MDC Partners Inc. 2019 Q3 SEC Filing Summary
Filing context: The provided filing is MDC Partners Inc.’s Form 10-Q for the quarter ended September 30, 2019, rather than a filing under the name Stagwell Inc. Stagwell participated in MDC’s March 2019 equity financing and its affiliate acquired Series 6 convertible preference shares and Class A shares. Results are presented under U.S. GAAP in U.S. dollars, except per-share amounts.
Business Context and Reporting Period
MDC operated a global network of advertising, marketing, media, public relations and communications agencies through four reportable segments: Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications and Media Services, plus All Other and Corporate. The nine-month 2018 segment results were recast for changes in internal management and reporting structure.
Mark Penn was appointed CEO and director effective March 18, 2019, and Chairman effective April 18, 2019. MDC acquired the remaining 35% interest in Hunter effective April 1, 2019, and sold Kingsdale on March 8, 2019.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $342.9 million | $375.8 million | $1.034 billion | $1.083 billion |
| Operating income | $29.4 million | $2.6 million | $68.5 million | $18.8 million |
| Operating margin | 8.6% | 0.7% | 6.6% | 1.7% |
| Net income (loss) | $5.5 million | $(13.7) million | $13.2 million | $(36.2) million |
| Net loss attributable to common shareholders | $(5.1) million | $(18.2) million | $(6.5) million | $(48.3) million |
| Diluted loss per share | $(0.07) | $(0.32) | $(0.10) | $(0.85) |
Q3 revenue declined 8.8% year over year, including a 7.5% organic decline, a 0.6% negative foreign-exchange effect and a 0.6% negative acquisition/disposition effect. Nine-month revenue declined 4.5%, including a 3.7% organic decline and a 1.1% negative foreign-exchange effect.
- Segment revenue: Q3 Global Integrated Agencies declined 7.3%, Domestic Creative Agencies declined 2.6%, Specialist Communications increased 8.4%, Media Services declined 28.3% and All Other declined 16.3%.
- Segment operating profit: Q3 Global Integrated Agencies generated $21.0 million, Domestic Creative Agencies $7.2 million, Specialist Communications $5.1 million, Media Services incurred a $1.7 million loss and All Other generated $6.8 million.
- Cash flow: Nine-month operating cash flow was negative $5.8 million, compared with negative $31.7 million in the prior-year period. Investing cash flow was positive $3.3 million, primarily due to $23.1 million of proceeds from the Kingsdale sale. Capital expenditures were $13.8 million.
- Cash and liquidity: Cash was $27.3 million at September 30, 2019, compared with $30.9 million at December 31, 2018. Working-capital deficit increased to $195.2 million from $152.7 million.
- Debt: Net debt was $895.4 million, consisting primarily of $900.0 million of 6.50% senior notes due 2024 and $8.1 million drawn under the revolving facility, net of debt issuance costs. The company reported $213.4 million of revolver availability.
- Debt covenants: The reported total leverage ratio was 5.04 versus a 6.25 maximum, fixed-charges ratio was 2.41 versus a 1.00 minimum, and covenant EBITDA was $178.9 million versus a $105.0 million minimum.
Material Changes Versus the Prior Comparable Period
- Operating income improved substantially, principally because Q3 and nine-month 2018 included $21.0 million of goodwill and other asset impairments and significant corporate severance and restructuring costs.
- Cost-reduction actions lowered staff, administrative and corporate expenses, including staffing reductions and lower professional fees and occupancy costs.
- Q3 2019 included a $1.9 million impairment of a right-of-use lease asset and related leasehold improvements. This was materially below the $21.0 million impairment recorded in Q3 2018.
- Foreign-exchange results shifted from a $3.3 million gain in Q3 2018 to a $4.0 million loss in Q3 2019, primarily due to Canadian-dollar weakness against the U.S. dollar on U.S.-dollar-denominated parent-company debt. For the nine-month period, foreign exchange improved to a $4.4 million gain from a $9.9 million loss.
- Interest expense declined modestly to $16.1 million in Q3 and $49.3 million for the nine months, reflecting lower average revolver borrowings.
- MDC issued $50.0 million of common shares and $50.0 million of Series 6 convertible preference shares in March 2019, receiving approximately $98.6 million net proceeds. The proceeds were primarily used to reduce revolver borrowings and for general corporate purposes.
- Adoption of ASC 842 on January 1, 2019 added $254.2 million of right-of-use assets and $299.2 million of lease liabilities to the balance sheet, with no material effect on the other financial statements.
Guidance, Outlook, Commentary and Risks
Management stated that existing cash, operating cash flow and available revolver capacity were expected to fund anticipated needs for the foreseeable future and that the company expected to remain in compliance with debt covenants over the next twelve months. The filing does not provide a specific revenue, earnings or margin guidance target.
Management attributed revenue pressure to client losses and lower client spending, particularly in healthcare, food and beverage and automotive, partially offset by new client wins and growth in transportation and travel/lodging and technology. Management continued to emphasize cost savings and staffing reductions.
- Liquidity is exposed to negative operating cash flow, a significant working-capital deficit, seasonal media-buying requirements and the need to fund debt service, capital expenditures, deferred acquisition payments and potential buyouts of noncontrolling interests.
- The company had $56.2 million of deferred acquisition consideration and $41.5 million of redeemable noncontrolling interests at September 30, 2019. The ultimate amounts and timing are uncertain and depend partly on future operating performance and employment conditions.
- Revenue is sensitive to client marketing budgets, economic conditions, client retention and new-business wins. The filing specifically notes that marketing expenditures may be reduced during economic weakness.
- Foreign-currency movements, particularly between the U.S. and Canadian dollars, can materially affect results; management estimated that a one-cent change in the U.S./Canadian exchange rate could affect the financial statements by approximately $3.5 million.
- Goodwill and intangible assets totaled approximately $797.7 million and remain subject to impairment testing. Litigation, acquisition integration, employee retention and compliance with debt covenants are additional stated risks.
- Legal proceedings were described as routine, with management stating that it did not expect them to have a material adverse effect. The filing reported no material changes to the risk factors in the 2018 Form 10-K.
Important Facts for Investors to Verify
- Confirm the correct issuer and corporate relationship: the filing is for MDC Partners Inc.; Stagwell appears as an investor and related party in the March 2019 financing.
- Assess whether the revenue decline, including the 7.5% Q3 organic decline, stabilizes or continues.
- Determine how much of the operating-income improvement reflects sustainable cost savings versus the absence of prior-year impairments, severance and restructuring charges.
- Monitor operating cash flow, working capital, revolver availability and compliance with the 6.25 total-leverage covenant.
- Review the conversion, accretion and potential dilution terms of the Series 4 and Series 6 convertible preference shares.
- Evaluate future cash requirements for the 6.50% notes, deferred acquisition consideration, redeemable noncontrolling interests and operating leases.
- Review subsequent filings for changes in client concentration, acquisitions, dispositions, goodwill impairment, foreign exchange exposure and executive incentive awards.