reduce client budgets, cash generation and asset values. One reporting unit with approximately $130.0 million of goodwill had fair value only marginally above carrying value, creating potential future impairment risk.
- The company disclosed an ineffective disclosure-control environment because a material weakness related to income-tax accounting had not been remediated as of June 30, 2020.
- MDC formed a Special Committee to evaluate a preliminary, non-binding business-combination proposal from Stagwell Media LP. The proposal had not been approved, and no assurance was provided that a transaction would occur. CEO and Chairman Mark Penn is also associated with Stagwell.
- Other obligations include $39.3 million of deferred acquisition consideration, $36.7 million of redeemable noncontrolling interests, future lease liabilities of $305.9 million, and approximately $11.8 million of commitments for leases not yet commenced.
Important Facts for Investors to Verify
- Confirm the intended issuer: the provided filing is MDC Partners Inc. for Q2 2020, while the request identifies Stagwell Inc.
- Assess the sustainability of liquidity given negative operating cash flow, $922.5 million of debt, variable-rate borrowings and substantial lease and acquisition obligations.
- Monitor COVID-19 effects on client spending, revenue recovery, covenant compliance and additional goodwill or lease impairments.
- Review the proposed Stagwell Media transaction, related-party dealings and potential conflicts involving Mark Penn.
- Track remediation of the material weakness in internal control over financial reporting related to income-tax accounting.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA, which excludes impairment and other material items.