Business Context and Reporting Period
The filing is a Form 10-Q for the three months ended March 31, 2016. The registrant identified in the filing is MDC Partners Inc., not Stagwell Inc.; the source text does not explain the relationship between the requested company name and the registrant. MDC operated through an Advertising and Communications segment and a Corporate Group, providing marketing communications, advertising, public relations, data analytics, strategic consulting and related services.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $309.0 million | $302.2 million | Up 2.3% |
| Operating profit | $8.5 million | $5.2 million | Up $3.4 million |
| Operating margin | 2.8% | 1.7% | Up approximately 110 basis points |
| Advertising and Communications operating margin | 7.0% | 8.6% | Down 160 basis points |
| Loss from continuing operations | $22.4 million | $23.4 million | Loss narrowed $1.0 million |
| Net loss attributable to MDC | $23.3 million | $32.1 million | Loss narrowed $8.8 million |
| Loss per diluted share | $0.47 | $0.65 | Improved $0.18 |
| Cash flow from operating activities | $(128.7) million | $(113.7) million | Outflow increased $15.0 million |
Revenue growth consisted of approximately $6.6 million of organic growth and $3.8 million from acquisitions, partially offset by a $3.6 million foreign-exchange impact. Growth was strongest outside North America, while U.S. revenue was broadly flat. Technology, automotive, data analytics, public relations, strategic communications and integrated advertising performed relatively well; retail and financial sectors declined.
Advertising and Communications operating profit declined to $21.7 million from $26.0 million. Higher staff costs, administrative expenses and deferred acquisition consideration expense more than offset lower direct costs and depreciation and amortization. Corporate expenses declined $7.7 million, primarily because of lower executive compensation, legal and other administrative expenses.
Other income was $15.5 million compared with other expense of $18.0 million in the prior-year quarter, primarily reflecting a $15.5 million foreign-exchange gain versus an $18.5 million loss. Interest expense increased to $15.6 million from $15.1 million. The company also recorded a $33.3 million loss on redemption of its former notes.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $21.8 million at March 31, 2016, compared with $61.5 million at December 31, 2015.
- Working capital deficit was $274.0 million, improved from $403.9 million at year-end 2015, primarily due to the debt refinancing.
- Total debt, including capital leases, was $897.1 million, up from $728.9 million at December 31, 2015.
- The company issued $900.0 million of 6.50% senior notes due 2024 and redeemed its $735.0 million of 6.75% notes due 2020. Net proceeds were approximately $880.0 million.
- Revolver borrowings were $17.0 million, with approximately $303.4 million of undrawn commitments and $4.6 million of outstanding letters of credit.
- Management stated that the company was in compliance with its credit agreement and expected to remain compliant over the following twelve months. Reported covenant measures included a 4.4 total leverage ratio against a 5.5 maximum, a 1.8 fixed charges ratio against a 1.0 minimum, and $210.2 million of covenant-defined EBITDA against a $105.0 million minimum.
- Deferred acquisition consideration totaled approximately $321.0 million, including $310.9 million of contingent payments.
Material Changes, Outlook and Risks
The principal financing change was the March 2016 refinancing, which extended the maturity profile but increased reported debt and generated a $33.3 million redemption loss. A subsequent event disclosed in the filing states that, effective May 3, 2016, the revolving credit agreement was amended and restated, extending its maturity to May 3, 2021 and permitting foreign-currency borrowings.
No formal revenue, earnings or margin guidance is provided. Management expects to maintain sufficient cash and available revolver capacity to fund operations for the next twelve months, but operating cash flow was substantially negative in the quarter and liquidity is affected by seasonality, media-buying timing and client collections.
- The SEC investigation concerning executive expenses, historical goodwill accounting and securities trading remained ongoing. Investigation-related professional expenses were $1.5 million in Q1 2016.
- Putative class actions were pending in the United States and Canada concerning alleged disclosure, executive compensation, goodwill accounting and internal-control issues.
- Noncontrolling-interest put rights could require approximately $16.7 million of payments under management’s assumptions, plus approximately $50.8 million payable upon certain employment terminations or deaths.
- Results are exposed to client spending, client retention, new-business wins, key employee retention, economic conditions, acquisitions, foreign-exchange movements and compliance with debt covenants.
- A one-cent change in the exchange rate between the U.S. dollar and foreign currencies was estimated to affect the financial statements by approximately $3.3 million. The company did not use foreign-currency derivatives.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2016, with no material changes in internal control over financial reporting.
Investor Verification Items
- Confirm the identity of the registrant and whether this MDC Partners filing is applicable to Stagwell Inc.
- Reconcile recurring operating performance with the significant foreign-exchange gain and the $33.3 million debt-redemption charge.
- Assess liquidity in light of $128.7 million of quarterly operating cash outflow, the $274.0 million working capital deficit and approximately $897.1 million of debt.
- Review the full terms and covenant calculations of the 6.50% notes and amended revolving credit agreement.
- Monitor the SEC investigation, related litigation and any resulting financial, governance or reporting consequences.
- Reassess contingent acquisition consideration and noncontrolling-interest put obligations as acquired businesses’ earnings and valuation assumptions change.