MDC Partners Inc. Form 10-Q Summary
Filing identity: The supplied filing is for MDC Partners Inc., not Stagwell Inc. It covers the three and nine months ended September 30, 2018, with comparative periods ended September 30, 2017. Financial statements are unaudited and presented in U.S. dollars.
Business Context and Reporting Period
MDC operated a global network of advertising, marketing, communications, public relations, creative, media services and related agencies across the United States, Canada and 13 additional countries. Reportable segments were Global Integrated Agencies, Domestic Creative Agencies, Specialist Communications, Media Services and All Other.
The company adopted ASC 606 using the modified retrospective method on January 1, 2018. The adoption increased opening accumulated deficit by $1.2 million and materially affected reported revenue and costs, particularly where third-party costs were reclassified from principal to agent.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $375.8 million | $375.8 million | $1,082.5 million | $1,111.0 million |
| Operating profit | $2.6 million | $37.2 million | $18.8 million | $72.0 million |
| Net income (loss) | $(13.7) million | $22.0 million | $(36.2) million | $25.8 million |
| Net income (loss) attributable to MDC | $(16.1) million | $18.5 million | $(42.1) million | $19.2 million |
| Loss (income) per common share, diluted | $(0.32) | $0.24 | $(0.85) | $0.24 |
- Revenue: Q3 revenue was flat year over year. Nine-month revenue declined 2.6%. Excluding ASC 606, management reported Q3 organic revenue growth of 1.5% and nine-month organic revenue growth of 0.2%.
- Margins: Nine-month Advertising and Communications Group operating margin declined to 5.9% from 9.1%; excluding ASC 606, the 2018 margin was 4.9%. Global Integrated Agencies’ adjusted nine-month operating margin was approximately 0.1%, compared with 5.7% in 2017.
- Cash flow: Nine-month operating cash flow was $(31.7) million versus $(14.5) million in 2017. Investing cash flow was $(48.4) million, including $34.3 million for acquisitions and $15.2 million of capital expenditures. Financing cash flow was $59.1 million, primarily from net borrowings under the revolving credit facility.
- Liquidity: Cash and cash equivalents were $25.1 million at September 30, 2018, including $4.0 million held in trusts. Working capital deficit was $181.7 million.
- Debt: Total debt, net of debt issuance costs, was $988.2 million, consisting primarily of $900.0 million of 6.50% senior notes due 2024 and $103.0 million outstanding under a $325.0 million revolving credit facility. The company reported $127.5 million of remaining revolver availability and was in compliance with debt covenants.
- Equity: Total shareholders’ deficit was $177.9 million at September 30, 2018, compared with $155.5 million at December 31, 2017. The Series 4 convertible preference shares had a $107.6 million liquidation preference.
Material Changes Versus the Prior Comparable Period
- Operating profit fell by $34.6 million in Q3 and $53.2 million for the nine-month period.
- The company recorded $21.0 million of Q3 goodwill and other asset impairment charges and $23.3 million for the nine-month period, primarily within Global Integrated Agencies. The charge included a goodwill write-down and full write-off of a trademark.
- Corporate expenses increased by $7.3 million in Q3 and $16.3 million for the nine-month period, primarily due to severance, restructuring, consulting and other corporate costs.
- Interest expense increased to $50.0 million for the nine-month period from $48.3 million. Foreign exchange results changed from a $18.8 million gain in 2017 to a $9.9 million loss in 2018.
- Global Integrated Agencies revenue declined 12.8% for the nine-month period, while Media Services revenue declined 14.5%. Specialist Communications revenue increased 3.4%, and All Other revenue increased 30.8%, partly reflecting acquisitions and changes in the agency portfolio.
- The company acquired Instrument, OneChocolate Communications and additional interests in Doner Partners, Source Marketing and Allison & Partners during 2018.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide explicit full-year revenue or earnings guidance in the supplied filing.
- On September 12, 2018, Scott Kauffman announced that he would step down as Chairman and Chief Executive Officer upon appointment of a successor.
- On September 20, 2018, the company began evaluating strategic alternatives, potentially including a sale of the company. No specific transaction, timetable or outcome had been determined.
- Management stated that existing cash, operating cash flow and revolver availability were expected to fund anticipated needs for the foreseeable future, but liquidity depends on future operating performance, covenant compliance and access to financing.
- Key risks include client budget reductions, economic and foreign exchange conditions, client retention, employee retention, acquisition integration, debt covenant compliance, deferred acquisition obligations and redeemable noncontrolling interests.
- The company continued cooperating with a confidential Department of Justice antitrust investigation concerning historical production bidding practices. A settlement, charges or monetary sanctions remained possible, and the filing does not provide a clear estimate of potential exposure.
- A reporting unit with approximately $130.0 million of goodwill had fair value only marginally above carrying value after the interim impairment test; additional impairment could result from weaker performance, market declines or changes in discount rates.
- The company planned to adopt the new lease standard on January 1, 2019 and expected a significant balance-sheet impact from recognizing right-of-use assets and lease liabilities, although the full effect had not yet been determined.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing names MDC Partners Inc., whereas the request identifies Stagwell Inc.
- Assess whether the reported revenue decline and margin deterioration reflect underlying operations, ASC 606 presentation changes, acquisitions, dispositions or foreign exchange.
- Review debt maturities, revolver availability, covenant headroom and the company’s ability to fund deferred acquisition and redeemable noncontrolling interest obligations.
- Evaluate the strategic review, CEO succession process and potential effects on business continuity, valuation and control provisions in the debt and preference share agreements.
- Monitor the DOJ investigation and any potential settlement, charges or sanctions.
- Reassess goodwill impairment risk, particularly for the reporting unit with approximately $130.0 million of goodwill and minimal estimated valuation cushion.